Mr. Uday Kotak, together with his family, is the principal sponsor and holds a 55.77% stake in the Bank. Foreign Institutional Investors hold around 22.70% of the Bank. The remaining shares are held by individuals, domestic banks and other financial institutions. The Bank’s shares are listed on the Bombay Stock Exchange and the National Stock Exchange and the Global Depository Shares are listed on the Luxemburg Stock Exchange.

The total project size is estimated at around $45 million, composed of a 15-year subordinated debt for IFC’s own account.

45.0 million (USD)

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	45.0
Equity

* These investment figures are indicative

Kotak Mahindra Bank is headquartered in Mumbai with operations in 69 cities and towns all over India.

The project is expected to:

- increase access to finance for the SME sector by supporting a bank with a focus on the SME sector;
- have a demonstration effect which will encourage international and domestic investors to come forward in providing such quasi-equity instruments to the medium to small sized private banks in India; and
- strengthen the presence of the private sector banks in India by helping increase the capitalization, and hence assets of private banks in a market where public banks are still dominating.

- Maintaining Capital Adequacy:

KMB, as a private sector bank, has no explicit or implicit government support. One of the main requirements for KMB to maintain a high credit rating is to maintain a high capital adequacy ratio. IFC’s $45 million investment in KMB is critical for the Bank to maintain its CAR at above 12%.

- Provide long-term financing on terms otherwise not available:

It would be difficult for KMB to raise UT2 capital from the domestic market due to limited investor appetite for long tenor deeply subordinated loans for small and medium sized banks. The IFC transaction is thus expected to provide long-term funding with a tenor and of amount that is currently not available in the capital markets to this segment.

- Broadening Future Funding Source:

Although KMB is a domestically AA+ rated bank, its funding sources are at present limited to traditional ones, namely: shareholders’ funds, deposits, senior debt and lower tier II funds. It has not yet tapped into the quasi-capital markets (such as UT2), domestically or internationally, to take advantage of this product that allows the Bank to leverage up, improve capital adequacy, and enhance the return on equity. This would be the first time that the Bank obtains the UT2 from a foreign investor. Having a track-record of being able to tap into the market would pave the ground for the Bank to build such funding channels in the future.

- Leverage:

The $45 million UT2 to be provided by IFC will be counted as the Bank’s statutory capital that will enable KMB to leverage up at a ratio of up to 10-15 times, i.e., about $650 million of incremental assets can be put on the balance sheet from the $45 million IFC investment. In comparison to KMB’s total asset size of about $2.3 billion (standalone entity, financial year ended March 2006), the assets that IFC’s investment could help mobilize for this medium sized private sector bank is significant. Thus, this IFC investment would help address the funding needs of the Bank to sustain its asset growth and to maintain and increase its market share.

This project has been classified as a Category FI project according to IFC’s Environmental and Social Review Procedure.

During appraisal, IFC analyzed KMB’s portfolio, for types of transactions, size, tenor and industry sectors and determined the Applicable Requirements based on an analysis of the potential social and environmental risks associated with KMB’s portfolio and considering IFC’s investment. The Applicable Requirements are:

- The IFC FI Exclusion List; and
- The applicable Indian National Social and Environmental Laws and regulations.

IFC also reviewed KMB’s existing social & environmental review procedures and capacity to implement the same.

Based on the Applicable Requirements and procedure and capacity review, KMB will be required to:

- Develop a Social & Environmental Management System (SEMS), prior to disbursement to the satisfaction of IFC.
- Identify responsible, qualified persons to manage and implement the SEMS.
- Commit to implement the SEMS, to ensure that its investments/activities are in compliance with the Applicable Requirements.
- Commit to take action to remedy any gaps in SEMS implementation on an ongoing basis.
- Submit a periodic report to IFC as per a format to be provided by IFC.