The modus operandi sounds so familiar. A company in the real estate industry. A bank that does not reveal everything on its books. Regulators stepping in after the events are over. The HDIL-PMC Bank episode has most of the colours of Satyam over it, except that the bank accounts were not fictitious, but were hidden from everyone. Also, unlike Satyam, the bank is in the spotlight.
Arrests have been made and charges levelled against almost everyone — the management, independent directors, auditors and even the RBI. The underlying message appears to be that such events are bound to happen; if and when they do, collateral damage should be minimised.
In its Annual Report for the year ended March 31, 2019, HDIL has disclosed that it banks with a dozen different entities. While the list includes small banks such as Jammu and Kashmir Bank and troubled institutions such as IL&FS, PMC Bank does not find a mention anywhere.
Being a listed company, it is bound to be visited with a lot of class-action suits from angry shareholders for the sheer audacity of its non-disclosures. Since HDIL has been referred by a bank to the Insolvency Code, the Committee of Creditors and the Resolution Professional will face a lot of questions, to many of which they may not even know the answer.
The RBI has found major irregularities in PMC Bank, including major financial violations, failure of internal controls and systems, and wrongdoing and under-reporting of its lending exposure. A look at the financial statements of the bank would leave one with the impression that this is a cooperative that is doing well.
Its balance sheet size is ₹13,619 crore, loan book ₹8,383 crore, deposits ₹11,617 crore, total income ₹1,297 crore and net profit ₹99.69 crore. The bank’s gross NPAs stand at 3.76 per cent, and net NPAs, 2.19 per cent.
The capital adequacy of the bank stands at 12.62 per cent, as against the minimum capital adequacy of 9 per cent for a commercial bank.
What tainted the rosy picture were loans to the HDIL group that never appeared in the financial statements. These loans were given through dummy accounts that escaped the attention of the auditors, and for some time, the regulator as well.
The story goes that the promoters of HDIL helped PMC Bank when they were not doing so well, and the bank has now returned the favour.
Since deposits of ₹11,617 crore are involved, the RBI will ensure that PMC Bank goes into the hands of a bank that is able to absorb its numbers. HDIL would probably be liquidated, and its real estate assets sold off to other real estate companies, who would only be too glad to get these assets — provided they don’t come with any legal baggage. On corporate governance, PMC Bank has said all the right things in its annual report: “Ensuring transparency in financial statements and protecting shareholders interest, effective and robust internal checks and control system…”
It also states that all the branches and departments are covered under audit, and that a risk-based audit approach has been followed for managing the bank’s overall governance so as to monitor the performance of internal controls for current as well as upcoming risks of all nature. It is clear that all these were not put into practice, and that the independent directors and auditors were there only because they had to be accommodated.
The writer is a chartered accountant