Home / Market / Mark-to-market /  Why Uday Kotak’s defiance is scaring his bank’s investors

Is Uday Kotak’s move to take RBI to the courts a case of righteous defiance or foolish bravado? Investors are still making up their mind and the uncertainty is affecting the Kotak Mahindra Bank Ltd stock. The scrip fell 6% after the bank said in an exchange filing that it has filed a writ petition against the Reserve Bank of India (RBI) in the Bombay high court to protect its interests. Kotak and the central bank haven’t been seeing eye to eye on the methods available for a private sector bank to reduce promoter shareholding.

Even though the deadline for meeting RBI’s norms was around the corner, investors didn’t seem too perturbed. Kotak Mahindra Bank’s shares have outperformed the markets this fiscal year. Investors seem to have assumed that Kotak would manage a workaround or a compromise. After all, there have been multiple similar deadlines in the past, and they were successfully navigated. But this time is evidently different.

For backdrop, RBI rules state that promoter shareholding in Kotak Mahindra Bank has to be brought down to 20% by the end of December this year and 15% by March 2020. It currently stands at a little over 30%.

In August, Kotak Mahindra Bank hit upon the route of issuing perpetual non-convertible preference shares to increase the paid-up capital, thereby diluting Kotak’s stake in the bank. RBI shot down this idea and refused to consider this route as a valid one. This implied that only traditional methods such as a direct sale of shares by the promoters or a fresh equity issue to outside investors would be considered kosher by the central bank.

But Kotak has persisted, and has been trying to convince the regulator to give in. The filing of the writ petition shows that neither side is blinking.

RBI’s stance is not surprising. Just a few months ago, it pulled up Bandhan Bank Ltd for violating the deadline of diluting promoter ownership. Other banks have behaved like obedient children and strictly followed timelines. Considering the law is equal to all and regulation cannot be partisan, RBI seems to have stuck to its guns.

The contents of Kotak Mahindra Bank’s petition are not known publicly yet, but analysts reckon it is mainly to challenge the exclusion of the preference share route for stake dilution. After all, Kotak’s argument is that this route is allowed under The Banking Regulation Act, 1949.

The window for suing the regulator is thanks to some poor drafting by RBI’s legal department. Under the rules, the promoter has to bring down stake with respect to paid-up capital, and not specifically equity capital. Kotak is just following the law to the letter, and has received a fair share of criticism for disregarding the spirit of the law.

Evidently, this isn’t something Kotak seems to be too worried about, having taken the letter of the law argument all the way to the courts. Having said that, the move is likely to buy the bank time, if it’s successful in getting a stay granted by the courts. In a best-case scenario, the courts may agree with Kotak Mahindra Bank’s argument.

For now, though, investors are left ruing the fact that uncertainty on the issue will linger, besides worrying about any likely fallout of taking on the regulator.

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