The Reserve Bank of India (RBI) last week reviewed the rules of promoter stake in private sector banks based on a panel recommendation. The central bank accepted 21 out of 33 recommendations proposed by an internal working group (IWG) on the subject.
Among the accepted ones (some with modifications), the most critical was the rule on capping the promoter stake in private sector banks. The RBI accepted a rule that says the cap on promoters’ stake in the long run of 15 years may be raised from 15 percent to 26 percent of the paid-up voting equity share capital of the bank. This rule is significant in two prominent cases.
Victory for Kotak
In 2020, the central bank had a legal battle with Kotak Mahindra Bank (KMB) over promoter Uday Kotak’s holdings. RBI norms stipulated that Kotak had to lower his stake below 20 percent before December 31, 2018, from around 30 percent.
To achieve compliance, in August 2018, Kotak Bank announced the completion of a perpetual noncumulative preference share issue (PNCPS), which it interpreted as lowering the promoter stake to 19.7 percent. The bank claimed it was complying with the RBI licensing norms through this deal.
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But the regulator said the preference share allotment route wasn’t sufficient to meet the promoter dilution requirement. The bank’s legal argument was that PNCPS was part of the paid-up capital.
A standoff continued. As the deadline for stake dilution came closer, KMB decided to move the Bombay High Court. In January last year, the RBI let KMB retain the 26 percent promoter stake with some riders. It said the promoters, Uday Kotak and family, while retaining their 26 percent stake in the bank, needed to cap the voting rights at 15 percent by April. KMB withdrew the case subsequently and some experts interpreted this as a win for Uday Kotak.
In June, Kotak sold 5.6 crore shares for more than Rs 6,900 crore in a block deal, reducing his stake to 26.1 percent, inching closer to the RBI’s stipulated level. Uday Kotak held a 25.76 per cent stake in Kotak Mahindra Bank as of September 2021. The RBI agreeing on a 26 percent cap now officially for private bank promoters is, in a way, a victory to Kotak. He can now hold on to his stake and not be worried about the RBI scrutiny.
Good for Hindujas
The RBI has said that this stipulation on promoter stake should be uniform for all types of promoters and would not mean that promoters, who have already diluted their holdings to below 26 percent, will not be permitted to raise it to 26 percent of the paid-up voting equity share capital of the bank, the RBI said.
“The promoter, if he/she so desires, can choose to bring down the holding to even below 26 percent, any time after a lock-in period of five years,” the RBI said.
Indusind International Holdings Ltd and IndusInd Ltd together hold 16.54 per cent stake in the Hindujas-led IndusInd Bank. The lender recently wrote to exchanges that the promoters were intending to acquire additional shares from the bank. After the RBI announcement on internal working group recommendations, Hindujas issued a statement welcoming the new rules.
“The increased promoter holding will lead to enhanced financial strength of the bank and its clients will be protected. We believe this measure of increased promoter holding will be of benefit to all stakeholders: the regulator, the banking institution and its clients, particularly at this time when the Indian economy is poised for exponential growth. We eagerly await the operating guidelines as it gives the promoters an opportunity to inject capital to increase stake up to 26 percent,” Ashok Hinduja, Chairman of IIHL, Mauritius, said in a statement.
With the new RBI rule in place, the Hindujas can hike the promoter stake to 26 per cent in the bank. In the case of Kotak Mahindra Bank, the RBI has already agreed to hike Uday Kotak’s stake in the bank to 26 percent, while in the case of the Hindujas, the road is now clear to acquire additional stake.
More from the recommendations
The RBI also accepted the proposal that there is no need to fix any cap n the promoters’ holding in the first five years. While no intermediate sub-target between 5 years and 15 years is required for the promoter to bring down the stake, at the time of issuing the licences, the promoters need to submit a dilution schedule which may be examined and approved by the Reserve Bank. The progress in achieving these agreed milestones must be periodically reported by the banks and shall be monitored by the Reserve Bank, it said.
As regards non-promoter shareholding, the current long-run shareholding guidelines may be replaced by a simple cap of 15 percent of the paid-up voting equity share capital of the bank for all types of non-promoter shareholders, the RBI said.
Overall, the new set of RBI regulations with respect to promoter stake in private bank are more of a relaxation from the existing laws and will be welcomed by private bank promoters.
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