"Global Trust Bank crossed the Rubicon. Skillfully overcoming challenging and sensitive situations shows inherent strength. . ."
This is how GTB's annual report for 2002-03 starts. Poor grammar is the least blooper one spots in the bank's annual report.
The report goes on to state, "GTB is working towards controlled risk. Every decision, every action, every employee is going about ensuring there are no surprises. All exposures were dissected and accounted for. When in doubt, provision was made."
As we learn, the financial statements grossly misrepresent the mud which was kept hidden in the bank's balance-sheet despite loudly claiming otherwise.
The RBI's inspection report for GTB for the year 2002-03 showed a hole of around Rs 742 crore (Rs 7.42 billion) which was not disclosed by GTB. Oriental Bank of Commerce -- with which GTB is merged - will inherit gross non-performing assets of about Rs 1,200 crore (Rs 12 billion) and impaired assets of Rs 300 crore (Rs 3 billion).
This implies that GTB's share capital and reserves stand wiped out by a good margin and the listed shares of the bank are now worthless. The draft scheme of the RBI for the merger recommends that the term capital/reserves be replaced by the entry collection account.
When I first glanced at a news article that 'small shareholders' were planning to seek compensation as they were not able to sell their worthless GTB shares for value, I was not too surprised.
The failure in any Indian institution or company seems to draw rounds of rabid cries for compensation as if the government stands as a free insurance agency to cover up market's blunders.
What was curious, however, was that these 'small' shareholders were in touch with Ramesh Gelli, the now infamous promoter of GTB, who, it was implied, was trying to help them.
On a plea of being bought out succeeds on a valuation of Rs 8 per share, Gelli will take home Rs 18 crore (Rs 180 million) as holder of 2,33,98,809 shares of the bank. The amount would be a little less for the promoters if the charges of insider trading prior to the collapse are true.
Others to share this cornucopia would be institutional investors including FIIs (Rs 1.5 crore), corporate bodies (Rs 20 crore), NRIs (Rs 4.8 crore) and IFCs (Rs 2 crore).
Such demands by shareholders run contrary to the basic principle of the way companies are formed - that shareholders are the residual owners of the assets of a company after all claims against the company are exhausted.
If nothing remains after the payment to depositors and creditors, shareholders are not entitled to anything. GTB was put into a moratorium because its reserves and capital seemed completely eroded - much beyond what its balance-sheet publicly disclosed.
However, if OBC investigates thoroughly about the financial position of GTB, it could transpire (though it's wildly optimistic) that the shares are in fact worth something.
For such an outcome RBI's draft scheme for amalgamation of GTB and OBC states: "If any surplus remains after the appropriation, the transferee bank shall make payments pro-rata from amount, if any, available towards the amounts, if any, due to the accounts of the former shareholders of the transferor bank in the manner and to the extent specified below - in the first place, the amounts, if any, due to the accounts of the former preference shareholders, after the amounts ... have been paid, the surplus, if any, remaining in the hands of the transferee bank shall be distributed pro-rata among the former ordinary shareholders of the transferor bank."
Any claim that the shareholders are troubled because of the existence of a special Banking Regulations Act is therefore incorrect. Thus, it is not as if the shareholders are being cheated of their rightful share under the corporate principle of residual ownership - they deserve their rights, no more no less.
The report also quotes a research paper of Kotak Securities which values GTB's shares at Rs 8.50 per share. The report sounds amusing - though I couldn't get a copy - not least for the reason that it assumes that the shares of GTB would have any value when its capital and reserves have been completely eroded.
If Kotak Securities really thought that the shares were so valuable, they should be buying the stock hand over fist at the currently available Rs 2.48 (resulting in a gain of over 240 per cent on investment) or alternately recommending to Kotak Mahindra Bank to merge with GTB by buying the shares of current shareholders at their valuation.
Obviously, neither would happen because the shares are nearly worthless. The market for some reason still values the shares above zero, and it is surprising that no one has short sold the shares. The value perhaps only represents the option value of a bankrupted company (even Enron used to trade for a few cents in its last few days of trading).
What about the poor shareholders? The ready answer is not as they claim - blame the government or the RBI for market failure and claim damages or compensation from taxpayer money. Under normal circumstances, market failures are part of the economic forces of the market and shareholders cannot blame anyone for losses on the investment of listed securities.
However, in the case of GTB there seems to be a prima facie case of misrepresentation of financial statements. The first finger then points to the bank's management and the second towards its auditors who certified in the annual report of 2002-03 that, "the information furnished above is certified by GTB to be true, fair and accurate."
Shareholders thus should direct their energies and legal actions towards the persons responsible for their state of being and not blame the regulator or the government for their misfortunes.
A plaintiffs' class action suit in the case could also kick-start the practice of awarding damages for willful misrepresentation by the management and auditors of the company in the company's financial statements.
Such cases need to be instituted to keep managers and auditors relatively more honest than they have been till now.
The author is an advocate with P H Parekh & Co.