Kotak Bank takes RBI to court over promoter shareholding issue
Kotak Mahindra Bank promoter Uday Kotak was barred from reducing stake via preference share issue
Mumbai: Kotak Mahindra Bank Ltd has moved the Bombay high court against the Reserve Bank of India (RBI) after its promoter Uday Kotak was barred from reducing his stake in the bank through a preference share issue, in the first instance of a bank dragging the regulator to court.
Documents on the Bombay high court website show the writ petition was filed by Kotak Mahindra Bank and its director Chengalath Jayaram against RBI and the finance ministry. Law firm Manilal Kher Ambalal & Co. (MKA & Co.) is representing Kotak Mahindra. The first hearing on the case will take place on 17 December.
Vikram Trivedi, managing partner of MKA & Co. declined to comment, citing client confidentiality.
The RBI had mandated the private sector lender to trim promoter shareholding to 20% of its paid-up capital by 31 December 2018, and to 15% before 31 March 2020. On 2 August, Kotak Mahindra completed an issue of perpetual non-convertible preference shares (PNCPS), increasing the bank’s paid-up capital from ₹953 crore to ₹1,453 crore, thereby bringing down the promoter’s holding from 30.3% to 19.7%. However, the bank informed the stock exchanges on 14 August that the method did not meet the RBI’s requirements.
In a regulatory filing on Monday, Kotak Mahindra said ever since, it has clarified and conveyed its position to the central bank “in relation to PNCPS being a part of paid-up capital, and the legal basis on the matter of dilution of shareholding under the Banking Regulation Act”.
“We have also shared with the RBI the opinions of eminent jurists and senior-most legal counsels of the country, which confirm our understanding.” It added that it has not heard from the RBI and given the deadline of 31 December, the “bank has been left with no option, but to protect its interests”.
A banking analyst, who did not wish to be identified, said in challenging RBI’s decision, Kotak Mahindra has essentially challenged RBI’s powers to regulate private sector banks.
There are two possible outcomes from this, the analyst said. The first is, if Kotak wins the case and is allowed to use PNCPS to reduce promoter shareholding, the central bank will definitely challenge it in the Supreme Court. The second scenarios is, if Kotak loses the case, then he will not only have to use another way to pare his stake, but will also face far more stringent regulatory supervision following the debacle. In either scenario, the 31 December deadline is unlikely to be met.
“The bank has filed a case against the regulator. The case will surely set a precedent for any such future disputes. The matter pertains to the interpretation of the law and should be dealt with by the court only,” said Ashish K. Singh, founder and managing partner of law firm Capstone Legal.
“The deadline for the diluting the shareholding is 31 December 2018; so if the writ petition is admitted, the time period is required to be extended by the direction of the court.”
In August, when RBI rejected the bank’s proposal, experts said it was along expected lines as one cannot circumvent RBI regulations.
Typically, stake dilution happens through sale or issue of fresh equity shares. Mint reported on 14 August that Kotak Mahindra would have needed to issue ₹1.25 trillion equity to meet the norms of promoter stake dilution. If promoters had to sell shares outright, it would have required a block deal of about ₹25,000 crore.
Shares of Kotak Mahindra closed 6.6% lower at ₹1,198.15 on the BSE, unperforming a 2% decline in the main index.
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