Weekly Round Up – Week 17

The week was marked by decisions of the regulators and courts. Major events were sale of stake in NHB and NABARD by RBI, Supreme Court’s direction to RBI and SEBI barring Hotel Leela Ventures from going ahead with the sales. In the international news, talks for merger of two large German banks failed showing still precarious situation of European financial sector.   

In a move aimed at restructuring of the financial institutions, RBI sold its entire stake in National Housing Bank (NHB) and the residual stake in National Bank for Agriculture & Rural Development (NABARD) to the central government. The move was recommended by Narasimham Committee way back in 2001 and aims at removing the conflict of interest. The conflict of interest arises as RBI is the regulator of financial sector yet holds stake in these lending institution. NHB, NABARD and many such sector specific financing and monitoring agencies were formed over the decades to aid development of these sectors. RBI was assigned operational control as government looked indisposed to manage their affairs. It may be noted that RBI held a similar stake in SBI for decades which was sold to the government in 2007.

In an important decision aiding transparency, the Supreme Court redirected RBI to disclose the willful loan defaulters’ list, failing which; it would have to face charges of contempt of court. The ruling was first made in another case in 2015. However, RBI had refused to disclose the list stating it would be in violation of its role as regulator and it is exempted from such disclosures under various provision of RTI Act. The ruling this week has come in response to the contempt petition subsequent to its refusal. Increasing intervention of constitutional courts in economic and business issues may give an impression that domestic institutions are in disarray or are trying to assert their power. However, it is actually a sign of transition and increasing maturity that Indian economy is going through.

Security & Exchange Board of India (SEBI) barred Hotel Leela Ventures from selling its Hotels and other assets to the Canadian investment firm, Brookfield. The agreement was entered over a month back by Leela and involved sale of assets accounting for 80% of its last year’s income and 88% of its net worth. The proceeds from the sale, nearly Rs 4,000 crore, were to be used to pay back the lenders. The move has been opposed by ITC and LIC citing “oppression”, who hold about 8% and 2.4%. While they do not meet the norm of minimum 10% shareholding to raise objection, SEBI took cognizance of the complaint, side-stepping the norm. Leela Ventures has been making losses totaling over Rs 1,000 crore in last five years. As a result, its equity has eroded to only Rs 384 crore at the end of FY18 against total liability of over Rs 45,000 crore.

Even though public sector banks in India receive criticism on failed efforts, it is not unusual in global space too. Talks for the merger of Germany’s two largest banks, Deutsche Bank and Commerzbank collapsed this week due to risk of execution and high capital needs. German government which has about 15% stake in Commerzbank had backed the talks. Interestingly, the smaller of the two, Commerzbank is nearly the same in size as SBI with total assets of €460 billion (nearly Rs 36 lakh crore). However, its equity level is barely €29 billion necessitating urgent infusion of funds, the rationale for the merger. Even though the bank is profitable with nearly € 0.9 bn of income, it is not sufficient to meet its capital needs. On the other hand, Deutsche Bank is much bigger with total assets of €1.5 trillion or nearly Rs 100 lakh crore, over half of total Indian banking industry size. The bank is also struggling with low equity at €62 bn, less than 5% of total assets. Even though it is nearly three times bigger, its net income for 2018 was lower than Commerzbank, probably putting it under greater uncertainty of being able to deliver.

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