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Kotak Mahindra Bank's preferential issue does not meet the dilution norms, the Reserve Bank of India has said.
Under the norms of the licence given to the bank, the Founder and Promoter Uday Kotak was to reduce his stake in the bank to 20 percent by 2019 and 15 percent by 2020.
In adherence to the licence conditions Kotak, two weeks ago, expanded his paid-up capital by issuing 52 percent more perpetual non-convertible preference shares. While this effectively brought down his share in the paid-up capital from 30 percent to a little under 20 percent, questions were raised if the preference issue circumvented RBI rules on stake dilution.
While preference shares are mid-way between debt and equity, perpetual preference shares are closer to equity 3. Basel rules recognise perpetual preference shares as tier 1 capital.
Legal experts said Kotak is legally right in doing so since his licence conditions require him to cut his share in the paid-up capital not in the number of voting shares. However, others argued the intent of RBI’s rules were to ensure a promoter’s stake is brought down as a percentage of “voting shares”.
In an exchange filing, Kotak Mahindra Bank said it continues to believe it has met the central bank's requirement and that it will engage with RBI on the matter.
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