Under the RBI regulations, the promoter groups of private banks are required to reduce their holdings in a phased way. This is to ensure much wider public participation in bank equity. Under the RBI guidelines, Mr. Uday Kotak was required to reduce his stake from the current level of 30.3% to below 20% by December 2018 and to below 15% by March 2020.
What Kotak Bank has done…?
In a promoter dilution that was unique in its methodology and implementation, the percentage holdings of Mr. Uday Kotak was reduced through the issue of Perpetual Non-Cumulative Preference Shares (PNCPS). This is permitted under the RBI guidelines. How exactly has this issue of PNCPS been structured? Currently, the ownership structure of Kotak Bank is distributed in the ratio of 30% with the promoter group and the balance 70% with public shareholders. The Rs.500 crore of PNCPS that were issued takes the total capital base of Kotak Bank from Rs.953 crore to Rs.1453 crore. In the aftermath of the PNCPS issue, the share of PNCPS in the enhanced equity capital stands at 34%, while the share of public shareholding has come down from 70% to 46%. As a result, the shareholding percentage of the promoter group has fallen to marginally below 20% which meets the RBI guidelines. This has ensured the RBI guidelines being met without a surge in the floating stock.
Two birds with one stone…
A 10% reduction in the promoter holding at this stage would have resulted in a substantial amount of float available in the market. Normally, that is not very positive for the price. While the PNCPS are entitled to dividends, they do not have cumulative rights. That means if the company skips dividend during any one year, then that cannot be carried forward. Effectively, they are like equity but unlike equity; these PNCPS does not carry voting rights. The PNCPS can only vote when it concerns the rights of the PNCPS holders or when it concerns winding up of the company!
Kotak became a bank in 2000…
That is one area of advantage that Kotak has. As per the 2000 rules, promoter’s stake is defined as “paid-up capital” whereas in 2013 it was modified to “paid-up equity share capital”. Since the pre-2013 rules would apply for Kotak, their interpretation is perfectly in line with the RBI guidelines.
While the RBI approval is still awaited, there is a larger issue for the RBI and the government to ponder over. Ideally, promoters should be allowed to retain a larger stake rather than forcing them to monetize and move out. If the Kotak model passes RBI muster, then it will provide a new model (at least for the pre-2013 banks). As far as the new and small banks are concerned, they may still have to live by the new rules! ©