Sebi says RBI should've handled BoR case better

Stung by allegations of going easy in the Bank of Rajasthan (BoR) case, market regulator Securities and Exchange Board of India (Sebi) has shifted the blame on the Reserve Bank of India (RBI).

In a letter to the department of economic affairs (DEA), Sebi has said merger between the erstwhile BoR and ICICI Bank was approved by the banking regulator despite being "fully aware" of the "surrogate acquisitions" made by the former's promoter entities.

"When the amalgamation was approved, Reserve Bank of India was fully aware about the surrogate acquisitions by the promoter entities and despite the same, it was decided to extend the full benefit of the amalgamation to the promoters of Bank of Rajasthan without any caveats," Sebi has said in its letter to DEA, the contents of which have been seen by Business Standard.

Sebi's letter was with reference to the series of complaints received by the Central Vigilance Commission and the finance ministry against the market regulator in the matter of BoR questioning the low penalty and quality of investigation.

Sebi has said its job centred around probing whether there was any market manipulation by the promoters, while the RBI was the agency which had primary grievance against the promoters and could have handled the matter more seriously.

An email seeking comments on the matter to Sebi and RBI didn't elicit any response.

The violations in the case of BoR date back to 2009, where the promoters - the Tayal group - had actually increased their shareholding through front entities, while disclosures made by them to the exchanges showed that they had reduced their holdings. These violations had occurred ahead of the merger between BoR and ICICI Bank in 2010.

Sebi in March 2010 had passed an order against 100 promoter entities of BoR, banning these from accessing the capital market for acquiring shares under fictitious and benami names beyond the limit permitted by RBI. The order followed a February 2010 order by RBI, imposing a penalty of Rs 25 lakh on BoR.

THE BANK OF RAJASTHAN CASE

2007

• June: Bank of Rajasthan promoters’ shareholding stands at 44.18%, which they had to bring down to 10%, according to RBI guidelines

2009

• November: RBI refers matter to Sebi for examination of violations of the Securities Act
• December: Promoters declare to stock exchanges their shareholding has been reduced to 28.61%. But RBI inspection reveals promoter holding increased via surrogate acquisitions

2010

• February: RBI imposes Rs 25-lakh penalty on bank
• March: Sebi passes ex-parte order against BoR promoters, barring them from the securities market. Sebi investigation reveals promoters increased their shareholding to 63.15%
• August: RBI approves merger of Bank of Rajasthan with ICICI Bank; Sebi issues no-objection certificate

2012

• March: Final order by Sebi lifts ban on 118 entities; refers matter to adjudication officer for penalty

2013

• February: Sebi imposes Rs 30-crore penalty  on 118 entities

2014

• February: SAT revises penalty to Rs 20 crore on 103 entities

"The additional shareholding of the promoters through their front entities could have been considered an unlawful gain, as the amalgamation was a subsequent event and could have also resulted as a loss for the shareholders of BoR as in the case of Global Trust Bank, where the shareholders of Global Trust Bank were not allotted shares of Oriental Bank of Commerce," Sebi has said.

Sebi has also pointed out that the penalty levied by RBI was only Rs 25 lakh even as the penalty in the Banking Regulations Act can be twice the amount involved in such contravention or default.

The regulator in the letter has said it has treated this matter very seriously to check for instance of price or volume manipulation but "no such instance came to light and the offence was limited to wrong disclosure".

The market regulator has also observed that RBI had approved the merger in 2010 even before completion of investigation. However, interestingly, even Sebi granted a no-objection certificate to the merger in 2010, stating that its March 2010 order would not come in the way of the proposed merger.

Sebi has told the DEA that it could not direct the promoters of BoR to make an open offer despite their violating the creeping acquisition limit of 5 per cent as by the time the adjudication proceedings got initiated, the lender was already merged with ICICI Bank.

Last week, the Central Bureau of Investigation (CBI) initiated a preliminary enquiry against Sebi's executive director R K Padmanabhan, who had investigated the case. Also, the minority shareholders of BoR have filed a writ petition in the Bombay High Court against Sebi for imposing an inadequate penalty of just Rs 30 crore on the promoter entities, who the petitioners allege made unlawful gains of more than Rs 700 crore. Sebi's Rs 30-crore penalty was later revised downwards to Rs 20 crore by the appellate tribunal.