HC refuses to stay Dec 31 deadline for Kotak Mahindra Bank promoter stake dilution

Uday Kotak, Vice Chairman and Managing Director of Kotak Mahindra, holds a nearly 30 percent stake in the bank. In line with the RBI’s stipulation that promoters gradually reduce their stake in a bank, the bank issued non-convertible preference shares, a dilution that was shot down by the RBI.

Kotak has to dilute his stake to 20 percent by December 31 and 15 percent by March 31, 2020.

The bank's counsel Darius Khambata on Monday argued that the issue of dilution of promoter stakes has been going on since a few years.

"In the past, the RBI asked the bank to only dilute promoter shareholding of its paid-up capital. However, the impugned letter sought dilution of paid-up voting equity capital," Khambata said.

The bank further argued that RBI’s requirement is inconsistent with its own policy and directions and public interest, and “bear no nexus with the object sought to be achieved and contrary to the objects, purpose and provisions of the Banking Regulations Act, 1949”.

Appearing for the RBI, senior counsel Venkatesh Dhond and advocate Parag Sharma opposed the plea and said the reason behind asking for promoter stake dilution is to ensure that the voting power is not in the hands of one single group.

"In August 2018, the RBI issued the letter to the petitioner. Now when the deadline is approaching, the bank has come to the high court seeking stay," Dhond argued.

The bank in its petition termed the RBI's directive as "arbitrary, without any authority of law and contrary to the provisions of the Banking Regulation Act, and Article 14 and 19(1)(g) of the Constitution of India".

"Even assuming that the RBI has the power to issue directions requiring reduction of promoter shareholding in banking companies, the said power can only be exercised, and has always been exercised by the RBI, with reference to the petitioner's paid-up capital and not in relation to its paid-up voting equity capital," the petition mentioned.

The bank sought the high court to quash and set aside the RBI directions to dilute the promoter stake.

It has also prayed for the court to declare that the reduction of promoter shareholding shall stand complied with, if it is achieved as a percentage of the paid-up capital and not the paid-up voting equity capital of the bank.

Kotak’s senior counsel Darius Khambata also told the court that with the change of guard at the RBI, the new governor should be allowed to apply his mind to the issue.

With inputs from PTI