Mumbai: Sumitomo Mitsui Financial Group Inc. (SMFG), the second largest Japanese bank by market value, will acquire 4.5% stake in Kotak Mahindra Bank Ltd for $296 million (Rs1,380 crore).

War chest: Kotak Mahindra Bank MD, vice-chairman Uday Kotak. Abhijit Bhatlekar / Mint

The bank will issue fresh shares to SMFG in August or September, pending approval by its shareholders and regulatory authorities. Following this, the stake of promoters in Kotak Mahindra Bank will come down to around 49%, in sync with the regulatory requirement. Currently Uday Kotak and his family hold around 48% stake and Anand Mahindra owns a little over 3%, taking the overall promoters’ stake to around 51%.

The private placement will be made at Rs833 a share, a premium of around 12% to Kotak Mahindra Bank’s Tuesday close. The deal was announced before market hours on Wednesday.

Shares of Kotak Mahindra Bank ended the day up 3.23% to close at Rs770.65 apiece on the Bombay Stock Exchange even as the bourse’s benchmark index Sensex rose 0.95% and the banking index rose 0.76%. In Tokyo, SMFG shares fell 1.4%.

Kotak, vice-chairman and managing director (MD) of the bank, said: “Sumitomo Mitsui could increase their stake (in the bank) if they wish." Going by the local regulation, a foreign bank that does not have a branch presence in the country can acquire 10% stake in an Indian bank, added Kotak.

As part of the deal, SMFG plans to team up with Kotak Mahindra in asset management, stock broking and investment banking operations.

“With this tie-up, we will explore new business opportunities in the infrastructure and the project finance," Kotak said. “We will grow this partnership step by step. SMFG is big in the insurance and brokerage space which presents a huge opportunity for us. Many Japanese companies are looking to list in India."

SMFG’s 100% Indian subsidiary SMBC Capital India Pvt. Ltd focuses on providing advisory services to clients in sectors such as infrastructure.

In the past, Kotak Bank had a partnership with Goldman Sachs to offer investment banking services. A few years back they parted ways, paving the path for Goldman Sachs to set up independent operations in India.

Kotak plans to use the money raised for growth and does not rule out acquisitions in the banking space. “This is like a war chest which can be used for organic and inorganic growth options. We will grow our branch network to 500 by December 2012," he added.

The deal gives SMBC a toehold in India and may also help it win commercial-banking business from Indian companies, said Barclays Plc analyst Shinichi Tamura.

“Sumitomo Mitsui has long-term relationships with some of India’s big consortium, but in order to expand that business they need the help of a local bank," said Tokyo-based Tamura. “We’ll likely see more alliances by large Japanese banks in Asia as there is no growth in domestic financial markets."

A 30 June report of Mumbai-based brokerage Prabhudas Lilladher Pvt. Ltd said the transaction is strategic as SMBC is looking to expand its overseas operations through this partnership. Recently, ING Bank NV Singapore sold its 3.1% stake in Kotak Mahindra Bank at Rs750 per share but that was a distress sale, the report added.

Bloomberg contributed to this story.