MUMBAI: A spate of sharp, complex transactions dating back to 2007, involving a bid by certain offshore entities to acquire Tamilnad Mercantile Bank (TMB), an old private sector lender in India, have come back to haunt the British bank Standard Chartered.
The Directorate of Enforcement (ED), Chennai has imposed a penalty of Rs 100 crore on Standard Chartered Bank (SCB) for alleged violations of regulations under the Foreign Exchange Management Act. Ranjan Ghosh, former SCB India head of financial institutions, has been fined Rs 50 lakh. Close to a dozen former directors of the TMB, one of its former chairman, and former company secretary have also been pulled up by the Directorate, according to an order released a week ago.
TM, headquartered in the southern port city Thoothukudi, held a board meeting on Tuesday to discuss the findings by the Directorate. K.V.Rama Moorthy, chief executive of the bank, declined to comment on the matter.
The numerous transactions, disputes, and alleged violations outlined by ED and mentioned in an earlier Reserve Ban k of India (RBI) report — which ET has reviewed — come across as an elaborate plan to put in place a financial arrangement to gain a gradual control in a bank by sidestepping restrictions like the 5% cap on shareholding in a private bank and RBI’s cautious approach in issuing new banking license. And, SCB, with the backing of its headquarters from London, was central to this plot.
On one hand, the then board of TMB, with the assistance of SCB, allowed transfer of shares to foreign entities which were not approved by RBI; on the other hand, SCB was involved in multiple roles: SCB India held a rupee-denominated escrow account to enable the share sale by the Sterling Group to different investors including foreign and local entities; it was the custodian of TMB shares and blank share transfer forms; and Stanchart Mauritius, while running a dollar escrow account for the transactions, also funded the purchase of TMB shares by outfits linked to NRIs like Ramesh Vangal, Ravi Trehan, and Rajat Gupta — who along with 4 other foreign investors were originally approved by RBI to pick up stake in TMB.
According to the ED report, Stanchart India held securities of TMB as collateral for money lent by Stanchart Mauritius to overseas companies for purchase of TMB shares. Such a transaction, without the permission of RBI, amounts of violation of FEMA.
“The Bank is in the process of evaluating the order. As such we are unable to comment further at this stage,” a Stanchart spokesman said in response to an email from ET.
The ED report, which pieces together internal documents and statements from persons and companies named in the transactions, indicate that SCB’s role was more than a pure banker advising and handling a cross-border deal. In fact, SCB, according to internal emails and documents, had a plan to slowly acquire a sizeable stake in TMB with the help of Corsair Investments LLC, a New York based private equity house.
First, instead of transferring shares to seven investors (including the three NRIs/PIOs) approved by RBI), shares were transferred in favour of entities which were connected to the NRIs. As against transferring shares to Ramesh Vangal, Ravi S Trehan, and Rajat Gupta (former McKinsey CEO) and four foreign investors — Kamameha School, Federal Insurance Co New Jersey, Cuna Mutual Wisconsin, and Swiss Re Partnership Holdings Switzerland — the transfers were made to Katra Holdings, RST, GHI, Kamameha Mauritius, Cuna Group Mauritius, and Swiss Re Investment Mauritius. While the NRIs concerned claimed that the first three entities were controlled by them and former TMB officials said it was a technical error, both RBI and ED believed the transfers were against regulations.
Indeed, the stock transaction trail did not stop there. Interestingly, Subcontinental Equities, a SCB group subsidiary, bought shares from RST and Katra while another foreign company purchased shares from GHI — though Katra denied the purported sale.
Of the 2.84 lakk shares of TMB (prior to the 2016 bonus issue) more than 1.21 lakh shares (over 42% equity) were under the escrow account of SCB. Around 51,000 shares are under dispute, according to an old RBI report. At a meeting on May 13, 2007, TMB board cleared the transfer of 95418 shares (about 33%) to the seven non-resident Indians and some residents like Gokul Patnaik, a management consultant, Vector Program Pvt Ltd and others. Of this, the offshore investors were to receive 46800 shares (valued at over Rs113 crore). The decision was legally challenged by a community member, and RBI, following an investigation, had observed that 19 entities (including the 7 offshore investors) were parties acting in concert. Most of these parties denied they were acting in concert. (Sources said the bank’s decision to announce a bonus did not go down well with RBI)
DEAL WITHIN DEAL
SCB had lent over $30 mn to Katra (linked to Vangal) and $18mn to GHI (linked to Rajat Gupta) to fund the TMB share purchase.
