Pack of cards: LVB, Dhanlaxmi Bank contagion may engulf other banks

In this article, ETV Bharat's Deputy News Editor Krishnanand Tripathi explains how virtual meetings in the banking sector has loopholes and how there are communication gaps. RBI is yet to appoint officials in the board of Lakshmi Vilas Bank.

Hyderabad: Virtual AGMs, social distancing protocols can come handy to those investors who have been trying to acquire some smaller banks by taking advantage of the situation created by Covid-19 global pandemic, said two people from the banking industry.

Banking industry has been grappling with the news of surprise changes in the management of two banks in less than a week’s time. In both the cases, virtual meetings were used to carry out the change in management of Lakshmi Vilas Bank last week and Dhanlaxmi bank this week.

Even before the banking sector could settle from the shock news of midnight coup in Lakshmi Vilas Bank on September 25 when seven of its directors, including the MD & CEO and also the statutory auditor approved by the RBI, were shown the door in a virtual AGM, the same virtual meeting method was adopted to topple Dhanlaxmi Bank’s MD & CEO Sunil Gurbaxani on Wednesday.

In May this year, the ministry of corporate affairs allowed companies to hold virtual annual general meetings (AGMs) till June end which was later extended to September end as holding physical AGMs looked difficult due to the Covid-19 global pandemic.

“Change of management in the banking sector through virtual AGMs may set a dangerous precedent,” said a former banker.

In case of Lakshmi Vilas Bank, according to the record submitted by the bank to concerned authorities, a majority of shareholders participating in the virtual AGM voted against the reappointment of Managing Director and CEO S Sundar, and six other directors including N Saiprasad, G Jaganmohan Rao, Raghuraj Gujjar, KR Pradeep, BK Manjunath, and YN Lakshminarayana Murthy.

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Appointment of only three directors, former IAS officer Shakti Sinha, Meeta Makhan and Satish Kumar Kalra, a former ED of Andhra Bank was cleared. Meeta Makhan was named as chairperson of the committee of directors, which was approved by the RBI Sunday to run the affairs of the bank till the time a new MD & CEO is appointed.

“This virtual AGM system has a lot of loopholes, one cannot be sure of whether every shareholder was properly communicated or not, whether emails were received or bounced back, who knows all these things,” said a source from the banking industry while declining to be named.

Surprisingly enough, the same virtual AGM route was used to oust Sunil Gurbaxani, MD & CEO of Dhanlaxmi Bank on September 30.

“If this method of using AGMs to topple bank management becomes successful then it will be repeated elsewhere as well,” said the former banker.

He said smaller banks like the Bank of Karnataka or South Indian Bank might also fall prey to such management changes.

Mindful of the contagion effect these incidents may have on other smaller banks, the Reserve Bank same day appointed its general manager DK Kashyap as an additional director in Dhanlaxmi Bank for a period of two years.

“RBI appoints additional directors in case of need, who are non-executive and non-independent and their role is observation and reporting,” a senior RBI official told ETV Bharat.

However, the Reserve Bank has not yet appointed any of its officials in the board of Lakshmi Vilas Bank despite holding several rounds of meetings at its Mumbai headquarters on Monday.