Kotak, ING & Public Support!

KOTAK + ING NEEDS MORE PUBLIC SHAREHOLDER SUPPORT?By: Menaka Doshi, Executive Editor, CNBC TV18The Voting Cap in Banking means both Kotak & ING need more public shareholder support than they would have…for this deal to go through!As in the case of all bank mergers, this deal will be done under the BANKING REGULATION ACT, 1949 and not the COMPANIES ACT, 1956Both banks will need approval from their shareholders for the amalgamation scheme.That approval threshold as per the BR Act 1949 is ‘a majority in number representing two-thirds in value of the shareholders’ of those present and voting, including proxies.Ordinarily 2/3rds (67%) would have been easy for each bank  to achieve as in Kotak Mahindra Bank the promoter (Uday Kotak & group) stake is 40% and in ING Vysya Bank the promoter (ING) stake is 43%. Hence, Kotak Mahindra Bank would have needed 27% public shareholding to vote in favour of the deal. And ING Vysya would need 24%.Merger Approval2/3rds of 100 = 67%                Promoter           Public Shareholding Support Needed            Kotak       40%                  27%ING          43%                  24%

But here’s where the twist lies. Banking regulations do not permit an individual to exercise more than 10% voting rights.That means Uday Kotak (individually) owns 39.7% but can exercise only 10% voting rights. A similar restriction would apply to ING which owns 43% in ING Vysysa (there’s a twist here too, read on). Hence both banks will need more public shareholder support than otherwise.Here’s a simple illustration… Imagine Kotak Mahindra Bank’s equity capital is 100 shares. And for calculation ease, assume the extreme situation that owners of all 100 shares are present at the shareholder meeting. 67 shares would have to vote in favour of the deal. Uday Kotak has 40 shares, so had he been able to exercise voting rights on all 40, the deal would need support from an additional 27 shares owned by public shareholders. But since Uday can exercise only 10% voting rights, the voting base becomes 70 (30 of his shares are non-voting). The 2/3 rd approval threshold works out to 47 shares needed in favour of the deal. Of those 47, Uday votes on 10. So the deal needs another 37 public shares in its favour. So that’s 10 more than he would have needed had he been able to exercise voting rights on his full shareholding.Illustration: Kotak Mahindra BankTotal Shares      100        702/3                     67        47UK                     40        10Public                 27        37    An almost similar calculation would apply to ING Vysya, based on the same extreme situation that all shareholders attend the meeting. Except here the voting base would get reduced to 67 as ING’s stake is 43% and the assumption is it can vote on only 10%. So 33% is non-voting. Illustration: ING Vysya BankTotal Shares      100        672/3                     67        45ING                    43        10Public                 24        35   BUT - Interestingly, in the case of ING Vysya, the ING promoter stake is held via 2 entities. ING Mauritius Holdings: 33.2%ING Mauritius Investments: 9.5%The language of the banking regulations suggests that the 10% voting cap applies to each person (or entity). Strictly on the basis of the language one could conclude that ING Mauritius Holdings’ voting rights will be capped to 10% and ING Mauritius investments can exercise full 9.5% voting rights. Giving promoter ING a total 19.5% voting right.One could argue that this goes against the spirit of banking regulations and hence will not prevail. But it’s not clear what stance RBI will take. So let’s assume for a moment that ING is allowed to exercise 19.5% voting rights, then only 23% promoter shareholding becomes non-voting. The base gets reduced to 77, and the deal needs support from only an additional 32 public shares to reach 51, which is the reduced approval threshold. That makes it tougher for dissenting public shareholders to prevail!Illustration: ING Vysya BankTotal Shares      100        67           77   2/3                    67         45           51ING                   43         10           19Public                24         35           32It will be interesting to see how RBI decides this and exactly how much voting power ING is able to exercise.Both banks will need shareholder approvals before getting a go-ahead from RBI.They will also need to file with the Stock Exchanges.And the CCI approval process will likely run in parallel.Neither bank has yet commented on this analysis. And I have yet to reach RBI to get confirmation of the process. This is my analysis of what the process could look like. IMPORTANT: Since no one can predict how many shareholders will attend the meetings I have assumed full attendance for the sake of calculation. If relatively few shareholders attend then it will be a breeze for both banks to get the requisite shareholder approval.PS: I have rounded off most numbers for ease of calculation