Mumbai: The Reserve Bank of India agreed to give billionaire Uday Kotak more time to cut his stake in Kotak Mahindra Bank even as the regulator decided to cap his voting rights, ending a decade-long dispute over promoter shareholding.

As part of the agreement, Uday Kotak will now have to cut his stake in Kotak Mahindra Bank by only 4% over the next six months, against the 15% that the regulator wanted him to reduce by March, but the Reserve Bank will cap his voting rights—first at 20% till 31 March, which will then drop overnight to 15% even if his actual shareholding is higher. The banking regulator has also added clauses to the agreement to ensure Kotak adheres to the formula.

So, while Kotak gets a respite from having to sell large chunks of his holding in the bank he founded, potentially depressing its stock price, the central bank gets its way by restricting Kotak’s voting rights.

Kotak will now sell 4% of his stake worth 12,500 crore over the next six months, ending the dispute between the regulator and the bank over dilution of promoter stake.

In a notice to stock exchanges on Thursday, Kotak Mahindra Bank said the regulator has agreed to its proposal to reduce the promoter stake from the current 29.96% to 26% over the next six months. It also said the promoter voting rights will be capped at 20% of the paid-up voting share capital until 31 March and will be further capped at 15% from 1 April onwards. Kotak Mahindra Bank added that promoters will not purchase any further “paid-up voting equity shares" of the bank till promoter shareholding reaches 15%.

The proposal was submitted by Kotak Mahindra Bank on 19 August and later on 10 January, to which the regulator gave its in-principle approval on 29 January. The regulator had earlier asked Kotak to lower his stake to 20% by the end of December 2018 and to 15% by March 2020.

Section 12(2) of the Banking Regulation Act restricts an individual’s voting rights to 10% of the total voting rights of all shareholders in the bank. However, a proviso added through a later amendment in the same section allows the regulator to increase the cap on voting rights, in a phased manner, to 26%, which currently has been fixed (through a notification) at 15%.

With this settlement, the bank has also decided to withdraw the writ petition filed in the Bombay high court after RBI struck down its proposal to issue perpetual non-convertible preference shares to comply with promoter shareholding norms.

On 2 August, Kotak Mahindra Bank completed an issue of non-convertible perpetual non-cumulative preference shares (PNCPS) to bring down the promoter’s holding to 19.7%. However, the bank informed the stock exchanges on 14 August that the method did not meet the Reserve Bank of India’s requirements.

If Kotak had to comply with the earlier regulation of paring his stake by 15% by March 2020, it would have entailed a huge dilution through either a secondary market sale or fresh issuance of shares, leading to a significant erosion in the stock’s market capitalization. The current agreement, under which Kotak has to trim his stake by 4% over six months, is still manageable.

“With the Kotak issue now resolved, we expect RBI to resolve the non-operating financial holding company structure issue in the banking system. Only two banks—Bandhan and IDFC—have been issued licences under this structure. These institutions may now get permission to reverse-merge the holding company with the bank and, therefore, comply with promoter holding regulations," said Ashutosh Mishra, head of research at Ashika Stock Broking.

The central bank has been engaged with Kotak Mahindra Bank over reducing promoter shareholding since 2008. On 8 June 2019, RBI imposed a penalty of 2 crore on the bank for non-adherence to guidelines.

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