Kotak Mahindra Bank vs RBI

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 3542 of 2018
Kotak Mahindra Bank Ltd & Anr. .. Petitioners
Reserve Bank of India & Anr.
Versus
Respondents
INDEX
Sr. No. Particulars Page No.
'I Affidavit
Exhibit "A"
11-5Copy of the dated 7 February 2002
Exhibit "B"
Copy of the letter dated26 June 2002
Exhibit "C"
Copy of the letter dated 6 November 2002.
• Exhibit "D"
Copy of the letter dated 15th November 2002
•. Exhibit "E"
5'4Copy of letter dated 8 March 2004
Exhibit "F"
5 kCopy of letter dated 2 April 2004
• Exhibit "C"
Copy of the. letter dated 28 June 2004
Exhibit "H"
SCopy of the letter dated 20 July 2004
Exhibit "I"
t SOCopy of the letter dated 30 August 2004
;. Exhibit "J"
Copy of the letter dated 3 January 2005
-
.. Exhibit "K"
'' °Copy of the letter dated 30 July 2007
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Exhibit "L"
Copy of the letter dated 2nd November 2007
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C.
lf Exhibit "M"
5(0 - SCopy of the letter dated I9th November .2007
Exhibit "N"
(0Copy of the letter dated 5th December 2007
1 Exhibit "0"
Copy of the letter dated 29 December 2007
- Exhibit "P"
5 CCopy of the letter dated 27 February 2008
l. Exhibit "0"
Copy of the letter dated 27 March 2008
Exhibit "R"
5Copy of the letter dated 12 March 2009
2V Exhibit "S"
Copy of the letter dated 1 April 2009
2?. Exhibit "T"
5Copy of the letter dated 3d June 2009
2 Exhibit "U"
SCopy of the letter dated 9th November 2009
2 Exhibit "V"
Copy of the letter dated 10th December 2009
2St Exhibit "W"
Copy of the letter dated 2nd February 2010
Exhibit "X"
S ?sO
Copy of the letter dated jst November 2010
- Exhibit "Y"
ICopy of email dated 2' AUgUSt 2018
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGThIAL CIVIL JURISDICTION
WRIT PETITION NO. 3542 of 2018
Kotak Mahindra Bank Ltd & Ann
. . Petitioners
Versus.
Reserve Bank of India & Anr.
. Respondents
- It'A tts1 RPL'q ON BEHALF OF RESPONDENT NO..d
TO OPPOSE THE ADMISSION OF THE WRIT PETITION
1, N. Ramasubramaflian, s/u V. Natarajan, Deputy General Manager,
Department of Banking Regulation, Reserve Bank of India, Central Office, Fort,
Mumbai, do hereby solemnly affirmandsay that;
1 have gone through the above Writ Petition(hereinafter referred to as
"the Petition") and the documents filed along with the same. I have
also, duly and fully acquainted myseif with the facts of the case,based on
the records and papers of Respondent No.1 (hereinafter referred to as
"RBI"), and I am also authorized to file this affidavit onits behalf. I say.
therefore, that I am both able and competent to depose to this affidavit.
2.
I am filing this Affidavit in Reply for the limited purpose of opposing the
admission of the Petition and the want of any interim / ad interimrelief. I
crave leave of this Hon'ble Court to file a further affidavit, should the
same become necessary, or be advised.
3. At the outset, I deny all allegations, contentions and submissions made in
the Petition, whichare contrary to or inconsistent with what is.stated in this
Affidavit. I further say that any allegations, contentions or submissions in
the said Petitionwhich have not been specifically dealt with or denied by
me, may not be deemed to he adm elYfl4CC0Uflt of non-traverse.
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4. At the further outset, I say that the reliefs prayed for in the Petitionare not
capable of being granted in the exercise of the writ jurisdiction of this
Hon'ble Court.
5. Without prejudice to the above, I submit that the nature of the reliefs
sought is such that a Writ Petition is inappropriate. A reading of the
Petition would show that its central purpose is to involve this Hon'ble
Court in questions of economic policy -- to wit, what is the ideal degree of
ownership/control which may he allowed in private banks, in order to
prevent the concentration of economic power, and make such banks more
responsive to the voices of their minority stakeholders.
6.
1 say that the Banking Regulation Act, 1949 ("the BR Act") empowers the
RBI to supervise and regulate banking institutions (both public and
private) in the Country. Banking business involves financial
intermediation and plays a key role in the mobilization and distribution of
the Country's savings. Banks are "special" as they not only accept and
deploy large amounts of uncollateralized public funds in a fiduciary
capacity, but they also leverage such funds through credit creation. In view
of these considerations, banking business has been a highly regulated area
all over the world. The powers conferred upon RBI under the provisionS of
the BR Act,are exercised keeping in mind the depositors' interest, banking
policy, and public interest at large, which cannot be diluted for the interest
of a few.
7. A cursory reading of the Petition shows that, the matters complained of
therein have been the subject of keen deliberation within the RBI, and the
Executive and Legislative anns of the State at large. There is also a broad
policy framework, which the law in force places within the sole
ompetence of the RBI, as a central bank, to evolve and refine, based on
nowledge, experience and expertise. The reliefs sought in the. Petition,
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if granted, shall result in making inroads into the RBI's autonomy, and to
permit the Petitioners and others (whose actions the RBI is meant to
reulate to become regulators of their own selves. Not only will thisturn
banking policy, as reflected in the BR Act, on its head, but wll, in the
respectful submission of the RBI, set an unhealthy precedent.
8. Moreover, and strictly without prejudice, it is respectfully submitted that,
the Petitioners before this Hon'ble Court, have no standing to question the
RBI's policy decisions at issue. Those decisions, if at all, seek to regulate
shareholding rights of Petitioner No. l's promoters. Those promoters have
not filed any petition. They, therefore, have no issue with their holding
being regulated in the manner provided for by the RBI. The
correspondence annexed to the Petition contains not one letter addressed
by thesePromoters. If theydid not and/or do not, think it necessary to
question the dilution of their rights, the Petitioners can hardly have a
complaint in relation to the same. The very fact that these Petitioners have
come before this Hon'ble Court, and not those whose rights in property the
Petition claimsshall be affected by the impugned communications, shows
first-hand the need to make private banks more independent, and reflective
not of the interests of one individual or faniilybut all stakeholders, whose
voices must be heard in their (the banks') running.
9. Itis, therefore, submitted that, the Petition smacks of ulterior motives, and
aims at the defeat of statutory powers and duties conferred upon / vested in
the RBI. It is further submitted that if the reliefs as prayed are granted, the
very purpose of the directions /instructions/ guidelines issued by RBl
under the provisions of the BR Act will be defeated.
10. I say further that, the Petitioners, have also made several willful
misrepresentations of fact and raised arguments wholly irrelevant to the
real matters in issue, in order to obfuscate the latter. The Petitioners have,
by such misrepresentation, clinically singled out unrelated issues;
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attempting to portray an atmosphere of instability jr the financial
regulatory functions of the RBI. I say that the Petitioners are also guilty of
suppressio yen and suggestiofalsi.
11. For all the reasons above, I submit that, the above Petition is not
maintainable, and/or that, it deserves to be dismissed, with costs.
12.
Strictly without prejudice to what is aforesaid, and so as to give this
Hon'ble Court the full and unvarnished facts and circumstances of the
case, I shall now set these out briefly. Thereafter, and based on those facts,
I shall deal with the contents of the Petition, paragraph-wise. Where
documents/materials refened to by me, are already annexed to the
Petition, I am not now re-annexing the same.
13. Petitioner No.1 ("1CM") is a private, Indian bank. Petitioner No. 2 is a
shareholder of KM. Petitioners• ostensibly challenge a letter dated
13.08.2018fr0m the RBI, requiring compliance with RBI's Ownership in
Private Sector Banks Directions, 2016, by diluting KIvis promoters'
shareholding in KM to 20% of its 'paid-up voting equii' capital" by
31.12.2018, and to 15% by 31.03.2020. The reliefs sought, hoviever, also
cover 8 prior "Reduction (2ommunications" issued by RI, between
February 2008 and January 2017,
14. Thismatter stretches back over 18 years. On 3 January 2001, RBI issued
its "Guidelines on Entry of New Ban/cs in the Private Sector" ("2001
Guidelines") requiring a "minimum" promoters' contribution of 40% of a
banks paid-up capital, with a 5 years' lock-in. The 2001 Guidelines
required that, "In case the promoters' contribution to the initial capital is
in excess of. ..40 per cent, they shall dilute their excess stake after one year
of the bank's operations. (In case divestment after one year is proposed to
be spread over a period of time, this would require specflc approval of
ithe RBI)." Hence, even at thatstage, the holding of promoters in banks-
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49% of paid-up capital, "in order to provide a level playf ngfield."
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so.
15. On 7 June 2002, the RB! issued a Press Release statingthat the "maximum
limit" of Indian promoters' shareholding in private banks was raised to
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covered by those Guidelines, was capped at 40%, one year after it
commenced operations.
15.
On 30 March 2001, KIVI applied for a banking license, under S. 22 (1) of
the Banking Regulation Act, 1949, pursuant to the 2001 Guidelines. The
application (from Kotak Mahindra Finance Ltd.) stated that, initially, the
proposed bank would be. a subsidiary, but that, "The sharcholding will be
diluted afier obtaining approvals from RBL"
16.
On 7 February 2002, RB! wrote to KM, making a reference to its letter
dated 30.03.2001, and communicated to the latter RBl's "in principle
approval to enable it to convert itself into a new banking company. The
terms and conditions on which that approval was granted were set out in
an Annexure to RBI's letter. Conditions 4 and 7 of that Annexure
reiterated the need for KM to comply with the limit on promoters' holding,
as contained in the 2001 Guidelines, Conditions 15, 17 and 18 in the
Annexure, further provided as follows:
"...15.There shall be an 'arms — length' relationship
organizationally and operationally between the b nk and its
promoters and all transactions between them should be as
between two independent unconnected entities on market
related rates and with due adherence to approved practices in
completion of such transactions.
.1 7.As regards interpretation of the clauses! provisions of the
terms and conditions of the in-principle' approval the
decision of the RBI shall be final.
"18. RBI may impose additional conditions that it deems
appropriate..."
A copy of this letter, which is not annexed to the Petition, is annexed as
Exhibit "A".

