Mumbai: Karnataka Bank, a regional bank that is over a century old, has written to the Reserve Bank of India (RBI) expressing concern that a group of shareholders was acting in concert during voting on the re-appointment of two independent directors. In the letter sent on May 18, 2026, the bank itself – not an outside shareholder – has asked the RBI to investigate the matter under Section 12B of the Banking Regulation Act.The letter is signed by the managing director and CEO, Raghavendra S. Bhat.Background to the matterIn January 2026, the Karnataka Bank Board put up for approval before shareholders the re-appointment of two independent directors, Dr D.S. Ravindran and Balakrishna Alse S. As they were independent directors, both resolutions required the approval of 75% of voters votes cast to pass.According to the bank – and this is among the strongest assertions in its letter to RBI – the voting produced an unusual outcome. Ravindran’s appointment failed to pass with just 59.45% votes in his favour and 40.55% against. The second resolution went differently, as Balakrishna Alse received 76.78% votes in favour and 23.22% against, and therefore passed.Shareholder Voting on Directors’ AppointmentsNameDirectorDateFor (%)Against (%)ResolutionTotal Voted (mn)Shareholders Voted (%)Justice A.V. ChandrashekarIndependent29 Jul 202574.125.9Special120.331.8P. Pradeep Kumar PanjaIndependent29 Jul 202597.52.5Special119.631.6B.R. AshokNon-Executive23 Sep 202588.211.8Ordinary148.039.1Uma ShankarIndependent23 Sep 202589.110.9Special147.939.1Raghavendra Srinivas BhatManaging Director23 Sep 202589.910.1Ordinary148.239.2D.S. RavindranIndependent6 Mar 202659.540.6Special151.340.0Balkrishna AlseIndependent6 Mar 202676.823.2Special151.240.0Source: Karnataka BankWhy did the board become suspicious?All three major proxy advisory firms, Institutional Investor Advisory Services (IiAS), Institutional Shareholder Services (ISS) and Stakeholders Empowerment Services (SES) recommended that shareholders vote in favour of both directors, Ravindran and Alse. When institutional shareholders approved one and rejected the other, it raised eyebrows at the bank, and there was a reason for it: In July 2025 as well, some shareholders had supported one independent director while opposing another.This is especially concerning for Karnataka Bank due to its ownership structure. The bank is not promoter-driven but has a widely distributed shareholding with 72% ownership with the public. In such a scenario, the outcome of voting is highly dependent on how many shareholders actually cast their vote on resolutions moved by the board. It also increases the odds of a change in the bank’s management, should even a relatively small section of shareholders end up on one side of a vote.An interesting revelation in the shareholder voting for these resolutions is that only 31.6% to 40% of the total shareholders participated in the voting. In fact, the bank notes in its letter to RBI that subsequent to the vote on independent directors, certain shareholders acquired additional shares.As a result, among the voters were an aggregate group of only 29 shareholders who represented 39.76% of the votes cast. This would amount to a very large chunk of shareholding represented in one “bloc” of votes for any bank. But in the case of Karnataka Bank, it holds special significance (or risk) because of its otherwise distributed ownership.In addition to the above concerns, Karnataka Bank’s board members also received copies of an anonymous complaint regarding happenings at the high-level management. The complaint, alleges that certain shareholders were acting together. In the letter to RBI, the bank’s managing director and CEO mentions these complaints, but does not say that they were true. It merely says they were received.More on voting patterns at Karnataka BankWhat caused the board to become alarmed and write to the RBI? For this, one must understand the historical shareholder participation pattern at the bank. Typically, only 35% to 45% of the bank’s shareholders participate in voting on resolutions. But in the case of votes cast against Resolution 1, in which Ravindran’s appointment as independent director failed to pass, a group collectively exercised voting rights over 6,01,67,684 shares (16% of shareholding) constituting 39.76% of the votes cast.The board does not accuse anyone outright. Instead, it says that the circumstances suggest a prima facie possibility that shareholders were acting in concert. In fact, Section 12B of the Banking Regulation Act exists precisely to tackle such situations. It is meant to prevent a group of persons acting in concert regarding voting rights by requiring prior RBI approval of any individual or entity intending to acquire 5% or more of the shares or voting rights in a bank.That is why the bank’s board says in the letter that it is approaching RBI (and the Securities and Exchange Board of India) “in good faith”, in the interest of transparency, corporate governance and regulatory compliance.Earlier governance disputesThe voting on Ravindran and Alse was not the only contentious issue at Karnataka Bank in recent days. The bank’s Nomination and Remuneration Committee (NRC), a subset of the board, had met on June 7, 2024 and decided that it did not want the chairman, Pradeep Kumar Panja, to continue in the position after his first three-year term ended on November 13, 2024.Instead, the NRC expressed its preference for Uma Shankar, another senior director, to be the next chairperson. But when the bank’s board considered the NRC’s recommendation just about two weeks later, on June 19, 2024, the majority of the board (barring NRC members) backed Panja again – and he was subsequently re-elected by an overwhelming 97.5% of shareholder vote.As per the minutes of the board meeting in which Panja was picked for a second term, directors backing him repeatedly referred to “continuity”, “transformation”, Panja’s banking experience, capital raising efforts, his relationships with regulators and the need for stability.Also read: Open War in Karnataka Bank as CEO and Executive Director Defy BoardIn this context, the concerns expressed by the NRC regarding Panja’s performance during his tenure and the reasons for and against his continuation are highly significant. Interestingly, the NRC did not appear to record its entire discussion in the draft minutes of its meeting. Only the broad brush strokes of