Uday Kotak’s board term likely under RBI's scrutiny
4 min read 25 Apr 2023, 11:46 PM ISTBank shareholders okayed his board role after MD term ends
PremiumThe Reserve Bank of India may be examining the proposal to re-appoint billionaire banker Uday Kotak as a non-executive director on the board of Kotak Mahindra Bank after his term ends in December, a person familiar with the matter said.
On 21 April, 99% of the 9,986 shareholders of Kotak Mahindra Bank voted in favour of naming Uday Kotak as the non-executive non-independent director of the bank after he steps down as the managing director and chief executive officer.
Typically, the appointment of non-executive directors on a bank’s boards does not require RBI’s approval, with the primary responsibility of ensuring whether these directors meet the fit-and-proper criteria residing with the bank’s board. But the regulator could intervene if it feels the appointment fails to meet its fit-and-proper criteria.
According to RBI’s April 2021 guidelines on corporate governance in banks, promoters who are managing directors and chief executives or whole-time directors (WTDs) cannot continue for more than 12 years. But the tenure could be extended to 15 years at the discretion of RBI. “While examining the matter of re-appointment of such MD and CEOs or WTDs within the 12/15 years period, the level of progress and adherence to the milestones for dilution of promoters’ shareholding in the bank shall also be factored in by the Reserve Bank," it said.
While RBI rules do not forbid a promoter CEO from being appointed as a director on the board once his term ends, it is unclear whether such an appointment goes against the spirit of the regulation.
“The intent behind the regulation is to ensure that promoters are not associated with the bank once his term gets over," said a former RBI official. “No organization should be dependent on a single person. It should have a strong second-rung leadership to run the bank in the absence of a promoter CEO. Ideally, he should be kept away from the bank completely. In a non-executive role, he may not call the shots. But that depends on a strong chairman at the helm," he added.
An email sent to a spokesperson for RBI went unanswered.
A spokesperson for Kotak Mahindra Bank said the bank believes in the highest standards of governance. “Our resolution is consistent with this and has support of over 99% of the voting shareholders, who voted in the interest of the stability of the institution and stakeholders. Many of the shareholders represent large global and domestic financial institutions who you would appreciate respect the spirit of governance," the spokesperson added.
Experts question whether RBI’s lack of clarity in drafting the guidelines for promoter CEO is intentional. In the same guidelines, RBI rules leave no scope for ambiguity in the case of non-promoter MD and CEO. The rules say that a non-promoter CEO must go through a three-year cooling period after he completes 15 years. “During this three-year cooling period, the individual shall not be appointed or associated with the bank or its group entities in any capacity, either directly or indirectly," the guidelines said.
“There is no ambiguity in the way promoter and non-promoter CEOs are treated in the guidelines, except with regards to their tenure. RBI guidelines are rule-based, not discretion-based," said another former RBI official.
According to a person familiar with the development, the RBI guidelines talk about a cooling period for managing directors and CEOs or WTDs, who are looking to return to the bank in an executive role, and in this case, Uday Kotak is taking on a non-executive role. The bank has come to this understanding after seeking legal clarification.
Some proxy advisory firms like IiAS, which represent minority investors, said that the regulator should not rock the boat if the promoter CEO has been performing well.
“It is difficult to defend a one-size fits all approach in the case of the role of an ex-CEO. If it’s a professionally owned company and if the CEO is a significant shareholder, then removing him could risk rocking the boat. Look at Infosys, for instance, where there was an extended period of tension between the then CEO and board on the one hand and some of the founders on the other. Much of this hostility was aired in public," said Amit Tandon, founder of IiAS. “If there is an issue with the performance, RBI is empowered to remove the CEO," he added.The debate over Uday Kotak’s ownership in Kotak Mahindra Bank has seen a series of twists and turns. In February 2013, RBI had laid down that the promoter stake in private banks must be reduced to 15% within 12 years of the commencement of business. For years, promoters, including Uday Kotak, avoided implementing this directive.
In 2017, Kotak Mahindra Bank agreed to reduce the promoters’ stake in three stages: 30% by 30 June 2017, 20% by 31 December 2018 and finally 15% by 31 March 2020. A year later, the bank decided to sell perpetual non-convertible preference shares to bring down the promoter’s stake ahead of its deadline to trim the stake from 30% to 19.7%. This move was, however, struck down by RBI.
In response, Kotak Mahindra Bank, in an unprecedented move, took the regulator to court. However, the tussle ended in a settlement.
