~RV14~~ RESERVE BANK OF INDIA _

www.rbi.org.in

Deputy Governor

Order passed by the Deputy Governor, Reserve Bank of India in connection with theacknowledgment of transfer of shares of Tamilnad Mercantile Bank Limited

The Hon'ble Bombay High Court heard various Writ Petitions 1 that were pending before thatCourt 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 ofTamilnad Mercantile Bank Limited (TMBL) pending before RBI, and such decision may be takenlatest by February 28, 2011. It was also directed that RBI should take appropriate decision inthis behalf, after taking into consideration the documents submitted by the Petitioners as well asRespondents. The Court also made it open to the Petitioners as well as Respondents to makeappropriate representations in writing to RBI in this behalf with necessary documents. As RBIwas not in a position to pass any Speaking Order by the time line indicated by the Court due tolate 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 fortaking 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 proceedto examine the issues involved in the transfer of shares of TMBL in question in the light ofguidelines issued by RBI in respect of acknowledgement of transfer/allotment of shares inprivate sector banks.

Guidelines issued by RBI in respect of acknowledgment of transfer / allotment of sharesin private sector banks

3. A brief history and the provisions of the present guidelines governing the acknowledgementof 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, wheneverbanks received applications for transfer of shares which would result in holdings of the proposedtransferee 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 thetransfer of shares makes the holdings of the proposed transferee, whether singly or along withthe 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 evenwhen individual allotment / transfer of shares is for less than 1 percent of the paid-up capital ofthe bank if dubious methods (such as by paying abnormally high price, huge monetaryincentives 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. InSeptember 1999, the threshold level of shareholding requiring acknowledgement was increasedfrom 1% to 5% of the total paid up capital of the bank.

(iv) In May 2000, banks were advised to promote an amendment to their Articles of Associatio:lto the effect that acquisition of shares by a person / group which would take his / its holding to alevel of 5% or more of the issued capital (subsequently modified to total paid up capital) of thebank should be with the prior approval of RBI.

(v) With a view to streamline the procedure for obtaining acknowledgment and removinguncertainties for investors with regard to allotment or transfer of shares and to indicate in atransparent manner the broad criteria followed by RBI for the purpose of acknowledgement oftransfer / 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 theacknowledgment from RBI for acquisition / transfer of shares will be required for all cases ofacquisition of shares which will take the 'holding' of an individual or group to equivalent of 5% ormore of the paid-up capital of the bank.

4. The requirement of obtaining acknowledgment has been laid down by RBI as a regulatoryprescription, 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 companybetween a resident and a non-resident is also governed by the provisions of the ForeignExchange 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 toacquire shares in TMBL and for this purpose had sought the permission of Foreign ExchangeDepartment (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, inrespect of 8 NRls3/foreign investors named therein4 The process of granting a no-objection byFED involved, among other things, a reference from FED to DBOD where DBOD had examinedthe proposed share transfers with reference to the acknowledgement of transfer / allotmentguidelines issued by RBI on February 3, 2004. On the basis of information furnished by theapplicants 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 upcapital 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 theirbooks with respect to 7 non-resident investors5 and a few other resident investors6, involving in

1 DBOD.No.PSBD.BC.64/16.13.100/2003-04 dated February 3,2004

l NRI (non-resident Indian)

, Caisse de depot at placement de quevoo Centre COP Capital - Canada, Ravi S Trehan of New York, Ramesh Vangal, Rajat Kumar Gupta, Kamehameha

School, Federal Insurance Company, Cuna Mutual Group, Swiss Re Partnership Holding AG

, Katra Holdings, RST Limited., GHI Limited., Kamehameha Mauritius Limited., Cuna Group (Mauritius) Limited., FI Investments (Mauritius) Limited., Swiss

Re Investors (Mauritius) Limited

6 Shri Gokul Patnaik, M/s Vector Program Limited., Shri MGM Maran, Shri B Ramachandra Adityan and 205 other Indian residents.

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(f:i:~;)\~~~,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 ofDirectors has passed a resolution on March 17, 2008 restricting voting rights of the above 7non-resident sllareholders and 2 resident shareholders (Shri Gokul Patnaik and Mis VectorProgram Private Limited), holding in all an aggregate 70,906 shares [24.89% of the paid-upcapital 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 hadpassed a resolution on May 26, 2008 to the effect that pending receipt of RBI's direction in thematter, all rights attached to the 70,906 shares of the above mentioned investors would be keptin abeyance, including the right to vote in the ensuing 83rd, 84th and 85th Annual GeneralMeetings (AGMs). The matter was examined by RBI and TMBL was advised vide letter datedMay 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 ofBombay challenging the in-principle approval dated March 30, 2007 issued by FED, andacquisition of shares by certain investors, including the above named NRls and foreigninvestors as well as certain resident investors (i.e Shri Gokul Patnaik, Mis Vector ProgramPrivate Limited, Shri P S Sathiyaseelan, Shri M G Muthu, Shri M G M Maran) involving in all90,488 shares. The Hon'ble High Court of Bombay passed an order directing the parties tomake 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 transferin respect of 75,499 shares (registered on May 13, 2007, inter alia, in the name of 7 ForeignInvestors and Shri Gokul Patnaik and Mis Vector Program Private Limited) or any rights to14,949 shares held by Shri P S Sathiyseelan (1600 shares), Shri M G Muthu (2820 shares) andShri 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 bydirecting Shri Kanagaraj to make representations before RBI, annexing all the documents onwhich he wanted to rely upon. The Court had also directed RBI to consider the representationsof the other petitioners in the WP before passing any order on the representation of ShriKanagaraj.

12. In pursuance of the above order, RBI received representations from Shri Kanagaraj as wellas from other investors? in July 2009.

13. Based on the information made available through various representations as well as theresults of scrutiny of the proxies exercised by the shareholders, RBI observed that 18individuals I entities, including the above 7 NRls I foreign investors, besides Mis VectorProgram Private Limited, Mis Hemangini Leasing and Finance Private Limited, Mis ShanmugaLeasing and Finance Private Limited, S/Shri Gokul Patnaik, MGM Maran, MG Muthu, LSridharan, N Ganesan, P S Sathiyaseelan, R Chinnakannan and Smt C Chandrammal hadclear understanding and co-operation among themselves and had a common purpose of

'GHllimited., RST limited Cuna Group (Mauritius) Limited., Swiss Re Investors (Mauritius) limited., Shri M G M Maran and Shr; M G Muthu, Shri l

Sridharan, Shri N Ganesan, Shri Gokul Patnaik, Hemangin; Finance and leasing Pvt limited., Shri R Chinnakannan and Smt C Chandrammal.

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\:\~fi1~:V''-~maining substantial acquisition of shares / representation on the Board of TMBL and thereby

gain control of TMBL.

14. Accordingly, TMBL was directed by RBI vide a Speaking Order passed on October 12, 2009to approach RBI along with full details in a given format for acknowledgment of transfer ofshares in favour of the above mentioned group of 18 in terms of guidelines contained in circulardated February 3, 2004 The acknowledgement process, among other things, would involvescrutiny of the declaration submitted by the investors and initiating a due diligence exercise inrespect 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 holdersas well as submission of insufficient information by some of them, claims made by a few newentities and denials made regarding purchase/sale of shares held by a few of the aboveshareholders etc, a stalemate resulted in the acknowledgment process.

Meanwhile, on November 26, 2009, the High court of Madras declared the results of the pollconducted for the vacancies of directors in 83rd and 85th AGMs of the bank held on June 5, 2008on the basis of voting done by the shareholders and after considering the speaking order datedOctober 12, 2009 passed by RBI.

