BT Buzz: Private banks see red as RBI refuses to budge on shareholding pattern, IPO norms

BT Buzz: Private banks see red as RBI refuses to budge on shareholding pattern, IPO norms

RBI is coming down heavily on private banks' promoters who are not adhering to its guidelines on stake reduction and mandatory IPO

Reluctance on part of private banks to adhere to RBI's shareholding and IPO norms has brought them in the crosshairs of the central bank. Reluctance on part of private banks to adhere to RBI's shareholding and IPO norms has brought them in the crosshairs of the central bank.

The Reserve Bank of India (RBI) is coming down heavily on promoters of private banks dilly-dallying on reducing their stakes or asking for relaxation in the IPO norms. Six months after the Kotak Mahindra Bank dragged the RBI to court over the stake reduction matter, the regulator slapped a penalty of Rs 2 crore last week. In September last year, the RBI had put restrictions on Kolkata-based Bandhan Bank from opening new branches and had also frozen the compensation for its CEO and founder Chandra Shekhar Ghosh as a penalty for not complying with its guidelines to reduce the stake. There are many Small Finance Banks (SFBs) that are approaching RBI for a relaxation in IPO norms for their banking units or for allowing them more time to tap the market. But, the RBI, unlike earlier years, is in no mood to budge. The banking universe of private banks and the SFBs is so large today that any relaxation to one will invite a similar concession from others.

At the core of the tiff between RBI and private banks is the shareholding norms. As per the RBI's guidelines, private bank promoters have to reduce their holding to 40 per cent within three years of operations, 20 per cent within 10 years and 15 per cent within 15 years of operations. The whole intent of RBI's timeline for reduction is that there shouldn't be any concentration of holding in a promoter group. Conversely, the shareholding should be diversified so as to help in better governance and professional management and independent board. All through these years - the licenses were first given in early 90s to private banks - the private banks promoters had been complying with guidelines. In fact, the RBI was very generous in extending the timelines. Take for instance, the HDFC Bank has promoter HDFC Ltd holding 26.50 per cent equity in the bank. In the IndusInd Bank, which is owned by Hindujas, the promoters hold 16.80 per cent stake. Yes Bank, which is relatively a new bank, has promoters holding 19.80 per cent stake. In fact, Kotak Bank has also reduced promoters' stake in last two decades. It came down from 45 per cent to 29.99 per cent since its inception. This was done by way of inducting new investors and also merging the ING Vysya Bank in an all stock deal. The challenge for Kotak Bank started when promoters had to reduce the stake from 29.99 per cent to 20 per cent by December last year. Months before the December deadline, the market was agog with a rumour that Kotak will acquire Axis Bank to meet its stake reduction timeline. In August last year, the bank announced a perpetual non-convertible preference shares issue, which resulted in dilution of the promoter stake to 19.70 per cent of the paid up capital. The RBI contends that the guideline states the shareholding reduction in relation to equity capital and not paid up capital, which includes other form of capital. The RBI soon responded to Kotak after two weeks by directing that "the perpetual preference issue doesn't meet their promoter holding dilution requirement". Kotak Bank, however, took a confronting stand by stating that "they have met the requirement and will engage with the RBI". The private bank also shared the opinions of few jurists to the RBI.

In December last year, the Kotak also approached the Bombay High Court to protect its interest. The court has now put the hearing of the case to January next year, citing paucity of time. Meanwhile, the RBI has levied a penalty of Rs 2 crore on bank for violation of its guidelines. Many experts suggest that the Kotak Bank must have factored in the penalty - a price it would be ready to pay rather than sell the equity cheap to an investor. The market cap of Kotak Bank is around Rs 2.80 lakh crore.

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The newest private bank, Bandhan Bank, has also come on the firing line of RBI for not adhering to the stake reduction norms. Bandhan was among only two entities, the other being IDFC, that secured the banking license when many other big names had also applied few years ago. Bandhan's licensing agreement clearly stated that the Bandhan Financial Holdings, the holding company of the banking unit, was required to bring down its stake to 40 per cent of the paid up voting equity capital of the bank within three years of operations. That was to be done by August last year. When Bandhan failed to achieve it, the RBI had put two sets of penalties. It directed the bank to take prior approval from RBI for opening new branches. Secondly, the remuneration of CEO Chandra Shekhar Ghosh was also frozen. Since the levy of penalties, the bank has made some progress in reducing the stake. In January this year, the merger of Gruh Finance with Bandhan Bank got the approval. This merger has helped bring down the stake of holding company Bandhan Financial from 82 per cent to 61 per cent. Experts suggest that the promoters have to act well in advance to reduce the stake as closer to the deadline makes it all the more difficult to get a good deal from investors.

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The new differentiated banks, especially SFBs, seek exemption in IPO norms from the RBI. But the RBI has made it very clear that they have to get listed in the market within three years of operations. In addition, SFBs will have to maintain a minimum of 40 per cent promoters' stake for a period of five years. But SFBs are dilly dallying. Of the three small finance banks listed on the bourses, two are actually holding companies. Equitas Financial Holdings and Ujjivan Financial Services are holding companies of their banking units. These listed entities have to list their banks in next two years. Similarly, there are 7-8 other SFBs that have to list their shares, but not much is heard from rest of the players.

The recent regulatory action of RBI clearly states that the RBI is in no mood to give any relaxation. But, the private bankers often cite examples of governance issues and accountability in banks such as ICICI Bank and Axis Bank where CEOs had to leave. Both these banks have a diversified holding and a very professional and independent board. "What is RBI trying to achieve when they have already capped the voting rights at 10 per cent?" asked a banker. There is also an anomaly in the sense that foreigners are allowed to own a higher stake in private banks. In fact, a day will come when institutional investors will call the shots at private banks. Expert suggest the banking is a highly regulated entities and the appointment, CEO compensation and mergers and acquisitions are all approved by the regulator.

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Published on: Jun 24, 2019, 7:07 PM IST
Posted by: Vivek Punj, Jun 24, 2019, 7:07 PM IST