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~ RESERVE BANK OF INDIA

www.rbi.org.in

Deputy Governor

Order passed by the Deputy Governor, Reserve Bank of India in connection with the acknowledgment of transfer of shares of Tamilnad Mercantile Bank Limited
The Hon'ble Bombay High Court heard various Writ Petitions 1 that were pending before that Court on October 14, 2010, and disposed of the same by directing Reserve Bank of India [RBI] to take appropriate decision in connection with the acknowledgement of transfer of shares of Tamilnad Mercantile Bank Limited (TMBL) pending before RBI, and such decision may be taken latest by February 28, 2011. It was also directed that RBI should take appropriate decision in this behalf, after taking into consideration the documents submitted by the Petitioners as well as Respondents. The Court also made it open to the Petitioners as well as Respondents to make appropriate representations in writing to RBI in this behalf with necessary documents. As RBI was not in a position to pass any Speaking Order by the time line indicated by the Court due to late receipt of information on the investors, the Bombay High Court was moved on February 28, 2011 seeking an extension of time, and the Court was pleased to grant an extension of time for taking a decision in the matter upto March 31, 2011. 2. Accordingly, in deference to the order passed by the High Court of Bombay, I hereby proceed to examine the issues involved in the transfer of shares of TMBL in question in the light of guidelines issued by RBI in respect of acknowledgement of transfer/allotment of shares in private sector banks.

Guidelines issued by RBI in respect of acknowledgment of transfer / allotment of shares in private sector banks
3. A brief history and the provisions of the present guidelines governing the acknowledgement of transfer / allotment of shares, issued by Department of Banking Operations and Development (DBOD) of RBI, are given below. (i) In 1970, banks in the private sector were advised to seek RBI's acknowledgment, whenever banks received applications for transfer of shares which would result in holdings of the proposed transferee equivalent to 1% or over the paid-up capital of the bank. (ii) In January 1991, banks in private sector were advised to refer the matter to RBI, when the transfer of shares makes the holdings of the proposed transferee, whether singly or along with the companies/concerns in the group equivalent to 1% or over of the paid-up capital of the bank. (iii) In April, 1992, it was clarified to the banks that a reference to RBI would be necessary even when individual allotment / transfer of shares is for less than 1 percent of the paid-up capital of the bank if dubious methods (such as by paying abnormally high price, huge monetary incentives to the renouncees of the rights shares etc.) have been adopted to get over the ceiling
1 WP

No.2319 of 2009, WP 160 of 2010, WP NO.1821 of 2010, WP (Lodging) NO.1842 of 2010 and WP (Lodging) No.1843 of 2010

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\~';;6'Fg,e percent and to camouflage the purpose of cornering of shares by individual/group. In September 1999, the threshold level of shareholding requiring acknowledgement was increased from 1% to 5% of the total paid up capital of the bank. (iv) In May 2000, banks were advised to to the effect that acquisition of shares by level of 5% or more of the issued capital bank should be with the prior approval of promote an amendment to their Articles of Associatio:l a person / group which would take his / its holding to a (subsequently modified to total paid up capital) of the RBI.

(v) With a view to streamline the procedure for obtaining acknowledgment and removing uncertainties for investors with regard to allotment or transfer of shares and to indicate in a transparent manner the broad criteria followed by RBI for the purpose of acknowledgement of transfer / allotment in respect of transfer, resulting in different holding levels - 5% or more, 10% to 30% and exceeding 30% - detailed guidelines were issued vide circular dated February 3, 2004 on 'Acknowledgement of Transfer / Allotment of Shares,2. It was made clear that the acknowledgment from RBI for acquisition / transfer of shares will be required for all cases of acquisition of shares which will take the 'holding' of an individual or group to equivalent of 5% or more of the paid-up capital of the bank. 4. The requirement of obtaining acknowledgment has been laid down by RBI as a regulatory prescription, in exercise of its powers under the provisions of the Banking Regulation Act, 1949 (BR Act). 5. Apart from the above requirement, the transfer of existing shares in a banking company between a resident and a non-resident is also governed by the provisions of the Foreign Exchange Management Act, 1999 (FEMA) and the regulations framed there under. Developments from 2007 6. Certain non-resident investors including one Shri Ramesh Vangal (an NRI) had proposed to acquire shares in TMBL and for this purpose had sought the permission of Foreign Exchange Department (FED) of RBI. On the basis of the information made available at that point of time, FED of RBI issued its 'No objection' from FEMA angle, vide their letter dated March 30, 2007, in respect of 8 NRls3/foreign investors named therein4 The process of granting a no-objection by FED involved, among other things, a reference from FED to DBOD where DBOD had examined the proposed share transfers with reference to the acknowledgement of transfer / allotment guidelines issued by RBI on February 3, 2004. On the basis of information furnished by the applicants to FED, it was observed that the guidelines on acknowledgment of allotment / transfer of shares were not attracted as (i) no individual would hold 5% or more of the paid up capital of the bank and (ii) the proposed transferees, prima facie, did not constitute a group 7. TMBL vide its Board Resolution dated May 13, 2007 effected transfer of shares in their books with respect to 7 non-resident investors5 and a few other resident investors6, involving in

DBOD.No.PSBD.BC.64/16.13.100/2003-04 de quevoo

dated Centre

February

3,2004 - Canada, Ravi S Trehan of New York, Ramesh Limited., Vangal, Rajat Kumar Gupta, (Mauritius) Kamehameha Limited., Swiss

NRI (non-resident Indian) , Caisse de depot at placement School, Federal , Katra Holdings, Insurance RST Limited.,

COP Capital

Company,

Cuna Mutual

Group, Swiss Re Partnership Mauritius

Holding AG FI Investments

GHI Limited., Kamehameha

Limited., Cuna Group (Mauritius) Shri B Ramachandra

Re Investors (Mauritius) Limited 6 Shri Gokul Patnaik, M/s Vector Program

Limited., Shri MGM Maran,

Adityan and 205 other

Indian residents.

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\~~~,418 shares. Soon thereafter, these share transfers were challenged before the Hon'ble High Court of Madras by way of different civil suits. 8. Subsequently, TMBL vide its letter dated March 20, 2008, informed RBI that its Board of Directors has passed a resolution on March 17, 2008 restricting voting rights of the above 7 non-resident sllareholders and 2 resident shareholders (Shri Gokul Patnaik and Mis Vector Program Private Limited), holding in all an aggregate 70,906 shares [24.89% of the paid-up capital of the bank] to 10% of the total voting rights on poll at any general meeting citing 'perceived linkages' among those investors and the provisions of Section 12(2) of the BR Act. 9. Again, TMBL vide its letter dated May 27, 2008, informed RBI that its Board of Directors had passed a resolution on May 26, 2008 to the effect that pending receipt of RBI's direction in the matter, all rights attached to the 70,906 shares of the above mentioned investors would be kept in abeyance, including the right to vote in the ensuing 83rd, 84th and 85th Annual General Meetings (AGMs). The matter was examined by RBI and TMBL was advised vide letter dated May 30, 2008 that RBI was not in a position to give any decision, as the matter was sub-judice Developments in 2008 10. One Shri Kanagaraj filed a Writ Petition No 2684 of 2008 in the Hon'ble High Court of Bombay challenging the in-principle approval dated March 30, 2007 issued by FED, and acquisition of shares by certain investors, including the above named NRls and foreign investors as well as certain resident investors (i.e Shri Gokul Patnaik, Mis Vector Program Private Limited, Shri P S Sathiyaseelan, Shri M G Muthu, Shri M G M Maran) involving in all 90,488 shares. The Hon'ble High Court of Bombay passed an order directing the parties to make representations before RBI. In the said WP, Shri Kanagaraj had prayed to quash the inprinciple approval issued by FED, and also to direct TMBL not to give any effect to the transfer in respect of 75,499 shares (registered on May 13, 2007, inter alia, in the name of 7 Foreign Investors and Shri Gokul Patnaik and Mis Vector Program Private Limited) or any rights to 14,949 shares held by Shri P S Sathiyseelan (1600 shares), Shri M G Muthu (2820 shares) and Shri M G M Maran (10529 shares) without complying with the guidelines issued by DBOD. 11. After hearing the above WP, the Hon'ble High Court of Bombay disposed of the same by directing Shri Kanagaraj to make representations before RBI, annexing all the documents on which he wanted to rely upon. The Court had also directed RBI to consider the representations of the other petitioners in the WP before passing any order on the representation of Shri Kanagaraj. 12. In pursuance of the above order, RBI received representations from Shri Kanagaraj as well as from other investors? in July 2009. 13. Based on the information made available through various representations as well as the results of scrutiny of the proxies exercised by the shareholders, RBI observed that 18 individuals I entities, including the above 7 NRls I foreign investors, besides Mis Vector Program Private Limited, Mis Hemangini Leasing and Finance Private Limited, Mis Shanmuga Leasing and Finance Private Limited, S/Shri Gokul Patnaik, MGM Maran, MG Muthu, L Sridharan, N Ganesan, P S Sathiyaseelan, R Chinnakannan and Smt C Chandrammal had clear understanding and co-operation among themselves and had a common purpose of
'GHllimited., RST limited Sridharan, Shri N Ganesan, Cuna Group (Mauritius) Limited., Swiss Re Investors (Mauritius) Shri Gokul Patnaik, Hemangin; Finance and leasing Pvt limited., limited., Shri M G M Maran and Shr; M G Muthu, Shri R Chinnakannan and Smt C Chandrammal. Shri l

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''-~maining substantial acquisition of shares / representation gain control of TMBL. on the Board of TMBL and thereby

14. Accordingly, TMBL was directed by RBI vide a Speaking Order passed on October 12, 2009 to approach RBI along with full details in a given format for acknowledgment of transfer of shares in favour of the above mentioned group of 18 in terms of guidelines contained in circular dated February 3, 2004 The acknowledgement process, among other things, would involve scrutiny of the declaration submitted by the investors and initiating a due diligence exercise in respect of the investors to ascertain their 'fit and proper' status. Developments since passing of the Speaking Order in October, 2009

