Exclusive | Uday Kotak to launch Rs 6,000 crore mega deal to comply with RBI settlement pact

Billionaire banker and Kotak Mahindra Bank Managing Director Uday Kotak is all set to sell stake worth around Rs 6,000 crore in the private sector lender to comply with a settlement agreement struck with the Reserve Bank of India (RBI) in January on promoter stake dilution, sources told Moneycontrol.

The move will bring the curtains down on an extended standoff between the regulator and the bank over the reduction in promoter shareholding.

“The promoter stake sale will happen via block/bulk deals, which is likely to be launched shortly. Kotak Mahindra Bank has already issued shares as part of the recent Rs 7,000 crore qualified institutional placement (QIP), so Kotak may not have to sell 4 percent stake to meet the 26 percent promoter stake requirement, which was the case earlier,” a person familiar with the stake sale plans said.

“This deal should roughly see the sale of 2-3 percent stake,” said a second person.

“Morgan Stanley, Goldman Sachs and Kotak Securities are the advisers to the share sale," a third person added.

Moneycontrol has sent an email to Kotak Mahindra Bank but could not elicit an immediate response. Morgan Stanley, Goldman Sachs and Kotak Securities couldn’t be contacted immediately for comment.

On January 30, Kotak Mahindra Bank said RBI has agreed to its proposal to reduce promoter stake to 26 percent from the current 29.9 percent over the next six months. It also said promoter voting rights will be capped at 20 percent of the paid-up voting share capital until March 31 and will be further capped at 15 percent, effective April 1. Kotak Mahindra Bank had added that promoters will not purchase any further 'paid-up voting equity shares' of the bank till the promoter shareholding reaches 15 percent.

With this settlement agreement, the bank has decided to withdraw the writ petition filed in the High Court of Bombay after RBI struck down its proposal to issue perpetual non-convertible preference shares to comply with promoter shareholding norms. On February 18, RBI granted final approval to the settlement between both parties.

Kotak Mahindra Bank had knocked the doors of the Bombay High Court in December 2018. In a statement to the stock exchanges, the bank noted that since August 2018 it had “clarified and conveyed to the RBI its position in relation to perpetual non-cumulative preference shares (PNCPS) being a part of the paid-up capital and the legal basis on the matter of dilution of shareholding under the Banking Regulation Act.”

“We have also shared with the RBI the opinions of eminent jurists and senior most legal counsels of the country, which confirm our understanding. However, we have not heard from the RBI on the above matter,” it added.

“Given the milestone of December 31, 2018, the bank has been left with no option but to protect its interest. By way of abundant caution, the bank has today (December 28, 2018) filed a writ petition with the High Court of Bombay to validate the bank’s position,” the bank said.

Six months post the legal action initiated by Kotak Mahindra Bank, RBI slapped a Rs 2 crore penalty on the private sector lender for failure to adhere to the regulator’s diktat on promoter shareholding norms.

The Kotak Mahindra Bank saga is not the only instance of the RBI pulling up a bank with respect to reduction in promoter shareholding. In September 2018, the RBI had frozen the salary of Bandhan Bank CEO CS Ghosh and barred the lender from opening new branches for not following regulatory guidelines on stake dilution.

For more details on the origin of the Kotak-RBI battle, the rules of the game and the reason behind the regulator’s objection to the bank’s stake dilution strategy, please read this Moneycontrol explainer dated December 14, 2018.