Kotak Mahindra Bank (KMB) and the Reserve Bank of India (RBI) have had a long history of regulatory challenges, spanning issues such as compliance lapses, promoter shareholding limits, and leadership tenure
The Reserve Bank of India (RBI)’s recent decision on Kotak Mahindra Bank adds yet another chapter to the longstanding history of regulatory complexities between them. The private lender has faced multiple interventions from the central bank since 2008, and the problems still continue over various issues, including compliance lapses, promoter shareholding limits, and others.
Let’s take a look at the complicated relationship between RBI and Kotak Mahindra Bank,
In April 2024, the central bank observed “serious deficiencies” and “non-compliances” in Kotak’s IT inventory management, patch and change management, user access management, data security, and more. The regulatory body directed Kotak to stop onboarding new customers through online and mobile banking platforms, along with issuing fresh credit cards. Following this, Uday Kotak’s wealth witnessed a sharp dip of $1.3bn in his wealth.
The bank then commissioned an external audit to validate compliance, and initiated remedial measures to address the concerns of RBI. Throughout the year, the lender managed to gain RBI’s trust with its submissions and corrective steps. And today, the restrictions have been lifted after a year-long wait. On Tuesday, the private lender has finally got approval from RBI to onboard new customers and issue fresh credit cards.
Kotak welcomed the RBI’s decision, saying “we will continue to work closely with RBI to shortly resume digital onboarding of new customers and issuing fresh credit cards”.
In 2003 when Kotak Mahindra became the first NBFC-turned-bank, the central bank had some rules on promoters shareholding limits. As per RBI, promoters needed to hold at least 49% of the bank’s paid-up capital for a period of five years. The idea behind this mandate was to ensure that promoters had skin in the banking game. In short, if the promoters mess with public deposits, it will directly leave an impact on their financial health too.
And then-CEO Uday Kotak held even more than the RBI’s mandate. The twist in the ‘Kotak vs RBI’ story comes in 2008. The central bank asked Kotak about “not reducing the shareholding to 49% as prescribed even after five years. It also asked the bank to show its plan to reduce it further to 10%.
Kotak became confused here. In a response to RBI, the bank clarified about the ‘minimum’ shareholding limits mentioned in the rules, not ‘maximum’. This was the beginning of back and forth between RBI and Kotak. Till 2018, both sides exchanged over 35 letters debating over promoter’s shareholding limits. Some media reports stated that Kotak even accused RBI or constantly ‘rewriting the rules’.
Slowly, Kotak started diluting the promoter’s stake in the bank and reduced it to 30%. But in 2018, RBI wanted it to reduce it to 20%. The bank agreed to regulator’s demand on a condition --- it wanted to issue ‘preference shares’, not equity shares.
Let us tell you why. If a promoter or any shareholder holds preference shares, he/she has the advantage of receiving dividends announced by the company before the equity shareholders. The RBI wasn’t happy with the condition, and the matter reached the Bombay High Court.
In October 2018, the RBI issued a show cause notice to Kotak Mahindra Bank for not reducing the promoter’s stake as per the timelines. The private lender, in December, filed a writ petition against the RBI before the Bombay High Court and challenged the restrictions on promoter shareholding.
“The term on which the license for turning NBFC into bank was granted cannot be altered and any changes in the guidelines run prospectively,” the petition read. The legal battle kept on going for over two years, and it settled in January 2020.
According to the settlement, promoters voting rights were capped at 20% of the total voting equity shares until March 31, 2020; and then reduced to 15% from April 1, 2020 which aligns with the 2013 RBI guidelines and the Banking Regulation Act, 1949. Further, the promoter had to reduce their shareholding to 26% within six months and was not allowed to buy more shares until their holding reached 15% or a level permitted by the RBI.
On June 2, 2020, Uday Kotak sold 56 million shares held by him in the bank for Rs 6,900 crore through a block deal, in an effort to reduce his stake from 28.93% to 26.1%.
The next intervention in line was the promoter-CEO tenure. According to the RBI rules 2021, the MD and CEOs or whole-time director (WTD) are allowed to continue for up to 15 years. Till then, Kotak had already completed 17 years as KMB’s CEO. Hence, the new RBI rules would have forced him to step down from his position.
However, there was a gap. The new norms came in 2021, but Kotak’s reappointment for the next three years was already approved in 2020. In September 2023, Kotak resigned with immediate effect ahead of four months of the end his tenure. He then became a non-executive director of the bank and Ashok Vaswani was appointed as its new MD and CEO.