Banking regulator Reserve Bank of India (RBI) is sifting through the recent events that have unfolded at BharatPe, one of the joint venture partners of Unity Small Finance Bank, to examine if there were violations of corporate governance rules and whether those have a bearing on the criteria set for promoters of banks, said two people with direct knowledge of the matter.
Trouble at BharatPe, which along with Centrum Financial Services, promotes Unity SFB, began when an audio clip surfaced that purportedly had co-founder Ashneer Grover abusing a Kotak Mahindra employee, accusing the bank of declining to finance his personal investment in an IPO launched by beauty company Nyka.
Grover, 39, maintains that the clip is fake, but the controversy snowballed after he sought damages from Kotak Mahindra boss Uday Kotak. Kotak Mahindra Bank in turn said Grover used "foul" language to threaten its employees and reserved the right to take appropriate legal action against him.
Grover was subsequently asked to go on leave until mid-March by the BharatPe Board, which was followed by the exit of his wife Madhuri Jain Grover. There are alleged issues in the operational matters and instances of financial irregularities at BharatPe, according to a report submitted to BharatePe Board by Alvarez and Marsal, a risk advisory firm.
The report primarily focuses on two irregularities. The first is with respect to the recruitment process and the second is about payments to non-existent vendors.
The report noted that it was difficult to assess why the company was dealing in purchases from non-existent vendors and why the company was unable to give proof of delivery of materials. These matters require further detailed investigation, said the report.
Moneycontrol has accessed the report.
This amplifies the corporate governance woes of BharatPe.
“Along with the fit and proper criteria rules laid out by the central bank that emphasises on past performance, capital preparedness etc, maintaining golden standards of corporate governance is crucial in the eyes of the regulator. The RBI is looking at the recent developments in BharatPe to see if there is any violation,” said one of the persons quoted above.
The second person cited above said RBI’s interest is to protect the depositors. “For this reason, the regulator will always look at the financial position and corporate governance standards of the entities that promote banks. In this case also, the RBI is looking at these aspects.”
Both spoke to Moneycontrol on condition of anonymity.
Grover, on his part, is bracing for a legal fight with the BharatPe board and investors.
On June 18, 2021, the RBI had given in-principle approval to Centrum Financial Service to set up an SFB in partnership with BharatPe. The partnership took effect on January 25, 2022, when the RBI and government permitted Unity SFB to merge with itself the troubled PMC Bank.
The merger process is on.
Can Unity-PMC merger face trouble?
If the regulator finds evidence of major violations of corporate governance at BharatPe, the RBI could put a stop to the Unity SFB-PMC Bank merger, according to corporate lawyers.
“If the RBI deems that the recent developments in BharatPe involving Ashneer Grover and his wife are suggestive of governance issues and therefore challenging the fit and proper parameters, then the RBI could stop the process of Unity Small Finance Bank-PMC Bank merger,” said Ashvin Parekh of Ashvin Parekh Advisory Services.
This comment is significant since the merger is underway after nearly two years of delay in a resolution for PMC Bank. The central bank has the powers to intervene in the merger process if the promoters’ fit-and-proper criteria is questioned with evidence.
Harvinder Singh, Partner, DSK Legal, said the RBI can relook at the approvals if there are adverse findings of the forensic investigation that BharatPe’s board has ordered.
“The allegations against Grover in the media till now is of personal nature. Till now there is no criminal case or allegations of financial fraud on Ashneer or his wife or if they have done something morally wrong. The RBI should not act on media speculation."
Akshay Sachthey, Associate Partner, Phoenix Legal, said the developments are likely to worry PMC depositors, several of whom are not satisfied with the payment proposal under the PMC-Unity merger scheme.
“The RBI is also likely to closely scrutinise the developments given the overwhelming public interest involved, although with the merger sanctioned and in force, it seems unlikely that it would be unwound,” Sachthey said.
The RBI has wide powers under the Banking Regulation Act, 1949 including to remove directors/officers to protect the interests of the public/depositors and secure proper management.
“But these powers will apply to the regulated entity, Unity, which is a different legal entity from BharatPe, and does not have Grover on its board. It seems Unity proposes to shaft in ex-CAG Vinod Rai as a director, which could help bridge the trust deficit with depositors,” said Sachthey.
On January 28, in an exclusive interview to Moneycontrol, Centrum chairman Jaspal Bindra said the Grover controversy doesn’t affect the Centrum-BharatPe JV partnership.“The individual issue that you're talking about is really more of an issue for them, I suspect, than it is for us. Because I don't think so a single shareholder is going to change the partnership dynamics between us,” Bindra said.