RBI refuses to endorse Sivasankaran's Tamilnad Mercantile Bank stake sale

CHENNAI: The Reserve Bank of India has refused to acknowledge maverick NRI businessman C Sivasankaran's sale of nearly 33% stake in the private sector Tamilnad Mercantile Bank (TMB) to Indian and foreign investors four years ago. Sivasankaran had sold the stake to Ramesh Vangal and ex-McKinsey chief Rajat Gupta , among others.   The RBI, which was directed by the Bombay High Court last year to decide on the ownership, has said the deal lacked transparency and it violated the Foreign Exchange Management Act ( FEMA .  According to a copy of the RBI order, available with ET, RBI deputy governor Anand Sinha has found "no transparency" in the deal. He said the seven foreign investors, and the Indian investors had acted in concert and "formed a group" while buying the stake. This, he said, is a violation of FEMA. The investors now have to reduce their collective holding to below 5%.   TMB managing director AK Jagannathan said the RBI has submitted its decision to the bank. "The appropriate stakeholders should study it and see what needs to be done. The RBI order is an order for us and only the implications of the order matter to us."   Vangal couldn't be reached for his comments.   In May 2007, seven foreign investors - Vangal's Katra Holding, Ravi S Trehan's RST, Rajat Gupta's GHI, Kamehemaha Mauritius, FI Investments (Mauritius), Cuna Group (Mauritius), and Swiss Reinvestors (Mauritius) - and Indian investors Gokul Patnai and Vector Programme bought 24.93% in TMB, a Nadar community-dominated bank. These investors paid 24,182 a share for the 10 paid-up share of bank.   Besides the new non-Nadar investors, another 8% was picked up by influential Nadar businessmen and Indian investors such as MGM Maran and MG Muthu, PS Sathiyaseelan, Hemangini Finance and Leasing, Shanmuga Financial Services, L Sridhar, and N Ganeshan. R Chinnakannan and C Chandammal, the parents of Sivasankaran, were also part of this group. These investors had paid 6,050 a share. The shares where bought from four companies belonging to Sivasankaran's Sterling group.   Jagannathan said the bank's accounts are being audited and the balance sheet would be ready by the end of this month. The AGM will also be held shortly where major decisions would be taken. "We will be raising capital and things will evolve after that," he said.  In October 2010, the Bombay HC had restrained the TMB from taking any major policy decision or holding its annual general meeting till the Reserve Bank of India acknowledged the transfer of shares.  Sources told ET that based on the RBI's directive, the bank's board has decided to hold the AGM for the 2010 and 2011 fiscals at Tuticorin on June 15. Among other things, it will list resolutions to be adopted by members for increasing the authorised capital from 1 crore to 100 crore, issue 30 bonus shares for every one share and allow investors to hold shares in the demat form.  Sources said following the directive from the RBI, the bank has to find investors for the over 32% stake at a huge premium. At the same time, the RBI's stand will pave the way for the bank to float a public issue and offer shares to retail investors. On a thin equity of 28.45 lakh, TMB has reserves of over 1,200 crore.