15. However, due to reasons such as non-cooperation by many of the above 18 share holders as well as submission of insufficient information by some of them, claims made by a few new entities and denials made regarding purchase/sale of shares held by a few of the above shareholders etc, a stalemate resulted in the acknowledgment process. Meanwhile, on November 26, 2009, the High court of Madras declared the results of the poll conducted for the vacancies of directors in 83rd and 85th AGMs of the bank held on June 5, 2008 on the basis of voting done by the shareholders and after considering the speaking order dated October 12, 2009 passed by RBI. 16. Subsequent to the above, Writ Petitions8 were again filed in Hon'ble Bombay High Court and the Court disposed of all the petitions by passing the order described in paragraph 1 above. Developments since passing of the Court order on October 14, 2010 17. In pursuance of the directions issued by the Hon'ble High Court of Bombay and based on the preliminary information received by RBI directly from four foreign investors during November and December 2010 viz. Kamehameha Mauritius Limited, Cuna Group (Mauritius) Limited, FI Investments (Mauritius) Limited and Swiss Re Investors (Mauritius) Limited, which, among other things, indicated the parent regulator's names, due diligence reports from the overseas regulators were obtained on the parent institutions. The reports have not indicated any adverse information on the parent entities / groups. Further, due diligence reports were also called for from the Financial Services Commission, Mauritius in respect of five investors named in the RBI Speaking Order dated October 12, 2009 (viz. Kamehameha Mauritius Limited, Cuna Group (Mauritius) Limited, FI Investments (Mauritius) Limited, Swiss Re Investors (Mauritius) Limited and M/s Katra Holdings Limited). Financial Services Commission vide letter dated March 11, 2011 has indicated that they have no adverse comments on any of the entities. In order to obtain information in respect of all the 18 investors along with the bank's comments well in time, RBI had advised TMBL (on November 22, 2010, December 3 and 10, 2010, January 6 and 10, 2011 and February 7, 2011) to collect, and furnish details along with the bank's comments in respect of all the 18 investors, whose share holding requires acknowledgement from RBI in terms of the instructions contained in the guidelines of February 3, 2004. After prolonged correspondence, TMBL had submitted the information collected from many of the shareholders, including those not covered under the earlier Speaking Order dated
8

C Kanagaraj Vs. RBI & Others WP No.2319 of 2010, R Sellaprasad Vs. RBI and others WP No.160 of 2310, Thoothu8kudi Narargal Mahamai Vs RBI and others WP No.1821 of 2010, Fllnvestments (Mauritius) Limited Vs RBI and another WP(Lodging) NO.1842 of 2010, Kamehameha Mauritius Limited Vs RBI and another WP9Lodign) 1843 of 2010.

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~tober 12, 2009, along with its preliminary comments and extracts of unconfirmed Board Resolutions passed in the Board meetings vide letters dated February 11 and 17, 2011 and final confirmed Board resolutions in respect of the 18 investors vide its letter dated February 19, 2011. The final confirmed Board resolutions were received by RBI on February 21,2011. However, it was observed that information received from TMBL required further examination and it was also observed that the information provided by the investors was insufficient to complete the due diligence exercise on the investors. Therefore, the Bombay High Court was requested for 4 weeks time for deciding on the representations of the investors and the Bombay High Court was pleased to grant extension of time upto March 31, 20.11. 18. Based on the information received from TMBL during February 2011, scrutinies into the accounts of 11 investors were conducted as a part of the due diligence exercise. Information was also obtained from Foreign Exchange Department and Department of Non-Banking Supervision of RBI in respect of the investors I companies. Additional information was called for from the investors on the details of sellers, consideration paid, bank accounts through wtiich the consideration was paid, date of sale, physical custody of the shares, annual reports of the last three years (in respect of two resident investor companies viz. Mis Vector Program Private Limited and Shanmuga Financial Services Private Limited) by March 10, 2011. Mis Katra Holdings Limited (Mauritius) was advised to confirm the veracity of the statements made by Shri R. Chinnakannan, Smt. C. Chandrammal and Hemangini Finance and Leasing P. Limited that they have sold their shares to Katra Holdings and it was also advised to provide details of the RS.3.00 crore remittance it had made to Shri P.S.Sathiyaseelan during October 2007. The investors were advised that in case no reply is received by the date specified, it would be construed that they have no information to furnish in respect of the issues raised in the letters. All the 11 investors had responded to our letters by March 15, 2011. The information received has been indicated against each investor in the following paragraphs. Further, comments were also sought from Standard Chartered Bank (SGB), Mumbai on the allegations of Shri Ramesh Van gal indicating that since Mis Subcontinental Equities Limited, is a subsidiary of Standard Chartered Holdings, London, and due to the inherent conflict of interest, Standard Chartered Bank which is acting as an escrow agent, is colluding with Mis Subcontinental Equities Limited in trying to transfer away his shares to the subsidiary of SGB. Several investors and entities which claim to have paid consideration towards purchase of shares have represented to RBI seeking personal hearings. However, while assuring that the written representations already made by them would be fully taken into consideration while passing any order, the entities were advised that in view of the short time available, it would not be possible to give them any personal hearing.

Gist of representations shareholding

received from the investors

and the present status of the

19. All the 18 investors named in the RBI Speaking Order dated October 12,2009, except two viz. Mis RST Limited and Mis GHI Limited, have submitted their representations to RBI as well as to TMBL between November 2010 and February 2011. Further, on seeking additional information, 11 investors have provided further information in March 2011. It is observed that in their various representations, all the 16 investors have stated that the shares have been acquired in their independent capacity out of their own funds and that they do not form part of any group. 5

Further, from the information received from the bank and the investors, it is observed that while Hemangini Finance and Leasing P Limited, Shanmuga Financial Services P Limited, Shri R. Chinnakannan and Smt C. Chandrammal are still the shareholders as per the bank's records, all the four have indicated that they no longer hold the shares as the same have been disposed of in favour of M/s Katra Holdings Limited. Shri Sathiyaseelan has also indicated that he has disposed major portion of his shares in favour of M/s Katra Holdings Limited (1492 shares out of his 3255 shares), while he is still the shareholder as per the books of the bank Further, in respect of shareholdings of Shri Gokul Patnaik, M/s Vector Program Private Limited, M/s GHI Limited, M/s RST Limited and M/s Katra Holdings Limited (Mauritius) there seems to be purported sale of shares to 4 new foreign investors. However, the same appears to be under dispute since the sellers have not confirmed the sale. Shri LSridharan, Shri N.Ganesan, Shri MGM Maran and Shri MG Muthu appear to be still holding the shares. However, payment of consideration towards purchase of shares could not be traced from their bank accounts. Four foreign investors viz. Kamehameha Mauritius Limited, Cuna Group (Mauritius) Limited, FI Investments (Mauritius) Limited, Swiss Re Investors (Mauritius) Limited appear to be still holding the shares in violation of FEMA provisions and have stated that they have no common source of funds with the others and have given common proxies in favour of M/s Katra Holdings Limited for the 83rd and 85th AGM's of the bank on June 5, 2008 without any voting instructions or other related details and hence should be treated as distinct and not part of the group. However, since the question of the investors 'acting in concert' and them being a part of the group was already discussed and decided in the RBI Speaking Order dated October 12, 2009 and since no additional fresh information has been submitted by any of the investors, reexamination of this aspect is not warranted. Comments received from TMBL 20. TMBL has placed the information received from the investors / shareholders before its Board in its meetings on February 9 and 16, 2011. Based on the resolutions passed by the Board, TMBL has forwarded three letters dated February 11, 17 and 19, 2011 and come to the following conclusions: TMBL has identified 7 individuals/entities9 as belonging to one Katra and Shri B Ramachandra Adityan Group, whose acquisition reflects attempts of takeover or destabilisation of the management. TMBL has identified 2 entities 10 belonging to Katra Group, whose acquisition reflects attempts at takeover or destabilisation of the management. TMBL has identified 4 individuals/entities 11 as belonging to one Sterling Group who however, does not require acknowledgment.

Shri M G M Maran, Shri M G Muthu, Shri L Sridharan, Shri N Ganesan, Mis Katra Holdings Limited., Shri Gokul Patnaik and Mis Vector Program P Limited 10 Mis RST Limited and Mis GHI Limited
&

11 Sm!. C Chandrammal, Shri R Chinnakannan, Mis Hemangini Finance Limited.

Leasing P Limited., and Mis Shanmuga Financial Services P

TMBL has identified 4 foreign investors 12 as distinct entities and has sought confirmation for the transfer of shares effected in May 2007 TMBL has concluded that Shri P S Sathiyaseelan is not associated with any group and transfer of shares appears to be in the nature of genuine investment. TMBL has identified another 3 foreign investors 13 (the purported purchasers) as jistinct entities, whose acquisition does not reflect attempts of takeover or destabilisation of the management of the bank. expressing my views on the issue of acknowledgement, it would be beneficial to summary of the comments/views/inform'ation received from various sources in with the acknowledgement process, individual/entity-wise. The main observations due diligence exercise are also mentioned against each investor The same are as

21. Before provide a connection during the under:

(i) MIs RST Limited (2845 shares - 1%) (a) Representation from MIs RST Limited
In pursuance of the October 14, 2010 Court order and TMBL's letters dated December 14, 2010, January 5, 2011, February 1 and 7, 2011, Mis RST Limited has not made any representation to either RBI or TMBL.

(b) Comments from TMBL

TMBL vide its various letters has reported to RBI that Mis RST Limited belongs to Mis Katra Group, and along with the group, is likely to acquire either singly or along with the companies and concems in the group, a controlling interest in the bank. TMBL has further reported that the transfer in the name of Mis RST Limited does not appear to be in the nature of genuine investment and it suspects an attempt at comering of shares by Mis RST Limited and the acquisition reflects attempts to take over or destabilisation of management of the bank.

(c) Comments from FED

FED has stated that the transfer of shares in favour of Mis RST Limited, instead of Shri Ravi S Trehan, who has the no objection from FED, is in contravention of the provisions of FEMA.

(d) Comments from others

While the 2845 shares continue to stand in the name of Mis RST Limited, one Mis Subcontinental Equities Limited (SCEL), a foreign investor, has claimed to RBI, vide its letter dated November 11, 2010 and also to TMBL that since May, 2010 it has acquired the shares from Mis RST Limited As per the report by TMBL, vide its letter dated February 17, 2011, Mis RST Limited has not disputed the sale so far. Further, TMBL has stated that SCEL has not provided the 'original share certificates' and 'original share transfer deed' executed by Mis RST Limited since Mis RST Limited has not disputed the sale, and the same would be produced once SCEL gets clearance from RBI from FEMA angle.