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is. On 26 June 2002, RBI wrote to Kl4, making a reference to Conditions 4
and 7 of the "in principle" approval, and advising the latter of the issuance
of the above Press Note, in that behalf. A copy of this letter, which is not
annexed to the Petition is annexed as Exhibit "B".
19. On 6 November 2002, and in response to KM's letter dated 28 August
2002 (enclosing the proposed Memorandum and Articles of Association of
the proposed Bank, for RET's approval), the RBI wrote to the latter
advising it that KM had the RBI's approval to pioceed with the
Memorandum and Articles of Association,
"subject to the condition (inter
alia, that)... The company may ensure that section -12 of the Banking
Regulation Act 1949 is complied with and the same is properly
incorporated in the capital clauses both in the Articles & Memorandum of
Association..." A copy of this
letter (along with one of the letter dated
28.08.2002), which is also not annexed to the Petition, is annexed as
Exhibit "C".
20.
On 15 November 2002, a letter was addressed on behalf of KM to the
RBI, referring in terms to the 2001 Guidelines and all communications
addressed by the latter, setting out the terms and conditions that KM was
required to comply with before its conversion into a bank, and informing it
(RBI) that it (K1vI) had, in fact, complied with the same. In particular, KIVI
noted that it was in compliance with RET's letters dated 07.02.2002,
26.06.2002 and 06.11.2002, and that, "The excess holding will be divested
after one year of the proposed bank s operations — as per RBI guidelines".
Annexure D of this letter further contained the following undertakings:
"...2. KMFL undertakes that on receipt of the operating license to
carmy out banking business and on conversion into a bank it
shall abide by all the regulations of the Banking Regulation
Act 1949, Reserve Bank of India Act, 1934, other relevant
statutes and the Directives (in addition to those already
accepted). Prudential regulations and other Cidelines/
Instructions issued by the RBI and rhe regulations of SEBI
regarding pub/ic issues and other guidelines apjflable to
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annexed as Exhibit "E".
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e FBI responded to this letter vide its letter dated 2 April 2004, stating
"As the bank has completed one year of operations, the ban/c may
listed banking companies unless specfically waived by the
PJJI.
"3. We confirm our acceptance to system of consolidated
supervision by the RBI for the proposed bank and its group
companies."
A copy of the said letter dated 15.11.2002 (also not annexed to the
Petition) is annexed as Exhibit "0".
21. On 6 February 2003, RI granted KM a banking license, subject at all
times to its compliance with every rule, regulation, direction or advice
furnished by the RBI, and to the RBI's powers to interpret its own
regulations authoritatively.
22. On 3 February 2004, RBI issued "Guidelines for acknowledgement of
transfer / allotment of shares in private sector banks" ("2004
Acknowledgement Guidelines"). The Petitioners rely on Clauses 9, 10
and 13 to contend that the Guidelines "contemplated shareholders'
holding more than 30% of the paid-up capital", They however
acknowledge that "voting rights would be restricted in accordance with
the provisions of the B.R. Act...".
23. On 8 March 2004, KM wrote to RBI, noting the impending completion of
one year of its banking operations, and the consequent requirement for it
to dilute its promoter holding to 49% of paid up capital. KM also made a
reference to the Government of India's Press Note No. 2 (2004 series),
dated 5 March 2004, increasing the FDI limit in private sector banks, and
in view thereof asked that the RBI "approve the promote.s holding in
excess of 49% without the condition of dilution after one year of the
Bank's operations." A copy of that letter (not annexed to the Petition) is
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di!uie the promoters holding to 49% as per the terms and conditions of
the license issued vide our letter DBOD.l'To.PSBS 928/16.01.136/2002-03
dated February 6 2003 as already advised. The bank nay, therefore,
advise us the spec7Ic steps it proposes to take to bring down the
promoters holding to 49%." A copy of the said letter (not annexed to the
Petition) is annexed as Exhibit"F'..
25.
KM responded to the above letter, by its letter dated 28 June 2004, stating
that it was "presently considering various options for dilution ofpromoter
holding as advised by you. We will keep you apprised on r/u specflc steps
in due course." A copy of this letter (also not annexed to the Petition) is
annexed as Exhibit "G".
26.
In response, RBI sent KM a letter dated 20 July 2004, advising the latter
"to formulate a firm action plan for dilution of promoter s holding in the
bznk to the stipulated level of 49% and advise us the specfIc steps to
bring down the promoter '.s holding to the stipulated level ar the earliest."
A copy of the said letter (not annexed to the Petition) is annexed as
Exhibit "H".
27. KM, by its letter dated 30 August 2004, and apart from giving a "broad
business plan", inter alia, noted as under:
Post raising of additional capital as indicated above and exercise
of options granted, it is expected that the promoter holding will
dilute to 49% in a phased manner by March 2008...
"..,As seen above, raising capital as per requirements of the
business plan will dilute promoter's holding to around 49% in a
phased manner by Marc/i 2008. You would also notice that we
intend to maintain prudential levels of capital adcquacy at each
stage despite proposed growth. It may be noted that the lock in on
promoter's shareholding is up to March 2008 as per the licence
granted to the Bank..."
A copy of the said letter (not annexed to the Petition) is annexed as
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28. On 3 January 2005, KM wrote again to the RBI, referring, inter alia, to the
letter dated 30.08.2004, giving a "revised plan of the proposed dilution of
promoter's holding to 49%..." KM now stated that it would achieve that
target by 30 June 2007 (instead of March 2008). A copy of this letter
(again, not annexed to the Petition) is annexed as Exhibit "J".
29. On 28 February, 2005, RBI issued "Guidelines on Ownership and
Governance of Private Sector Banks (O&G Guidelines,) ". The Petitioners
contend that the objective of these Guidelines "was not to avoid
conccntration of control or voting rights, which was separately and
distinctly provided for by the legislature under Section 12(2) of the BR
Act."
30. This is not correct, inter alia, because it ignores the fact that;
(a) RBI's Guidelines, set out certain "broad principles.., relating to
ownership and governance of private sector banks", the first of
which was "to ensure that... (t)he ultimate ownership and control of
private sector banks is well diversIied."
(b) The Guidelines went on to provide, inter alia, the following;
"...5. Shareholding
".,.(i1,) In the interest of diversified ownership of banks, the
objective will be to ensure that no single entity or group of
related entities has shareholding or control, directly or
indirectly, in any bank in excess of 10 per cent of the paid up
capital of the private sector bank Any higher level of
acquisition will be with the prior approval of RBI and in
accordance with the guidelines of February 3, 2004 for grant
of acknowledgement for acquisition of shares.
"(iii) Where ownership is that of a corporate entity, the
objective will be to ensure that no single individual/entity has
ownership and control in excess of 10 per cent of that entity.
Where the ownership is that of a financial entity the objective
will be to ensure that it is a widely held entity, publicly listed...
"...9. Transition arrangements
"...(ii) Where any existing shareholding by any individual
entity/group of related entities is in excess of 10 per cent, the
bank with be required to indicate a time table for reduction of
holding to the pernissible level. While considering such cases.
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RBJ will also take into account the terms and conditions of the
banking licenccs..."
31 On 30 July 2007, KM wrote to the RBI, seeking the latter's approval (in
accordance with KM's license conditions) for the "issue / oftr of equity
shares" to Qualified Institutional Buyers ("QIBs"). KM's letter noted that,
"Post the above issue, the promoter holding which is currently at 55.46%
will come down to 52.71%. Further, the Bank as a policy has been
granting stock options to its employees as a measure to attract and retain
talent. Options granted constitute 4.72% of the current paid up equito (sic,)
capital of the Bank We are also seeking shareholders approval for
increasing the number of stock optiofls that may be granted to the
employees. After taking into account options already granted. options
approved by shareholders but not yet granted and the proposed issue, the
promoters' holding will reduce to below 49%..." A copy of this letter
(again, not annexed to the Petition) is annexed as Exhib1t..
32. On 2 and 19 November, in response to a letter of the P.131, dated 30
October 2007, KM wrote to it giving details of the allotment to QIPs (as
proposed in KM's letter dated 30 July 2007), and stating that, "...The
Promoter holding after the issue, in teims of the actual number of shares
held is 181,143,319 equity shares of Rs1O/- each being 52.67% of the total
paid up capital of the Bank." Copies of the said letters dated 02.11.2007
and 19.11.2007 (also riot annexed to the Petition) are annexed as Exhibits
L and respectively.
33. The RB! replied to the letter dated 02,11.2007 by its letter dated 5
December 2007 giving KM its "'post facto" approval for the allotment to
QIBs. However, it noted that, "even after the said QIP. the promoters'
holding is 52.d7% of the bank's total paidup capital. You are, therefore,
5 ,vised to ensure reduction of the promoters' holaing to 49% by
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December 31, 2007." A copy of this letter (not annexed to the Petition) is
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annexed as Exhibit
34. On 29 December 2007, Kvl replied to the above letter, recording, inter
a/ia, as under:
"As seen above, the Bank has raised Rs. 2140 crore by way of
additional capital. However, thanks to the rising stock prices, the
issuances have been at significantly higher prices as against the
envisaged price of Rs. 70/- per share.
"These capital issuance (sic) have been executed keeping in mind the
growth of the Bank and the consequent requirements of capital
adequacy to fund the expanding asset base. While the favourable
markets made it possible to raise about five times the amount of
capital initially envisaged, the desired promoter dilution has not yet
happened as the price at which shares have been issued has been
substantially higher.
"In October 2007 the Bank issued 17,000,000 equity shares to
Qualfled Institutional Buyers. Post issuance, the equity share
capital of the Bank has increased to 343,950,052 equity shares of
Rs. 101= each amounting to Rs. 343.95 crores. The promoter
hoding as on December 10, 2007 is 181,140,319 equity shares of
Rs. 101= each constituting 52.63% of the paid up capital.
"Going forward the Bank shall raise additional capital when
neededfor its operations.
KM then gave details of its ESOP schemes and plans in relation to the
same. It contended that, "If ESOPs a!ready granted to employees as well
as those approved by the shareholders for future grants are considered,
the promoter holding conies to 48.98%, below the limit." It thereafter
stated that it was waiting for the RBI's "final clarflcations" on "holding
company structure in the Indian fInancial system", since, according to it
(KM) these "could provide us with an opportunity to restructure the
holding pattern of the Bank and accelerate compliance with the licensing
condition on promoter holding." KM concluded by stating the foilowing:
"The three issuances of capital in last three years and further grant
of ESOPs to employees clearly demonstrate the seriousness of the
efforts made by Ban/c in reducing promoter holding. Further, at this
tage, the Bank has a very comfortable capital adequacy ratio of
ver 17% with Tier I itseif being over 13% and any issuance at this
age will result in suboptimal utilisation of capital.
'The Bank would raise further capital as and when the need arises
to take care of its expanding business which would further dilute
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promoter holding. We also await the clarUications on holding
company structure and will accordingly, look at accelerating the
dilution ofpromoter holding. We, therefore, request you to permit us
to reduce the promoter holding to 49% as indicated herein."
A copy of the above letter (not annexed to the Petition) is annexed as
E*hibit "0".
35. On 7 February 2008, RBI wrote to K.M, in reply to the letter dated
29.12.2007, noting:
(a) That, the 5 years' lock-in period for the promoters' 49%
shareholding was coming to an end;
(b) That, despite KM's commitment to reduce promoters' aggregate
holding to 49% of "paid-up capital" by June 2007, the same was not
complied with, and had to be achieved by 31.03.2008 and that no
further extension of time would be granted;
(c) That, KM's explanations for its failure as aforesaid, were "not
acceptable"; and
(d) That, since the 0 & G Guidelines were now applicable to KM, it had
to submit a "time-bound action plan, as prescribed vide paragraph
9('iii,.l of the said Guidelines, towards reduction of the promoters'
holding to 10% of the paid-up capital of the bank by February 29,
2008"
36. In response, by a letter dated 27 February 2008 (which has not been
disclosed by Petitioners; and a copy whereof is annexed as iibit "P",
KM wrote as under:
Subsequent to your letter, we have had a meeting with the Top
Management of RB.!. We have highlighted therein that the present
market conditions are volatile and a few equity issues have been
withdrawn from the market after opening, considering the same
and, with a view o give you a definite time frame. we request you to
give us time upto March 31, 2009 to bring down the promoter
holding to 49%. We confirm that we shall not seek any further
extension beyond March 31, 2009.
"As regards para 5 of your letrer, we shall revert to you by the end
of March 2008, after discussions with the members of the Board as
also tha members of the promoters 'family."
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37. By its letter in reply,dated 27 March 2008 (also not disclosed; and a copy
whereof is annexed as Exhibit "0"), RBI stated the following:
"....2. You are hereby granted extension of time up to March 31,
2009 to bring down the promotens' holding in the bank to 49% of the
bank's paid-up capital in accordance with the licensing conditions.
in this connection, ii is clarified that g. further extension of time
would be granted and that :he promoters would have to divest a par!
of their holding if it becomes necessaly to do so in order to ensure
compliance. We also advise that in case any corporate governance
issues arise in the meanwhile, the promoters will have to sell their
holding in excess of49% forthwith.
3. You may also please submit to us, by June 30, 2008. a time
bound action plan tcwards further ;'eduction of the promoters
holding to 70% of the hank's paid-up capital as laid down in the
Ownership & Governance ('ruidelines issued by RB! on Februamy
28, 2005.
38. On 25 June .2008, lUvi wrote to RBI, seeking a 'clarification" whether
KM's reading of the banking license, 2004 Acknowledgement Guidelines
and 0 & 0 Guidelines, that the "permissible level" of promoter
sharehoiding was 49%, was correct. KM felt the need for clatifications
and/or interpretations, only when the long and oft-extended deadlines were
about to expire.
39. On 3liuly 2008, KM wrote to RBI stating, in continuation of the above
letter, that, if the latter was of the view that KM needed to bring down the
promoter holding to below 49%, that RBI "consider the permissible
holding of the promoters in our Bank to atleast 40%." KM went on to say
that, "based on (RBI's) approval we will revert to you at the earliest on
the time bound plan of bringing down the promoter holding level."
40. On 12 March 2009, KM v'rote to the RB! once more, seeking yet another
extension (despite what was stated in its letter dated 27.02.2008) "of one
year...i.e. up to March 31, 20)0", to bring down its promoters' holding to
49%.A copy of the letter dated 12 March 2009 (not annexed to the
Petition) is annexed as Exhibit "R".
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44. KM wrote back on 10 December 2009, purporting to justi' keeping the
name "Mahindra" and requesting the RBI to "take on record our
compliance with the promoter dilution conditton without requiring us to
drop Mahindra "from our name and brand." A copy of that letter (also
ot annexed to the Petition), is annexed as Exhibit "V".
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41. By its letter dated 1 April 2009, RBI acceded to the above request,
however, the extension granted to bring the promoters' holding to 49%, in
accordance with the licensing conditions was only permitted up to 30 June
2009. A copy of the letter dated 1 April 2009 (also not annexed to the
Petition), is annexed as Exhibit "S".
42. On 3 June 2009, KM replied to the above letter claiming that, pursuant to
a "request" from one of its promoters (Mr. Anand Mahindra), and "taking
into account inter alia the nature of his involvement in the affairs of the
Bank since 2003, a significant dilution in his shareholding in the Bank
over the last decade and the fact that he is not a person acting in concert
with the other promoters... the Board of Directors at its meeting e'n June 3,
2009 resolved that he is no longer a promoter of the Bank." In view
thereof, Xlvi contended that, "the promoter shareholding in the Bank
stands at 48.53% as on date and the Bank is in compliance with the
license condition to bring down the holding of the promoters to 49% of the
paid-up capital..." A copy of the letter dated 3June 2009 (not annexed to
the Petition), is annexed as Exhibit "T".
43. By its letter dated 9 November 2009, REI responded to the above letter
stating that its claim to having complied with the dilution requirement on
account of Mr. Mahindra's ceasing to be a promoter / promoter director
could be considered if the bank stopped using or dropped the name
"Mahindra", from its name. A copy of that letter (again, not annexed to
the Petition), is annexed as Exhibit "U".

