Early August, Kotak Mahindra Bank announced issuance of non-convertible perpetual non-cumulative preference shares to dilute the promoter holding from around 30% to 20%, leading to public debate on whether this is the right way of dilution in the promoter’s stake.
Even before we settle down and order fresh lime soda, I ask Kotak the obvious question: What is his next course of action? Without showing any sign of stress, he says the bank continues to believe that it has met the RBI’s requirement and will engage with the regulator. Since, unlike the capital market regulator, India’s banking regulator does not have any appellate body, I ask him whether he will explore legal options. Kotak says it is for the bank’s board to decide (on this).
Kotak Mahindra Finance Ltd (now Kotak Mahindra Bank) applied for a banking licence in 2001, based on January 2001 RBI licensing norms. These norms allowed promoters to hold 40% of paid-up capital in the bank. In 2002, the RBI modified its bank licensing norms to increase the promoter stake from 40% to 49% of paid-up capital. In 2003, the RBI gave a banking licence to Kotak Mahindra Finance Ltd—the first non-banking finance company (NBFC) transforming into a bank.
The 2003 licence conditions required the promoters to hold a minimum 49% of paid-up capital for five years (till 2008), and did not specify any dilution below 49% of paid-up capital. Subsequently, in 2012, the RBI charted a road map to bring down the promoter’s stake in Kotak Mahindra Bank to 20% of paid-up capital by 2018 and 10% by 2020.
The bank has brought down the promoter’s stake in phases by issuing fresh capital (to Sumitomo Mitsui Banking Corporation and Government of Singapore Investment Corporation Pte Ltd), some voluntary stake sale by the promoters (to the Canada Pension Plan Investment Board and Caisse de dépôt et placement du Québec) and merger (it took over ING Vysya Bank Ltd through a share swap deal).
Kotak says that under the Companies Act, preference shares can be issued for 20 years but the Banking Regulation Act allows perpetual preference shares, and even Basel III norms recognize such shares as part of the core capital of a bank.
I touch a raw nerve when I tell him he is probably following the regulatory norms in letter but not in spirit. “You need to appreciate that when we set up the bank, our licensing norms asked the promoters to hold 49% of paid-up capital without any need to dilute below this level. And the voting right cap, which was earlier at 15%, has been raised to 26%. You must see the full picture," he says.
It’s the subject of a larger debate. Many feel that more skin in the game ensures good governance and responsibility, and that widely-held ownership doesn’t necessarily mean great governance. A few of India’s large non-promoter-led private banks illustrate that.
At this point, we decide to order—a five-course dinner, especially curated by Hemant Oberoi. Over the starter, Peruvian Sushi, Kotak reiterates his favourite “nationalist" theme—most Indian private banks are largely foreign owned and his bank is an exception (with 47% foreign ownership). “Do you want me to woo the foreign institutional investors?" he asks.
His idols are John Pierpont Morgan, Sr, Marcus Goldman, Charles E. Merrill and his friend, Edmund C. Lynch—all of whom have built global financial houses in the US. JPMorgan Chase & Co., Goldman Sachs and Merrill Lynch were all set up by families and, over a period of time, the promoters diluted their stakes in a non-disruptive manner as business scaled up.
The midas touch
When it comes to money, Kotak has the Midas touch. In the 1980s, he collected ₹ 30 lakh to start an NBFC for bill discounting—its current banking avatar is worth around ₹ 2.4 trillion. His ₹ 2 crore investment in Hutchison Essar in 1998 fetched him ₹ 1,019 crore in 2006.
What is his position on the global rich list? I release the bouncer casually, eating White Fish and Amarillo Carpaccio (Kotak, a vegetarian, is having a portobello preparation). He ducks the question, saying it’s all in the public domain. “I love the journey. I want to create an Indian institution which the world will be proud of."