(e) Main observations during the due diligence exercise

The transfer of shares in favour of Mis RST Limited, instead of Shri Ravi S Trehan, is in contravention of the provisions of FEMA. Further, since Mis RST Limited has not provided information either to TMBL or to RBI, no due diligence exercise could be conducted on the
Mis Swiss Re Investors (Mauritius) Limited, Mis F I Investments (Mauritius) Limited., Mis Cuna Group (MauritiUS) Limited and Mis Kamehameha Mauritius Limited. 13 Mis Stars hip Equity Holdings Limited, Mis East River Holdings Limited., and Mis Subcontinental Equities Limited.
12

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<~(~1fty. As per the information gathered, the shares of the investor are in the custody of SCB, Mumbai under the 'Project Windmill Escrow Account'. Mis Subcontinental Equities Limited (SCEL), a foreign investor, has claimed to have purchased the TMBL shares from Mis RST Limited.

(ii) Mis GHI Limited (14080 shares - 4.95%) (a)Representation from Mis GHI Limited
In pursuance of the October 14, 2010 Court order and TMBL's letters dated December 12, 2010, January 5, 2011, February 1 and 7, 2011, Mis GHI Limited has not made any representation to either RBI or TMBL.

(b) Comments from TMBL

TMBL vide its various letters has reported that Mis GHI Limited belongs to Mis Katra Group, and along with the group, is likely to acquire either singly or along with the companies and concerns in the group, a controlling interest in the bank. TMBL has further reported that the transfer in the name of Mis GHI Limited does not appear to be in the nature of genuine investment and it suspects an attempt at cornering of shares by Mis GHI Limited and the acquisition reflects attempts to take over or destabilisation of management of the bank.

(c) Comments from FED

FED has stated that RBI had permitted transfer of shares in the name of Shri Rajat Kumar Gupta but the shares have been transferred and held in the name of Mis GHI Limited, in contravention of the provisions of FEMA.

(d) Comments from others

While the 14080 shares continue to stand in the name of Mis GHI Limited, one Mis Windmill Investors Limited, a foreign investor, has claimed to RBI vide its letter dated November 10, 2010 that it has acquired the shares from Mis GHI Limited. According to Mis Windmill Investors Limited, it has paid consideration to Mis GHI Limited towards purchase of the shares registered in the name of the latter. However, Mis Windmill Investors Limited has not approached TMBL in this connection. A few complaints have been received from the shareholders of TMBL pointing out that United States Securities and Exchange Commission has initiated administrative proceedings (for insider trading in the 'Galleon' investigation) on March 1, 2011 against Shri Rajat Kumar Gupta (owner of Mis GHI Limited) and requested RBI to refuse acknowledgement to Mis GHI Limited on 'fit and proper' grounds.

(e) Main observations during the due diligence exercise

The transfer of shares in favour of Mis GHI Limited, instead of Shri Rajat Kumar Gupta, is in contravention of the provisions of FEMA, Further, since Mis GHI Limited has not provided information either to TMBL or to RBI, no due diligence exercise could be conducted on the entity. As per the information gathered, the shares of the investor are in the custody of SCB, Mumbai under the 'Project Windmill Escrow Account'. Mis Windmill Investors Limited, a foreign investor, has claimed to have purchased the TMBL shares from Mis GHI Limited. The outcome of the investigation by United States Securities and Exchange Commission in respect of Shri Rajat Kumar Gupta may have a bearing on the 'fit and proper' status of Mis GHI Limited.

(iii) Mis Katra HoldinQs Limited, Mauritius (10364 shares - 3.64% ) (a) Representation from Mis Katra Holdings Limited
In pursuance of the October 14, 2010 Court order, Mis Katra Holdings Limited made its representation to RBI vide its letter dated November 11, 2010 and had also submitted some

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~rmation to TMBL in the given format. Mis Katra Holdings Limited claims to be fully owned by Shri Ramesh Vangal, and further it claims that its shareholding in TMBL is independent of any other person and is 'not a part of any group'. It also declared that none of the companies or individuals who are shareholders of TMBL has any shareholding or directorship in Mis Katra Holdings Limited and it does not exercise control on any of the companies or individuals that are shareholders of TMBL. Katra Holdings Limited vide letter dated February 24, 2011 indicated that Mis Subcontinental Equities Limited (which belongs to Standard Chartered Holdings, London, which in turn belongs to Standard Chartered Bankplc, UK) have wrongly and illegally made the application to RBI for approval to transfer their shares although Katra Holdings Limited, Mauritius has not entered into any agreement with Mis Subcontinental Equities Limited. Katra Holdings Limited has stated that due to the conflict of interest involved in Standard Chartered Bank acting as an escrow agent and its subsidiary acquiring shares in TMBL, SCB is colluding with Mis Subcontinental Equities Limited, in trying to transfer away their shares to the subsidiary and that SCB has wrongly parted the shares of certain investors, including Katra Holdings Limited, for a physical review done at TMBL. Further, in response to RBI's letter requiring further information, Shri Ramesh Vangal has indicated that RS.3.00 crore was paid to Shri PS Sathiyaseelan towards advance consideration for the purchase of 1492 shares which would be produced for transfer on obtaining necessary approval from RBI. (b) Comments from TMBL While forwarding the representation of Mis Katra Holdings Limited, TMBL, vide their letter dated February 19, 2011, has forwarded its Board resolution which resolved to treat Mis Katra Holdings Limited as part of one Shri B Ramachandra Adiyan Group. Further, TMBL has reported that Mis Katra Holdings Limited is likely to acquire either singly or along with the companies and concerns in the group, a controlling interest in the bank. TMBL has further reported that the transfer in the name of Mis Katra Holdings Limited does not appear to be in the nature of genuine investment and it suspects an attempt at cornering of shares by Mis Katra Holdings Limited and the acquisition reflects attempts to take over or destabilisation of management of the bank. Further, the chartered accountant's certificate produced by Mis Katra Holdings Limited regarding the source of funds has not specified that the shares have been bought from 'owned funds' (c) Comments from FED FED has stated that the shares of TMBL which were permitted to be held by Shri Ramesh Vangal were observed to be held in the name of Mis Katra Holdings Limited. As such, the shares held by Mis Katra Holdings Limited in TMBL are in contravention of the extant FEMA proVISions. (d) Comments from others Mis Subcontinental Equities Limited, a foreign investor, had reported to TMBL and RBI that they had purchased shares from Katra Holdings Limited. Mis Subcontinental Equities Limited vide its letter dated November 10, 2010, had claimed to have acquired 10364 shares and enclosed a copy of letter dated May 31, 2010 issued to it by SCB, Mumbai indicating that USD 14,611,958 was paid to Mis Katra Holdings Limited for purchase of 10,364 shares. However, Mis Katra Holdings Limited has denied the purported sale transaction. In view of the dispute relating to the sale, TMBL had called for the original documents to verify the facts relating to the purported sale. Consequently, the original share certificates and blank transfer deeds signed by Mis Katra Holdings Limited were stated to have been produced by Mis Subcontinental Equities Limited to TMBL on February 5, 2011. However, TMBL has reported that Mis Katra Holdings Limited has disputed that they have sold the shares to anybody and stated that there is no requirement to
9

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""tlfi'Oertake a physical verification of shares to demonstrate the shareholding. As per a letter dated September 15, 2010 received from SCB, it is observed that Mis Katra Holdings Limited was extended a facility of USD 20 million to enable Mis Katra Holdings Limited to refinance a loan it had previously received in order to acquire shares in Tamilnad Mercantile Bank Limited. As per SCB's letter dated March 14, 2011, the mechanism under the Escrow Agreement is that Mis Katra Holdings Limited will be given a loan which will be used to acquire 10,364 shares in TMBL, which will be held temporarily prior to a sale to the purchaser nominated by Corsair. The purchaser then will payoff the loan of Mis Katra Holdings Limited at SCB, Mauritius and the 10,364 shares would be lodged for transfer in the name of the purchasing entity. Further, SCB has stated that as per the Escrow agreement, Corsair has the sole discretion to instruct SCB, Mauritius to deliver an amount from the Escrow Account in satisfaction of the loan advanced to Mis Katra Holdings Limited. Accordingly, on April 29, 2008, Corsair exercised its rights and requested SCB, Mauritius to transfer USD 14,611,958 in satisfaction of the loan advanced to Mis Katra Holdings Limited. SCB has stated that at this point of time, Mis Katra Holdings Limited ceased to have any beneficial ownership in the TMBL shares registered in its name. Further, a few complaints have been received from shareholders of TMBL pointing out that Evolvence India Holdings have filed an application of default judgement in New York, USA for recovery of the full amount lent to Katra Holdings Limited in July 2009. The latest position on the same has been obtained from internet searches which have indicated that the litigation was settled by Shri Ramesh Vangal in June 2010 by paying an amount of USD 2.5 million before legal expenses and direct costs (USD 0.3 m). Main observations during the due diligence exercise The transfer of shares in favour of Mis Katra Holdings Limited, instead of Shri Ramesh Vangal, is in contravention of the provisions of FEMA. As per the information gathered, the shares of the investor are in the custody of SCB, Mumbai under the 'Project Windmill Escrow Account'. Further, Mis Subcontinental Equities Limited, a foreign investor, has claimed to have purchased the TMBL shares from Mis Katra Holdings Limited and produced documentary evidence by way of a copy of the letter dated May 31, 2010 issued to it by SCB, Mumbai indicating that USD 14,611,955 was paid to Mis Katra Holdings Limited for purchase of 10,364 shares. However, Katra Holdings Limited is disputing the sale transaction. In response to specific RBI queries, relating to purchase of shares by Katra Holdings and payment of consideration to Shri R. Chinnakannan, Smt. C. Chandrammal, and Mis Hemangini Finance and Leasing (P) Limited, Shri Ramesh Vangal has indicated that Mis Katra Holdings Limited has not made any payment to the said persons I entity. Although the scrutinies into the accounts of Shri R. Chinnakannan, Smt. C. Chandrammal, Hemangini Finance and Leasing (P) Limited and Mis Shanmuga Financial Services Private Limited indicate that they have received funds from Katra Holdings Private Limited in July 2008, Shri Ramesh Vangal has not shared the information whether Mis Katra Holdings Private Limited, Bangalore, of which he is the Chairman, had purchased the shares from these entities I persons and paid consideration to them. While the shareholding (10,3'64 shares) by Katra Holdings Limited, Mauritius is under a sale dispute, Katra Holdings Private Limited, Banga/ore seems to have acquired 7124 shares from the above 4 shareholders and Shri PS Sathiyaseelan. Further, the past litigation in respect of settlement of dues by Katra Holdings Limited raises concern in respect of the credit history of the investor.
(e)

