Uday Kotak, Asia’s wealthiest banker and outspoken advocate for corporate governance, is now embroiled in a controversy that clearly shows that all is not as it seems. Recent reports have shed light on the significant electoral bond purchases made by Infina Capital Private Ltd., a company within the Kotak family group.

What’s more alarming is the revelation that these bonds were subsequently donated in their entirety to the ruling Bharatiya Janata Party (BJP), pointing to a concerning intersection of corporate interests and political patronage.

The Shades Of Grey
In the shadiness of corporate dealings and political manoeuvres Infina Capital Private Ltd., has emerged as a major player, donating a staggering Rs 1.3 billion through electoral bonds – more than double the amount disclosed by the State Bank of India (SBI) to the Election Commission of India (ECI) during fiscal years 2019 to 2022.

The veil of opacity surrounding electoral bonds is further lifted as discrepancies between actual purchases and disclosed amounts become clear.

In fiscal year 2020 alone, Infina Capital purchased Rs 760 million worth of electoral bonds, yet only a fraction, Rs 350 million, found its way into the SBI’s disclosure.

Such glaring inconsistencies raise pertinent questions about transparency and accountability in the electoral funding process.

Looking deeper into the timeline of events, the significance of Infina Capital’s electoral bond purchases during fiscal years 2019 and 2020 cannot be understated.

These years coincide with a critical juncture for Uday Kotak, as his bank, Kotak Mahindra Bank (KMB), found itself embroiled in a regulatory battle with the Reserve Bank of India (RBI).

In August 2018, the RBI rejected KMB’s proposal aimed at reducing Uday Kotak’s holding in the bank, prompting KMB to challenge the banking regulator in court just four months later.

What ensued was a legal tug-of-war, culminating in an unexpected out-of-court settlement in January 2020, heavily favouring Uday Kotak.

The circumstances surrounding this settlement have remained shrouded in mystery until now. However, the disclosure of electoral bonds data reveals a disturbing pattern, suggesting a potential quid pro quo arrangement between political beneficiaries and corporate donors.

Of particular concern is the revelation that a substantial portion of the funds, at least Rs 350 million, was channelled to the ruling Bharatiya Janata Party (BJP) in the fiscal year 2020.

This alarming revelation raises the question – to what extent the interests of corporate donors influence political decisions?

Infina’s purchase of electoral bonds and Infina’s net profits (in Rs million)

The Red Flags
Infina, categorized as a non-deposit-taking systemically important non-bank finance company (NBFC), operates under an ownership structure fraught with conflicts of interest.

It is 49.99% owned by Kotak Mahindra Capital Company (KMCC), a 100% subsidiary of KMB; Komaf Financial Services Pvt holds another 49.98%. Ltd, a Kotak family company; and 0.03% is owned by Kotak Trustee Company Private Ltd.

The ownership structure of Infina is rife with conflict of interest as slightly more than 50% of Infina is owned by the Kotak family while the remaining is owned by a 100% subsidiary of the bank where Uday Kotak is the promoter.

With nearly half of Infina owned by Kotak Mahindra Capital Company (KMCC), a subsidiary of KMB, and the remainder held by a Kotak family company and a subsidiary of the bank itself, the entanglement of corporate interests is glaring.

The Truth
A detailed examination of Infina’s financial records unveils a staggering truth – from 2019 to 2023, the company amassed a total of Rs 1.3 billion in electoral bond purchases.

This figure starkly contrasts with the amount disclosed by the State Bank of India (SBI) to the Election Commission of India (ECI) by more than 2X, highlighting a glaring discrepancy that demands scrutiny.

The stark disparity between ECI disclosures and Infina’s own accounts underscores the need for analysts to examine electoral bond data more closely.

Reconciliation of ECI disclosures with company financial accounts becomes paramount to disclosing the extent of electoral bond transactions and potential discrepancies.

The Ugly Truth
While SBI’s disclosures to the ECI only cover the fiscal year 2020 onwards, Infina’s Rs 300 million purchase in 2019 would have evaded scrutiny.

However, in fiscal year 2020, Infina’s reported purchase of Rs 760 million in electoral bonds starkly contrasts with SBI’s disclosure of only Rs 350 million directly purchased by Infina.

This glaring gap suggests the possibility of Infina acquiring an additional Rs 410 million in electoral bonds from the secondary market, subsequently depositing them with a political party.

Such tactics, aimed at maintaining anonymity and circumventing disclosure norms, raise serious questions about the integrity of the electoral bond scheme and the intentions behind such transactions.

