Kumar Mangalam Birla, chairman of the Rs1.4 trillion aluminium-to-mobile telephony conglomerate Aditya Birla Group, will raise his stake in Aditya Birla Nuvo Ltd by December. The group company runs Aditya Birla Financial Services, or ABFS, and holds 25.38% of mobile firm Idea Cellular Ltd.

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The holding will be increased by converting preferential warrants issued in June 2009 into equity shares.

“Our balance sheet will further improve with the remaining equity infusion by promoters for Rs425 crore and the promoter’s stake will rise to 51% from the current 46%," Aditya Birla Nuvo chief financial officer Sushil Agarwal said in an interview last week.

Aditya Birla Nuvo, a company with interests in information technology, garments, carbon black and fertilizers, had issued 18.5 million warrants to promoters on 22 June 2009, giving them the option to purchase one equity share against one warrant at Rs541.19 a share.

Future plans: Aditya Birla Group chairman Kumar Mangalam Birla. Abhijit Bhatlekar / Mint

Aditya Birla Nuvo rose 0.16% to close at Rs854.65 on the Bombay Stock Exchange on Wednesday even as the exchange’s benchmark index, the Sensex, rose 2.4%.

The promoters have an 18-month window till December for conversion. The Birlas paid Rs575 crore and increased the stake to 46% from 41.5% by converting part of the warrants into equity shares between June and September.

Most of the money will go into fuelling the growth of ABFS, a business which the group plans to strengthen and convert into a bank as and when the Reserve Bank of India (RBI) gives licences.

“We would be keen to have a banking licence (if allowed by the regulator) as this will be a strategic fit for our financial services business," Agarwal said. “We need more banks as we have around 400 million bank accounts, including multiple bank accounts in a country of more than a billion. However, everything will depend on the regulator’s guidelines."

RBI had in August released draft guidelines on licensing norms for new banks after finance minister Pranab Mukherjee in his February Budget announced that the central bank will allow the entry of new players in banking. The objective is to spread banking services across the nation.

RBI is currently in talks with industry lobbies, banks and corporations before drafting the final guidelines. The banking regulator has made it clear that companies with exposure to real estate may not be considered for setting up new banks. Its stance vis-a-vis big industrial conglomerates is not known, though some have reservations about their being allowed to set up banks.

Analysts said the Birlas are in contention for a bank licence with other large industrial houses such as the Tatas, but RBI may be cautious about giving licences to groups with diversified business interests.

“They will look for companies with strong corporate governance and the Birlas fit the bill," said Deepak Tiwari, analyst with domestic brokerage Kisan Ratilal Choksey Shares and Securities Pvt. Ltd. “But the central bank will be cautious."

Another analyst with a local brokerage said there may be reluctance because RBI won’t be able to pick and choose among industrial houses and if the Birlas are given (a licence) the banking regulator will have to say yes to others as well.

“Conglomerates such as the Reliance-Anil Dhirubhai Ambani Group, which competes with the Birlas in financial services, will also ask for a licence. More than the Birlas, I think NBFCs (non-banking financial companies) like the Shriram Group have a better chance," the analyst said on condition of anonymity as his views were personal.

ABFS has assets of around Rs90,000 crore under management, including mutual funds, life insurance, private equity, and general insurance spread over 1,600 branches. It has 16,500 employees.

Aditya Birla Nuvo has applied to financial sector regulators, including RBI, the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority (Irda) to create a new company for financial services.

“All the financial services businesses are already operating under a virtual entity, ABFS. A holding company structure is indeed very supportive in creating a successful, long-term and sustainable financial services business as this helps in bringing synergy and sharper focus among these businesses in line with our vision," Agarwal said.

The financial services-focused company will improve synergies in marketing, legal, compliance and human resources, besides strengthening capital-raising ability.

The company has already got an in-principle approval from Sebi, but RBI and Irda are yet to give their nod. The group sought their permission to create a holding company last year.

RBI’s reservations about the holding company structure are known. In the past, ICICI Bank Ltd, the nation’s largest private sector lender, had wanted to have a holding company for its insurance ventures, but it did not get an RBI approval. State Bank of India, too, is awaiting RBI approval for a similar proposal.

Earlier in 2009, Birla refrained from converting 20.5 million preferential warrants of Aditya Birla Nuvo into equity at ,997.45 a share after the stock lost 60%. These warrants were issued in February 2008 and had they been converted in September 2009, the company would have raised 4,000 crore.

The latest move to increase the promoter’s stake in the company also coincides with an improvement in Nuvo’s financial performance. Revenue rose to 15,500 crore, the highest ever for the company, in 2009-10.

The company posted a net profit of 155 crore in 2009-10 against a loss of 436 crore in the previous year.

In the April-June quarter this fiscal, Aditya Birla Nuvo posted a net profit of 149 crore against a loss of 35 crore in the corresponding quarter last year.