Shareholders in action

Problems at Lakshmi Vilas Bank should be settled swiftly

The Reserve Bank of India (RBI) on Monday assented to the notion that the Lakshmi Vilas Bank would be run by a three-member committee of directors, alongside the bank’s remaining senior management. This followed a gripping passage in which, at the bank’s annual general meeting last week, shareholders refused to allow seven board members and the CEO to continue in their positions. This left the board decimated, and at a time when the bank itself was in a crisis. It has been making losses for the last 10 quarters; its deposits are dissipating steadily; it has been under the RBI’s “prompt corrective action” for long enough that it has struggled to grow its loan book and return to profitability; and most headlines surrounding the bank are dire, as they concern the investigation of its employees for misappropriating funds in collusion with the erstwhile promoters of Religare. Two arrests in that context were made in Delhi just last week. The bank has seen three managing directors in the past three years.

It is quite clear, given the bank’s position, that without a significant infusion of capital it will not be able to stay on as a going concern. The bank’s auditors had themselves highlighted that in their notes on the results of the March quarter. (The statutory auditors, too, found themselves the objects of shareholder ire at the AGM, and have been dismissed.) The bank had claimed that due diligence for a merger with members of the Clix Capital group was completed. This turbulence, however, might further delay the merger and infusion of capital unless the banking regulator makes a specific effort.

Even if ill-timed, the shareholder revolt is not difficult to understand, given the lack of patience that has been growing among investors with successive attempts to shore up confidence in the bank through news about imminent capital infusions. Among other issues, investor advisory service IiAS issued a report urging the shareholders to vote out five of the directors who, it argued, were “old hands”, and should be replaced. Shareholders clearly took this advice to heart — and, indeed, went significantly beyond it and voted out seven directors. This is a welcome sign of the growing role of advisory firms, mirroring international trends. In many mature markets, investor advisory services play an important role in stirring up otherwise passive shareholders, especially those representing institutional interests.

Even otherwise, however, minority shareholders have been particularly vocal and active in the work-from-home period this year. In August, the India head of private equity major TPG Capital Asia was voted off the board of Shriram Transport Finance by minority shareholders. There have been several other firms where long-term directors — including some promoters — have come under scrutiny from analysts and others. This is, broadly, a healthy trend. While an excessive focus from shareholders on quarterly and annual results can have its downsides — it can lead to short-term profit chasing at the cost of longer-term sustainability and growth, with negative consequences for both company and broader economy — in India the problem has usually been too little minority shareholder power. From that point of view, the Lakshmi Vilas Bank issue fits into a larger paradigm shift. That said, the financial sector can ill afford a bank in such danger for so long. The RBI must get off the sidelines and act on the merger proposal swiftly.