Mumbai/New Delhi: The Reserve Bank of India (RBI) is looking at the way in which Standard Chartered Plc acquired a 4.64% stake in Tamilnad Mercantile Bank Ltd (TMB) even as an investigating agency is independently looking at whether the UK bank owns more than the permitted 5% stake in the Indian lender.
The UK bank may have done this through a series of transactions involving an escrow account managed by its Mauritius arm, of which Standard Chartered India is a sub-agent, according to an RBI order and an official at the same investigating agency.
Under India’s banking laws, no entity can own more than 5% in an Indian bank without RBI’s approval. The situation is complicated by one of the investors supposedly involved in these transactions, Katra Holdings Ltd, insisting that it hasn’t given up its 3.64% stake in TMB.
While, on paper, StanChart owns only 4.64% through a subsidiary, it could actually own more, said the official. He did not want to be named given the sensitivity of the issue.
At the heart of the matter is the Project Windmill escrow account, an account operated by US-based private equity (PE) group Corsair Capital Llc to facilitate, in 2007, the purchase of a 33% stake in TMB that was held by non-resident Indian businessman C. Sivasankaran. The Economic Times first reported Corsair’s involvement in a 21 April story. A total of 18 investors acquired shares in TMB, with 12 of them holding the stock through the Project Windmill escrow account.
Standard Chartered Bank first issued a loan to one of the investors and subsequently bought TMB’s shares from this investor and one other, according to RBI.
More investors who bought shares of TMB could have been funded by StanChart, said the agency official. Mint couldn’t independently verify the claim.
None of the transactions have RBI approval, according to an order issued by deputy governor Anand Sinha. RBI refers in its order to “allegations” that the investors may have been acting in concert with Corsair or “third parties” attempting to wrest control of the Indian bank.
StanChart did not respond to Mint’s specific queries, saying it is unable to do so due to ongoing legal actions on the matter, but it acknowledged that the bank has a “long-standing relationship with Corsair Capital”.
“We are not in a position to respond in detail, given that there are a number of legal actions taking place in relation to this. However, we can confirm that we have a long-standing relationship with Corsair Capital, which is a highly reputable private equity firm. Standard Chartered maintains the highest levels of corporate governance and has acted at all times within all applicable laws and regulations. We are well aware of the regulations surrounding ownership of financial institutions in India,” the bank said in an emailed statement.
According to the RBI order, which has been reviewed by Mint, StanChart first extended a loan of $20 million (around Rs90 crore today) to Katra Holdings, a firm headed by former PepsiCo India head Ramesh Vangal, to refinance the purchase of 10,364 TMB shares.
Subsequently, StanChart’s fully owned subsidiary Subcontinental Equities Ltd acquired the stakes of Katra and another investor, RST Ltd.
As a result of these transactions, Subcontinental’s stake in TMB increased to 4.64%.
“It appears that four more entities together holding a 13.09% stake in TMB have received loans from Standard Chartered Bank. Similar to Katra’s arrangement, these entities also kept the shares in escrow and gave Corsair the mandate to choose the buyer. We are trying to ascertain the exact amount and whether there is a malafide intent behind such a move,” the official said.
RBI’s order states that “the arrangements under which such substantial portion of the shareholding is held under the escrow arrangement is not clear and lacks transparency”.
The issue has been muddled further by the information in the RBI order that Katra Holdings had denied it sold shares to Subcontinental.
“Katra Holdings…has indicated that Subcontinental Equities has wrongly and illegally made the application to RBI for approval to transfer their shares although they (Katra) have not entered into any agreement with Subcontinental Equities. Due to the conflict of interest involved in Standard Chartered Bank acting as an escrow agent and its subsidiary acquiring shares in TMB, SCB (the bank) is colluding with Subcontinental Equities in trying to transfer away their shares,” the order said.
Emails sent to TMB did not elicit any response.