45. On 2 February 2010, KM wrote again to RBI, referring to a meeting
between parties' representatives on 22 January 2010, and undertaking that,
"As indicated to you at the meeting, we shall bring down the holding qf the
promoters in such a manner that the promoter holding plus the holding of
Mr. .4nand Mahindra, his relatives and entities controlled by them would
be below 49% within a period of one year." A copy of that letter (also not
annexed to the Petition), is annexed as Exhibit "W".
46. On 5 March 2010, and in view of the above letter, RBI wrote to KM
granting an extension (upto 31.10.2010) to bring down promoters' holding
in the bank to 49% of "paid-up" capital, and once more asking for "a time
bound planforfurther dilution of the promoter 's stake in the bank so as to
conform to the 0 & Gguidelines..."
47.
On 29 March 2010, KM replied to the above letter, and, in relation to the
necessary action plan for further dilution of its promoters' holding,
reiteratedwhat was stated in its letters of 25 .06.2008 and 31,07.2008.
48. On 29 October 2010, RBI wrote to KM, referring to the former's letter of
05.03.2010; noting that KM was yet to submit the time bound road map
asked for; and advising once more that the same be submitted,
immediately.
49. On 1 November 2010, KM wrote to the RBI, inter alia, recording as
under:
",,,We wish to inform you that as of October 29" . (a) the
promoters' shareholding in the Bank is 33,57,90,268 equity shares
constituting 45.76% of the Bank total paid up equity share capital:
and 'b,) the shareholding of Anand Mahindra (Group) in the Bank is
2,36,89,352 equiry shares constituting 3.23% of the Bank's total
0 paid up equity share capital. The collective shareholding as per (a)
"' and (2?) as aforesaid is 48.99% of th Bank's total paid up equity
"* shore capital. With this, we have complied with the requirement
< jcommunicated vide your letter of Marsh 5, 2010.
*IL.ii The dilution of shareholding as above has been achieved by way of
ptiferential allotment of shares by the Bank to Sumitomo Mitsui
L67

Banking Corporation as well as allotment of shares to the employees
of the Bank & its subsidiaries Ofl exercise of ESOPs."
A copy of the above letter (not aexed to the Petition), is arexed as
Exh!bJt'XL.
50.
On 4 November 2010, KM responded to P31's letter dated 29.10.2010,
with a letter virtually identical to the one dated 29.03.2010.
51.
On 10 Match 2011, RBI responded to the above letter, noting that it had
examined KM's representati0ns but that
"as per the requirement under
the 0 & G guidelines... banks are required to have a divers /ied
5ar holding" }I
was, therefore, Once again asked
"to provide a definite
plan Jbr dilution of promoters stake in the bank in vo stages i.e. a) to
20% and b) to JO%...pO5itiY before April 30, 2011."
52.
On 29 April 2011, KM replied to the RBI, essentiallY
000tending (as it did
earlier) that, "there has been no clarity in relation to what the RBI
considers to be the "permissible" level
of shareholding by pronzoters." nor
the criteria it would apply and the process that it would follow in
determining the same..... This letter also made armentS
reflecting the
stand taken in the Petiti'Jfl,
to wit: asking promOtet to reduce their
holding, would inevitably lead to
.jcreasedfogn 5areholding" KM
further referred to proposed amendments to the BR Act, to allow
"voting
rights in excess of 10%
admitting need for individual or group
5areholding in excess of 10%."
In vieW of the above, the RB! was agaln
asked to "clarif5) its policy regarding the permissthle level of promoter
hotding..."
53.
HoweVer, in what it teed a "good faith" measure, KM undertook
"to
reduce the promoters'
5reholdtg from current level of 45.5% (not
uding the holdi'ig of Shri Anafld Mahindra, as intimated previouslY.
/A '
1f
'kJ1S ceased to be a promoter of
the bank and has also recentlY stepped
C
16

down as a director) to 40% within a period of three years." KM also
added that, it would "try for a suitable M & A proposal to bring down the
shareholding ofproinoters."
54. On 29August 2011, RBI issued Draft Guidelines for Licensing of New
Banks in the Private Sector ("2011 Proposed Guidelines") for feedback.
These contemplated that;
(a) Promoter I promoter groups would set up the bank only through a
"wholly-owned Non-Operative Holding company ('NOHc,)", which
will hold the bank as well as all other financial services companies
regulated by RBI or other financial regulators. The objective was to
"ring fence" the regulated financial services activities of the group
(including the bank) from its other activities, and so that, "only non-
financial services companies / entities and individuals belonging to
the promoter group will be allowed to hold shares in the NOHC'.
Financial sen'ices companies belonging to the promoter group
would be held by the JVOHC and would not have shareholding in it."
b) The NOHC's shareholding in the bank would be brought down to
20% of "paid-up" capital ("PUC") within 10 years, and to 15%
within 12 years, from the date of licensing and retained at that level
thereafter.
(c)
At least 50% of the NOI-IC's Directors would have to be
independent of the promoter / promoter group entities, their business
associates, customers or suppliers.
(d) RBI would have to be satisfied that the corporate.structure does not
impede financial services under the NOHC from being rjng fenced,
and that it would be able to supervise the bank and the NOHC on a
onsolidated basis.
uwnership and management should be separate and distinct in the
romoter / promoter group entities that own or controithe NOHC.
'"9
:17

iI/• ';k:-
•,.,".. I •-c" 'l cc;
iij Ji
- /
0/Il
k'1-1) (I') Shareholding of 5% or more of the PUC of the bank by individuals I
entities / groups would be subject to RBI approval.
No single entity or group of related entities, other than the NOHC,
shall have shareholding or control, directly or indirectly, in excess of
10% of the PUC of the bank.
(h) The promoters, their group entities, NOHC and the bank shall be
subject to the system of consolidated supervision by RBI.
55. On 10 January 2012,RBI wrote to KM, once more stating that, "The
promoters' stake in the bank should be brought down to 10% of the paid-
up capital of the bank latest by March 3], 2016 positively." KM was also,
again, requested to submit a road map in that behalf, by 15.03.2012. It
may be noted that in the Petition, the Petitioners portray RBI's letters as
being unresponsive to their requests for "clarity", notwithstanding that,(a)
the latter's stand could not have been clearer; and b) no road map towards
dilution to 10% had been forthcoming. KM's April 2011 letter purported
to give merely a "good faith" assurance to reduce the holding to 40%
within 3 years. It was on that basis that the above timeline (10% by
31.03.2016) was set. But, rather than comply, KM later gave a "best
eslimate" to go downto 20%, by March 2020, instead.
56. On 16 January 2012, KM replied to the above letter, claiming that the
RB I's requirements would "cause serious disruption". As in the Petition,
KM contended that the dilution would require the raising of "around
Its. 1,25,000 crore (higher than the market capitalization of our largest
banks today)..." However, KM went on to state asunder:
"...Keeping the above considerations in mind, we have undertaken
vide our letter dated April 29, 2011 to bring down our promoter
holding to 40% prior to April 29, 2014. Therefore, ([directed to
implement your requirement, we would have to dilute 30% (from
40% to 10%) of our promoter holding in less than two years... This
would then effectively constitute the road map sought by you.
"However, whilst the policy and statutory basis of .the. above
requirement is not clear to us, ow best estimate of a fairand non-
18

