Saturday, November 22, 2014


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%”

So, there you go - ING may have 42%stake but it has less than 20% voting right. How can it make a decision on it's own?

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.


  1. Don't agree with your point of view that a acquiring bank should value the acquiree at its own valuation levels.. what is the justification for that?

    PS - you should write more regularly... always good to hear from you outside CNBC screen

  2. Thanks Pi. I will try to be more regular. Regarding your comment - as I said, this point is up for debate. But HDFC Bank paid 5x for Centurion BoP. This some would argue is even better asset.