Banking

Clouds Continue to Gather Around Lakshmi Vilas Bank as Shareholders Vote Out the CEO

With uncertainty looming though, depositors are a worried lot. Somewhere along, they need to be assured. Who else can do it better but the RBI?

It has now been a year since the Reserve Bank of India (RBI) initiated prompt corrective action (PCA) against Lakshmi Vilas Bank.

But uncertainty has continued to linger at the private sector lender, with matters worsening this past week. The banking regulator cannot afford to allow things to linger on to resolve themselves. It is time the RBI stepped in, and cleared the cobwebs.

In the latest episode in the not-so-encouraging saga of Lakshmi Vilas Bank, the shareholders decisively threw out resolutions related to the appointment of seven directors, including surprisingly S. Sundar, who was appointed as interim Managing Director and CEO at the beginning of this year.

The annual general body meeting of the shareholders was held two days ago on September 25, with shareholders clearing resolutions related to only three directors.

The seven rejected names are: S. Sundar; N. Saiprasad (non-executive, non-independent director); Gorinka Jaganmohan Rao (non-executive, independent director); K.R. Pradeep (non-executive, non-independent director); B.K. Manjunath (non-executive, independent director); and Y.V. Lakshminarayana Murthy (non-executive, independent director).

The appointment of only three directors was cleared. They are: Shakti Sinha, Satish Kumar Kalra and Meeta Makhan.

It is a stunning blow, to say the least. Such a decisive strong reaction from the shareholders reflects the widespread no-confidence among the shareholding population against the people running the affairs of the private lender.

Losses incurred for the past 10 quarters does indeed reveal a tale of its own. For the year ended March 2020, Lakshmi Vilas Bank reported a loss of over Rs 825 crore.

Assorted factors – both business and non-business – must have compelled the RBI to put the private lender under the PCA programme in September 2019. This places, among others, curbs on its lending to corporates.

Also read: The Takeaways From RBI’s Refusal to Bless the Indiabulls-Lakshmi Vilas Bank Merger

The Bank’s total Capital Adequacy Ratio (CAR) as per Basel Ill guidelines, was at 0.17 % as at June 30, 2020 as against 1.12 % as at March 31, 2020. Net NPA stood at 9.64% as on June 30, 2020, as against the Net NPA of 8.30%, as on June 30, 2019. Net NPA was 10.04% as on March 31, 2020.

A few months ago, in July to be precise, the bank insisted in a release that “despite logistical challenges arising due to COVID-19 situation, we have made significant progress with Clix group for the proposed amalgamation of Clix Capital Service Pvt. Ltd. and Clix Finance India Pvt. Ltd. into the bank”.

It went on to add: “However, there may be slight delay in the mutual due diligence and preparation of documents for regulatory requirements due to Covid situation and travel restrictions. Hence, both the parties mutually agreed to extend the exclusivity period till 15th September 2020.”

But the shareholder action in throwing out resolutions relating to appointment of a majority of the directors has put a question mark over the discussions with the Clix group.

A worker walks past the logo of Reserve Bank of India (RBI) inside its office in New Delhi, July 8, 2019. Photo: Reuters/Anushree Fadnavis/Files

Last October, the RBI put paid to the private lender’s efforts to merge the bank with Indiabulls Housing Finance. It was widely believed that the banking regulator was not amused by the clear manoeuvring of Indiabulls to get a back-door entry into the banking space through the merger of LVB with itself. Also, Indiabulls was in the limelight at that point in time for a number of not-so-positive reasons.

A couple of months before the rejection of the merger plan by the RBI, LVB saw its managing director and CEO Pasrthasarathi Mukherjee resign citing, of all things, personal reasons. At one point, Srei Capital, too, was reportedly eying this bank.

For some time now, there has been a consistent feed of news coming out from the private lender on possible partners to co-run the bank. That perhaps has managed to send out false hopes to a host of stakeholders – from depositors to common shareholders and the like. Somewhere along, however, these hopes remained in the realm of possibility. Probably, shareholders of the minority kind have run out of patience.

Interestingly enough, institutional shareholders (who hold close to 17.5% shares) have overwhelmingly voted against the resolutions appointing these seven directors.

Also read: India’s Shadow Lobbies: How Business Captured the Government

According to stock exchange data, the promoters’ holding in the bank is in the vicinity of 7%.

No doubt, the LVB shares are widely distributed. If sources are to go by, a portion of the distributed public holding is under the influence of a few. Notwithstanding this, the shareholders managed to assert their unhappiness!

Typically, professionalism must be ruling in a largely distributed holding structure as the one that exists in LVB. And, one expects the board to be packed with lots of talent. Interestingly enough, the bank sought to fill the board positions mostly with the same set of people who had been directors in the past. Continuity is alright. If the past was bad, why insist on its continuance.

That a substantial number of the resolutions were thrown out by the shareholders gives a clue or two to the uneasiness within. Institutional holders and others have converged here. Far from viewing it as shareholder activism, the whole LVB episode must be read in a whole new context. Performance has to be the overriding new theme.

How things will unfold now that the shareholders have acted? In a statement, the bank has said that the senior management, along with the board, will run the daily affairs of the lender till a new MD is appointed. It has also sought to dispel any concerns over its liquidity situation, saying the situation is adequate.

With a host of uncertainty looming though, depositors are a worried lot. Somewhere along, they need to be assured. Who else can do it better but the RBI?

The country has seen one too many actions on the financial sector front in quick succession.

The collapse of Punjab and Maharashtra Co-operative Bank, the Yes Bank imbroglio and the IL&FS disaster are still haunting the common depositors. The LVB could become the latest cause of concern for the central bank.

K.T. Jagannathan is a senior business journalist.