16. Subsequent to the above, Writ Petitions8 were again filed in Hon'ble Bombay High Court andthe 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 onthe preliminary information received by RBI directly from four foreign investors during Novemberand December 2010 viz. Kamehameha Mauritius Limited, Cuna Group (Mauritius) Limited, FIInvestments (Mauritius) Limited and Swiss Re Investors (Mauritius) Limited, which, among otherthings, indicated the parent regulator's names, due diligence reports from the overseasregulators were obtained on the parent institutions. The reports have not indicated any adverseinformation on the parent entities / groups. Further, due diligence reports were also called forfrom the Financial Services Commission, Mauritius in respect of five investors named in the RBISpeaking Order dated October 12, 2009 (viz. Kamehameha Mauritius Limited, Cuna Group(Mauritius) Limited, FI Investments (Mauritius) Limited, Swiss Re Investors (Mauritius) Limitedand 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 commentswell 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 thebank's comments in respect of all the 18 investors, whose share holding requiresacknowledgement from RBI in terms of the instructions contained in the guidelines of February3, 2004. After prolonged correspondence, TMBL had submitted the information collected frommany 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 andothers 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 BoardResolutions passed in the Board meetings vide letters dated February 11 and 17, 2011 and finalconfirmed 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 examinationand it was also observed that the information provided by the investors was insufficient tocomplete the due diligence exercise on the investors. Therefore, the Bombay High Court wasrequested for 4 weeks time for deciding on the representations of the investors and the BombayHigh 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 theaccounts of 11 investors were conducted as a part of the due diligence exercise. Informationwas also obtained from Foreign Exchange Department and Department of Non-BankingSupervision of RBI in respect of the investors I companies. Additional information was called forfrom the investors on the details of sellers, consideration paid, bank accounts through wtiich theconsideration was paid, date of sale, physical custody of the shares, annual reports of the lastthree years (in respect of two resident investor companies viz. Mis Vector Program PrivateLimited and Shanmuga Financial Services Private Limited) by March 10, 2011. Mis KatraHoldings Limited (Mauritius) was advised to confirm the veracity of the statements made by ShriR. Chinnakannan, Smt. C. Chandrammal and Hemangini Finance and Leasing P. Limited thatthey have sold their shares to Katra Holdings and it was also advised to provide details of theRS.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 beconstrued 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 receivedhas been indicated against each investor in the following paragraphs.

Further, comments were also sought from Standard Chartered Bank (SGB), Mumbai on theallegations of Shri Ramesh Van gal indicating that since Mis Subcontinental Equities Limited, isa subsidiary of Standard Chartered Holdings, London, and due to the inherent conflict ofinterest, Standard Chartered Bank which is acting as an escrow agent, is colluding with MisSubcontinental 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 ofshares have represented to RBI seeking personal hearings. However, while assuring that thewritten representations already made by them would be fully taken into consideration whilepassing any order, the entities were advised that in view of the short time available, it would notbe possible to give them any personal hearing.

Gist of representations received from the investors and the present status of theshareholding

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

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Further, from the information received from the bank and the investors, it is observed that whileHemangini 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, allthe four have indicated that they no longer hold the shares as the same have been disposed ofin favour of M/s Katra Holdings Limited.

Shri Sathiyaseelan has also indicated that he has disposed major portion of his shares in favourof M/s Katra Holdings Limited (1492 shares out of his 3255 shares), while he is still theshareholder 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 tobe purported sale of shares to 4 new foreign investors. However, the same appears to be underdispute since the sellers have not confirmed the sale.

Shri LSridharan, Shri N.Ganesan, Shri MGM Maran and Shri MG Muthu appear to be stillholding the shares. However, payment of consideration towards purchase of shares could notbe traced from their bank accounts.

Four foreign investors viz. Kamehameha Mauritius Limited, Cuna Group (Mauritius) Limited, FIInvestments (Mauritius) Limited, Swiss Re Investors (Mauritius) Limited appear to be stillholding the shares in violation of FEMA provisions and have stated that they have no commonsource of funds with the others and have given common proxies in favour of M/s Katra HoldingsLimited for the 83rd and 85th AGM's of the bank on June 5, 2008 without any voting instructionsor 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 thegroup was already discussed and decided in the RBI Speaking Order dated October 12, 2009and 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 itsBoard in its meetings on February 9 and 16, 2011. Based on the resolutions passed by theBoard, TMBL has forwarded three letters dated February 11, 17 and 19, 2011 and come to thefollowing conclusions:

• TMBL has identified 7 individuals/entities9 as belonging to one Katra and Shri BRamachandra Adityan Group, whose acquisition reflects attempts of takeover ordestabilisation of the management.

• TMBL has identified 2 entities 10 belonging to Katra Group, whose acquisition reflectsattempts at takeover or destabilisation of the management.

• TMBL has identified 4 individuals/entities 11 as belonging to one Sterling Group whohowever, does not require acknowledgment.

9 Shri M G M Maran, Shri M G Muthu, Shri L Sridharan, Shri N Ganesan, Mis Katra Holdings Limited., Shri Gokul Patnaik and Mis VectorProgram P Limited10 Mis RST Limited and Mis GHI Limited

11 Sm!. C Chandrammal, Shri R Chinnakannan, Mis Hemangini Finance & Leasing P Limited., and Mis Shanmuga Financial Services PLimited.

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TMBL has identified 4 foreign investors 12 as distinct entities and has sought confirmationfor the transfer of shares effected in May 2007

• TMBL has concluded that Shri P S Sathiyaseelan is not associated with any group andtransfer of shares appears to be in the nature of genuine investment.

• TMBL has identified another 3 foreign investors 13 (the purported purchasers) as jistinctentities, whose acquisition does not reflect attempts of takeover or destabilisation of themanagement of the bank.

21. Before expressing my views on the issue of acknowledgement, it would be beneficial toprovide a summary of the comments/views/inform'ation received from various sources inconnection with the acknowledgement process, individual/entity-wise. The main observationsduring the due diligence exercise are also mentioned against each investor The same are asunder:

(i) MIs RST Limited (2845 shares - 1%)

(a) Representation from MIs RST LimitedIn 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 anyrepresentation to either RBI or TMBL.

(b) Comments from TMBLTMBL vide its various letters has reported to RBI that Mis RST Limited belongs to Mis KatraGroup, and along with the group, is likely to acquire either singly or along with the companiesand concems in the group, a controlling interest in the bank. TMBL has further reported that thetransfer in the name of Mis RST Limited does not appear to be in the nature of genuineinvestment and it suspects an attempt at comering of shares by Mis RST Limited and theacquisition reflects attempts to take over or destabilisation of management of the bank.

(c) Comments from FEDFED has stated that the transfer of shares in favour of Mis RST Limited, instead of Shri Ravi STrehan, who has the no objection from FED, is in contravention of the provisions of FEMA.

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

(e) Main observations during the due diligence exerciseThe transfer of shares in favour of Mis RST Limited, instead of Shri Ravi S Trehan, is incontravention of the provisions of FEMA. Further, since Mis RST Limited has not providedinformation either to TMBL or to RBI, no due diligence exercise could be conducted on the

12 Mis Swiss Re Investors (Mauritius) Limited, Mis F I Investments (Mauritius) Limited., Mis Cuna Group (MauritiUS) Limited and MisKamehameha Mauritius Limited.13 Mis Starship Equity Holdings Limited, Mis East River Holdings Limited., and Mis Subcontinental Equities Limited.

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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 RSTLimited.

(ii) Mis GHI Limited (14080 shares - 4.95%)

(a)Representation from Mis GHI LimitedIn 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 anyrepresentation to either RBI or TMBL.(b) Comments from TMBLTMBL 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 andconcerns in the group, a controlling interest in the bank. TMBL has further reported that thetransfer in the name of Mis GHI Limited does not appear to be in the nature of genuineinvestment and it suspects an attempt at cornering of shares by Mis GHI Limited and theacquisition reflects attempts to take over or destabilisation of management of the bank.

(c) Comments from FEDFED has stated that RBI had permitted transfer of shares in the name of Shri Rajat KumarGupta but the shares have been transferred and held in the name of Mis GHI Limited, incontravention of the provisions of FEMA.

(d) Comments from othersWhile the 14080 shares continue to stand in the name of Mis GHI Limited, one Mis WindmillInvestors Limited, a foreign investor, has claimed to RBI vide its letter dated November 10, 2010that it has acquired the shares from Mis GHI Limited. According to Mis Windmill InvestorsLimited, it has paid consideration to Mis GHI Limited towards purchase of the shares registeredin the name of the latter. However, Mis Windmill Investors Limited has not approached TMBL inthis connection. A few complaints have been received from the shareholders of TMBL pointingout that United States Securities and Exchange Commission has initiated administrativeproceedings (for insider trading in the 'Galleon' investigation) on March 1, 2011 against ShriRajat Kumar Gupta (owner of Mis GHI Limited) and requested RBI to refuse acknowledgementto Mis GHI Limited on 'fit and proper' grounds.

