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.
Going toe to toe with a powerful regulator isn’t normally good for your financial health. But it has proven to be profitable, on paper at least, for India’s billionaire banker Uday Kotak.
The founder of Mumbai-based Kotak Mahindra Bank Ltd. has seen his wealth nearly triple since March 2014, when the Reserve Bank of India said he failed to meet the first of its successive milestones to reduce his stake in the bank. His wealth now stands at $11.4 billion, according to the Bloomberg Billionaires Index, mainly due to share price gains that have increased the value of his holding in KMB, currently 30 percent.
The latest RBI deadline was for Kotak to reduce his holding below 20 percent by the end of last year, part of the regulator’s industrywide efforts to reduce the influence of founding shareholders in Indian banks. Kotak Mahindra is taking legal action to contest that, arguing that a sale last year of 5 billion rupees ($72 million) in preference shares complies with central bank rules. A new hearing is due to take place on the bank’s motion later Tuesday in the Bombay High Court.
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.
“Uday Kotak seems to delay implementation of the shareholding rules as much as he can, adding billions to his wealth in the process,” said independent analyst Hemindra Hazari, who writes for the Smartkarma platform. “Had he followed the timelines, he would have had to sell his shares for far less a price than today.”
Last year, the High Court refused to shield Kotak Mahindra from any penalties that might be imposed by the RBI over the failure to cut Uday Kotak’s equity stake below 20 percent. In September, the central bank ordered Bandhan Bank Ltd. not to raise Chief Executive Officer Chandra Shekhar Ghosh’s salary and restricted the lender from opening new branches without its approval after the bank failed to meet shareholding requirements.
“The actions of the bank have been in accordance with RBI’s communications, the needs of the company, and the law. It is incorrect to impute any motives to that,” said Rohit Rao, KMB’s chief communication officer. He noted that the bank’s share price gains have accrued to all shareholders, not just its founder. “We are unable to comment further” since the matter is subjudice before the Bombay High Court, he added.
Kotak Mahindra missed the original deadlines set by the bank for progressively reducing its founder’s stake in 2014 and 2016, though it did meet a dilution requirement set by the RBI in 2017, according to court documents.
Shareholders would lose out if Uday Kotak is forced to reduce his stake, according to J.N. Gupta, managing director of Stakeholder Empowerment Services, an investor advisory firm.
“Given the size of the bank, issuing equity to reduce the stake is impractical,” Gupta said. “Selling the stake in the secondary market will also hurt investors as it will divert his attention from the bank. Either way, it will hurt.”
Uday Kotak will find a long queue of willing buyers for his shares if the court’s decision goes in favor of the regulator, said Ajay Bodke, head of investment strategy at Prabhudas Lilladher Pvt Ltd. “His bank is a jewel in the crown of the Indian banking sector.”