The government on Monday suspended the disgraced chairman and managing director (CMD) of Syndicate Bank, a day after he was arrested by the Central Bureau of Investigation (CBI) for accepting bribes to extend credit lines to companies.

Financial services secretary G.S. Sandhu said the government had been intimated by the CBI regarding the case against Syndicate Bank CMD S.K. Jain and has decided that two executive directors of the bank will manage the bank’s operations for now.

The announcement from the government came after market hours even as shares of the Manipal, Karnataka-based bank shares shed 7.05% to 134.40 on BSE.

In a late-evening statement to the stock exchanges, Syndicate Bank acknowledged that the government had placed Jain under “deemed suspension with effect from 2 August".

The state-run bank, however, said it has “taken steps for the smooth running of banking operations".

The one-line statement on BSE was an attempt to assuage investor concerns after the bank stock slumped 9% at one point on Monday because of uncertainty over the running of the bank after Jain’s arrest.

The Reserve Bank of India (RBI) did not respond to an email seeking comment. However, a central bank official said that since a criminal case had been filed, the matter now has to be handled by the government even though RBI will continue to keep tabs on the bank.

The case has once again put the spotlight on governance issues in public sector banks, though it is wrong to generalize, said Vaibhav Agarwal, vice-president of research at Angel Broking Pvt. Ltd.

“This calls for a tightening in governance, and if any positive has to come out of it, it could become a catalyst for the merger of small state-owned banks with larger ones. But things like this have also happened in the past and work has gone on in the next week or month," he said.

Executives of two other private companies have also been arrested in the bribery scandal—Neeraj Singhal, vice-president of Bhushan Steel Ltd, and Ved Prakash Agarwal, CMD of Prakash Industries Ltd.

Bhushan Steel shares fell up to 9.03% while Prakash Industries shares plummeted 20%, or the circuit at which trading in the shares had to be suspended on Monday.

Bhushan Steel shares finally closed 4.23% lower at 378.15. India’s benchmark Sensex rose 0.95% to 25,723.16 points.

In a clarification to the stock exchanges after market hours, Delhi-based Bhushan Steel denied any involvement in the bribery scandal.

“Please note that our company is not involved in any manner with regard to the alleged payments and the same are denied and hence in our opinion would not have any material impact. However, the matter is currently under investigation and we are in process of taking appropriate legal recourse as advised," Bhushan Steel said. Prakash Industries had not communicated anything to the exchanges at the time of going to press.

The CBI claims to have recovered 21 lakh in cash, 1.68 crore of gold and 63 lakh in fixed deposit receipts from Jain’s residence. Raids were conducted at 20 places in four cities of Bangalore, Bhopal, Mumbai and Delhi.

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