L-fl
4-
disruptive road map for the dilution of our promoter holding is a
dilution to 20% of our paid up capital by March 31, 2020 in the
following manner: (a) 40% by March 31, 2014; ('&) 30% by March
31, 2017; and(c) 20% by March 31, 2020,
"Such dilution will be effected through a combination of capital
raising, ESOPs to employees, inorganic growth through mergers &
acquisitions. iduction of strategic and financial investors and
possibly a partial sale of our promote:' holding.
"We earnestly hope for a favourable consideration of our proposed
road map."
57. On 26 June 2012, upon a review of the estimate given in the above letter,
RBI wrote to KM, referring to R131's letters dated 29,04.2011 and
06.01.2012, and advising it that, upon a careful examination of KM's
request, as well as the targets it had given,KM should ensure that the
promoter' stake is brought down to 20% of the "paid-up" capital by
31.03.2018, and further to 10% by 3 1.03.2020. However, it was noted that,
"a view will be taken on dilution ofpromoters stake from 20% to 10% or
such other percentage depending up on the prescription in the new bank
guidelines."
58. On 6 July 2012, KM replied to the above letter, setting out an estimated
road map for meeting what it itself.described as "deadlines" for dilution of
promoter holding "as per your (RBI's) directions" of (a) 40% by
31.03.2014; (b) 30% by 31.12.2016; and (e) 20% by 31.03.2018. II
further recorded the followhg:
"...As regards further dilution, we note thai a view will he taken by
you on reduction from 20% to 10% or such other percentage
depending on the prescription in the new bank guidelines. We hope
that any threshold in excess of 20% under the new bank guidelines
will also be extended to us."
59. In January 2013, the Banking Laws (Amendment) Act, 2012 ("2012
Amendment Act"), came into force, adding to Section 12(2) of the BR
f'Act, a proviso enabling the RBI, to increase "in a phased manner", ceiling
ting rights from (the then existing) 10% to 26%. The Act also
ced Section 12-B to the BR Act, prohibiting any person acquiring
19

"shares of a banking company or voting rights therein" which acquisition
taken together with shares and voting rights, if any, held by him I affiliates
already, accumulate to 5% or inoreof the 'paid-up share capital", or
"entitles him to exercise fIve percent. or more of the voting rights", in such
company, from doing so without prior pennission from the RI.
60. On 22 February 2013, RBI issued final Guidelines for Licensing of New
Banks in the Private Sector ("2013 Guidelines"), in line with the 2011
Proposed Guidelines, and with the 2012 Amendment Act. However, the
•same made the following important changes:—
(a) The NOFHC (called "NQHC" in the 2011 Proposed Guideline) must
have a capital structure in which "voting equity shares" not
exceeding 10% of the "total voting equity shares" may be held by
promoter group individuals / family / entities [Gl. 2(C)(ii)(a];
(b) Only promoter group companies having 51%+ of "voting equity
shares" held by "the public", must hoid 51%+ of the NOFHC [GI.
2(C)(ii)(b)];
(c) The NOFHC must have a minimum 40% of the "paid-up voting
equity capital' ('PUVC") of the bank, locked-in for 5 years [01..
2(D)(ii); any excess being brought down to 40% in 3 years [01.
2(D)(iii)];
(d) The NOFHC's shareholding in the bank would be brought down to
20% of PUVC within 10 years, and to 15% within 12 years, from the
date of commencement of business [01. 2(D)(v)];
(e) The bank must get its shares listed on the stock exchange within 3
years of commencing its business [01. 2(D)(vii)];
(f) Any acquisition of shares which would take the aggregate holding of
any individual I entity I group to 5% or more of the PUVC would
require prior approval of RBI [01. 2(K)(ii)];
/.

,C
I. .' •• Z
20

C
(g) No single entity or group of related entities, other than the NOFHC,
shall have shareholding or control, directly or indirectly, in excess of
10% of the PUVC [01. 2(K)(iii)J; and
(h) The Bank was also required to maintain an ann's length relationship
with Promoter / Promoter Group entities, and the major suppliers
and major customers of these entities [Gl. 2(K)(iv)J.
61. Pursuant to the 2013 Guidelines, RBI granted 'in principl& approval to
two new banks.
62. on 18 March 2014, i.e. just before the targeted deadline of 30 March 2014
(to achieve 40% dilution), KM wrote to RBI, sharing with it the steps
taken to reduce the promoters' holding in line with its letter of 06.07.2012
That holding had come down to 43.59%. KM also altered its deadline to
bring the holding to 40% by 30.09.2014 (instead of3l.03.2014); (b) 30%
by 31.12.2016; and (c) 20% by 31.03.2018, but recorded that, "we wish to
comply with obligation to you to achieve the reduction of promoter
shareholding by March 31, 2018, and are taking all prudent, reasonable
and lawful steps in that regard."
63.
On 23 May 2014, RBI wrote to KM in response, expressing its displeasure
with the latter's failure to achieve even the first milestone of dilution to
40%. KM was advised that no further revision of existing timelines would
be permitted, and that it had to (a) apprise RBI of the follow up action
taken; and (b) submit quarterly progress reports on the dilution. KM was
also put to notice of the initiation of regulatory action, if it did not adhere
to its commitments.
64. On 27 November 2014, the RBI issued Guidelines for Licensing of Small
/__Zax1 Banks, and for Payments Banks, in the Private Sector. These
kt
&
s similarly required promoters to hold a minimum of 40% for a
five years from the date of commencement of business.
21

65.
Pursuant to these Guidelines, RBI panted 'in principle' approval to 11
Payments Banks and 0 Small Finance Banks.
66.
On 5 March, 2015, RBI issued a Notification u/S. 12 (2) of the BR Act,
raising the ceiling on voting rights, initially, from 10% to 15%.
67. On 27 October 2015, KM wrote to the RB!, inter alia, in relation to "Mr.
C/day Kotak's promoter shareholdiflg in the Bank" The letter noted
developments such as the merger of iNG Vysya with KM, and the
"significant changes in the policy aid regulatory landscape relating to
matters of ownership and governance of banks and the concept of
'control".
It was noted that, between 2003 and October 2015, the
promoter holding was diluted from 61.5% to 33.71%, "primarily through
actions and activities of banking business." KM acknowledged that,"Only
a small reduction in percentage occurred on account of Mr. Uday Kotak
divesting a part of his shareholding, which was only done to avoid any
regulatory action against the Bank..."
68.
KM then requested RBJ to reconsider its advice / direction and to pennit
Mr. Kotak to hold his current stake of 33.7 1% and allow dilution to occur
in a non_disruptive mannex. RBI was also requested to keep its letter of
26.06.2012 in abeyance. It ought to be noted that although this letter noted
the 2011 Draft Guidelines, it made no reference to the Guidelines finally
issued in 2013, and which spoke of the PUVC concept.
69.
On 19 November 2015, pursuant to Ss. 12-B, 21 and 35-A of the BR Act,
the RBI issued its Prior Approval for Acquisition of Shares or Voting
Rights in Private Sector Banks DirectionS, 2015 ("2015 Prior Approval
OXDireCt10fls").
Direction 2 made these applicable
"to the exLsting and
.-, p ' roposed "major shareholder.c" of the Private Sector Banks and all
— - -) ) z/'r'vate Sector Banks including Local Area Banks licensed to operate in
(
/
°c
22

5-
India ', by RBI. As far as existing 'major shareholders" were ct neerned,
any rise in their holdings above 10% required RBI approval, inexplicably,
the Petitioners (wrongly) contend that these Directions applied only to
future acquisitions.
70. On 5 May 2016, RBI issued Draft Guidelines for On Tap Licensing of
Universal Banks in india ("2016 Draft On-Tap Guidelines"), retaining
the PUVC concept (with nearly identical thresholds) as were provided
under the 2013 Guidelines.
71. On 12 May 2016, RBI issued its Ownership in Private Sector Banks
Directors ("2016 Ownership Master Directions"). The Petitioners rely
on (a) c1auses5 and 7 thereof; (b) the retaining of the PUC concept therein;
and (c) their proximity in date to the 2016 Draft On-Tap Guidelines, to
suggest that RBI consciously applied the PUC concept to existing banks,
r and not PUVC. What they gloss over isthe express application to
"promoters being individuals and non-financial entities in existing banks",
of shareholding qualifications "in line with" the 2013 Guidelines.
72. On 2lJu1y 2016, RBI issued a further Notification u/S. 12(2) of the BR
Act, raising the ceiling on voting rights from 15% to 26%.
73. On 1 August 2016, R131 issued final Guidelines for On Tap Licensing of
Universal Banks in in the Private Sector ("2016 Final On-Tap
Guidelines"), retaining the PUVC concept. Petitioners once more (and
obviously incorrectly) seek to juxtapose these with the Draft On-Tap
Guidelines and the Ownership Master Guidelines, to contend that the same
exhibited a conscious decision by the RBI to apply PUVC only to new
banks, whilst retaining PUC for existing ones (like KM)
9 September 2016, KM wrote to the RBI stating that post its merger
ING Vysya, the promoter holding in the bank had come down to
23

4
33.6%. It noted that, under its "voluntary estimate", it was to bring this
down to 30% by 31.12.2016, but that this would entail new capital of
Rs.17,000 crores (in view of the steep rise in the bank's market
capitalization). It also noted the issuance of the Final On-Tap Guidelines,
and stated that it was evaluating the changes made thereby. In the
meantime, RBI was informed that, "...as discussed, we will not be
pursuing the interim estimate of 30% by December 31, 2016." 'Ar
75. On 18 November201O, RBI iespondedto the above letter, advising KM to
"comp7y with the interim target of 30%" by 3 1.12.2016, and "20% by
March 2018", as was committed in Kiv1s letter of 06.07.2012. It was also
advised that KM should bring down the holding to 15°/o by 31.03.2020, in
compliance with RBI's letter of 26.06.2012. It was further, and once again
recorded that, non-adherence to those timelines may invite regulatory
action as indicated in RBI's letter of 23,05.2014.
76. On 13 December 2016, K.M replied, seeking to "reaffirm our commitment
to work within the RBlframework and the law at all time,s." However, it
once more cited the rise iii market capitalization and contended that the
reduction targeted for 3 1.12.2016 was "an impossibility." It then noted the
changes to the laws and policies governing banks, acknowledging that,
although "(o)rdinarily, policy changes would apply to entities licensed
under the relevant policy but the P81 has been uniformly applying relevant
policy changes to both nei and existing banks." KM ended by reiterating
its letter of 19.09.20 16, and requested RBJ to also reconsider the tinielines
for March, 2018 and March, 2020.
77. On 29 December 2016, Ral wrote back stating that the matter was under
consideration.
24

