Bombay High Court Refuses Interim Relief For Kotak Mahindra Bank On RBI Deadline To Cut Promoter Stake

The Bombay High Court denied interim relief to Kotak Mahindra Bank Ltd. regarding the Reserve Bank of India’s direction to dilute its promoter shareholding.

The case was adjourned till Jan. 17 and the RBI will have to respond before that. As per the RBI’s timeline, Uday Kotak needs to bring down his stake in the bank to 20 percent from 29.73 percent by Dec. 31.

Kotak’s lawyer urged the court to prevent the RBI from taking any coercive regulatory action till the next hearing. The RBI’s counsel, however, said the central bank is a “responsible regulatory body”.

The two-judge Bombay High Court bench led by Justice BP Dharmadhikari then left it to the RBI whether a regulatory action should be taken if the bank doesn’t comply with its direction to reduce promoter holding to 20 percent by Dec. 31. To which, the Kotak lawyer said he would take the RBI counsel’s word on that.

The banking regulator had changed its stance in an Aug. 13 letter to the lender and asked it to reduce promoter holding as a percentage of “paid-up equity voting capital” from an earlier communication that mentioned “paid up capital”, according to Kotak’s counsel. The new RBI governor should be allowed to consider the matter and respond to the bank’s September letters which explained its position, he said.

The RBI counsel, however, argued that Kotak Mahindra Bank had only equity shares within its paid-up capital till August and therefore all directions of the RBI to the bank did not specifically use the term “paid-up equity voting capital”. The bank acted in a “clever” manner because its promoters did not want to lose control, the counsel said. “If they (the promoters of the bank) are not willing to sell to a foreign shareholder, they can sell equity to an Indian investor.” The RBI, the counsel said, issued the directions to reduce “concentration of power in promoter’s hands” and that could not be achieved through the issue of preference shares with no voting rights.

In August, Uday Kotak proposed to reduce his promoter holding in the bank using preference shares rather than bringing down his share of common equity. Within 10 days of the proposal, the RBI told Kotak that the perpetual non-convertible preference shares route to dilute promoter shareholding was not acceptable. The private lender moved the Bombay High Court on Dec. 10 after the RBI restricted it from reducing promoter holding using preference shares.

The bank is not just challenging the RBI’s disapproval of the use of preference shares in reducing promoter shareholding. The petition, a copy of which has been seen by BloombergQuint, also shows that the lender is challenging whether the RBI has the powers to dictate promoter shareholding.