Business Daily from THE HINDU group of publications
Thursday, Sep 07, 2006
Business Daily from THE HINDU group of publications Thursday, Sep 07, 2006 |
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Money & Banking - Insight United Western Bank: A failure well flagged M. Ramesh
Warning bells On May 30, 1998, the RBI imposed penalty of Rs 10 lakh in respect of irregular transactions in respect of Makharia Group of companies. In its order dated January 15, 1999 the apex bank said that UWB had "violated" its guidelines on Gujarat Telephone case. In 2003, the central bank issued "a letter of displeasure" because the bank wanted to set up a joint venture with SICOM, which holds about nine per cent stake in it.
Chennai , Sept. 6 The failure of United Western Bank (UWB) does not come as a surprise to those in the know of the affairs of the bank, because, at least since 1998 the Reserve Bank of India has been regularly flagging failure symptoms, warning and penalising the bank for various irregularities. These irregularities included giving loans to the Makharia family so that they could purchase the bank's shares and become shareholders, giving loans to the employees' unions for the same purpose and not-so-arm's-length dealings with Makharias and another institutional shareholder, the State Industrial Corporation of Maharashtra (SICOM), according to the Draft Letter of Offer filed by the bank with the SEBI last month. On May 30, 1998, the RBI imposed penalty of Rs 10 lakh in respect of irregular transactions in respect of Makharia Group of companies.
Credit facility
The bank had provided credit facility by way of an overdraft of Rs 6.88 crore to Emtex Industries (India) Ltd for subscribing to its share issue. UWB had also sanctioned letter of credit (LC) facility to Makharia group companies. The RBI observed that the credit facility granted to Emtex was done "for the sole purpose of enabling the Makharia group of companies to subscribe to the rights issue of the bank and LC facility was provided with a view to prevent the Makharia group company's account from turning into NPAs." Today, Emtex Industries (India) Ltd is a BIFR company. It owes UWB Rs 49.91 crore and the loan is classified as "doubtful." Another company, Maliram Makharia Stockbrokers Pvt Ltd, owes the bank Rs 5.75 crore. The company entered into a "settlement" with the bank in July 2003, but as of August 2, 2006, the due instalment had not received by the bank. In 1999, the RBI again asked the bank to pay a fine of Rs 5 lakh because it had allowed Gujarat Telephone Cables Ltd, parent company of GTCL Mobilecom Technology Ltd, to use cash credit facility for subscribing to the capital issue of GTCL Mobilecom. In its order dated January 15, 1999 the apex bank said that UWB had "violated" RBI guidelines.
Interest-free loan
In 2001, the RBI once again had reasons to fine United Western Bank. The bank had obtained the RBI's permission to give an interest-free loan of Rs 6 crore to the UWB Employees Equity Trust, but actually gave the Trust a loan of Rs 20 crore. The apex bank directed UWB to recall the entire amount granted to the Trust by sale of shares and to make provision in the balance sheet for 2000-01 against the expected loss in the loan amount based on the current market valuation of the shares.
SICOM jt venture
In 2003, the RBI issued "a letter of displeasure" because the bank wanted to set up a joint venture with SICOM, which holds about nine per cent stake in it. The bank opted out of the proposed joint venture, SICOM-UWB NRI Services Ltd, after the RBI pointed out that the joint venture was in contravention of Section 19(2) of the Banking Regulation Act. But the bank still had several transactions with SICOM, which include accepting high-cost deposits from the institution, investing in SICOM Venture Capital Fund and purchasing the home loan portfolio of a housing finance subsidiary of SICOM. United Western Bank bought loans worth Rs 9.19 crore for a price of Rs 4.33 crore, but as on date loans worth Rs 3.55 crore have turned into NPAs.
SEBI warning
The SEBI has also warned the bank and the employees' unions for various irregularities. For example, in 1997 the SEBI restrained a branch of the bank from acting as `bankers to issue' for six months, because the branch accepted share applications well after the closure of the issue. In 2004, it warned the bank in the case of the public issue of Anik Ship Breaking Company Ltd, for irregularities in debiting an account. In 2001, the Company Law Board held in the case of PIK Securities Management Pvt Ltd vs United Western Bank, that the bank had committed acts of minority oppression. "We have raised corporate governance issues with the bank several times over the years, but we never got any reply," said Mr Gopal Patwardhan, Managing Director of Duke Advisors (P) Ltd, which holds around three per cent stake in the bank.
Related Stories: More Stories on : Private Banks | Insight | Mergers & Acquisitions
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