Tamilnad Mercantile Bank IPO Prospectus Lays Bare History Of Governance Lapses

Tamilnad Mercantile Bank Ltd., which has filed its draft red herring prospectus, has a history of governance lapses, the consequences of which linger on as the lender prepares to go public.

The 100-year-old private bank is looking to issue 1.58 crore fresh shares as part of its public offering. While the bank has no identifiable promoter, existing shareholders are also offering 12,505 shares through an offer-for-sale.

While addressing the press in April, the bank's Managing Director and Chief Executive Officer KV Rama Moorthy had said the bank would look to raise Rs 1,000-1,200 crore through an IPO.

Even as it prepares to go public, the bank disclosed that 37.61% of its paid up equity capital, or 5.36 crore equity shares, is subject to outstanding legal proceedings.

"...adverse developments in such proceedings could result in the imposition of injunctions or penalties or require us to incur significant costs..." the DRHP said.

Since 2007, the bank has been embroiled in a controversy over a transfer of shares to non-resident Indians, which also engulfed Standard Chartered Bank.

The DRHP throws light on the facts of that case.

In March 2007, the bank had taken permission from the Reserve Bank of India to transfer 53,611 equity shares held by three domestic shareholders to certain specified non-resident Indians. In May 2007, though, 46,862 shares were transferred to seven other non-resident Indian who were not part of the earlier list.

The transfer in May 2007 was part of a broader transfer of 95,418 equity shares to domestic as well as international investors.

This transfer was first challenged by Kanagaraj, a shareholder, via a writ petition before the Bombay High Court. This shareholder argued that the share transfers were in violation of the private bank ownership norms.

The court directed Kanagaraj to approach the RBI instead.

In March 2011, the RBI found that the transfer to a group of shareholders was in excess of the 5% regulatory limit. Through an order, the regulator refused to acknowledge this excess shareholding.

Even as the transaction was under scrutiny, the bank approved a further transfer of these shares.

"Our bank also approved further transfers of 27,289 equity shares out of the 'unacknowledged shares' to two other non-resident entities on Dec. 26, 2011 and June 11, 2012," the DRHP disclosed.

For years, the matter remained under investigation.

Finally, in August 2020, the Enforcement Directorate levied a penalty of Rs 17 crore on the share transfers. A Rs 50-lakh penalty was also levied on Balakrishnan Prabaharan, a director on the bank's board. These penalties are yet to be paid by the bank, the DRHP said.

Standard Chartered Bank was also fined Rs 100 crore. "Senior officials at Standard Chartered saw an investment in TMB shares as an opportunity that might ripen into an eventually larger ownership for the bank,” the Enforcement Directorate said in its order, according to a Bloomberg report dated Sept. 8, 2020.

The matter did not end there.

In October 2020, the bank sought to compound the violations. Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal.

In January 2021, the RBI turned down this request saying the nature of violations could were not eligible for compounding. The bank wrote to the banking regulator again in July 2021, asking it to reconsider the compounding request.

The matter is now pending with the Appellate Tribunal for Foreign Exchange.

In 2016, Tamilnad Mercantile Bank also issued bonus shares to its shareholders at a ratio of 1:500.

In November 2017, the Enforcement Directorate issued another show-cause notice to the bank and its directors citing violation of FEMA guidelines during the May 2016 bonus issue. This was linked to:

1. Issuance of bonus shares against the shares transferred in 2007.

2. Another 10,589 shares transferred in violation of FEMA guidelines in January 2017.

3. Additional 54,700 shares held in an escrow account at Standard Chartered Bank (Mauritius), which was opened and maintained in violation of FEMA guidelines.

The ED's show-cause notice in 2017 sought an explanation from the bank on why it should not levy a penalty of Rs 531 crore against the shares issued in cases (1) and (2) mentioned above and an additional Rs 506 crore penalty for (3).

While the bank has filed its responses to the notice, the matter is yet to be resolved. According to the DRHP, the RBI, in its risk assessment reports for fiscal year 2018 and 2019, noted that the bank has not taken any steps to account for this penalty being levied.

Various institutional and individual shareholders have also filed petitions at different high courts, challenging the transfer of shares.

In January 2016, Tamilnad Mercantile Bank got a order from the Supreme Court which would club all these petitions under one bench.

The Ministry of Corporate Affairs had also issued a show-cause notice to the bank, for violation of certain sections of the Companies Act and failure to organise an annual general meeting in 2017.

The bank is contesting the show-cause notice as it is required to conduct its AGMs under the chairmanship of a retired justice, with special permission of the court. This condition was laid down as part of the ongoing cases.

Annual general meetings for 2020 and 2021 have also not been conducted.

T Rajakumar, a former director, has also filed a writ petition at the Madras High Court in June, seeking to prevent the bank from going public citing alleged mismanagement and the ongoing investigation by the Enforcement Directorate.

In his petition Rajakumar has iterated that:

• The names of the persons in control of the bank have not been disclosed in the annual report.

• There was a spurt in the bank's business in fiscal year 2020-21.

• The bank does not need to go for an IPO since it is adequately capitalised.

According to the DRHP, while the matter is still pending before the court, the bank has filed a counter-affidavit in August 2021, denying these allegations and seeking dismissal of the petition.

In August 2011, the bank's board had disqualified Rajakumar's board presence for not meeting the fit and proper criteria. Eventually, the former director was successful in his challenge against the disqualification at the Thoothukudi District Court. He was allowed to then serve his full term at the bank.

Tamilnad Mercantile Bank has challenged the district court's order at the Madras High Court. Even though Rajakumar has vacated his board seat in 2016, the challenge is still pending.

Later in September 2019, Rajakumar held a press conference in Chennai, where he alleged that there was mismanagement at the bank.

Following these claims, Tamilnad Mercantile Bank filed criminal and civil cases against Rajakumar, which are currently being heard at the Madras High Court.

The RBI has also levied penalties on the bank for contravention of independent, daily reconciliation norms on the Swift platform, divergence in non-performing accounts, delay in reporting frauds, violation of cybersecurity norms and not monitoring end use of funds.

For the year ended March 31, 2021, the bank reported a net profit of Rs 603.3 crore, up 48% year-on-year. Net interest income for the year was at Rs 1,537.5 crore, up 16.5% from a year ago.

Gross non-performing asset ratio for the bank stood at 3.44%, while net NPA was at 1.98%.