Kotak Mahindra Bank moves Bombay High Court; challenges RBI's decision of rejecting its sale dilution

Weeks ahead of the deadline to reduce promoter holdings, private sector lender Kotak Mahindra Bank on Monday, moved the Bombay High Court challenging the RBI decision rejecting its sale dilution announced in August.

The promoter Kotak family owns over 30 per cent in the bank and has to reduce it by a little over ten percentage points by December 31 to take it under 20 per cent. In August, it had tried to lower the holdings through a complex perpetual non-cumulative preference shares sale but did not make the regulatory cut.

In the petition, the bank is seeking a widening of the definition of the paid-up equity capital to include these preference shares as well beyond the present equity voting capital. It is also questioning the laws related to the capping of the shareholding at a more fundamental level, asking if there is a legal basis to have shareholding caps.

Sources said the bank had sought the opinion from a host of senior lawyers on the matter, who, mentioning the past precedents, including Supreme Court judgements, have supported the lender's stance.

They said one of the cases where the broader definition of shareholding was used and accepted by both the NCLT as well as NCLAT was in the ongoing Cyrus Mistry-Tata Sons matter.

These precedents, however, does not find a mention in the petition be filed by Kotak Bank but will be cited during the arguments stage, sources said.

After the filing of the petition earlier during the day, the matter was mentioned before a division bench of justices BP Dharmadhikari and SV Kotwal who have kept it for hearing on December 17.

In August, Uday Kotak, the founder and promoter of Kotak Mahindra Bank, had said his family's stake was pared down to 19.70 per cent from about 30 per cent following the issuance of preference shares.

However, within a few days, the Reserve Bank rejected the stake dilution method adopted by Kotak saying it did not meet its regulatory norms, something the private sector lender contested in its reply to the regulator.

"We continue to believe that we have met the requirement and will engage with RBI in this behalf," Kotak Mahindra Bank informed the exchanges Monday citing its regulatory filing on August 14.

In a regulatory filing today, the bank said it has since clarified and conveyed to the RBI its "position in relation to perpetual non-cumulative preference shares (PNCPS) being a part of paid-up capital and the legal basis on the matter of dilution of shareholding under the Banking Regulation Act."

Further, Kotak Bank said it has also shared with RBI the opinions of eminent jurists and very senior legal counsels which confirm its understanding.

"However, we have not heard from RBI on the above matter. Given the milestone of December 31, 2018, we have been left with no option but to protect our interest.

"By way of abundant caution, the bank has today filed a writ petition with the Bombay High Court to validate the bank's position," it said.

Earlier, the RBI had asked promoters to bring down their stake to under 20 per cent by December 30, 2018, and to 15 per cent by March 2020 in line with the guidelines for new bank licences released four years ago and then under 10 per cent later on.

On last Friday, speculation about Warren Buffet's Berkshire Hathaway took a 10 per cent stake in the bank, had led to a 14 per cent surge in the Kotak stock.

The scrip closed sharply down at Rs 1,198.15 a piece on the BSE Monday shedding 6.56 per cent, as against a 2 per cent plunge in the benchmark.