SMFG buys stake in Kotak Mahindra

Sumitomo Mitsui Financial Group has agreed to buy a 4.5 per cent stake in India’s fourth-largest private bank, the first investment by a Japanese financial group in an Indian bank.

SMFG and India’s Kotak Mahindra will also explore setting up an infrastructure fund, helping companies in India raise money through samurai bonds and other opportunities as part of a new equity alliance.

“India has domestic growth but could do with [access to more] savings while Japan has savings but could do with some growth,” Uday Kotak, Kotak Mahindra vice-chairman and managing director, told the Financial Times.

The Rs13.7bn ($296.2m) stake purchase by SMFG, which will make it Kotak Mahindra’s biggest shareholder after the founding families and Warburg Pincus, the US investment bank, is part of a push by Japanese companies to expand into markets beyond the ageing population at home.

India’s financial industry has become one of the fastest-growing, fuelled by growth in retail and corporate lending, but the majority of the country’s population of more than 1.1bn people lacks access to banking services.

India’s banking system will need large injections of funds if it is to keep pace with the country’s economic growth, which the government wants to boost to levels approaching 10 per cent.

This is SMFG’s fourth Asian bank investment following its acquisition of a 15 per cent stake in the Export Import Bank of Vietnam, a 4.1 per cent stake in Hong Kong’s Bank of East Asia and a 0.5 per cent stake in South Korea’s Kookmin Bank.

SMFG has a stake of less than 2 per cent in Barclays, which it acquired for about £500m ($748) in 2008.

Mr Kotak said the divestment was necessary to satisfy regulatory requirements to reduce the stake of the controlling shareholders – his family and that of Anand Mahindra, which controls the Mahindra & Mahindra automotive conglomerate – from 51 per cent to below 50 per cent.

The Kotak family holds 48 per cent of the bank and the Mahindra family 3 per cent.

After the transaction, their combined stake will be about 49 per cent while the other large shareholder, Warburg Pincus, will be left with about 10 per cent.

He said the sale of the stake to a strong strategic investor enabled Kotak to command a valuation representing the longer-term fundamentals of the bank rather than one based on “market gyrations”.

SMFG’s strong balance sheet could help Kotak pursue its target of organic and inorganic growth across banking, asset management, capital markets, investment banking, broking, life insurance and other areas.

He said he saw opportunities for co-operation with SMFG’s brokerage Nikko Cordial Securities and other areas.

The partners would be able to serve the increasing number of Japanese companies investing in India in the automotive, infrastructure and other industries.