Saturday, August 1, 2015

Will SEBI Allow RBL Bank’s IPO?

Come August 3rd, and all IPO investors’ eyes would be glued to SEBI’s next update on pending IPOs to know whether RBL Bank’s IPO approval has progressed to any extent. In its last update, SEBI had disclosed that it had sought clarifications from Lead Managers of RBL Bank’s IPO. While SEBI has not disclosed what was the clarification sought, and while it is routine for the regulator to seek such clarifications, in RBL Bank’s case, there is a peculiarity as it is already known that the private lender is in serious and multiple violations of a capital raising norm, which is a kind of violation that SEBI has been most stern about in recent times.

It has been almost a decade since any private sector Indian bank has gone for its Initial Public Offer. In fact, there are only a very few unlisted private sector lenders remaining in the market. That is why the upcoming IPO of Kolhapur, Maharashtra, based RBL Bank is likely to be in the focus of investors.

RBL Bank is battling a major problem with the regulators, which came into the open when it had to disclose two illegal Rights Issues and a prohibited Preferential Allotment it had done a few years back. The violations are serious as it involved getting investments from 2,591 and 1,969 investors for the unsubscribed portion of two Rights Issues, and 352 investors for the Preferential Allotment, even while it was clear in the Indian Company Law that such issues can’t be to more than 49 investors. 

Normally, such a repeated violation is sure to attract not only a ban on the IPO, but even regulatory proceedings against the company by SEBI, RBI, MCA, RoC etc. But in RBL Bank’s case, even if there is regulatory action, the IPO might see the light of the day for some peculiar reasons.

Firstly, the violations occurred much before the current management team led by Vishwavir Ahuja took charge of the 72 year old bank. Ahuja was the India head of Bank of America.

None of the Directors or top Executives under whom these violations occurred are now with the bank. Also, there is no promoter group involved with this bank, formerly called Ratnakar Bank Ltd.

Secondly, RBL Bank is backed by several reputed domestic and overseas investors including IFC (a World Bank arm), CDC Group Plc (of UK Government), ICICI, HDFC, IDFC,, Norwest Venture Partners, Samara Capital, Beacon Capital, Faering Capital, TVS Shriram, Cartica Capital, Ascent Capital, Aditya Birla Private Equity, Asia Capital & Advisors, and Gaja Capital.

Thirdly, RBL Bank’s IPO is a major one involving the raise of Rs. 1450 crore and involving both fresh issue of shares (for Rs. 1100 crore) as well as an OFS by some existing investors.

Next in line comes the influence of the managers of this IPO which include some of the largest in business like Kotak Mahindra Capital, Axis Capital, Citigroup, Morgan Stanley, HDFC Bank, ICICI Securities, IDFC Securities, IIFL Holdings and SBI Capital Markets.

And lastly, RBL Bank has been advised by RBI almost one year back to go for a public listing.

While there are such positive points regarding the approval for this IPO, on the flipside there are several questions. The kind of unapproved capital raising done by RBL Bank in the past from 4912 investors puts the lender as well as SEBI in a difficult position, as SEBI has been quite strict about such illegal capital raising, as seen from the infamous Sahara case.

Now all eyes will be on SEBI’s upcoming update on August 3rd to know more about how it will tackle a serious violation and still allow for one of India’s largest banking sector IPOs, in recent times.

There is also a fair chance that SEBI will stick to its stand as far as such illegal public issues are concerned, and instead of approving the IPO, take penal action against RBL Bank, and refer the case to other concerned agencies like MCA and RoC.

However, if SEBI’s approval eventually comes for RBL Bank‘s IPO, the next thing to be watched out for will be the asking price for the IPO.

In its DRHP, RBL Bank has compared itself with Kotak Mahindra Bank, Yes Bank, & IndusInd Bank, all of which are trading at high valuations. However, in its size it is more comparable to much smaller lenders like Dhanlaxmi Bank, DCB Bank, City Union Bank, & Lakshmi Vilas Bank, which are trading between 1.1 to 2 times their book value.

The strengths of RBL Bank include high growth rate, high NIM, reasonable cost to income ratio, and low NPAs. Its core weaknesses include small number of branches compared to its peer group, low level of CASA deposits, and a loan book dominated by corporates and MSMEs.

Its high growth rate is also partially due to its low base so far, and it remains to be seen how fast it can scale up given the small branch footprint and low CASA deposits. While NPAs are currently reasonable, RBL Bank’s high exposure to corporates and MSMEs is a risk factor.

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