(e) Main observations during the due diligence exerciseThe transfer of shares in favour of Mis GHI Limited, instead of Shri Rajat Kumar Gupta, is incontravention of the provisions of FEMA, Further, since Mis GHI Limited has not providedinformation either to TMBL or to RBI, no due diligence exercise could be conducted on theentity. 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 foreigninvestor, has claimed to have purchased the TMBL shares from Mis GHI Limited. The outcomeof the investigation by United States Securities and Exchange Commission in respect of ShriRajat 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 LimitedIn pursuance of the October 14, 2010 Court order, Mis Katra Holdings Limited made itsrepresentation 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 byShri Ramesh Vangal, and further it claims that its shareholding in TMBL is independent of anyother person and is 'not a part of any group'. It also declared that none of the companies orindividuals who are shareholders of TMBL has any shareholding or directorship in Mis KatraHoldings Limited and it does not exercise control on any of the companies or individuals that areshareholders of TMBL. Katra Holdings Limited vide letter dated February 24, 2011 indicated thatMis Subcontinental Equities Limited (which belongs to Standard Chartered Holdings, London,which in turn belongs to Standard Chartered Bankplc, UK) have wrongly and illegally made theapplication to RBI for approval to transfer their shares although Katra Holdings Limited,Mauritius has not entered into any agreement with Mis Subcontinental Equities Limited. KatraHoldings Limited has stated that due to the conflict of interest involved in Standard CharteredBank acting as an escrow agent and its subsidiary acquiring shares in TMBL, SCB is colludingwith Mis Subcontinental Equities Limited, in trying to transfer away their shares to the subsidiaryand that SCB has wrongly parted the shares of certain investors, including Katra HoldingsLimited, for a physical review done at TMBL. Further, in response to RBI's letter requiring furtherinformation, Shri Ramesh Vangal has indicated that RS.3.00 crore was paid to Shri PSSathiyaseelan towards advance consideration for the purchase of 1492 shares which would beproduced for transfer on obtaining necessary approval from RBI.

(b) Comments from TMBLWhile forwarding the representation of Mis Katra Holdings Limited, TMBL, vide their letter datedFebruary 19, 2011, has forwarded its Board resolution which resolved to treat Mis KatraHoldings Limited as part of one Shri B Ramachandra Adiyan Group. Further, TMBL hasreported that Mis Katra Holdings Limited is likely to acquire either singly or along with thecompanies and concerns in the group, a controlling interest in the bank. TMBL has furtherreported that the transfer in the name of Mis Katra Holdings Limited does not appear to be inthe nature of genuine investment and it suspects an attempt at cornering of shares by Mis KatraHoldings Limited and the acquisition reflects attempts to take over or destabilisation ofmanagement of the bank. Further, the chartered accountant's certificate produced by Mis KatraHoldings Limited regarding the source of funds has not specified that the shares have beenbought from 'owned funds'

(c) Comments from FEDFED has stated that the shares of TMBL which were permitted to be held by Shri RameshVangal were observed to be held in the name of Mis Katra Holdings Limited. As such, theshares held by Mis Katra Holdings Limited in TMBL are in contravention of the extant FEMAproVISions.

(d) Comments from othersMis Subcontinental Equities Limited, a foreign investor, had reported to TMBL and RBI that theyhad purchased shares from Katra Holdings Limited. Mis Subcontinental Equities Limited vide itsletter dated November 10, 2010, had claimed to have acquired 10364 shares and enclosed acopy of letter dated May 31, 2010 issued to it by SCB, Mumbai indicating that USD 14,611,958was paid to Mis Katra Holdings Limited for purchase of 10,364 shares. However, Mis KatraHoldings Limited has denied the purported sale transaction. In view of the dispute relating to thesale, TMBL had called for the original documents to verify the facts relating to the purportedsale. Consequently, the original share certificates and blank transfer deeds signed by Mis KatraHoldings Limited were stated to have been produced by Mis Subcontinental Equities Limited toTMBL on February 5, 2011. However, TMBL has reported that Mis Katra Holdings Limited hasdisputed that they have sold the shares to anybody and stated that there is no requirement to

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(\j~~~J/""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 Limitedwas extended a facility of USD 20 million to enable Mis Katra Holdings Limited to refinance aloan 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 thatMis Katra Holdings Limited will be given a loan which will be used to acquire 10,364 shares inTMBL, which will be held temporarily prior to a sale to the purchaser nominated by Corsair. Thepurchaser then will payoff the loan of Mis Katra Holdings Limited at SCB, Mauritius and the10,364 shares would be lodged for transfer in the name of the purchasing entity. Further, SCBhas 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 toMis Katra Holdings Limited. Accordingly, on April 29, 2008, Corsair exercised its rights andrequested 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 HoldingsLimited 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 thatEvolvence India Holdings have filed an application of default judgement in New York, USA forrecovery of the full amount lent to Katra Holdings Limited in July 2009. The latest position on thesame has been obtained from internet searches which have indicated that the litigation wassettled by Shri Ramesh Vangal in June 2010 by paying an amount of USD 2.5 million beforelegal expenses and direct costs (USD 0.3 m).

(e) 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 theinvestor 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 purchasedthe TMBL shares from Mis Katra Holdings Limited and produced documentary evidence by wayof a copy of the letter dated May 31, 2010 issued to it by SCB, Mumbai indicating that USD14,611,955 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 paymentto 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 ShanmugaFinancial Services Private Limited indicate that they have received funds from Katra HoldingsPrivate Limited in July 2008, Shri Ramesh Vangal has not shared the information whether MisKatra Holdings Private Limited, Bangalore, of which he is the Chairman, had purchased theshares 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 HoldingsPrivate Limited, Banga/ore seems to have acquired 7124 shares from the above 4 shareholdersand Shri PS Sathiyaseelan. Further, the past litigation in respect of settlement of dues by KatraHoldings Limited raises concern in respect of the credit history of the investor.

(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 and4,593 shares on May 28, 2007 and holds in all 11,342 shares. He has made representation to

10

¥~f~'~'-,,\:'-''''\

"'" ,., _ "";1

1<;, . J'~. ~.JJI'. '"",,-~,,'/

\~~4~fi(vide his letter dated November 11, 2010, wherein he claims to have made investment inhis name in his individual capacity, out of his own resources, and that the investment is not atthe behest of any person or group. He has stated that his shareholding is independent and notpart of any group. Shri Gokul Patnaik claims to be a 'Management Consultant' and claims to beunder no regulator either in India or abroad. Further, Shri Gokul Patnaik has enclosed aChartered Accountant's certificate which merely states that the amount has been paid, on May15, 2007, out of his personal account kept with ICICI Bank Limited. Further, in response to RBIletter requiring further information, Shri Gokul Patnaik has indicated that he had purchased the11342 shares from Mis Mansiri Investment & Leasing Private Limited and 3 other individualsand paid a consolidated consideration amount to Mansiri on May 15, 2007 He had alsoconfirmed that he had received advance consideration of RS.25.61 crore from one East RiverHolding Limited (ERHL). However, since ERHL had not obtained approval from RBI, Shri GokulPatnaik has stated that he had terminated the arrangement and applied to RBI for obtainingapproval to refund the funds

(b) Comments from TMBLTMBL has furnished its opinion, vide its various letters that Shri Gokul Patnaik forms part of theKatra and Shri B Ramachandra Adityan Group. TMBL has further reported that Shri GokulPatnaik along with Shri Ramachandra Adityan and Katra Group is likely to acquire either singlyor along with the companies and concerns in the group, a controlling interest in the bank. Thetransfer of shares in his name appears to be not in the nature of genuine investment and TMBLsuspects an attempt at cornering of shares with a view to acquire a controlling interest in thebank. It has further been reported by TMBL that the acquisition by Shri Gokul Patnaik reflectsattempts at takeover or destabilisation of the management

(c) Comments from othersMis 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 of10589 shares. East River Holdings Limited has also enclosed an FIRC indicating that a foreigninward remittance amounting to Rs.25,61 crore was remitted into Shri Gokul Patnaik's accounton May 15, 2007 towards advance consideration for purchase of TMBL shares. However, ShriGokul Patnaik has approached suo moto with the request that RBI should not permit transfer ofshares held by him in TMBL. Due to the dispute in respect of the sale, TMBL had called for theoriginal documents to verify the facts relating to the purported sale. TMBL has since advisedthat Mis East River Holdings Limited has produced the original share certificates and blanktransfer forms signed by Shri Gokul Patnaik for physical verification and TMBL has found thesame to be in order. As per SCB letter dated March 14, 2011, SCB has indicated that 'theEscrow Agreement makes a provision for the transfer of temporary stakes in TMB to Mr Patnaikand Vector' SCB has also stated that 'although Mr Patnaik and Vector are not parties to theEscrow Agreement, they have signed letter agreements with Corsair undertaking to transfertheir shareholdings to RBI approved purchasing entities nominated by Corsair and to cooperatein facilitating such transfers.'