78. On 30 January 2017, RBI wrote to KM informing it that, upon examining
the bank's request, it was being permitted to achieve dilution of
promoters' shareholding in the following manner:
(a) 30% by 30.06.2017 (instead of3l.12,2016);
(b) 20% by 31.12.2018 (instead of31.03.2Ol8) and
(c) 15% by 31.03.2020 (unchanged).
KM was notified that non-adherence to the above timelines would invite
regulatory restrictions, It was also suggested that the bank may explore
options such as sale of promoters' stake, infusion of capital by public
subscription, or mergers and acquisitions.
79. On 3 April 2017, KM wrote to RBI informing it that the above letter was
placed before the former's Board, and that it would "continue to work SO
that our promoter .chareholding could he diluted in a nondisruptive
manner." It noted that, that holding was now at 32%, pursuant to a
"secondary sale", by the promoters. The letter went on to note KM's
Board's approval of a "capital raise", to achieve a further 1% promoter
dilution, and efforts to increase FII/FPI headroom to enable investors to
acquire KM stock.
80. On 25 May 2017, KM notified RBI that its promoter shareholding now
stood at 30%.
81. On 12 February 2018,RBI wrote to KM, referring to the above letter and
advising the latter to submit details of the present promoter holding and
proposed course of action / plans / swategy to comply with the timelines
for dilution.
82. On 23 February 2018, KM replied noting that the matter was to be taken
up at a Board Meeting on 1('' at the promoter holding then
was '/ust below 30%".

.7 L
_-__..,NPrOmGters PUVC moved not an inch.
26
83. On 26 March 2018, KM wrote again to RBI, recording that it was
continuing "to evaluate its various business options ana its legal
obligations." It noted that any plans / action / strategy impacting
shareholding could only be disclosed once approved by the Board, and in
accordance with law, and that the same would be made "as may be
required by the Bank in discharge of its commercial, fiduciarj and lawful
obligations and requirements"
84. On 13'' April 2018, RBI wrote to KM recording, inter alia, as under:
".2. While we appreciate that it would be important to be
alive to the market sensitivities of any plans for bringiug the
promoter stake down, the purpose of our letter was to
underscore the fact that another milestone in this regard is
fast approaching and timely steps need to be taken by the
bank to avoid seeking extension of' time. We felt if
appropriate to convey this to you so that the board pursues
this matter for achieving the required outcomes in a timely
manner and conveys to us its commitment to achieve the
dilution as per the timelines stipulated.
"3. It may be added that any request for further exteirsion of
the tinelines to bring down the promoters' shareholding to
the required level will not be considered by the Reserve
Bank"
85. The next deadline for KM to reduce PUVC of its promoters (to 20% by
3 1.12.2018) was fast approaching. It knew it had not taken the necessary
steps to achieve that target (which it knew also, was binding). A failure
now would have put KM in a serious breach of the law. Consequently, in
August 2018, KMcame up with the novel ruse of issuing, by private
placement, PerpetualNon-cumulative Preference Shares ("PNCPS"), in
keeping with the Master Circular on Basel III Capital Regulations, of
01.07.2015 ("Basel III Capital Regulations"). The fact that the PNCPS
were merely an instrument to skirt KM's legal obligations, is clear from
the fact that, whilst these let it claini that dilution below 20% was
achieved, in reality, nothing could be further from the truth since, KM's

On 4 September 2018, KM responded to the Impugned Letter, recording
vents behind its decision to issue PNCPS, and claiming that it had
4 N,,
' (
the RBI of the issuance of the PNCPS soon after the decision of
< ,q C/S/ e
27
86. Moreover, the clandestine and unilateral manner in which KM went about
doing this, makes it clear that its only object was t.o attempt to present RB1
with afait accompli. It was for this reason that, on 13August 2018, RB!
issued a communication ("the Impugned Letter"), inter alia, recording as
follows:
".4. We note that the bank's Board of Directors approved the
proposal to raise funds by way of NCPS of up to Rs.500 crore in its
meeting held on May 19, 2018 and that this was reported to the
MGA. We also note that the Board, in its meeting on July 19, 2018,
was informed that the issue of PNGPS would, inter die, reduce
promoter shareholding to below 20% of paid up capital and that a
legal opinion in this regard was being obtained. The resolutions
passed in this regard were communicated to MCA.
"5.In the 4GM held on July 19, 2018, the matter of dilution of
promoter shareholding was discussed and a special resolution was
passed authorizing issue of NPS, for an amount not exceeding
Rs.500 crore. This was communicated to the stock exchanges on the
same day.
"6.However, the bank did not care to apprise Reserve Bank of these
developments, thus going back or. the assurance given in your letter
of March 26. We were informed of the PNCPS issue only after it was
completed. We have taken serious exception to this, which amounts
to willful non-disclosure of information sought by the Reserve Bank.
"7. The bank will be aware that the purpose of the dilution in
promoters' shareholding to the prescribed level of 15% of paid up
capital is to avoid concentration of control in the hands of the
promoters. This therefore requires dilution of voting shares.
Spec j/lcally, our Master Direction on Ownership in Private Banks
stipulates, in section 5(i) and the footnotes to the shareholding
matrix in section 6 of the Direction, that, for all existing banks, the
permitted promoter / promoter group shareholding will be in line
Nit/i what has been permitted in the February 22, 2013 uidelincs
on licensing of new banks in the private sector. These guidelines
clearly state that the dilution of shareholding shall be in respect of
paid-up voting equiy capital.
"8. Accordingly, the issue of PNCPS by the Bank does not alter the
percentage of paid-up vting equity capital in the hands of the
promoters, which is to be brought down to the stipulated limitsT
within the tjmeline communicated to the bank vide our letter dated
January 30, 2017.
"9.Please have this letter placed before the members of the Board of
the banlç for their perusal. in the next meeting of the Board."

the NC'PS Issuance Committee and again immediately upon allotment.
Consequently. our disclosures to RBI were in accordance with our letter
of March 26, 2018 and we have acted in a transparent, honest and legal
manner." It claimed that;
(a) The RBI had consistently communicated to it, and that it had always
understood and acted on the basis that, the promoter holding in KM
was to be a percentage of PUC, not PUVC.;
(b) The reference to PUVC in the Impugned Letter was the first time
RBI had made such a demand;
(c)
The applicable guidelines and directions, in relation to existing
banks, spoke always and only of PUC, not PUVC, and that the
reference to the 2013 Guidelines was inapplicable; and
(d) That, KM had received Legal Opinions to backup its claims.
88. Interestingly, however, KM yet felt the need to state, in para 17, as under:
17. It may be appreciated that over the years the shareholding of
the Bank's promoter has come down as a percentage of paid-up
capital in a nondisruptive manner and in accordance with law and
in compliance with the Bank's commercial, fiduciary and lawfid
obligations and requirements. When we received legal confirmation
that the issuance of the PN'PS would result in the shareholding of
the promoter coming down to 19.7% of paid-up capital well before
December 31, 2018 in a non-disruptive manner, it became an
additional factor for the Bank to undertake this issuance. We would
urge the RBJ to recognize our actions as compliant in law. Please
note that the Bank has always tried to work with the RB! and to
ensure that nothing should affect the standing and reputation of this
institution and its relationship with RBI."
89. On 24 September 2018, KM addressed another letter to RBI, inter alia,
reiterating its stand, and questioning the latter's policy on ownership as
disadvantageous to Indian ownership of Indian banks. It purported to
question the rationale behind the requirement for caps on "voting control",
contending that "sharcholding is not a relevant consideration for voting
control in the context of banks as voting rights have always been
separately capped...". KM, indeed, questioned the tire policy •
ework on the issuance of banking licences, as having "anomalies"
28

#-, IA •''I) I . A,
Q I '4w •'
.' t ,. "&7,3D' '.4e it.
:t
//6'
<r..
o51
Q 7' and its purpose, have been the subject-matter of Rules, Regulations and
(•_
1* I' .. - nes at least since 2013; and have been understood by KM to be
90, On 26 November 2018, KM wrote to individual members of the RBJ's
Board for Financial Supervision,reiterating its stand. Klvl even claimed
that the communications which the RBI claimed were not complied with,
were in the nature of an "advice" or "caution", and may not be binding on
banking companies, a position rutming counter to KM's own past conduct.
91. On 10 December 2018, the above Petition was filed seeking, inter alia, the
following reliefs:
(a) A writ of Certiorari qua all 8 Reduction Communications, as well as
the Impugned Letter;
(h) If not (a), then a writ of Mandamus to withdraw I cancel the said
Communications and Letter; and
(o If neither (a), nor (b), then a Mandamus declaring that the reduction
of promoter shareholding pursuant to the said Communications shall
be complied with, if achieved as a percentage of PUC, not PUVC,
"and not as sought to be done for the first time in the (Impugned
Letter)".
92. The facts narrated hereinabove clearly show that, parties have been in
correspondence right since 2004, on the very questions now raked up in
the Petition. Throughout this period, RBI has been consistent and
unequivocal about the settled position, and K1vI has never seriously
contested this. The very fact that the Petition challenges RBI's consistent
actions stretching back more than a decade, is itself telling. Moreover, and
in any event, I respectfully submif that, the capping of promoters' PUVC
holding is a measure that seeks to dissuade the concentration of power in
their hands, and to make private banks more democratic. Such capping,
29

93. The need for KM to challenge communications from the year 2008 is the
fact that, these are all based on the RBI's consistent understanding (which
heretofore were unchallengP.d by 1(M) that, any restriction on promoters'
holdings are, in the main, aimed at preventing the concentration of power,
and to ensure that private banks are not run as private fiefs. Where a
banking company has only ordinary equity shares (as KM had until its
issuance of the PNCPS), the effect of a reduction in a promoter's PUC
holding ipso facto reduced the concentration of PUVC in his hands. KM's
claim to have met the 31.12,2018 target by the issuance of PNCPS is,
therefore, both' mischievous and misconceived. Those shares hold no
voting rights. Thus, even if their issuance leads to a dilution in PUC, it has
no effect on promoters' PUVC holding — which is the correct milestone
KM had to achieve (and in respect of which it remains in defaule. KM
knew (and knows) this.
94. it is for this reason that it claims the relief for a declaration that "the
reduction of promoter shareholding pursuant to the Reduction
Communications shall stand complied with if achieved as a percentag of
the paid-up capital...and not the paid-up voting equity capital." This relief
itself demonstrates that even 1QvI understood the purport of the Reduction
Communications (right since 2008) was, in ultimate, to require a reduction
in its promoters' voting power.
95, Accordingly, I submit that, the present Petition also suffers from
inordinate, and entirely unexplained delay. Moreover, the Petitioners
having not challenged any of the Guidelines / Directions issued by the
RBI, at least since 2013, they ought not to be permitted now to question
mere correspondence which seeks to enforce the same. Setting aside the
(ifli Impugned Letter, or any of the Reduction Communications, shall not alter
(/4, /;:, 'c7
/1 /
', ' 'çt,he state of the law. The same would yet require the same caps on paid-up
i'
Z
- crj
30

