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Bombay High Court refuses interim relief for Kotak Mahindra Bank: Here's what experts have to say

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Bombay High Court refuses interim relief for Kotak Mahindra Bank: Here's what experts have to say

The Bombay High Court on Monday refused to grant stay on private sector lender Kotak Mahindra Bank's plea for extension of the Reserve Bank of India's( RBI) December 31 deadline for promoter stake dilution.
A division bench of justices B P Dharmadhikari and S V Kotwal directed the RBI to file its affidavit by January 17, 2019, on a petition filed by the Kotak Mahindra Bank against the dilution directive.
The bank had last week petitioned the high court challenging a letter dated August 13, 2018, of the RBI, directing it to dilute its promoter shareholding to 20 percent of its paid-up voting equity capital by December 31 this year and to 15 percent by March 31, 2020.
CNBC-TV18 caught up with Janmejaya Sinha, chairman Asia Pacific, Boston Consulting Group; R Gandhi, former deputy governor, RBI and Sandeep Parekh, founder, Finsec Law Advisors to understand the implications of the court verdict and to find whether there is any room for more negotiations with the RBI to see and look for a middle ground.
What are the practical options for Kotak? Was it wrong to have gone to court first? Would it have made more sense to negotiate with the central bank?
Sinha: I cannot imagine that Kotak Bank would have gone to court lightly, I just do not believe that. I think they must have tried to talk to RBI as many times as they could because no regulated entity wants to take its regulator to court. It must be a tight bind that they are in. One has to look at it from 3 or 4 perspectives and then decide how to look at it.
What was their original licensing agreement that they had got? Second is what is fair and third is what is possible? Just going an offloading 10 percent of stake in 10 days is not straightforward. Then the question is, is it a good bank or is it a bad bank, is it being well-run or is it a threat to the system?
They did not have to offload 10 percent in 10 days, they knew this was coming for the last two years and valuations have been going through the roof. So, with each passing day it was becoming a larger amount of money to be sure. The argument of whether it is fair is another one and I will come to it in a bit. However, do you think Kotak should have seen this coming or did the bank on the fact that 10 years ago the promoters regularly got extensions and so he thought he will also get one?
Sinha: A precedent is an important thing to look at. What was his original licensing norm, was it 49 percent or was it 20 percent or was it 10 percent, when was it changed, what was the wording, there is a lot which I have read in the newspapers that RBI said that it was not in the spirit of the law. The actual wording of the letter that he had got was different from what was then expected. When you are dealing with these things, you have to be tight. So, I would not like to speculate.
If you are asked to do something you will follow the letter of that law and then you say it is against the spirit. When actually there are many regimes in place you will get confused.
On the other hand, it is also true that for a long time there has been a movement towards getting to the final destination, but then you have to make the destination clear. If any of them are not as clear as they can be, the person has a right to feel aggrieved.
I do not believe any bank would like to take the regulator to court. It is not done lightly, you are going to live everyday with that regulator, so who takes the regulator to court?
There is, of course, a change in the RBIs wording. Clearly, in the license condition they have said paid-up capital and when I read the guidelines for licensing of new banks in the private sector in February 2013, there at every point they are speaking about shareholding and not about paid-up equity. Likewise, when you look at the master direction ownership in private sector banks on May 2016, again the directions at all points related to shareholding is being referred to in the language of the law. However, this is not the case in the 2000s when fit and proper was discussed, it was paid-up equity that the RBI was talking about and perhaps as Kotak said on record in his license condition it was paid up capital. Now, where does this leave Uday Kotak legally? Can there be any special leave petition, any legal option available or is Kotak Mahindra Bank clearly violating the law as of January 1, 2019, what is your sense?
Parekh: Whether they are violating the law or not that is the secondary question right now. I think we need to look at tactics rather than the long term strategy because they need to finish something before December 31 or standard violation of the law as the RBI understands it.
Now they can do two things, either they can go down which means they can go to RBI and ask for three more months to comply. The bank can also inform that they are willing to withdraw the writ. I am talking about legal strategy, not about principles of whether it is capital or voting shares or go to a larger bench or go to the Supreme Court etc.
The problem is going up. Usually, there is a principle of judicial deference letters which means they normally do not get into the merits of the case. They look at whether there is perversity, bias, illegality and the like so normally it is okay we have an experts regulator it knows what he is doing and we will normally not like to interfere.
It is amazing Kotak did not think that this could be one of the verdicts of the court that they will not grant a stay, you should have given it more than 50 percent chance, shouldn’t you?
Parekh: Not just more than 50 percent chance, but also that given the short time frame, if they had 6 months or 8 months it was probably worth a gamble to fight with the regulator. Remember, this is Christmas in the west so investors are not going to pick up your calls right now so it is going to be a tough journey for the next few weeks for Kotak.
Can you leave in violation of the law because in the Bandhan Bank case the bank is already in violation and therefore it has been meted out a punishment that starting December 31. They cannot open new branches and the managing director salary cannot be increased? Can Kotak proceed on the assumption that their penalty will be similar and they will work with that penalty, they will be able to manage probably with the electronic banking up to a point by then they will find people to sell their shares too so what if you leave in violation for a few months is that an option?  
Gandhi: That is what Uday Kotak and Kotak Mahindra Bank must have factored in the sense that when you cross the line, of the dead line you are liable for regulatory action. Regulatory action need not necessarily be exactly what has been prescribed for the Bandhan Bank, it could be different. So, by that one should not stay away carry that exactly will apply here. But regulatory penalties will be there, that if Kotak Bank has thought that it is a reasonable cost that they may have to pay until the bank actually comply with the instruction that could be a possibility. That could be a strategy also, not only a strategy that is what will be happening now by December 31. Even theoretically, before December 31 also they can do something, we do not know what are the efforts Kotak Bank is making to comply with the instruction, another 10 days are there.
You mean they can find the buyer for their shares you think?
Gandhi: 10 days are there, so even otherwise I would presume that they must be negotiating with several people. If something clicks because of that is also a compliance. So theoretically there are very possibilities you can comply before December 31, you can leave with penalties immediately, thereafter, until you actually comply, so that is what I think they must be counting on.
Kotak Bank’s position has been off the record told us that they are the regulated entity, a promoter is not an entity regulated by the Reserve Bank, so technically RBI can’t tell the promoter to bring down the stake, it can tell Kotak Mahindra Bank to arrange the capital in such a way that no promoter owns more than 30 percent. But that is a killer condition for Kotak Mahindra Bank. They have 2.3 crore shares outstanding if they have to bring Uday Kotak’s stake down from 30 percent to 10 percent they have to issue 1 crore share more now that will be 50 percent more equity has to be raised which works out about Rs l lakh crore. Is that an option at all for the bank?
Parekh: As you said this is not a 10 day scenario, they have to do either of the two things and there is third possibility also which needs to be kept in mind which is M&A. They did one big M&A couple of years back so it was possible. Issue 10:40 to new investors is possible, sale by the current promoter, so there are multiple combinations which are possible so to say that they have a gun at their head in the last 10 days is not fair. But having said that I still think that that RBI does need to re-think. First of all, they need to improve their drafting skills. Second is they need to rethink whether fragmented shareholding is a panacea which they are claiming it is because we have seen big issues with large private banks and there is fragmented shareholding. So I am not sure it is kind of a destination which RBI is looking at.
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