RBI, Kotak Mahindra Bank Reach Agreement On Promoter Shareholding Tussle

Private sector lender Kotak Mahindra Bank Ltd. has reached an agreement with the Reserve Bank of India, settling long-standing differences between the lender and its regulator over promoter shareholding.

In a notification to stock exchanges on Thursday, Kotak Mahindra Bank said the RBI has conveyed its in-principle agreement of the following:

• Promoters voting rights in the bank to be capped at 20 percent of paid-up voting equity share capital until March 31, 2020.
• Promoters' voting rights in the bank to be capped at 15 percent from April 1, 2020 onwards.
• Promoters' shareholding in the bank to be reduced to 26 percent within six months from the date of final approval of the RBI.
• Thereafter, the promoters will not purchase any further paid up voting equity shares' of the Bank till the percentage of promoters' shareholding reaches 15 percent.

Kotak Mahindra Bank-RBI Stand-Off

The tussle between the RBI and Kotak Mahindra Bank started in 2008, five years after the private sector lender had received its licence. The banking regulator had written to the lender seeking details of how promoter Uday Kotak was going to reduce his stake in the bank to 10 percent or below.

Things came to a head in 2017, when the RBI wrote a letter to the bank with a timeline by when Kotak Mahindra Bank must achieve dilution of promoter stake. In its letter, the RBI said that by March 31, 2020, the promoter stake must come down to 15 percent or below. In August 2018, the regulator also did not permit the bank to reduce promoter stake by issuing perpetual non-cumulative preference shares, since it did not fit with the RBI's guidelines.

Eventually, Kotak Mahindra Bank took the extreme step of challenging the RBI in court. That case now stands withdrawn.

Victory For Uday Kotak?

The final agreement reached between the RBI and Kotak Mahindra Bank marks a significant softening of the regulator's stance in this case.

The RBI had originally asked Uday Kotak, promoter of the bank to reduce his shareholding to 15 percent of paid-up equity capital by March 2020 from the current 29.96 percent.

Had the RBI insisted on that sharp cut in promoter shareholding, the bank's promoter group would have had to either bring in a large financial investor or use the merger and acquisition route.

Instead, the RBI has agreed to let the promoter reduce shareholding to 26 percent within six months of the final decision. The timeline for bringing down promoter stake to 15 percent has been left open. The regulator has only said that Kotak Mahindra Bank's promoters will not subscribe to any further paid-up voting equity shares till their shareholding reaches the 15 percent level.

In return, the regulator has said the promoter's voting rights will be capped at 20 percent till March 2020 and at 15 percent starting April, 2020, in line with the eventual level of promoter shareholding.

As per existing regulations voting rights in a bank are capped at 26 percent.

Wider Implications?

The RBI's decision in the Kotak Mahindra case may not have wider implications for lenders such as Bandhan Bank Ltd, which has also faced delays in reducing promoter shareholding to the requisite level.

This is because the rules under which Kotak Mahindra Bank was given a licence were different from those existing at the time Bandhan Bank was granted approval to begin banking operations. Kotak had argued that its licencing conditions went through multiple changes. Others like Bandhan cannot make that case.

Yet by insisting that Kotak Mahindra Bank should eventually bring down its promoter shareholding to 15 percent, the RBI has reiterated its preference for capping the equity shareholding that bank promoters can hold. In doing so, it has rejected Uday Kotak's argument that bank promoters need greater ‘skin in the game'.