Madhavpura Mercantile Cooperative Bank
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Madhavpura Mercantile Cooperative Bank (MMCB) was a Gujarat-based interstate
cooperative bank Cooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world. Cooperative banking, as discussed here, includes retail banking carr ...
that became defunct and lost its licence after it was unable to pay back the money it owed public depositors.
Reserve Bank of India The Reserve Bank of India, chiefly known as RBI, is India's central bank and regulatory body responsible for regulation of the Indian banking system. It is under the ownership of Ministry of Finance, Government of India. It is responsible for ...
cancelled its licence in June 2012 under section 22 of the Banking regulations Act, 1949.


History

Madhavpura Mercantile Cooperative Bank was registered as a
cooperative society A cooperative (also known as co-operative, co-op, or coop) is "an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically-control ...
in
Gujarat Gujarat (, ) is a state along the western coast of India. Its coastline of about is the longest in the country, most of which lies on the Kathiawar peninsula. Gujarat is the fifth-largest Indian state by area, covering some ; and the ninth ...
on 27 September 1968. It began business within a fortnight, on 10 October, in
Ahmedabad Ahmedabad ( ; Gujarati: Amdavad ) is the most populous city in the Indian state of Gujarat. It is the administrative headquarters of the Ahmedabad district and the seat of the Gujarat High Court. Ahmedabad's population of 5,570,585 (per t ...
's Madhavpura spice-market area dealing with grocery traders. It received its banking licence 26 years later, on 19 August 1994, and became an interstate cooperative bank in April 1996. Three years later, in 1999, its status improved to that of a scheduled bank.


Involvement with stock brokers and impact of the 2001 Sensex crash

In 1999–2000, when the bank had 50,000 public depositors, it started lending out large sums of money to stock brokers in gross violation of
Reserve Bank of India The Reserve Bank of India, chiefly known as RBI, is India's central bank and regulatory body responsible for regulation of the Indian banking system. It is under the ownership of Ministry of Finance, Government of India. It is responsible for ...
(RBI) rules and regulations. The MMCB had issued pay orders worth to stock broker
Ketan Parekh Ketan Parekh is a former stockbroker from Mumbai, who was convicted in 2008 for involvement in the Indian stock market manipulation scam that occurred from late 1998 to 2001. During this period, Parekh artificially rigged prices of certain chos ...
, which he discounted at
Bank of India Bank of India (BOI) is an Indian public sector bank headquartered in Bandra Kurla Complex, Mumbai. Founded in 1906, it has been government-owned since nationalisation in 1969. BoI is a founder member of SWIFT (Society for Worldwide Inter B ...
. The bank had also lent money to Mukesh Babu and Sirish Maniar of the brokerage firm Maniar Group. At the time banks in India were not allowed to lend more than to stock brokers. In early 2001 Parekh and other brokers made a large sum of money when the
Bombay Stock Exchange BSE Limited, also known as the Bombay Stock Exchange (BSE), is an Indian stock exchange. It is located on Dalal Street in Mumbai. Established in 1875 by cotton merchant Premchand Roychand, a Jain businessman, it is the oldest stock exchange in ...
's
Sensex The BSE SENSEX (also known as the S&P Bombay Stock Exchange Sensitive Index or simply SENSEX) is a Capitalization-weighted index, free-float market-weighted stock market index of 30 well-established and financially sound companies listed on the ...
saw a bull run; however, when the
dotcom bubble The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet. Between 1995 and its peak in March 2000, the Nasdaq Compos ...
burst, the Sensex dropped down to 3,000 points, and Parekh and the bank started having problems. On 8 March 2001, the news broke out that the bank had given a huge guarantee to Parekh which he lost in the stock crash. As little remained in the bank's coffers, public depositors began withdrawing their money; only a few were successful. Prior to the scam, the Madhavpura Mercantile Cooperative Bank was the largest urban cooperative bank in Gujarat. It had a deposit base of in March 2001, half of which was from other banks. Seeing the condition of the bank and fear of losing their money among the depositors the RBI restricted the bank's operations on 13 March 2001. The Central Registrar of Cooperative Societies superseded the bank's board, whose 12 members were # Ramesh Chandra Parikh (Chairman) # Devendra Pandya (MD) # Ramanlal Parikh # Natverlal Desai # Manilal Shah # Prabhudas Kothari # Purushottamdas Shah # Pravinchandra Shah # Pravinchandra Patel # Dinesh Majumdar # Sevantilal Shah # Natverlal Thakker


