Kotak Mahindra Bank shares tank 3.5% after RBI setback on stake reduction; should you buy or sell stock?

Shares of Uday Kotak-run Kotak Mahindra Bank tanked by nearly 3.5% on Thursday, after India’s apex bank RBI notified on Tuesday that the bank’s preferential issue does not meet its dilution norms. Under RBI’s current norms, Founder and Promoter Uday Kotak was required to reduce his stake in the bank to 20% by December 2018 and 15% by March 2020. Accordingly, Uday Kotak had expanded his paid-up capital by issuing 52% more perpetual non-convertible preference shares. The expansion had effectively brought down his share in the paid-up capital from 30% to a little under 20%, but there were questions regarding RBI’s stake dilution norms.

The opinion on RBI’s stake dilution remains mixed, as some believe Kotak has to just cut his stake in the total paid-up capital. However, others contend that he is required to bring down his stake as a percentage of voting shares. Kotak Mahindra Bank shares were seen trading at Rs 1,253.60, down by more than 3% in the morning trade. The major reaction was seen today, as yesterday the stock markets were closed on account of Independence Day.

Research firm Citi said that the bank could now look to raise equity from the primary markets. Further, the firm said that Uday Kotak may look to sell part of his holding in the secondary market. Citi has a target price of Rs 1,565 on the shares. The firm’s target price implies an upside of 25% from the current market prices. Citi expects a meaningful acquisition in the banking space or in life insurance, AMC or NBFC. Morgan Stanley has an overweight rating on the shares, with a target price of Rs 1,435. The target price implies an upside of more than 14% from the current price levels.

“Given the RBI requirement bringing the promoter’s stake down to 20 per cent by December 2018 and 15 per cent by March 2020, for us it implies large dilution or a stock supply equivalent to Rs 25,000 crore (at current prices), or a large acquisition,” Nomura said in a note.

Kotak Mahindra Group