Kotak, the Wealthiest Asian Banker, Under Pressure to Appoint External Successor, Say Sources

Introduction

India’s banking regulator, the Reserve Bank of India (RBI), is reportedly pressuring Kotak Mahindra Bank to choose an external candidate as the successor to its billionaire founder, Uday Kotak, for the position of Chief Executive Officer (CEO), according to insiders familiar with the matter.

Regulator’s View on Succession

The RBI has conveyed its view to the board members of Kotak Mahindra Bank and the founder himself, stating that an outsider should be appointed as the next CEO. The central bank wants to ensure a clean break for the outgoing head and eliminate any potential influence on decisions.

• The regulator is also reviewing the bank’s holdings in two wholly-owned insurance units to assess potential risks to the company’s stability.
• India has implemented stricter rules limiting bank CEOs’ tenure to a maximum of 15 years to strengthen the financial system.

Response from Kotak Mahindra Bank

A spokesperson for Kotak Mahindra Bank denied receiving any formal or informal communication from the RBI regarding CEO succession. The spokesperson also affirmed that the bank’s current holdings in its insurance companies comply with regulatory prescriptions and processes.

Market Reaction

Following the news, shares of Kotak Mahindra Bank fell 1.2%, while the benchmark S&P BSE Sensex Index rose 0.3% in Mumbai trading. Year-to-date, the bank’s stock has risen 1.5% compared to a 9% increase in the index.

• Analysts from Jefferies Financial Group Inc. see an outsider appointment as a slight negative and point out the added uncertainty.
• By the end of August, the bank is expected to suggest at least three names in order of preference, of which the RBI will approve one for appointment.

Review of Insurance Units

Kotak Mahindra Bank’s holdings in its wholly-owned insurance subsidiaries, Kotak Mahindra Life Insurance Co. and Kotak Mahindra General Insurance Co., are also under review by the RBI. The central bank is assessing the bank’s stakes in the insurance companies.

• Kotak Mahindra had been working to reduce its stakes in the insurers with the help of advisors, including Morgan Stanley, but no transactions have been finalized yet.

Background on Uday Kotak

Uday Kotak, with a net worth of approximately $14.5 billion, is the founder of Kotak Mahindra Bank and has been its CEO since its conversion into a lender in 2003 from a non-banking finance company.