Kotak Mahindra Bank's preferential issue does not meet the dilution norms, the Reserve Bank of India had said on Tuesday.
Shares of Kotak Mahindra Bank fell around 3 percent on Thursday morning as investors reacted to regulatory developments on Tuesday.
The stock touched an intraday high of Rs 1,271.00 and an intraday low of Rs 1,257.75.
Kotak Mahindra Bank's preferential issue does not meet the dilution norms, the Reserve Bank of India had said on Tuesday.
Under the norms of the licence given to the bank, the Founder and Promoter Uday Kotak was to reduce his stake in the bank to 20 percent by 2019 and 15 percent by 2020.
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In adherence to the licence conditions Kotak, two weeks ago, expanded his paid-up capital by issuing 52 percent more perpetual non-convertible preference shares. While this effectively brought down his share in the paid-up capital from 30 percent to a little under 20 percent, questions were raised if the preference issue circumvented RBI rules on stake dilution.
While preference shares are mid-way between debt and equity, perpetual preference shares are closer to equity 3. Basel rules recognise perpetual preference shares as tier 1 capital.
Legal experts said Kotak is legally right in doing so since his licence conditions require him to cut his share in the paid-up capital not in the number of voting shares. However, others argued the intent of RBI’s rules were to ensure a promoter’s stake is brought down as a percentage of “voting shares”.
In an exchange filing, Kotak Mahindra Bank said it continues to believe it has met the central bank's requirement and that it will engage with RBI on the matter.
Brokerage: Citi | Rating: Buy | Target: Rs 1,565
The brokerage said that the bank could now look to raise primary capital in the bank. It added that Uday Kotak may look to sell part of his holding in the secondary market. Going forward, it also expects a meaningful acquisition in the banking space or in life insurance, AMC or NBFC.
Brokerage: Morgan Stanley | Rating: Overweight | Target: Rs 1,435
The global research firm said that the bank has historically cut promoter holding via stake sales or equity dilution. Unless approved by RBI, this would be an overhang, he said, adding that a potential solution could be to look for sizeable inorganic growth opportunities. Promoter holdings could also be reduced via an equity capital raising, analysts at the firm wrote in their note.
Brokerage: Goldman Sachs | Rating: Buy
Goldman Sachs continues to remain positive on Kotak’s fundamental performance. It expects 31% EPS CAGR over FY18-21.
Brokerage: Jefferies | Rating: Underperform | Target: Rs 1,100
In case of no resolution, overhang of a large share sale exists, the brokerage house observed. Valuations multiples are expensive vs the underlying profitability, it added.
At 09:30 hrs Kotak Mahindra Bank was quoting at Rs 1,259.00, down Rs 32.60, or 2.52 percent, on the BSE.