(d) Comments from FEDShri Gokul Patnaik is said to have admitted receipt of RS.25.61 crore towards sale considerationand also admitted having utilised the money towards payment of his previous liabilities. ShriGokul 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 GokulPatnaik on May 13, 2007 and another 4593 shares on a subsequent date. All these 11,342shares are held in the 'Project Windmill Escrow Account'.

11

(e) Main observations during the due diligence exerciseAs per the information gathered, the shares of the investor are in the custody of SCB, Mumbaiunder the 'Project Windmill Escrow Account' The scrutiny of the account of Shri Gokul Patnaikindicated 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, 2007towards advance consideration for purchase of TMBL shares. The amount was transferred onthe same day to Mis Mansiri Investment & Leasing Private Limited, the seller of the TMBLshares. Further, the scrutiny also indicated that an amount of Rs.2.95 crore was receivedthrough a foreign inward remittance from SCB ale Project Windmill Escrow Ale, Mauritius onJune 27, 2008 for 'advance consideration towards purchase of shares of TMBL by CC IndiaHoldings Limited.' This amount was found to be transferred to Mis Katra Holdings PrivateLimited on the next day of receipt of such funds. Since funds were received through foreigninward remittances and utilised by the investor for purposes other than the intended one, thematter is under examination.

(v) MIs Vector Proqram Private Limited, Banqalore (13455 shares - 4.73%)

(a) Representation from MIs Vector Program Private LimitedMis Vector Program Private Limited, a resident company, has made its representation to RBIvide its letter dated November 10, 2010. In its representation, Mis Vector Program PrivateLimited claims to have made investment out of its own resources and that it does not have anyassociation with any other shareholders of TMBL and the directors or shareholders of MisVector Program Private Limited do not hold any directorship or other interest in companies thatare shareholders of TMBL Further, it has stated that it is not in any manner connected to othercompanies or individuals referred to in RBI's order dated October 12, 2009. Mis Vector ProgramPrivate Limited has enclosed a Chartered Accountant's certificate which merely states that theamount has been paid on May 15, 2007, out of its account maintained with Axis Bank Limited,M G Road Branch, Bangalore.

(b) Comments from TMBLTMBL has furnished its opinion vide its various letters that Mis Vector Program Private Limitedforms part of the Katra Group and Shri B Ramachandra Adityan group. TMBL has furtherreported that Mis Vector Program Private Limited, along with Shri Ramachandra Adityan andKatra Group, is likely to acquire either singly or along with the companies and concerns in thegroup, a controlling interest in the bank. The transfer of shares in its name appears to be not inthe nature of genuine investment and TMBL suspects an attempt at cornering of shares with aview to acquire a controlling interest in the bank. It has further been reported by TMBL that theacquisition by Mis Vector Program Private Limited reflects attempts at takeover ordestabilisation of the management of the bank.

(c) Comments from othersMis 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 inwardremittance amounting to RS.32.54 crore was remitted into the bank account of Mis VectorProgram Private Limited on May 15, 2007 towards advance consideration for purchase of TMBLshares. TMBL has informed that even though Mis Vector Program Private Limited has deniedhaving sold shares to Mis Starship Equity Holdings Limited, Mis Starship Equity HoldingsLimited has produced to TMBL on February 5, 2011 the original share certificates and transfer

12

(,,~~)'~ds executed 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 thetransfer 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 signedletter agreements with Corsair undertak:ng to transfer their shareholdings to RBI approvedpurchasing entities nominated by Corsair and to cooperate in facilitating such transfers.'

(d) Main observations during the due diligence exerciseA scrutiny of the account of Mis Vector Program Private Limited indicated that it had received aforeign inward remittance amounting to Rs.32.54 crore from Mis Starship Equity HoldingsLimited on May 15, 2007 towards advance consideration for purchase of TMBL shares whichwas 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 ProgramPrivate Limited has neither declared to us anything relating to sale of shares nor receipt offoreign funds. As per the information gathered, the shares of the investor are in the custody ofSCB, 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 LeasingPrivate Limited on a date later to May 13, 2007. Mis Hemangini Finance and Leasing PrivateLimited, vide its letter dated November 15,2010, has informed RBI that it no longer holds anyshares in TMBL. Further, in response to RBI letter requiring further information, Mis HemanginiFinance and Leasing Private Limited has reiterated that it has sold its shares to Mis KatraHoldings Private Limited, Bangalore (which is also owned by Shri Ramesh Vangal of Mis KatraHoldings Limited, Mauritius) in July 2008 and received consideration on the sale.

(b) Comments from TMBLTMBL has expressed its opinion, vide its various letters that Mis Hemangini Finance andLeasing Private Limited belongs to one Sterling Group and continues to be shareholder in thebooks of the bank. It has also declared that Mis Hemangini Finance and Leasing Private Limitedis not likely to acquire any controlling interest either singly or along with the companies in thegroup, there is no suspicion that it attempts at cornering of shares with a view to acquire acontrolling interest in the bank, and its acquisition does not reflect attempts at takeover ordestabilisation of the management.

(c) Main observations during the due diligence exerciseMis Hemangini Finance and Leasing Private Limited belongs to Sterling group of companiesand has indicated sale of its shares to Mis Katra Holdings Private Limited, Bangalore. Scrutinyof the account of Mis Hemangini Finance and Leasing Private Limited indicated receipt of fundsfrom Mis Katra Holdings Private Limited, Bangalore, an associate of Katra Holdings Limited,Mauritius around July 2008.

(vii) Mis Shanmuqa Financial Services Private Limited (2322 shares - 0.82%) (New nameMsi Hi-Tech Traders Private Limited)

(a) Representation from Mis Shanmuga Financial Services Private LimitedMis Shanmuga Financial Services Private Limited vide their letters has claimed to be holding2322 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 requiringfurther information, Mis Shanmuga Financial Services Private Limited has indicated that it hassold its shares to Mis Katra Holdings Private Limited, Bangalore (which is also owned by ShriRamesh Vangal of Mis Katra Holdings Limited, Mauritius) in July 2008 and receivedconsideration on the sale.

(b) Comments from TMBLTMBL has expressed its opinion vide its various letters that Mis Shanmuga Financial ServicesPrivate Limited belongs to one Sterling Group and continues to be shareholders in the books ofthe bank. It has also declared that Mis Shanmuga Financial Services Private Limited is notlikely 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 controllinginterest in the bank, and its acquisition does not reflect attempts at takeover or destabilisation ofthe management.(c) Main observations during the due diligence exerciseScrutiny of the account of Mis Shanmuga Financial Services Private Limited indicated receipt offunds from Mis Katra Holdings Private Limited, Bangalore, an associate of Katra HoldingsLimited, Mauritius around July 2008.

(viii) Shri R. Chinnakannan (1220 shares - 0.429%) and Smt. C Chandrammal (333 shares- 0.117%)

(a) Representation from the investorsBoth Shri Chinnakannan and Smt Chandrammal claim to have purchased the shares out of ownsources of funds much before 2007, and they claim to have disposed of the shares to Mis KatraHoldings Private Limited in July, 2008. Further, in response to RBI letter requiring furtherinformation, Shri Chinnakannan and Smt. C Chandrammal have reiterated that they have soldtheir shares to Mis Katra Holdings Private Limited, Bangalore in July 2008 and receivedconsideration on the sale.