(iv) Shri GokuJ Patnaik - (11342 shares - 3.987%) (a) Representation from Shri Gokul Patnaik

Shri Gokul Patnaik, a resident Indian, has acquired 6,749 shares of TMBL on May 13, 2007 and 4,593 shares on May 28, 2007 and holds in all 11,342 shares. He has made representation to
10

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his letter dated November 11, 2010, wherein he claims to have made investment in his name in his individual capacity, out of his own resources, and that the investment is not at the behest of any person or group. He has stated that his shareholding is independent and not part of any group. Shri Gokul Patnaik claims to be a 'Management Consultant' and claims to be under no regulator either in India or abroad. Further, Shri Gokul Patnaik has enclosed a Chartered Accountant's certificate which merely states that the amount has been paid, on May 15, 2007, out of his personal account kept with ICICI Bank Limited. Further, in response to RBI letter requiring further information, Shri Gokul Patnaik has indicated that he had purchased the 11342 shares from Mis Mansiri Investment & Leasing Private Limited and 3 other individuals and paid a consolidated consideration amount to Mansiri on May 15, 2007 He had also confirmed that he had received advance consideration of RS.25.61 crore from one East River Holding Limited (ERHL). However, since ERHL had not obtained approval from RBI, Shri Gokul Patnaik has stated that he had terminated the arrangement and applied to RBI for obtaining approval to refund the funds

(b) Comments from TMBL TMBL has furnished its opinion, vide its various letters that Shri Gokul Patnaik forms part of the Katra and Shri B Ramachandra Adityan Group. TMBL has further reported that Shri Gokul Patnaik along with Shri Ramachandra Adityan and Katra Group is likely to acquire either singly or along with the companies and concerns in the group, a controlling interest in the bank. The transfer of shares in his name appears to be not in the nature of genuine investment and TMBL suspects an attempt at cornering of shares with a view to acquire a controlling interest in the bank. It has further been reported by TMBL that the acquisition by Shri Gokul Patnaik reflects attempts at takeover or destabilisation of the management (c) Comments from others Mis East River Holdings Limited vide its representation dated November 10, 2010 made to RBI, has claimed to have paid consideration to Shri Gokul Patnaik towards purchase of 10589 shares. East River Holdings Limited has also enclosed an FIRC indicating that a foreign inward remittance amounting to Rs.25,61 crore was remitted into Shri Gokul Patnaik's account on May 15, 2007 towards advance consideration for purchase of TMBL shares. However, Shri Gokul Patnaik has approached suo moto with the request that RBI should not permit transfer of shares held by him in TMBL. Due to the dispute in respect of the sale, TMBL had called for the original documents to verify the facts relating to the purported sale. TMBL has since advised that Mis East River Holdings Limited has produced the original share certificates and blank transfer forms signed by Shri Gokul Patnaik for physical verification and TMBL has found the same to be in order. As per SCB letter dated March 14, 2011, SCB has indicated that 'the Escrow Agreement makes a provision for the transfer of temporary stakes in TMB to Mr Patnaik and Vector' SCB has also stated that 'although Mr Patnaik and Vector are not parties to the Escrow Agreement, they have signed letter agreements with Corsair undertaking to transfer their shareholdings to RBI approved purchasing entities nominated by Corsair and to cooperate in facilitating such transfers.' (d) Comments from FED Shri Gokul Patnaik is said to have admitted receipt of RS.25.61 crore towards sale consideration and also admitted having utilised the money towards payment of his previous liabilities. Shri Gokul Patnaik's receipt of funds from abroad and utilisation thereof is under examination. However, it has come to notice that 6749 shares were registered in the name of Shri Gokul Patnaik on May 13, 2007 and another 4593 shares on a subsequent date. All these 11,342 shares are held in the 'Project Windmill Escrow Account'.

11

(e) Main observations during the due diligence exercise As per the information gathered, the shares of the investor are in the custody of SCB, Mumbai under the 'Project Windmill Escrow Account' The scrutiny of the account of Shri Gokul Patnaik indicated that he had received a foreign inward remittance amounting to RS.25.61 crore, (mentioned in paragraph (c) above) from Mis East River Holdings Limited on May 15, 2007 towards advance consideration for purchase of TMBL shares. The amount was transferred on the same day to Mis Mansiri Investment & Leasing Private Limited, the seller of the TMBL shares. Further, the scrutiny also indicated that an amount of Rs.2.95 crore was received through a foreign inward remittance from SCB ale Project Windmill Escrow Ale, Mauritius on June 27, 2008 for 'advance consideration towards purchase of shares of TMBL by CC India Holdings Limited.' This amount was found to be transferred to Mis Katra Holdings Private Limited on the next day of receipt of such funds. Since funds were received through foreign inward remittances and utilised by the investor for purposes other than the intended one, the matter is under examination. (v) MIs Vector Proqram Private Limited, Banqalore (13455 shares - 4.73%) (a) Representation from MIs Vector Program Private Limited Mis Vector Program Private Limited, a resident company, has made its representation to RBI vide its letter dated November 10, 2010. In its representation, Mis Vector Program Private Limited claims to have made investment out of its own resources and that it does not have any association with any other shareholders of TMBL and the directors or shareholders of Mis Vector Program Private Limited do not hold any directorship or other interest in companies that are shareholders of TMBL Further, it has stated that it is not in any manner connected to other companies or individuals referred to in RBI's order dated October 12, 2009. Mis Vector Program Private Limited has enclosed a Chartered Accountant's certificate which merely states that the amount has been paid on May 15, 2007, out of its account maintained with Axis Bank Limited, M G Road Branch, Bangalore. (b) Comments from TMBL TMBL has furnished its opinion vide its various letters that Mis Vector Program Private Limited forms part of the Katra Group and Shri B Ramachandra Adityan group. TMBL has further reported that Mis Vector Program Private Limited, along with Shri Ramachandra Adityan and Katra Group, is likely to acquire either singly or along with the companies and concerns in the group, a controlling interest in the bank. The transfer of shares in its name appears to be not in the nature of genuine investment and TMBL suspects an attempt at cornering of shares with a view to acquire a controlling interest in the bank. It has further been reported by TMBL that the acquisition by Mis Vector Program Private Limited reflects attempts at takeover or destabilisation of the management of the bank. (c) Comments from others Mis Starship Equity Holdings Limited, a foreign investor, vide its letter dated November 10, 2010, has claimed to have acquired 13455 shares from Mis Vector Program Private Limited. Mis Starship Equity Holdings Limited has also enclosed an FIRe indicating that a foreign inward remittance amounting to RS.32.54 crore was remitted into the bank account of Mis Vector Program Private Limited on May 15, 2007 towards advance consideration for purchase of TMBL shares. TMBL has informed that even though Mis Vector Program Private Limited has denied having sold shares to Mis Starship Equity Holdings Limited, Mis Starship Equity Holdings Limited has produced to TMBL on February 5, 2011 the original share certificates and transfer
12

(,,~~) executed '~ds

in its favour by Mis Vector Program Private Limited. Further, as per SCB letter dated March 14, 2011, SCB has indicated that 'the Escrow Agreement makes a provision for the transfer of temporary stakes in TMB to Mr Patnaik and Vector'. SCB has also stated that 'although Mr Patnaik and Vector are not parties to the Escrow Agreement, they have signed letter agreements with Corsair undertak:ng to transfer their shareholdings to RBI approved purchasing entities nominated by Corsair and to cooperate in facilitating such transfers.' (d) Main observations during the due diligence exercise A scrutiny of the account of Mis Vector Program Private Limited indicated that it had received a foreign inward remittance amounting to Rs.32.54 crore from Mis Starship Equity Holdings Limited on May 15, 2007 towards advance consideration for purchase of TMBL shares which was transferred on the same day to Mis Mansiri Investment & Leasing Private Limited and HiTech Traders Private Limited, the sellers of the TMBL sllares. However, Mis Vector Program Private Limited has neither declared to us anything relating to sale of shares nor receipt of foreign funds. As per the information gathered, the shares of the investor are in the custody of SCB, Mumbai under the 'Project Windmill Escrow Account'. (vi) Mis Hemanqini Finance and Leasinq Private Limited (575 shares - 0.20%) (a) Representation from Mis Hemangini Finance and Leasing Private Limited (HFLP) TMBL had registered in all 575 shares in the name of Mis Hemangini Finance and Leasing Private Limited on a date later to May 13, 2007. Mis Hemangini Finance and Leasing Private Limited, vide its letter dated November 15,2010, has informed RBI that it no longer holds any shares in TMBL. Further, in response to RBI letter requiring further information, Mis Hemangini Finance and Leasing Private Limited has reiterated that it has sold its shares to Mis Katra Holdings Private Limited, Bangalore (which is also owned by Shri Ramesh Vangal of Mis Katra Holdings Limited, Mauritius) in July 2008 and received consideration on the sale. (b) Comments from TMBL TMBL has expressed its opinion, vide its various letters that Mis Hemangini Finance and Leasing Private Limited belongs to one Sterling Group and continues to be shareholder in the books of the bank. It has also declared that Mis Hemangini Finance and Leasing Private Limited is not likely to acquire any controlling interest either singly or along with the companies in the group, there is no suspicion that it attempts at cornering of shares with a view to acquire a controlling interest in the bank, and its acquisition does not reflect attempts at takeover or destabilisation of the management. (c) Main observations during the due diligence exercise Mis Hemangini Finance and Leasing Private Limited belongs to Sterling group of companies and has indicated sale of its shares to Mis Katra Holdings Private Limited, Bangalore. Scrutiny of the account of Mis Hemangini Finance and Leasing Private Limited indicated receipt of funds from Mis Katra Holdings Private Limited, Bangalore, an associate of Katra Holdings Limited, Mauritius around July 2008. (vii) Mis Shanmuqa Financial Services Private Limited Msi Hi-Tech Traders Private Limited) (2322 shares - 0.82%) (New name

(a) Representation from Mis Shanmuga Financial Services Private Limited Mis Shanmuga Financial Services Private Limited vide their letters has claimed to be holding 2322 shares of TMBL since 1996-97, in its name. Further, Mis Shanmuga Financial Services

13

'~)
~ate Limited has claimed that the shares were purchased out of its own funds, and to that effect, has enclosed a Chartered Accountant's Certificate. In response to RBI letter requiring further information, Mis Shanmuga Financial Services Private Limited has indicated that it has sold its shares to Mis Katra Holdings Private Limited, Bangalore (which is also owned by Shri Ramesh Vangal of Mis Katra Holdings Limited, Mauritius) in July 2008 and received consideration on the sale.

