Uday Kotak’s Board Position Under RBI’s Watch

The Reserve Bank of India is reportedly considering the reappointment of billionaire banker Uday Kotak as a non-executive director on the board of Kotak Mahindra, following the end of his term in December. On April 21st, the majority of shareholders of Kotak Mahindra Bank voted in favor of appointing Uday Kotak as a non-executive, non-independent director of the bank once he steps down from his position as managing director and chief executive officer.

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The Reserve Bank of India (RBI) does not normally need to approve the appointment of non-executive directors to a bank’s board. However, the RBI may intervene if it believes the appointee does not meet its criteria. The RBI’s April 2021 guidelines on corporate governance in banks state that certain directors cannot continue for more than 12 years, but their tenure may be extended to 15 years at the discretion of the RBI. When reviewing re-appointments, the RBI will consider progress made towards diluting promoters’ shareholdings in the bank.

It is uncertain whether the appointment of a promoter CEO as a director on the board after their term ends violates the spirit of Reserve Bank of India (RBI) regulations, which do not explicitly prohibit such an appointment. According to a former RBI official, the purpose of the regulation is to ensure that banks are not reliant on a single individual, and that they have a robust second-tier leadership capable of running the bank without the promoter CEO’s involvement. While a promoter CEO in a non-executive role may not have the same influence, it depends on the strength of the chairman leading the board.

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Kotak Mahindra Bank’s spokesperson has said that the bank’s resolution is consistent with the highest standards of governance and has the support of over 99% of voting shareholders. However, experts have questioned the RBI’s lack of clarity in its guidelines for promoter CEOs, which allows for interpretation. RBI rules state that a non-promoter CEO must go through a three-year cooling period after completing 15 years, during which time they cannot be associated with the bank or its group entities.

Kotak Mahindra Bank had agreed to lower the promoters’ stake in the bank to 30% by 30 June 2017, 20% by 31 December 2018 and 15% by 31 March 2020. However, the bank decided to issue perpetual non-convertible preference shares to reduce the promoter’s stake from 30% to 19.7% before the deadline, which RBI rejected. As a result, Kotak Mahindra Bank went to court against RBI in an unprecedented move, but the matter was eventually settled.