Japan’s financial powerhouse SMBC moves a step closer to taking control of

Mumbai: Japanese financial powerhouse Sumitomo Mitsui Banking Corp. (SMBC) is in advanced discussions to buy a significant stake in Yes Bank, following months of negotiations, said people aware of the matter. The move is expected to trigger an open offer for an additional 26% of the bank, the sixth-largest private lender by assets.Yes Bank’s shares jumped up to 8.5% to an intraday high of Rs 19.24 in initial trade on Mumbai stock exchange, while BSE Sensex was down 0.05%.

SBI, which holds a 24% stake in the lender, has been looking for a new owner, following Yes Bank’s turnaround after a central bank-orchestrated rescue in 2000. Domestic banks and financial institutions such as HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank and Life Insurance Corp. of India together own 11.34% of Yes Bank. Private equity funds Advent International and Carlyle held 9.20% and 6.84%, respectively, as of March.

Apart from SBI, it’s still not clear which of the other financial institutions will exit. If a deal takes place and following an open offer, SMBC is poised to become the single-largest shareholder.

A 51% stake sale would make it India’s largest banking sector M&A deal. It’s also expected to be the biggest bet by the Japanese financial group in the country, following its $2 billion acquisition of a 74.9% stake in non-banking finance company (NBFC) Fullerton India Credit in 2021.

The Japanese conglomerate’s senior leaders met their counterparts in State Bank of India (SBI) along with other key shareholders in Mumbai last week to finalise terms.

Considering the scarcity of private sector bank ownership opportunities in India, SBI has been seeking a control premium for its stake. However, the Yes Bank stock’s performance has been lacklustre, closing Monday at Rs 17.73 apiece, down 9.5% year to date for a market capitalisation of Rs 55,594.50 crore.

SMBC is said to have received a verbal assurance from the Reserve Bank of India (RBI) that it will be allowed to retain a majority stake in the bank. Current foreign direct investment (FDI) norms permit aggregate overseas participation in Indian private banks up to 74%, with the holding of each entity capped at 15%. FDI rules don’t permit a single foreign bank to take a controlling stake in an Indian lender. However, the RBI has made exceptions, including Prem Watsa’s Fairfax acquiring a 51% stake in ailing Catholic Syrian Bank in 2018 or DBS taking over Lakshmi Vilas Bank in 2020. The equity value of the targets was near zero in those instances.

The RBI, however, has made clear that it will not be relaxing the rule on voting rights, currently capped at 26%, said the people cited.

The term of Yes Bank’s managing director and chief executive officer (CEO) Prashant Kumar ends in October. Thereafter, if the deal takes place and it becomes the dominant stakeholder, SMBC will send its recommendations for the post to the central bank. India was carved out as a separate region by SMBC…