(b) Comments from TMBL TMBL has expressed its opinion vide its various letters that Mis Shanmuga Financial Services Private Limited belongs to one Sterling Group and continues to be shareholders in the books of the bank. It has also declared that Mis Shanmuga Financial Services Private Limited is not likely to acquire any controlling interest either singly or along with the companies in the group, there is no suspicion that it attempts at comering of shares with a view to acquire a controlling interest in the bank, and its acquisition does not reflect attempts at takeover or destabilisation of the management. (c) Main observations during the due diligence exercise Scrutiny of the account of Mis Shanmuga Financial Services Private Limited indicated receipt of funds from Mis Katra Holdings Private Limited, Bangalore, an associate of Katra Holdings Limited, Mauritius around July 2008. (viii) Shri R. Chinnakannan - 0.117%) (1220 shares - 0.429%) and Smt. C Chandrammal (333 shares

(a) Representation from the investors Both Shri Chinnakannan and Smt Chandrammal claim to have purchased the shares out of own sources of funds much before 2007, and they claim to have disposed of the shares to Mis Katra Holdings Private Limited in July, 2008. Further, in response to RBI letter requiring further information, Shri Chinnakannan and Smt. C Chandrammal have reiterated that they have sold their shares to Mis Katra Holdings Private Limited, Bangalore in July 2008 and received consideration on the sale. (b) Comments from TMBL TMBL has expressed its opinion vide its various letters that both these two individuals belong to one Sterling Group and continue to be shareholders in the books of the bank. It has also declared that both of them are not likely to acquire any controlling interest either singly or along with the companies in the group, there is no suspicion that they attempt at cornering of shares with a view to acquire a controlling interest in the bank, and their acquisition does not reflect attempts of takeover or destabilisation of the management of the bank. (c) Main observations during the due diligence exercise Scrutiny of the account of Shri Chinnakannan and Smt Chandrammal indicated receipt of funds from Mis Katra Holdings Private Limited, Bangalore, an associate of Katra Holdings Limited, Mauritius around July 2008. (ix) Shri MGM Maran (10459 shares - 3.677%) and Shri MG Muthu (2830 shares - 0.99%) (a) Representation from Shri M G M Maran and Shri M G Muthu Shri M G M Maran had made representations to RBI directly vide his letter dated November 10, 2010 on behalf of himself as well as Shri M G Muthu, his father, and also furnished some details
14

/;~:~~"j
<~."{~e given format to TMBL vide his letter dated January 20, 2011. Shri Maran has declared that both of them together hold 13289 shares of TMBL only as personal investment, out of which, 8540 shares were purchased by them in 2007-08, and the rest were purchased between 2000 and 2007. He has claimed to have made the investment not with an intention to gain a controlling interest in the hank either singly or with the companies and concerns in the 'Group' and further does not attempt at cornering of shares, takeover or destabilisation of the management. Further, in response to RBI letter requiring further specific information in respect of details of bank accounts through which the consideration for purchase of shares in May 2007 was paid and also the present location of the physical shares, no information on the same was provided by Shri MGM Maran. (b) Comments from TMBL TMBL vide its various letters has stated that it has treated Shri M G M Maran as part of Shri B Ramachandra Adityan and Katra Group. Since, he along with Shri B Ramachandra Adityan were instrumental in approaching the foreign institutional investors to purchase the shares of the bank from Sterling Group, TMBL has resolved to treat him and his father Shri M G Muthu as part of Katra Group. TMBL has also stated that he is likely to acquire either singly or along with the companies and concerns in the group, a controlling interest in the bank. TMBL has stated that the transfer of shares appears to be not in the nature of genuine investment by the transferee concerned and the TMBL suspects an attempt at cornering of shares with a view to acquire a controlling interest in the bank. The acquisition of shares reflects attempts at takeover or destabilisation of the management of the bank. (c) Main observations during the due diligence exercise As per the information gathered, the shares of the investor are in the custody of SCB, Mumbai under the 'Project Windmill Escrow Account'. Inspite of specific queries made, Shri M G M Maran had not provided information in respect of details of bank accounts through which consideration for purchase of shares in May 2007 was paid and also the present location of the physical shares. Further, the scrutiny of his bank account declared by him to TMBL, also did not indicate routing of the payment towards acquisitions of his shares. Therefore, source of funds for acquisition of the shares could not be established. (x) Shri L Sridharan (500 shares - 0.176 %) and Shri N Ganesan (500 shares - 0.176 %) both reqistered on 13.5.2007) (a) Representation from the investors Shri L Sridharan and Shri N Ganesan, have, vide their representations dated November 11, 2010, claimed to have purchased the shares standing registered in their names, around May 13, 2007, and for this purpose, they have stated to have used their own financial sources and also made some borrowings. They have produced Chartered Accountant's Certificates in support of the financial resources. Further, in response to RBI letters requiring further specific information in respect of details of bank accounts through which the consideration for purchase of shares was paid in May 2007 and also the present location of the physical shares, no information on the same was provided by both Shri L Sridharan and Shri N Ganesan. (b) Comments from TMBL TMBL has vide its various letters reported to us that both Shri Sridharan and Shri Ganesan should be treated as part of Katra and Shri B Ramachandra Adityan Group. TMBL has reported that both of them are likely to acquire either singly or along with the companies and concerns in the Group, a controlling interest in the bank Further, TMBL has stated that the transfer of
15

;t~~s)
":~es in their names appears to be not in the nature of genuine investment by them since the bank suspects an attempt at cornering the shares with a view to acquire a controlling interest in the bank and since their acquisition reflects attempt at takeover or destabilisation of the management. Further, the bank has indicated that as per the counter affidavit filed by Shri Ramchandra Adityan in OA NO.681, 682,683 of 2007 in CS 491 of 2007, Shri Adityan had stated that in order to discharge his obligation to distribute the shares to persons who had paid in respect of 4600 shares, they were kept in the names of Respondents NO.23 to 29 of the above case (Shri L. Sridharan and Shri N. Ganesan are respondent Nos. 23 and 29 respectively). (c) Main observations during the due diligence exercise As per the information gathered, the shares of the investors are in the custody of SCB, Mumbai under the 'Project Windmill Escrow Account'. Inspite of specific queries made, Shri L Sridharan and Shri N Ganesan, had not provided information in respect of details of bank accounts through which consideration for purchase of shares was paid in May 2007 and also the present location of the physical shares. Further, scrutinies of their bank accounts declared by them to TMBL, also did not indicate routing of the payment towards acquisitions of their shares Therefore, source of funds for acquisition of shares by the investors could not be established. As per Shri Adityan's submissions to the Court, it appears that Shri L. Sridharan and Shri N. Ganesan were holding TMBL shares for further distribution to other persons. (xi) Shri P S Sathivaseelan (3255 shares - 1.144%))

~'"

(a) Representation from Shri Sathiyaseelan Shri Sathiyaseelan vide his letter dated February 8, 2011 has stated that he had acquired 2356 shares between 1994-2004 and another 1199 shares between 2007-2010, and sold 1492 shares to Mis Katra Holdings in April, 2010. Shri Sathiyaseelan has enclosed Chartered Accountant's certificates in support of the purchases of 3255 shares out of his own accumulated savings at different points of time between 1994 and 2010. Further, in response to RBI letter requiring further information, Shri Sathiyaseelan has indicated that RS.3.00 crore remittance was received in October 2007 from Katra Holdings, Bangalore purely on commercial terms on strength of a pro-note and 1492 shares were handed over to Katra Holdings to sell the shares in Indian market to realise the amount. Therefore, the transaction has not attracted the FEMA provisions and as such foreign exchange violation does not arise. (b) Comments from TMBL TMBL vide its letter dated February 17, 2011 has declared that his holdings are distinct and since the holdings are less than 5%, it does not require any acknowledgment from RBI. It has further declared that he is not likely to acquire any controlling interest in the bank, it does not suspect any attempt by him to corner the shares of bank, his acquisition does not reflect attempt at takeover or destabilisation of the management. The Board of TMBL has further observed that as per the information made available to them, 1492 shares standing in the name of Shri Sathiyaseelan and 1515 shares in the name of his family members have been lodged as collateral by Mis Katra Holdings Limited with one Mis EIFCo Invest VI for availing a loan of US $ 2 million. Hence, these 3007 shares sold by Shri Sathiyaseelan and his family members may be taken as the holding of Katra Group.

16

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~~fMain observations during the due diligence exercise In response to RBI letter requiring further information, Shri P.S Sathiyaseelan has indicated that RS.3.00 crore remittance was received from Katra Holdings, Bangalore purely on commercial terms on the strength of a pro-note and 1492 shares were handed over to Katra Holdings to sell the shares in Indian market to realise the amount. He has stated that for the above reason the transaction has not attracted FEMA provisions and as such foreign exchange violation does not arise. However, his statement is at variance with the remittance document available on RBI records which indicates that the remittance of RS.3.00 crore was towards advance consideration for purchase of TMBL shares and that the remittance was received from Mis Katra Holdings Limited, Mauritius and not Mis Katra Holdings Private Limited, Bangalore. (xii) MIs Kamehameha Mauritius Limited (2025 shares - 0.71%)

(a) Representation by MIs Kamehameha Mauritius Limited In pursuance of the order passed by Hon'ble High Court of Bombay on October 14, 2010, Mis Mis Kamehameha Mauritius Limited made its representations to RBI directly vide letter dated November 10, 2010. Mis Kamehameha Mauritius Limited has indicated that it is an SPV incorporated in 2007 and is beneficially owned by Kamehameha Schools and has purchased 2025 shares of TMBL as an independent entity and has shared common registered office at Mauritius with certain other investors of TMBL, purely for administrative reasons. It declares that there was absolutely no common source of funds with other foreign investors and has given common proxy in favour of Mis Katra Holdings Limited without any voting instructions or other related details. Further, it has been stated that it does not have any common directors or common shareholding or common source of funds or any other mode of control over Mis Katra Holdings Limited. (b) Comments from TMBL While forwarding the representation of Mis Kamehameha Mauritius Limited, TMBL vide its letter dated February 19, 2011, has stated that Mis Kamehameha Mauritius Limited is a distinct entity and has sought confirmation of registration of shares in the name of Mis Kamehameha Mauritius Limited. TMBL has declared that Mis Kamehameha Mauritius Limited is not likely to acquire, either singly or along with the other companies in group, any controlling interest in the bank and the bank does not suspect any attempt at cornering of shares with a view to acquiring controlling interest in the bank and that its acquisition does not reflect attempt to take over or destabilisation of the management of the bank. Three directors on the Board of TMBL have expressed dissenting views (as observed from the TMBL letter dated February 17,2011) citing violation of provisions of FEMA and transfer of 95418 shares on May 13, 2007 by makin@ a single payment forming a special investment holding company with a single director in a country where law is liberal. They have expressed their opinion that the objective is to take control of the management rather than investment purpose. (c) Comments from FED FED has stated that it had permitted transfer of shares in the name of Mis Kamehameha School but the shares have been transferred and held in the name of Mis Kamehameha Mauritius Limited in contravention of the provisions of FEMA.

