Explained: How new RBI norms may benefit promoters of private-sector banks

In a breather for private-sector bank promoters, India’s central bank has reviewed the rules for the stakes they would be allowed to hold.

The Reserve Bank of India has accepted as many as 21 out of the 33 recommendations made by a panel that deliberated on the matter. 

What are some of the key recommendations that the RBI has accepted? 

The most important recommendation that the RBI has accepted pertains to the capping of stakes held by promoters in these private-sector banks. 

According to a report published by financial news portal Moneycontrol, the RBI accepted a rule that says the cap on promoters’ stake in the long run of 15 years may be raised from 15% to 26% of the paid-up voting equity share capital of the bank.

Which are the banks most impacted by this?

Kotak Mahindra Bank, promoted by Uday Kotak and his family, and IndusInd Bank, promoted by the Hinduja family, are the most impacted by this decision. 

How does RBI’s move help Kotak?

As per the earlier RBI norms, Kotak was required to lower his stake from 30% to below 20% by the end of December 2018. To comply with this stipulation, in August 2018, Kotak Mahindra Bank said that it had completed a perpetual noncumulative preference share issue, which it said lowered the promoter stake to 19.7%. The bank claimed it was complying with the RBI licensing norms through this deal.

But the RBI did not buy this, and as the deadline neared, the bank moved the Bombay High Court. In January 2020, the RBI allowed Kotak to retain a 26% stake, but with some riders. 

What riders did the central bank impose on Kotak Mahindra Bank’s promoters?

It said the promoters, Uday Kotak and family, while retaining their 26% stake in the bank, needed to cap the voting rights at 15% by April. Following this, the Kotak family withdrew the case. 

Then, in June 2020, Kotak sold 5.6 crore shares for more than Rs 6,900 crore in a block deal, reducing his stake to 26.1%, inching closer to the RBI’s stipulated level. Uday Kotak held a 25.76% stake in Kotak Mahindra Bank as of September 2021. 

Now that the central bank has agreed to the 26% cap, the battle against Kotak seems to have ended. 

How does it impact the Hindujas?

The central bank had said that the stipulated cap should be uniform for all and would not mean that promoters who have already diluted their holdings to below 26% would not be permitted to raise it to 26% of the paid-up voting equity share capital of the bank. 

The Hindujas want to acquire more shares from the bank and raise their stakes to 26%. They have now welcomed the move. 

“The increased promoter holding will lead to enhanced financial strength of the bank and its clients will be protected. We believe this measure of increased promoter holding will be of benefit to all stakeholders: the regulator, the banking institution and its clients, particularly at this time when the Indian economy is poised for exponential growth. We eagerly await the operating guidelines as it gives the promoters an opportunity to inject capital to increase stake up to 26 percent,” Ashok Hinduja, chairman of IIHL, Mauritius, said in a statement.

Through their control of IIHL, the Hinduja brothers own 16.5% of IndusInd Bank and the RBI had been pushing back on their demand to be allowed to own more of the bank. 

A report in The Economic Times newspaper said that the Hindujas are ready to pump more than $1 billion to raise their stakes in multiple tranches to 26%. 

At present, the promoters own 16.54% in IndusInd Bank. Overseas funds collectively own more than 51%.