(b) Comments from TMBLTMBL has expressed its opinion vide its various letters that both these two individuals belong toone Sterling Group and continue to be shareholders in the books of the bank. It has alsodeclared that both of them are not likely to acquire any controlling interest either singly or alongwith the companies in the group, there is no suspicion that they attempt at cornering of shareswith a view to acquire a controlling interest in the bank, and their acquisition does not reflectattempts of takeover or destabilisation of the management of the bank.

(c) Main observations during the due diligence exerciseScrutiny of the account of Shri Chinnakannan and Smt Chandrammal indicated receipt of fundsfrom 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 MuthuShri 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 ofwhich, 8540 shares were purchased by them in 2007-08, and the rest were purchased between2000 and 2007. He has claimed to have made the investment not with an intention to gain acontrolling 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 themanagement. Further, in response to RBI letter requiring further specific information in respectof details of bank accounts through which the consideration for purchase of shares in May 2007was paid and also the present location of the physical shares, no information on the same wasprovided by Shri MGM Maran.

(b) Comments from TMBLTMBL vide its various letters has stated that it has treated Shri M G M Maran as part of Shri BRamachandra Adityan and Katra Group. Since, he along with Shri B Ramachandra Adityanwere instrumental in approaching the foreign institutional investors to purchase the shares ofthe bank from Sterling Group, TMBL has resolved to treat him and his father Shri M G Muthuas part of Katra Group. TMBL has also stated that he is likely to acquire either singly or alongwith the companies and concerns in the group, a controlling interest in the bank. TMBL hasstated that the transfer of shares appears to be not in the nature of genuine investment by thetransferee concerned and the TMBL suspects an attempt at cornering of shares with a view toacquire a controlling interest in the bank. The acquisition of shares reflects attempts at takeoveror destabilisation of the management of the bank.

(c) Main observations during the due diligence exerciseAs per the information gathered, the shares of the investor are in the custody of SCB, Mumbaiunder the 'Project Windmill Escrow Account'. Inspite of specific queries made, Shri M G MMaran had not provided information in respect of details of bank accounts through whichconsideration for purchase of shares in May 2007 was paid and also the present location of thephysical shares. Further, the scrutiny of his bank account declared by him to TMBL, also did notindicate routing of the payment towards acquisitions of his shares. Therefore, source of fundsfor 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 investorsShri 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 alsomade some borrowings. They have produced Chartered Accountant's Certificates in support ofthe financial resources. Further, in response to RBI letters requiring further specific informationin respect of details of bank accounts through which the consideration for purchase of shareswas paid in May 2007 and also the present location of the physical shares, no information onthe same was provided by both Shri L Sridharan and Shri N Ganesan.

(b) Comments from TMBLTMBL has vide its various letters reported to us that both Shri Sridharan and Shri Ganesanshould be treated as part of Katra and Shri B Ramachandra Adityan Group. TMBL has reportedthat both of them are likely to acquire either singly or along with the companies and concerns inthe 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 inthe bank and since their acquisition reflects attempt at takeover or destabilisation of themanagement. Further, the bank has indicated that as per the counter affidavit filed by ShriRamchandra Adityan in OA NO.681, 682,683 of 2007 in CS 491 of 2007, Shri Adityan hadstated that in order to discharge his obligation to distribute the shares to persons who had paidin respect of 4600 shares, they were kept in the names of Respondents NO.23 to 29 of theabove case (Shri L. Sridharan and Shri N. Ganesan are respondent Nos. 23 and 29respectively).(c) Main observations during the due diligence exerciseAs per the information gathered, the shares of the investors are in the custody of SCB, Mumbaiunder the 'Project Windmill Escrow Account'. Inspite of specific queries made, Shri L Sridharanand Shri N Ganesan, had not provided information in respect of details of bank accountsthrough which consideration for purchase of shares was paid in May 2007 and also the presentlocation of the physical shares. Further, scrutinies of their bank accounts declared by them toTMBL, also did not indicate routing of the payment towards acquisitions of their sharesTherefore, 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 SathiyaseelanShri Sathiyaseelan vide his letter dated February 8, 2011 has stated that he had acquired 2356shares between 1994-2004 and another 1199 shares between 2007-2010, and sold 1492shares to Mis Katra Holdings in April, 2010.

Shri Sathiyaseelan has enclosed Chartered Accountant's certificates in support of thepurchases of 3255 shares out of his own accumulated savings at different points of timebetween 1994 and 2010. Further, in response to RBI letter requiring further information, ShriSathiyaseelan has indicated that RS.3.00 crore remittance was received in October 2007 fromKatra Holdings, Bangalore purely on commercial terms on strength of a pro-note and 1492shares were handed over to Katra Holdings to sell the shares in Indian market to realise theamount. Therefore, the transaction has not attracted the FEMA provisions and as such foreignexchange violation does not arise.

(b) Comments from TMBLTMBL vide its letter dated February 17, 2011 has declared that his holdings are distinct andsince the holdings are less than 5%, it does not require any acknowledgment from RBI. It hasfurther declared that he is not likely to acquire any controlling interest in the bank, it does notsuspect any attempt by him to corner the shares of bank, his acquisition does not reflect attemptat 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 hisfamily 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 ShriSathiyaseelan and his family members may be taken as the holding of Katra Group.

16

,~.$:. <\~>~i'l(f\ft-,-';',< _:d~t=L4> / /

~~fMain observations during the due diligence exerciseIn response to RBI letter requiring further information, Shri P.S Sathiyaseelan has indicated thatRS.3.00 crore remittance was received from Katra Holdings, Bangalore purely on commercialterms on the strength of a pro-note and 1492 shares were handed over to Katra Holdings to sellthe shares in Indian market to realise the amount. He has stated that for the above reason thetransaction has not attracted FEMA provisions and as such foreign exchange violation does notarise. However, his statement is at variance with the remittance document available on RBIrecords which indicates that the remittance of RS.3.00 crore was towards advance considerationfor purchase of TMBL shares and that the remittance was received from Mis Katra HoldingsLimited, Mauritius and not Mis Katra Holdings Private Limited, Bangalore.

(xii) MIs Kamehameha Mauritius Limited (2025 shares - 0.71%)

(a) Representation by MIs Kamehameha Mauritius LimitedIn pursuance of the order passed by Hon'ble High Court of Bombay on October 14, 2010, MisMis Kamehameha Mauritius Limited made its representations to RBI directly vide letter datedNovember 10, 2010. Mis Kamehameha Mauritius Limited has indicated that it is an SPVincorporated in 2007 and is beneficially owned by Kamehameha Schools and has purchased2025 shares of TMBL as an independent entity and has shared common registered office atMauritius with certain other investors of TMBL, purely for administrative reasons. It declares thatthere was absolutely no common source of funds with other foreign investors and has givencommon proxy in favour of Mis Katra Holdings Limited without any voting instructions or otherrelated details. Further, it has been stated that it does not have any common directors orcommon shareholding or common source of funds or any other mode of control over Mis KatraHoldings Limited.

(b) Comments from TMBLWhile forwarding the representation of Mis Kamehameha Mauritius Limited, TMBL vide its letterdated February 19, 2011, has stated that Mis Kamehameha Mauritius Limited is a distinct entityand has sought confirmation of registration of shares in the name of Mis KamehamehaMauritius Limited. TMBL has declared that Mis Kamehameha Mauritius Limited is not likely toacquire, either singly or along with the other companies in group, any controlling interest in thebank and the bank does not suspect any attempt at cornering of shares with a view to acquiringcontrolling interest in the bank and that its acquisition does not reflect attempt to take over ordestabilisation of the management of the bank.

Three directors on the Board of TMBL have expressed dissenting views (as observed from theTMBL letter dated February 17,2011) citing violation of provisions of FEMA and transfer of95418 shares on May 13, 2007 by makin@ a single payment forming a special investmentholding company with a single director in a country where law is liberal. They have expressedtheir opinion that the objective is to take control of the management rather than investmentpurpose.

(c) Comments from FEDFED has stated that it had permitted transfer of shares in the name of Mis Kamehameha Schoolbut the shares have been transferred and held in the name of Mis Kamehameha MauritiusLimited in contravention of the provisions of FEMA.

