Gaurav Choudhury
It is not always that questions are raised about a country’s central bank over its boundaries of authority. Of late, a barrage of questions has been directed at the Reserve Bank of India (RBI), particularly by Kotak Mahindra Bank (KMB), which has spared no punches raising pointed posers on the issues of the regulator’s power.
This is unusual, for the RBI has had a reputation of being a no-nonsense watchdog, with an orthodox approach. That is now under question with the higher judiciary called upon to adjudicate matters.
How often has one seen a bank calling a RBI decision “ultra vires” (acting beyond legal power and authority)? How many times has any bank dared to accuse the RBI of using “carte blanche” powers to push through a decision?
How often has a bank charged the RBI with seeking to “belittle” a private lender? How many times has a bank accused the central bank of indulging in “insinuations”, which it described as “mischievous,” “incorrect” and “baseless”?
Seldom, one would reckon.
The gloves are off, or so it appears, in the ongoing dispute over promoter shareholding between KMB and RBI in the Bombay High Court.
KMB has termed the RBI direction to cut promoter shareholding in the bank to 20 percent as “ultra vires”, violating the norms and principles of the Banking Regulation (BR) Act.
“The petition seeks to challenge the actions of the RBI as being ultra vires the BR Act and the Constitution of India,” the bank said in a reply to the central bank’s contention that lender has sought relief that could erode RBI’s autonomy.
The RBI regulates all banks under the Banking Regulation Act, 1949, which has been amended over the years.
RBI had asked the bank to cut promoter shareholding to 20 percent of paid up capital by December 31, 2018 and 15 percent by March 31, 2020.
As on December 31, 2018, Uday Kotak, the bank’s vice chairman and managing director, held 29.72 per cent stake in the bank. The bank in August 2018 had proposed issuing perpetual non-cumulative preference shares (PNCPS) to cut promoter holding to 19.70 percent, which the RBI rejected.
The bank has challenged the RBI’s contention in the Bombay High Court, which is hearing the matter.
The RBI has told the Bombay High Court that the bank’s petition “smacks of ulterior motives, and aims at the defeat of statutory powers and duties conferred upon/vested in the RBI”.
In response, the bank has said that the RBI’s contention is “not only unreasonable and incorrect, but amounts to the RBI contending that it is entitled to carte blanche powers irrespective of the provisions of the BR Act”.
“The RBI is a statutory body whose exercise of powers must conform to the provisions of the BR Act and the principles enshrined in the Constitution. The petition only seeks to uphold the principles of law and is not seeking to challenge the autonomy of the RBI in any manner,” the bank said in its response.
The RBI’s bank licensing rules mandate that a private bank’s promoter will need to pare its holding to 40 percent within three years, 20 percent within 10 years and to 15 percent within 15 years.
The RBI has argued that the lowering promoter shareholding is to prevent concentration of control and make private banks more democratic.
The bank, however, responded that “Section 12 of the BR Act reveals the Parliamentary intent to treat voting right beyond 26 percent as giving rise to concentration of control”.
Voting rights ceiling is specified under Section 12(2) of the Banking Regulation Act. The voting rights cap, fixed at 26 percent, is aimed to add an extra layer of safety net to ensure that promoters with large shareholding cannot push through decisions in boards.
The RBI has told the Bombay High Court that it is the bank, and not the promoters of the bank, which has petitioned the court.
“They (the promoters) have no issue with holding being regulated in the manner provided for by the RBI,” the banking regulator had told the Bombay High Court in response to Kotak Mahindra Bank’s petition challenging RBI’s direction to trim promoter shareholding.
The RBI has also stated that the since the bank, not the promoters, have approached the court, it shows “first hand, the need to make private banks more independent, and reflective not of the interests of one individual or family, but all stakeholders, whose voices must be heard in their (the banks’) running.”
KMB has termed these as “insinuations” and said that “it also belittles the impact of the RBI’s unreasonable and arbitrary position”.
Until the Court’s ruling, the blows will likely continue.
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