👍👍👍Letter without spirit | The Financial Express

Clipped from: https://www.financialexpress.com/opinion/letter-without-spirit/3064323/

Kotak Bank has followed the RBI guidelines but appears to have ignored the regulatory intent

One wishes Kotak had walked the talk while deciding on his future role at the bank after his retirement as CEO on December 31 this year.

The journey has been spectacular so far: In 1985, Kotak Mahindra Finance Ltd was formed with an initial equity capital of Rs 30 lakh. Today, Kotak Mahindra Bank has a market cap of Rs 3.7 trillion. In the process, Uday Kotak has become one of the most respected names in the financial services industry because of his strategic excellence and integrity, which has helped India’s third-largest private bank scale new heights. Kotak has also earned the role of an industry statesman whose voice is heard by the government and the regulators with the respect it deserves. When the Infrastructure Leasing & Financial Services scam was unearthed, the government turned to him; and he did a remarkable job—IL&FS resolved debt worth Rs 61,000 crore, which was 62% of the total. Kotak also wrote India’s code of corporate governance.

In a media interview some time back, Kotak said he believed “banks were special—they were very leveraged institutions by nature, therefore it’s even more critical to ensure that the governance and the process of running a banking company were well-organised, managed and regulated”. One wishes Kotak had walked the talk while deciding on his future role at the bank after his retirement as CEO on December 31 this year.

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Earlier this week, shareholders voted overwhelmingly in favour of appointing him as a non-executive, non-independent director on the board for five years. The appointment is in sync with the Reserve Bank of India’s guidelines that state that founder-CEOs can continue at the bank’s corner office for 12 years. The tenure can be extended only once by three years if the RBI agrees that it is in the best interest of the bank. Those CEOs whose tenures had already exceeded this limit when the guidelines came into effect were allowed to finish their current terms. If they want to seek reappointment as CEOs after that, they are expected to go on a three-year cooling-off period where they can’t be directly or indirectly linked to the lender. The guidelines, however, did not specify anything about these CEOs seeking reappointment as board members after retirement. Kotak Bank has obviously used this loophole to its advantage.

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It is, however, valid to argue that in this case, Kotak is following the letter of the guidelines while ignoring the spirit. According to the discussion paper titled Governance in Commercial Banks in India, released in June 2020 (the RBI’s final guidelines on this issue are based on this), it is desirable to limit the tenure of the whole-time directors or CEOs to build a robust culture of sound governance practice and to adopt the principle of separating ownership and management. This makes it obvious that the regulatory intent is to control the impact an owner could have on the operations of a bank after his retirement.

Kotak’s decision to continue on the board can have other repercussions as well. The new CEO would have to contend with the larger than life presence of the bank’s promoter-cum-immediate predecessor on the board, which may crimp his/her style of functioning. In its resolution, the bank said the board needs to have the continued benefit of Kotak’s expertise, contribution, and guidance. In effect, the board is publicly declaring that Kotak is indispensable to the bank. That doesn’t reflect well on the bank’s succession plan—Kotak has been at the helm for 20 years, which should have been enough time to groom future leaders.