A section of Dhanlaxmi Bank shareholders, including some prominent names, had raised an alarm on the bank’s financials and rising cost of expenses. They called for an extra ordinary general meeting (EGM) on June 12 to address these issues.
That move, communicated in an April 28 letter, was unusual and rarely exercised in banking companies. Under Section 100 of the Companies Act, 2013, shareholders who constitute one-tenth of the paid-up share capital of the company carrying voting rights can call an EGM to raise their concerns.
Also, this EGM happened against the backdrop of a series of exits from the bank’s board, where the strength is now reduced to just five (including the chief executive officer and two nominee directors appointed by the Reserve Bank of India or RBI) from a full strength of nine board members. But, according to the people who were present, contrary to expectations of a shareholder revolt, the whole meeting turned out to be a quiet affair with some general questions being asked by a few of the shareholders.
Even those shareholders who sought the EGM citing a “financial crisis” didn’t raise those points in a manner suggested in their EGM notice. According to insiders, this subdued meeting could be the outcome of a hurried last minute discussion between the bank and section of the rebellious shareholders after the call for the EGM was made.
The bank, logically, doesn’t want bad press at this point. Yet, this doesn’t take away the importance of deeper underlying problems faced by the bank which the RBI must pay attention to sooner than later.
To begin with, the bank needs to have a strong board. As Moneycontrol reported in a recent story, there have been back-to-back premature exits from Dhanlaxmi Board reducing the number of board members to just five.
The Thrissur-headquartered bank has a tumultuous past at the top level. The shareholders had ousted the former CEO, whose name was cleared by the RBI, in September 2020. Right now, among the board members, excluding the RBI nominees, there is only one independent director. One other board member is a local investor holding 10 per cent stake in the bank and one is the CEO of the bank.
There is an ongoing case in Kerala High Court where a group of former directors has challenged the bank’s decision not to award them board seats. As far as the financials are concerned, the bank has indeed reported a profit in the March quarter but its capital adequacy ratio (CAR) and trend in operating expense validate the concerns of shareholders.
In March quarter, the bank reported a decline in capital adequacy ratio to 13 percent from 14.5 percent a year ago. Operating expenses rose to Rs 397 crore from Rs 366 crore, marking an increase of about 9 percent. Provisions more than doubled to Rs 97 crore from Rs 43 crore. Going by the cash flow statement as of March, total cash flows declined to Rs 735.84 crore from Rs 985 crore in the year-ago period.
Overall, the bank’s financials need to be improved and, more importantly, the board needs to be strengthened by inducting more independent shareholders who are truly independent. The regulator needs to be alert.
Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services, had told Moneycontrol recently that the mandate and timelines of action taken by RBI nominees on the boards of troubled banks need to be examined carefully. It could be expanded within the framework of extant laws or the law could be amended.
The RBI, in the past, has ignored early warning signals and acted late to address the corporate governance issues letting the problem turn worse and thus demanding serious last minute rescue measures. It shouldn’t repeat the mistake of merely hoping things to fall in line on its own.
At this point, Dhanlaxmi Bank’s financials aren’t highly alarming. But there are worrying signs of unrest at the board level. The central bank must alert its nominees to pay close attention to the developments to avoid a future mishap.
(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)
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