Private sector lender Kotak Mahindra Bank said that its board has approved raising capital by issuing 6.5 crore equity shares of Rs 5 each, subject to regulatory approvals. The fund-raising by the bank comes after the Reserve Bank of India asked its promoter billionaire Uday Kotak, to reduce his stake to 26 percent by August 2020 from about 30 percent held currently.

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Post the announcement, global brokerage CLSA has questioned the timing of this move since this is expected to reduce promoter stake by only about 1 percent, from 29.96 percent currently to 28.97 percent after dilution (at current market price).

"While this is just an enabling resolution at this stage, the timing of this decision makes us ponder the possible reasons behind the bank’s move," it said in a recent note.

CLSA believes the capital raise opens up possibilities for pursuing a tactical M&A opportunity currently when many financial companies are experiencing distress and dislocations in their balance sheet given the fallout of COVID-19.

The stock is down 34 percent from its 52-week high and trading at a 30 percent discount to its past five-year average valuation. The stock rose over 7 percent in intra-day deals today to Rs 1,237 per share on BSE.

The noted that Kotak Bank remains one of the most well-capitalised banks with tier-1 Capital Adequacy Ratio of 18 percent and the proposed capital raise of $1bn may raise its tier-1 Capital Adequacy Ratio to 20 percent of the regulatory minimum requirement, and hence it may lead to a dilution of its Return on equity for shareholders by 30-50 bps for FY21-22.

Meanwhile, Morgan Stanley is bullish on this deal. It said that the capital raising would further improve the company's balance sheet strength. It added that post the capital raise the bank's ability to absorb loan losses would increase to 23 percent.