C'
voting equity capital holding, and KivI's promoters shall remain bound by
the same.
96. It is far too well-settled that, a Writ Court is one of equity, and equity does
not allow the Court to issue injunctions which are of no use, or idle. Given
that, e'en absent the letters here challenged, Petitioner No. l's promoters
shall remain bound to give effect to the very directions contained therein,
coupled with the fact that, those promoters have deliberately not joined
Petitioners in filing this Petition (realizing that to do so would require
them to challenge the very Guidelines they have always professed to
honour and be bound by), RBI humbly submits that, the above Petition
deserves to be dismissed in lirnine, and with costs.
97. Strictly without prejudice to all that is aforesaid, I shall now very
concisely deal with the contents of the Petition, paragraph-wise. All
paragraph numbers hereinafter appearing are, therefore, reference to those
in the Petition (unless otherwise specified).
98. With reference to paragraphs 1 to 4, I say that the averments made by the
Petitioners therein are matters of record.
99. With reference to paragraph 5, it is submitted that neither the issuance of
the impugued communication by RBJ, nor that of any of the so-called
reduction communications, nor even any claimed action on its part, is
either arbitrary, or ultra vires. In fact, the actions under challenge arc
instructions issued in terms of the policies, guidelines on licensing and
directions on ownership in private sector banks, issued by RBI from time
to time, in exercise of powers conferred on it under the B R Act. These
policies and therelevant guidelines (which, as aforesaid, are not
themselves under challenge) are sector banks
including the Petitioner.
)
S
31

100. With reference to paragraph 6, it is submitted that in terms of the licensing
conditions imposed by RBI, at the time of issuance of license to the 1°
Petitioner, the "promoter's contribution shall be a minimum of 49 per cent
of the paid up capital. Promoter's contribution shall be locked in for a
minimum period offive years from the date of licensing of the bank The
promoter's holding in excess of the minimum proportion of 49%, shall be
diluted afier one year of the bank's operations." It is true that the RBI
communicated to the Petitioner vide its letters, as admitted by the
P.titioner, to dilute its promoters' shareholding and to adhere to the
licensing conditionG. These communications indicate that the Petitioner
bank was given sufficient time for dilution and time and again advised to
comply with the licensing conditions.
101. With reference to paragraph 7, it is submitted that the Petitioners have
tried to make cut a case that they have adhered to the conditions imposed
by the RBI and no lapse can be attributed to them. In this regard, it is
submitted that until the B R Act was amended in January 2013, sub-
section 12(1)(ii) excluded 'preference shares' (except those issued before
July 1, 1944) from the capital of a banking company. Hence, from the
issue of license in 2003, until the aforesaid amendment, the
communications exchanged with the Petitioner bank regarding reduction
in the percentage of promoters' shareholding in terms of 'paid up capital'
were within the limited context of reduction in the percentage of equity
shares only.
102. Moreover, and importantly, during the span of several years prior to
January 2013, there were repeated requests by the Petitioner bank for
extension of time to comply with the required reduction in percentage
of shareholding. These were coupled with assurances given by the

'paid up capital' meant when these assurances were given. It is,
thexefore, crystal clear that these assurances were given in relation to
the percentage of holding of 'equity shares' alone, and not any other
class of shares. Petitioner No. 1, in fact, had no other class of shares.
Consequently, any reduction in PUC ipso facto reduced PUVC.
103. Subsequent to the amendments to the BR Act, RBI in 2013, issued
'Guidelines for Licensing of New Banks in the Private Sector' and the
'Master Direction (MD) on Ownership in Private Banks' dated May 12,
2016. rhese Directions, inter alia, stipulated that, for all existing
banks, the permitted promoter I promoter group shareholding v,ill be in
line with what has been permitted in the February 22, 2013 guidelines
on licensing of new banks in the private sector. These new bank
guidelines clearly stated that the dilution of shareholding shall be in
respect of "paid-up voting equity capital".As on the date of issue of the
MD in May 2016, the Petitioner bank fell under the category of an
'existing bank'.
104. Furthermore, it is also necessary to reiterate that the Petitioner bank had
no other class of shares except 'Equity shares' till July 2018, when it
amended its Memorandum and Articles of Association ("MoA" and
"AoA") to issue 'preference shares', to enhance its authorised capital
and to include 'preference shares' in its authorised capital. Before this
amendment of the MoA and AoA, the entire capital of the Petitioner
bank consisted of only 'equity shares' and thus the entire capital was
considered as 'voting equity capital'. There was, therefore, no occasion
to have to convey to the Petitioner bank that reduction of promoter
shareholding had to be a percentage of "paid-up voting equity capital".
only after the amendment in the MoA and AoA that capital of
titioner bank came to have two different components i.e. 'voting
Ois e,
capital' (equity shares) and 'non-voting equity capital'
33

(preference shares). This was the reason for making explicit use of the
word 'paid up voting equity capital', since August 2018. It is further
submitted that, RBI, therefore, did not issue a letter to the Petitioner
bank, until after amendment to its AoA and MoA, referring explicitly to
'paid up voting equity capital'. Petitioners conveniently ignore the fact
that, their own shareholding structure meant that a reference to 'paid up
capitaY meant nothing but 'paid up voting equity capital', in law and in
spirit, until such time as the bank issued preference shares, during
August 2018.
105, 1 further submit that, diversified shareholding results in voting rights being
distributed among shareholders and thereby avoids concenatiOfl of
control. Section 12(2) of the BR Act complements this broader objective
by providing only for a ceiling for voting rights. Even in 2001, vihen the
initial holding was 49%, voting rights were capped at 10/0.Tbe objective
of allowing the higher shareholding of around 49% and a lock-in of 5
years was to ensure that the promoters had sufficient skin in the game in
the formative stages of the bank to influence the functioning of the bank
irrespective of the fact that voting rights were capped at 10%.
106. I say that, at each step, the submissions made by the Petitioner bank, in
relation to its request for extension of time were examined carefully and
the Petitioner bank was advised that its promoters' stake should be brought
down to 20% of the PUC by March 31, 2018, (thereby giving a longer
period of 15 years from the date of licensing, than the 12 years
contemplated under the new bank guidelines then being drafted). A further
period of 2 years, up to March 31, 2020, was
promoters' shareholding from 20% to 10% or
depending upon the prescription in the new
Petitioner bank was also, once again, advised to
allowed to reduce the
such other percentage
bank guidelines. The
submit a road map for
34

dilution of its promoters' stake urgently. Thus, the Petitioner bank was
given several opportunities to meet the requirements of RBI.
107. That said, and with reference to paragraphs 8 and 9, it is denied that the
letter dated 13 August 2018 is at all arbitrary, illegal or unreas',nable, or
that any of its contents were arrived at on the basis of a retrospective /
illegal / impermissible application of any Guidelines issued by the RBI.It
is denied that the fact that bringing down of promoter shareholding limits
concentration of control in the hands of promoters is at all misconceived,
arbitrary or unreasonable. It is denied that the same is a matter of "belief"
or "assumption".
108. With further reference to paragraph 9, it is denied that the Rejection
Communications or the 2018 RBI Letter are inconsistent with the RBI's
own policies or directions; or that the same bear no nexus with the object
sought to be achieved by those policies and directions; or that the same are
contrary to the objects, purposes or provisions of the BR Act; or that they
are in any way arbitrary, unreasonable, illegal, without authority of law,
ultra vires, unconstitutional o bad in law.
109. With reference to paragraph 10, its contents are essentially legal
submissions based on an "erroneous" interpretation of Sections 12 and 12-
B of the BR Act. I, therefore, crave leave to make appropriate
submissions thereon, at the hearing of the Petition. For the present,
however, I deny that either the Reduction Communications or the 2018
RBI letter contain any directions which go beyond the scope and/or ambit
of those Sections, or that for this or any other reason, the same are ultra
vires the. BR Act.
With reference to paragraphs 11 to 14, the averments made therein are
c ircly speculative and Petitioners submissions/allegations based therkn,'
' "p . .. .
' a .aseless and/or plainly false. The Petitioners have chosen to raise these
4, 4$' f '"1
?4,;
35

t1j
arguments after over 15 years only because during that period they have
continued to drag their feet in the matter of compliance with the RBI's
directions. The facts stated hereinabove; clearly show that at each step the
RBI's stand has been consistent, and was not, at the relevant time,
questioned by the Petitioners. They repeatedly sought extensions of time
to comply with those directions. The contents of the paragraphs under
reply are neither new nor novel. 'I'hese, as shall be evident from what is
stated earlier raised over a decade, have been consistently rejected, and
which rejections, the Petitioners did not challenge until it became clear to
them that they would miss yet another deadline (i.e. of 20 per cent of
bringing PUVC below 20 per cent by 3l' December, 2018).
111. Each of the submissions raised in the paragraphs under reply have been
answered point by point by the R131 as far back as in June, 2012. The RBI
went to the extent of granting extension after extension, even agreeing that
the date for bringing Petitioner No. l's promoter shareholding to 15 per
cent shall be deferred to 3 15 March, 2020. Not only did the Petitioners
miss extended deadlines but they now seek to turn a virtue into a vice by
suggesting that the RBI's actions challenged in the Petition would either
put Indian Banks into foreign hands or lead to concentration of voting
powers with ibreign proxy advisors or would •force Petitioner No. I to
become a foreign institution. Each of these suggestions is denied.
112. In any event, I submit that this is scaremongering without any basis.
Petitioner No. I is a listed companyand its shares are freely traded on the
Stock Exchanges. The non-promoter holding is 69.99% (as on December
31, 2018). This Petition is not interested in retaining Indian ownership. It
seeks to perpetuate "Promoter" ownership. It is, therefore, also denied that
any part of Reduction Communications or the 2018 RBI letter is
,-zQNi - easonable or arbitrary or that compliance with the same wo44be in the
./,, _ th of public interest rather than in furtherance of it.
. ( a.g> cg
N /o//
r'

0r7.Thus, it would be clear that, these guidelines were for acquisition or
of shares and not for the acknowledgement of holding by existing
era. The 'Independent Advisory Committee', referred to by the
37
C
113. With reference to paragraphl5, I say that the contents are formal in nature.
114. With reference to paragraphs 16 to 74 of the Petition, I say that these
purport to contain a narration of the facts of the case. I have already,
hereinabove, set out those facts in their entirety and demonstrated how the
inferences which the Petitioners seek to draw from those facts, are
unsustainable both in fact and in law. I, therefore, merely repeat and
reiterate what is stated by me in the earlier paragraphs and deny all that is
contrary thereto, or inconsistent therewith in the paragraphs under reply.
115. Without prejudice to the aforesaid, where necessary, I have hereinafler set
out RBI's stand on the contentions raised by the Petitioners in the said
paragraphs under reply. Save and except for what I have stated herein, the
contents of those paragraphs are denied in their entirety.
116. As far as the constitution of the independent Advisory Committee is
concerned, I say that in paragraph 12 of the 'Guidelines for
acknowledgement of transfer/allotment of shares of private sector banks'
issued in 2004, it was mentioned that;
"12, The RBI will conslitute an independent Advisory Committee
which will make appropriate recommendations to P21 for dealing
with applications for grant of acknowledgement as indicated in
paragraph 4 above."
Paragraph 4 of the guidelines read as:
4, As hitherto, aclrnowledgement from RBI for acquisition/transfer
ofshares will be requiredfor all cases of acquisition ofshares which
will take the aggregate holding of an individual or group to
equivalent of 5 percent or more of the paid-up capital of the bank
RB! while granting acknowledgement may require such
acknowledgement to be obtained for subsequent acquisition at any
higher threshold as may be spec ffled.