A closer look at the dealings of SCB Mauritius and the terms of the escrow account bring out the role and rights of Corsair. According to RBI and ED, Corsair was involved in arranging foreign investors and had the right to nominate investors to whom shares from the escrow account would be transferred to. Patnaik and Vector were not part of the escrow arrangement but allegedly agreed on transfer of shares to offshore parties like East River Holding and Starship respectively. According to RBI, the arrangement lacked transparency and more than 42% of the equity was under an escrow arrangement with a foreign private equity firm (Corsair) which was allegedly trying to wrest control of TMB. The question is, for whom?
It appeared that the maze of transactions was part of a strategy by SCB and Corsair. According to an internal communication, SCB Group Corporate Development Chief David Stileman had said that SCB would lend $30 million that would cement Corsair’s ultimate purchase of 51%. SCB had also explored a right of first refusal pact with Corsair to buy into TMB as and when regulations permitted. SCB planned to initially buy 5% in TMB, have a “privileged access” in the bank and be like a “big brother”. On the ‘right of first refusal’, Stileman had said, “…we only have an unofficial one. We are on Corsair’s board and will have an insight into TMB for a number of years so that when they come to sell we will be greatly advantaged”. Acting as an escrow agent, the strategy reflects a conflict of interest on the part of SCB.
In January 2007, Stileman, in his own name and that of his colleague Jaspal Bindra (former head India and South Asia operations of SCB), recommended in a formal memorandum SCB’s proposed investment in TMB. Responding to SCB group executive director Richard Meddings, Bindra in an email in January 2007 said, “..a major shareholding (in TMB) rests with a businessman with no banking experience. Thus, RBI is even less comfortable with the current shareholder (in TMB) than it might be with a `foreign one’. On the other hand, the community which continues to hold a large stake has political and would not permit their bank falling in the hands of a local bank. I am told Corsair has found a way of being acceptable to both.. however we will know for sure when RBI approves. As far as we are concerned RBI should see us as a syndicate investor within permissible limits and thus not a cause for concern.”
SCB was also a limited partner (investor) in Corsair. Its former CEO Mervyn Davis, joined Corsair in 2010 after retiring and is still the chairman of the Corsair Capital, the fund’s website shows.
In its statements to ED, SSB India claimed that it acted as an agent of SCB Mauritius, the escrow rupee account was like any other NRO account, and TMB shares were never pledged. SCB Mumbai had maintained that it had shares of Scandent Group (linked to Vangal) and title deeds of land belonging to Vangal but no mortage was created in favour of SCB Mauritius. According to ED, Scandent held 62.5% in a local company Cambridge Solutions India Ltd, and SCB had control over Cambridge through ‘non-disposable undertaking & power of attorney structure’. The structure had the effect of SCB Mumbai — which according to ED acted independently and not as an agent — guaranteeing the debt of SCB Mauritius.
SCB India spokesman did not respond to ET’s queries on SCB had any beneficial interest in TMB and whether it is still keen to raise its stake in the southern bank.
As per ROC filings of FY19, Indian shareholders from the Nadar community own 68.16%, NRIs own 24.92% while corporate bodies own another 5.95% of the bank. However, a source the foreign shareholders – including Swiss Re, Robert and Ardis James Foundation Ltd, Vector Programme Limited, Subcontinental Equities own 21.2% of the bank as of March 2020 while the community shareholding is at 75.01%. However, this could not be independently verified.
For FY19-20, TMB deposits and advances have both grown 5% Y-O-Y (FY18-19) to Rs 36,825 crore and Rs 27,715 crore respectively while CASA rose 9.9% to Rs 9,518.08 crore . The bank’s net profit recorded 58% rise in the same period, as per the official disclosure from the bank. The gross NPA as a percentage to total advances fell to 3.62% from 4.32% and net NPA dropped to 1.80% from 2.40%. The capital adequacy ratio (Basel III) of the bank increased to 16.74% from 16.17%. The non-interest income of the bank stood at Rs 526.45 crore as compared to Rs 414.31 crore while the net interest income (NII) has increased to Rs 1,319.51 crore from Rs 1,230.16 crore. The 99-year old Tamilnad Mercantile Bank is intricately linked to the Nadar community. It was originally called the Nadar Bank Limited.