Dhanlaxmi Bank Sees A Return Of Shareholder Strife
Dhanlaxmi Bank's management and shareholders find themselves in the midst of another face-off.
A turf war is once again playing out at Dhanlaxmi Bank Ltd., with large shareholders seeking more accountability from the board and the management.
The 95-year-old Kerala-based lender, with deposits of Rs 12,403 crore and Rs 8,142 crore in advances, is no stranger to shareholder battles. It ousted an earlier Chief Executive Sunil Gurbaxani in one such shareholder battle in September 2020 and appointed State Bank of India veteran JK Shivan as CEO in January 2021.
A little over a year later, the board and management are once again facing trouble from shareholders.
In a March 28 notice that was received by Dhanlaxmi Bank on April 28, shareholders representing a 13.67% stake in the lender have called for an extraordinary general meeting. The shareholders, led by B Ravindran Pillai who owns a 9.99% stake in the bank, have highlighted rising expenses, low capital adequacy and broader financial performance as their reason for calling the meeting.
"A detailed discussion on the financial position of the bank, especially the abnormal increase under expenditure, has to be initiated by the bank," the shareholders said in their notice.
According to three people in the know, who spoke on the condition of anonymity, this could be the first of many steps by the shareholders to try and increase their influence over the bank.
What Shareholders Want
Trouble started in September last year. At that time, the board declined to approve the appointment of five board directors, including Pillai. It also did not clear the reappointment of PK Vijayakumar as a director.
This prompted some of these applicants to approach the Kerala High Court, where they sought that their candidature be placed before an annual general meeting for a shareholder vote. After multiple hearings in the matter, the Kerala High Court on March 9 said that the shareholders' petition was maintainable and stopped the bank from conducting any further annual general meetings for appointment of directors, till the matter was resolved.
This has also meant that the bank has not been to add any new directors to the board. Currently, Dhanlaxmi Bank's board has only five members, including CEO Shivan and two nominee directors from the Reserve Bank of India.
According to the first person quoted above, the shareholders have been irked by the bank's decision to not include them as directors on the board, even though the nomination and remuneration committee of the same board found them to be eligible.
In a recent letter to RBI Governor Shaktikanta Das, shareholders said that by rejecting the candidature of Pillai and Vijayakumar, the board "has shown utter disregard to principles of corporate governance". BQ Prime has reviewed a copy of the letter.
"The bank has been facing a lot of governance Issues since the new MD took over and has a very truncated board. The attempts to fill in vacancies were met with stiff resistance from the two nominees Sri Jagan Mohan G and Sri DK Kashyap of RBI in the board with active support of MD and part-time chairman of the board for reasons best known to themselves," the shareholders have alleged.
Mohan left the Dhanlaxmi Bank board on May 30 and the RBI appointed Jayakumar Yarasi in his place as nominee director, according to an exchange notification.
Shareholders have also raised concerns against independent directors, whom they allege want to take control of the bank.
"Any move on the part of shareholders to increase market capitalisation is resisted by these directors who always wanted to have total control in the bank with support from RBI nominees," the shareholders said in their letter.
Apart from this, shareholders have opposed the opening of new branches and appointing senior officials from other banks, which is adding to cost pressures, the first person said. On April 1, the lender had announced to the exchanges that the regulator had allowed Dhanlaxmi Bank to open 20 new branches.
In the year ended March 31, operating expenses rose 8.5% year-on-year to Rs 397.14 crore. The bank's cost-to-income ratio, though, dropped to 74.73% in the fourth quarter of FY22, from 81% a year ago.
If the current CEO is not willing to listen to the shareholders' demand, they may even seek to oust him, the second person quoted above said. To be sure, a decision in this regard is yet to be made.
JK Shivan and PK Vijayakumar declined to comment. An email sent to Ravindran Pillai remained unanswered.
Amit Tandon of Institutional Investors Advisory Services said the board as well as shareholders have the ability to hire and fire a CEO.
"Even if a CEO was appointed with their approval, the shareholders can call for a vote on his/her tenure and vote on the proposal. We've to remember that all of this at the end of the day is coming from a need to exercise greater corporate control," Tandon said.
The Bank's Position
Dhanlaxmi Bank believes it has followed all regulatory requirements and has fashioned a turnaround, preparing for future growth, the third person quoted above said.
The RBI is also constantly monitoring the functioning of the bank, seeking weekly reports on all developments. So while the shareholders may question the bank's board and the management, the regulator is fully apprised of all decisions made at the lender, this person said.
Asset quality has improved significantly, after a brief period of high defaults during the Covid-19 pandemic. Gross NPA ratio dropped to 6.32% as on March 31, compared with 7.55% in the third quarter. Net NPA ratio has dropped to 2.85%, down 98 basis points quarter-on-quarter. The bank aims to bring its net NPA ratio to below 1% in FY23, the third person said.
Rights Issue Ahead?
According to the third person quoted above, the bank is planning a rights issue of Rs 127 crore, which would help boost the capital adequacy ratio to nearly 13.5%, from the current 12.98%, he said.
"The RBI has been consistently behind the curve when dealing with the old private sector banks. In bank after bank, it is the shareholders that appear to be driving the agenda. You may question their motivation, but these issues need to be raised," said Tandon of IiAS.
According to Shriram Subramanian of InGovern Research Services, the situation at Dhanlaxmi Bank is unique and needs alignment between the management, the shareholders and the banking regulator.
"The shareholders have the right to ensure that the management toes the line they set. It is the management's job to convince shareholders about their strategy," Subramanian said. "But when it comes to banks, the RBI also has a role to play because public money is involved. If the shareholders want that the bank be run by people who listen to them, it is their prerogative to convince the RBI about it."