Why Uday Kotak Wants To Stay Around At The Bank He Founded, After Retirement

Last Friday, 99.088% of the 9,866 shareholders voted in favour of appointing Uday Kotak as a non-executive, non-independent director on the board of Kotak Mahindra Bank once he retires as the top boss in December. The shareholder approval is valid for five years, and Kotak would not be liable for retirement by rotation.

The move to seek reappointment as a board member came after the Reserve Bank of India, in April 2021, fixed rules on the tenures of managing directors and chief executive officers of private banks.

In its resolution, the bank talks about the current volatility in the global economy, India's target to be a $5 trillion economy, and the role Kotak Mahindra Bank will play in all this.

"It is therefore of significant importance and critical for the board of the bank to have the continued benefit of Mr. Kotak’s expertise, contribution, and guidance in a non-executive capacity after he ceases to be the managing director and CEO," the resolution stated. The bank also stated that Kotak had given his consent to continue on the board after his retirement.

In its guidelines, the regulator stated that founder CEOs, like Kotak, can continue at the bank's corner office for 12 years. The tenure can be extended only once by three years if the RBI agrees that it is in the best interest of the bank. Those CEOs whose tenures had already exceeded this limit at the time of the guidelines were allowed to finish their current terms.

If they want to seek reappointment as CEOs after that, they are expected to go on a three-year cooling-off period where they can't be directly or indirectly linked to the lender. All this would be subject to a maximum age cap of 70 years.

Kotak, 64, founded Kotak Mahindra Finance Ltd. in 1985 as a bill discounting business. In 2003, Kotak Mahindra became one of the two entities to get a universal banking licence. In 2023, Kotak will complete 20 years at the helm.

The regulator, in its guidelines, however, did not specify anything about these CEOs seeking reappointment as board members after retirement. This glitch might end up being the core of Kotak's claim.

"The RBI guideline does not require a cooling period for the MD and CEO of a bank to take up a non-executive position. Also, appointment of non-executive directors does not require RBI approval," a spokesperon for Kotak Mahindra Bank said while responding to queries by BQ Prime.

Going by the words in the regulations, Kotak seeking reappointment as a director on the board immediately after retirement is not an issue. But the intent of the regulator may not have been fully met.

To understand this intent better, we need to look at the discussion paper titled Governance in Commercial Banks in India, released in June 2020. This is the document on which the RBI has based its April 2021 guidelines.

The discussion paper stated that this will help in separating ownership from management and also reinforce a culture of professional management. The paper also does not talk about the reappointment of promoter CEOs after their maximum tenure is completed.

It is very clear from the paper that the regulatory intent is to control the impact an owner could have on the operations of a bank, beyond institution building. Letting promoter CEOs continue as board members after a long tenure as the leader could risk creating multiple power centres within the board. This could effectively dampen the new CEO's influence and decision-making ability.

In Kotak's case, this regulatory intent might very well be a stumbling block. While the RBI typically does not have a direct say in the appointment of board directors, there is a strong advisory channel it implements. What the regulator eventually does in this situation would set the tone for the future of bank governance.