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ING-Kotak Bank deal may face minority shareholders' hurdle

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Uday Kotak
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The risk that the minority shareholders of ING Vysya Bank could reject the merger deal forcing Kotak Mahindra Bank (KMB) to increase the swap ratio in favour of the former could lead to downside risks to the fair value of the deal, according to a report put out by research firm Espirito Santo.

The other big risk was the 'key man risk' to the deal. The firm said, "We believe that Uday Kotak is one of the key drivers behind the superior performance of the bank in terms of growth and conservatism."

Additionally, Kotak Mahindra Bank will be required to bring down its promoter shareholding to 30% to fall in line with the banking regulator's prescription. The Reserve Bank of India (RBI) has already set stiff deadlines for the promoter stake to be brought down from the current 40% to 30% as of December 2016 and further to 15% eventually. With this deal the shareholding will come down to 34%, which could lead to technical overhang on the stock as the market will always be concerned about stake sale by the promoters.

"The promoter stake in Kotak Mahindra bank has to drop to 30% by December 2016 and further to 15% eventually. This could lead to technical overhang on the stock as the market will always be concerned about the stake sale by the promoters," Espirito Santo said in its report.

Kotak Mahindra Bank said in a release, "The amalgamation is subject to the approval of the shareholders of Kotak and ING Vysya respectively, RBI under the Banking Regulation Act, the Competition Commission of India and such other regulatory approvals as may be required."

Uday Kotak had said in the press conference on Thursday that he expects all the permissions to be in by April 2015 after which the two entities can be amalgamated.

The takeover of ING Vysya by Kotak is the first such deal in the banking sector post the financial crisis. The last merger happened when ICICI Bank acquired Bank of Rajasthan in 2010.

Prabhudas Liladhar, a leading local stock broker, said in a report, "The merger with ING Vysya is a good fit for Kotak Mahindra Bank as it will help the latter in further increasing its outreach. ING has a strong liability profile, robust SME portfolio (35% of its loans) which KMB lacks currently (9% of loans and has aspiration to build) and minimal geographical branch overlap with Kotak Mahindra Bank. ING also has an attractive liability franchise with a CASA mix of 33%. We believe that the deal is priced reasonably."

Nomura Securities said in a report, "The key game changer in our view is the addition of the SME piece. Kotak has been one of the best retail lending franchises and the deal enhances its strength on the asset side significantly."

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