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RBI-Kotak case: Here's what experts say about the regulator's bank ownership rules

Updated : April 24, 2019 07:35 PM IST

The Bombay High Court adjourned the hearing of the Kotak Mahindra Bank versus the Reserve Bank of India (RBI) case till January 2020. This has created a peculiar situation as Kotak Mahindra Bank is likely to remain in violation of the RBI's bank ownership rules for one more year while other banks like Bandhan Bank, Ujjivan Financial Services and Equitas Holdings have to scamper to comply with promoter ownership rules.

Kotak Bank was given a banking licence in 2002, and at that time the promoters were told not to bring down their stake to below 49 percent. The licence, however, contained a clause that RBI may impose additional conditions and that the bank at all time will have to comply with the regulator's conditions.

RBI's bank ownership rules underwent a significant change in 2013 when it said that promoters of banks have to bring down their shareholding to 20 percent of the paid-up equity within 10 years of getting a licence, and to 15 percent within 12 years.

Kotak Mahindra Bank followed by first bringing down the promoter stake to 30 percent. When it came to bringing down the stake further to 20 percent by December 2018, the bank issued preference shares to do the same. However, since preference shares don't have voting rights, promoter Uday Kotak's stake remained at 30 percent of the voting shares.

RBI rejected Kotak's interpretation and asked the bank to bring down the promoter's shares to 20 percent of the equity capital, and not just paid-up capital. Uday Kotak then dragged the RBI to court.

To discuss this further, CNBC-TV18's Latha Venkatesh talks to HP Ranina, former RBI board member, Tamal Bandyopadhyay, author and columnist and Ashvin Parekh, managing partner at APAS.

Here's what they have to say:

HP Ranina: “...Kotak cannot hide behind any interpretation... Kotak must bring down his shareholding to 20 percent of the total equity capital of the bank and again going to the court - I don’t think it really makes sense.”

Tamal Bandyopadhyay: “I am afraid this situation is little bit of complex, not as simple as you are explaining because Kotak’s case is very different from Bandhan Bank’s case and the reason being - right from the beginning, Bandhan applied for a banking licence and got the banking licence on the express understanding of the guidelines that it has to come down to express at such and such period. But in Kotak’s case, there is a series of changes. Once you got banking licence which stocks about 40 percent then I think it rose to 49 percent and then subsequently all the changes have been made. Interestingly, even voting rights also changed from 15 percent to 26 percent. I see there is a contradiction between the two. On one hand, you are limiting the promoters' equity, on the other hand, you are raising the voting rights... the entire thing the way it was handled -it could have been handled in a different way from the Reserve Bank’s point of view.”

Ashvin Parekh: “The regulators must be allowed to change rules... they have to regulate the industry and in this particular context, there are deposit holders involved. So whatever is good in the public interest and deposit holders has to prevail... the larger issue here is if the regulator intended and if the spirit behind this particular regulation was to ensure that both, not just the capital but also the voting rights, should have its ramification... I would certainly say that RBI does have the necessary or should have the necessary powers to regulate and to control the ownership.”
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