Banking Central | Why Uday Kotak's era is far from over at Kotak Mahindra Bank

Uday Kotak will continue as a major shareholder and board member in the bank

The news of Uday Kotak’s resignation as the Managing Director and Chief executive of Kotak Mahindra Bank (KMB) on September 2 didn't come as a major surprise. His tenure was scheduled to end on December 31 after the RBI capped a promoter's tenure as the CEO from at 15 years. Kotak had exceeded the limit when the guideline was issued in 2021.

Put differently, the bank was preparing for a life without Uday Kotak at the wheel for some time. The resignation, therefore, didn't trigger much of a ripple in the bank even though it came four months in advance. Kotak himself said in his exit note that he took the call a bit early to facilitate the leadership transition.

Yet, the announcement of the country's one of the most celebrated bankers, fuelled speculation in the industry whether the decision had anything to do with the regulator’s wish for non-interference of the incumbent in the CEO selection process. That argument, though, doesn’t hold water since Kotak Mahindra sent out two names to the Reserve Bank of India for consideration as its next chief before Kotak's exit. His staying or leaving in the corner office for four more months, therefore, won't mean much for the selection process.

But, Uday Kotak quitting the high chair will remain as a landmark event in Kotak Group history. Kotak isn’t just another senior banker taking retirement. There aren’t many individuals who have built a bank single-handedly as he did. Typically, banks take birth by the efforts of a group of investors or a specific community. It isn’t an easy business to be in.

The business of banking works largely on trust and remains highly sensitive as a banking institution deals with public money. And, there are endless challenges at every stage. All this requires tremendous grit and perseverance. That’s where Uday Kotak stands out.

When he began in 1985, nobody knew the company. As Kotak himself has said on multiple occasions, all this started in a 300-square-foot office room in Mumbai with bill discounting business that later grew to an entire set of services as an NBFC and later as a bank in 2003.

Kotak always took exterme caution to grow its book steadily, not venturing into high-risk areas that caused the downfall of many other rivals halfway. But, an even bigger factor was the brand Uday Kotak itself. Over the years, Kotak emerged as a trusted name in banking circles. He also became the go-to man for the governments, past and present, in the event of a crisis in the financial services space such, with the IL&FS rescue being a major example of this. Kotak’s impeccable track record as a trouble-shooter and risk manager always got the industry’s attention. His words carried weight on crucial issues.

Rift with the regulator

Uday Koak is among the very few bankers who dared taking on the regulator. He had dragged the Reserve Bank to court in 2020 over promoter stakeholding in the bank. The RBI guidelines had stipulated that Kotak had to pare his promoter holding below 20 percent before December 31, 2018 from around 30 percent. To achieve compliance, in August 2018, the bank announced the completion of perpetual noncumulative preference share issue (PNCPS), which it interpreted as cutting the promoter stake to 19.7 percent. The bank had claimed that it was complying with the RBI licensing norms through this deal.

But that didn't satisfy the regulator. The RBI said preference share allotment route wasn’t sufficient to meet the requirements laid out by the promoter stake dilution guidelines. The bank argued that PNCPS was part of the paid-up capital. With the impasse continuing and the deadline for stake dilution getting closer, Kotak Mahindra Bank moved the Bombay High Court. The RBI eventually allowed retention of up to 26 percent promoter stake with some riders.

The RBI said the promoters, Uday Kotak and family, while retaining a 26 percent stake, need to cap the voting rights at 15 percent by April. The lender withdrew the case subsequently and some interpreted this as a win for Uday Kotak.

He has always been known to speak from his heart even on issues potent to displease regulators. In a recent message to shareholders, Kotak yet again seemingly criticised the regulator, saying that bureaucratisation  of financial services can hamper innovation.

“I feel the financial sector players risk becoming more robotic, curbing the entrepreneurial flair since the fear of making a mistake overrides the joy of creation and development. While we need ‘Arjuna’s eye’ on risk management, we must prevent bureaucratisation of financial services,” he wrote.

Is it the end of the road?

Not really. Uday Kotak is hanging up his boots only under regulatory compulsions, but the co-founder of Kotak Mahindra Bank will continue to command a say in the running of the lender as a key shareholder in the bank and a prominent voice on the board. The 64-year-old banker with a net-worth of $13.4 billion, directly and indirectly controls a little above a quarter percentage of the bank's shares.

Kotak, along with his relatives and enterprises in which he has beneficial interest, held 25.95 percent of the equity share capital of the bank and 17.26 percent of the paid-up share capital of Kotak Mahindra Bank as on March 31, 2023.

Uday Kota’s son Jay Kotak is a rising star in the group, currently co-heading Kotak 811, the digital arm of Kotak Mahindra Bank. Although Jay's name is ruled out for the corner office as of now, probably due to lack of experience in the business, industry chatter is that sooner than later Jay will rise in the ranks to the leadership position.

The short point here is that Uday Kotak will remain a significant force in the bank he founded even after his CEO stint and, of course, a prominent figure in India’s fast-growing banking sector.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.