Kotak Donated Rs 60 crore To BJP Amid Crucial Decisions By RBI On Kotak Mahindra Bank

The electoral bond data released by the Election Commission has brought attention to Kotak Mahindra Bank and its chairman, Uday Kotak. A report by Scroll.in highlights that the bank’s subsidiary, Infina Finance Private Limited, purchased electoral bonds worth a significant amount of Rs 35 crore to the Bharatiya Janata Party (BJP) in the months preceding key settlements and policy decisions. The firm did not donate money to any other political party.

The backdrop of this story includes a long-standing dispute between Uday Kotal and the Reserve Bank of India (RBI). The conflict stemmed from the RBI’s guidelines capping promoter stakes in private banks at 15 percent within 12 years of beginning the business, which Kotak Mahindra Bank allegedly exceeded. The promoter group had to trim its stake in Kotak Mahindra Bank from 44.96 percent in 2013 to 15 percent in 2015 since it received its licence in 2003.

But by 2015, the promoter group still had a stake of 40.02 percent, with 39.65 percent remaining with Kotak himself. Despite the RBI asking it to trim it down in February 2017, the private bank only slashed its stake by 29.79 percent by May. In August 2018, the private bank suggested diluting the promoter stakes by issuing non-cumulative preference shares, a method that allows investors to receive dividends on profits before they are distributed among common shareholders. However, the RBI rejected the proposal, citing that it would not dilute the promoters’ control.

In December 2018, the private bank took the matter to court, challenging the RBI’s rejection, culminating in an out-of-court settlement in January 2020. RBI accepted to reduce the promoter stake cap to 26 percent within six months, foregoing the previous 15 percent cap.

During the months leading up to this settlement, Infina Finance, jointly owned by Kotak Mahindra Bank and the Kotak family, made Rs 35 crore worth of electoral bond donations to the BJP. Of this, Rs 25 crore worth of bonds, bought on October 10, 2019, were encashed by the ruling party on October 16, 2019. Notably, Rs 10 crore was donated on January 16, 2020, just days before the settlement announcement. The BJP encashed these on January 21, 2020, eight days before the RBI accepted Kotak’s proposal on decreasing the promoter’s stake.

The peculiar chain of events has raised eyebrows, particularly regarding the timing of these donations. However, former Finance Secretary Subhash Chandra Garg dismissed direct connections, calling them “far-fetched,” as quoted by Scroll.in.

The RBI’s subsequent policy changes regarding CEO tenures in private banks added another layer to the controversy. The RBI proposed that a promoter’s tenure to remain CEO or the whole-time director of a bank should be limited to 10 years in June 2020. Uday Kotak, who had already served as CEO for 17 years, received a three-year extension in December 2020, despite the proposed tenure restrictions. The proposed policy came into effect on April 26, 2021, with the exception that promoter CEOs of private banks could have a tenure of 12 to 15 years. It also allowed an exception for those who had already received extensions. Despite the policy, Uday Kotak could remain in the CEO and MD positions at Kotak Mahindra Bank, states Scroll.in.

Apart from Kotak, the Federal Bank’s Shyam Srinivasan and DCB Bank’s Murali Natarajan were also granted tenure extensions. But the RBI only granted them an extension of one year, while Kotak got three years.

The Reserve Bank’s decision to allow exceptions for certain CEOs, including Kotak, coincided with Infina Finance’s electoral bond purchases. Infina Finance bought electoral bonds worth Rs 25 crore on April 7, 2021. Five days later, the sum was credited to the BJP. Fourteen days later, the RBI announced its policy.

The scrutiny surrounding these events has highlighted broader concerns about transparency, corporate governance, and the nexus between political contributions and regulatory decisions. Critics argue that such instances erode public trust and raise questions about the autonomy of regulatory bodies.

On September 1, 2023, Uday Kotak stepped down from his role as managing director and CEO of Kotak Mahindra Bank, India’s third largest private sector bank, four months before the extension ended. Uday Kotak still holds a 25.71 percent stake in the bank.