Why are Tamilnad Mercantile Bank shareholders demanding stay on its IPO?

Tamilnad Mercantile Bank (TMB) is set to launch an IPO with a price band of Rs 500-525 per share on September 5. But when three shareholders appealed to the Securities Appellate Tribunal (SAT) for a stay on the IPO because the RBI and ED had control over 37.61% of its share capital due to legal issues, the SAT dismissed their appeal. 

Here's the entire story:  

The IPO: Tamilnad Mercantile Bank, India's oldest private lender, intends to raise Rs 832 crore via an IPO, and had filed the Draft Red Herring Prospectus (DRHP) in 2021. As per this initial DRHP, the IPO was going to be launched via a fresh issue of shares (OFS) and the sale of existing shares. But as per the recently filed IPO documents, the IPO will debut on the stock market on September 5, 2022, only with a fresh issue of shares and without any sale of existing shares. This means the entire money raised will go to the company and not to the shareholders who want to sell their shares.

The TMB IPO is set to hit the stock market on September 5 and close on September 7, 2022.

The legal issue: 

• The Tamilnad Mercantile Bank had originally planned an OFS and fresh issue of shares when it filed the draft red herring prospectus (DRHP) in September 2021. But subsequently, the bank scrapped its decision on the OFS.
• Soon after the bank filed its DRHP in 2021, proxy advisory firm IiAS appealed to SEBI to approve the IPO only after the bank manages to resolve all of its legal issues.
• The investors too have argued that the bank needs to file a fresh DRHP with Sebi which would contain details of the revised arrangement. SEBI, however, did not find merit in the argument and did not ask the bank to file a fresh DRHP and allowed it to go ahead with its public issue.
• This led the three investors (Robert and Ardis James Co, East River Holdings Ltd, and Swiss Re Investors (Mauritius) Ltd ) to file petitions before SAT to seek a stay on the IPO and check if the bank can go ahead with its listing next week. The shareholders are concerned since the IPO process was rushed despite the existence of legal proceedings against the company that was initiated by agencies like RBI and ED. 
• The SAT dismissed the appeal of the shareholders, thus giving a green signal for the IPO. 

What legal proceedings have been initiated by ED and RBI: As per TM Bank, 37.61% of its paid-up share capital (ie about 53.6 million shares) are subject to previous legal proceedings and have been held in abeyance by agencies like the Reserve Bank of India and the Enforcement Directorate. At a time when so many shares are locked by agencies, how is the pricing and valuation of the IPO shares for the company logical?

What were the issues with RBI and ED: From June 2018 to May 2021, RBI imposed a fine of more than Rs 7.35 crore on TM Bank for not adhering to rules around the issue and pricing of shares, deficiencies in regulatory compliance on fraud classification, and certain cyber security incidents. RBI also once imposed restrictions on the bank on opening new branches in 2019. 

In 2021, the Enforcement Directorate (ED) seized shares worth Rs 294 crore of former Chairman N Muthu over a probe linked to his alleged violation of the FEMA law. In 2022, Enforcement Directorate attached assets worth Rs 216.4 crore from the bank's former Chairman MGM Maran in December 2021  

What are the experts saying? Ajcon Global recommends subscribing to the TMB IPO issue due to the bank's strong legacy, loyal customer base, focus on improving servicing framework, a strong presence in Tamil Nadu and consistently growing deposit base. Though the legal issues might have been a roadblock for prospective investors, the SAT's clearance means that investors may not have to worry before investing about Rs 14,000 to Rs 15,000 in 1 lot of TMB's shares.