Why is Uday Kotak being singled out for his bank's success?

'I find the RBI edict to the Kotak Mahindra Bank to reduce Uday Kotak's shareholding very unreasonable,' says Sudhir Bisht.

Think of an enterprise that obtained a banking licence in 2003 when the public sentiment firmly preferred banking with 'safe' public sector banks as compared to the rookie private sector banks.

The odds of success were firmly stacked against the tiny new bank.

And yet, within a span of 15 years, this new entity, Kotak Mahindra Bank, has been ranked among the top 3 banks in India by market capitalisation.

In fact, here's the market cap of the Kotak Mahindra Bank revealed as on March 15, 2019. At Rs 253,053 crores, it is neck-and-neck with ICICI Bank's m-cap at Rs 253,151 crores.

Just to give readers a sense of how valued Kotak Mahindra Bank is, I list the m-cap of some of the oldest banks in India that belong to the public sector.

As in the case of all organisations that are successful, there are one or two great leaders behind that success. The leader is, of course, supported by a great core team of strategists, tacticians and implementers, but the buck stops at the leader. He is the one who has to set up a great team, motivate that great team and back them to the hilt.

It is the leader who is the face of the organisation and the success of finding great partners, investors and customers in an overcrowded market place rests mostly on his broad shoulders.

In case of the Kotak Mahindra Bank, the leader happens to the founder and CEO -- Uday Kotak who is largely seen as the person responsible for making his bank one of the most trusted banks in India.

His decision to offer 6% interest on saving accounts was frowned upon as being too rash, but is now termed legendary.

Uday Kotak must have made a number of personal sacrifices apart from investing most of his personal wealth in the bank. He must have organised marathon sessions of making personal presentations when he was raising money.

When Kotak Mahindra and ING Vysya merged in 2015, the merger efforts were personally led by him.

It is said Uday Kotak gave up playing cricket and playing the sitar, his two passions, given the fact that he completely submerged himself into the task of transforming his bank from good to great.

In spite of all his investment of time, money, energy and passion, Uday Kotak is now being asked to reduce his stake in the bank that he started.

This is being done by the Reserve Bank of India which doesn't want any single individual to have a stranglehold on the strategic decision making process of any bank.

I have the highest respect for the RBI -- even though it failed in its oversight function of the banking sector in the past decade or so -- but I find its edict to Kotak Mahindra Bank to reduce Uday Kotak's shareholding very unreasonable.

Uday along with his family members and trusts holds 30.01% shares of the bank. The RBI asked the bank to pare down the shares of promoters to 15% by March 2020.

The bank proposed to the RBI that it was willing to reduce Uday Kotak's stake by raising as much as Rs 500 crore by issuing perpetual non-cumulative preference shares to dilute the promoter's shareholding.

This was, however, turned down by the RBI on the ground that it failed to meet the promoter holding dilution requirements.

Kotak Mahindra Bank moved the Bombay high court after the RBI rejected its proposal. This is the first instance of any bank going to court against the Reserve Bank of India, and this signals the times to come when private non-PSU banks will muster enough courage to take on the RBI's might.

Mint newspaper reports that 'Kotak Mahindra Bank Ltd told the Bombay high court that its promoters are ready to give an undertaking to cap their voting rights at 20% despite holding a 30% stake in the private lender to allay concerns of the Reserve Bank of India on concentration of power.'

The next hearing in the case has been scheduled for April 1. The senior counsel Venkatesh Dhond, representing the RBI, has sought a week's time to file an affidavit in response to the Kotak Mahindra Bank's writ petition.

I believe that if the RBI's eventual aim is to limit the control of any individual to 20% or 15%, it should agree to the Kotak Mahindra Bank proposal. There are several other questions that arise on account of the RBI-Kotak standoff.

1. If the RBI thinks that nobody should own more than 15% of a bank, then why are PSU banks having Government of India holdings of more than 30% to 40% not being asked to reduce their share in PSU banks?
   Every political party charges its counterpart in power for interfering in the functioning of PSU banks.
   The recent erosion of value of many a large PSU bank is attributed to the large, risky and bad loans given to a few capitalists at the behest of the banks's political masters.
   Will RBI also ask the Government of India to reduce its share to 20% or 15%?
2. Kotak Bank has proposed limiting voting right of Uday Kotak to 15% in spite of his holding 30% shares of paid-up equity. Why should this not serve the purpose of limiting the concentration of power?
3. Promoters don't invest their blood and sweat to dilute their shareholding at a future date to comply with an RBI order.
   Promoters remain invested and deeply involved till the strategic objectives of the organisation and their own personal objectives are achieved.
   Forced dilution can discourage the spirit of free enterprise.
   Shouldn't the RBI realise this aspect of banking business?
   Is the RBI even aware of the soft side of banking that like any other business rewards entrepreneurship?
4. The RBI also has noble intents. It may be pressing for dilution as it may feel that a promoter with very large ownership may misuse his powers to lend indiscriminately to his own business or those of his associates.
   But can't this be easily controlled?
   Kotak Mahindra Bank may be asked to make special weekly, fortnightly or monthly disclosures on its dealings with all companies associated with its founder.
   Also, Uday Kotak can be excluded from any decision making process that involves business dealing with his affiliate companies.
5. Lastly, I wish to quote from the Economic Times that says, 'Kotak Mahindra shares have outperformed those of most of its peers, thanks to the bank's success in avoiding some of the asset quality concerns that have weighed on many of the country's lenders.'
   'KMB boasts one of the lowest bad-loan ratios and one the highest net interest margins among Indian banks, making its shares the best performer in the NSE Nifty Bank Index over the past five years.'

The track record of Kotak Mahindra Bank under its founder has been spectacular, to say the least. What is important to note that the bank has achieved this success while traversing a middle path that combines professional ethics with calculated risk that is associated with the business of lending.

Should the leader who is ethical and successful be rewarded or asked to dilute?

Well, the hon'ble high court has an onerous task on its hands.

May the good bank and the respected regulator both feel a sense of win-win, when the final outcome is known, that is my sole wish.

Sudhir Bisht, PhD, author and columnist, tweets at @sudhir_bisht.