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Kotak bank moves HC against RBI order on promoter stake dilution

MUMBAI: Kotak Mahindra Bank has approached the Bombay High Court against a central bank order that had disallowed the use of preference shares to reduce promoter shareholding in Indias second most valuable private lender.

The bank, on the other hand, believes that it had met the promoter holding dilution requirement with the perpetual noncumulative preference share (PNCPS) issuances. On August 2, the bank had announced the completion of the PNCPS issue, resulting in dilution of promoter stake to 19.70 per cent of paid-up capital.

However, the Reserve Bank of India (RBI) had said that the preference share allotment route did not meet its promoter holding dilution requirement.

Kotak Mahindra has appointed Manilal Kher Ambalal law firm to argue its case in the high court.

Shares of the bank fell 6.5 per cent to Rs 1,198 on the Bombay Stock Exchange. The stock had climbed 9 per cent on Friday on speculation that Berkshire Hathaway would buy 10 per cent in the bank. Promoter shareholding is 29.7 per cent as on September 30, 2018. Under the RBI guidelines for new banks, the promoters of Kotak Mahindra Bank had to bring down their holding to 20 per cent by December 2018. To reduce promoters control over the bank, RBI requires the shareholding to fall to 15 per cent by 2020.

The bank issued PNCPS of Rs 500 crore and increased paid-up capital to Rs 1,453 crore from Rs 953 crore. RBI has clarified that this did not fall under the definition of promoter stake dilution. “Given the milestone of December 31, 2018, the bank has been left with no option but to protect its interest. By way of abundant caution, the bank has today (on Monday) filed a writ petition with the … Bombay High Court to validate the bank's position,” the lender said in a filing to the BSE.

Kotak Bank has conveyed to the RBI its position that the PNCPS is a part of paidup capital and the legal basis on the matter of dilution of shareholding under the Banking Regulation Act.

“This is a question of law and it has to be decided by the court,” said Ashish K Singh, managing partner of law firm Capstone Legal. “The interpretation of the RBI Banking Regulation Act can differ and it is the courts prerogative to decide such complex questions of law.”

According to the Banking Regulation Act, the capital includes equity and preference. Kotak Mahindra had taken views from eminent lawyers and unanimously got the view that the Act allows equity dilution through preference share sale, without diluting voting rights.

In the past two years, small finance banks such as Ujjivan has also issued PNCPS. Section 12 (2) of the Banking Regulations Act says that voting rights by any shareholder be capped. The Act was amended to raise voting rights up to 26 per cent in 2013 from 10 per cent.

The RBI raised it to 15 per cent in 2013 and then to 26 per cent in 2016. If a shareholder owns more than 26 per cent in a bank, the voting right of that investor is still capped at 26 per cent.

The other option before the bank was to raise capital, but that would have meant issuance of Rs 1.1lakh crore worth of stock. The bank has a capital adequacy of over 18 per cent. It looked at acquisitions options to dilute promoter holding, but did not finalise one. Also, getting an investor for a large stake would require RBI approval.

The bank is likely to cite the Cyrus Mistry case before the high court.

Cyrus Mistrys holding in Tata Sons is more than 10 per cent by way of equity, but less than 10 per cent of equity plus preference. NCLT and NCLAT both have passed judgements that if the requirement is more than 10 per cent capital, it has to be 10 per cent of equity plus preference.

“The question is whether to reduce capital or promoter's control,” said Sandeep Parekh, partner of Finsec Law Advisors. “Kotak may have valid grounds to file the writ petition, as RBI has asked it to reduce capital in its sloppy drafting, rather than asking it to reduce control….The best way to change its condition would be for the RBI to modify its regulatory obligation…. to dilute control.”

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