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| Better be bankable | | The Tayal case should be a wake-up call on new banks |
| Business Standard / New Delhi Mar 15, 2010, 00:10 IST |
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While RBI readies to start issuing new banking licences and looking at criterion like increasing the net worth requirements, it would do well to look back at the Bank of Rajasthan case and see if it has learnt any lessons from it. And these involve looking at the history of those allowed to run banks where thousands of crores and more of public deposits are at stake. With the Bank of Rajasthan’s extraordinary general meeting last week resulting in P K Tayal, the bank’s largest shareholder, not getting re-elected as a director, RBI’s immediate worries may be over; but the details of whether Tayal, in fact, used his position to influence the bank’s lending will be known only after the special audit report by Deloitte Haskins and Sells is out by the end of the month — the bank, it turns out, didn’t even have credit committees to clear large loans, according to an interview given by its managing director and chief executive officer. That things had been going wrong at the bank, of course, is something RBI has suspected for some time and that is why, last November, the central bank appointed the new chief executive and managing director. Last week, acting upon a reference from RBI, stock market regulator Sebi found that, while professing to have reduced his shareholdings in the bank (from 44.2 per cent in June 2007 to 28.6 per cent in December 2009) in line with RBI directions, Tayal had actually increased his shareholdings to 55 per cent. This was done by transferring funds from Tayal group companies to the Yadav group of companies — the latter bought the bank’s shares and later transferred them to firms located in Silvassa at addresses which were the offices or manufacturing facilities of various Tayal group companies.
Two sets of issues come up. First, if this had been going on for a while, why is it that no RBI audit caught this? Two, this is not the first time Tayal has been the subject of serious investigations by the authorities. In 1996, for instance, the income tax authorities had alleged a group company had inflated bills of textile machinery by Rs 145 crore — when an audit was done at the behest of a financial institution, IFCI, the auditor said the company had said the vouchers for this amount had been destroyed in a fire and that some data relating to two Tayal companies had got corrupted in the computer. In 1998, the Central Economic Intelligence Bureau had found evidence of share transactions of the type Sebi has now discovered and pointed out the funds for these share transactions were provided by siphoning off money from group companies. All of this was known to RBI but instead of probing deeper, it just went by the book — when the matter was referred to the Department of Company Affairs, it fined the group Rs 58,000 (!) in keeping with the provisions of law and ended the matter. So, from RBI’s point of view, there was no pending case against Tayal. Given the facts of the Tayal case, and the manner in which investigations either drag on, get closed for political reasons or get settled with minor fines, RBI needs to take a larger view of the history of the groups being considered for banking licences, and also remember the principles that defined bank nationalisation in 1969, including delinking of industrial and finance capital.
(Disclosure: Kotak Mahindra Bank is a significant stakeholder in Business Standard)
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