On Thursday morning, shares of Kotak Mahindra fell around 3% as investors reacted to regulatory developments on this Tuesday.

The stock touched an intraday high of Rs 1,271.00 and an intraday low of Rs 1,257.75.

On Tuesday, RBI said that Kotak Mahindra Bank’s preferential does not meet the dilution norms.

The Founder and Promoter Uday Kotak were to reduce his stake in the bank to 20 % by 2019 and 15 % by 2020, under the norms of the license given to the bank.

On BSE, at 09:30 hrs Kotak Mahindra Bank was quoting at Rs 1,259.00, down Rs 32.60, or 2.52%.

In fulfilment of license conditions Kotak, two weeks ago, expanded his paid-up capital by issuing 52 % more constant non-convertible preference shares. While this effectively brought down his share in the paid-up capital from 30% to a little under 20%. Questions were raised if the preference issue deceived RBI rules on stake dilution.

While preference shares are mid-way between debt and equity, perpetual preference shares are closer to equity 3. Basel rules recognize perpetual preference shares as tier 1 capital.

According to the legal experts, Kotak is legally right in doing so since his license conditions require him to cut his share in the paid-up capital not in the number of voting shares. However, others comment that the intent of RBI’s rules was to ensure a promoter’s stake is brought down as a percentage of “voting shares”.

In an exchange filing, Kotak Mahindra Bank said it continues to believe it has met the central bank’s requirement and that it will engage with RBI on the matter.

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