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Will new RBI rules on promoter-CEO tenure impact Uday Kotak?

The RBI rules allow Uday Kotak to continue till January 1, 2024 . However, the regulator has given a signal to the bank to plan the transition process.

April 26, 2021 / 07:49 PM IST
Kotak Mahindra Bank MD Uday Kotak

Kotak Mahindra Bank MD Uday Kotak

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The  Reserve Bank of India (RBI) final guidelines on tenure of bank CEOs (chief executive officers) will mean Kotak Mahindra Bank (KMB) chief Uday Kotak will have to step down by 2023-end on the expiry of his current three-year term. Although this gives the bank ample time for Kotak's exit, the RBI new rules are a cue to the major private lender to begin planning the leadership transition process.

According to the RBI rules announced on April 26, in the case of MD&CEO or WTD (whole-time director) who is also a promoter/ major shareholder, the incumbent cannot hold these posts for more than 12 years. In the case of promoter CEOs, at the sole discretion of the Reserve Bank such MD&CEO or WTDs may be allowed to continue up to 15 years. Kotak has already completed 17 years as KMB's CEO.

Kotak is at the top post of the bank since 2003-2004, when the bank started operations. By the time Kotak’s term ends on January 1, 2024, he would have completed 20 years at the post. “There is no immediate change for Kotak as he has been appointed for three years by the RBI recently for three years,” said an official at the bank who didn’t want to be named. The RBI approved Kotak's re-appointment in December last year with effect from January 1.

However, as it appears, Kotak will have to exit the post he held for two decades at the end of 2023 and hence the bank will have to begin preparations for the leadership transition soon. “Finding a successor to Kotak will not be a big challenge for the bank,” said Siddharth Purohit, analyst at SMC Global Securities in Mumbai. “The bank has a good leadership team in place,” Purohit said.

 A bitter past

Earlier in 2020, Uday Kotak and RBI had a court battle over Kotak's promoter stake holding in the bank. The RBI norms stipulated that Kotak had to pare promoter stake 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 claimed it was complying with the RBI licencing norms through this deal. But here the RBI posed a question.

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 the deadline for stake dilution fast approaching, KMB finally decided to move the High Court of Bombay. In January last year, the RBI let KMB retain the 26 percent promoter stake with some riders.

The RBI said the promoters, Uday Kotak and family, while retaining 26 percent stake, need to cap 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.

While this was an out-of-court settlement, some interpreted this as a win for Kotak at the end of the bitter court battle.

New RBI norms

Issuing the latest rules, the RBI said the post of the MD&CEO or WTD (whole time directors) cannot be held by the same incumbent for more than 15 years in the case of a non-promoter individual.

The RBI said after the 15-year term, the CEO will be eligible for reappointment in the same bank, if considered necessary and desirable by the board, after a minimum gap of three years, subject to meeting other conditions. During this three-year cooling period, the individual shall not be appointed or associated with the bank or its group entities in any capacity, either directly or indirectly.

In the case of promoter CEOs, at the sole discretion of the Reserve Bank, such MD&CEO or WTDs may be allowed to continue up to 15 years. While examining the matter of re-appointment of such MD&CEOs or WTDs within the 12/15 years period, the level of progress and adherence to the milestones for dilution of promoters’ shareholding in the bank shall also be factored in by the Reserve Bank, the RBI said.

The RBI also clarified that no person can continue as MD&CEO or WTD beyond the age of 70 years. Within the overall limit of 70 years, as part of their internal policy, individual bank's Boards are free to prescribe a lower retirement age for the WTDs, including the MD&CEO, the RBI said.

Going by the 15-year cap rule, Shyam Srinivasan, MD&CEO of Kerala-based Federal Bank and RBL Bank MD& CEO, Vishwavir Ahuja, both will have time till 2025 as both officials have completed a decade in their roles as chief executives. Similarly, Chandrashekhar Ghosh of Bandhan Bank has completed five years as CEO of the Kolkata-based bank, meaning he will have ten more years (non-promoter CEOs are allowed for 15 years), before his term comes to end, which is 2030.

Announcing the rules, the RBI also capped the upper age limit for non-executive directors (NEDs), including the Chair of the board, at 75 years and after attaining the age of 75 years no person can continue in these positions, the RBI said.

The total tenure of an NED, continuously or otherwise, on the board of a bank, shall not exceed eight years. After completing eight years on the board of a bank, the person may be considered for re-appointment only after a minimum gap of three years, the RBI said.  This will not preclude him/her from being appointed as a director in another bank subject to meeting the requirements, the RBI said.

Dinesh Unnikrishnan
Dinesh Unnikrishnan
first published: Apr 26, 2021 07:49 pm