RBI may scrutinize Kotak’s board term

On 21 April, 99% shareholders of Kotak Mahindra Bank voted in favor of nominating Uday Kotak as non-executive non-independent director of the bank after he stepped down as managing director and chief executive officer.

Normally, the appointment of non-executive directors on a bank’s board does not require RBI approval, with the primary responsibility being to ensure whether these directors meet the fit-and-proper criteria to remain with the bank’s board. Let’s fulfill But the regulator can intervene if it finds that the appointment fails to meet the fit and proper criteria.

As per RBI’s April 2021 guidelines on corporate governance in banks, promoters who are managing directors and chief executive officers or whole-time directors (WTDs) cannot continue for more than 12 years. But the tenure can be extended up to 15 years at the discretion of RBI. “While examining the case for re-appointment of such MD & CEO or WTD within a period of 12/15 years, the level of progress and milestones to be followed for dilution of promoters’ shareholding in the bank shall also be followed by the Reserve Bank. ,” it said.

While RBI regulations do not prohibit a promoter CEO from being appointed as a director on the board after his term ends, it is not clear whether such appointment is against the spirit of the regulation.

A former RBI official said, “The intent behind the regulation is to ensure that once the tenure is over, the promoters are not associated with the bank.” No organization should be dependent on any one person. A promoter to run the bank in the absence of the CEO. Ideally, they should be kept completely away from the bank. In a non-executive role, he cannot call the shots. But it depends on a strong president at the top,” he added.

An email sent to an RBI spokesperson did not elicit any response.

A spokesperson of Kotak Mahindra Bank said that the bank believes in the highest standards of governance. “Our resolution is in consonance with and has the support of over 99% of the voting shareholders, who voted in the interest of stability of the institution and the stakeholders. Many of the shareholders represent large global and domestic financial institutions, which you would appreciate while respecting the spirit of governance,” the spokesperson said.

Experts question whether the RBI’s lack of clarity in drafting guidelines for promoter CEOs is deliberate. In the same guidelines, the RBI rules leave no scope for ambiguity in the case of non-promoter MDs and CEOs. The rules say that a non-promoter CEO will have to undergo a cooling period of three years after completing 15 years. “During this three-year cooling off period, the individual shall not be directly or indirectly employed in any capacity or associated with the Bank or its group entities,” the guidelines said.

“There is no ambiguity in the manner in which promoter and non-promoter CEOs are treated in the guidelines with respect to their tenure. The RBI guidelines are rules-based, not discretion-based,” said another former RBI official.

According to a person familiar with the developments, the RBI guidelines talk about a cooling period for managing directors and CEOs or WTDs who want to return to the bank in an executive role, and in this case, Uday Kotak is in a non-role. Fulfilling Executive role. The bank has come to this understanding after seeking legal clarification.

Some proxy advisory firms like IIAS, which represent minority investors, said the regulator should not rock the boat if the promoter CEO is performing well.

“It is difficult to defend a one-size-fits-all approach in the case of an ex-CEO role. If it is a professionally owned company and if the CEO is a significant shareholder, his removal may risk rocking the boat. Example For more, look at Infosys, where there was an extended period of tension between the then CEO and board on the one hand and some of the founders on the other. Amit Tandon, founder of IIAS, said, “Much of this animosity was aired publicly. Was. If there is a problem with performance, the RBI has the right to remove the CEO.” has seen a series of twists and turns. In February 2013, the RBI stipulated that promoters in private banks within 12 years of commencement of business The stake should be brought down to 15%.For years, promoters including Uday Kotak avoided implementing this directive.

In 2017, Kotak Mahindra Bank agreed to reduce promoters’ stake in three phases: 30% by 30 June 2017, 20% by 31 December 2018 and finally 15% by 31 March 2020. A year later, the bank decided to sell the permanent non. To bring down the convertible preference shares ahead of the deadline to bring down the promoter’s stake from 30% to 19.7%. However, the move was struck down by the RBI.

In response, Kotak Mahindra Bank took the unprecedented step of taking the regulator to court. However, the feud ended in a settlement.