Kotak Mahindra Bank Vs RBI: A Story In Letters
A series of over 35 letters and emails shared between the bank and the regulator since 2008, enclosed in Kotak’s writ petition in the Bombay High Court on Dec. 10, chronicles the arguments of both the regulator and the regulated.
The long trail of correspondence highlights a number of issues ranging from lack of regulatory clarity, the constant revision of milestones, missed deadlines and interchangeable use of legal terms.
Lack Of Regulatory Clarity
Kotak Mahindra Bank got a licence in 2003 under the condition that promoters can hold up to 49 percent in the bank. At the time the promoter shareholding was 61.5 percent.
The correspondence on reduction of promoter shareholding started in 2008 when the RBI sent a letter to the bank pointing out that it had missed the deadline to reduce promoter holding to 49 percent, by six months. The regulator gave Kotak time till March 31, 2008, with no further extension, to comply with its banking license requirement.
The RBI also asked the bank to prepare a “time-bound action plan” to reduce the promoter stake to 10 percent of the paid-up capital, in accordance with the ‘2005 Ownership and Governance Guidelines’ that had come into force by then.
Kotak, in its response, pointed out to the RBI that the licensing condition required its promoters to hold a minimum of 49 percent stake for a period of five years, but did not mention that their shareholding had to be reduced beyond that “at any point in time”.
The bank also raised concerns over interpretation of 2005 ownership guidelines, which said that any individual or group of related entities holding stake in excess of 10 percent in a private bank will be required to indicate a time table for reduction of such holding to the ‘permissible level’. But, the regulation required the central bank to also take into consideration the terms and conditions of the banking licences.
We would like to have greater clarity on what we should take as the “permissible level” of promoter shareholding, which on our reading appears to be 49 percent.Kotak Mahindra Bank’s Letter To RBI Dated June 25, 2008
The RBI replied to that letter with no explanation on the “permissible level” of promoter holding and instead gave Kotak a further extension of time. The letter also asked Kotak to “give a time-bound plan for further dilution of the promoter’s stake” in compliance with the 2005 ownership rules.
We advise having considered your request in the matter and grant extension of time up to Oct. 31, 2010 to bring down the promoter’s holding in the bank to 49 percent of the bank’s paid-up capital, in accordance with the licensing conditions.RBI’s Letter To Kotak Mahindra Bank Dated March 5, 2010
In 2011, Kotak again raised concerns over the dichotomy between its licensing requirement and the 2005 ownership guidelines, while asking the RBI to give it three years to reduce its promoter holding to 40 percent.
RBI prescribed that the promoters’ contribution shall be a minimum of 49 percent of the paid-up capital and shall be locked for a minimum period of 5 years. Therefore, the promoter holding of 49 percent at any point in time is a fundamental condition of the license itself.Kotak Mahindra Bank’s Letter To RBI dated April 29, 2011
To this, RBI replied on Jan. 10, 2012 with no explanation to Kotak’s concerns and advised it to cut promoter shareholding to 10 percent of the paid-up capital by March 31, 2016. The regulator, once again, asked the bank to furnish a road map for the same by March 15, 2012.
Following the letter, the bank submitted its first promoter stake reduction road map but made clear that it lacked clarity from the regulator on why it was being advised to do so.
Whilst the policy and statutory basis of the above requirement is not clear to us, our best estimate of a fair and non-disruptive road map for the dilution of our promoter holding is a dilution to 20 percent of our paid up capital by March 31, 2020 in the following manner: a) 40 percent by March 31, 2014 b) 30 percent by March 31, 2017 and c) 20 percent by March 31, 2020.Kotak Mahindra Bank’s Letter To RBI Dated Jan. 16, 2012
Changing Milestones, Missed Deadlines
Between the regulator and the bank, the milestones for diluting promoter holding and deadlines to furnish those, kept changing with each letter.
On June 26, 2012, the RBI rejected Kotak’s January 2012 road map and asked the bank to reduce promoter stake to 20 percent of the paid-up capital by March 31, 2018 and to 10 percent by March 31, 2020.
“A view will be taken on dilution of promoters’ stake from 20 percent to 10 percent or such other percentage depending upon the prescription in the new bank guidelines,” the RBI’s letter added.
For a second time on July 6, 2012, Kotak proposed a revision in the deadline for reducing its promoter stake. It said it could achieve 40 percent promoter holding by March 31, 2014, 30 percent by Dec. 31, 2016, and 20 percent by March 31, 2018, to comply with RBI’s June 26, 2012 letter.
