Stake skirmish

Of late, the Reserve Bank of India (RBI) has been taking a hard line on enforcing deadlines for the promoters of private sector banks to dilute their ownership stakes. Promoters, in turn, have been dodging the regulator to think up roundabout devices to comply with the letter of the law, without offloading equity. Bandhan Bank’s latest move to acquire Gruh Finance at a steep valuation through a share-swap deal, after RBI froze its CEO remuneration and branch expansion plans last year, is a case in point. Kotak Mahindra Bank’s legal tussle with the RBI to rubber-stamp its promoter’s attempt to dilute his stake through perpetual preference shares, is another. The promoters of Kotak Mahindra Bank or Bandhan Bank certainly aren’t doing themselves or their investors a favour by flouting extant regulatory norms for holding a universal banking licence. But then, the RBI must also shoulder part of the blame for its lack of a coherent and consistent policy on bank ownership, and its shifting goalposts on this issue.

When Kotak Mahindra Bank acquired its universal banking licence in 2003, RBI rules specified a minimum 49 per cent promoter holding. But it had a change of heart in 2005 and decided that private banks needed to have a well-diversified ownership with no single entity controlling over 10 per cent of paid-up capital. In February 2013, issuing a new set of guidelines for licensing new private banks, it raised this limit to 15 per cent. Promoter-controlled holding companies were expected to start off with a 40 per cent equity stake but prune it to 15 per cent within 12 years. For private banks seeking to comply with RBI’s ownership rules, the additional caps on promoter voting rights and the minimum 26 per cent domestic shareholding requirement under FDI pose further challenges. Thanks to convoluted rules, most serious players have kept away from applying for a universal banking licence for over a decade, denying bank consumers the benefits of competition.

Recent skirmishes between the RBI and bank promoters on equity dilution detract from far more serious issues of bank governance thrown up by recent bank frauds and the bad loan crisis. Public sector banks are widely held and feature the state as promoter. Yet they have been the prime targets of Nirav Modi-type frauds and have evergreened loans to wilful defaulters. Widely held private banks have been found guilty of chronically under-reporting bad loans under RBI’s AQR. These instances suggest that the RBI may be barking up the wrong tree in focussing so much on dispersed ownership to ensure bank governance. It should instead focus on improving the constitution of bank boards, separating the chairman and CEO roles and demanding greater accountability from independent directors so that they rein in banks from business decisions that are inimical to depositors and shareholders.

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