By Mahesh Nayak
Shareholders of IDFC First Bank on Monday rejected a proposal to allow Currant Sea Investments BV, an affiliate of Warburg Pincus LLC, nominate a non-executive director on the board.
The special resolution, which required a 75% majority, received 64.10% of votes in favour, falling short of the necessary threshold. The special resolution failed due to opposition from institutional investors, with 51.30% voting against it and 48.7% in favour. In contrast, retail investors showed an overwhelming support, with 98.67% voting in favour.
Last month, the IDFC First board had approved a preferential equity issue of about Rs 4,876 crore to Currant Sea Investments. Following that, the bank sought shareholders’ nod through postal ballots to amend its Articles of Association. It sought their approval to provide a right to Currant Sea Investments (or any of its assignees) to nominate one non-retiring, non-executive director by way of a special resolution.
Earlier this month, Warburg Pincus, through Currant Sea Investments, had sought the approval of the Competition Commission of India to acquire a 9.99% stake in IDFC First by subscribing to over 812.6 million compulsorily convertible cumulative preference shares.
Despite Monday’s setback, the deal is not necessarily in jeopardy. The bank can revisit the proposal after addressing shareholder’s concerns and regulatory approvals.
“Although the proposal appeared straightforward, its implications could be substantial. For any PE investment transaction of this nature, this would be a very standard and fundamental investor protection right,” said Nazneen Ichhaporia, partner (PE and M&A transactions) at ANB Legal, who feels the rejection of this proposal may influence future negotiations regarding board representation rights and governance arrangements involving private equity stakeholders. “There may be some delay in transaction completion timelines, as the PE would need to answer to its LPs and stakeholders about proceeding without board representation rights.”
A banking analyst said on condition of anonymity, “The dissatisfaction is evident. Some investors are unhappy with the bank’s stake dilution and share issuance price.”
In October 2023, IDFC First Bank had raised Rs 3,000 crore via a qualified institutional placement issue at Rs 90.25 per share. Now, Warburg Pincus is reinvesting at a discount to the price of sale by its affiliate Cloverdell Investment. Last March, Cloverdell Investment exited IDFC First Bank at Rs 75.24 per share.
The bank clearly indicated in its analyst call that capital raising is for the next phase of growth, but the Street is in a dilemma regarding the higher cost-to-income ratio and the quality of the book. The current cost-to-income ratio for IDFC First Bank is around 57%, compared to 42% for Kotak Mahindra Bank and 31% for Federal Bank. The same for Yes Bank and DCB is around 34% and 31%, respectively.
Meanwhile, the shareholders approved two other key resolutions – the issuance of convertible cumulative preference shares worth Rs 7,500 crore and the reclassification of authorised share capital – with overwhelming majorities.
IDFC First Bank’s stock price on Monday closed a 1% down at Rs 68.65 on the BSE.