Uday Kotak, India’s richest banker, seeks regulatory reforms
- Shruti Sundar Ray
- Aug 19, 2019
- 4 min read
Updated: Jun 9, 2020
Having built his successful banking empire on the social capital of family and friends, Uday Kotak, now, works with the government to ease regulations in favour of the industry
Veteran banker Uday Kotak delivered the Lalit Doshi Memorial Lecture in Mumbai. He was not only addressing the audience, the who’s who of the finance and industrial sectors, but also the government and its policy-makers. He was reiterating the need for swallowing the bitter pill—be it the reintroduction of the controversial FRDI Bill or reforming public sector banks by reducing government ownership.
This is not the first time that Kotak, India’s richest banker, has proposed changes to boost the slowing economy. As the president-delegate of the industry body CII, Kotak is in a position to work with the government to revive growth in lagging sectors. He has called for bringing down the high taxes on risk capital, that have roiled the markets.
Kotak’s engagement with the government does not stop at urging for sops. Hailing the repeal of Article 370, he has assured that the industry would invest in Jammu and Kashmir. Kotak has been the government’s industry insider on other occasions too—as the head of the SEBI committee on corporate governance and as the new head of the IL&FS board, tasked with its reorganization.
These positions of responsibility have been congruous with his impressive track record as the MD of Kotak Mahindra Bank. The bank is, now, the 2nd largest private sector bank in India, by market capitalization. Much of the credit for the bank’s success has been given to Uday Kotak, who founded it as a financial services enterprise, in 1985.
Kotak Capital Management Finance, as it was called then, was started by Kotak as a bill discounting business. Back then, banks lent to companies at 17% interest but gave only 6% returns on fixed deposits to individuals. “I told my family friends that instead of a 6 percent return, I would give them a 12 percent return,” recounted Kotak in an interview with Forbes. This is how he sourced funds which he then lent to reputed companies at 16% interest, managing to earn a 4% spread.
This example is, often, used to highlight his entrepreneurial spirit but what is glossed over is the patronage of family friends and connections that carried him through his efforts. Kotak’s introduction to Anand Mahindra proved to be providential. Mahindra saw potential in the young Kotak and invested in the budding firm, which, now, came to be known as Kotak Mahindra Finance Limited. The decision to use family names was a conscious one for Kotak. In an exclusive with Moneylife, Kotak shared, “You use your family name first because you put your reputation to risk to build trust.”
The company, soon, entered the auto loans space, where it carved its niche. In 1995, it was one of the early companies to jump on the globalization bandwagon in the form of a JV with the Goldman Sachs Group, which Kotak, himself, was instrumental in securing. His next big win came in 2003, when the company received a banking license from the RBI, becoming the first NBFC in India to be converted into a bank.
The years have seen the Kotak Mahindra group grow and diversify beyond mainstream banking into insurance, private equity and fintech. Within banking, the group made a big leap with its acquisition of the rival ING Vysya bank in 2015. Here too, the merger was reported to have had a distinct Uday Kotak touch.
The story of Kotak is often told in the same way—a journey from living in a house with 60 people to amassing a net worth of $13.5 billion. After completing his MBA, Kotak decided against joining his family’s thriving business in commodities to, instead, chart his own route in the nascent financial services sector. But, his breakaway, too, was supported by his family who provided him with his first office space, in a godown.
Kotak’s father also introduced him to a major institutional broker of the time, Mukul Harkisondas, who would be his first mentor. The banker’s spectacular rise has been dotted with helping hands, along the way. As per a profile by Forbes, op corporate lawyer Cyril Shroff, one of Kotak’s early backers has stated that he invested in Kotak’s firm “more as a friend and well-wisher.”
The capital of connections has run both ways when it comes to Kotak, who does not seem to hesitate to invest in friends, himself. He has contributed substantially to Columbia University, his wife’s alma mater and home to family friend Jagdish Bhagwati, the eminent economist. His investment in English daily Business Standard was also prompted, in part, by a personal rapport with editor T N Ninan.
The picture is not altogether rosy, though. Business Standard has been confronted with allegations of defamation and bad press by Kotak’s rival Yes Bank.
Kotak, himself, has been embroiled in a lengthy legal tussle with the RBI over dilution of his stake, as the promoter of Kotak Mahindra Bank. The banking license granted to the bank by the RBI is conditional to a cap on promotor control over 15 years but Kotak holds more than 30% of the shares, well above the required 15%. “Uday Kotak seems to delay implementation of the shareholding rules as much as he can, adding billions to his wealth in the process,” claimed independent analyst Hemindra Hazari.
Kotak, on the other hand, has resisted the retroactive application of the shareholding norm claiming that issuance of non-convertible preference shares adequately meets the stipulations. He has challenged the RBI ruling before the Bombay High Court and reopened the larger debate on corporate governance. The RBI, too, is not irreproachable in this mess and has been criticized for its lack of transparency.
The courts are yet to rule on Kotak’s future in his bank. But, through his lawsuit, the so-called ‘nationalist’ banker has called into question the accountability of the central bank, itself.
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