the decision not to continue with Panja and select Uma Shankar were recorded – that the NRC met, Panja recused himself from the discussion about his own continuance, the NRC decided he did not need a second term and picked his replacement (with Uma Shankar’s agreement).Concerns within bankHowever, as per a source in the bank, the concerns regarding Panja included delays in decision-making on crucial matters, unhappiness over his human resource (hiring) decisions and governance and compliance and oversight shortfalls under his watch. In particular, says the source, Panja’s poor oversight of the former CEO and former Executive Director was a matter of concern for the NRC.Here are the concerns the sources detailed, which were not recorded in the meeting:Administrative delays such as slow processing of meeting minutes and late uploading of agendas, leaving directors with insufficient time to review critical items.Process Lapses: Concerns over lateral hiring without proper procedures and launching “transformation” projects in pieces without full Board transparency or competitive bidding.Alleged skill gaps of former CEO (Srikrishnan Hari Hara Sarma) and then Executive Director (Sekhar Rao). To fill the skill gap, the bank set up a formal board-level selection committee to hire outside experts. Instead of following its rules, Sarma and Rao hand-picked their favourites without involving the committee. They only showed the committee their final choices, and sought the committee’s approval of the candidates. When the committee called out this lack of transparency, the chairman (Panda) stepped in and pushed them to accept the pre-selected candidates as a “special case”. It took a major internal fight to finally stop this practice and get the then CEO and ED back to following a fair hiring process.‘Cultural’ issues: The conduct of the then CEO and ED was alleged to be unprofessional – such as shouting or arguing when questioned and the chairman was unable to manage these interactions.Risk flags: There was a rise in the number of warnings from regulators and auditors regarding compliance and a tendency to “chase growth” through risky short-term deposits and advances through Inter Bank Participation Certificates (IBPC).Put simply, the source said that Panja had been unable to control senior management – one of the more serious lapses noted by the NRC – during his tenure. Here it is important to mention that the former MD and CEO of Karnataka Bank, Srikrishnan Hari Hara Sarma, and the former Executive Director of the bank, Shekhar Rao, had stepped down after a series of ‘mishaps’ at the bank.Essentially, the minutes of the board meeting and the NRC as well as the anonymous letter note that Sarma left after governance disputes. Shekhar Rao, closely associated with Sarma, also left. Panja was then reappointed, and has claimed that he is continuing this “transformation” project.At the NRC meeting held on June 7, 2024, after Panja returned to the meeting and was informed about the decision to not recommend his reappointment, he expressed his willingness to continue in the post. But the meeting was able to convince him it was time to move on.At the board meeting held on June 19, 2024 as well, Panja pitched strenuously to continue, citing the need to continuity to pursue something called “transformation” projects at the bank – he specifically appears to have claimed credit for having launched this process. This time, the majority of the board (barring NRC members) supported him, overruling the NRC recommendation.However, the “transformation agenda” was not started by Panja, but by the earlier CEO, M.S. Mahabaleshwara, based on the recommendations of Boston Consulting Group many years prior.Consequences?It is after this development that two independent directors were unable to secure reappointment, despite support from the management and the proxy advisory firms. (They could not meet the required 75% votes required for special resolutions, as detailed earlier.)The two directors are Justice A.V. Chandrashekar and, as mentioned earlier, D.S. Ravindran. As noted earlier, Alse was able to cross the 75% mark.Note that not all of these details are mentioned in the letter to the RBI, which is understandable because these would be matters for the regulator to investigate.More about why voting behaviour mattersQuant Mutual Fund and Bandhan Mutual Fund are significant shareholders in Karnataka Bank. Their voting pattern, too, has raised concern within the bank regarding possible coordinated behaviour, going by public records.For instance, for the re-election of directors Quant Mutual Fund voted against all directors except Panja. This, too, went against the advice of the proxy advisory firms. Does it mean that Quant Mutual Fund had its own agenda? This is something for the RBI to investigate. Definitely it has raised alarm bells within the bank, going by the anonymous letter.That letter to senior management insists that these two mutual funds – Quant and Bandhan – have repeatedly voted against what the proxy firms advised. This is when all three proxy firms had recommended voting for the re-appointment of these directors. Therefore, for institutional shareholders to disregard proxy advisory firms’ consensus recommendation and vote contrary to them indicates that these mutual funds have a separate agenda.An interesting feature in Quant Mutual Fund’s voting behaviour is that the fund only approved of re-electing the chairman, P. Pradeep Kumar Panja while rejecting all the other directors on the grounds of performance and/or on the basis of the resignation of Sarma and Rao.While there had been a collapse in profitability and rising costs at Karnataka Bank during the tenure of Sarma and Rao, it is hard to understand why the fund rejected all the independent directors and the new CEO but spared the chairman who was at the helm when these problems occurred and who is ultimately responsible for effectively managing affairs of the bank.Recall that Karnataka Bank has identified 29 shareholders, holding roughly 16% of the equity share but accounting for nearly 39.8% of votes cast, who it believes may have been acting in concert. Quant and other mutual funds are said to be backed by certain powerful individual shareholders, prompting concerns at the bank and leading to the letter to RBI.A questionnaire has been emailed to Karnataka Bank officers and responses will be updated when they are received.