It is crucial to underscore that in two out of the three years during which Infina procured electoral bonds (FY2019 and FY2020), the acquisition either directly led to the company recording a financial loss (as evidenced in FY2020) or contributed to exacerbating existing losses (as observed in FY2019).

Despite maintaining adequate capitalization (exhibited by a capital adequacy ratio of 318.2% in FY2020), the NBFC seemingly overlooked the ramifications of reporting losses or escalating existing ones due to its involvement in electoral bond purchases during those particular years.

The Link
Infina’s connection with Kotak Mahindra Bank (KMB) is intricate — while Kotak Mahindra Capital Company (KMCC), a wholly-owned subsidiary of the bank, holds a 49.99% stake in the NBFC, there exists a direct link between KMB and Infina through a senior official.

Across all three years of Infina’s electoral bond acquisitions, Jaimin Bhatt, serving as the president and group Chief Financial Officer (CFO) at KMB, concurrently held positions on the boards of both KMCC and Infina.

Bhatt’s presence on these boards aimed to safeguard KMB’s interests. Given that purchasing electoral bonds falls outside the realm of Infina’s regular business activities, obtaining board approval for such transactions would have been imperative.

Given the sensitive and politically charged nature of electoral bond purchases, which deviate from the ordinary course of business for all three corporate entities involved, questions arise regarding whether Bhatt, as a senior official of KMB, apprised the KMB board of Infina’s bond acquisitions.

Crucially, did he elucidate the rationale behind these acquisitions and articulate the objective behind allocating a substantial sum, at least Rs 600 million, to the BJP?

Failure to inform the KMB board of such transactions would constitute a grave governance lapse, while if the board was indeed informed, it would inevitably raise concerns about potential quid pro quo arrangements.

Notably, the directors’ reports of Infina during those years made no mention of the NBFC’s electoral bond purchases; this information was only discernible within the ‘other expenses’ schedule in Infina’s financial accounts.

Uday Kotak, Give And Take

In October 2017, Uday Kotak, then serving as Managing Director and CEO of KMB, chaired the SEBI-appointed Committee on Corporate Governance – emphasizing the pivotal role of disclosure and transparency in fostering good governance, the committee’s report underscored the significance of timely and accurate disclosure on all material matters concerning corporations.

Despite regulatory imperatives driving disclosure and transparency standards, the apparent silence in KMB’s directors’ reports regarding a Kotak entity’s substantial electoral bond acquisitions from FY2019 to FY2022, while a Kotak-appointed CFO (also the group CFO) represented KMB on the board, reflects a glaring deficiency in corporate governance within a bank of KMB’s stature, valued at nearly $42 billion.

The sequence of electoral bond donations by a Kotak-linked NBFC to the ruling party, coupled with the recurrent, peculiar concessions granted to Kotak by the regulator, undoubtedly raises the opportunity of a quid pro quo arrangement.

The Glaring Silence
Since the revelations, the usually vocal cohort of banking journalists and sell-side analysts covering KMB has seemingly fallen silent.

One would expect a deluge of analytical pieces and opinion columns dissecting a significant news story involving a prominent private sector banker’s company donating a hefty sum of Rs 600 million in electoral bonds to the ruling BJP, alongside suspicions of potential quid pro quo deals aimed at securing regulatory concessions.

However, what the public and the capital markets have received from those tasked with reporting on and analyzing KMB is nothing but a deafening silence.

While the electoral bond issue has undoubtedly tarnished the reputation of Asia’s wealthiest banker, the repercussions for the RBI’s standing as a banking regulator are far more damning.

Remember the acrimonious exchanges between KMB and the banking regulator during their legal dispute over Uday Kotak’s reluctance to dilute his equity stake, the ignominious out-of-court settlement reached on Kotak’s terms, and the subsequent extensions granted to Uday Kotak as CEO.

Now, these events with the periodic donations, totalling at least Rs 600 million, made by a Kotak entity to the ruling political party at the centre, it becomes evident that the public can draw its own conclusions about the banking regulator’s apparent inertia and its willingness to acquiesce to political authorities.

Witnessing the once-revered RBI reduced to a compliant entity on its 90th anniversary is nothing short of disheartening.

The Last Bit, The implications of such revelations extend beyond mere financial transactions; they strike at the heart of democratic principles.

Also, the interests of powerful corporations appear to overshadow the regulatory mandate of institutions like the RBI.

The erosion of public trust in democratic institutions is a grave consequence of such clandestine dealings, and calls for stringent reforms in electoral funding mechanisms grow louder.