Tussle over Kotak promoter stake heads into final stretch

The next few days and weeks are going to be decisive for Uday Kotak, founder of Kotak Mahindra Bank. 
The bank missed the December deadline set by the Reserve Bank of India (RBI) to pare his stake in the bank to 20 per cent and has moved court challenging the regulator. Though the Court refused to stay the RBI directive, a final verdict is not yet out.

The central bank is yet to impose punitive action, perhaps awaiting the next hearing slated for January, 17 As per banking regulations, an individual promoter’s holding in scheduled commercial bank, is capped at 15 per cent. The logic is that banks take public deposits, and excessive promoter shareholding resulting in concentration of power could lead to abusing those powers and initiate decisions for self-benefit. Such decisions can have a systemic impact and hurt not just the bank’s shareholders, but also the banking system.  

So, in 2012, RBI directed Kotak, who currently owns about 30 per cent, to reduce his holding to 20 per cent by December, 2018 and further to 15 per cent by March, 2020. Other private banks like HDFC and Axis Bank have institutional promoters, whereas ICICI bank has no promoter holding, and hence such a peculiar issue didn’t crop up in the past. 

Accordingly, in August 2018, Kotak proposed to issue non-convertible perpetual non-cumulative preference shares to reduce the promoter’s stake to 19.7 per cent, worth `500 crore at `5 a piece. But the proposal was shot down by RBI, which expected a reduction in paid up capital consisting of equity shares. Preference shares aren’t part of core equity, and are non-voting, non-convertible instruments. This means one may accrue dividends, but cannot be converted into shares. Effectively, what Uday Kotak proposed was not a dilution of equity, but instead will help him retain his 30 per cent control over the lender. 

Typically, stake dilution is done by issuing fresh equity shares, by selling promoter shares or through acquisitions. In fact, Kotak isn’t new to this situation and has executed other options to dilute stakes from 45 per cent in 2012 by buying out ING Vysya in 2014, selling stakes to GIC and issuing new shares, which together reduced it to 30 per cent in a span of five years.

When nothing went its way this time, the private-lender, led by Asia’s richest banker, engaged the central bank to reconsider its proposal on issuing preference shares and was eventually compelled to move court challenging RBI’s decision last month. It’s unclear if the central bank will be flexible in relaxing norms, now that there’s a change in guard. 

Kotak’s petition is set in a broader context and challenges RBI’s role, referring to Section 12 and 12b of the Banking Regulation Act, 1949,  (BRA), and insists that as per the section, RBI is not empowered to “issue directions to banks to reduce their promoter shareholding or otherwise contemplate reduction of shareholding of any person in a bank.” In case the verdict favours Kotak, other banks will drag the regulator to court. Else, Kotak will have to face penalties, besides staring at all the options available in the past -- issue new shares, buy another bank or sell his stake.