Thrissur-based Dhanlaxmi Bank’s shareholders have raised the alarm on the lender’s financial situation and rising costs even as its board tries to recover from two back-to-back resignations.
At this point, the number of directors on the bank’s board has shrunk to just five from its full strength of nine members. The directors who remain include C K Gopinathan, who is also a major investor in the bank with a 10 percent stake, and an independent director, G Rajagoplan Nair.
Besides the CEO, the only other two directors are DK Kashyap and Jayakumar Yarasi, who are RBI nominees.
Markets regulator Sebi requires listed companies to have a minimum of six directors on the board.
Also, listed companies should typically have at least three to four independent directors in the interests of good corporate governance, say, top experts. If Nair resigns, the bank will have none left.
One of the independent directors, Suseela Menon R, resigned with effect from May 1, citing personal reasons. But, according to Dhanlaxmi Bank insiders, the actual reason for the resignation is due to differences with a section of investors.
According to a person in the know, the bank may face legal hurdles in appointing fresh directors as there is an ongoing court case in the Kerala High court on the board seat battle.
A few former directors had moved the High Court seeking a judicial intervention to direct the Bank to place their candidature for directorship at the Annual General Meeting. The petitioners are K M Madhusoodanan, P Mohanan and Prakash DL.
Other shareholders of Dhanlaxmi Bank include MA Yussuffali (5 percent), Kapil Wadhawan (5 percent), Shital Raghu Kataria (2.63 percent) and Vespera Fund (4.42 percent).
Shareholders raise alarm
Meanwhile, a section of Dhanlaxmi Bank shareholders has written to the Board seeking an Extraordinary General Meeting (EGM), citing a financial crisis, even as the turmoil on the Board continues.
In a letter to the Board on April 28, these shareholders warned of an impending financial crisis at the bank, citing uncontrolled expenditure resulting in a worsening cost-to-income ratio and falling capital adequacy. Following this, the bank has called an EGM on June 12.
“The Bank is passing through a financial crisis as is evident from the results for the quarter ended 31/12/2021 and the Cost to Income Ratio has risen to alarming proportions. The Bank is not having any effective control over expenditure especially Legal and Administrative,” said the shareholder letter.
“The Bank is going to start new branches and recruit fresh personnel even though the CAR of the Bank has been adversely commented on by the RBI. A detailed discussion on the financial position of the Bank, especially the abnormal increase under expenditure, has to be initiated by the Bank,” said the letter, which was signed by 11 shareholders.
B Ravindran Pillai, a well-known NRI investor who holds a 10 percent stake in the bank, is among the shareholders who signed the letter. Other signatories include shareholders B Govindan, Hareendran CK, and Jinsha Nath CK.
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.
Weak financials pose a concern
In the March quarter, Dhanlaxmi Bank reported a profit but also 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.
Dhanlaxmi bank was placed under the RBI’s prompt corrective action (PCA) framework in November 2015. The restriction was removed in September 2019, after the bank addressed the financial concerns.
However, the bank has seen a pick-up in lending and improvement in NPAs. In the March quarter, gross advances rose to Rs 8,444 crore from Rs 7,122 crore in the year-ago period, while gross NPAs declined to 6.32 percent from 9.23 percent in the year-ago period.
A troubled past
Dhanlaxmi Bank’s board and top management have witnessed a series of exits in the past. Most such resignations were due to differences between the board members. Former CEO Sunil Gurbaxani was ousted by shareholders in September 2020. In an interview with Moneycontrol, Gurbaxani had alleged there was a conspiracy within a section of shareholders for his ouster. “The Bank needs deep surgery and this bandage approach will not work. Secondly, the professional approach used by me is never accepted by these shareholders. Hence the conspiracy,” Gurbaxani had said.
Last December, G Subramonia Iyer, the part-time chairman of the bank, resigned citing personal reasons. Iyer had retired as executive director at Uco Bank and was one of the three members of a committee of directors appointed by the Reserve Bank of India in October 2020 to run the bank after shareholders voted out Sunil Gurbaxani as CEO.
Iyer was appointed part-time chairman in February 2021.
He isn’t the first Dhanlaxmi Bank chairman to quit ahead of his term. Sajeev Krishnan, part-time chairman and independent director of Dhanlaxmi Bank, resigned on June 29, 2020, citing personal reasons. In 2019, MD and CEO T Latha resigned before her term ended.
Following Krishnan’s resignation last year, two board members quit —- KN Murali, independent director, and G Venkatanarayanan, additional director. Jayaram Nayar, the former chairman, also resigned citing personal reasons.
Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services, said the regulator must take strict action early when banks show signs of early decay.
“The mandate and timeliness 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,” said Parekh.“The record of action in past cases has not been very encouraging. Also, if there is a decay observed in the banking company, either in supervision or operation, immediate action should be taken by the regulator to protect the interests of depositors,” Parekh added.