RBI turns the heat on capital-starved banks

Dhanalakshmi Bank promoter pares holding.

The Reserve Bank of India (RBI) has issued a fresh directive to banks having less than the required capital to address ownership issues and take steps to increase their net worth to a minimum of Rs 300 crore.

This assumes significance as several banks, including Dhanalakshmi Bank, Catholic Syrian Bank, Nainital Bank and Ratnakar Bank, are raising funds to boost their net worth to at least Rs 300 crore.

All undercapitalised banks have received clear direction from the RBI asking principle shareholders in banks to reduce their stake and also increase the net worth to the stipulated Rs 300 crore.

The regulator has also indicated any stake sale over 5 per cent will need its approval. "We will conform to the RBI directive. The bank has appointed Enam to raise capital through a rights issue. We should complete the due diligence in the next two to three months,'' said P S Prasad, managing director, Dhanalakshmi Bank.

Banking sources said the Thrissur-based Dhanalakshmi Bank's promoter P Raja Mohan Rao, a businessman from Andhra Pradesh, is also selling a part of his stake (up to 15 per cent) in the bank to three foreign investors.

Rao, managing director of a Bangalore based company, United Telecom Ltd, holds 36.69 per cent stake in the bank. He sold around 4.68 per cent stake for about Rs 10 crore to Mavi Investment Fund Limited, which purchased the shares on behalf of MM Warburg Bank (SCHWEIZ) AG).

"The businessman will sell the shares in the secondary market in three tranches. Rao will continue to hold around 10 per cent stake in the bank after the deal. Rao aims at raising close to Rs 60 crore through the deal,'' said a senior banker.

Sources indicate the promoter is in a haste to sell as he is under pressure from the RBI to reduce his stake. Hence, he sold the shares at price as low as Rs 73. The bank was also in talks in with AIG Private Equity.

The bank's net worth, as on June 30, 2007, stood at around Rs 130.23 crore. The bank management is planning to raise funds through a rights issue, however it would have to reduce promoter holding before the proposed rights issue.

Catholic Syrian Bank, another south-based bank, recently raised around Rs 33.30 crore through private placement to three private equity (PE) players. The three PE funds have made investments at Rs 190 a share, including a premium of Rs 180, which accounts for 14 per cent of the existing equity of the bank.

This investment of Rs 33.30 crore should boost the bank's net worth closer to the Rs 300 crore threshold. As on March 31, 2007 the bank's net worth stood around Rs 228.76 crore.

Ratnakar Bank, with a net worth of around Rs 54.19 crore as on March 31, 2006, is also struggling to raise funds. The promoters of Centrum Finance are the single-largest shareholder in the bank.

The management has received board approval to raise funds through an initial public offering and preferential allotment. Despite this, the bank has not yet raised any funds. The bank's chairman and chief executive officer S G Kutte was not available for comments.

Meanwhile, Bank of Baroda board had approached the RBI for exempting Nainital Bank, a BoB subsidiary, from the stipulation of boosting its net worth to Rs 300 crore.

In the recent past, capital-starved banks such as United Western Bank and Sangli Bank were merged with IDBI Bank and ICICI Bank, respectively.