Kerala-based private lender Dhanlaxmi Bank saw its independent director, Sridhar Kalyanasundaram, quitting the bank on September 16, which is less than a year since he joined the institution in December last year. The independent director had cited disregard for his inputs and had various differences with the Bank’s MD and CEO J K Shivan including on Rs 125 crore rights issue, which was approved in March 2022 but not fructified.
Amarjit Chopra, who has been a former independent director on a couple of banks’ boards including the Bank of Baroda as well as Past President at the Institute of Chartered Accountants of India (ICAI), shares his perspective on the episode from the governance standpoint. Edited excerpts:
Q: How is your reading of an independent director resigning at Dhanlaxmi Bank citing many governance issues in his case?
Amarjit Chopra: I have mixed feelings over the resignation of Sridhar Kalyanasundaram. I have a great sense of satisfaction that an independent director has shown the guts to resign over governance issues in Dhanlaxmi Bank Ltd. but at the same time, I am not too convinced by a few allegations.
He joined the Board only in December 2022, and in nine months the kind of disputes that he had with the management, one feels perturbed that. Needless to say, there appears to be a complete breakdown of communication between the resigning director and other Board members as well as the management.
Going by his allegations prima facie there do appear to be governance issues at the Bank. Some allegations made by the independent director especially relating to the Conduct of Board and committee meetings as well as the Rights Issue certainly need to be looked into..
The independent director has claimed in his resignation letter that the MD, and Company Secretary, and the management were deliberately avoiding holding Risk Management Committee meetings despite the Board having approved and recommended holding the same. These facts can easily be verified.
Importantly the independent director alleged that the rights issue, approved by the Bank on March 17, 2022, did not take place till now. This is something factual.
Further in his resignation letter, the independent director raised secretarial issues at the Bank and also, pointed out that a shareholder in May 2023 alleged that the MD and CEO appointment in 2021 was not in order and had a lot of discrepancies. This issue is serious, particularly in view of the fact that with regard to the appointment of the MD and CEO, there existed two different legal opinions, one that the management sought from a law firm and one that the independent director sought from another law firm. In view of two conflicting opinions, the Board could have set up a committee to look into this to set the matter at rest.
Though I am not privy to the various incidents and the reasons thereof, in this case, it is observed that the independent director as per his own statement, recorded his dissent at every meeting where the agenda of rights issue was sought to be transacted.
I have always believed that the independent directors are expected to discuss the issues legally and on facts having obtained complete information from the management in the Committee and Board meetings and facilitating the completion of the agenda in the best interests of all stakeholders. Dissenting is not bad provided it is also clearly suggested as to what is the way out to resolve the issue..
To my mind, the independent Director in his resignation letter could have brought out certain specific objections he had. In his resignation letter, he mentioned that he raised 81 issues with regard to rights issue but the significant issues are not mentioned in the letter. Accordingly, it is not possible for me to comment upon the correctness or otherwise of his stand on the rights issue.
Also, the independent director mentioned that he opposed the Rs 130 crore Rights Issue arguing that he thought that amount was not sufficient if the Bank was to remain competitive and relevant and he proposed to enhance the authorized capital of the Bank from Rs 400 crore to Rs 5000 crore. It is not clear to my mind what prompted him to suggest for enhancement of the authorized capital 12.5 times.
Also, in his resignation letter, he mentions having written about the proposal for enhancement of authorized capital to the Audit Committee, but to my mind the reference to the Audit Committee was not appropriate.
As I said earlier one can sense a complete breakdown of communication between the independent director, and MD and CEO. It’s quite perturbing and is a poor reflection on the governance of the bank . To my mind, no differences are irreconcilable. The Board having representatives from the banking regulator and govt could have handled it much better.
Q: How should the regulators read the independent director’s resignation?
Amarjit Chopra: As I said, certain allegations made by the Independent Director appear serious. And as Dhanlaxmi Bank is a listed bank, both the RBI and SEBI should come together to examine this matter. Also, since the secretarial lapses are alleged, it may warrant the attention of the corporate affairs ministry too.
The regulators would do well to ascertain the reasons for an abnormal delay in the right issue approved more than 18 months back and the same not having seen the light of the day so far.
If the regulators find merit in the allegations, they should proceed against the MD and CEO as well as other directors and the Company Secretary. If they find allegations to be frivolous, they should bar the independent director from holding any other directorship in the future.
So, to my mind, this episode warrants SEBI, RBI, and MCA to come together and take action either way but going by the track record of the the regulators, I am not sure whether this would happen..
Q: How should the statutory auditors of the Bank read the director’s resignation?
Amarjit Chopra:
Most of the allegations made by the independent director are related to governance and business except for an issue raised with respect to the one-time-settlement (OTS) offer of Jalan Hotels of Kolkata, which may or may not have financial implications..
In that case, the independent director alleged that it was accepted at a huge discounted offer of about Rs 5.25 crore despite holding a registered charge on a property having a reported market value of Rs 35 crore. So far as allegations regarding secretarial matters are concerned it would be up to the Secretarial Auditor to look into those.
So far as the Jalan Hotels case is concerned, statutory auditors may look at the procedures followed for OTS and if they find justification in the allegation, they should comment in the Long Form Audit Report in the Credit segment. Also in case they have a suspicion of fraud, nothing stops them from reporting it to RBI.
Q: Do you foresee more independent directors from here on resigning and speaking up even more?
Amarjit Chopra: It would be difficult to say how this resignation would impact independent directors’ behaviour in the future. But one thing is certain with every passing day independent directors are realising that they have an onerous role to perform in improving the governance and business practices in the corporate world. Independent directors will need to speak up their minds in the Board and Committee minds failing which they run the risk of being questioned by various regulators.
It would be imperative for independent directors to do proper KYC of promoters before accepting directorship. And in case even if later on they find something fishy or they find they are not allowed to perform their role, it would be better to quit..
In my view in the Dhanlaxmi Bank case, I wish the regulators to look into allegations with all seriousness. It could be a test case to determine the conduct of independent directors in the future.
The findings of this case could have an impact on giving wings to independent directors and clip the arrogant behaviour of management. And in case the findings are that allegations are frivolous then it would set the tone for responsible behaviour of independent directors.
