Home / Industry / Banking /  Kotak misses deadline to cut stake

Mumbai: Uday Kotak, founder of Kotak Mahindra Bank, on Monday missed the 31 December deadline set by the Reserve Bank of India (RBI) to cut his holding to 20%.

This gives rise to two scenarios, both of which seem to work in Kotak’s favour: either RBI stays its punitive actions in view of the ongoing court case, or Kotak accepts the central bank’s preferred mode of penalties as a minimum cost for maintaining status quo.

Kotak Mahindra Bank had on 10 December approached the Bombay high court challenging RBI’s decision to disallow Kotak from reducing his stake by issuance of non-convertible perpetual non-cumulative preference shares (PNCPS) in August. In a similar development, RBI had in September placed restrictions on Bandhan Bank for its failure to lower promoter holding by freezing branch expansion and remuneration to managing director and chief executive Chandra Shekhar Ghosh.

Under RBI regulations, an individual promoter’s holding in scheduled commercial banks is capped at 15%. In June 2012, RBI had asked Kotak, who currently owns about 30% in the bank, to cut his holding to 20% by the end of 2018 and to 15% by March 2020.

In a bid to comply with the directions, Kotak Mahindra Bank had issued PNCPS aimed at reducing Uday Kotak’s stake to 19.7% from 30%.

The banking regulator, however, rejected the proposal to bring down the promoter shareholding through PNCPS.

Consequently, the bank moved the high court given the nearing deadline. During the hearing on 17 December, the Bombay high court refused to stay the RBI directive on the matter. The next hearing is slated for 17 January.

“We have since (rejection of proposal) clarified and conveyed to the RBI our position 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. However, we have not heard from the RBI on the above matter," the lender stated in a stock exchange announcement on 10 December, explaining the rationale for taking legal recourse.

Also Read | Lessons from Kotak Bank’s preference shares issue

Usually, stake dilution is done by way of issuing fresh equity shares, which let shareholders vote. PNCPS holders do not enjoy voting rights.

“The matter is sub judice. Hence, the bank cannot offer any comments in this regard," Rohit Rao, chief communication officer, Kotak Mahindra Bank Ltd, said in an emailed response to queries seeking comment.

One person close to the development, however, said that although the court had not put a stay on the central bank’s directive and the regulator could take punitive action against the private sector bank, it was likely to wait for the court ruling before imposing penalties.

“RBI is likely to take any action against the bank after long consideration. It is likely to impose penalties only after the violation is proven," the person said. An email sent to an RBI spokesperson did not elicit a response.

Legal experts, however, say that the banking regulator can take punitive action if required. “As of 1st January, Kotak Mahindra Bank would be in breach of the RBI directive on promoter holding. Given that they have sought and not obtained an interim stay, RBI can take punitive or remedial action against the bank," said Sandeep Parekh, managing partner, Finsec Law Advisors.

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