Dhanlaxmi Bank chairman TM Venkatraman told The Financial Express that the bank expects its advances to pick-up substantially in the later part of this fiscal and is therefore considering various options to improve its CAR.

"The other options are raising tier-II capital, private placement and strategic alliance apart from the rights issue. However, the plan will be finalised only after the bank's annual general meeting to be held on August 9," Venkataraman said.

Senior bank officials pointed out that the rights issue is aimed at placating the bank's shareholders. "This follows the decision of the board of directors of Dhanalakshmi Bank to convert partly-paid equity shares as fully paid-up shares," the officials said.

Dhanalakshmi Bank had earlier issued its shares at a premium of Rs 40 and the first call was for Rs 15 which was paid by most of its investors. However, with the share prices declining in the secondary market (currently hovering around Rs 13), calls on 47,41,200 equity shares were in arrears as on March 31, 1999.

"The bank did not opt for forfeiture clause and instead decided on conversion. The RBI has also welcomed this scheme since a forfeiture would have opened the floodgates for similar moves by other corporate issuers since many shareholders have refused to pay up the full amount in view of depressed prices," Venkatraman said.

It is for the first time in the country that a commercial bank is planning to convert its partly paid-up shares to fully paid-up ones which will lead to reduction in the issued and subscribed capital. "The bank has received a `no-objection' from the Reserve Bank of India (RBI) for the reduction in capital and will be obtaining shareholders' approval for the same at its AGM," Venkatraman said. None of the bank's 37,000 shareholders holds more than 3 per cent shares and it will not be difficult to convince them, he said. However, a high court approval will also be sought after the AGM, he added.

"In addition to this the bank's shareholdes are primarily its clients and those having long term associations with it. As such any forfeiture will mean that the bank will not be able to raise capital in the future," Venkatraman said.

Insight:

The decision to go in for a proportionate reduction in equity capital instead of a forfiture has benefited some shareholders but the bank lost over 30 per cent of the post-issue capital, gravely altering the capital adequacy ratio. Now the bank is faced with the prospect of making another equity issue while its equity servicing capacity is low. The bank earned a 0.28 per cent return on assets last year and reduced the dividend payout to 10 per cent from 24 per cent in the previous year.

-- Aaron Chaze