Govt, RBI clear IOB clean-up with shareholders funds

The proposal by Indian Overseas Bank to set off accumulated losses by dipping into share premium account was unanimously approved the board, a senior bank official said.

In an unprecedented move, state-owned IOB, which is under RBI’s Prompt Corrective Action (PCA) watch over worsening asset quality, last Thursday cleared a proposal to set off accumulated losses of Rs 6,799 crore using its share premium account balance of Rs 7,650 crore. “It was a unilateral board decision,” said IOB CEO Subramaniakumar.

The government holds 82% in IOB with another 9% being owned by LIC. A similar move by Global Trust Bank in 2001 was shot down by regulators. “That was because they were under the Companies Act and we are under the RBI Act. The courts viewed them under different provisions. In our case we are well within our rights to do it and the board representatives of the government and the RBI too have cleared the move,” Subramaniakumar said.

Corporate governance watch firm InGovern has accused IOB of using shareholders money to cover up crony capitalism. “Nothing wrong legally. Nothing wrong from a corporate governance. If it wasn’t from share premium reserves it would have been something else,” said Shriram Subramanian of InGovern.

He added that IOB’s action will set in motion a precedent for other banks to clean up their balance sheets in similar route and get ready for the next round of fund infusion by the government.

“Eventually banks have to clean up their acts. Through this action IOB does not change anything financially, it is a precedent being set,” Subramanian said.

“Unless, there is a fundamental change in operations, the next fund infusion by the government (share premium component) will lie idle in the balance for five or 10 years for the repeat of a similar exercise,” he added.

Link: Times of India- January 09, 2018