2 min read.Updated: 18 Dec 2018, 11:13 AM ISTMaulik Vyas
Uday Kotak now has two weeks to comply with the RBI order on cutting promoter shareholding of Kotak Mahindra Bank or face penal action
Mumbai: The Bombay high court has declined to stay a directive of the Reserve Bank of India (RBI) to the promoters of Kotak Mahindra Bank Ltd, including its billionaire owner Uday Kotak, to lower their stake in the bank by 31 December.
The private sector lender had moved the high court after RBI rejected the bank’s proposal to issue perpetual non-convertible preference shares in August to comply with promoter stake rules. Uday Kotak, who owns about 30% in the bank, has been asked by the central bank to cut his holding to 20% by the end of this year, and to 15% by March 2020.
While the next hearing on the case has been scheduled for 17 January, Monday’s decision by the Bombay high court is likely to force Kotak’s hand on the promoter’s stake issue. Kotak has two weeks to comply with the RBI directive or face penal action.
In a similar case, the banking regulator had earlier frozen the salary of Bandhan Bank chief executive and founder Chandra Shekhar Ghosh and also denied the private lender permission to open new branches.
“The promoter of Kotak Bank would prefer to face some penal action similar to what RBI had done with Bandhan Bank. However, we expect the promoter to comply with the RBI guidelines on shareholder norms over a period of time," said Ashutosh Mishra, head of institutional research at Ashika Stock Broking.
Senior counsel Venkatesh Dhond, who appeared for RBI, said promoter stake dilution is aimed at ensuring that voting power is not concentrated in the hands of a single group and that all banks have complied with the rule.
“We have issued a letter to the bank in August, but now when the deadline is approaching, the bank has come to the high court seeking a stay," he argued.
Darius Khambata, the lawyer representing Kotak Mahindra, said: “In the past, the RBI asked the bank to only dilute promoter shareholding of its paid-up capital. However, the impugned letter sought dilution of paid-up voting equity capital.
“After receiving the letter, the bank wrote two letters—one to then RBI governor and the other to the RBI board seeking clarification. But, we haven’t got any response."
Khambata pleaded before the court that “RBI must not take any coercive step post December 31, the deadline by when the promoters have to reduce their stake to 20%".
“We are the only private sector bank owned by an Indian," Khambata said on behalf of Kotak Mahindra. “If we go by the RBI mandate, then it will be difficult to find any domestic investor and hence the only option would be to bring in foreign investors."
After hearing arguments from both sides, the division bench of the Bombay high court comprising Justice B.P. Dharmadhikari and Justice S.V. Kotwal said the central bank is a responsible regulator and the court would not direct it to do anything at this stage.
The bank, in its petition, has argued that “the impugned reduction communications and the 2018 RBI letter have been issued by the RBI without authority of law, contrary to the provisions of the Banking Regulation Act, Article 14 and Article 19 (1)(G) of the Constitution of India."