Investigation and steps taken by RBI

On 13 March 2001 the RBI found out that the bank's net worth was −, its deposit erosion was 90.9% and gross
non-performing asset A non-performing loan (NPL) is a bank loan that is subject to late repayment or is unlikely to be repaid by the borrower in full. Non-performing loans represent a major challenge for the banking sector, as it reduces the profitability of banks, and ...
s were 88.2% and . The next day, the registrar superseded the board and appointed an administrator as the overseer of the bank. On 23 August a scheme for reconstruction of the bank was approved by the RBI for a period of 10 years. Further investigations revealed that after chairman Ramesh Chandra Parikh's son Vinit had lost in the stock-market crash, his losses were paid for through the bank's funds. By February 2004 the bank was able to recover from other banks; Ketan Parekh had returned only . He was arrested that August, and in December a special
Central Bureau of Investigation The Central Bureau of Investigation (CBI) is the premier investigating agency of India. It operates under the jurisdiction of the Ministry of Personnel, Public Grievances and Pensions. Originally set up to investigate bribery and governmen ...
(CBI) court set up for the case cancelled Parekh's conditional bail after he failed to pay the promised . In June 2003, a New Delhi court granted the CBI a five-day remand of the two Maniar Group stockbrokers – Shirish Manyar and Mukesh Babu. Chargesheets were filed against MMCB chairman Parikh, its CEO Devendra Pandya, Ketan Parekh and his associate Dharmesh Joshi. Joshi's bank account in London containing £6 million was frozen by the CBI in March 2006.


Cancellation of licence

Reserve Bank of India found out on 31 March 2011 that the bank's net assets were worth - and deposit erosion was 100 percent, the gross non performing assets were - and losses were . After the reconstruction scheme expired on 23 August 2011 and after seeing no major improvement in the bank's performance the RBI advised the Government of India on 26 December to liquidate the bank. On 4 January 2012 the Central Task Force for Cooperative Urban Banks also gave the same advice to the
Government of India The Government of India (ISO: ; often abbreviated as GoI), known as the Union Government or Central Government but often simply as the Centre, is the national government of the Republic of India, a federal democracy located in South Asia, c ...
. The Reserve bank issued a showcause notice to the bank on 16 March 2012 asking why it banking licence should not be cancelled. The cooperative bank replied that the main reason for the failure of the restructuring scheme was the unwillingness of the other cooperative banks to fulfill their commitments and it suggested another revival plan in which an NRI was willing to give to the bank for a period of 10 years through the
World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
. It was able to recover only from public defaulters and were debt on Ketan Parekh. Also the bank neither had any background information regarding the NRI who was willing to help nor the source of his funds. Seeing this the RBI cancelled the bank's licence with effect from 4 June 2012. As of 5 June 2012 Parekh had paid only . Parekh alone had to pay at the interest rate of 12% per year resulted . As of June 2013, 700 civil and 230 criminal cases filed by the bank were pending in various courts. Several cases were filed against the bank and in 70 of these cases trial hadn't begun as of March 2014. One of the accused Ramesh Chandra Parikh, former chairman of the bank died in 2007 while in judicial custody. In January 2011 the public prosecutor in the case, Chetan Shah demanded re-investigation of the case.