17

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<c:WMain observations during the due diligence exercise The transfer of shares in favour of Mis Kamehameha Mauritius Limited, instead of Mis Kamehameha School, is in contravention of the provisions of FEMA. As per the information gathered, the shares of the investor are in the custody of SCB, Mumbai under the 'Project Windmill Escrow Account'. (xiii) Fllnvestments (Mauritius) Limited (5399 shares -1.95%)

(a) Representation by MIs Fllnvestments (Mauritius) Limited In pursuance of the order passed by Hon'ble High Court of Bombay on October 14,2010, Mis FI Investments (Mauritius) Limited made its representations to RBI directly vide letter dated November 10, 2010. It has indicated that it is an SPV incorporated in 2007 and is beneficially owned by Chubb Group of Insurance Companies and has purchased 5399 shares of TMBL in an independent capacity and that it shares common registered office at Mauritius with certain other investors purely for administrative reasons. It has stated that it used its own independent funds and given common proxy in favour of Mis Katra Holdings Limited without any voting instructions or other related details. Further, it claims that even though Mis Katra Holdings Limited was helping it in the acquisition of shares, it does not have any interest in Mis Katra Holdings Limited or influence on any of its directors or shareholders. (b) Comments from TMBL While forwarding the representation of Mis FI Investments (Mauritius) Limited, TMBL vide its letter dated February 19, 2011, has stated that Mis FI Investments (Mauritius) Limited is a distinct entity and has sought confirmation of registration of shares in the name of Mis FI Investments (Mauritius) Limited. TMBL has declared that Mis FI Investments (Mauritius) Limited is not likely to acquire, either singly or along with the other companies in group, any controlling interest in the bank and that the bank does not suspect any attempt at cornering of shares with a view to acquiring controlling interest in the bank and its acquisition does not reflect attempt to take over or destabilisation of the management of the bank. Three directors on the Board of TMBL have expressed dissenting views (as observed from the TMBL letter dated February 17, 2011) citing violation of provisions of FEMA and transfer of 95418 shares on May 13, 2007 by making a single payment forming a special investment holding company with a single director in a country where law is liberal. They have expressed their opinion that the objective is to take control of the management rather than investment purpose (c) Comments from FED FED has stated that it had permitted transfer of shares in the name of Mis Federal Insurance Company, New Jersey, USA, but the shares have been transferred and held in the name of Mis FI Investments (Mauritius) Limited in contravention of the provisions of FEMA. (d) Main observations during the due diligence exercise The transfer of shares in favour of Mis FI Investments (Mauritius) Limited, instead of Mis Federal Insurance Company, New Jersey, USA, is in contravention of the provisions of FEMA. As per the information gathered, the shares of the investor are in the custody of SCB, Mumbai under the 'Project Windmill Escrow Account'.

18

(a) Representation by MIs Cuna Group (Mauritius) Limited In pursuance of the order passed by Hon'ble High Court of Bombay on October 14, 2010, Mis Cuna Group (Mauritius) Limited made its representations to RBI directly vide letter dated November 10, 2010. It has indicated that it is an SPV incorporated in 2007 and is beneficially owned by Mis Cuna Mutual Group and has purchased 2025 shares of TMBL in an independent capacity and shared common registered office at Mauritius with certain other foreign investors purely for administrative reasons, it has stated that it used its funds received from the parent company and has given common proxy in favour of Mis Katra Holdings Limited without any voting instructions or other related details. (b) Comments from TMBL While forwarding the representation of Mis Cuna Group (Mauritius) Limited, TMBL vide its letter dated February 19, 2011, has stated that Mis Cuna Group (Mauritius) Limited is a distinct entity and has sought confirmation of registration of shares made in the name of Mis Cuna Group (Mauritius) Limited. TMBL has declared that Mis Cuna Group (Mauritius) Limited is not likely to acquire, either singly or along with the other companies in group, any controlling interest in the bank, TMBL does not suspect any attempt at cornering of shares with a view to acquiring controlling interest in the bank and its acquisition does not reflect attempt to take over or destabilisation of the management of the bank. Three directors on the Board of TMBL have expressed dissenting views (as observed from the TMBL letter dated February 17, 2011) citing violation of provisions of FEMA and transfer of 95418 shares on May 13, 2007 by making a single payment forming a special investment holding company with a single director in a country where law is liberal. They have expressed their opinion that the objective is to take control of the management rather than investment purpose. (c) Comments from FED FED has stated that it had permitted transfer of shares in the name of Mis Cuna Mutual Group, Wisconsin, USA, but the shares have been transferred and held in the name of Mis Cuna Group (Mauritius) Limited in contravention of the provisions of FEMA. (d) Main observations during the due The transfer of shares in favour of Mis Mutual Group, Wisconsin, USA, is in information gathered, the shares of the 'Project Windmill Escrow Account'. (xv) Mis Swiss Re Investors (Mauritius) diligence exercise Cuna Group (Mauritius) Limited, instead of Mis Cuna contravention of the provisions of FEMA. As per the investor are in the custody of SCB, Mumbai under the

Limited

(10124 shares - 3.56 %)

(a) Representation by Mis Swiss Re Investors (Mauritius) Limited In pursuance of the order passed by Hon'ble High Court of Bombay on October 14, 2010, Mis Swiss Re Investors (Mauritius) Limited made its representations to RBI directly vide letter dated November 10, 2010 It has indicated that it is an SPV incorporated in 2007 and is beneficially owned by Mis Swiss Re Holding, Switzerland and has purchased 2025 shares of TMBL in its independent capacity and shared common registered office at Mauritius with certain other foreign investors, purely for administrative reasons, used funds obtained from its Parent and has

19

,.. <i~k::_, :' ,j~.'r.;.-.i

~{f~:~;,
>~~n common proxy in favour of Mis Katra Holdings Limited without any voting instructions or other related details etc. (b) Comments from TMBL While forwarding the representation of Mis Swiss Re Investors (Mauritius) Limited, TMBL vide its letter dated February 19, 2011, has stated that Mis Swiss Re Investors (Mauritius) Limited is a distinct entity, and has sought confirmation of registration of shares made in the name of Mis Swiss Re Investors (Mauritius) Limited. Further, TMBL has declared that Mis Swiss Re Investors (Mauritius) Limited is not likely to acquire, either singly or along with the other companies in group, any controlling interest in the bank, TMBL does not suspect any attempt at cornering of shares with a view to acquiring controlling interest in the bank and its acquisition does not reflect attempt to take over or destabilisation of the management Three directors on the Board of TMBL have expressed dissenting views (as observed from the TMBL letter dated February 17, 2011) citing violation of provisions of FEMA and transfer of 95418 shares on May 13, 2007 by making a single payment forming a special investment holding company with a single director in a country where law is liberal. They have expressed their opinion that the objective is to take control of the management rather than investment purpose. (c) Comments from FED FED has stated that it had permitted transfer of shares in the name of Mis Swiss Re Partnership Holding AG, Switzerland but the shares have been transferred and held in the name of Mis Swiss Re Investors (Mauritius) Limited in contravention of the provisions of FEMA. (d) Main observations during the due diligence exercise The transfer of shares in favour of Mis Swiss Re Investors (Mauritius) Limited, instead of Mis Swiss Re Partnership Holding AG, Switzerland is in contravention of the provisions of FEMA. As per the information gathered, the shares of the investor are in the custody of SCB, Mumbai under the 'Project Windmill Escrow Account' (xvi) Representations from other than the 18 investors named in RBI Speaking order dated October 12, 2009 viz. Mis Starship Equity Holding Limited (13455 shares), Mis East River Holding Limited (10589 shares), Mis Subcontinental Equities Limited (13209 shares) and MIs Windmill Investors Limited (14080) (a) Mis Starship Equity Holding Limited, Mis East River Holding Limited, Mis Subcontinental Equities Limited and Mis Windmill Investors Limited through their legal representatives vide separate letters dated November 10, 2010 have made representations to RBI directly indicating that they have applied to RBI for obtaining approval from FED and have claimed that: Mis Starship Equity Holding Limited has purchased 13455 shares from Mis Vector Program Private Limited by paying consideration through Escrow agent and the original share certificates and transfer deeds executed by Mis Vector Program Private Limited were to be kept in escrow for the purpose of this transaction. It is an independent investor, fully capitalised by AXA Group and W&S Group, which are the independent beneficial share holders of Mis Starship Equity Holding Limited. It has enclosed a copy of the Foreign Inward Remittance Certificate (FIRC) dated May 23, 2007 indicating a foreign inward remittance of RS.32.54 crore to Mis Vector Program Private Limited on

", 5fl:4d.,' .; -

20

May 15, 2007 towards purchase of shares of TMBL by Mis Starship Equity Holding Limited. Mis East River Holding Limited has purchased 10549 shares from Shn Gokul Patnaik by paying considerations through Escrow agent and the original share certificates and transfer deeds executed by Shri Gokul Patnaik were to be kept in escrow for the purpose of this transaction It is an independent investor, fully capitalised by its beneficial owners, Mis Kuwait Investment Authority and Burnei Investment Agency. It has enclosed a copy of the FIRC dated May 23, 2007 indicating a foreign inward remittance of RS.25.61 crore to Shri Gokul Patnaik on May 15, 2007 towards purchase of shares of TMBL by Mis East River Holding Limited. Mis Subcontinental Equities Limited has acquired 13209 shares (2845 currently registered in the name of Mis RST Limited and 10364 in the name of Mis Katra Holdings Limited) by paying considerations through SCB, Mauritius. The original share certificates and transfer deeds executed were handed over to Mis Subcontinental Equities Limited. It is an independent investor, fully capitalised by Standard Chartered Holdings, the beneficial shareholder of Mis Subcontinental Equities Limited. It has enclosed a copy of SCB, Mumbai letter dated May 31, 2010 addressed to itself indicating that USD 14,611,955 was paid to Mis Katra Holdings Limited for purchase of 10,364 shares. Mis Windmill Investors Limited has beneficially acquired 14080 shares from Mis GHI Limited by making full payments and the original share certificates and transfer deeds were handed over to it The original share certificates and blank transfer forms are stated to be in its possession. However, Mis Windmill Investors Limited has not furnished the same to TMBL for verification as the sale has not been disputed by Mis GHI Limited. Mis Windmill Investors Limited is an independent entity backed by beneficial owner, Liberties Strategic Services.

