Kotak Bank moves HC against RBI over promoter shareholding dispute

PPrivate lender Kotak Mahindra Bank has filed a writ petition with the Bombay High Court after the Reserve Bank of India (RBI) turned down the bank’s proposal to reduce promoter stake by issuing perpetual non-convertible preference shares (PNCPs).

In a filing to the exchanges on Monday, the bank said its position on preference shares being a part of paid-up capital and the legal basis on the matter of dilution of shareholding under the Banking Regulation Act was clarified and conveyed to the RBI. "We have also shared with the RBI the opinions of eminent jurists and senior most legal counsels of the country, which confirm our understanding,” said the exchange filing.

The bank said that it did not hear from the RBI on the matter and was left with no other option to protect its interest, given the milestone of December 31, 2018. The bank added that the petition was to ‘validate the bank’s position by way of abundant caution".

According to Kotak Mahindra Bank’s information memorandum filed with stock exchanges, the RBI expects the private lender to reduce promoter holding to 20 per cent of paid-up capital by December 31, 2018, and 15 per cent by March 31, 2020.

In August, the bank had issued one billion non-convertible PNCPS to “diversify funding sources” and to “help meet the RBI’s requirement on shareholding”. The bank had said that the shareholding of the promoters of the bank, led by MD & CEO Uday Kotak, would come down from 30.03 per cent to 19.7 per cent after the issue.

Later that month, the RBI communicated to the bank that its PNCPS issue does not meet the central bank’s promoter holding dilution requirement.

“We continue to believe that we have met the requirement and will engage with the RBI,” the bank had said in response to RBI’s rejection of the proposal.

According to a Macquarie report, the Banking Regulation Act allows dilution of promoter stake via PNCPS. “Given that these shares are perpetual in nature, they are indeed treated as paid-up share capital. As per the Companies Act, however, these shares do not carry any voting rights.

“This does not hamper its consideration as ‘capital’. Non-convertible nature means there is no risk of dilution for minority shareholders either,” the report added.

However, industry experts said that the RBI’s rejection of the bank’s proposal was to set a precedent for other banks who might have been thinking of following the same route.

Bandhan Bank is also at looking at various options to bring down its promoter stake, including merging its partner entities. The bank is required to bring down its promoter stake to 40 per cent within three years of business.

In 2013, the RBI had specified that the promoter stake in all new banks will be capped at 10 per cent within 12 years of the bank starting operations, whereas it will be capped at 15 per cent for existing banks.

The central bank’s order to reduce promoter stake is to ensure that the ownership of the bank is widely distributed. The debate is whether dilution of promoter stake has an impact on the governance of banks. While one side argues that high promoter stake would lead to concentration of power which is likely to be abused, the other side believes that the same concentration could result in greater accountability.

In 2014, the RBI-appointed committee headed by former Axis Bank chairman PJ Nayak recommended that promoters be allowed to hold 25 per cent stake in private sector banks as against the present norm of 10 per cent. The committee report had argued that a low promoter stake would remove the necessary incentives for ensuring good governance at the bank.

Private banks like Axis Bank, Indusind Bank and Yes Bank as well as Kotak Bank have had to previously reduce their promoter stake due to RBI’s order.

The Kotak Bank stock closed at Rs 1198.15 on the Bombay Stock Exchange, down 6.56 per cent from the previous close.