Rs 100 Crore Fine on Standard Chartered Puts Spotlight Back on Tamilnad Mercantile Bank

Ownership has always been a touch issue with TMB.

This bank has the uncanny ability to get into the spotlight on the eve of every general election in Tamil Nadu – primarily because it presents juicy fodder for the political class without any bias. Indeed, in a way, it’s a heady cocktail, with business, politics and community mixing freely to keep it a live subject.

We are talking about, of course, of Tamilnad Mercantile Bank (TMB), one of the oldest private banks in the country. It was promoted by the Nadar community, a dominant trading sect in Tamil Nadu. Since the 1990s, when the Ruias of the Essar Group bought into the shares of TMB – cashing in on the internecine quarrel between warring promoter-groups of the community – the private sector lender has managed to hit headlines intermittently.

The political leadership in the state especially – cutting across party lines – has a permanent interest in keeping the TMB pot boiling always, given the community angle to the bank.

As the state is slowly inching towards an election around the first quarter of 2021, TMB has returned to make headlines yet again. In a significant move, multi-national Standard Chartered Bank has been slapped with a penalty of Rs 100 crore for violation of the provisions of the FEMA (Foreign Exchange Management Act) in a case relating to unauthorised allocation of shares in the Tuticorin-headquartered TMB.

Besides imposing the penalty on Standard Chartered Bank, the adjudicating authority under FEMA also levied a fine of Rs 17 crore on TMB and Rs 35 crore on M.G.M. Maran, the former chairman of TMB.

The investigation under FEMA was taken up in the TMB share allotment case following a reference made by the Reserve Bank of India. The apex bank wanted an investigation into advance remittances received by certain entities for purchase of TMB shares through an escrow mechanism maintained with Standard Chartered Bank, Mumbai (SCB).

The case was adjudicated by the adjudicating authority viz., the Special Director, Enforcement Directorate, Southern Region.

In his order, the adjudicating authority imposed a penalty of Rs 11.33 crore on TMB for recording in its books the transfer of 46,862 shares of TMB in the names of seven foreign entities – RST Limited (wholly-owned by Ravi S. Trehan), Katra Holdings Limited (wholly-owned by Ramesh Vangal, a former Indian head of  Pepsi), GHI I Limited (wholly-owned by Rajat Gupta), (iv) Kamehameha (Mauritius) Limited, FI Investments (Mauritius) Limited, Cuna Group (Mauritius) Limited  and  Swiss Re Investors (Mauritius) Limited. These entities were not approved by the RBI for acquiring the shares of TMB.

A further penalty of Rs 5.66 crore was imposed on TMB for its act of recording in its books the subsequent transfer of 27,289 shares out of the above 46,862 shares in the names of two foreign entities – Sub-Continental Equities Ltd, Mauritius and Robert & Adris James Company Limited, Mauritius, without the permission of the RBI.

A penalty has also been imposed on the directors of the board of TMB, who approved the recording of the transfer of shares of TMB.

The adjudicating authority has held SCB guilty of contraventions of the provisions of FEMA for opening the SCB Project Windmill (Sale Consideration) Escrow Account, without prior permission of the RBI and for having allowed deposits totalling Rs 113 crore in the said account and for having held 1,12,151 shares of TMB in SCB Project Windmill (Shares) Escrow Account. Accordingly, a penalty of Rs 34 crore has been imposed on Standard Chartered Bank for the above contraventions.

In addition, a penalty of Rs 66 crore has been imposed on Standard Chartered Bank for providing collateral/ guarantee/taking into custody of TMB shares and original sale deeds of land in lieu of which Standard Chartered Bank, Mauritius granted a loan of  55.40 million (equivalent to Rs 221 crore) to three foreign entities Katra Holdings Limited (Mauritius), RST Limited, Cayman Islands and GHI I Limited, Cayman Islands, without any special permission from the RBI.

A penalty of Rs 35 crore was also imposed on M.G.M. Maran, then Chairman of TMB, for having opened, without the permission of the RBI, a bank account in Singapore and for having received foreign exchange to the tune of $68,50,000 (equivalent to Rs. 28.08 crore) in the said account from a foreign entity as consideration for facilitating and assigning the rights towards transfer of shares of TMB in favour of Katra Holdings Limited, consequent to a private agreement with Katra Holdings Limited, and for having failed to repatriate the said foreign exchange of $68,50,000 into India.

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The bank has often been a target for takeover. An internecine quarrel between the promoters of the bank from the Nadar community saw the Ruias of Essar pickup close to 65% shares in the bank sometime in the first half of 1990s.

When they couldn’t get the shares transferred in their names following opposition from the RBI, they got out of TMB. They eventually sold their shares to C. Sivasankaran of the Sterling group. It was a kind of a barter deal by which they transferred the nearly half-a-dozen firms which they had acquired and which had held shares in TMB. In lieu of them, the Ruias got from Sivasankaran the cellular licence which he had held for Delhi circle.

But even Sivasankaran too faced stiff resistance when the community closed ranks and resisted his attempt to take over the bank. TMB became a hot political subject so much so that the issue headed straight to the corridors of power at the Centre. Peace arrived at a meeting with L.K. Advani, the former deputy prime minister, with which Sivasasnkaran agreed to sell the shares back to the Nadar community. Much water has flown under the bridge since then. Vangal and associates got into the bank thanks to the lack of cohesiveness with the promoter group.

Even today, ownership is a touchy issue in TMB. It appears the latest action by the adjudicating authority under FEMA has brought the TMB issue back to square one.

K.T. Jagannathan is a senior business journalist.