RBI rejects tool used for Kotak stake dilution

Mumbai: The Reserve Bank of India (RBI) rejected the means by which Uday Kotak diluted his promoter stake in Kotak Mahindra Bank. The lender insisted it was compliant with regulations, setting the scene for a possible showdown with the regulator as a December deadline looms.

Kotak had sought to lower his stake to 20%, as stipulated, by selling nonconvertible perpetual noncumulative preference shares (PNCPS) to a group of investors earlier this month. The limit has to be met by December.

“RBI has today communicated to us that our PNCPS issuance does not meet their promoter holding dilution requirement,” Kotak Mahindra said in a statement to the exchanges on Tuesday evening. “We continue to believe that we have met the requirement and will engage with the RBI in this behalf.” A Kotak Mahindra spokesperson said the bank does not have anything to add to the stock market notice.


“Kotak can say that they will engage with the regulator but approving this instrument later after rejecting it now would put the RBI’s credibility under the scanner,” said Manish Ostwal, senior analyst at Nirmal Bang Securities. “This rejection will have a negative impact on the stock when the market opens on Thursday because Kotak has little time now to comply with RBI regulations.”

On August 2, bank founder Kotak sold 1 billion of the preference shares to domestic institutional investors and companies.

PNCPS not Part of Equity Capital
At ₹5 apiece, the sale raised ₹500 crore, reducing Kotak’s stake to 19.7% from 30%.

Analysts said the sale didn’t meet requirements as the preference shares are classified as AT1 or Tier 1 bonds according to the Basel III classification but are not part of common stock held by a bank, or equity capital, and hence won’t result in dilution of control, which is the intent of the central bank rule.The share ended at ₹1,291.60, up 0.31%, on Tuesday. Kotak’s statement came after market hours and the market is closed on Wednesday for the Independence Day holiday.

The central bank requires promoters to reduce their stakes in banks in phases to ensure that ownership is widely distributed.

Kotak last sold shares in May 2017 in the open market, lowering his stake in the private sector lender to below 30% in compliance with the RBI direction to do so.

“Kotak will probably need to sell shares to multiple investors. But this will create an overhang on the stock because a sale of 10% of the stock will create an overhang of $3 billion to $3.5 billion,” said Suresh Ganapathy, research analyst at Macquarie Securities. “Kotak has no choice now but to reduce stake. Going back to the regulator and trying to argue their point will not work because the regulator has taken a decision. Going to court is also not an option because you do not want to take on the regulator whose permission you need for business decisions.” Nirmal Bang’s Ostwal said approving Kotak’s sale would have created a precedent.

“Promoters at IndusInd and Yes Bank could have also done the same,” Ostwal said. “RBI has taken the right decision. Kotak may be a credible institution but this was just against the spirit of regulations.”