It’s no secret that Kotak Mahindra Bank has walked away with
a steal with ING Vysya Bank. The stock behaviour on Thursday and Friday was
clearly telling us that the market liked the price at which it managed to get
this really great asset. But the deal has left some unanswered questions and I
dare say if I am an ING Vysya shareholder, I won’t hesitate to say, this even
leaves some stench of not following best corporate governance standards either.
I will explain why
First and foremost, it’s well known that ING desperately
wanted to cash out of ING Vysya Bank – the parent company’s troubles are well
known. So obviously, there is a hint of duress in this sale. But should that
matter if the owner wants to sell it? – yes it does and here is the primary
reason.
Take a look at the shareholding pattern of ING Vysya Bank: First of all, the promoters hold only 42.73% stake, not even 50%. Secondly, the total promoter shareholding of 42.73% is further subdivided into two
entities: ING Mauritius Holdings which holds 33.22%
and ING Mauritius Investments which holds 9.51%.
Now take a look at what the regulations say regarding the shareholding and
voting cap for private banks.
“Bodies Corporate
under Category A (2) Foreign consists of two wholly owned subsidiaries of ING
Bank N V namely (i) ING Mauritius Investments I (9.51%) and ING Mauritius
Holdings (33.22%). The First body Corporate enjoys full voting rights of 9.51%
. The voting of second body corporate is governed by section 12(2) of the
Banking Regulation Act, 1949 which says that no shareholder holding shares in a
banking company shall, in respect of any shares held by him, exercise voting
rights (on poll) in excess of ten per cent or such percentage as my be
permitted under the prevailing laws as may be amended from time to time of the
total voting rights of all the shareholders of the banking company. At present
the voting rights of any shareholder of the Bank, irrespective of the number of
shares held by him is restricted to 10% . As such voting rights of the second
body corporate is restricted to 10% and thus the aggregate voting rights of
Foreign bodies corporate stand at 19.51%”
The second reason
is up for debate – normally in bank acquisitions, for a healthy bank – the
acquirer values the target at same valuations as itself – case in point being HDFC
Bank’s acquisition of Centurion Bank of Punjab
at almost 5 times Book Value whereas Kotak is paying only 2 times the trailing
book value. In this case, there is a big discount of nearly 30-40% for an asset
which is far more complimentary that Centurion was for HDFC Bank. ING Vysya has
553 branches to Kotak’s 661 and has 638 ATMs vs 1156 for Kotak. Even in terms
of income and profit parameters, Kotak is no more than 3x ING Vysya Bank. But the deal has valued Kotak almost 6 times
of ING Vysya Bank. But as I said, this is an issue open for debate.
The bottom line –
ING has a voting right of 19.51% in ING Vysya Bank. It cannot make a decision
for 100% shareholders. This deal should have been put to vote first and I can
guarantee you, this deal would have been struck down by shareholders. In fact,
I have spoken off the record to some institutions and they are already
planning to write to the RBI. The 57.37% shareholders classified as minority
shareholders actually control the voting rights and they have every reason to
ask for a better deal. This deal will face major hurdles from minority
shareholders and for good reasons.
Disclaimer: These
are my personal views.
