THE CURIOUS CASE OF UDAY KOTAK'S STAKE

Uday Kotak’s stake in his bank is making the marketmen nervous. They want the promoter to settle the issue once and for all and do away with this sense of uncertainty.

As the 31^st December 2018 deadline looms large, Uday Kotak, promoter of Kotak Mahindra Bank must be frantically lobbying with the RBI. He might want to ensure his earlier plan of issuance of nonconvertible perpetual noncumulative preference shares (PNCPS) to a group of investors  does get accepted. But with chances of that happening looking dim, he might be having a Plan B is place.

The bone of contention – Uday Kotak, as at 30^th Sept 2018 holds 29.73% stake in the Bank and as per RBI norms, promoter stake should not exceed 20%. The stake eventually has to come down to below 15% by March 2020.

The deadline to bring this stake down came first in Dec 2016 but somehow, RBI relented and had allowed an extension on the deadline and as that one looms large, the uncertainty factor hasn’t changed.

Uday Kotak had come up with a unique idea of bringing down his stake to below 20% but yet, not ceding management control. The PNCPS were issued in August and this helped bring down Uday’s stake to 19.73%. The PNCPS holders will own a 34.41% stake in the post-issue paid-up capital and public shareholding after the issue was to come down from 69.97% to 45.89%. After the issue, the bank’s paid-up capital increased from Rs 9.53 billion to Rs 14.53 billion.  Thus increasing the paid-up capital automatically brought down Uday’s stake, with nothing else changing.

RBI obviously did not relent as these preference shares come under AT1 or Tier 1 bonds under Basel III classification but they do not become a part of the equity capital, which in turn means there is no dilution of control by the promoter – a pre-requisite of RBI rule.

So now what? One option is to raise funds by diluting Uday’s 10% stake to PE Funds or other parties.  But the Bank already has a high capital adequacy ratio and this could bring down RoE.

The other option being talked about is Uday selling his 10% stake and using the funds to buy another bank, which will gel with its growth strategy. But remember, the ING Vysya Bank takeover took over a year to complete.

Or maybe Uday can sell 10% in the secondary market directly via block deal.

Well, it would be interesting to see how this cookie crumbles and how Uday Kotak gets out of this tight corner.

At the same time, maybe RBI should give some thought to the  PJ Nayak committee of 2013 which said that the upper limit for promoters holding should be upto 25% as it feels that 15% is too low.

Indeed with the ICICI Bank fracas still fresh, we need to rethink whether diversified or even state ownership leads to better governance?