The private sector banking space witnessed its first consolidation move in four years on Thursday with ING Vysya Bank and Kotak Mahindra Bank (KMB) announcing that they were merging in an all-stock deal.

The deal, valued at $2.5 billion (about ₹15,000 crore), comes at a time when competition in the domestic banking space is set to hot up further with the Reserve Bank of India giving IDFC and Bandhan Financial Services in-principle approval to set up banks in the private sector.

Further, the final guidelines for the setting up of niche banks — payment and small finance banks — are expected by this month end.

Under the share swap ratio approved by KMB’s board, ING Vysya’s shareholders will get 725 equity shares of ₹5 each of KMB for every 1,000 equity shares of ₹10 each that they hold.

Both Mumbai-headquartered KMB and Bangalore-headquartered ING Vysya issued similar notices regarding the amalgamation to the stock exchanges, after market hours.

However, the stock market got a whiff of the transaction and the share prices of both banks surged during the day. KMB shares ended the day 7.28 per cent higher to close at ₹1,157.05, while ING Vysya rose 7.15 per cent to close at ₹814.20.

Earlier, L&T Financial Holdings was believed to have expressed interest in acquiring ING Vysya.

Fourth-largest bank Once the amalgamation goes through, the resulting entity will leapfrog YES Bank to become the fourth-largest private sector bank. As at September-end, the combined entity had a business size (deposits plus advances) of ₹2,13,261 crore as against YES Bank’s ₹1,42,161 crore.

Kotak Mahindra Bank, which has established itself in the consumer and wholesale banking segments, will benefit from ING Vysya’s strong SME business.

The branch network of the new entity will rise to over 1,200, while the head count will swell by 10,590 to 39,811 employees.

As of September-end 2014, Uday S Kotak, Executive Vice-Chairman & Managing Director, KMB, held a 39.71 per cent stake in the bank. Overall, the promoter and the promoter group hold a 40.07 per cent stake. Dutch financial services giant ING Group holds 42.73 per cent in ING Vysya.

The merger will see the promoter and the promoter group’s shareholding in KMB getting pared to 34 per cent in the new banking entity. The ING Group will end up owning 6.5 per cent.

Uday Kotak said ING has agreed to a one-year lock-in of shares in the post merger period. “We can leverage the ING Vysya’s strong presence in the South and SME banking business. We expect the merger to be closed by April 1, 2015. We expect smooth integration in operations in 3-6 months,” said Kotak.

The ING Group has been trying to sell its global assets in the aftermath of the global financial crisis. In India, ING exited its life insurance joint venture with Exide by divesting its stake to the latter last year. In May, ING sold the schemes of its mutual fund to Birla Sun Life Mutual Fund.

Apart from shareholder approval, the transaction will also be subject to statutory approvals, including those from the RBI and the Competition Commission of India. This is the first time that a bank merger will go to the CCI. The KMB said the transaction does not fall within the purview of related-party transactions.