17

~C:;~"/:;".:,," ,r;"'f":,

f.~J'J<c:WMain observations during the due diligence exercise

The transfer of shares in favour of Mis Kamehameha Mauritius Limited, instead of MisKamehameha School, is in contravention of the provisions of FEMA. As per the informationgathered, the shares of the investor are in the custody of SCB, Mumbai under the 'ProjectWindmill Escrow Account'.

(xiii) Fllnvestments (Mauritius) Limited (5399 shares -1.95%)

(a) Representation by MIs Fllnvestments (Mauritius) LimitedIn pursuance of the order passed by Hon'ble High Court of Bombay on October 14,2010, Mis FIInvestments (Mauritius) Limited made its representations to RBI directly vide letter datedNovember 10, 2010. It has indicated that it is an SPV incorporated in 2007 and is beneficiallyowned by Chubb Group of Insurance Companies and has purchased 5399 shares of TMBL inan independent capacity and that it shares common registered office at Mauritius with certainother investors purely for administrative reasons. It has stated that it used its own independentfunds and given common proxy in favour of Mis Katra Holdings Limited without any votinginstructions or other related details. Further, it claims that even though Mis Katra HoldingsLimited was helping it in the acquisition of shares, it does not have any interest in Mis KatraHoldings Limited or influence on any of its directors or shareholders.

(b) Comments from TMBLWhile forwarding the representation of Mis FI Investments (Mauritius) Limited, TMBL vide itsletter dated February 19, 2011, has stated that Mis FI Investments (Mauritius) Limited is adistinct entity and has sought confirmation of registration of shares in the name of Mis FIInvestments (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, anycontrolling interest in the bank and that the bank does not suspect any attempt at cornering ofshares with a view to acquiring controlling interest in the bank and its acquisition does not reflectattempt 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 theTMBL letter dated February 17, 2011) citing violation of provisions of FEMA and transfer of95418 shares on May 13, 2007 by making a single payment forming a special investmentholding company with a single director in a country where law is liberal. They have expressedtheir opinion that the objective is to take control of the management rather than investmentpurpose

(c) Comments from FEDFED has stated that it had permitted transfer of shares in the name of Mis Federal InsuranceCompany, New Jersey, USA, but the shares have been transferred and held in the name of MisFI Investments (Mauritius) Limited in contravention of the provisions of FEMA.

(d) Main observations during the due diligence exerciseThe transfer of shares in favour of Mis FI Investments (Mauritius) Limited, instead of MisFederal 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, Mumbaiunder the 'Project Windmill Escrow Account'.

18

(a) Representation by MIs Cuna Group (Mauritius) LimitedIn pursuance of the order passed by Hon'ble High Court of Bombay on October 14, 2010, MisCuna Group (Mauritius) Limited made its representations to RBI directly vide letter datedNovember 10, 2010. It has indicated that it is an SPV incorporated in 2007 and is beneficiallyowned by Mis Cuna Mutual Group and has purchased 2025 shares of TMBL in an independentcapacity and shared common registered office at Mauritius with certain other foreign investorspurely for administrative reasons, it has stated that it used its funds received from the parentcompany and has given common proxy in favour of Mis Katra Holdings Limited without anyvoting instructions or other related details.

(b) Comments from TMBLWhile forwarding the representation of Mis Cuna Group (Mauritius) Limited, TMBL vide its letterdated February 19, 2011, has stated that Mis Cuna Group (Mauritius) Limited is a distinct entityand 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 toacquire, either singly or along with the other companies in group, any controlling interest in thebank, TMBL does not suspect any attempt at cornering of shares with a view to acquiringcontrolling interest in the bank and its acquisition does not reflect attempt to take over ordestabilisation of the management of the bank.

Three directors on the Board of TMBL have expressed dissenting views (as observed from theTMBL letter dated February 17, 2011) citing violation of provisions of FEMA and transfer of95418 shares on May 13, 2007 by making a single payment forming a special investmentholding company with a single director in a country where law is liberal. They have expressedtheir opinion that the objective is to take control of the management rather than investmentpurpose.

(c) Comments from FEDFED 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 diligence exerciseThe transfer of shares in favour of Mis Cuna Group (Mauritius) Limited, instead of Mis CunaMutual Group, Wisconsin, USA, is in contravention of the provisions of FEMA. As per theinformation gathered, the shares of the investor are in the custody of SCB, Mumbai under the'Project Windmill Escrow Account'.

(xv) Mis Swiss Re Investors (Mauritius) Limited (10124 shares - 3.56 %)

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

19

~{f~:~;,, <i~k::_,· :'.. ,j~.'r.;.-.i", 5fl:4d.,' ;- .

>~~n common proxy in favour of Mis Katra Holdings Limited without any voting instructions orother related details etc.

(b) Comments from TMBLWhile forwarding the representation of Mis Swiss Re Investors (Mauritius) Limited, TMBL videits letter dated February 19, 2011, has stated that Mis Swiss Re Investors (Mauritius) Limited isa distinct entity, and has sought confirmation of registration of shares made in the name of MisSwiss Re Investors (Mauritius) Limited. Further, TMBL has declared that Mis Swiss ReInvestors (Mauritius) Limited is not likely to acquire, either singly or along with the othercompanies in group, any controlling interest in the bank, TMBL does not suspect any attempt atcornering of shares with a view to acquiring controlling interest in the bank and its acquisitiondoes 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 theTMBL letter dated February 17, 2011) citing violation of provisions of FEMA and transfer of95418 shares on May 13, 2007 by making a single payment forming a special investmentholding company with a single director in a country where law is liberal. They have expressedtheir opinion that the objective is to take control of the management rather than investmentpurpose.(c) Comments from FEDFED has stated that it had permitted transfer of shares in the name of Mis Swiss Re PartnershipHolding AG, Switzerland but the shares have been transferred and held in the name of MisSwiss Re Investors (Mauritius) Limited in contravention of the provisions of FEMA.

(d) Main observations during the due diligence exerciseThe transfer of shares in favour of Mis Swiss Re Investors (Mauritius) Limited, instead of MisSwiss Re Partnership Holding AG, Switzerland is in contravention of the provisions of FEMA. Asper the information gathered, the shares of the investor are in the custody of SCB, Mumbaiunder the 'Project Windmill Escrow Account'

(xvi) Representations from other than the 18 investors named in RBI Speaking orderdated October 12, 2009 viz. Mis Starship Equity Holding Limited (13455 shares), Mis EastRiver 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 SubcontinentalEquities Limited and Mis Windmill Investors Limited through their legal representatives videseparate letters dated November 10, 2010 have made representations to RBI directlyindicating that they have applied to RBI for obtaining approval from FED and have claimedthat:

• Mis Starship Equity Holding Limited has purchased 13455 shares from Mis VectorProgram Private Limited by paying consideration through Escrow agent and the originalshare certificates and transfer deeds executed by Mis Vector Program Private Limitedwere to be kept in escrow for the purpose of this transaction. It is an independentinvestor, fully capitalised by AXA Group and W&S Group, which are the independentbeneficial share holders of Mis Starship Equity Holding Limited. It has enclosed a copyof the Foreign Inward Remittance Certificate (FIRC) dated May 23, 2007 indicating aforeign inward remittance of RS.32.54 crore to Mis Vector Program Private Limited on

20

May 15, 2007 towards purchase of shares of TMBL by Mis Starship Equity HoldingLimited.

• Mis East River Holding Limited has purchased 10549 shares from Shn Gokul Patnaik bypaying considerations through Escrow agent and the original share certificates andtransfer deeds executed by Shri Gokul Patnaik were to be kept in escrow for the purposeof 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 copyof the FIRC dated May 23, 2007 indicating a foreign inward remittance of RS.25.61 croreto Shri Gokul Patnaik on May 15, 2007 towards purchase of shares of TMBL by Mis EastRiver Holding Limited.

• Mis Subcontinental Equities Limited has acquired 13209 shares (2845 currentlyregistered in the name of Mis RST Limited and 10364 in the name of Mis Katra HoldingsLimited) by paying considerations through SCB, Mauritius. The original share certificatesand transfer deeds executed were handed over to Mis Subcontinental Equities Limited.It is an independent investor, fully capitalised by Standard Chartered Holdings, thebeneficial shareholder of Mis Subcontinental Equities Limited. It has enclosed a copy ofSCB, Mumbai letter dated May 31, 2010 addressed to itself indicating that USD14,611,955 was paid to Mis Katra Holdings Limited for purchase of 10,364 shares.

