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K.G. Kumar

NEXT week's Annual General Meeting of the Federal Bank, Kerala's leading private sector bank, is bound to be a turbulent one, with tempers running high among an influential section of its shareholders over the alleged move of ICICI Bank to acquire the Aluva-based prized jewel.

The Federal Bank Shareholders' Association has claimed that ICICI Bank was trying to take control of Federal Bank through covert moves. Should that happen, the association says, it will have a deleterious effect on the State in general and the shareholders in particular.

All the five Kerala-based banks — Federal Bank, South Indian Bank, Lord Krishna Bank, Catholic Syrian Bank and Dhanalakshmi Bank — have always been in the sights of takeover artists. It's easy to see why Federal Bank is an especially prime target. Two months back it reported a 20 per cent rise in its net profit for the first quarter of the current fiscal to Rs 45.03 crore, as against Rs 37.43 crore for the corresponding period previous year.

The total income of the bank increased to Rs 372.46 crore (Rs 365.86 crore), while the total expenditure decreased marginally to Rs 254.14 crore (Rs 254.21 crore). As a result, the operating profit increased to Rs 118.32 crore (Rs 111.65 crore), the book value per share rose to Rs 318.61 from Rs 298.24, while earnings per share improved to Rs 82.64 from Rs 62.65.

ICICI Bank, which currently holds a 20.44 per cent stake in Federal Bank, has long been rumoured to be eyeing this little brethren. However, faced with the present resentment among some of the shareholders, it was quick to clarify that it has no intention to acquire Federal Bank.

ICICI says that its shareholding in Federal Bank was acquired through its support to the latter in raising its capital from 1993 onwards. The Reserve Bank of India requires banks holding more than 5 per cent stake in another bank to submit a definite roadmap for reduction of the holding to 5 per cent. In line with this directive, says ICICI Bank, it had already informed the RBI in July 2004 of its intention to reduce its shareholding in the Federal Bank to 5 per cent within a definite timeframe.

ICICI Bank has also clarified that it has no intention of active participation in the executive management of Federal Bank. At face value, this absolves the Aluva-based bank of all its present problems. But verifying how far this promise is being fulfilled will be quite an onerous task. Only time will tell how far this promise is put into practice.

Given ICICI Bank's own problems, it is unlikely to venture into any takeover moves. Nor is the RBI likely to support or condone any such attempt. However, it is strange - in a puzzling sort of manner - to see some sections of Federal Bank's shareholders purporting to be the guardians of the bank's conscience.

Given the past history of banking takeovers in Kerala - notably, the experience of Catholic Syrian Bank and the merger of Nedungadi Bank with Punjab National Bank - the bottom line is rarely the ultimate concern of such interest groups. In the present case, the section of Federal Bank's shareholders opposed to any takeover says it is guided by Kerala's self-interest and the need to protect the small-scale rural customers of the bank.

Often, though, such concerns can fast degenerate into a debilitating parochialism, and the line demarcating parochialism from paranoia is a thin one indeed.

The writer can be contacted at kgkumar@gmail.com

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