(b) Comments from TMBL TMBL has submitted to RBI various letters that Mis Starship Equity Holding Limited, Mis East River Holding Limited and Mis Subcontinental Equities Limited are all distinct entities, and do not form part of a group. Further, TMBL has indicated that they are not likely to acquire, either singly or along with the companies in the group, any controlling interest in the bank. TMBL does not suspect that Mis Starship Equity Holding Limited, Mis East River Holding Limited and Mis Subcontinental Equities Limited are attempting to corner shares with a view to acquiring controlling interest in the bank and their acquisition does not reflect any possible attempt at takeover or destabilisation of management With regard to the purported sale of shares by Mis Vector Program Private Limited to Mis Starship Equity Holding Limited and Shri Gokul Patnaik to Mis East River Holding Limited, TMBL has observed that Mis Starship Equity Holding Limited and Mis East River Holding Limited produced original share certificates and blank transfer forms executed in their favour by Mis Vector Program Private Limited and Shri Gokul Patnaik respectively. However, Mis Vector Program Private Limited and Shri Gokul Patnaik have denied the sale and did not produce Share Certificates and Transfer Forms for physical verification With regard to the purported sale of shares by Mis RST Limited and Mis Katra Holdings Limited, to Mis Subcontinental Equities Limited, TMBL has observed that Mis Subcontinental Equities Limited produced original share certificates and blank transfer forms executed in its favour by Mis Katra Holdings Limited, while Mis Katra Holdings Limited has denied the sale and did not produce Share Certificates and Transfer Forms for physical verification. TMBL has further reported that original share certificates standing in the name of Mis RST Limited were not 21

:'~~~J)
"-~duced by Mis Subcontinental Equities Limited for verification, since the purported sale has not been denied by Mis RST Limited. As regards Mis Windmill Investors Limited, TMBL has not furnished any comments investor does not appear to have approached TMBL as yet. since the

(c) Comments from others Shri Gokul Patnaik had vide his letter dated March 9, 2011 confirmed that he had received advance consideration of Rs.25.61 crore from East River Holding Limited (ERHL). However, since ERHL had not obtained approval from RBI,Shri Gokul Patnaik has stated that he had terminated the arrangement and applied to RBI for permitting refund of funds. Katra Holdings Limited vide their letter dated February 24, 2011 indicated that Mis Subcontinental Equities Limited (which belongs to Standard Chartered Holdings, London, which in turn belongs to Standard Chartered Bankplc, UK) have wrongly and illegally made the application to RBI for approval to transfer their shares although they have not entered into any agreement with Mis Subcontinental Equities Limited. Due to the conflict of interest involved in Standard Chartered Bank acting as an escrow agent and its subsidiary acquiring shares in TMBL, SCB is colluding with Subcontinental Equities Limited, in trying to transfer away their shares. Further, SCB has wrongly parted the shares of certain investors, including Katra Holdings Limited, for a physical review done at TMBL. (d) Main observations in respect of the four foreign entities Although Mis Vector Program Private Limited and Shri Gokul Patnaik have received foreign inward remittance in their accounts and Katra Holdings Limited seem to have received funds into its account maintained in Mauritius towards purchase of shares, some disputes seem to exist among the investors and purchasers. It is observed that inspite of claims of payment of consideration by the above foreign entities viz. Mis Starship Equity Holding Limited, Mis East River Holding Limited, Mis Subcontinental Equities Limited and Mis Windmill Investors Limited, they do not seem to have availed any legal remedy in the past to resolve the matter. All the four foreign investors mentioned above are yet to obtain approval from RBI under FEMA angle. However, since the original share transfers in favour 18 investors is under examination, transfer of such shares to these entities and granting approval for subsequent transfer of shares does not arise at this stage. 22. Escrow arranQement with Standard Chartered Bank (5CB) (a) Since many of the above investors' shareholding is in the 'Project Windmill Escrow Account' at SCB, it may be worthwhile to understand the Escrow arrangement of the investors had with SCB. As per SCB letters dated September 15, 2010 and March 14, 2011, SCB, Mauritius was appointed as Escrow and Transaction Settlement Agent to Corsair Investments LLC, Broadstreet Group, Katra Holdings Limited and GHI Limited in May 2007. SCB has also indicated that the overall scheme of the Escrow Agreement provides for the sale of shares in TMBL to multiple independent RBI approved investors sourced by Corsair. SCB, India was appointed as a sub-agent which had opened Escrow Accounts for holding of shares and processing of purchase consideration. Based on the information obtained from SCS, it is observed that as on February 15, 2011,1,12,151 shares are held in the 'Project Windmill Escrow Account' at SCS.

22

\J~~
'~~13 has indicated in their letter dated March 14, 2011 that Katra Holdings Limited was extended a facility of USD 20 million to enable Katra Holdings Limited to refinance a loan it had previously received in order to acquire shares in Tamilnad Mercantile Bank Limited. As per SCB's letter dated March 14, 2011, the mechanism under the Escrow Agreement is that Katra Holdings Limited will be given a loan which will be used to acquire 10,364 shares in TMB which will be held temporarily prior to a sale to the purchaser nominated by Corsair The purchaser then will payoff the loan of Katra Holdings Limited at SCB Mauritius and the 10,364 shares would be lodged for transfer in the name of the purchasing entity. Further, regarding Vector Program Private Limited and Shri Gokul Patnaik, SCB has stated that they hold shares in TMBL until such time as Corsair sources purchasing entity to purchase the shares from them. SCB has also stated that although Mr Patnaik and Vector are not parties to the Escrow Agreement, they have signed letter agreements with Corsair undertaking to transfer their shareholdings to RBI approved purchasing entities nominated by Corsair and to cooperate in facilitating such transfers. (b) Comments from others Katra Holdings Limited vide letter dated March 15, 2011 has stated that Mis Corsair Capital, a prominent New York based Private Equity firm, had introduced seven foreign investors who had interest in investing in TMBL shares. The seven foreign investors include Swiss Re Investors (Mauritius) Limited, FI Investments (Mauritius) Limited, Kamehameha (Mauritius) Limited and Cuna Group (Mauritius) Limited, in whose names transfer of shares was effected by TMBL on May 13, 2007 and another 3 foreign investors (i.e Subcontinental Equities Limited, East River Holdings Limited and Starship Equity Holding Limited) who have applied for transfer of shares. Mis Katra Holdings Limited has stated that all the seven foreign investors were close associates of Corsair and are limited partners and investors in funds controlled and managed by Corsair. Katra Holdings Limited has also pointed out common directorship among Corsair and Swiss Re, Corsair and Standard Chartered Bank pic (where Subcontinental Equities Limited is a subsidiary of Standard Chartered Holdings, London). Katra Holdings Limited has stated that following the RBI order of October 2009, they had taken up with Corsair to unwind the arrangement with them however, Corsair was unwilling for the same. Mis Katra Holdings Limited has further observed that Mis Corsair Capital has been attempting unilaterally to wrest control of all the shares of TMBL through the above named 7 entities (c) Main observations on the Escrow arrangement It may be pertinent to note that apart from the 95,418 shares that related to sale by Sterling Group in 2007, other shares seem to have been added to the 'Project Windmill Escrow Account' at SCB subsequently. It is observed that the total shares of TMBL held in the 'Project Windmill Escrow Account' at SCB are 1,12,151 shares. Further, it is observed that although the sale of shares from Sterling group to various investors has been affected in the bank's books as on May 13, 2007, the relative shares are still under Escrow. Also, out of the shares in Escrow, in respect of shares relating to Mis Katra Holdings Limited, Vector Program Private Limited, Shri Gokul Patnaik, Mis RST Limited and Mis GHI Limited, representations have been received indicating sale of shares by the investors along with certain documentary evidence. This along with SCB's statement that Vector Program Private Limited and Shri Gokul Patnaik hold shares in TMBL until such time as Corsair sources purchasing entity to purchase the shares from them, indicates that there is a possibility that the shares held in Escrow are temporary holdings awaiting transfers to third parties. On the whole, shares of 12 out of 18 investors in the group are part of the 'Project Windmill Escrow Account' and shares of 5 other investors have reportedly been sold to an associate of an investor whose shares are already in the above
23

~-:-~

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I'_~.'.'n': ...
\:~~;'~row account. As per SCB letter, the overall scheme of the Escrow Agreement provides for the sale of shares in TMBL to multiple independent RBI approved investors sourced by Corsair a Private Equity firm on which there are allegations that it is attempting to unilaterally wrest control of all the shares of TMBL. 23. Before making my observations on the specific transfer of shares involved, it would be pertinent to refer to the relevant provisions of the Acknowledgement Guidelines contained in Circular dated 3rd February, 2004. Paragraphs 8, 9, 10 and 11 of the said Circular read as under: "8. In determining whether the applicant (including all entities connected with the applicant) is fit and proper to hold the position of a shareholder, RBI may take into account all relevant factors, as appropriate, including, but not limited to The applicant's integrity, reputation and track record in financial matters and compliance with tax laws. Whether the applicant has been the subject of any proceedings of a serious disciplinary or criminal nature, or has been notified of any such impending proceedings or of any investigation which may lead to such proceedings. Whether the applicant has a record or evidence of previous business conduct and activities where the applicant has been convicted for an offence under any legislation designed to protect members of the public from financial loss due to dishonesty, incompetence or malpractice. Whether the applicant has achieved a satisfactory outcome as a result of financial vetting. This will include any serious financial misconduct, bad loans or whether the applicant was judged to be bankrupt. The source of funds for the acquisition Where the applicant is a body corporate, its track record of reputation for operating in a manner that is consistent with the standards of good corporate governance, financial strength and integrity in addition to the assessment of individuals and other entities associated with the body corporate as enumerated above.