• Mis Windmill Investors Limited has beneficially acquired 14080 shares from Mis GHILimited by making full payments and the original share certificates and transfer deedswere handed over to it The original share certificates and blank transfer forms arestated to be in its possession. However, Mis Windmill Investors Limited has notfurnished the same to TMBL for verification as the sale has not been disputed by MisGHI Limited. Mis Windmill Investors Limited is an independent entity backed bybeneficial owner, Liberties Strategic Services.

(b) Comments from TMBLTMBL has submitted to RBI various letters that Mis Starship Equity Holding Limited, Mis EastRiver Holding Limited and Mis Subcontinental Equities Limited are all distinct entities, and donot form part of a group. Further, TMBL has indicated that they are not likely to acquire, eithersingly or along with the companies in the group, any controlling interest in the bank. TMBL doesnot suspect that Mis Starship Equity Holding Limited, Mis East River Holding Limited and MisSubcontinental Equities Limited are attempting to corner shares with a view to acquiringcontrolling interest in the bank and their acquisition does not reflect any possible attempt attakeover or destabilisation of management

With regard to the purported sale of shares by Mis Vector Program Private Limited to MisStarship 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 HoldingLimited produced original share certificates and blank transfer forms executed in their favour byMis Vector Program Private Limited and Shri Gokul Patnaik respectively. However, Mis VectorProgram Private Limited and Shri Gokul Patnaik have denied the sale and did not produceShare 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 EquitiesLimited produced original share certificates and blank transfer forms executed in its favour byMis Katra Holdings Limited, while Mis Katra Holdings Limited has denied the sale and did notproduce Share Certificates and Transfer Forms for physical verification. TMBL has furtherreported 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 since theinvestor does not appear to have approached TMBL as yet.

(c) Comments from othersShri Gokul Patnaik had vide his letter dated March 9, 2011 confirmed that he had receivedadvance 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 hadterminated the arrangement and applied to RBI for permitting refund of funds.

Katra Holdings Limited vide their letter dated February 24, 2011 indicated that MisSubcontinental Equities Limited (which belongs to Standard Chartered Holdings, London, whichin turn belongs to Standard Chartered Bankplc, UK) have wrongly and illegally made theapplication to RBI for approval to transfer their shares although they have not entered into anyagreement with Mis Subcontinental Equities Limited. Due to the conflict of interest involved inStandard Chartered Bank acting as an escrow agent and its subsidiary acquiring shares inTMBL, SCB is colluding with Subcontinental Equities Limited, in trying to transfer away theirshares. Further, SCB has wrongly parted the shares of certain investors, including KatraHoldings Limited, for a physical review done at TMBL.

(d) Main observations in respect of the four foreign entitiesAlthough Mis Vector Program Private Limited and Shri Gokul Patnaik have received foreigninward remittance in their accounts and Katra Holdings Limited seem to have received fundsinto its account maintained in Mauritius towards purchase of shares, some disputes seem toexist among the investors and purchasers. It is observed that inspite of claims of payment ofconsideration by the above foreign entities viz. Mis Starship Equity Holding Limited, Mis EastRiver 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 fourforeign 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, transferof such shares to these entities and granting approval for subsequent transfer of shares doesnot 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 EscrowAccount' at SCB, it may be worthwhile to understand the Escrow arrangement of the investorshad 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 InvestmentsLLC, Broadstreet Group, Katra Holdings Limited and GHI Limited in May 2007. SCB has alsoindicated that the overall scheme of the Escrow Agreement provides for the sale of shares inTMBL to multiple independent RBI approved investors sourced by Corsair. SCB, India wasappointed as a sub-agent which had opened Escrow Accounts for holding of shares andprocessing of purchase consideration. Based on the information obtained from SCS, it isobserved that as on February 15, 2011,1,12,151 shares are held in the 'Project WindmillEscrow Account' at SCS.

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\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 hadpreviously received in order to acquire shares in Tamilnad Mercantile Bank Limited. As perSCB's letter dated March 14, 2011, the mechanism under the Escrow Agreement is that KatraHoldings Limited will be given a loan which will be used to acquire 10,364 shares in TMB whichwill be held temporarily prior to a sale to the purchaser nominated by Corsair The purchaserthen will payoff the loan of Katra Holdings Limited at SCB Mauritius and the 10,364 shareswould be lodged for transfer in the name of the purchasing entity.

Further, regarding Vector Program Private Limited and Shri Gokul Patnaik, SCB has stated thatthey hold shares in TMBL until such time as Corsair sources purchasing entity to purchase theshares from them. SCB has also stated that although Mr Patnaik and Vector are not parties tothe Escrow Agreement, they have signed letter agreements with Corsair undertaking to transfertheir shareholdings to RBI approved purchasing entities nominated by Corsair and to cooperatein facilitating such transfers.

(b) Comments from othersKatra Holdings Limited vide letter dated March 15, 2011 has stated that Mis Corsair Capital, aprominent New York based Private Equity firm, had introduced seven foreign investors who hadinterest in investing in TMBL shares. The seven foreign investors include Swiss Re Investors(Mauritius) Limited, FI Investments (Mauritius) Limited, Kamehameha (Mauritius) Limited andCuna Group (Mauritius) Limited, in whose names transfer of shares was effected by TMBL onMay 13, 2007 and another 3 foreign investors (i.e Subcontinental Equities Limited, East RiverHoldings 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 associatesof 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 subsidiaryof Standard Chartered Holdings, London). Katra Holdings Limited has stated that following theRBI order of October 2009, they had taken up with Corsair to unwind the arrangement with themhowever, Corsair was unwilling for the same. Mis Katra Holdings Limited has further observedthat Mis Corsair Capital has been attempting unilaterally to wrest control of all the shares ofTMBL through the above named 7 entities

(c) Main observations on the Escrow arrangementIt may be pertinent to note that apart from the 95,418 shares that related to sale by SterlingGroup 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 WindmillEscrow Account' at SCB are 1,12,151 shares. Further, it is observed that although the sale ofshares from Sterling group to various investors has been affected in the bank's books as onMay 13, 2007, the relative shares are still under Escrow. Also, out of the shares in Escrow, inrespect of shares relating to Mis Katra Holdings Limited, Vector Program Private Limited, ShriGokul Patnaik, Mis RST Limited and Mis GHI Limited, representations have been receivedindicating sale of shares by the investors along with certain documentary evidence. This alongwith SCB's statement that Vector Program Private Limited and Shri Gokul Patnaik hold sharesin 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 holdingsawaiting transfers to third parties. On the whole, shares of 12 out of 18 investors in the groupare part of the 'Project Windmill Escrow Account' and shares of 5 other investors havereportedly been sold to an associate of an investor whose shares are already in the above

23

~-:-~

l/;E~:~-,..I'_~.'.'n':...'-J'j-~ <,t-~, .~;::v'.:. - , ~'-';:,

\:~~;'~row account. As per SCB letter, the overall scheme of the Escrow Agreement provides forthe sale of shares in TMBL to multiple independent RBI approved investors sourced by Corsaira Private Equity firm on which there are allegations that it is attempting to unilaterally wrestcontrol of all the shares of TMBL.

23. Before making my observations on the specific transfer of shares involved, it would bepertinent to refer to the relevant provisions of the Acknowledgement Guidelines contained inCircular dated 3rd February, 2004. Paragraphs 8, 9, 10 and 11 of the said Circular read asunder:

"8. In determining whether the applicant (including all entities connected with theapplicant) is fit and proper to hold the position of a shareholder, RBI may take intoaccount all relevant factors, as appropriate, including, but not limited to

• The applicant's integrity, reputation and track record in financial matters andcompliance with tax laws.

• Whether the applicant has been the subject of any proceedings of a seriousdisciplinary or criminal nature, or has been notified of any such impendingproceedings or of any investigation which may lead to such proceedings.

• Whether the applicant has a record or evidence of previous business conductand activities where the applicant has been convicted for an offence underany legislation designed to protect members of the public from financial lossdue to dishonesty, incompetence or malpractice.

