Tangled up in regulatory knots, Bandhan Bank seeks a way out
Either Bandhan Bank was overconfident that its promoter shareholding will reduce by half in a jiffy or it decided to jump in without testing the depth of the waters
Dodging regulatory bullets is no easy task but to find oneself as the target of two regulators is unfortunate. Bandhan Bank Ltd has found itself at the receiving end of the Reserve Bank of India (RBI) for violation of a key norm—its promoter shareholding threshold. Indian bank licensing rules restrict the role of the promoter of a bank progressively by mandating a reduction in stake to 40% within three years of setting up shop.
This deadline zoomed past Bandhan Bank in June.
Naturally, the regulator’s ire followed. RBI slapped the lender with a restriction on further branch expansion. Its chief Chandra Shekhar Ghosh cannot get his next increment unless he fixes this shareholding embarrassment.
But here is the twist in the tale. The youngest lender had itself listed in March and therefore its promoter cannot offload shares until March 2019 as per a diktat by capital market regulator Securities and Exchange Board of India.
One way or the other, Bandhan Bank is a rule violator. One of the regulatory guns has already gone off.
The bank has been pulling the heartstrings of the public through its last-mile connectivity in the most unwanted areas of the eastern parts of India. What’s more, the shareholders of its holding company are mainly trusts set up for the poor and institutional investors—Ghosh holds only a minuscule amount.
But even though it has returned a neat 16% since listing to its investors, they may not think twice before dumping the stock in panic. After all, the worst fear has come true, that of regulatory risk.
In all its fairness, Bandhan Bank was transparent in listing the possibility of violating RBI’s norms in its prospectus when it launched its initial public offering (IPO). What is bizarre is both regulators gave the IPO go-ahead, knowing that the lender would find itself in a bind a few months later.
The other probability of the regulators not realizing the clash of their own regulation is, of course, unthinkable.
On Bandhan Bank’s part, either it was overconfident that its promoter shareholding will reduce by half in a jiffy or it decided to jump in without testing the depth of the waters. Nevertheless, it now had its wings clipped.
One way out is to acquire another lender. But Bandhan Bank has little time to do this and no worthy candidates to shop for. Another way suggested by analysts is a merger of the lender, its promoter Bandhan Financial Holdings Ltd and Bandhan Financial Services Ltd, which holds the holding company.
The regulators want compliance and investors want returns. Bandhan Bank may pull the heartstrings of the public with its banking for the poor image, but to pull the purse strings of its investors, the lender needs to find its way out of this quandary as early as possible, without too many of its shares coming into the market and depressing prices.