Private sector lender Kotak Mahindra has moved the Bombay High Court challenging the Reserve Bank of India's decision to reject its sale dilution announced in August. The promoter owns Kotak family owns over 30 per cent in the bank and has to reduce it by a little over ten per cent points by December 31 to keep it under 20 per cent. In its petition, the bank seeks a widening of the definition of the paid-up equity capital to include these preference shares as well beyond the present equity voting capital. It is also questioning the laws related to the capping of the shareholding at a more fundamental level, asking if there is a legal basis to have shareholding caps.
Kotak Mahindra completed an issue of perpetual non-convertible preference shares on August 2, increasing the bank's paid-up capital from Rs 953 Crore to Rs 1453 Crore, bringing down the promoter’s holding from 30.3 per cent to 19.7 per cent. However, it informed the stock exchanges on August 14 that the method did not meet RBI requirements. In a regulatory filing on Monday, Kotak Mahindra said ever since, it has clarified and conveyed its position to the central bank “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.” It added that it has not heard from the RBI and given the deadline of 31 December, the “bank has been left with no option, but to protect its interests”. Sources said the bank had sought opinion from a host of senior lawyers on the matter, who, mentioning past precedents, including Supreme Court judgments, have supported the lender.
A banking analyst said in challenging RBI's decision, Kotak has essentially challenged RBI's powers to regulate private sector banks. They said there are two possible outcomes from this. If Kotak wins the case, and is allowed to use PNCPS to reduce promoter shareholding, the RBI will definitely challenge it in the SC. The second scenario is, if Kotak loses the case, then he will not only have to find another alternative to pare his stale, but also face more stringent regulatory supervision after the debacle.
“The bank has filed a case against the regulator. The case will surely set a precedent for any such future disputes. The matter pertains to the interpretation of the law and should be dealt with by the court only,” said Ashish K. Singh, founder and managing partner of law firm Capstone Legal.
