Sucheta Dalal :Tracking Bank Takeovers (15 Dec 2003)
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal


You are here: Home » Column Topics » Financial Express » Tracking Bank Takeovers (15 Dec 2003)
                       Previous           Next

Tracking Bank Takeovers (15 Dec 2003)  

At the Bank Economists Conference last week, Reserve Bank of India governor Yaga Venugopal Reddy expressed concern over the lack of clear statutory provisions regarding takeover of bank management. And he has reason to worry, especially about the goings on at private banks both old and new. Clearly, the problem is not when small banks are taken over by large nationalised or multinational banks, this only reduces RBI’s headache. Serious problems arise when individuals quietly acquire equity in smaller banks and control them.

Several recent instances of such bank takeovers should have been acutely embarrassing for the central bank, which otherwise insists on deciding who is fit and proper to acquire and run banks. For instance, the RBI was caught napping for a decade over the de facto takeover of Nedungadi Bank by stockbroker Rajendra Banthia. When the bank was finally on the verge of a collapse, after several hundred crore rupees had been diverted towards stock market speculation, the RBI buried the problem by forcing a merger with Punjab National Bank.

Similarly, it was public knowledge that Bank of Sikkim was controlled by another stockbroker Vinod Baid (of the Prudential Capital Markets) and Delhi businessman Ratan Singh Chaudhary. But the regulator woke up and investigated the bank only after it had collapsed. The collapse of Benares State Bank under the benevolent 50 per cent ownership of controversial takeover tycoon R Rajarathnam is well known. The bank was put under a moratorium and ultimately merged with Bank of Baroda.

In two other cases — Rathnakar Bank and Bank of Rajasthan — the RBI has simply backed the management and not reacted to letters and petitions by the bank officers association/unions alleging irregularities. As for the Tamilnad Mercantile Bank, there is a very public battle put on by the Nadar community to allegedly prevent management control from passing into the hands of non resident Indian S Sivasankaran of the Sterling group of companies which owns a 34 per cent stake. The RBI’s view on the developments at TMB is at best unclear. In recent months, there has been much turmoil in Dhanalakshmi Bank Ltd (DBL), after a mere Rs 20 crore investment in a rights issue gave management control to one Rajamohan Rao of United Telecom. Since then, Dr Rao has been named in a First Information Report filed by the Central Bureau of Investigation in the well-known bribery case involving Motorola of the US and officials of Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Ltd.

Rajamohan Rao acquired control over DBL when its March 2002 rights issue of Rs 27.5 crore bombed. While the issue closed in March that year, allotment was completed only in September after Dr Rao bailed it out with an investment of Rs 20 crore. This took his holding up from 0.1 per cent to 36 per cent and was cleared by the central bank. Bank sources say that the RBI had imposed certain conditions for the allotment of unsubscribed bulk shares to Dr Rao, but the details are not known.

Inside sources say that the change in management was however not made public either in the March 2003 Annual Report or the first quarter results of June 2003. Although the bank is listed, it is not clear whether the acquisition confirms to SEBI’s takeover rules and the change has attracted the capital market regulators’ attention. In fact, the first indication of changed shareholding occurred when the half yearly results announcement stated that the non-promoter share holding was 62.99 per cent for the current year as well as September 2002.

In September 2003, the CBI filed a case under Prevention of Corruption Act and Indian Penal Code in Delhi against five persons named in the FIR No RC DAI-2003-A-0054 dated 27/9/2003. They are accused of bribing MTNL/BSNL officials in connection with Motorola India’s bid to supply materials to these corporations. Rajamohan Rao of United Telecom is one of the people named in the FIR; and it is alleged that United Telecom arranged for the Rs 50 lakh that was paid to MTNL officials on behalf of Motorola.

Meanwhile, there have been several significant developments too. Its previous managing director, B Muthuswamy resigned within seven months after taking charge of the bank in April this year. In this period too, he was on leave for over a month before his exit. If the RBI has not openly reacted to the change, it is probably because the bank has packed the board with several senior retired bureaucrats and bankers, giving an impression of a strong board supervised bank. Former chairman of Bank of India, KV Krishnamurthy has been appointed as part chairman, but it is not clear if this appointment has been cleared by the central bank.

The Dhanalakshmi Bank Officers Organisation (DBOO) wrote to the RBI regional director Trivandrum in January this year expressing concern over real estate investments, allegedly shaky venture capital funding, large investments in new businesses, mounting non-performing assets and delinquency at the bank. Thereafter, the president of the DB Officers Organisation, KO Devassy, was forced to take early retirement and found unfit to continue at the age of 58, leading to a strike by the organisation in May-June 2003.

The DB management has claimed that the Reserve Bank did investigate Devassy’s allegation and decided that they were “unfounded”. Hence, it called his action in writing to the RBI “an act of indiscipline warranting action”.

Dhanalakshmi Bank is not the only one that needs RBI’s close attention. The controversial Global Trust Bank is also not out of the woods. The RBI must, in line with the governor’s indication that it would like to view all block sales of over 5 percent in the bank, investigate the recent block deal in GTB shares on the Bombay Stock Exchange.

If SEBI has banned GTB promoters from participating in the capital market, then who were the large investors who sold the shares? And who is the buyer? Market sources say that a reputed Singapore based foreign institutional investor acquired the shares. Governor Reddy is entirely correct in seeking an amendment to the relevant laws to give it a say in bank takeovers; otherwise, the many instances cited above make a mockery of central bank supervision.

-- Sucheta Dalal