Kotak Bank slid 7 per cent on dragging RBI to HC

Private banker Kotak Mahindra Bank has filed an appeal with the Bombay High Court against the Reserve Bank of India, contesting the regulator's decision on reduction of the bank's promoter shareholding.

Uday Kotak had offered to reduce his promoter holding in the bank using preference shares as opposed to diluting his share of common equity. However, the Reserve Bank of India vetoed this decision stating that the dilution of promoter shareholding via the Perpetual Non-Convertible Preference Share (PNCPS) route was unacceptable. 

Kotak Mahindra Bank took another shot at swaying the RBI by explaining that PNCPS form a part of paid-up capital and the bank has a legal basis to dilute the shareholding under the Banking Regulation Act. It also emphasized that prominent jurists and proficient legal counsels of the nation were in agreement with the bank’s view. However, the regulator refused to budge, thereby compelling the bank to file a writ petition against the RBI to safeguard its interests. 

The bank’s licensing agreement requires a reduction in the promoter shareholding over a period. The RBI, after initially awarding a few extensions, proceeded to impose a timeline over which Kotak Mahindra Bank was obligated to lower its promoter shareholding below 20 per cent from the 29.73 per cent as of December 2018. Furthermore, the promoter shareholding needs to be lowered to 15 per cent by March 2020. 

The bank’s plan to bring down the shareholding via the PNCPS route would have increased the paid-up capital to Rs. 1,453 crore from Rs. 953 crore, thereby reducing the promoter’s interest in paid-up capital to 19.7 per cent from 30.3 per cent. However, even then, the promoter shareholding would remain at 30.3 per cent as a percentage of post-issue equity share capital, because preference shares do not count towards the equity share capital. 

Although there was much deliberation amongst experts about the acceptability of the instrument, the opinion was divided. While some claimed that the instrument was permitted under the Banking Regulation Act, others pondered whether the bank’s preferred route was in keeping with the spirit of the regulations. The intention of the regulations imposed by the RBI concerning promoter shareholding of banks is to ensure that there isn’t an excessive concentration of power in the hands of a single person or group. 

Amidst all the debate, Kotak Mahindra Bank was left with no option but to seek legal relief from the court. This caused the shares of the bank to plummet 7 per cent. 
On Monday, the shares of Kotak Mahindra Bank opened at Rs. 1,245 per share and hit a high and low of Rs. 1,288.75 and Rs. 1,188.80, respectively. At the end of the trading session, the stock closed at Rs. 1,198.15, down 6.56 per cent.