The Reserve Bank of India’s reply to Kotak Mahindra Bank’s writ petition on the regulator’s possession regulations units the level for a felony battle that has up to now received little media interest.
Responding to the financial institution’s writ petition, which was filed in December 2018 within the Bombay excessive court docket, the principal bank remaining month has placed up a strong defence that rebuts the claims of the private sector lender.
Apart from Bloomberg, which become been the only main media employer to disclose the contents of the RBI respond, India’s economic press has failed to supply this case the significance it merits.
Such media behavior regarding the unheard of case of a financial institution taking its regulator to courtroom is extraordinarily uncommon. A nearer inspection of the files filed with the aid of the RBI in its reply indicates that Kotak Mahindra Bank (KMB) can be overly constructive in challenging the regulator’s authority to compel the financial institution’s promoters to reduce their stake.
KMB’s essential contention turned into that the Banking Regulation Act, 1949 (BRA) does now not empower the RBI to compel any bank to reduce any individual’s (which include a promoter’s) shareholding in a financial institution.
According to KMB, the BRA simplest lets in the RBI to decide a ceiling on vote casting rights, and wherein a shareholder isn’t always taken into consideration to be suit and right, to curtail the person’s balloting rights to five%. The bank claimed that RBI’s earlier directives to dilute promoter shareholding in KMB had been limited to “paid-up capital” and now not paid-up voting equity capital. The financial institution claimed that it changed into best after KMB’s problem of choice capital that the RBI in a letter dated August 13, 2018 emphasised the dilution of promoter shareholding as a percentage of “paid-up balloting fairness capital.”
The writ additionally stated that Section 12 and Section 12-B of the BRA handled the issue of ownership of stocks and voting rights in a financial institution, and argued that RBI powers on this trouble are only restrained by way of those Sections; any guidelines given by using the regulator go past the purview of these sections, and are extremely vires of the BRA. Indeed, KMB’s writ alleged that RBI performing to dilute the promoters’ stake in any bank became “arbitrary, obviously unreasonable, unlawful, without the authority of law, ultra vires and …unconstitutional and horrific in regulation”.
Such a announcement by using a regulated entity immediately undermines the credibility and authority of the RBI as a banking regulator and manager.
Disputing KMB’s allegations and defending its movements, the RBI in its reply argued that once RBI gave an “in precept” popularity of Kotak Mahindra Finance Ltd. To convert itself right into a bank via a letter dated February 7, 2002, Conditions 17 and 18 in the Annexure which KMB needed to comply with stated,
The RBI states that this letter became now not annexed in Kotak’s petition. The crucial bank’s respond additionally states that on the problem of lowering promoters stake in KMB, each parties had been in correspondence considering the fact that 2004 and even as RBI has been steady in its stand to lessen promoters’ shareholding, KMB till August 2018 had “in no way severely contested” it. Nor had KMB challenged the Guidelines/Directions issued through the RBI on this problem from as a minimum 2013.
Defending the use of paid-up capital in its correspondence with KMB, RBI states that till the BRA changed into amended in January 2013, sub-phase 12(1)(ii) excluded ‘desire stocks’ (except those issued earlier than July 1, 1944) from the capital of a financial institution. Therefore within the correspondence between granting the banking license to KMB in 2003 till the BRA amendment, the discussion regarding dilution in promoter shareholding became within the context of fairness stocks best.
Furthermore, in step with the RBI, prior to the BRA modification, KMB made repeated requests for extension of time to comply with the desired discount in promoter shareholding and provided assurances to the RBI of complying with the together agreed timelines. The communicate among the regulator and KMB to dilute promoter shareholding changed into best inside the context of paid-up equity capital, as KMB until August 2018 had no other class of shares. Hence the correspondence among the RBI and KMB prior to the problem of choice capital meant that the reference to “paid-up capital’ turned into ‘paid up voting capital’.
After the amendments to the BRA in 2013, the RBI issued ‘Guidelines for Licensing of New Banks inside the Private Sector’ on February 22, 2013 and the ‘Master Direction on Ownership in Private Banks’ on May 12, 2016. The latter said that for all current banks, the promoter shareholding would be the same as accepted within the February 22, 2013 guideline (“@ For all current banks, the accredited promoter/promoter organization shareholding can be in line with what has been approved within the February 22, 2013 tips on licensing of familiar banks viz. 15 in line with cent.”) which stipulated that the dilution of shareholding will be in appreciate of “paid-up balloting equity capital.”
Therefore the RBI argues that in its correspondence with KMB on the issue of dilution of promoters’ shareholding it turned into correct in referring to KMB’s fairness capital as paid-up capital prior to the bank’s trouble of choice capital.
On the problem of the applicability Section 12, BRA, the RBI addresses (para one hundred forty four-a hundred and fifty in respond) KMB’s argument that the impugned discount communication and the 2018 RBI letter run opposite to both the letter and spirit of Section 12 and 12-B of the BRA. KMB interprets those sections as pertaining handiest to the goal of ‘ensuring that manipulate of banking groups is inside the fingers of suit and right men and women’, and as having nothing to do with the law of banks’ capital, and shareholding and voting rights of shareholders typically.
According to the RBI, the concerned segment sufficiently empowers the RBI to regulate the volume of vote casting rights of any man or woman shareholder in a bank and does now not dilute the regulator’s authority, whilst Section 35-A, BRA offers RBI wide powers to problem directions to any financial institution in the public interest or within the hobby of banking coverage. Hence the RBI believes these sections deliver the RBI the desired powers to difficulty instructions to KMB to dilute the promoter shareholding.
The correspondence in RBI’s respond carries an exciting anecdote on how KMB tried to reduce promoter shareholding through removing the classification of promoter for Anand Mahindra (AM).
The RBI had informed KMB that it needed to deliver down the promoter conserving to 49% by using June 30, 2009.
On June three, 2009, KMB informed the RBI that the bank’s board of directors had resolved that AM turned into now not a promoter resulting from his full-size dilution on the grounds that 2003, and he was no longer someone acting in concert with the other promoters; consequently the promoter preserving as on June 3, 2009 became 48.Fifty three%.
However, the RBI replied in a letter dated November nine, 2009 that for AM to be labeled as a non-promoter, the bank could have to forestall using the phrase ‘Mahindra’ in its call.
Realising that the RBI changed into unwilling to supply its request, KMB in a letter dated February 2, 2010 to the RBI said that the financial institution will convey down the promoters’ conserving (including that of AM) to underneath 49% within a period of twelve months.
As on September 30, 2010, Anuradha Mahindra held 14.54 mn stocks and 1.Ninety eight% of KMB. Finally on October 29, 2010, the promoter shareholding (such as that of AM) changed into delivered all the way down to forty eight.99%. It is pertinent to notice that KMB had at first confident the RBI that the forty nine% promoter conserving might be carried out through June 2007; in the end it become accomplished greater than three years later, with none shape of regulatory censure.
To date, in the media, insurance at the KMB-RBI spat has in large part weighed in at the aspect of KMB and Uday Kotak in particular.
The RBI’s respond to KMB’s writ gives compelling proof to justify its stance in forcing Kotak to lessen his stake in KMB, and stakeholders will now have to anticipate the Bombay excessive court’s decision in this vital difficulty.