“Corsair arranged for several highly reputable, world-class, non-Indian investors to purchase shares in TMB in a manner consistent with all applicable Indian regulations,” said the PE firm’s spokesman Robert Siegfried. “Corsair believes TMB is a high quality financial institution.”
Anand Subramanian, chief investment officer of Katra Group, denied any sale of the firm’s stake in TMB and said it remains a shareholder.
“Katra has not sold any of its 3.64% shareholding in TMB and is still the shareholder of TMB. Any transfer of shares to a foreign entity does not arise until RBI approval is obtained and this has not been obtained,” he said. “Katra’s shareholding in TMB is within the permissible limits of an individual entity in a private sector bank in India and its intent has consistently been to remain a long-term investor. We welcome the RBI order. It will help give direction in unwinding a complex situation.”
Sujjain Talwar, partner at Mumbai-based law firm Economic Laws Practice, said a firm acting as an escrow agent shouldn’t be involved in transactions in the account, which amounts to conflict of interest in the whole arrangement. “If the bank has given a loan to the investor to purchase stake in a third entity and if the loan agreement allows the bank to acquire the pledged share in the event of a default, it is normal. But this would be subject to any other agreement between the parties.”
Other investors who bought shares of TMB from Sivasankaran include former McKinsey and Co. chief Rajat Gupta’s GHI Ltd, Kamehameha Mauritius Ltd, FI Investments (Mauritius) Ltd, Cuna Group (Mauritius) Ltd, Swiss Re-investors (Mauritius) Ltd, Gokul Patnaik, Vector Programme Pvt. Ltd, M.G.M. Maran, M.G. Muthu, and several other individuals and entities, both domestic and foreign. TMB refused to acknowledge the transaction and register the transfer of shares.
Earlier, some TMB investors who hold their shares through the escrow account had approached the Bombay high court regarding the ongoing share transfer dispute. Following this, in October, after hearing various writ petitions, the court directed RBI to take an appropriate decision on the transactions by 28 February.
RBI sought time till 31 March, citing the late receipt of information on the investors. It passed the order on 31 March.
The 2007 share sale, under which the Sivasankaran-led Sterling Group sold its stake, has also come under RBI’s scrutiny.
Referring to the foreign investors who bought shares in TMB, RBI has observed in its order that four of them, including Subcontinental, “are yet to obtain approval from RBI under the Fema angle”. Fema stands for the Foreign Exchange Management Act.
“I have no choice but to decline to acknowledge the holding of 5% or more of the paid-up capital of TMBL by the group…the group holding in the aggregate should be below 5% of the paid-up capital of TMBL,” Sinha’s order said.
The Project Windmill account was created for the sale of TMB shares to multiple independent RBI-approved investors sourced by Corsair, the RBI order said, adding that “there are allegations that it (Corsair) is attempting to unilaterally wrest control of all the shares of TMBL”.
“On the whole, shares of 12 out of 18 investors in the group are part of the Project Windmill escrow account and the shares of five other investors have reportedly been sold to an associate of an investor whose shares are already in the escrow account,” RBI said in its order.
“There is a possibility that the shares held in escrow are temporary holdings (with respect to certain investors) awaiting transfers to third parties,” it added.
Noting that the “developments” in TMB have the potential to result in indiscriminate concentration of shareholding in the hands of a few investors, the banking regulator has said it “cannot remain passive to the developments”.
Interestingly, the four Mauritius-based investors in the group—Kamehameha Mauritius Ltd, FI Investments, Cuna Group, Swiss Re-investors— were incorporated as investment vehicles only in 2007 when the transfer of around 33% TMB shares from Sterling Group to a group of foreign investors took place.
RBI said it could not establish the source of funds for some of the individual investors in the group.
Started in 1921, TMB—one of the oldest private sector banks—has been traditionally controlled by the Nadar community. According to the information on its website, the bank had total deposits of Rs11,639 crore as of 31 March 2010, and Rs8,288 crore of loans. It has at least 215 branches and 141 ATMs.
The bank posted a net profit of Rs184.53 crore for the fiscal year ended March 2010.