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Last Updated : Jun 11, 2020 06:29 PM IST | Source: Moneycontrol.com

Why the Hindujas’ demand to raise stake in IndusInd Bank will cut no ice with RBI despite Kotak truce

The settlement of the dispute between Kotak Mahindra Bank and RBI over promoter shareholding limit has put the spotlight on such large shareholders of other private lenders, especially the Hindujas of IndusInd Bank

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The settlement of the dispute between Kotak Mahindra Bank (KMB) and Reserve Bank of India (RBI) over promoter shareholding limit has put the spotlight on such large shareholders of other private lenders. The central bank and Kotak Mahnidra Bank called a truce in January and promoter Udak Kotak recently sold part of his stake in a bulk share deal to comply with RBI rules.

Top of the list are the Hindujas, the promoters of IndusInd Bank, who have made no secret their desire to raise their stake beyond the permitted 15 percent limit in the bank.

In an interview to the Economic Times in March, Ashok Hinduja, Chairman of the Hinduja Group of companies, said given that KMB got special dispensation, it makes sense for the promoters of IndusInd Bank to approach the RBI for permission to increase stake in the bank to 26 percent from 15 percent.


“When I saw that KMB has got a dispensation, we also thought of writing to them. Why not give us that dispensation as well? Let’s see how they respond,” Hinduja was quoted as saying.

But RBI is apparently not in favour of permitting the Hindujas to increase their stake in IndusInd Bank. The promoters made a case to increase the holding but it will cut no ice with the RBI, according to a person familiar with the matter.

“The view is that this request won’t be allowed,” said the person, requesting anonymity. RBI’s view could change in future if the regulator feels that the bank’s promoters have a compelling case.

What are the rules on promoter holding in new banks?

RBI’s rules on promoter holding in private banks have changed from time to time. IndusInd Bank secured a banking licence in 1994 and KMB got one a decade later.

The new bank licensing norms in 1993 didn’t specify rules on promoter holding separately. Promoters must have a minimum paid-up capital of 40 percent and this will be locked in for a period of five years, according to the rules issued that year.

In 2013, when the RBI issued another round of private bank licensing guidelines, the regulator stipulated a Non-Operative Financial Holding Company (NOFHC) model. The RBI said a NOFHC shall initially hold a minimum of 40 percent of the paid-up voting equity capital of a bank which shall be locked in for five years and  brought down to 15 percent within 12 years.

The rules were changed three years later. In August 2016, when fresh guidelines on universal on-tap licensing were issued, RBI insisted that promoter shareholding had to be cut down to 40 percent within five years of operations, 30 percent within 10 years and 15 percent within 15 years of receiving the licence.

The rationale behind RBI’s rule on promoter holding is that it wants promoters to keep an arm’s length from banking institutions, which are essentially guardians of public money.

The KMB-RBI battle and truce
Not long after the new rules were issued, the promoter shareholding issue put KMB in the crosshairs of the RBI. A courtroom battle followed.

According to the RBI norms, Kotak had to pare promoter stake below 20 percent before December 31, 2018 from around 30 percent. 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 claimed it is complying with the RBI licencing norms through this deal but RBI didn’t buy it. The regulator said preference share allotment route wasn’t sufficient to meet promoter dilution rule requirement. But the bank’s legal argument was PNCPS was part of the paid-up capital. With the impasse continuing and deadline for stake dilution fast approaching, KMB finally decided to move High Court of Bombay.

In January, the RBI let KMB retain the 26 percent promoter stake with some riders.

The RBI let the promoters, Uday Kotak and family, retain 26 percent stake but capped the voting rights at 15 percent by April. KMB withdrew the case subsequently and some 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, bringing down his stake to 26.1 percent, inching closer to the RBI’s stipulated level.

The Bandhan episode

RBI also pursued Kolkata-based Bandhan Bank on the promoter stake issue. Even after five years of inception, Bandhan Financial Holding, the non-operative financial holding company, which is the promoter entity, still holds about 61 percent stake in the bank. The bank promoter is supposed to lower the stake to 40 percent. The promoter holding was actually 82 percent before the acquisition of GRUH Finance last year.

In September 2018, RBI imposed punitive actions on Bandhan Bank. This included withdrawing permission to open branches and freezing the remuneration of the Managing Director and CEO of the bank at the existing level until further notice. However, in February, RBI allowed the bank to open branches without its approval but with a rider that at least a quarter of the branches should be opened in unbanked rural areas in a year.

This relaxation was given after RBI noted that it is impressed with bank’s efforts to comply with the licensing rules. While the RBI’s logic is unclear, till date, the shareholding stands at 61 percent.

Can Hinduja’s cite the KMB case as a precedence?

The Hindujas approached the RBI to settle the matter soon after the central bank and KMB called a truce.

But it is unlikely that the regulator will take a favourable stand on this demand. To begin with, the Hindujas are asking for increasing the promoter stake from existing regulatory limit (of 15 percent) whereas in the case of KMB, it was relating to lowering the promoter stake to the prescribed level. At a time when the RBI is insisting all private bank promoters pare down their stake to the prescribed levels, why would the regulator permit an individual promoter to hike their stake?

There could be other issues as well. Ultimately, the decision lies with RBI’s comfort level on a case-to-case basis.  According to a senior banking consultant, who requested anonymity, the issue is RBI’s comfort, or lack of it, with the background of promoters. “It is up to the central bank to decide if they are comfortable with a certain promoter. In KMB’s case, RBI allowed for settlement also because the promoter is not an industrialist and is a financial services professional. This isn’t, of course, the case with Hindujas,” said the consultant.

The Hinduja group has interests ranging from oil to banking to gas and power. The group is led by billionaire brothers Gopichand and Srichand Hinduja, who often find their named in list of wealthiest people.

IndusInd Bank recently wrote to exchanges saying the promoters have communicated their intention to acquire additional shares from the bank. But considering the existing regulatory cap, the promoters — IndusInd International Holdings and IndusInd Bank — can pick only 0.32 percent additional stake. They own 14.68 percent of the paid-up share capital of the bank.

Bank promoters can of course make a case for higher shareholding citing the prevailing guidelines at the point when they secured a bank licence, which were changed from time to time. The Hindujas could use this logic to make their case.

They could argue with the regulator that they should be allowed to hold higher stake because the terms under which IndusInd Bank was given a licence have changed radically. But that may not be enough to sway the RBI.

This sets the stage for another protracted legal battle between the regulator and a bank.
First Published on Jun 11, 2020 06:15 pm