Indian Overseas Bank was promoted by a business community (Chettiars) that is known for its conservatism and adherence to laws in letter and spirit. It is therefore ironic that IOB has now proposed to appropriate Share Premium Account to set off whopping accumulated losses. It is true that post-nationalisation, the character of banks has changed drastically. But nobody would have expected a laid-back bank like IOB to come up with a financial engineering masterpiece as it has done now.
The bank has convened an Extraordinary General Meeting of its shareholders on January 30th ( Martyrs' Day !) Is the bank making its shareholders martyrs? The move is controversial because as the bank has rightly mentioned in its notice convening the meeting, the use of Share Premium Account to set off Accumulated Losses is not envisaged in Banking Companies Act or Banking Regulation Act. As the bank conveniently states, "it is neither permitted nor prohibited". IOB's pragmatic view is stated as follows:
"The Bank is of the view that this is the most practical
and economically efficient option available to the
Bank in the present scenario so as to present a true
and fair view of the financial position of the Bank."
Does dubious deletion of Accumulated Losses by utilising funds from Share Premium Account present a true and fair view of the financial position of the bank? Since banking-related Acts are silent on this aspect of financial engineering, we can draw lessons from the Companies Act.
The Companies Act permits appropriation from Securities Premium only for five purposes. 1) to write off preliminary expenses, 2) to write off discount on issue of securities, 3) to provide for premium on redemption of securities, 4) to issue bonus shares, 5) to enable buy-back of share capital.
Therefore, a non-banking company can not do what IOB proposes to do. Banks are expected to be more conservative and are not supposed to adopt expedient measures to whitewash their financial statements. IOB's notice to shareholders hints that RBI's approval for this innovative move has been obtained. According to Banking Regulation Act (Sec 17 (2) ) and RBI's reiteration in 2006, any appropriation from Share Premium Account by a bank should be notified to RBI within 21 days with proper justification.
This proposed move will set a precedent for other banks to follow. A larger bank like ICICI Bank which is indubitably smarter in presentation of financial statements may be waiting in the wings to appropriate from Securities Premium Account to bolster its Profit and Loss Account whenever a future contingency arises. Such future contingencies are more likely than not.
The bank has convened an Extraordinary General Meeting of its shareholders on January 30th ( Martyrs' Day !) Is the bank making its shareholders martyrs? The move is controversial because as the bank has rightly mentioned in its notice convening the meeting, the use of Share Premium Account to set off Accumulated Losses is not envisaged in Banking Companies Act or Banking Regulation Act. As the bank conveniently states, "it is neither permitted nor prohibited". IOB's pragmatic view is stated as follows:
"The Bank is of the view that this is the most practical
and economically efficient option available to the
Bank in the present scenario so as to present a true
and fair view of the financial position of the Bank."
Does dubious deletion of Accumulated Losses by utilising funds from Share Premium Account present a true and fair view of the financial position of the bank? Since banking-related Acts are silent on this aspect of financial engineering, we can draw lessons from the Companies Act.
The Companies Act permits appropriation from Securities Premium only for five purposes. 1) to write off preliminary expenses, 2) to write off discount on issue of securities, 3) to provide for premium on redemption of securities, 4) to issue bonus shares, 5) to enable buy-back of share capital.
Therefore, a non-banking company can not do what IOB proposes to do. Banks are expected to be more conservative and are not supposed to adopt expedient measures to whitewash their financial statements. IOB's notice to shareholders hints that RBI's approval for this innovative move has been obtained. According to Banking Regulation Act (Sec 17 (2) ) and RBI's reiteration in 2006, any appropriation from Share Premium Account by a bank should be notified to RBI within 21 days with proper justification.
This proposed move will set a precedent for other banks to follow. A larger bank like ICICI Bank which is indubitably smarter in presentation of financial statements may be waiting in the wings to appropriate from Securities Premium Account to bolster its Profit and Loss Account whenever a future contingency arises. Such future contingencies are more likely than not.
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