Kotak Mahindra Finance surged further on Friday, after it obtained a licence from the RBI to set up a bank.

Within minutes of commencement of trading on the BSE, the scrip of the non-banking financial institution turned bank leaped by 6% to Rs 184. A total of 26,000 shares changed hands on the counter.

On Thursday, Kotak Mahindra Finance was granted a licence to carry on banking business by the Reserve Bank of India. The NBFC will convert itself into a bank called Kotak Mahindra Bank. However, it did not reveal as to when the conversion will actually take place.

Earlier, in January 2003, the shareholders of KMFL approved the proposal to change the name of the company to Kotak Mahindra Bank. A proposal to change the authorised capital of the company to Rs 100 crore (Rs 1 billion) divided into 10 crore shares of Rs 10 each was also approved by shareholders at the extra-ordinary general meeting held on 30 December 2002.

The bank will commence operations with an asset base of Rs 1,500 crore (Rs 15 billion) and a net worth of over Rs 500 crore (Rs 5 billion), which includes paid-up equity capital of Rs 59 crore. Kotak Mahindra Bank would be headed by vice-chairman and managing director of KMFL, Uday Kotak, who is likely to take charge as the chief executive officer of the bank.

Initially, the promoters will hold 61% in the banking entity. Uday Kotak will hold 56% stake, while Anand Mahindra (vice-chairman and MD, Mahindra &Mahindra) will hold 5%. As per the RBI guidelines for private sector banks, the promoters are required to bring down their stake to 49% within a year of operations.

The central bank had, in February 2002, given ‘in principle' approval for setting up two new private sector banks to Rabo India and KMFL. In the latter's case, RBI had indicated that it preferred the existing non-banking financial company to convert itself into a bank, rather than set up a separate entity. However Rabo India has not been granted the banking licence by RBI as it could not meet the guidelines laid by it.

At present, KMFL has a branch network of 30, which is likely to be expanded once the conversion into a bank takes place. The bank will directly hold equity stake in various subsidiaries engaged in investment banking, insurance, stock brokerage and asset management.

KMFL was originally promoted in 1985 by Uday Kotak and Sidney Pinto along with Kotak & Company under the name Kotak Capital Management Finance. The promoters were joined by Harish Mahindra and Anand Mahindra in 1986 and the company was renamed Kotak Mahindra Finance.

KMFL has established itself as one of India's leading financial institutions. Its activities include corporate finance, capital market financing, asset reconstruction, commercial vehicle finance, consumer finance, technology finance, car finance, investment banking, mutual fund and life insurance.

It also has international partnerships with Goldman Sachs (one of the world's largest investment banks and brokerage firms), Ford Credit one of the world's largest dedicated automobile financiers) and Old Mutual (a large insurance, banking and asset management conglomerate) through joint ventures and subsidiary companies.

For the quarter ended 31 December 2002, KMFL posted a 4.24% rise in net profit to Rs 11.29 crore (Rs 10.83 crore) on 24% increase in total income of Rs 57.75 crore (Rs 46.61 crore).