Dhanlaxmi's governance turmoil: A saga of management-shareholder conflicts

The differences between the two are being complicated by an unsolicited bid from a little-known Delhi-based business group

At the end of August this year, Dhanvarsha group, a Delhi-based diversified business house, made an unsolicited Rs 300 crore offer for Kerala-based private sector lender Dhanlaxmi Bank. Dhanvarsha has offered Rs 11.85 per share — the stock is quoting at Rs 12.45 levels — to acquire the bank’s entire equity stake.

Dhanvarsha has said its proposal is pending before the bank’s board. The group, whose activities span e-commerce, infrastructure, travel and tourism, retail, pharmaceuticals, information technology, education, and cyber security, is expanding into banking in a major way. Last month, it submitted a proposal to bail out Mumbai’s City Cooperative Bank, with a capital infusion of Rs 230 crore, and has already signed an agreement for private placement.

Anshumman Joshi, chairman, Dhanvarsha group, told Business Standard that the group is also aggressively looking at other co-operative banks such as Raghavendra cooperative bank in Bengaluru. So why does it want to buy Dhanlaxmi? “I need a commercial bank that can be a face for taking over other (co-operative) banks,” he explained.

The choice of bank is certainly challenging, not least because of Dhanlaxmi’s long history of shareholder-management conflicts. In 2009, when Amitabh Chaturvedi took charge as the managing director and chief executive officer (CEO) of the bank, speculation was rife that he would pave the way for the acquisition of the bank by Anil Ambani’s Reliance Capital, since he had headed the latter’s financial services arm before taking charge at the Thrissur-headquartered bank.

In those days, Ambani’s ambitions in banking services were well known. In one of the early meetings itself at Thrissur town hall, Chaturvedi had to clarify that he was not an “Ambani man” and his aim was to make the bank stronger. In August 2010, he changed the name of the bank to Dhanlaxmi, three letters short of the previous name Dhanalakshmi Bank. Though Ambani’s Reliance Life Insurance held 3.21 per cent of the bank in 2014, the speculation did not materialise (the group no longer has shares in the bank).

However, the rift between the management and the shareholders has been a perennial cause of concern in the bank’s operations. According to industry experts, several shareholders acquired the shares at about Rs 40 around 2013 and did not get any returns so far. The changing management thus could not live up to shareholders’ expectations.

The rift has led to the exit of many top-level executives of the bank over the past five to six years. The list of recent exits includes Suseela Menon (an independent director) in May 2022, Sunil Gurbaxani (ousted as CEO) in October 2020, G Subramonia Iyer (part-time chairman) in December 2021, Sajeev Krishnan (part-time chairman and independent director) in June 2020, and T Latha (MD and CEO) in October 2019 among others.

“The bank has gone through very turbulent times. I had raised my voice against many of the issues related to the management,” said P K Vijayakumar, an independent director of the bank from August 2020 to August 2021.

In June this year, the bank had an extraordinary general meeting (EGM) called by a group of 11 minority shareholders unhappy with the working of the bank and its financials. The shareholders were miffed with the bank’s rising expenses, low capital adequacy, and overall financial performance.

The latest casualty due to the tug-off war between the management and the shareholders is Dhanlaxmi’s plans to raise Rs 127 crore through a 2:1 rights issue to improve its capital adequacy ratio, which fell to 12.98 per cent as of March 2022, to over 15 per cent in 2022-23. The idea was to push its growth plans by coming up with new branches and products.

“The main issue with the bank is that they don’t have a proper board in place and have only one independent director. To go for a rights issue, you need to complete the quorum. After August 2020, not even one director except the MD and CEO was appointed by the board. Even now, the management is not willing to take more directors,” Vijayakumar said.

But Dhanlaxmi is unable to appoint new directors owing to a legal tussle at Kerala High Court, between the management and a group of shareholders. The shareholders had approached the court in an attempt to prevent the management from appointing new board members. The rights issue will not get cleared as the bank is unable to fill the mandatory posts of women and independent directors.

A compromise formula was floated recently based on which the management agreed to appoint Ravindran Pillai and K N Madhusudan as board members. Pillai is the head of R P Group and holds 9.99 per cent stake in the bank, while Madhusudan holds around 1 per cent. Pillai was on the board of the bank till May 2020 when he turned 70. He claimed re-election after the Reserve Bank of India (RBI) raised the age limit of non-executive directors to 75 years in 2021. But in March this year, the high court stopped the bank from holding an annual general meeting for the appointment of directors, until the legal issues are sorted.

The current directors on the bank’s board are C K Gopinathan, a former director of Catholic Syrian Bank who holds 10 per cent equity; Chief Executive Officer J K Shivan; independent director G Rajagopalan Nair, an expert on fintech with a long experience in banking; and the two RBI nominees, D K Kashyap and Jayakumar Yarasi.

Sorting these legal problems is just one of the issues with which a new owner will have to contend. “The bank is also facing serious financial issues. It has posted a net loss during the last quarter owing to higher expenses and increased provisioning,” said a former managing director of the bank.

Indeed, against a net profit of Rs 6.8 crore in the first quarter (Q1) of FY22, the bank saw a huge net loss of Rs 26.4 crore in Q1FY23. The bank’s total income for Q1FY23 was Rs 237 crore against Rs 246 crore in the same period last year.

To be sure, asset quality has improved with gross non-performing assets reducing to 6.35 per cent of the gross advances during Q1FY23 compared to 9.27 per cent in the same period last year. Similarly, its net non-performing assets also dipped to 2.69 per cent during the quarter this year, as against 4.58 per cent last fiscal. Dhanlaxmi was under the RBI’s prompt corrective action framework between November 2015 and September 2019.

So Dhanvarsha may be buying a bank with decent fundamentals. But it will have to deal with a bunch of irate shareholders first.