___ ..:O'>çthe issuance of the O&G Guidelines which is yet to comply with the
/1
/
/-:.
.
c!.1 .
38
Petitioner bank was to make recommendations to RBI, wheth.r to want
acknowledgement or not, for the acquisition/transfer of shares in a private
sector bank, exceeding 5% and not to deal with clarifications on policy
including holding by existing promoters.
118. It is important to note that the requests of the bank for seeking time or
extending timeline for achieving dilution targets were considered
sympathetically on several occasions and the Petitioner bank has been
allowed sufficient time for dilution of its promoters' shareholdirig. Further,
intermediate targets were prescribed to provide a glide path and obviate
the need for too large a dilution towards the end of the timeline. As such,
the Petitioner bank's allegation thai the dilution has been compelled within
a short period of four months is totally devoid of truth. In any case, the
Petitioners are not, even in the Petition, seeking time for compliance. It is,
in effect, asserting that its subterfuge is compliance.
119. It is further submitted that in May 2005, subsequent to the istivance of the
O&G guidelines in February 2005, a review was undertaken to assess the
status of the compliance of all private sector banks with the guidelines.
Based on the review, 3private sector banks, other than Petitioner bank,
with promoters' shareholdirig of greater than 10%, which were not held by
well regulated, widely he!d financial institutions or by government/public
sector entities, were pursued for dilution of the promoters' stake.
120. Out of these 3 banks, DCB Bank Ltd. and Indusind Bank achieved the
dilution of promoters' shareholding to below 15%. In respect of YES
Bank, which was licensed in 2001 along with Petitioner No. 1 and had a
promoter shareholding of 72.20% at inception, the same was brought
down to 19.91% as on September 30, 2018. Thus Petitioner No. I is the
only bank in the entire bankine industry which was in existence at the time

directions of RBI for dilution of promoter shareholdin No individual or
group of individuals has been allowed to have shareholding in excess of
10% in a bank. Petitioner bank is the only bank with an individual holding
equity shares over 10%. If anything, it could be argued by other banks that
the FBi's sympathetic attitude to Petitioner No. 1 has enabled the latter to
deny a level playing field to its competitors.
121. With specific reference to paragraph 47, it is submitted that, Section 2 of
the'Prior Approval for acquisition of Shares or Voting Rights in Private
Sector Banks: Directions, 2015' ("2015 Acquisition Directions") reads as
under:
"2. Applicability - The provisions of these Directions shall
apply to the existing and proposed "ma/or shareholders" of the
Private Sector Banks and all Private Sector Banks"
The definitions of 'Aggregate holding", major shareholder', and related
definitions are as under:
Section 3 'i,) rb,) "Acquisition" means the act of acquiringShares
orcompulsorilyconvertihie preference shares / debentures / bonds,
orvoting rights, orconverting of optionally convertible ; reference
shares / debentures / bonds, or o combination of the above, through
purcha.se or transfer. in apri vale sector bank."
Section 3 (V ('e,) -"Aggregate holding" means the total holding
including through "acquisition" nd shares or compulsorily
convertible debentures / bonds or voting rights held by the
applicant, his relatives, associate enterprises and persons acting in
concert with him in the concerned bank. The aggregate holding will
also include optionally convertible preference shares / debentures /
bonds ([the option of conversion is proposed to be exercised.
In case of compulsorily convertible preference shares / debentures /
bonds, the computation of holding in this respect will be as if the
event of conversion has occurred and as such, the quantum of these
Instruments shall be included in "aggregate holding" and also to the
paid-up share capital of the bank
In case of optionally convertible preference shares / debentures /
bonds also, the computation of holding will be the same as indicated
for compulsorily convertible preference shares / debentures / bonds,
([the option of conversion is proposed to be exercised.
ction 3 (1) (i) - "Major shareholder" means shareholder having /
ikely to have an "aggregate holding" to the extent of 5 per cent
39

or more of the paid-up share capital of the bank or S per cent or
more of the total voting rights of the concerned bank.
It is thus clear that the Prior Approval for acquisition of Shares or Voting
Rights in Private Sector Banks: Directions, 2015' ("2015 Acquisition
Directions') are applicable to existing banks as well.
122. With ftirther reference to paragraphs 48 to 52, it is subniitted that the
Petitioner bank has, on its, own, self-serving interpretation, sought to
misconstrue the provisions of the Master Direction on 'Ownership in
Private Sector Banks, Directions, 2016 dated May 12, 2016', and has
intentionally avoided references to critical provisions of the Master
Directions which were applicable to it. Some of these provisions are
detailed below.
123. Section 11 of the Master Direction — Ownership in Private Sector
Banks, Directions, 2016 dated May 12, 2016 [which was issued by RBI
exercising powers conferred by the Second proviso to Section 12(B)(2)
of the Banking Regulation Act, 1949] deals with 'Transition
arrangements' and, inter a/ia, in sub -section (iii) of section 11, the
same Master Direction states that:
In the case of existinZ.jjriVate sector banks, t'ü() where any
promo rer/ promoter group has shareholding in excess of 15 per
cent and timelines have a/ready been stipulated by RBI /j_r
bringing it down to 10 per cent such timelines sha!l continue to
apply forbringing the shareho/ding down to 15 per cent,
124. It may be noted that the Petitioner bank is. squarely covered under this
provision of the Master Direction since at the time of its issuance, it
had promoter shareholding in excess of 15 per cent and tirnelines had
already been stipulated by RBI for bringing it down to 10 1.cent vide
para 2(i) of its letter dated June 26, 2012.
urther in line with the prescription in the new bank guidelines ('new
licensing guidelines issued on February 22, 2013) vide para 2 of
•.•:<'
4k to(a,
N ,.p
F',.
d N
40

L3
RBI letter dated November 18, 2016, the Petitioner bank was, intci'
alia, advised that the bank should bring down the promoters'
shareholding to 15% by March 31, 2020 (as against earlier target of
10%).
126. Thus, it is clear that as per the Master Direction dated May 12, 2016
such timelines were continued to be applied for bringing the
shareholding down to 15 per cent by Petitioner No.] .Sub section (i) of
section 5 of this Master Direction, inter alia, states that
(1) In the case of individuals and non-financial entities (other than
promoters /promoter group), the limit shall be JO per cen! of the
paid up capital. However, in case of promoters being individuals
and non-financial entities in existing banks the permitted promoter /
promoter group shareholding shaJi.e in line with permitted level in
the February 22, 2013 14-uidelines on licensing of universal banks
viz. 15 per cent.
Moreover, in the first footnote to Cl. 4(B) (shareho1ding matrix) in
section 6 of the same Master Direction, it is stated that:
"For a/I existing banks, the permitted promoter / promoter group
shareholding will be in line with what has been permitted in the
February 22, 2013 guidelines on licensing of universal banks viz. 15
per cent."
127. It is amply clear that in Pedtioner bank's case, because it was an
existing bank as on the date of issuance of these Master Directions and
promoters were individuals and non-financial entities, the shareholding
was to be in line with permitted level in the February 22, 2013
guidelines on licensing of new banks viz. 15 per cent. It is also critical
to note here that, in paragraph 2(D) of the February 22, 2013 guidelines
on licensing of new banks, which deals with 'Minimum voting equity
-.
capital requirements for banks and shareholding by NOFHC', the RBI
._.__.4'as particular in its consistent use of the phrase "paid-up voting equity
"and not "paid-up capital" or "paid-up equity capital".
41

128. It is further submitted that first, nowhere in the 'Guidelines for 'on tap'
Licensing of Universal Banks in the l'rivate Sector' dated August 1,
2016, it is specified that these guidelines are applicable to new banks
licensed under these guidelines only and not to existing banks. Second,
as clarified above, various provisions (particularly regarding limits on
stake of promoters) of the 'Licensing Guidelines of 2013' were
applicable to Petitioner No. 1, Third, Petitioner No. 1 was and is bound
to follow the instructions/directions provided in the Master Directions
of May 12, 2016, as these were issued by RBI exercising powers
conferred by the Second proviso to Section 12(B)(2) of the Banking
Regulation Act, 1949. Fourth, it also needs to be clarified here that
Petitioner No. 1 can neither say that new conditions cannot be imposed
on it by RBI nor can it interpret the RBI guideiines/directions, as per its
own convenience.
129. With further reference to paragraph 53, it is submitted that by quoting the
reasons of 'huge market capitalization' as an alleged hindrance in dilution
of promotes' stake, the Petitioner bank merely tries once more to buy
some time. At other times, the Petitioner bank gave reasons of 'volatility',
global slowdown, etc. for its failure to adhere to the REI's dilution
schedule. At certain other times, it sought to buy time through repeatedly
seeking clarifications, submitting its own versions/opinions on RBI 0
guidelinesf directions. Overall, these tactics were nothing but a way to run
down the clock. Any increase in the amount of capital involved, due to
increase in market capitalization of Petitioner No. 1 (which calculations I
do not admit), is a direct consequence of its repeated failure to meet the
dilution timelines, repeatedly extended at its request, over the years.
Surely, Petitioners cannot he permitted to take advantage of thir own
wrongs.
42,

