Kotak Mahindra Bank Moves Court Against RBI Decision On Promoter Shareholding

Private sector lender Kotak Mahindra Bank Ltd. has moved Bombay High Court after the Reserve Bank of India restricted it from reducing promoter holding using preference shares.

In a statement to stock exchanges on Monday, the bank said that it has filed a writ petition to “protect its interests” as a “matter of abundant caution”.

In August, Uday Kotak proposed to reduce his promoter holding in the bank using preference shares rather than bringing down his share of common equity. Within 10 days of the proposal, the RBI told Kotak that the Perpetual Non Convertible Preference Shares (PNCPS) route to dilute promoter shareholding was not acceptable.

In its statement on Monday, the bank said that it had once again explained its position to the RBI but is yet to hear back from the regulator.

“We have since clarified and conveyed to the RBI our position in relation to PNCPS being a part of paid up capital and the legal basis on the matter of dilution of shareholding under the Banking Regulation Act. We have also shared with the RBI the opinions of eminent jurists and senior most legal counsels of the country, which confirm our understanding,” the bank said.

Shares of the bank fell sharply by close to 6 percent following the notification to exchanges.

Promoter Shareholding: Kotak vs RBI

The issue stems from the requirement, included in Kotak Mahindra Bank's licencing conditions, that the bank needs to reduce its promoter shareholding over a period.

After receiving a few extensions from the regulator, in February 2017, the RBI gave Kotak Mahindra Bank a timeline over which it must bring down promoter shareholding.

As per this timeline, Uday Kotak needs to bring down his stake in the bank below 20 percent from the current 29.73 percent by December 2018. Promoter shareholding needs to be further brought down to 15 percent by March 2020.

To meet this requirement, Uday Kotak proposed to issue non-convertible preference shares to dilute promoter shareholding.

As per the bank's plan, following the issue of these preference shares, the paid-up capital would have 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 remains at 30.3 percent since preference shares do not count towards the equity share capital.

Instrument Permitted But Is It In Spirit Of Regulation?

Soon after Kotak proposed the route, analysts debated whether the instrument was acceptable.

According to a Macquarie report issued in August, the instrument is permitted under the Banking Regulation Act and is treated as paid-up share capital under the Companies Act. “As per the Companies Act, however, these shares do not carry any voting rights, unless it concerns decisions relating to their rights or winding up of the company,” said Macquarie.

However, other analysts questioned whether Kotak's preferred route of reducing promoter stake was in keeping with the spirit of the regulations.

The intent of the Reserve Bank of India's regulations on promoter shareholding of banks is to ensure that these deposit taking institutions are widely held. By asking promoters to bring down their shareholding over a period of time, the regulator wants to ensure that power over these institutions is not excessively concentrated in the hands of one person or group.

“Historically, the Bank has reduced promoter holding via equity dilution,” Morgan Stanley had said in a note soon after Kotak had announced its plan in August.

Experts On Kotak Mahindra Bank's Decision To Move Court