Private sector bank Karnataka Bank will be issuing Rs 500 crore worth of equity shares through a qualified institutional placement. The issue will contribute towards its Tier I capital, in the computation of its capital adequacy ratio. Banks have to maintain a certain proportion of their capital to their assets (loans) known as capital adequacy ratio (CAR), a measure of their financial strength to meet contingencies. Karnataka Bank had a CAR of 13.54% as of March 31, 2009 as per Basel-I norms.
If we assume the QIP is made at about Rs 140, Karnataka Bank will issue about 3.6 crore new shares. That will be a 29% increase in its equity capital, which will affect its earnings per share in the near to medium term. The bank’s share price is down 6% at Rs 135.