Does a private bank’s discharge of its public duties have a bearing on how it appoints its Board of Directors? That question was debated during a recent Kerala High Court ruling, which upheld Dhanlaxmi Bank’s appeal against four petitioners who had dragged the lender to court after the petitioners’ applications for Board positions were rejected.
On October 25, a division bench of the Kerala High Court ruled that while Dhanlaxmi Bank may have to discharge various public duties in the course of its banking operations, like receiving deposits, issuing loans, etc., how it appoints its Board of Directors was a private matter.
“The Dhanlaxmi Bank may have to discharge various public duties in the realm of its banking operations like receiving deposits, issuing loans, taking steps for recovery and so on. But the said function discharged by the appellant banking company has nothing to do with electing the Board of Directors, which is a private affair, if at all assuming that such transactions have any public element and public duty,” said the court.
Prominent lawyer Rafiq Dada appeared for the bank, while P Chidambaram represented the petitioners.
What is the case about?
At the heart of the matter is the ongoing power struggle at Dhanlaxmi Bank’s Board. A section of powerful shareholders and former directors want Board seats. But the bank rejected their applications. This led to a legal battle.
The petitions were filed by KN Madhusoodanan, P Mohanan, PK Vijayakumar, and Prakash DL against the Reserve Bank of India (RBI), Dhanlaxmi Bank, and its Board of Directors. Earlier, a single bench had ruled that the petitions were maintainable. But the division bench has now ruled against this order.
The petitioners contested the rejection of their candidature to Board positions, saying that under Section 178 of the Companies Act, 2013, a Nomination and Remuneration Committee is to be constituted, and the duty of the said committee, under Section 178(2) of Act, is to identify persons qualified to become Directors of the company following the criteria laid down, and recommend their appointment to the Board.
That apart, the petitioners pointed out that neither Section 160 nor Section 178 of the Act provided any right to the Board of Directors to reject or refuse the placement of the names before the General Body, they said.
What is the bank’s contention?
Dhanlaxmi Bank contended that these legal provisions do not apply to the bank as it was a private institution, and not a public entity or statutory body. Hence, the bank raised a preliminary objection regarding the maintainability of the writ petitions. The bank said it was not a statutory body and did not discharge a public duty or a positive obligation of a public nature. Hence, the appointment of Directors is a private decision.
What did the court say?
In its order, the division bench said even if one assumes that certain public duties were discharged by the bank with respect to receipt of deposits and issue of loans and other financial activities, it had nothing to do with who the company chooses to appoint to the Board.
The court noted that none of the provisions of the Banking Regulation Act and the SEBI Act dealt with the appointment of Directors of private banking firms.
“Even assuming that the procedures contained under Section 160 and Section 178 of the Companies Act are violated, it is a subject matter within the realm of a private dispute by and between the rival parties,” the Court said.
Why is the HC order significant?
This order sets a precedent for future cases, where shareholders or investors move court seeking board positions in private banks.
What happens now?
The development comes in the wake of some shareholders calling an extra-ordinary general meeting (EGM) on November 12. Among the points on the agenda is the authorisation of CK Gopinathan, one of the Directors, to reach a settlement with the petitioners. However, with the latest HC ruling, this resolution may turn irrelevant.
Why did Dhanlaxmi shareholders call an EGM?
The shareholders also want to limit the powers of the present MD and CEO, Shivan JK, to use capital, except for necessary expenses.
Shareholders who requested the EGM are unhappy with the CEO’s performance, particularly his management of the bank’s capital position .
The petitioners can now move higher courts challenging the verdict of the division bench, which is the likely scenario now. The bank has already moved caveats in the Supreme Court, civil courts and the National Company Law Tribunal.
Who are the directors of Dhanlaxmi Bank?
At present, the RBI has two directors on the Board of the bank — DK Kashyap and Jayakumar Yarasi. At this point, the number of directors on the bank’s board has shrunk to just five, including the CEO, from its full strength of nine members.
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