Kotak Mahindra Bank vs RBI: Should Indian banks stay only in Indian hands?

Chennai: As an RBI deadline ends on Monday for Kotak Mahindra Bank to reduce promoters’ stake, the clamour has increased for a review of the central bank’s ownership guidelines for the country’s private sector lenders.
Kotak had moved the Bombay High Court against the central bank’s direction on diluting promoter shareholding that had disallowed the use of preference shares to reduce promoter shareholding in India’s second-most valuable private lender.  The Centre for Economic Policy Research (CEPR), a right-leaning think tank, has said in a new report that it is high time for a review of regulations and legislations and for re-working the model of governance and ownership norms for Indian private sector banks.
What RBI says?
Under the RBI guidelines for new banks, the promoters of Kotak Mahindra had to bring down their holding to 20 per cent by December 2018. Besides, the RBI requires the shareholding to fall to 15 per cent by 2020 to reduce promoter’s control over the bank. At present it is 30 per cent, RBI claims.
The Reserve Bank of India is likely to wait for the Bombay High Court’s ruling on Uday Kotak’s promoter shareholding issue as the deadline ends on 31 December and the case is coming up for hearing on 17 January.
Kotak’s answer
On August 2, the bank had announced the completion of the PNCPS (Perpetual Non Convertible Preference shares) issue, resulting in dilution of promoter stake to 19.70 per cent of the paid-up capital. The bank issued PNCPS of Rs 500 crore and increased paidup capital to Rs 1,453 crore from Rs 953 crore. The central bank believed that this does not fall under the promoter dilution category. This left Kotak Bank with no other option but to approach the Bombay High Court.
‘The matter is sub judice. Hence, the bank cannot offer any comments in this regard,’ said chief communication officer, Kotak Mahindra Bank, Rohit Rao.
On the date of hearing, Kotak’s counsel said that there should not be any coercive action against the bank. The bank may not be permitted to expand its branch network and the CEO’s remuneration may be frozen. Earlier this month, the court refused to grant any interim relief to the bank.
Rethinking needed
Recently, the Swadeshi Jagaran Manch (SJM) had also said there was an urgent need for a rethink on the regulatory framework for private bank ownership so that it remains in Indian hands. ‘None of us want Indian homegrown banks to go into hands of foreign players,’ the SJM had said.
The CEPR said the objective should be to form regulations that leads to creation of global giants like JP Morgan, Merrill Lynch, Goldman Sachs and Santander within India. It said these global giants were set up by families or individuals who diluted promoter stakes as a natural corollary to their success, growth and eventual scale over a period.
Only such an enabling environment will help well-run banks such as HDFC Bank and Kotak Mahindra Bank reach a global scale that serves India’s interests as the world’s fastest growing large economy, the think-tank added.
Industry’s opinion
Leading corporate legal firm Corporate Professionals’ founder Pavan Kumar Vijay said there is a need to increase competition in the banking space and that calls for a review of the ownership guidelines, which have been a cause for non-participation to obtain license.
He said the review is required more specifically around the maximum permissible stake promoters can have and it needs to be raised from 15 per cent to at least 26 per cent, which would be at par with the voting right cap.
Earlier this year, the RBI had pulled up Bandhan Bank for falling short of meeting the deadline to reduce promoter shareholding and put restrictions in terms of expansion and CEO compensation. However, the ruling was relaxed in December and the bank has been allowed to open new branches.
(with inputs from agencies)

NT Bureau