130. With specific reference to paragraph 61, it is submitted that though the
Petitioner bank undertook to disclose plans to RBI, no such plan was ever
disclosed.
131. With further reference to paragraphs 62 to 64, it may be noted that the
Board of Directors of the Petitioner bank had approved the proposal to
raise funds by issue of PNCPS of up to Rs.5,000 million, in its meeting
held on May 19, 2018 and this was reported to the Ministry of Corporate
Affairs (MCA). Further, the Board, in its meeting on July 19, 2018, was
informed that the issue of PNCPS would, inter alia, reduce promoter
shareholding to below 20% of its PUC and that a legal opinion in this
regard was being obtained. The rcsoiutions passed in this regard were
communicated to MCA. In the AGM held on July 19, 2018, the matter of
dilution of promoter shareholding was discussed and a special resolution
was passed authorizing issue of PNCPS, for an amount not exceeding
Rs.5,000 million. These three developments were not informed to RBI
contrary to the assurance given in the letter of March0 2018.
132. Before August 2, 2018 (date when die PNCPS was issued), the Petitioner
bank did not duly disclose to RBI its intention to use this tool as means of
dilution of promoter's shareholding. E'en when it approached RBI for
amendments to its AoA and MoA in the month of May 2018 for issuance
of preference shares to raise its authorizcd capital, it did not indicate that
the instrument was going to he issued with an objective of dilution (and
not with the alleged primary objective to diversify sources of funding, as
stated by the bank).
133. Notwithstanding that, the Petitioner bank had, at different times, sought to
" 0 7 postpone the timehnes prescribed under the dilution schedule, based on an
*
4 4, ' dependent study of the prevailing economic I market situation at specific
vrt,ô ;
4 q'.
'? d7 , e, the RBI took a considerate view and extended deadlines. However, it
.2 1
43

may be noted that bank was iiQ given only a short window of 3 months or
3 years to bring down holding of promoters (as alleged by Petitioner No.
1) but as much as about 10 years to bring it down to 20% and about 12
years to bring it down to 15% (from the end of lock-in of 49% in 2008).
Thus, the contention of the Petitioner bank that it was given a short period,
for bringing down the promoters' holding, is untenable and mirleading.
134. That said, I do not admit that it was as a part of any "strategy to diversify
its funding sources to optimize its mix of liabilities", that Petitioner No. 1
undertook the issuance of the PNCPS. This claim, in fact, is belied by the
entire Petition, the whole purpose of which is to urge that the "dilution"
allegedly brought about by those PNCPS was so that "the reduction of
promoter shareholding pursuant to the Reduction communications shall
stand complied with f achieved as a percentage of the paid-up
capital...and not the paid-up voting equiPy capitaL" I also do not admit
that the issuance of the PNCPS has led to Petitioner No. l's promoters'
shar.eholding being reduced to 19.70%.
135. With further reference to paragraphs 65 and 66, the averments made by the
Petitioner bank are denied. A reference to "Exhibit PP-l" as filed by the
Petitioners would show that they have conveniently removed the mail id of
the recipient. The Petitioners are, therefore, put to strict proof of their
claim to have informed / appraised the RBI of ts actions. It is submitted
that the Petitnlner bank is well aware that the Department of Banking
Regulation [DBR or erstwhile DBOD} is the Department which handles
the issuance of licenses, operations of banks, dilution of promoters'
shareholding, etc. Knowing fully that DI3R of P31 is the Department with
whom the Petitioner is in constant touch for the last 14 years, it would
have been that Department which ought to have been consulted. However,
titioner No. I, with ma/a fide intent, sent a mail on August 2, 2018 at
7 AM to another officer of the RBI who is not invo1ved..vih the work
44

relating to DBR of RBI. A copy of the mail sent to Shri R K Mona,
General Manager is annexed as Exhibit ". This act of the Petitioner
bank clearly establishes how it tried to take the Regulator for a ride and
the conduct of the Petitioner bark amply demonstrates the scant regard it
has for the statutory regulations stipulated by the RBI.
136. Indeed, the entire manner in which Petitioner no. I proceeded with the
issuance of the PNCPS indicates that it did not want to give any time to
the Regulator to examine the issue and intervene in a timely manner. As
admitted by the Petitioner bank, the Board of Directors of the Petitioner
bank had approved the proposal to raise fimds by way of Non-Convertible
Preference Shares (NCPS) of up to Rs.500 crore in its meeting held on
May 19, 2018 and a resolution was passed, which was repoited to the
MCA. Further, the Board, in its meeting on July 19, 2018, was informed
that the issue of Perpetual Non-Convertible Preference Shares (PNCPS)
would, inter ella, reduce promoter shareholding to below 20% of paid up
capital and that a legal opinion in this regard was being obtained. The
resolutions passed in this regard were communicated to MCA.
137. In the AGM held on July 19, 2018, the matter of dilution of promoter
shareholding was discussed and a special resolution was passed
authorizing issue of PNCPS, for an amount not exceeding Rs.500 crore. At
no point of time did the Petitioner hank think fit to inform the RBI about
these developments, giving, I submit, the lie to Petitioners' claims that this
was for any "strategy" of "diversification".
138. The contents of paragraphs 7 to 74 are references to correspondence. I
.merely reiterate the contents of the letters / communications addressed by
0 7' e RBI and deny what is stated in the letters of the Petitioners as being
I also crave leave of this Hon'ble Court to make appropriate
ions in that behalf, at the hearing. However, with specific
45

reference to paragraphs 73 and 74. it is submitted that the BFS is
statutorily constituted, under the Reserve Bank of India (Board for
Financial Supervision) Regulations, 1994, and is not an adjudicating
authority in relation to disputes between the RBI and its regulated entities.
And therefore, there was no question of the Board giving a "personal
hearing" to Petitioner No. 1.
139. With reference to paragraphs75 and 76, I deny that the BR Act does not
empower the RBI to require a Bank to reduce its promoter shareholding or
to require such promoters to reduce their shareholding in the Bank. The
Petitioners' contentions in relation to the Banking Regulation Act are
therefore denied entirely. It is denied that the communications from the
RBI to Petitioner No.1 in relation to the reduction of its promoter
shareholding was not within its powers under the BR Act. It is denied that
Petitioner No, I has always acted in accordance with its commercial, legal
or fiduciary obligations including while issuing PNCPS. It is denied that
Petitioner No. I is in complete compliance with law. it is denied that
Petitioner No. 1 has met the milestone specified by the RBI. It is denied
that the RBI is now for the first time insisting on reduction of promoter
shnreholding as a percentage of 'paid—up voting equity capital" or that
such a requirement is ccntrary either to law or to fact.
140. With reference to paragraph 77, 1 offer no comment save and except to say
that Petitioner No. 1 has clearly not been in compliance with its
commercial, fiduciary and lawful obligations or requirements. It is denied
that it was in line with any alleged business philosophy that Petitioner No.
1 selected to issue the PNCPS. It is denied that the PNCPS was an attempt
of Petitioner No. I to harmonise business requirements with
communications from its regulator. Indeed, this contention is nothing but a
veiled admission that the PNCPS were instruments to evade full
compliance with the Regulators mandate and were therefore issued
46
:2'

and the spirit of Sections 12 and 12-B of the BR Act. The
etitioners interpret those sectionsas pertaining onlv to the goal of
47
letter
crn?h.W aq -<
Oi
N0,
specifically for the purpose of evading Petitioner No. l's obligations in
law.
141. With reference to paragraph 78, it is denied that the impugned Reduction
Communications or the 2018 RBI letter are; or that any actions 'hich the
RBI may take pursuant thereto, shall be, without jurisdiction, illegal, ultra
vires the BR Act, unreasonable, arbitrary, unfair, without authority of law
or unconstitutional,
142. I shall now, very concisely, deal with the Grounds set out in the Petition.
Before doing so, I wish to make the following, prefatory comments:
(a) Most, if not all, Grounds are questions / matters of law. These will
be responded to at the time of arguments — rio pleading on law is
necessary;
(b) What is set out above, in any event, significantly covers / touches
upon the Grounds I therefore repeat, reiterate and confirm the same;
(c For the avoidance of doubt, however, I make it clear that the RBI
contests the tenability of the said grounds (including as to any
question of "legitimate expectation" on the part of the Petitioners),
whether in the manner in which they have been raised, or at all; and
(d) The substance of the Grounds is, however, briefly commented
upon below.
143. Isay that the contents of Grounds (A) to (W) are entirely in the nature of
legal submissions. These, therefore, do not merit specific traverse as a part
of this reply. Being legal grounds or arguments, 1 crave leave to address
the same at the time of the hearing of this Petition.
144. The Petitioners' central argument is that, the impugned Reduction
Communications and the 2018 RBI Letter, run contrary to both the

"e'lsur(ing) that control of banking companies is in the hands offit and
proper persons", and as having nothing to do with the regulation of
banks' capital, and shareholding and voting rights of shareholders
generally.
145. 1 respectfully submit that the Petitioners' interpretation is not correct,
and is an erroneous oversimplification of those statutory pro'iisions.
146. Sections 12 and 12-B occur in Part II of the BR Act; a part that is
compendiously titled "Business ofBanking Companies". The provisions
in that Part of the Act set up, together, a comprehensive framework
governing the carrying on of the "business of banking". Any company
which "transects" such business, must do so within that framework
alone. The subject of k2S12, Sections 12 and 12-B are, therefore, banking
companies themselves, and particular shareholders in such
companies.
147. Section 12 ("Regulation of paid-up capital, subscribed capital and
authorised capital and voting rights of shareholders") therefore,
contains a general bar to the effect that, "No banking company shall
carry on business in India, unless it satisfies the... conditions
(prescribed in the said Section)". Sub-section (2) thexi prescribes a
further, general bar, by providing that, "No person" who holds shares in
a banking company can, in respect of "any shares" held by him,
exercise voting rights in excess of "ten per cent of the total voting
rights of all the shareholders ef the banking company." (Underlining
supplied.) The statute, therefore, could not be clearer in spelling out its
general policy: "No person" (irrespective of his fitness or propriety)
may exercise voting rights in a banking company above a ceiling of
10%.
48

' 0 t Section 35-A of the BR Act gives the REI powers of the widest
4 qw
,9 O/
T 0c "
litude, to issue directions both generally, or to any particular
ing company, if RBI deems this to be (a) in the public interest; or
in the interest of banking policy [as compendiously defined in
148. That the 10% figure is a "ceiling" (i.e. setting a maximum limit) is
underscored by the proviso to the sub-section which permits the RBI to
raise "such ceiling" up to 26%. The legislature also thought it fit to give
the R131 the power to extend this ceiling upto 26%,The clear legislative
intent of Section 12, therefore, is to (a) introduce a ceiling; (b) give
RBI a right to raise it upto a limit; and (c) make this "ceiling"
applicable to exercise of voting rights. It was not, and is not, the
proviso's intendment, to create any vested right in promoters to insist
that they must, in all cases, be permitted to exercise the full extent of
the ceiling of voting rights, in violation of other provisions of the Act
and directions issued thereunder. Section 12 andthe ceiling therein
mtist, therefore, be read harmoniously with other provisions of the BR
Act.
149. This is particularly because, the BR Act and Rules / Regulations made
thereunder, also contain provisions for promoter shareholuing, and
particularly, limits on shareholding and voting rights. Promoters'
shareholding limits and promoters' voting rights limits depend on
diverse factors, e.g. existing I new banks; lock-in period, etc. Therefore,
provisions dealing with "persons" and "exercise of voting rights" dc
not operate to render other provisions dealing with promoter
shareholding (including voting equity shares) nugatory or otiose,
150. Read correctly, therefore, Section 12(2) itself, sufficiently empowers
the RBI to regulate the extent of voting rights of any person "holding
shares in a banking company". Section 12-B of the Act does not, in any
manner, dilute the RBI's authority in that behalf. On the other hand,
So
49

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