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9. Where acquisition or investment takes the shareholding of the applicant to a level of 10 percent or more and up to 30 percent, the RBI will also take into account other factors including but not limited to the following: (a) source and stability of the funds for the acquisition and the ability to access financial markets as a source of continuing financial support for the bank, (b) the business record and experience of the applicant including any experience of acquisition of companies, (c) the extent to which the corporate structure of the applicant will be in consonance with effective supervision and regulation of the bank; and (d) in case the applicant is a financial entity, whether the applicant is a widely held entity, publicly listed and a well established regulated financial entity in good standing in the financial community. 10. Acknowledgement for transfer of acquisition or investment exceeding the level of 30 percent will be considered keeping the above criteria in view and also taking into account but not limited to the following (a) the acquisition is in public interest, (b) the desirability of diversified ownership of banks, (c) the soundness and feasibility of the plans of the applicant for the future conduct and development of the business of the

24

bank; and (d) shareholder agreements and their impact on control and management of the bank Compliance with other regulations 11. As hitherto, the RBI acknowledgement will be subject to compliance by the applicant with other applicable laws and regulations such as those issued by SEBI, DCA and IRDA." Even though the above are not exhaustive while exani1ning the fit and proper status of shareholders, it definitely acts a reference point while considering the applications for acknowledgement 24. My observations
(i) Banks are "special" as they not only accept and deploy large amount of uncoll3teralized public funds in fiduciary capacity, but they also leverage such funds through credit creation. The banks are also important for smooth functioning of the payment system. In view of the above, legal prescriptions for ownership and govemance of banks laid down in Banking Regulation Act, 1949 have been often supplemented by regulatory prescriptions issued by RBI from time to time. It is well settled that diversified ownership minimises the risk of misuse or imprudent use of leveraged funds, Banking is a business which thrives on confidence. The regulator of the banking system of the country cannot remain passive to the developments in a bank, which has the potential to result in indiscriminate concentration of shareholdings in the hands of a few, whose integrity and fitness are not beyond the shadow of doubt Any such development can erode the depositor confidence which, as a regulator, RBI is expected to protect.

(ii) The documents submitted before me and the information gathered from other sources explained above do not point to a different state of affairs regarding the 'Group Nature' of the entitites/individuals involved, than what was decided in the order dated October 12, 2009. Therefore, I am compelled to proceed as if the "Group" remains intact, thereby attracting the Guidelines on Acknowledgement issued by the Reserve Bank of India. (iii) It is true that subsequent to the order of the High Court, most of the investors, TMBL and certain outsiders have provided some information for facilitating the acknowledgement process. A substantial summary of the information and submissions provided by them have been indicated in the earlier part of this order. (iv) While some of the investors were more forthcoming with information required for acknowledgement process, others have chosen either not to respond at all or to respond with minimal information. Essentially, the acknowledgement process is an activity aimed at ascertaining the fitness of the group of persons to hold shares beyond the threshold limit of 5% A number of factors are taken into account for this purpose, including integrity, reputation and track record in financial matters It goes without saying that when a conclusion has been arrived at that a set of persons form a group or they are acting in concert, what is required to be seen is the fitness of the group as a whole. It may not serve any useful purpose to find that one member of the group is fit or that a few other members do not qualify. The integrity and reputation of the shareholders in a group, which form two essential ingredients in the acknowledgment process, cannot be tested in isolation. In other words, the company they keep in the Group decide to a great extent their integrity and reputation. When some of the entities forming part of the Group
25

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inadequate and unreliable disclosures concerning them as sought by the Regulator, a veil of suspicion shrouds the entire Group, even if there exist members with clean and unblemished antecedents. (v) The process of due diligence of shareholders involves reference to the relevant regulator and other authorities. Unless, the essential materials for the same are made available, it would not be possible to carry out this exercise in a meaningful way By virtue of the investors being incorporated as investment vehicles in other jurisdictions viz. Mauritius, Cayman Islands and USA, no substantial information could be obtained on these entities. The entities from Caymen Islands and USA had not provided any information to either the bank or the RBI and hence no due diligence exercise could be initiated. Further, the 4 investors from Mauritius were incorporated as investment vehicles in 2007 Le the year in which the transfer of TMBL shares had taken place and information on the entities in respect of integrity, reputation, business, track record in financial matters and compliance with tax laws could not be obtained and the sources of funds in respect of these entities also could not be established. However, on the whole, seven foreign entities forming part of the Group had acquired shares in violation of the permission given by FED under FEMA and further, in respect of two foreign investors, the charges of insider trading by a foreign regulator and past litigation in respect of settlement of dues raise concerns in respect of the investors' 'fit and proper' status. (vi) Three resident investors, namely, Shri Gokul Patnaik, Vector Program Private Limited and Shri Sathiyaseelan, have received foreign inward remittances towards purchase of shares in 2007. Further, another foreign inward remittance was received by Shri Gokul Patnaik in June 2008 and was transferred to an associate entity of an investor in the group. Since foreign inward remittances have been received by resident persons I entity, examination of the matter under FEMA provisions and resolution of the disputes among the investors and the purchasers may be required. Further, Shri Sathiyaseelan has misrepresented to RBI about the foreign inward remittance of RS.3.00 crore received from Mis Katra Holdings Limited, Mauritius The matter relating to transactions by Shri Gokul Patnaik are under examination. (vii) In respect of four resident individuals, namely, Shri L Sridharan, Shri N Ganesan, Shri MGM Maran and Shri M G Muthu, who are part of the group, sources of funds and funds trail to trace the payment of consideration to the sellers could not be established. Further, inspite of specific information being sought in this regard, the investors have chosen not to provide details of the same. Also, as per Shri Adityan's submissions to the Court, it appears that Shri L. Sridharan and Shri N. Ganesan were holding the shares temporarily for further distribution to other persons. (viii) In respect of 4 resident entities / individuals, namely, Hemangini Finance and Leasing Private Limited, Shanmuga Financial Services Private Limited, Shri R Chinnakannan and Smt C Chandrammal, although they continue to be the shareholders in the bank's books, the shares have been reportedly sold to Mis Katra Holdings Private Limited. (ix) TMBL is an old private sector bank with a small share capital base of Rs.28.44 lakh and total number of shares at 2,84,454. Out of the total 2,84,454 shares of the bank, 1,12,151 shares (i.e 42.59% of the total shares of the bank) are held in the 'Project Windmill Escrow Account' with SCB and out of the 1,12,151 shares, 51,293 shares are under dispute where the investors have claimed that they have not sold the shares while 3 of the foreign investors have reportedly been able to produce certain documentary evidence of payment of consideration and that they are in possession of original documents relating to sale. That is shares of 12 out of 18
26

f'~~; ~;:'estors

in the group are part of the 'Project Windmill Escrow Account' and shares of 5 other investors have reportedly been sold to an associate of an investor whose shares are already in the above Escrow account. Further, the arrangements under which such substantial portion of the shareholding is held under the Escrow arrangement is not clear and lacks transparency. However from the available material it appears that Corsair, a foreign Private ECluity firm has the discretion to operate the Escrow account and source purchasers for substantial portion of TMBL shares. 25. Order

As noticed above, substantial portion of the shares of TMBL are held in the 'Project Windmill Escrow Account' at SCB. The arrangement under which the shares are kept in the above Escrow account is not clear and lacks transparency. However, the available material indicates that a little below half of TMBL's shares are under Escrow account with a foreign private equity firm, against which there are allegations of trying to wrest control over TMBL shares, having the discretion to source purchasers for the TMBL shares. Some of the sale transactions purportedly entered into by 3 foreign entities, 7 resident individuals I entities and submission made by a shareholder to a High Court in respect of 2 individuals indicate a possibility that the shares held in 'Project Windmill Escrow Account' are temporary holdings awaiting transfers to third parties. Under the circumstances, conducting due diligence exercise on the temporary shareholders would have no meaning. Further, the information available in respect of the foreign investors is either bare minimum or not satisfactory. In any case, the share transfers in favour of 7 foreign investors were in violation of FEMA provisions. Shareholding in respect of few of the resident investors would also require FED clearance due to receipt of foreign inward remittance towards advance consideration for purchase of TMBL shares. Further, some of the investors have either not provided any information towards the acknowledgement process or have not responded to the specific information sought by RBI. A few investors have also not been forthcoming in declaring details in respect of their transactions and made inconsistent statements to RBI regarding the source of funds and purchase of shares making it difficult to establish the source of funds for the transfer of shares. Further, holding of shares by certain persons for further distribution to others, receipt of foreign inward remittances from third parties towards transfer of TMBL shares even in 2008 i.e after the original transfers in May 2007 and transfer of such funds to an associate of another investor in the group, disputes relating to share transfers inspite of receiving consideration and yet not availing legal remedy to resolve the disputes and complaints and allegations of lodging of shares of a resident by a foreign investor before transfers have been effected by the bank, acquisition of shares by an associate of a foreign investor that is a shareholder as per the books of the bank, indicate that the matter is indeed very complex and that the investors have nontransparent dealings and agreements / understanding. The existence of allegations and counter allegations relating to subsequent transfer of shares and the transactions being declared only recently, in 2010, i.e after 3 years from the date of foreign inward remittance in 2007, leaves a credibility gap in their submissions. On the whole, the transactions and the shareholding by these 18 investors is not inspiring confidence to the Regulator for granting acknowledgement. In the circumstances, I do not consider that the investors mentioned in the order dated October 12, 2009 have satisfied the criteria fixed by RBI for acknowledgment purpose. Therefore, I have no other choice but to decline to acknowledge the holding of 5% or more of the paid up capital of TMBL by the group consisting of Mis RST Limited, Katra Holdings Limited, GHI Limited, Kamehameha Mauritius Limited, Fl Investments (Mauritius) Limited, Cuna Group (Mauritius) Limited, Swiss Re-investors (Mauritius) Limited, Shri Gokul Patnaik, Vector Programme Private
27

'{!i1;
"<_:'~t=fr;,ited, Shri p, S. Sathiyaseelan, Hemangini Finance and Leasing P Limited, Shanmuga Financial Services P Limited, Shri L Sridharan, Shri N Ganesan, Shri R. Chinnakannan, Smt C Chandrammal, Shri M G M Maran and Shri M G Muthu. The Group holding in the aggregate should be below 5% of the paid up capital of TMBL.

(Anand Sinha) Deputy Governor March 31, 2011

28