Price sensitivity issues dog PNB's fraud disclosures

The challenge before the management is ensuring simultaneous disclosure of key information to stock exchanges and investigating agencies.

The ongoing events at Punjab National Bank have put the State-owned lender in a problem regarding revealing price-sensitive information.

The challenge before the management is ensuring simultaneous disclosure of key information to stock exchanges and investigating agencies. Given the turn of recent events, the bank has not been able to disclose all developments in a uniform manner.

On February 5, PNB informed the stock exchanges that it "has come across a suspected fraud involving one branch, wherein certain irregularities have been observed on account of people risk." Initially, the bank said the amount involved was only Rs 2.8 billion.

On February 11, the bank said it had detected "fraudulent and unauthorised transactions" worth $1.78 billion. "The matter is already referred to law enforcement agencies to examine and to book the culprits according to the law of the land," it said.

The State-owned lender further revised the suspected fraud amount in the court filling. However, the bank did not disclose the information until stock exchanges sought clarifications based on media reports. In the reply, PNB said it had added the credit exposure of the lenders' consortium to Geetanjali group to the fraud amount.

Experts say since the fraud was material developments, such information should be disclosed as soon as possible. PNB shares have been under intense selling pressure since the bank disclosed about the fraud. The stock has fallen 50 per cent from January levels.

Given this price sensitivity, any development pertaining to the fraud is crucial for shareholders to take an investment decision, say experts.

"Listed companies are obliged to disclose material developments to their shareholders as soon as possible under Regulation 30 of the LODR (Listing Obligations and Disclosure Requirements) rules," said Sandeep Parekh, founder, Finsec Law Advisors. 

However, following all the regulations would be a challenge during situations like these, say experts. In scenarios like frauds or scams, disclosing the developments on stock exchanges could help the offenders stay ahead of the agencies.

"From a technical perspective, a listed company should disclose all such developments to stock exchanges. However, we should also consider the holistic scenario. Incidents like the PNB fraud don't occur on a regular basis and the bank has a responsibility to not only protect its shareholders but also depositors. Providing information to agencies before disclosing these publicly could help the agencies take preventive action," said J N Gupta, managing director, Stakeholders Empowerment Services.

Photograph: Rupak De Chowdhuri/Reuters.