Kotak Mahindra Bank Most Impacted If RBI Limits CEO Tenure, Say Brokerages

A Reserve Bank of India discussion paper that suggests limiting the tenure of promoter-chief executives will hurt Kotak Mahindra Bank the most, according to brokerages.

The regulator, on Thursday, suggested that the tenure of promoter CEOs be limited to 10 years. Non-promoter CEOs should be allowed to continue only for 15 years.

While the RBI has only issued a discussion paper so far, it has also provided a possible time frame over which this can be implemented. After the completion of the suggested tenure, banks shall have time period of two years or till the expiry of current tenure to appoint a successor, whichever is later, if the rules are finalised.

Here’s what the brokerages have to say...

Macquarie Securities

• The above guidelines are a big negative for Kotak Mahindra Bank as Uday Kotak, being the promoter of the bank, has already served 10 years as CEO/whole time director. His term is expiring on Dec. 31, 2020. Kotak will have time till April 2023 to appoint a successor for the bank, assuming April 2021 is the date when the draft guidelines become effective.
• None of the other large private sector banks will have an issue and HDFC Bank anyway is seeing a CEO transition soon.
• The RBI, in the past, has had a bad experience with promoters of Global Trust Bank, Bank of Rajasthan, Yes Bank and many such promoter-sponsored banks and hence, perhaps in recommending a 10-year tenure for the promoters, the central bank feels it is safeguarding the financial institution.

Morgan Stanley

• Within our coverage, Kotak Mahindra Bank would have to undergo a CEO transition if this discussion paper is finalised in the current format.
• Stock price of Kotak Mahindra Bank could show some volatility in response to this. The outlook on the bank should not be significantly affected given strong/experienced management and good corporate governance, along with a strong balance sheet and liability franchise.
• The other banks in our coverage that may be affected is AU Small Finance Bank, if the RBI considers CEO tenure before it became a small finance bank.
• Among non-promoter/non-major shareholder CEOs, the CEOs of RBL Bank and Federal Bank have a tenure of about 10 years: They will have another five years before having to make the transition.

Jefferies

• If the norms are implemented as is (and notified by September 2020), Uday Kotak’s term may expire on September 2022 or April 2023. Dipak Gupta (currently Joint managing director) could be a prospective internal successor.
• AU Bank’s promoter-CEO will have seven years of tenure as per new norms and banks with professional CEOs like Bandhan Bank, Federal Bank and RBL Bank may have five to 10 years of residual tenure.
• Exiting CEOs can be appointed on the board to offer smoother transition. However, taking charge as chairman is a bit tricky, especially for promoters as they aren’t really seen as independent.