The RBI Bares Its Fangs

AFTER the judiciary, it appears to be the turn of the country’s Central bank to turn activist. Recently, the Reserve Bank of India (RBI) virtually rejected the statutory ruling of the Company Law Board in the Tamilnad Mercantile Bank case. The Tuticorin-based bank hit the headlines a couple of years ago when the Ruias of the Essar Group acquired the majority shares of this bank from the family of one of the original promoters. The Ruia brothers had earlier won a legal battle after picking up the equity at a hefty price of Rs 4,750 per Rs 10 share.

Seven companies of the Essar group acquired about 68 per cent of the bank’s share in the Rs 28 lakh equity of the bank. The predatory moves, which began in September 1994, have come to a grinding halt following the RBI refusal.

The Central bank has listed a few reasons for rejecting Essar’s claim. Prima facie, according to the RBI communique to the bank’s board, the shares were acquired with a view to obtaining controlling interest. The seven companies of the Essar group will have more than 10 per cent of the voting right, which contradicts the one per cent limit prescribed under Section 10 (12) of the Banking Regulations Act. The RBI has discretionary powers in rejecting such transfers and has rejected the move on the ground that "Essar is an undesirable industrial group as it is known for its irregular repayments and has defaulted on bank accounts. A defaulter cannot become the owner of a bank". Pretty strong words for the staid RBI.

The apex bank has also pointed out that the present policy does not permit industrial groups to own private banks. "The disallowance of Reliance, Tatas and Birlas was the result of this policy." Earlier, the RBI had rejected Essar’s attempt to take over the Bangalore-based Vysya Bank despite the support of the then chairman of the bank, Ramesh Gelli.

The Ruias entered the scene by cashing in on the rift between the families belonging to the Nadar community which promoted the Tamilnad Mercantile Bank—Kathiresan-Vettrivel of the TSM group, the Pioneer Asia Match group of Sivakasi and the Ayyanar Spinning Mills group of Virudhunagar. The Pioneer group sold its 23 per cent stake to the Ruias to spite the others. This was followed by the Virudhu-nagar group selling 10 per cent to the Ruias. The entire Nadar community viewed the entry of the Ruias as an as ault on them. Under the chairmanship of newspaper baron Sivanthi Adityan, a share retrieval committee was formed and it announced an offer to buy back the shares at a hefty price of Rs 5,000 per Rs 10 share.

The state witnessed many rallies against "the northerners’ policy to take over their own bank". Adityan met Chief Minister M. Karunanidhi and sought his help to bring the bank back into the fold of the Nadar community. Meanwhile, the bank’s board worked out a compromise formula according to which the Ruias, after their formal takeover, would have four directors from the Nadar community on a permanent basis. The Company Law Board had accepted this settlement. Sensing the upswing of the Ruias’ fortunes in the Board order, the TSM group of Vettrivel—which initiated moves against the ESSAR group—sold its 2,300 shares at a reported price of Rs 3,750 per share.

Naturally, the RBI directive has come as a rude shock for the TSM group. Meanwhile, Nadar community leaders feel that their stand is vindicated by the recent ruling. This leads to a curious question: with the RBI refusing to permit the transfer, what will the Ruias do with the 68 per cent stake? They bought the shares at a higher price than is prevailing currently. And anyway, with RBI ruling against the takeover attempt, the share price can only be expected to nosedive. That could mean huge losses for the Ruias, who are reportedly already overextended and cash-strapped due to hectic diversification—from steel to shipping, from oil exploration to cellular telephony over the last decade.

Above all, the RBI ruling sets an important precedent. And shows that the Central bank’s bite can be worse than its bark.