• Whether the applicant has achieved a satisfactory outcome as a result offinancial vetting. This will include any serious financial misconduct, bad loansor 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 corporategovernance, financial strength and integrity in addition to the assessment ofindividuals and other entities associated with the body corporate asenumerated above.

9. Where acquisition or investment takes the shareholding of the applicant to a levelof 10 percent or more and up to 30 percent, the RBI will also take into account otherfactors including but not limited to the following: (a) source and stability of the fundsfor the acquisition and the ability to access financial markets as a source ofcontinuing financial support for the bank, (b) the business record and experience ofthe applicant including any experience of acquisition of companies, (c) the extent towhich the corporate structure of the applicant will be in consonance with effectivesupervision and regulation of the bank; and (d) in case the applicant is a financialentity, whether the applicant is a widely held entity, publicly listed and a wellestablished regulated financial entity in good standing in the financial community.

10. Acknowledgement for transfer of acquisition or investment exceeding the level of30 percent will be considered keeping the above criteria in view and also taking intoaccount but not limited to the following (a) the acquisition is in public interest, (b) thedesirability of diversified ownership of banks, (c) the soundness and feasibility of theplans 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 managementof the bank

Compliance with other regulations

11. As hitherto, the RBI acknowledgement will be subject to compliance by theapplicant 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 ofshareholders, it definitely acts a reference point while considering the applications foracknowledgement

24. My observations

(i) Banks are "special" as they not only accept and deploy large amount of uncoll3teralizedpublic funds in fiduciary capacity, but they also leverage such funds through credit creation. Thebanks 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 totime. It is well settled that diversified ownership minimises the risk of misuse or imprudent use ofleveraged funds, Banking is a business which thrives on confidence. The regulator of thebanking system of the country cannot remain passive to the developments in a bank, which hasthe 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 canerode the depositor confidence which, as a regulator, RBI is expected to protect.

(ii) The documents submitted before me and the information gathered from other sourcesexplained above do not point to a different state of affairs regarding the 'Group Nature' of theentitites/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 theGuidelines 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 andcertain outsiders have provided some information for facilitating the acknowledgement process.A substantial summary of the information and submissions provided by them have beenindicated in the earlier part of this order.

(iv) While some of the investors were more forthcoming with information required foracknowledgement process, others have chosen either not to respond at all or to respond withminimal information. Essentially, the acknowledgement process is an activity aimed atascertaining 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 andtrack record in financial matters It goes without saying that when a conclusion has been arrivedat that a set of persons form a group or they are acting in concert, what is required to be seen isthe fitness of the group as a whole. It may not serve any useful purpose to find that one memberof the group is fit or that a few other members do not qualify. The integrity and reputation of theshareholders 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 agreat extent their integrity and reputation. When some of the entities forming part of the Group

25

,~~~~~\

(I:'~'~j;'\~~:~~~ ...~~ke 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 unblemishedantecedents.

(v) The process of due diligence of shareholders involves reference to the relevant regulatorand other authorities. Unless, the essential materials for the same are made available, it wouldnot be possible to carry out this exercise in a meaningful way By virtue of the investors beingincorporated as investment vehicles in other jurisdictions viz. Mauritius, Cayman Islands andUSA, no substantial information could be obtained on these entities. The entities from CaymenIslands and USA had not provided any information to either the bank or the RBI and hence nodue diligence exercise could be initiated. Further, the 4 investors from Mauritius wereincorporated as investment vehicles in 2007 Le the year in which the transfer of TMBL shareshad taken place and information on the entities in respect of integrity, reputation, business, trackrecord in financial matters and compliance with tax laws could not be obtained and the sourcesof 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 thepermission given by FED under FEMA and further, in respect of two foreign investors, thecharges of insider trading by a foreign regulator and past litigation in respect of settlement ofdues raise concerns in respect of the investors' 'fit and proper' status.

(vi) Three resident investors, namely, Shri Gokul Patnaik, Vector Program Private Limited andShri Sathiyaseelan, have received foreign inward remittances towards purchase of shares in2007. Further, another foreign inward remittance was received by Shri Gokul Patnaik in June2008 and was transferred to an associate entity of an investor in the group. Since foreign inwardremittances have been received by resident persons I entity, examination of the matter underFEMA provisions and resolution of the disputes among the investors and the purchasers maybe required. Further, Shri Sathiyaseelan has misrepresented to RBI about the foreign inwardremittance of RS.3.00 crore received from Mis Katra Holdings Limited, Mauritius The matterrelating to transactions by Shri Gokul Patnaik are under examination.

(vii) In respect of four resident individuals, namely, Shri L Sridharan, Shri N Ganesan, Shri MGMMaran and Shri M G Muthu, who are part of the group, sources of funds and funds trail to tracethe payment of consideration to the sellers could not be established. Further, inspite of specificinformation being sought in this regard, the investors have chosen not to provide details of thesame. Also, as per Shri Adityan's submissions to the Court, it appears that Shri L. Sridharanand Shri N. Ganesan were holding the shares temporarily for further distribution to otherpersons.

(viii) In respect of 4 resident entities / individuals, namely, Hemangini Finance and LeasingPrivate Limited, Shanmuga Financial Services Private Limited, Shri R Chinnakannan and SmtC Chandrammal, although they continue to be the shareholders in the bank's books, the shareshave 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 andtotal number of shares at 2,84,454. Out of the total 2,84,454 shares of the bank, 1,12,151shares (i.e 42.59% of the total shares of the bank) are held in the 'Project Windmill EscrowAccount' with SCB and out of the 1,12,151 shares, 51,293 shares are under dispute where theinvestors have claimed that they have not sold the shares while 3 of the foreign investors havereportedly been able to produce certain documentary evidence of payment of consideration andthat 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 inthe above Escrow account. Further, the arrangements under which such substantial portion ofthe 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 thediscretion to operate the Escrow account and source purchasers for substantial portion of TMBLshares.

25. Order

As noticed above, substantial portion of the shares of TMBL are held in the 'Project WindmillEscrow Account' at SCB. The arrangement under which the shares are kept in the aboveEscrow account is not clear and lacks transparency. However, the available material indicatesthat a little below half of TMBL's shares are under Escrow account with a foreign private equityfirm, against which there are allegations of trying to wrest control over TMBL shares, having thediscretion to source purchasers for the TMBL shares. Some of the sale transactions purportedlyentered into by 3 foreign entities, 7 resident individuals I entities and submission made by ashareholder to a High Court in respect of 2 individuals indicate a possibility that the shares heldin 'Project Windmill Escrow Account' are temporary holdings awaiting transfers to third parties.Under the circumstances, conducting due diligence exercise on the temporary shareholderswould have no meaning. Further, the information available in respect of the foreign investors iseither bare minimum or not satisfactory. In any case, the share transfers in favour of 7 foreigninvestors were in violation of FEMA provisions. Shareholding in respect of few of the residentinvestors would also require FED clearance due to receipt of foreign inward remittance towardsadvance consideration for purchase of TMBL shares. Further, some of the investors have eithernot provided any information towards the acknowledgement process or have not responded tothe specific information sought by RBI. A few investors have also not been forthcoming indeclaring details in respect of their transactions and made inconsistent statements to RBIregarding the source of funds and purchase of shares making it difficult to establish the sourceof funds for the transfer of shares.

Further, holding of shares by certain persons for further distribution to others, receipt of foreigninward remittances from third parties towards transfer of TMBL shares even in 2008 i.e after theoriginal transfers in May 2007 and transfer of such funds to an associate of another investor inthe group, disputes relating to share transfers inspite of receiving consideration and yet notavailing legal remedy to resolve the disputes and complaints and allegations of lodging ofshares 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 booksof 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 counterallegations relating to subsequent transfer of shares and the transactions being declared onlyrecently, in 2010, i.e after 3 years from the date of foreign inward remittance in 2007, leaves acredibility gap in their submissions. On the whole, the transactions and the shareholding bythese 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 October12, 2009 have satisfied the criteria fixed by RBI for acknowledgment purpose. Therefore, I haveno other choice but to decline to acknowledge the holding of 5% or more of the paid up capitalof 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 CChandrammal, Shri M G M Maran and Shri M G Muthu. The Group holding in the aggregateshould be below 5% of the paid up capital of TMBL.

(Anand Sinha)Deputy GovernorMarch 31, 2011

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