The Malaysian Reserve

Asia’s richest banker may acquire rivals after RBI’s rebuff

Kotak seeks to meet a year-end deadline to reduce his stake in KMBL below 20% (Pic: Bloomberg)

Mumbai • A rebuff from the regulator may set Asia’s richest banker Uday Kotak (picture) on a US$17 billion (RM69.7 billion) acquisition trail, as he seeks to meet a year-end deadline to reduce his stake in Kotak Mahindra Bank Ltd (KMBL) below 20%.

Buying another financial firm may be the most palatable way for Kotak to pare his holding, following the Reserve Bank of India’s (RBI) rejection earlier this month of a preference share sale proposal.

If the bank issues about 1.2 trillion rupees (RM72 billion) of new stock to back an acquisition, that would effectively dilute the billionaire’s holding below the 20% target.

“Kotak may favour a big acquisition that will take care of his dilution woes in one go,” said Rakesh Kumar, an analyst with Elara Securities India Pte Ltd, who remains negative about KMBL stock until the issue is resolved.

Acquisition targets could include Axis Bank Ltd, India’s third-largest private lender, or a financial firm such as PNB Housing Finance Ltd, according to Devansh Lakhani, an analyst at Lakhani Financial Services Ltd. Last year, the RBI ordered Kotak to cut his ownership of the bank in phases, to below 20% by 2018 and to 15% by March 31, 2020, as part of a plan to reduce the influence of founding shareholders.

Kotak currently owns about 567 million of the bank’s 1.9 billion shares, or just under 30%.

The bank has said it still hopes to persuade the RBI to approve its original plan to reduce Kotak’s stake.

That involves a proposed sale of five billion rupees of so-called non-convertible perpetual non-cumulative preference shares to domestic institutional investors.

But if the bank fails to sway the regulator and opts solely for an acquisition to reduce its founder’s stake, it would require the issuance of about 970 million new KMBL ordinary shares to get the holding below 20%, worth about 1.2 trillion rupees at current market prices. KMBL rose 0.5% to 1,281.70 rupees as of 9:37am in Mumbai yesterday.

Another option is for Kotak to reduce his stake either wholly or in part via a share sale to institutional investors. The billionaire founder

took this route when he sold 1.5% of his shares to Caisse de Depot et Placement du Quebec and Canada Pension Plan Investment Board in March 2017.

To get down to the 20% solely via a share sale would require Kotak to dispose of about US$3.4 billion of the bank’s ordinary shares.

An acquisition is also part of the KMBL playbook. In 2014, the bank purchased ING Vysya Bank Ltd in a deal valued at US$2.4 billion via a share swap.

Rumours that KMBL is about to buy another financial firm have boosted the shares of Axis Bank, PNB Housing Finance, Mahindra & Mahindra Financial Services Ltd and Shriram Transport Finance Co, among others, in recent months.

Axis Bank, with a market capitalisation of US$23 billion, looks like the “best target” in that it would help KMBL increase its presence in corporate banking, according to Purvesh Shelatkar, senior VP at Centrum Broking Ltd.

Another option, which also has a precedent, is that Kotak dilutes his stake with a new US$17 billion share offering unrelated to an acquisition. But this is considered unlikely because KMBL’s capital adequacy ratio is a more than comfortable 17.7%, so any further buffering via a share issue would lead to an unnecessary dilution of earnings, according to Lakhani.

The bank last issued fresh shares in May 2017 when it raised US$901 million to boost lending and raise money for acquisitions. — Bloomberg