RBI Rejects Kotak Mahindra Bank’s Plan For Dilution Of Promoter Stake

Kotak’s preference share plan for promoter stake dilution rejected by the RBI.

Uday Kotak, chairman of Kotak Mahindra Bank Ltd. (Photographer: Udit Kulshrestha/Bloomberg)
Uday Kotak, chairman of Kotak Mahindra Bank Ltd. (Photographer: Udit Kulshrestha/Bloomberg)

Private sector lender Kotak Mahindra Bank Ltd., on Tuesday, said that the Reserve Bank of India has not accepted the promoter stake dilution plan the bank had presented. In a stock exchange notification, the bank said that it believes it has met the regulator’s guidelines and will continue to engage with the Reserve Bank of India on the same.

RBI has today communicated to us that our PNCPS issuance does not meet their promoter holding dilution requirement. We continue to believe that we have met the requirement and will engage with the RBI in this behalf.   
Kotak Mahindra Bank To Stock Exchanges (Full Statement)

Earlier this month, Kotak Mahindra Bank had informed stock exchanges that it has used the non-convertible perpetual non-cumulative preference share (PNCPS) route to dilute promoter shareholding. According to a Macquarie report, the instrument is permitted under the Banking Regulation Act and is treated as paid-up share capital under the Companies Act.

Following the issuance of these shares, the bank’s paid-up capital increased to Rs 1,453 crore from Rs 953 crore, thereby bringing down the promoter’s interest in paid-up capital to 19.7 percent from 30.3 percent. However, as a percentage of post-issue equity share capital, the promoter group shareholding remained at 30.3 percent since preference shares do not count towards the equity share capital.

The RBI had mandated the bank to reduce promoter shareholding to below 20 percent by December 2018 and 15 percent by March 2020.

Reacting to RBI’s rejection of the plan, Abizer Diwanji, national leader of financial services as consultancy EY, told BloombergQuint that his reading of the regulator’s guidelines permitted such a route to dilution.
“If you look at the Companies Act Section 43, it is extremely clear that preference share capital is part of share capital. So technically the requirement has been to reduce the total issued share capital, it seems to be within the law.”

“It was too smartly done. This was not to be. The RBI never wanted a preference capital issuance to be done to reduce the holding,” said Anil Singhvi, founder of governance advisory firm IIAS, to BloombergQuint.

When licenses were issued it was very clear that concentration of holding should not be there. If this was the intention why did Uday Kotak earlier sell his equity holding to bring it down to be compliant. Is it a revelation now that preference shares can be considered as paid-up capital? He reduced it (equity holding) almost 3-4 times to be compliant with RBI guidelines. 
Anil Singhvi, Founder, IIAS

Independent banking analyst Hemindra Hazari agreed with Singhvi. He said what Kotak had done amounted to a “public rebuke of the regulator”. And that RBI was right to reject it. “For many years the RBI has given the bank and Uday Kotak an extended timeline which has been denied to similar promoters of other banks.”

Letter Versus Spirit

At the time of the issuance of these shares itself there were questions raised by brokerages and investor advisory firms whether this route meets with the spirit of the RBI’s guidelines on cutting promoter stake in the bank. The aim of the regulator’s guidelines were to diversify ownership and reduce promoter control over a bank, they explained when questioning the route Kotak took.

Speaking to BloombergQuint after the issuance, Jaimin Bhatt, chief financial officer of the bank had noted that the issue of control does not arise since the Banking Regulations Act curtails voting rights of the promoters to 15 percent.

As per a July 21, 2016 notification, the voting cap has now been raised to 26 percent.

Correction Note: Corrects an earlier version reflecting a change in voting cap to 26 percent, as per a July 21, 2016 gazette notification.

Will Kotak’s Route To Bring Down Promoter Holding Pass Muster With RBI?

Watch the full discussion with Anil Singhvi, Abizer Diwanji and Hemindra Hazari here.