Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Consolidation: The next wave - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Dec 5, 2003

    Consolidation: The next wave

    With the recent acquisition of UTI Bank's stake by HSBC, the activity in private sector banking stocks has intensified. Another private sector bank, Centurion Bank, is also witnessing a change in shareholder structure. Do these moves indicate that Indian private sector banks are being increasingly looked upon as acquisition targets by foreign investors as well as banks? Do these recent moves point out to a round of consolidation in the banking sector?

    Before we answer this question we need to examine the factors that can lead to consolidation in the sector. First and foremost the issue of FDI (foreign direct investment) limit in private sector banking companies has been a major dampening factor as far as foreign investments (which could potentially lead to consolidation) in the sector are concerned. Despite the announcement by the finance minister in the 2003-04 budget regarding the raising of FDI limits in the banking sector, nothing concrete has been done regarding the same. Finance Minister Jaswant Singh had proposed a hike in Foreign Direct Investment (FDI) limit of private (and foreign) banks from the current 49% to 74%.

    The issue regarding voting rights of investors in a banking entity is also a dampening factor for acquisitions by foreign players in the Indian banking sector. Currently, the voting rights of any entity that holds 10% or above stake in a private sector bank, is limited to 10%. That means that even if an entity held 49% stake in a bank, his voting rights would be limited to 10%, signifying a cap on management control irrespective of the size of holding in a private sector bank.

    While the above-mentioned concerns have been the main reasons for the lack of consolidation in the sector, the situation seems to be changing for the better. The finance ministry has indicated that there may be changes in both these policies. The issue regarding voting rights is soon to be amended. Regarding FDI investment limits also, there are indications that the limit may be raised to 74% shortly. All these developments indicate that the government is keen on further opening up the banking sector to investments as well as foreign expertise. The HSBC deal (if it goes through) may actually be the beginning of a wave of consolidation in the future.

    If we take example of the UTI Bank - HSBC episode, while there is no doubt that the move has indicated global interest in hiking stake in the banking sector in India. However, what does it mean for the shareholder in the end. True that with a partner like HSBC, UTI Bank's perception among customers gets a leg up. It could bring expertise, both in terms of technology and strategy for UTI Bank. For HSBC, which is looking to expand its base beyond bigger Indian cities, UTI Bank could be an ideal platform, not to mention cost efficiencies for both parties. Even here, one should note that the HSBC offer has been shot down by the other FIs invested in UTI Bank. So, in the short to medium term, HSBC is likely to be forced to be a passive 'investor' (as it itself has stated). However, as time goes by and the legislation regarding FDI in the sector becomes more liberal, HSBC is likely to take a shot at management control.

    So in our view, investors should look at opportunities on a case-to-case basis. More importantly, they should look at the benefits that two merging partners bring to the table and what it means for the bank's growth prospects. The consolidation positives are likely to be a long drawn affair and if one is investing in banks with this motive, investment horizon needs to be long term to reap in the full benefits.



    Equitymaster requests your view! Post a comment on "Consolidation: The next wave". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)