Among the untold stories on bankers, this one takes the cake. Almost a decade ago, one of the city’s dealmakers with fond hopes of controlling a bank, cut a deal with the CEO of an old private sector lender. The pact was simple: the CEO must convince the board that it was time for new investors to come in and a new management to take over; in return his salary would be trebled and he would continue to be the managing director, at least for some years. The board, in which a Brahmin community of coastal Karnataka had the last word (and still does), overnight pushed through a rights issue that bloated the equity pool of the bank so much that it made it singularly unattractive for anyone to acquire. It was the classic poison pill at play. Many years later, bigger dealmakers are today snooping around that bank, but other than brief and occasional excitement in the stock price very little has happened.
No one knows whether a new management at that point would have helped the bank. The board had blocked the deal not because it was worried that new managers will upturn the bank’s prudent, conservative style of functioning. In fact, creating a larger equity base to service did not exactly help the bank. The board thwarted the deal simply because the board members were anxious to preserve their directorships. The bank was a case of diversified ownership, weak management and a ‘strong’ board — which by no way means a ‘good’ board. This is exactly the kind of a board that repeatedly squashed merger proposals of a Kerala-based bank, even by mustering support of the local church.
The other class of Indian private banks — mostly, the new generation lenders — have a different character: a strong management, diversified ownership and a ‘weak’ board. M&A stories in Indian banking are weaved around these two groups, with the first category being the target bank and the second, the acquirer. It’s a story that the regulator is most comfortable with. Old banks, with their weak managements and stubborn boards, are often perceived as the underbelly of the industry, and such mergers are a way to make the banking world easier to regulate. But while RBI can block mergers, it cannot push a bank to merge with a bigger lender, unless the bank that’s getting merged is a troubled one.
Some of the new generation banks are today actively looking at acquisitions to manage their high cost of funds. These players are fishing for banks with a decent branch network, stable deposit base and a good mix of current and saving accounts. For some, such deals are also driven by the need to grow; for instance one of the reasons that helped HDFC Bank to stay ahead of Axis is acquisition. But this is what the M&A story is all about — confined in the narrow world of private banks. State-owned banks have stayed away from M&As, while co-operative banks with their ownership structure and flavour of regional politics, are too messy to handle. Only a handful of PSU deals reached the drawing board and then fell through; and even these were typically cases where the CMD of one bank with some years of service left, identifying a target bank whose CMD was about to retire. Today, the only M&A in PSU banking is the merger of SBI subsidiaries with the parent.
But there is a third category of private banks which the new banking licensing guidelines, expected to be announced this month, can give birth to. There could be a new genre of banks with a strong management and an ownership structure which may or may not be diversified. The trickiest questions are:
Whether industrial houses will be allowed to promote banks?
If they are permitted what will be the maximum equity they can hold?
If RBI puts a shareholding cap of 10% in greenfield banks, then will the new promoters be required to fulfil the shareholding criterion from day one, or will they get a few years to dilute it over some years? Till now, banks and their shareholders have been given time to lower their holdings, even though other financial services players like new stock exchanges have been told to ensure a diversified ownership before they start operations.
Some countries like Canada allow a graded ownership structure, where the shareholding is linked to the bank’s market capitalisation — higher the m-cap, the more diversified is the shareholding. The central bank may come out with a variant of such a graded structure and rules on financial inclusion, besides putting a minimum net worth criterion of Rs 1,000 crore for a new bank (instead of the current capitalisation requirement of Rs 300 crore). In all probability it will ban common directorships, inter-group lendings and other transactions with group firms when a business house sponsors bank.
RBI’s reservations on business houses owning banks are well known. On many occasions the central bank has stalled share transfers whenever either a large diversified group, or a powerful NBFC, or an investment company of a bigger group tried to buy into a bank. Indeed RBI is paranoid on the subject. More than a year ago, when one of the aggressive financial services groups tried to take control of a small, unlisted bank in the western region, the central bank appointed two directors to block possible transactions. But with the government having hinted its intention to allow corporates set up banks, it would be difficult for the regulator to put a blanket ban. It will have to find a way out.
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