RBI warns yielding to Kotak bank’s plea in stake case will undermine its authority

The Reserve Bank of India (RBI) is warning that its authority could be undermined if courts rule against it in a case involving a major private-sector lender.

Kotak Mahindra Bank’s legal petition against the Reserve Bank of India’s objection to the method used by the founder to pare his stake in the lender, if granted, would weaken its regulatory authority, according to the RBI. Billionaire founder Uday Kotak, who currently holds 30% of the bank, has missed multiple milestones to reduce his stake in the lender, as mandated by the central bank.

The RBI required his holding to be cut below 20% by December.

The private lender is asking the court to approve its issuance of preference shares as a way to dilute its founder’s stake and is arguing that the central bank’s demands are against the public interest. The preference share sale has already been rejected by the RBI.

“The reliefs sought in the petition, if granted, shall result in making inroads into the RBI’s autonomy, and to permit the petitioners and others to become regulators of their own selves,” the RBI said in a petition to the Bombay High Court, a copy of which has been seen by Bloomberg News.

The central bank has been in tussle with Kotak since 2014 when it said he failed to meet the first milestone to reduce his stake in the bank. The RBI has been trying to separate the management and ownership functions at the nation’s lenders to improve corporate governance, and the case before the courts could force a reinterpretation of ownership restrictions governing local banks.

An RBI spokesman didn’t respond to a telephone call and email seeking comment, while a Kotak spokesman asked for more time to respond.

That the lender and not the founder of the bank chose to file a complaint against the RBI shows “the need to make private banks more independent and not reflect the interests of one individual”, the central bank also wrote in its submission to the court.

Kotak Mahindra missed the original deadlines set by the bank for progressively reducing its founder’s stake in 2014 and 2016, though it did meet a dilution requirement set by the RBI in 2017, according to court documents.

The bank will pledge that its founder’s voting rights will be in line with RBI’s ownership rules until May 2020, Harish Salve, a lawyer representing Kotak Mahindra said in a Bombay High Court hearing on Tuesday. The central bank had ordered Kotak to cut his stake in the bank to 20% by December and further reduce it to 15% after May 2020.