Kotak Mahindra Bank has blamed the Reserve Bank of India for shifting the terms and rules of promoter shareholding in private lenders; it said the central bank is now asking the private lender to lower the promoter stake on grounds that are different from the conditions under which it was given a banking licence.

“The licence did not require the promoter shareholding to be reduced to 49 per cent of the paid-up capital of the bank. It is, therefore, clear that 49 per cent was and is the “permissible level” of promoter shareholding in case of Petitioner 1 (Kotak Mahindra Bank),” the bank told the Bombay High Court in the ongoing litigation.

BusinessLine has reviewed a copy of the reply filed by the bank in the ongoing litigation.

The RBI had asked the bank to cut promoter shareholding to 20 per cent of paid-up capital by December 31, 2018, and 15 per cent by March 31, 2020.

Uday Kotak’s stake

As on December 31, 2018, Uday Kotak, the bank’s vice-chairman and managing director, held 29.72 per cent stake in the bank. The bank, in August 2018, had proposed perpetual non-cumulative preference shares (PNCPS) to cut promoter shareholding to 19.70 per cent, which the RBI rejected.

The bank has challenged the RBI’s contention in the Bombay High Court, which is hearing the matter. Kotak Mahindra Bank told the Bombay High Court that the promoters’ stake in the lender remains within “permissible limits” of the original conditions under which it was granted licence in 2002. Within private sector banks, the rules on ownership, promoter shareholding, and voting rights have changed significantly over the last two decades.

For instance, for all licences issued in 1993, as well as under the 2001 guidelines, promoter shareholding was capped at 40 per cent.

The 2001 Guidelines on Entry of New Banks in the Private Sector required promoters to dilute their stake in private banks to 40 per cent or below within one year of operation.

This was changed in June 2002 when the RBI decided to raise the maximum limit of shareholding of Indian promoters in private sector banks from 40 per cent to 49 per cent of their paid-up capital “in order to provide a level-playing field”.

In February 2005, in the Guidelines on Ownership and Governance of Private Sector Banks, the RBI stated that “where any existing shareholding by any individual entity/group of related entities is in excess of 10 per cent, the bank will be required to indicate a time-table for reduction of holding to the permissible level. While considering such cases, the RBI will also take into account the terms and conditions of the banking licences”.

The rule was changed when the RBI issued Universal Banking Guidelines, first in 2013, and later in 2016. The new rules now require that the non-operating finance holding company (NOFHC), or the promoter group, shall progressively bring down its shareholding from a minimum of 40 per cent to a maximum of 15 per cent within 15 years.

Kotak Mahindra Bank told the Bombay High Court that the “permissible level” for shareholders in a bank (as was determined in the 2005 Ownership and Governance Guidelines) “would necessarily have to be determined in line with the terms and conditions of the licence”.

“In the case of the Petitioner No 1 (Kotak Mahindra Bank), the licence did not require the promoter shareholding to be reduced below 49 per cent of the paid-up capital of the bank,” it told the court.

‘RBI did not respond’

Also, when the bank sought the RBI’s clarification on the “permissible level” of promoter shareholding, “the RBI did not respond or provide any guidance, but merely insisted on a roadmap to be provided for reduction of promoter shareholding”, said Kotak Mahindra Bank.

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