About the Crisis
On October 1, 2018 market share price of Bandhan Bank dipped nearly by 21% due to the restriction by Reserve Bank of India (RBI) on Bandhan Bank regarding the expansion of its branch operation and freezing of the salary of Chief Executive Officer Chandra Shekhar Ghosh. Reserve Bank of India (RBI) took this action when the Managing Director and Chief Executive Officer Mr. Chandra Shekhar Ghosh failed to meet the shareholding guidelines terms advised by the RBI.
RBI has clearly communicated under the licensing condition that a private sector bank should have a promoter share of 40 percent. RBI directed the Bank to bring down the promoters’ shareholding to 40 percent within the three years of operations. Bandhan Financial Holdings Limited (BFHL) acted as the promoting company for Bandhan Bank and had a holding of 82.28 percent in the bank.
Bandhan Bank Operational Journey
The journey of Bandhan Bank started back in 2001 when Mr. Chandra Shekhar Ghosh set up an NGO named Bandhan and by 2006, Bandhan established itself as microfinance. Driven by the constant desire to serve the people better, Bandhan Microfinance marched to stand as a Universal Bank in 2015. Bandhan Bank Limited was incorporated on 23rd December 2014 with 51% ownership of its subsidiary, Bandhan Financial Holdings Limited.
The progressive growth of Bandhan NGO into a fully-fledged commercial Bandhan Bank was more than a normal journey. Bandhan Microfinance had a strong presence in the underbanked areas such as eastern and north-eastern regions of India. Besides, the financial performance and balance sheet strength together with the attitude to serve the rural population provided a valid reason for the Reserve Bank of India to upgrade microlenders to large industrial houses. In just 5 years of operation, the bank has a customer base of 2.01 crore and a network of 4,559 banking outlets. The deposit value of the bank is Rs. 57,082 crore and total advances and Deposits of Rs. 1,28,928 crore.
Holding Structure of Bandhan Bank Limited
To understand the crisis of Bandhan Bank, it is necessary to understand the holding structure of Bandhan Bank Limited.
To deal with regulatory requirements, Bandhan Bank created a holding structure by forming a subsidiary called Bandhan Financial Holding. Bandhan Bank Limited was then promoted by this non-operating holding company, Bandhan Financial Holding, which now owns 60.96% stakes of the bank.
Reasons and norms regarding Dilution of Promoter Shareholding
RBI guidelines for Bandhan Bank was to dilute its promoters’ shareholding in the company. There are basically two main reasons behind this dilution. First and foremost, dilution of promoters’ shareholding in the capital structure of banks will lead to a reduction of the influence of the promoters in the bank due to their concentrated shareholding in the decision making. RBI wanted to diversify promoter holding in banks from individuals, to make it more institutionalized, and to improve corporate governance in banks. When the power to make decisions rests in the hands of a very few and improper utilization of resources may take place. Such concentration of funds may lead to misappropriation of funds or frauds.
A bank is a public institution dealing with the public’s money and any inappropriate decision due to the dominance of the promoter will result in catastrophic results.
There are financial implications for diluting promoter shareholdings. By diluting the shareholding, the banking institution will be able to raise more and more capital required for its expansion and better financial sustainability.
Apart from such behavioral need, there are some regulatory guidelines for the promoters advised by regulatory bodies. For instance, the Reserve Bank of India has Licensing Norms that have some provisions related to the promoter’s shareholding in banks. The guidelines for universal banks in the private sectors regarding promoters’ shareholding are as follows;
- In section 2, subsection (C) under shareholding pattern, the promoters’ shareholding by Non-Operating Financial Holding Company (NOFHC) should not exceed 40% of total paid-up capital. If exceeded needs to be brought down to 40 % within the span of three years since the inception of the bank.
- RBI guidelines for licensing of Private Sector Bank suggest that paid-up equity capital should be at least Rs 500 crore. The same guideline dictates that NOHFC should initially hold a stake greater than 40% of overall paid-up capital equity. This shall be maintained for the first five years of business operation and should be gradually brought down to 15% of total paid-up equity capital during the span of 12 years from the beginning of operations.
- The RBI guideline also suggested that banking entities should get publicly listed on the stock exchange of India within the span of three years since the date of commencing business operation.
These Guidelines by RBI shows its intentions towards the promoter’s shareholding via NOFHC in Banking Institutions.
IPO and Promoters’ Shareholding
As per the public listing guidelines, Bandhan Bank was listed on stock exchanges on March 27, 2018, i.e. three years after the operation at BSE and NSE. There was an oversubscription of IPO of Rs.4,470 crore by 14.63 times. It received a strong response from the market with a 27% premium on the listing date in the market.
IPO intended to bring down its promoters’ shareholding. IPO only managed to bring down the promoters’ shareholding to 82.28% from 89.76%. This proportion was way off the target limit of 40% as per RBI’s guideline.
One of the factors which were preventing the further dilution of promoters’ share was SEBI guidelines regarding the lock-in period. The guideline was regarding the Issue of Capital Disclosure Requirements under section 32 and 36. In this section, an aggregate 20 % of the total equity share capital post IPO requires to be held by promoters for a minimum of three years after the IPO issue.
Under this SEBI guideline, Bandhan Bank had the lock-in period till March 2019. SEBI accord overruled RBI guidelines for promoters’ share dilution.
Bandhan Bank could have been save from all this trouble if it would have planned its IPO listing
Alternatives for Share Dilution
After getting a year’s leverage due to the lock-in period under the SEBI guideline, Bandhan Bank has three ways left to dilute its promoter’s shareholding.
- Offer for Sale (OFS) where NOFHC needs to dilute its share by selling direct stakes of its equity.
- Merger and Acquisition as the inorganic approach of dilution
- Primary and Secondary fundraising through stock market operations
Bandhan Bank went for the inorganic approach for dilution. In October 2019, the bank, Bandhan Bank merged with Gruh Finance, a housing finance subsidiary of HDFC Limited based in Ahmedabad. This deal transferred 14.9% of its stakes to HDFC to merge with Gruh Finance.
This deal diluted the promoter’s stake proportion from 82.28% to 60.96%. This also helped Bandhan Bank to diversify its risk portfolio.
A recent update has resolved this dilution problem of Bandhan Bank. Institutional investors such as Caladium Investment Pte Ltd, Camas investment Limited, Morgan Stanley Asia Singapore, Copthall Mauritius Investment, etc. bought the promoters’ share of the bank. Now, promoters hold 20.95% of the Bandhan Bank which fulfills the regulatory requirement of RBI.
RBI’s Restrictions and Relaxations
Under section 35A of Banking Regulation Act, 1949, RBI imposed banking operation restriction on Bandhan Bank which restricted Bandhan Bank to open new branches.
In October 2019, RBI imposed a monetary penalty of Rs. 1 Crore on Bandhan Bank after it failed to meet regulatory compliance regarding shareholding.
After fierce negotiation, RBI allowed the opening of 40 branches in December 2018.
In August 2020, Bandhan Bank managed its promoters’ shareholding under the limit of RBI. Due to this reason, Bandhan Bank was free from all the restrictions.
Lesson Learned from Bandhan Bank’s Crisis
Bandhan Bank Crisis is an exemplary case in Indian banking history which reflects how important it is to follow the regulatory guidelines and what could be the consequences of not following the guidelines of regulatory bodies.
We can also learn about the investors’ behavior and volatility of the share market with respect to investor behavior. The RBI restriction announcement led the share price of Bandhan Bank to fall by 21 %.