RBI clears Kotak to hold 9.99% in AU, Federal

What the RBI approval changes

The Reserve Bank of India (RBI) has approved Kotak Mahindra Bank’s proposal to increase its stake in two listed lenders, AU Small Finance Bank (AU SFB) and Federal Bank. The approval allows Kotak Mahindra Bank Ltd (KMBL), along with its subsidiaries and funds or schemes managed by those subsidiaries, to hold up to 9.99% in each bank. Separate regulatory filings from AU SFB and Federal Bank confirmed the development on Thursday, following an RBI communication dated May 6, 2026.

The decision gives Kotak the regulatory headroom to build a meaningful minority position in both lenders. At the same time, it remains below the 10% threshold that typically triggers tighter regulatory scrutiny and additional approvals in the banking sector. Market reaction was mild, with all three stocks trading higher during the session cited in filings and reports.

What AU Small Finance Bank disclosed

In its exchange disclosure, AU SFB said the RBI has permitted Kotak Mahindra Bank and the broader Kotak Mahindra Group to expand its investment within defined limits. The filing stated that the RBI granted approval to acquire an “aggregate holding” of up to 9.99% of AU SFB’s paid-up share capital or voting rights.

The approval explicitly covers KMBL, its subsidiaries, and funds or schemes managed by KMBL’s subsidiaries, collectively referenced as the “Kotak Mahindra Group.” AU SFB also indicated it would move forward in line with the approval and remain compliant with applicable statutes and guidelines governing banking sector investments.

Federal Bank’s filing mirrors the same cap

Federal Bank made a similar disclosure through a BSE filing. It said it has received RBI approval allowing Kotak Mahindra Bank to increase its “aggregate holding” in Federal Bank up to 9.99% of the paid-up capital or voting rights.

In practical terms, the structure is consistent across both lenders: the RBI approval is for an aggregate group holding rather than only the parent bank’s direct shareholding. This matters because many financial groups build exposure through multiple vehicles such as mutual fund schemes, subsidiaries, or other managed entities.

Why 9.99% matters under banking rules

The approvals position Kotak to build sizeable minority stakes while staying within the RBI’s cap that prevents a single entity from crossing 10% without additional regulatory clearance. This boundary is widely tracked in banking investments because it can change the level of regulatory review, governance expectations, and reporting requirements.

The 9.99% limit also provides flexibility for staggered buying rather than a single large transaction. But the approval itself does not indicate a change in control or any merger plan. The disclosures focus on permissible ownership limits, not on a mandated acquisition timeline or a specific number of shares to be purchased.

Institutional ownership shifts at AU SFB

The RBI nod for AU SFB coincided with an increase in reported institutional ownership. Foreign Institutional Investors (FIIs) increased their stake to 37.27%, a rise of 0.82 percentage points. Domestic Institutional Investors (DIIs) also raised holdings to 31.3%.

In addition, one report cited the March quarter shareholding pattern in which Kotak Flexicap Fund held a 1.60% stake in AU SFB, amounting to 1,19,97,824 shares. The same set of disclosures referenced other investors with positions in AU SFB, including mutual funds such as Nippon Life, HDFC MF, Invesco, and DSP Midcap, as well as insurers such as SBI Life Insurance and HDFC Life Insurance.

AU SFB snapshot: scale and reported financial metrics

AU SFB was described as a retail-centric bank operating across 21 states. For the fiscal year ended March 31, 2025, the bank reported deposits of INR 124,269 crore and a gross loan portfolio of INR 115,704 crore. It also reported profit after tax (PAT) of INR 2,106 crore.

Valuation and market metrics cited in the source material included a P/E ratio of about 29.33 as of May 6, 2026, and a market capitalisation of around INR 76,000 crore. One report also referenced a 12-month average analyst price target near INR 1,145 and characterised coverage as generally positive.

Market reaction: mild gains across the three stocks

Trading data referenced in the reports suggested a modest positive response. AU SFB shares were quoted at INR 1,034.60, up 0.99% on the BSE in one update. Another update placed the stock at INR 1,036.90, up 1.26%, while a separate line noted the stock trading at INR 1,032.50, up 0.84% intraday.

Federal Bank shares rose 1.47% to INR 297.40, according to one cited market check. Kotak Mahindra Bank was up 1.12% at INR 380.40 in one update, while another mentioned the stock near INR 380.25 (up about 1%) and an early trade reading of INR 379.35 (up 0.84%).

What the approval means for investors and governance

For investors, the key takeaway is that the RBI has given regulatory clarity for Kotak’s group entities to build up to a 9.99% stake in each lender without needing a fresh approval for every incremental move, as long as it stays within the permitted cap. For the banks involved, it is a change in the potential shareholder base, with the possibility of a large, regulated financial institution becoming a more material minority shareholder over time.

The approvals also highlight how banking stakes are evaluated not just at the level of the parent company but at the aggregate group level, including subsidiaries and managed funds. That detail is important for tracking ownership, voting rights, and compliance with sector-specific thresholds.

Conditions and compliance references in disclosures

The disclosures indicated that the approval is subject to compliance with several regulations, including the Banking Regulation Act, 1949, RBI directions, provisions of the Foreign Exchange Management Act, 1999, and SEBI regulations, among other applicable laws and guidelines.

While these references are standard in many regulatory communications, they establish that any stake build-up must follow the full framework that governs ownership and voting rights in Indian banks.

Key facts at a glance

Conclusion

The RBI’s approval allowing Kotak Mahindra Bank and its group entities to hold up to 9.99% each in AU SFB and Federal Bank is a regulatory green light to build meaningful minority positions without crossing the 10% threshold. The decision was communicated by the RBI on May 6, 2026, and disclosed by both banks through regulatory filings on May 7. The immediate market response was measured, with modest gains reported in AU SFB, Federal Bank, and Kotak Mahindra Bank. The next updates, if any, are likely to come through future shareholding disclosures and subsequent filings that reflect changes in aggregate ownership levels.