Aftermath

After the scam was unfolded the RBI restricted the cooperative banks from providing money to brokerage firms, giving assistance against securities such as shares and debentures and formed task forces to formulate revival plans for the banks that were affected. In most cases the affected bank was merged to a bigger Urban Cooperative Bank. The banking regulatory authority increased the number of inspections of balance sheets of cooperative banks from once in two years to every year. A
parliamentary A parliamentary system, or parliamentarian democracy, is a system of democracy, democratic government, governance of a sovereign state, state (or subordinate entity) where the Executive (government), executive derives its democratic legitimacy ...
panel was set up to investigate in the stock market scam. The panel found out that the urban cooperative banks were manipulating their activities and that in absence of any inspecting authority many brokerage firms were using funds provided by these banks to manipulate the market. After the scam cooperative banks found it difficult to win back the trust and confidence of their customers. Chairman of the National Federation of Urban Cooperative Banks & Credit Societies Ltd, H K Patil had said;
The MMCB episode came as a big storm to the cooperative movement. However, the movement withstood and overcome the storm and for past few years, cooperative banks are seen doing fairly well. The regulator, too, has taken a note of the operations of UCBs,
The Bank filed a large number of cases against various defaulters. CID and Central Bureau of Investigation filed several charge sheets. In the case, a defaulter agreed to pay back the withstanding amount case against him was closed. Over 40 cases against defaulters were still pending in Mumbai as of July 2012. Government bodies like
Bank of India Bank of India (BOI) is an Indian public sector bank headquartered in Bandra Kurla Complex, Mumbai. Founded in 1906, it has been government-owned since nationalisation in 1969. BoI is a founder member of SWIFT (Society for Worldwide Inter B ...
and Deposit Insurance & Credit Guarantee Corporation were given priority for due recovery. After the scam
Securities and Exchange Board of India The Securities and Exchange Board of India (SEBI) is the regulatory body for securities and commodity market in India under the ownership of Ministry of Finance within the Government of India. It was established on 12 April 1988 as an executive ...
, the regulatory body for the Indian stock markets was given more power in investigating cases against manipulation and insider trading and to impose heavy penalty and initiate criminal proceedings. Chartered accounted M.M. Chitale played a key role in the formulation and execution of restructuring scheme. The committee under Chitale recommended that the bank should be allowed to make payments under a restructuring scheme. He refused to accept any fees for his work. MMCB repaid due to 268 banks in installments. The RBI issued a circular on 21 July 2004 to the banks that had deposited money with the MMCB to treat their deposits to the bank as non-performing assets and submit the particulars of their deposits to the reserve bank. MMCB auctioned properties of defaulters worth on 3 November 2004. Parekh was arrested after the scam garnered media attention. A lower court granted him bail on the condition that he will pay back to the bank in three years ending 24 August 2004. He failed to fulfill the condition and filed a plea in the
Gujarat High Court The Gujarat High Court is the High Court of the state of Gujarat. It was established on 1 May 1960 under the ''Bombay Re-organisation Act, 1960'' after the state of Gujarat split from Bombay State. The seat of the court is Ahmedabad. The prese ...
to change the terms and conditions of the bail but the court asked him to withdraw the plea.
Ketan Parekh Ketan Parekh is a former stockbroker from Mumbai, who was convicted in 2008 for involvement in the Indian stock market manipulation scam that occurred from late 1998 to 2001. During this period, Parekh artificially rigged prices of certain chos ...
offered to pay in 5 installments by May 2005 but the MMCB rejected his proposal. Nitin Constructions agreed to pay it owed to the MMCB and Dharnendra Agro Foods that owed Rs to the bank agreed to pay back the withstanding amount. In August 2005 the bank disbursed which included 25% of the principal amount and interest at the rate of 3% per annum to its public depositors and other cooperative banks in
Rajkot Rajkot () is the fourth-largest city in the Indian state of Gujarat after Ahmedabad, Vadodara, and Surat, and is in the centre of the Saurashtra region of Gujarat. Rajkot is the 35th-largest metropolitan area in India, with a population of ...
. Till March 2011 there were 1,645 Urban Cooperative Banks registered with the Reserve Bank of India. RBI had received 158 proposals for merging some of these banks and it issued no-objection certificates to 95 of these proposals. Only 6 UCBs had assets greater than .


Political allegations

In July 2010
Arjun Modhwadia Arjun Modhwadia is an Indian National Congress politician from Porbandar Gujarat, India. He was the Leader of the Opposition in the Gujarat Legislative Assembly from 2004 to 2007. He had been a president of Gujarat Pradesh Congress Committee ...
, an
Indian National Congress The Indian National Congress (INC), colloquially the Congress Party but often simply the Congress, is a political party in India with widespread roots. Founded in 1885, it was the first modern nationalist movement to emerge in the British Em ...
politician alleged that
Amit Shah Amit Anil Chandra Shah (born 22 October 1964) is an Indian politician currently serving as the Minister of Home Affairs since 2019 and the first Minister of Co-operation of India since 2021. He served as the President of the Bharatiya Janata P ...
who was a former director of the bank, had received in bribe from Ketan Parekh in exchange for help in the case. During the
2014 Indian general election General elections were held in India in nine phases from 7 April to 12 May 2014 to elect the members of the 16th Lok Sabha. With 834 million registered voters, they were the largest-ever elections in the world until being surpassed by the 2019 ...
Digvijay Singh also made similar allegations. In August 2011 before the term for the restructuring sceme was to finish a delegation representing the banking industry met with the Secretary of Union agriculture ministry P K Basu. However RBI cancelled the bank's licence in June 2012.


Liquidation committee

In 2013 the bank had to recover from a total number of 851 defaulters including 18 members of the broker Parikh's group which owed and another owed by 833 defaulters. Chaman Kumar, a retired
Indian Administrative Service The Indian Administrative Service (IAS) is the administrative arm of the All India Services of Government of India. Considered the premier civil service of India, the IAS is one of the three arms of the All India Services along with the Indian ...
officer had been appointed the liquidator. The other members of liquidation committee were; * P S Shenoy (former chairman of Bank of Baroda) * Siddharth Sinha (IIMA professor) * Kaushik Patel ( Chartered accountant) In 2012 the bank owed a total of : * to 281 banks * to Deposit Insurance & Credit Guarantee Corporation * as interest * to
Bank of India Bank of India (BOI) is an Indian public sector bank headquartered in Bandra Kurla Complex, Mumbai. Founded in 1906, it has been government-owned since nationalisation in 1969. BoI is a founder member of SWIFT (Society for Worldwide Inter B ...
* to public account holders * to Reserve Bank of India Till 2013 the bank had launched 5 One time settlement schemes; in 2000, 2001, 2004, 2007 and 2013.


References

{{Banking in India Cooperative banks of India Defunct banks of India Confidence tricks Banks established in 1968 Banks disestablished in 2012 Indian companies disestablished in 2012