Uday Kotak’s letter to KMB shareholders ruffles regulator

Kotak, in his last shareholder letter as managing director of KMB before stepping down at the end of this year, expressed concerns about the impact of over-regulation on the entrepreneurial spirit of financial sector companies. “I feel the financial sector players risk becoming more robotic, curbing the entrepreneurial flair since the fear of making a mistake overrides the joy of creation and development," he said. While we need ‘Arjuna’s eye’ on risk management, we must prevent bureaucratization of financial services, he added.

This disagreement is not the first instance of conflict between Uday Kotak and RBI. Kotak was embroiled in a protracted dispute with the central bank regarding his personal stake in the private lender. The bank challenged an RBI directive requiring a reduction of promoter ownership in banks to 15% in a Mumbai court. Eventually, RBI settled with the lender, permitting Kotak to retain a 26% stake. Emails sent to spokespeople for RBI and KMB remained unanswered.

According to the person, Kotak’s reference to Arjuna’s eye—a reference to the Mahabharata and a phrase used to describe someone who can focus on their goal with unwavering precision—seems to be directed at governor Das, who had referred to keeping Arjuna’s eye on rising inflation in several of his past speeches while defending the monetary policy committee for missing the inflation target of 2-6%.

RBI also appears to have taken issue with other statements made in the letter. For instance, citing the turbulent period for the Indian financial sector between 2008 and 2020, Kotak said the regulatory environment must be bold enough to let entrepreneurship thrive. He highlighted the need for significant capacity expansion for the Indian financial sector to aid the country’s dream of a $30 trillion economy by 2047. For this, the sector has to be unshackled in a nuanced manner towards optimum regulation, he said. He also called for faster implementation of the budget proposal to review financial sector regulations.

“We must avoid a mindset that we want accident-free roads; hence we will restrict cars. Instead, to take this analogy further, we need more roads, more cars, and better signals and traffic regulations. Accidents have to be minimized and managed, and cannot be eliminated without having a significant impact on growth aspirations," he said.

Kotak’s perceived criticism of RBI has come at a time he is set to step down after serving 20 years at the helm of KMB and take on a non-executive role.

According to a Mint report in April, RBI examined the proposal to re-appoint Kotak as a non-executive director. However, the person clarified RBI has not objected to his re-appointment as regulations do not need the regulator’s approval for appointment as a non-executive director on a bank’s board.

RBI regulations only cap the tenure of promoter chief executive officers (CEOs) to 12 years with the possibility of a three-year extension, subject to RBI’s approval. The regulations, however, do not specify anything about promoter CEOs being re-appointed as board members post their retirement.

“While regulations are clear that the appointment of non-executive directors does not require RBI’s nod, they should meet RBI’s fit-and-proper guidelines," said a lawyer aware. “RBI can’t stop Kotak from continuing on the board, but it can ensure he doesn’t overstep his influence and become a backseat driver to the new CEO."

Kotak’s standoff with RBI over the issue of promoter shareholding has been going on since 2014. The regulator granted Kotak several extensions, allowing him time to reduce the promoter stake. When RBI decided to crack the whip, Kotak Mahindra Bank, in an unprecedented move, took the regulator to court. Finally, RBI decided to settle out of court on 30 January 2020 on terms favourable to Uday Kotak. It permitted him to keep an equity stake in the bank of 26%, and not 15% as mandated for other promoters of private banks.