Kotak Mahindra Bank Tells Bombay High Court That It Differs With RBI’s Interpretation Of Law On Promoters’ Shareholding

In an affidavit submitted to the Bombay High Court, Kotak Mahindra Bank promoter Uday Kotak has stated that he differed with banking regulator Reserve Bank of India’s (RBI) interpretation of laws regarding promoters’ shareholding in banks.

The owners’ stake in Kotak Mahindra Bank as a percentage of paid-up capital is in compliance with RBI rules, he stated in his affidavit submitted on April 15, adding that the dispute arose because of RBI’s interpretation of the law.

His affidavit stated that the RBI never communicated with promoters on the issue of shareholding, essentially challenging the RBI’s directive which had asked promoters of Kotak Mahindra Bank to reduce the promoter’s shareholding.

In his affidavit, he stated that over the years, promoter shareholding reduction was communicated by the RBI to the bank as a percentage of paid-up capital. For the past 16 years since the Kotak Mahindra Bank received its license in 2003, there has been no communication by the RBI about this issue, the affidavit stated.

The affidavit stated that correspondence had ensued between the RBI and the bank, giving rise to a difference of opinion on the matter of RBI’s interpretation of its requirement.

The Kotak Mahindra Bank had moved the court on December 10 last year, challenging the RBI directive of August 13, 2018, which had instructed it to dilute the promoter shareholding from around 30% to a maximum of 20% of its paid-up voting equity capital by December 31, 2018, and then to 15% by March 31, 2020.

However, the RBI had rejected Kotak’s challenge and stated that if the relief sought in the Kotak Mahindra Bank petition was granted, it would make inroads into the RBI’s autonomy, as well as permit the petitioner and others to become regulators themselves.

Incidentally, since 2014, the RBI has been at loggerheads with the Kotak Mahindra Bank for having failed to reduce its promoter’s stake.

The Kotak Mahindra Bank’s promoters had sought to lower their shareholding to 19.7% in August 2018, through the sale of perpetual non-cumulative preference shares, but that plan was rejected by the RBI. The RBI had stated that such instruments were interest-bearing and derivative in nature, with a call option after five years and therefore not equivalent to equity.

The RBI wants promoters to reduce their stakes in banks in order to ensure that they never retain untrammeled control and also to promote professional management.