Kotak Mahindra Bank's case against an RBI decision on promoter stake dilution is likely to come up for hearing before the Bombay High Court on Thursday amid a growing clamour for a review of the central bank's own guidelines for home-grown private sector lenders. There is also a growing clamour, among those associated with the ruling dispensation, for ensuring that the certain amount of indigenous control is maintained in the banking sector even while welcoming the foreign capital and any stake dilution should be left to market evolution rather than forcing it.
As the debate continues on the RBI rules, which require private lenders to reduce their promoter holding eventually to 15 per cent over a period of time, one of the newest banks in the country, Bandhan Bank, recently announced a merger with HDFC Group's Gruh Finance Ltd in a share-swap deal.
Some experts have said that one of the key reasons for Bandhan Bank opting for this deal was to meet the RBI rules, especially after it had to face some curbs by the central bank last year for failing to reduce the promoter stake to 40 per cent within three years of operation. The rules require a bank to cut the promoter stake to 40 per cent within 3 years, 20 per cent within 10 years and then to 15 per cent within 15 years.
In case of Kotak Mahindra Bank, it was asked to cut the promoter stake to 20 per cent by December 31, 2018, from 30 per cent earlier, and eventually to 15 per cent by March 2020. In August, the bank announced an issue of PNCP (Perpetual Non-Convertible Preference) shares to bring down the promoters' holding to 19.7 per cent.
However, the regulator did not approve of this method of stake dilution, after which the bank filed an appeal with the Bombay High Court challenging the RBI decision. Earlier in December, the court had refused to grant any interim relief to the bank.
Experts supporting the RBI stand opine that the promoter stake dilution is aimed at ensuring that voting power is not concentrated in the hands of a single group and that all banks have complied with the rule. They also assert that the RBI communicated its stand to Kotak Mahindra Bank through a letter in August itself, but the lender went to court when the deadline was approaching. During an earlier hearing in the case, the counsel for the bank had argued that the RBI in the past asked it to only dilute promoter shareholding of its paid-up capital, but the impugned letter sought dilution of paid-up voting equity capital. As the case continues in the court, some experts have been seeking a review of the central bank's own guidelines for the country's private sector lenders.
The Centre for Economic Policy Research (CEPR), a right-leaning think tank, said in a recent report that it is high time for a review of regulations and legislation and for re-working the model of governance and ownership norms for Indian private sector banks. The Swadeshi Jagaran Manch (SJM) also said recently there was an urgent need for a rethink on the regulatory framework for private bank ownership so that it remains in Indian hands. "None of us wants Indian homegrown banks to go into hands of foreign players," the SJM said.
The CEPR said the objective should be to form regulations that lead to the creation of global giants like JP Morgan, Merrill Lynch, Goldman Sachs and Santander within India. It said these global giants were set up by families or individuals who diluted promoter stakes as a natural corollary to their success, growth and eventual scale over a period. Only such an enabling environment will help well-run banks such as HDFC Bank and Kotak Mahindra Bank reach a global scale that serves India's interests as the world's fastest growing large economy, the think-tank added.
Leading corporate legal firm Corporate Professionals' founder Pavan Kumar Vijay said there is a need to increase competition in the banking space and that calls for a review of the ownership guidelines, which have been a cause for non-participation to obtain a license. He said the review is required more specifically around the maximum permissible stake promoters can have and it needs to be raised from 15 per cent to at least 26 per cent, which would be at par with the voting right cap.
The CEPR said it is time for India to commit to building robust Indian banking and financial institutions by training the spotlight significantly and perhaps solely on applying the 'fit and proper' criteria of bank ownership, which is typically the case in mature banking markets.
(With inputs from agencies.)