India’s central bank is warning that its authority could be undermined if courts rule against it in a case involving a major private-sector lender. Kotak Mahindra Bank Ltd.’s legal petition against the Reserve Bank of India’s objection to the method used by the founder to pare his stake in the lender, if granted, would weaken its regulatory authority, according to the RBI. The private lender is asking the court to approve of its issuance of preference shares as a way to dilute the holdings of its billionaire founder Uday Kotak, as demanded by the RBI, and is arguing that the central bank’s demands are against the public interest. The preference share sale has been rejected by the RBI.
“The reliefs sought in the petition, if granted, shall result in making inroads into the RBI’s autonomy, and to permit the petitioners and others to become regulators of their own selves,” the RBI said in a petition to the Bombay High Court, a copy of which has been seen by Bloomberg News. The central bank has been in tussle with Kotak since 2014 when it said he failed to meet the first milestone to reduce his stake in the bank. The RBI has been trying to separate the management and ownership functions at the nation’s lenders to improve corporate governance, and the case before the courts could force a reinterpretation of ownership restrictions governing local banks.
An RBI spokesman didn’t respond to a telephone call and email seeking comment, while a Kotak spokesman asked for more time to respond. That the lender and not the founder of the bank chose to file a complaint against the RBI shows “the need to make private banks more independent and not reflect the interests of one individual,” the central bank also wrote in its submission to the court. A hearing is due to take place on the bank’s motion later Tuesday in the Bombay High Court. The banking regulator’s policy on founder’s shareholding is “inconsistent, unreasonable, arbitrary” and as applied to Kotak Mahindra is “contrary to public interest,” the lender’s lawyers said in its petition last year.