A pioneer in investigative journalism in India, Sucheta Dalal, has written a thought provoking piece on what is probably the most important court case in RBI’s history – it’s tussle with Uday Kotak on the matter of Mr Kotak’s shareholding in Kotak Bank. If the RBI loses this case it is hard to see how it will be able to maintain the legitimacy of the myriad rules it has created with regards to bank ownership in India.
“RBI ordered the promoters of Kotak Mahindra Bank (Kotak) and Bandhan Bank to bring down promoter holding to below 20%. In Kotak’s case, there has been back-and-forth on the issue for 10 long years, largely because of the many changes in guidelines and regulations in the interim. Finally, RBI gave an ultimatum to both the Banks and threatened coercive action if they did not comply by 31 December 2018….
Does RBI really have the power to punish banks on the basis of unexplained and ever-changing rules on the acceptable promoter holding? Can a regulator, which has repeatedly failed to catch wrongdoing for over 25 years (from Harshad Mehta to Nirav Modi and Gitanjali), have no accountability for capricious actions against good managements and consequent damage to shareholder value? Isn’t it absurd that two highly successful bankers are being punished by the regulator, despite exemplary performance?
The Kotak petition raises many important issues which, if  taken to a logical conclusion, will force some clarity on RBI’s powers, policymaking and supervision and its accountability….
The Kotak petition, which I have reviewed, makes four compelling points. 
1. RBI’s many changes on promoter shareholding, after it was granted a banking licence in February 2003, ought not be applied retrospectively to it.
 2. RBI’s regulations are ultra vires of Sections 12, Sec 12(2) and Sec 12(B) of the Banking Regulation Act (BR Act). Kotak argues that the BR Act does not empower RBI to ask any bank to reduce shareholding; the Act only permits it to fix a ceiling on voting rights. Or, if a shareholder is found to be ‘not fit and proper’ [Sec 12-B (8)], to curtail such person’s voting rights to 5%. It further argues that RBI’s general powers under Sec 35-A to issue directions to banks and make delegated legislation, is also circumscribed by the need for these to be in public interest and to protect depositors’ interest. 
 3. Kotak claims that it has complied with RBI’s direction by reducing its stake to 19.5% (below the mandated 20%) in August 2018 by issuing perpetual non-convertible preference shares (PNCPs). RBI had immediately rejected the move and demanded a reduction in paid-up voting capital to prevent concentration of control.
 4. Finally, the petition says, compliance would require the Bank to issue fresh equity of Rs1.10 lakh crore, which was “equal to the entire market-capitalisation of State Bank of India.” It calls this ‘manifestly unreasonable’, since it would not only dilute share value but require large placements to foreign institutional investors….
Whichever way one looks at it, the Kotak petition is a lose-lose proposition for RBI, whose power has been challenged for the first time in court (unlike SEBI which is routinely dragged to the Supreme Court over most decisions). 
If Kotak wins—and it has a strong case—it could seriously circumscribe RBI’s powers and make it more accountable than the government could ever have done. Investors will also want to know how this extreme rigidity, backed by punitive action, helps improve its supervision and catch the next IL&FS or NiravModi/Gitanjali in time. Those failures have inflicted far bigger pain on India’s financial system. If RBI wins and forces Kotak to dilute shareholding through needless acquisitions or issue of capital, it would mean an endorsement of capricious changes and no accountability for regulators.”
Clearly, the piece has been written from Uday Kotak’s point of view. It would be really interesting if someone as distinguished as Ms Dalal could write a piece from the RBI’s point-of-view. In particular, it would be really interesting to know what transpired in July-September 2018 which prompted the RBI to go after Yes Bank, Kotak Bank and Bandhan Bank’s promoters.

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