Kotak Mahindra Bank vs RBI: Misses stake cut deadline! Will Uday Kotak blink?

Uday Kotak led Kotak Mahindra Bank is in the midst of a battle with the Reserve Bank of India (RBI) over promoters holding, which the apex bank has ordered to be lowered down to 20% by end of December 31, 2018. However, looks like Kotak was not ready to bring down his stake in KMB till 20%, as he has boldly missed the deadline date specified by RBI.Hence, all eyes are now watching Uday Kotak and his move to retain his stake in the bank. There is not much impact seen on the KMB share price today as it is trading gradually lower by 0.50% at Rs 1,248.05 per piece at around 1034 hours. 

Now that, Kotak has missed the deadline, there are two case scenario which can emerge ahead. Firstly either RBI may decide to hold on up till the Bombay High Court verdict, or Kotak will have to accept penalties levied by the central bank as minimum cost for keeping his stake in  KMB unchanged. 

Economic Times quoted a source close to the matter as saying the RBI may wait for Bombay High Court’s ruling to decide on the next course of action on Kotak Mahindra Bank. 

A hearing is being held on January 17 on Uday Kotak's shareholding issue. Hence, one can expect that RBI may give a breather to KMB's founder till Bombay High Court's new verdict. 

What has happened is that, RBI asked Uday Kotak to bring down the promoter stake in the bank to 20% from the current 30% by Dec 2018 and 15% by March 2020.

However, Uday Kotak made it quite clear on December 10, that he is no mood to reduce his stake in KMB by filing a writ petition with the Hon'ble Bombay High Court against RBI to validate the bank's position.

Not only this, Uday Kotak and KMB also challenged RBI by referring to Section 12 and 12b of the Banking Regulation Act, 1949,  (BRA). 
 
The petition revealed that, as per the section, RBI is not empowered to “issue directions to banks to reduce their promoter shareholding or otherwise contemplate reduction of shareholding of any person in a bank.”

On December 10, KMB in a notification to exchanges said, "We have since clarified and conveyed to the RBI our position in relation to PNCPS being a part of paid up capital and the legal basis on the matter of dilution of shareholding under the Banking Regulation Act. We have also shared with the RBI the opinions of eminent jurists and senior most legal counsels of the country, which confirm our understanding."

The bank added, "Given the milestone of December 31, 2018, the Bank has been left with no option but to protect its interest."

On August 02, 2018, Kotak had announced  completion of its Perpetual Non Convertible Preference Shares (PNCPS) issue resulting in dilution of promoter stake to 19.70% of paid up capital. 

Earlier analysts at Macquarie said, "There is no precedence of any entity having challenged RBI in the past. In most cases the verdict usually is in favour of the regulator. The regulator still has powers to impose penalties and restrictions on Kotak as is the case with some other institutions who have failed to comply with promoter stake norms. However, there is a legal dispute here."

Macquarie also stated that, "it is clear that Kotak isn’t interested in selling his stake further."

As on September 2018, Uday Kotak holds about 29.73% stake in KMB with 56,69,27,100 equity shares. The MD & CEO of KMB is the largest promoter in the bank compared to other Kotak members. 

Going forward, exactly how Uday Kotak's shareholding in KMB moves will be keenly watched by both experts and investors.