Kotak was a good cricketer—a right-hand batsman and a left-hand spinner. He was the captain of his school (Hindi Vidya Bhavan) and college (Sydenham College of Commerce and Economics) cricket teams and played the Kanga League in Mumbai. In September 1979, at a Kanga League match at Azad Maidan, the ball hit his head when he was running between the wickets; he collapsed. An immediate operation to stop brain haemorrhage saved him but he was bed-ridden for months and missed a year at the Jamnalal Bajaj Institute of Management. During that time, he started going to the office of his joint family business of cotton export at the Navsari Building at Fort.
Kotak’s first love was cricket, and second, playing the sitar. He is out of both now but he has not lost his passion for figures. He was a math wizard who could see the larger picture beyond the numbers and topped his university in BCom.
His family was into trading cotton and other agricultural commodities, with offices in Shanghai, Mumbai (then Bombay) and Karachi. His father had returned from Karachi to India after Partition and 60 family members lived on one floor in a large house in Babulnath, sharing a single kitchen. It was a family, Kotak says, which “believed in capitalism at work and socialism at home".
After finishing his MBA at the Jamnalal Bajaj Institute, Kotak was set to join Hindustan Unilever (Hindustan Lever then). He was not keen on joining the family business, where he would have to deal with 14 family members and convince each of them on every decision. His father persuaded him to set up his own business, offering him a 300 sq. ft office space at the Navsari Building premises. Kotak started his financial consultancy there at the age of 23.
The banks were then offering very little interest to savers and charging high rates from borrowers, enjoying a huge spread. Kotak sneaked in as an intermediary, offering cheap money to companies discounting their bills. As they say, there was no looking back.
Today, Kotak Mahindra Bank is a one-stop financial shop which does everything from commercial banking to investment banking, insurance, mutual fund and asset reconstruction. Its consolidated balance sheet is ₹ 3.4 trillion and retail loans (including loans given to small and medium enterprises) constitute 70% of it. Its 1,400 branches serve 14.5 million customers and the bank is adding half a million new customers every month.
I ask him what differentiates Kotak Mahindra Bank from others. “We run the largest custody business in India, which gives us fees and float money; we are the largest wealth manager handling ₹ 2.5 trillion of ultra-HNIs; we buy distressed assets and keep them on our books and we are the only Indian entity among top 10 institutional brokerages," Kotak reels off. We have no time to listen to the waiter’s elaborate explanations of the exotic dishes and how they are made personally by Oberoi—Avocado Pizza, Brie & Truffle Soufflé, Mushroom Ravioli and Asparagus And Truffle Risotto (for Kotak) and Shrimp Dumpling and Lamb Shank (for me).
Another interesting feature which distinguishes his bank from others is that it started most of its subsidiaries with foreign partners and eventually bought them out.
What is the key to his success? His two-word answer: common sense. “Banks often misprice the risk. For every loan we give, I ask myself, ‘will we get the money back’?" After provisions, Kotak Mahindra Bank’s net bad loans were 0.86% in the June 2018 quarter.
What should be done with bad debt-ridden public sector banks? “Some of them can turn narrow banks (only investing in government bonds) and a few others can partner with private banks," Kotak says, but he does not support the idea of large corporations taking over public sector banks.
He also says the system must be ready for shocks from some NBFCs which have large exposure to the housing and infrastructure sectors. “There could also be problems with unsecured consumer finance a few years down the line."
I ask him about life beyond banking. “I work at least 60 hours a week." Can’t he delegate? “Yes, I do, my managers are all professional entrepreneurs. But the bank is growing. I need to put in long hours."
His elder son Jay, who has done an MBA from Harvard University, is an analyst in the investment bank, and younger son Dhawal, an undergraduate from Yale University, is involved in providing midday meals to 10,000 underprivileged students in eastern Mumbai’s Govandi-Chembur-Deonar belt. He wants to feed a million children every day.
Any regrets? “I don’t get time for any physical exercise," Kotak says, savouring the finest Belgian chocolate. “But Pallavi (his wife), a marathon runner, is big time into trekking. Between us, we lead a healthy life," he signs off with his usual disarming smile.
Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank.