The liberalization process initiated by the Government of India, during the early 1990's witnessed the entry of several private players in the Indian banking sector. ABC Bank (ABCB) was one of the earliest private sector

The liberalization process initiated by the Government of India, during the early 1990's witnessed the entry of several private players in the Indian banking sector. ABC Bank (ABCB) was one of the earliest private sector banks promoted by three former bank executives and was incorporated on October 30, 2004 in Hyderabad. Apart from these three promoters, the Gem Finance Corporation (GFC) and the Gem Bank for Development (GBD) were other major shareholders. ABCB was granted license to operate as a bank by RBI in December, 2004 and the bank offered an array of products and services in retail, wholesale, corporate, treasury and investment banking apart from depository and advisory services. The bank specialized in lending to the engineering, software, energy, telecom, textiles, pharmaceuticals and jewellery sectors. In a short span of five years of operations, the total business of the bank in the year 2009 exceeded ₹ 4 bn making it one of the fastest growing private banks in India. It was also the first among the Indian banks to raise Tier II capital from multilateral institutions. In five years, ABCB's deposits were worth ₹ 3 bn out of which 70 per cent were from retail domestic investors. Its presence in the States of Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu is significant with more than 70 percent of its branches in seven major cities and four metros. Bank had grown tremendously by July, 2015 by having 450 branches in major 234 cities of the country, 875 ATMs, 5800 employees, more than seven millions of depositors with deposits worth ₹ 65 bn and the amount of loans disbursed to different sectors of ₹ 52 bn. Despite all the sound state of affairs, the ABCB started collapsing in the year 2016-17 and its financial health started deteriorating. The reasons identified responsible for the deterioration of bank financial position are many but some important are related with the mistakes committed by the bank's management in advances portfolio, lack of financial control over deposit interest rates, weak credit supervision, negligible corporate governance, indulgence of promoters and the top management in the financing by having collusion with the borrowers. RBI's probe into ABCB's accounts revealed a significant erosion of the bank's net worth and huge number of concealed NPAs accounts. ABCB's attempt to strengthen its capital base from overseas failed due to regulatory problems, resulting into the total collapse of bank by the end of year 2019. The major factors that led to the fall of ABCB included disbursed loans of ₹ 1.5 bn to a leading stockbroker at the Bombay Stock Exchange (BSE) who used the money to purchase ABCB shares from the BSE and the National Stock Exchange (NSE). Trading volume of ABCB shares increased during July, 2015 and onwards to millions which was usually in the thousands after the entry of this leading stockbroker resulting into shooting up the price of ABCB's share continuously from ₹ 65 to ₹ 225 between October 2015 and June 2016 and thereafter started falling down regularly. The Securities and Exchange Board of India (SEBI) later confirmed that ABCB's stock price increased because of price manipulation and the stockbroker had insider information. SEBI imposed a ban in March, 2017 on the promoters, the stockbroker and their associates for dealing in the ABCB shares till completion of the investigation of bank's capital market activities. RBI charged ABCB with several financial irregularities and lack of transparency in its banking operations. It had not followed SEBI guidelines, which capped a bank's direct exposure to capital markets at ten per cent of total advances of the bank. Since 2014, ABCB had given loans worth ₹ 17 bn to many stock brokers against shares as security. When the stock market witnessed a major fall in the aftermath of the securities scam loans given by ABCB against the security of shares turned into bad debts, taking a toll on the bank's financial position. ABCB's exposure to the capital market in the fiscal ending 2013-14 was around 24 per cent of total advances; which came down to 14 per cent by March 2016 and around five per cent for the fiscal ending March 2017. Though the exposure to capital markets had been brought down gradually by ABCB, the damage had already been done as most advances given till fiscal ending 2013-14 turned into NPAs due to the down trend of the stock market after the Securities Scam. In late 2012 and early 2013, ABCB gave loans of over ₹ 18 bn to corporate and jewellery trade related entities. ABCB for the fiscal 2017-18 had a total of 35 NPA accounts of corporates; 15 NPA accounts in trading; 15 NPA accounts in broking business and 55 NPA accounts relating to jewellery, food processing, textiles, petrochemicals, agriculture and media companies. ABCB reported a fall of 175% in its profits before tax (PBT) in the last quarter of fiscal 2017-18 because of provision for NPAs of ₹ 2.5 bn. RBI annual financial inspection (AFI) showed that the net worth had been totally eroded and capital adequacy ratio (CAR) had turned out negative. ABCB for the financial year 2017-18 recorded loss of ₹ 3.7 bn with gross NPAs at ₹ 19 bn accounting for 35% of the bank's total advances. High NPAs was a primary reason for ABCB's poor performance as it had lent indiscriminately without following RBI norms, to stockbrokers, diamond traders, exporters, corporates and others. In the wake of these financial irregularities, RBI placed ABCB under monthly monitoring and its operations relating to advances, premature withdrawal of deposits, declaration of dividend and capital market exposure were restricted. The statutory auditors of the bank were also asked to be changed. The central bank further advised ABCB to infuse fresh capital to prevent the net worth from remaining negative and restore its CAR to a minimum of nine per cent. The bank was advised to explore all possible options for infusion of capital through domestic sources or through merger with another bank. All these factors resulted in the imposition of moratorium by RBI and on July 24, 2018, the Government of India imposed a moratorium on the bank, on the grounds of 'wrong financial disclosures.' The moratorium was for three months from close of business on July 24, 2018 till October 23, 2018. RBI said the moratorium was imposed in public interest and to protect the interests of depositors. All operations of ABCB were frozen and it was ordered not to give loans without RBI permission. It was allowed only to make payments for day-to-day operations or for meeting obligations entered into before the order. On July 26, 2018, RBI announced that ABCB would be merged with the Northern Bank of Commerce (NBC). As per the scheme, NBC took over all the assets and liabilities of ABCB on its books. It acquired all branches, ATMs, employees and customers of ABCB at an estimated merger cost of ₹ 8 bn. All corporate accounts including salary accounts were transferred to NBC. The entire amount of paid-up equity capital of ABCB of ₹ 1 bn was adjusted towards its liabilities. There was no share swap between ABCB and NBC resulting into that the shareholders of ABCB did not get any shares of NBC. However, the interest of ABCB's depositors was protected, but its shareholders had lost their total investments in the bank overnight. In the backdrop of the facts and information given in the case, you are required to answer the following questions in the context of provisions contained under the RBI Act, 1934 and the Banking Regulation Act, 1949:- Examine the objectives and the role of RBI and SEBI as a regulator in context of monetary policy, economic development, banking industry and the stock market. Also comment on the justifiability of their actions in the ABC Bank fiasco.