According to an ET story, the billionaire promoter of Kotak Mahindra Bank has just told Bombay High Court he doesn’t buy RBI’s interpretation of promoter holding in banks.
Kotak insisted that the owners’ stake in the bank as a percentage of paid-up capital was in line with rules. He also pointed out that the banking regulator never communicated with promoters over shareholding — something that has now become quite a contentious issue.
The tiff between the banking regulator and Kotak has been going on since 2014. According to the bank’s latest affidavit, the entire dispute has arisen from how the RBI has chosen to interpret the law.
The row has its origins a regulatory diktat that had decreed paring promoter’s holding in the bank that is India’s fourth largest private sector lender.
The RBI directive, issued in August 2018, had asked Kotak Mahindra Bank to dilute promoter’s holding from around 30 per cent to a maximum of 20 per cent of its paid-up voting equity capital by December 31, 2018 and to 15 per cent by March 31, 2020.
According to RBI, the reason behind asking for promoter stake dilution is to ensure that voting power is not confined in the hands of one single group. The RBI had said the objective of paring the promoter shareholding was to prevent concentration of power and to make private banks more democratic.
Kotak Mahindra Bank had moved the Bombay High Court in December 2018 against the RBI diktat.
An unprecedented move
In a hearing in March this year, the court had turned down an interim relief plea by the bank on the ground that “the matter was not as simple as the petitioner was making it out to be”. This was the second time the bank was denied interim relief. Earlier in December, the bank had pushed for a stay on the December 31 deadline but its plea had been thrown out.
The promoters of the bank, in August 2018, had tried to bring the holdings lower by way of a perpetual non-cumulative preference share sale. Kotak maintained that his family’s stake would be pared to 19.70 per cent from about 30 per cent through this sale.
The complex mechanism, however, failed to cut any ice with the regulator — the RBI told Kotak it didn’t meet regulatory norms.
Kotak soon challenged RBI’s stand and then, on December 10, in a move with no parallel in India, he dragged the RBI to the Bombay High Court against the December 31, 2018 stake dilution deadline.
What Kotak wants
As per its petition, the bank wants the definition of paid-up equity capital to be widened to include these preference shares as well beyond the present equity voting capital, says a report. It also questions the norms on capping shareholding at a more fundamental level.
More importantly, the bank is asking if there is any legal basis at all to have such shareholding caps.
Kotak has contended that the RBI has never had clear communication with promoters about shareholding norms — he says RBI had initially asked the bank to only dilute promoter shareholding of its paid-up capital, but later also sought dilution of paid-up voting equity capital.
According to the plea, after receiving the letter from RBI, the bank wrote two letters to the RBI governor — seeking clarification, but did not get any reply.
Following RBI’s letter, Kotak Mahindra Bank wrote two letters to RBI Governor seeking clarification but didn’t get any reply, the bank’s plea says.
Kotak Mahindra Bank has termed RBI’s directive as “arbitrary, without any authority of law and contrary to the provisions of the Banking Regulation Act, and Article 14 and 19(1)(g) of the Constitution”, a PTI story says quoting the lender’s petition.
Kotak questioned RBI’s authority to seek reduction of stake by any investor – promoter or not – in a bank. The RBI has no power to tell any bank to cut anyone’s shareholding under the Banking Regulation Act, said the bank. According to the bank, Sections 12 and 12-B of the Act “form a complete code on a matter of shareholding and voting rights in a bank and therefore circumscribe the powers of the RBI in this regard.”
RBI’s assertion is not only unreasonable and incorrect but amounts to the RBI contending that it is entitled to carte blanche powers irrespective of the provisions of the Act, Kotak Mahindra Bank said in its rejoinder. It cannot be the RBI’s case that it has “unlimited and unimpeachable powers” in matters related to Indian banks and operates outside of statutory and constitutional limitations, Kotak said.
In essence, Kotak Mahindra is seeking to contest the validity of the RBI’s orders, saying they were issued without authority of law and it was not the regulator’s prerogative to determine policy.
The RBI appears to have conflated the concepts of economic ownership and control, and that this approach ignored provisions in the Act that specifically regulate voting rights of all shareholders under section 12 (2) and deal with the concentration of control, says an ET story quoting the bank’s rejoinder.
(With PTI and ET Bureau inputs)