The question as to how RBI may react to the position of bank MD passing from father to son, in the case of a promoter-shareholder, is a pertinent debate for the country even now.
Last month Jay Kotak, son of Uday Kotak was introduced to investors at an analyst meet as the co-head of the bank's 811 initiative which is its digital banking unit. According to some analysts who attended the meeting, that analysts' meeting appeared to be designed to "introduce" or even "launch" Jay Kotak as a rising management leader of the bank. Key invitees to the meeting included some of the largest mutual fund managers in the country, who are rarely seen at analyst meets. Hence most investors and media persons have interpreted the move as part of succession planning at the bank, with the promoter-father grooming his son to take over as chief executive officer (CEO) sometime in the future. Newspapers also reported that when asked about the future role of Jay Kotak in the bank, a spokesperson had replied saying it will be solely determined by merit. In this column, we look at the issue from the point of view of the regulator, the Reserve Bank of India (RBI).
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First up, there is no immediate question for RBI to answer. Jay Kotak hasn’t been nominated to a key management position like COO or CEO or as a member of the board. RBI has no role in the form of having to give its approval for his appointment. At the moment the speculation is that after Uday Kotak completes his term as CEO and vice-chairman in December 2023, the board will mostly choose between Executive Directors - KVS Manian and Shanti Ekambaram - for the post of Managing Director (MD). Both are expected to groom Jay Kotak for the top job which could fall vacant after Manian or Ekambaram complete their five-year term.
RBI's moral dilemma may hence start only six years from now, if and when Jay Kotak is positioned by the bank as an MD. Nevertheless, the question as to how RBI may react to the position of bank MD passing from father to son, in the case of a promoter-shareholder, is a pertinent debate for the country even now.
The first argument against allowing a promoter's scion to take over the top slot in a bank is that banks are different. "Nepotism" is not favoured in our merit-based societies even in manufacturing companies. But at least in the case of a steel or a cement or any manufacturing company, a large part of the equity risk is born by the promoter/shareholder family. In banks, however, out of Rs 100 loan, Rs 92 is depositors' money, And of the remaining Rs 8 only Rs 2 would be the promoter Kotak family's contribution. Hence, the argument goes, that promoters have no divine right to bring in their scions. Secondly, a default by a steel company at best hurts its suppliers. Default in a bank can have a domino effect on a large part of the financial system. Hence given the large stake of depositors and the economy in banks, the practice of promoter shareholders to keep the headship within the family cannot be allowed in banks.
A former RBI veteran pointed out that if Jay Kotak is proposed as an MD, for RBI it will be very much like Uday Kotak returning himself. Under current rules, a promoter shareholder can remain MD for 15 years, after which he has to mandatorily give up the position for five years. He can return as MD after the five-year cool-off. By that logic, it is perfectly legitimate for Jay Kotak to put his hat in the ring after five years. However, the regulations require that in case the promoter(Uday Kotak in this case ) wants to return, he should not hold any position on the board for five years. So far, the expectation is Uday Kotak intends to be on the board after ending his turn as MD in December 2023.
Now, will the RBI be comfortable with Uday Kotak as MD till 2023, and his continuing on the board thereafter, and Jay Kotak as MD after six years? That’s where second-guessing RBI blurs into speculation and moral questions. A respected former RBI executive said the central bank would follow a principle of "rebuttable presumption". That means the nomination of the promoter's son will be prima facie presumed as nepotism, and the bank's board will have to give extra proof to show that the son (or daughter) is better than competing candidates. It won't be enough for the bank's Nomination Committee to prove that the son is "as good" as the others or even "per se" good. He has to be shown to be better. The onus of providing proof will be far greater.
RBI will be guided by three rules, he said: 1. It will have to be satisfied itself that the promoter's son is the best candidate available. 2. It will have to ensure that depositors are comfortable that the bank is well run and 3. It will have to ensure that the optics of governance are maintained ie the regulator has to ensure that good precedents are set for future generations and for all banks.
Yet another RBI veteran pointed out that if Jay Kotak is indeed presented as an MD candidate say five years from now ( when he will be 37 years old), he too will be able to hold the position for only 12 years, ie till he is 49. What thereafter? Well, Uday Kotak does have a second son. But it is a bit ridiculous to debate about things, so many years into the future.
Let me end with a contrary argument presented in a book titled "In Praise of Nepotism" written in 2003. The author, Adam Bellow eloquently argues that nepotism is widely condemned but even more widely practised. He amasses vast evidence from ancient tribes, and papal lineages to modern families like Kennedys, Rothschilds, and Gores and argues that practised well, nepotism has actually served society well and may not be such a bad thing. That is Bellow's view, not mine!