Hard to copy

Indian bank M&A looks hard to copy

India's latest bank tie-up looks like a one-off. Kotak Mahindra's $2.4-billion takeover of a smaller rival backed by Dutch ING Groep will create the country's fourth largest private sector lender by branches. It's a rare example of consolidation in the industry. India's privately-owned banks are in better shape than their state-backed peers but the dominance of large family shareholders makes such unions unusual.

Under the terms of the tie-up, investors in ING Vysya will swap each share for 0.75 new shares in Kotak, creating an institution with a combined market value of $15.8 billion. The swap values each Vysya share at Rs 787, or a modest eight-per cent premium to the market price on November 18, before news of the deal leaked.

There are good arguments for creating a bigger pan-Indian institution. Kotak has a strong presence in the north and west of India, while two-thirds of Vysya's network is in the south. India's economic reforms should offer greater lending opportunities for private banks, which have fewer bad debts than their state-backed rivals. Kotak's current valuation of four times its forward book value, double Vysya's multiple, makes an all-share deal attractive.

The deal also helps billionaire Uday Kotak meet a requirement to reduce his shareholding in the bank he founded without selling shares. The Reserve Bank of India has set a deadline in 2016 for the businessman to reduce his stake to 30 per cent, from around 40 per cent today, as part of efforts to broaden public participation in listed banks. After absorbing Vysya, Kotak's stake will fall to 34 per cent.

Yet a tie-up is only possible because ING Groep is willing to give up its 43-per cent shareholding in Vysya for a seven-per cent stake in the enlarged entity. Most of India's other large private sector banks are dominated by large family shareholders who would baulk at such an idea. For the Dutch bank, folding its stake into a larger entity is a neat way to reduce the risk of an overseas investment at a time when it continues to divest many of its international businesses. In India's banking sector, such an alignment of interests is rare.

Disclosure: Kotak Mahindra and associates are significant shareholders in Business Standard Limited