Rbi Probe Unearths Broker Banthia & #39;S Role In Nedungadi Bank

The Reserve Bank of India's (RBI) inspection report on south-based Nedungadi Bank has confirmed that stock broker -- Rajendra K Banthia -- who was a director of the bank till December 26, 2000, had a substantial shareholding in the bank directly or through his family members or associated firms.

The bank board had approved a scheme in September 1999, which had envisaged the purchase and sale of shares taking advantage of the arbitration opportunities available between the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) as well as other stock exchanges. The board had delegated powers to the chairman and general manager to purchase and sell shares to the extent of Rs 5 crore and Rs 2 crore, respectively.

The brokers, approved by the board for the deal, were Harvest Deal Securities, First Custodian Fund and Srikant G Mantri. The scheme envisaged simultaneous purchase and sale of shares to take riskless arbitrage profits, with the bank not keeping any open position of unsold shares. The brokers would pass on the arbitrage gains fully to the bank and they would get compensated by way of commission/ brokerage.

According to the RBI inspection report, Banthia is closely connected with the three broking firms. Mantri held 10.51 per cent of the paid-up capital of the bank and also had a bank guarantee of Rs 6 crore from the bank along with an overdraft facility of Rs 5 crore. The First Custodian Fund had overdraft and bank guarantee limits of Rs 5 crore each from the bank.

The report further highlighted that all the three broking firms functioned in the same premises and had common phone and fax connections. The report said that these were clear indications that all the three were closely connected and directly/ indirectly controlled by Banthia.

Moreover, Harvest Deal, where Banthia is the managing director, owes an amount of Rs 1.10 crore to the bank by way of interest payable on late delivery as on the date of inspection. The other two associate companies also owed the bank Rs 7.53 crore under the credit facilities enjoyed by them and share arbitrage transactions.

The peak exposure of the bank to the three broking firms was around Rs 94.52 crore when the scheme was suspended. They had paid back Rs 73.42 crore over one year period, leaving a balance of Rs 21.10 crore which was payable by Mantri on March 31, 2000. The firms also owe Rs 8.72 crore towards interest charges for delayed payment of sale proceeds. The value of the underlying shares involved in the transactions have declined and the dues are now largely unsecured.