Back

Big Bank Theory: Kotak’s legal challenge vs RBI good for regulation

Friday, Jan 25

 

(Veteran banker Uday Kotak is an unlikely person to take on the Reserve Bank of India in a legal fight. But, the silver lining to this legal spat is that it will lead to clarity on regulations for banks, investors and depositors at a time when many other banks may face similar regulatory scrutiny)

 

By T. Bijoy Idicheriah

 

In an ideal world, the regulated entities will follow the guidelines set by the regulator in 'letter and spirit' and the world will be a happy place. Unfortunately, we don't live in an ideal world.

 

A lot of the current mess on the asset quality front has its origins in the Reserve Bank of India and the government looking to find quick fix solutions following the global financial crisis. The problem festered to such an extent that the central bank had to resort to a surgical strike with the Asset Quality Review.

 

Asset quality is one area where the RBI has made the most changes in norms in the last decade. The other is probably regulations on the banking sector or bank licensing norms. As the RBI issued norms for on-tap universal licences, it changed its norms on need for non-operative holding companies and thresholds on how fast promoters need to cut stake, so that they have more skin in the game in the success of the bank. The idea was to weed out fly-by-night operators.

 

But, in this chop and churn, the RBI opened itself up to criticism, as the most recent case of Uday Kotak, promoter of Kotak Mahindra Bank, dragging the central bank to court shows. In the process the RBI's actions now stare at legal scrutiny.

 

Kotak is an industry veteran and has been the head of various industry and regulatory initiatives, the most prominent being the Securities and Exchange Board of India panel on corporate governance. He has through shrewd acquisitions, such as ING Vysya Bank, managed to make Kotak Mahindra Bank a pan-India lender, which literally reflects in its latest advertising tagline – Kona Kona Kotak. In his most recent endeavour, Kotak is heading the government effort to salvage the debt-ridden Infrastructure Leasing & Financial Services.

 

 

 

This is why Kotak is an unlikely person who you think will drag the RBI to court on matters of interpretation of the law. Even though Kotak, whom the RBI had asked to cut stake promoter stake in the bank to 20% by Dec 31, could not get interim relief from the Bombay High Court, the central bank did promise to act responsibly on the matter. Since then, the RBI counsel has asked for more time to submit its reply, pushing the next hearing to March.

 

The RBI finds itself in unchartered territory, defending its actions or even its regulatory powers, and whether retrospective changes can be made in regulations. This is new for the RBI as other banks including Bandhan Bank, IndusInd Bank, IDFC First Bank, YES Bank have quietly agreed to either follow the norms or are in the process of meeting them.

 

Heads of some small finance bank have already been asked to step down for not meeting RBI norms, even though adhering to those may have found them guilty of violating SEBI listing norms or existing shareholder agreements such as in the case of ESAF Small Finance Bank. Bandhan Bank has seen a freeze on the salary of its Managing Director and Chief Executive Officer Chandra Shekhar Ghosh and branch expansion till it meets the RBI norms on lower promoter stake.

 

The RBI believes that lower promoter stake and more diversified shareholding ensures better corporate governance, especially in cases where promoters are also in charge of running the affairs of the bank. This is why it has often added promoter stake reduction to 10-15% across various regulatory iterations on bank licence guidelines. The recent case of a private bank, where a founder was not granted a fresh term by RBI possibly on account of issues on corporate governance and bad loan recognition, is a stark reminder on why RBI needs to flex regulatory muscle. Banks handle public money, and RBI has to take actions that it believes are necessary to protect depositors. Banks, which have been wary of RBI imposing restrictions in operations, have generally chosen to fall in line with the regulatory view.

 

All said, Kotak taking RBI to court is still a positive development. Banking regulators and central banks have been under scrutiny globally since the global financial crisis a decade ago and the lack of a layer above RBI to adjudicate on such issues has been discussed ad nauseum. Talks of a super regulator or unified financial sector regulator or FSLRC have been fodder for headlines, but each regulator including RBI has been adept at scuttling such plans to protect their turf. The fear of the government imposing its views through a super regulator, are real and many of the concerns of the regulators are genuine on this front.

 

In such a scenario, Kotak who feels aggrieved by RBI insisting on him reducing stake or facing the risk of operational restrictions, thought that it was in his and his investors best interest to take the legal route. The question on timing on why Kotak chose to wait till the last minute, is a separate issue, as the RBI timelines on cutting promoter stake, were disclosed to the exchanges by Kotak Mahindra Bank years ago. But, Kotak has a case and he has decided to make a fight of it. As long as the legal battle is driven by interpretation of the law and RBI's regulatory norms, the real winner will be the banking system. The possibility of RBI reaching a settlement behind closed doors on the issues with Kotak Mahindra Bank, is a possibility, in case the central bank feels that a legal precedent or verdict may be counterproductive.

 

No matter which way the legal gavel goes, there is bound to be a greater appreciation of the interests of the banks and of the regulator's powers at the end of this battle. The real winners will be the minority shareholders, and public depositors. That is always a positive development.  End

 

(When he's not breaking a leg on stage, he's breaking news and views on banks and regulatory issues. In Big Bank Theory, Assistant Editor (Money) T. Bijoy Idicheriah talks shop on matters that matter to the sector.)

  

Cogencis Tel +91 (22) 6619-0000

Send comments to feedback@cogencis.com

This copy was first published on the Cogencis WorkStation

© Cogencis Information Services Ltd. 2019. All rights reserved.

Other News

RBI warns banks on use of remote access to commit digital fraud

Saturday, Feb 16 By T. Bijoy Idicheriah MUMBAI – The Reserve Bank of India has warned banks about a new modus operandi being used to commit digital payments frauds, including through Unified Payments Interface, by accessing a victim's mobile device.  Cogencis has accessed a copy of the confidential letter, dated Feb 14, from the RBI's Cyber Security and […]

FOCUS: As supply risks wane, deficit may soften blow for aluminium

Friday, Feb 15 By Mugunthan Kesavan NEW DELHI – Calm has returned to the aluminium market after a nine-month rollercoaster ride, with the US lifting sanctions on United Company Rusal–the second largest producer of the metal in the world. In April the US imposed sanctions on some Russian companies, including Rusal which is controlled by business tycoon Oleg […]

NALCO cuts prices of aluminium ingots by over 2% post 3 hikes in row

Friday, Feb 15 By Nikita Periwal MUMBAI – National Aluminium Co has cut prices of aluminium alloy ingots and sow ingots by more than 2% with effect from Thursday, trade sources told Cogencis.    The cut in prices of the products comes after the company hiked rates three times in a row. Most aluminium producers in India have been cutting […]