In March 2014, close to its first milestone to reduce promoter holding to 40 percent, Kotak once again revised the road map and said it could meet the deadline by September 2014 due to impending parliamentary elections. Until then, Kotak had been able to reduce its promoter shareholding from 45.21 percent to 43.59 percent.
We will be declaring the financial results for the year ending March 31, 2014 by end April. Thereafter, equity markets are expected to be extremely volatile given the impending results of parliamentary elections. This would again limit the opportunities available for diluting the promoter shareholding during the period.Kotak Mahindra Bank’s Letter To RBI Dated March 18, 2014
But the RBI refused to grant any further extension to Kotak’s proposed road map and threatened regulatory action if the deadline to cut promoter stake to 40 percent was not met.
It is observed that despite submitting a road map for dilution in July 2012, the bank has not achieved the first milestone of dilution to 40 percent as on March 31, 2014, giving various reasons for non-compliance with its own road map. We, therefore, express our displeasure in this regard. We advise that no further revision of the extending timeline will be permitted in future. You are also advised to apprise us the follow-up action taken in the matter and submit a quarterly progress report on the dilution of promoter shareholding beginning the quarter ending June 2014, to enable us to monitor compliance thereof. We further advise that if the bank does not adhere to its commitments, the RBI would be constrained to initiate regulatory action against the bank such as freezing branch expansion, etc.RBI’s Letter To Kotak Mahindra Bank Dated May 23, 2014
The bank, in a detailed letter on Oct. 27, 2015, informed the then RBI governor Raghuram Rajan that it was able to reduce its promoter shareholding to 33.71 percent within 12 years of its licensing date. Kotak requested Rajan to stay any further dilution of promoter shareholding and asked for a meeting to present its case.
For reasons not mentioned in the petition, the bank wrote again to the regulator in September 2016 and said that it “will not be pursuing the interim estimate of 30 percent by December 31, 2016”.
The RBI rejected Kotak’s proposal yet again.
It is advised that the bank should comply with the interim target of 30 percent by December 31, 2016 and 20 percent by March 2018, as committed vide their letter dated July 6, 2012. It is further advised that bank should bring down the promoters shareholding to 15 percent by March 31, 2020 in compliance with our letter dated June 26, 2012. Non-adherence to the above timelines may invite appropriate regulatory action against the bank, as indicated in our letter dated May 23, 2014 on the subject.RBI’s Letter To Kotak Mahindra Bank Dated Nov. 18, 2016
A final timeline emerged in RBI’s Jan. 30, 2017 letter to Kotak Bank, and it was relaxed further considering the bank’s repeated requests for extension:
- 30 percent by June 30, 2017 (instead of Dec. 31, 2016)
- 20 percent by Dec. 31, 2018 (instead of March 31, 2018)
- 15 percent by March 31, 2020 (unchanged).
Interchangeable Use of Terms
Kotak Bank sought to achieve the second milestone of cutting promoter stake to 20 percent, five months prior to the Dec. 31 deadline. The bank proposed to issue non-convertible preference shares to dilute promoter shareholding.
The banking regulator, however, rejected Kotak’s use of preference shares on Aug. 13 on grounds that it did not comply with its directions.
The bank will be aware that the purpose of the dilution in promoter’s shareholding to prescribed level of 15 percent of paid-up capital is to avoid concentration of control in the hands of promoters. This therefore requires dilution of voting shares.RBI’s Letter To Kotak Mahindra Bank Dated Aug. 13, 2018
Kotak alleged that the terms ‘concentration of control’ and ‘diversified ownership’, along with ‘paid up capital’ and ‘paid up equity voting capital’ were used interchangeably in the RBI’s Aug. 13 letter.
The bank argued that regulatory provisions for promoter shareholding thresholds were distinct from concentration of control, and control was determined by voting rights of banks’ shareholders, which were capped at 26 percent, as per the Banking Regulations Act.
It is for the first time being communicated to the bank that the purpose of the dilution is “to avoid concentration of control in the hands of the promoters”.Kotak Mahindra Bank’s Letter To RBI Dated Sep. 4, 2018
Kotak also raised objections to use of term “paid up equity voting capital” in its Sept. 4 letter, as it had not been used in the RBI’s communication with the bank prior to Aug. 13, 2018.
The phrase was first used in the ‘2013 Guidelines for Licensing of New Banks in Private Sector’, and therefore, Kotak said, it applied to new banks and not existing ones.