Bank of Rajasthan (BoR), an old private sector lender, has been pulled up by RBI for a string of violations like deletion of records in the banks IT system, irregular property deals and irregularities in the conduct of accounts of a corporate group.

While the banking regulator did not name the corporate, its learnt that BoR gave a huge overdraft, beyond all permissible limits, to the Sahara group, the Lucknow-based para-banking group, which is making a foray into real estate.

Taking a serious note on the corporate governance lapses, RBI has imposed a penalty of Rs 25 lakh on BoR. Over the past few months, the central bank has virtually taken over the bank. In November, RBI placed its nominee as the new CEO of BoR and is in the process of appointing two additional independent directors on the bank board. With this, RBI will have five directors on the BoR board.

Other charges include non-adherence to anti-money laundering rules in the opening and conduct of certain accounts, and BoRs failure to provide certain documents sought by RBI and then misrepresenting that such documents were not available.

When contacted by ET, BoR MD and CEO G Padmanabhan said: These are corporate governance issues. Its a conclusion of a process and these are old issues. In order to address corporate governance issues and bring in regulatory comfort, I have been brought in by RBI. Mr Padmanabhan was earlier with State Bank of India as a chief general manager.

Among the details obtained by ET, RBI has questioned a property acquisition by bank from a party related to the promoters. The regulator has also found anomalies in some of the lease transactions and even properties sold by the bank to groups connected to the banks promoters. Indeed, the notes to the accounts in the banks third quarter results said the owners of the rented property housing the corporate office had sought for rent revision. If acceded, it would result in a liability of Rs 14 crore.

On the deletion of records, RBI found the data on share transfers for a few years beginning 2002, were missing. When questioned, BoR had told RBI that the data records deleted as the data was overwritten.

According to PK Tayal, one of the main promoters of the bank, The banks networth was just Rs 6 crore in 1999 and today it is Rs 1,100 crore. It has a CAR of over 11%. However, rating agency ICRA while recently downgrading the banks tier-II bonds, pointed out the decline in the banks asset quality, high exposure to sensitive sectors like real estate and textile and the low net profitability over the last few quarters.

Some of the provident funds have invested in these bonds. With the bank expecting to provide Rs 52 crore of additional liability in Q4FY10 on account of AS-15 impact, ICRA expects the bank to report a loss in the current financial year.

The lapses in the know are customer or anti-money laundering rules in current accounts, some of which belonged to promoter-related entities. The bank had not done the necessary due diligence while opening these accounts.

The penal action by RBI has come at a time when the bank has called for an EGM in March to take shareholder approval for appointment of PK Tayal, Surendra Kumar Agarwal, Kailash Chand Jain, Madhukar (former Sebi member), Rajiv Arora, Justice AR Lakshmanan as directors. The appointments will have to be cleared by RBI.

Someone is trying to malign me, said Mr Tayal. In 2008, BNP Paribas wanted to buy shares at Rs 200 and it had gone through the books of accounts for one month before they decided. It was only because the market fell that they (BNP) decided to back out.

When asked whether he was looking to sell his stake or merge the bank with another private sector lender, Mr Tayal said: Why should I sell at this price? Why should there be any merger? There are already investors available at Rs 600. Now the market is improving, the economy is improving.

The bank is planning to come out with a QIP issue of Rs 250 crore. Promoters of private sector banks have been asked by RBI to bring down their stake holding to 10% from 28%. Though Mr Tayal said he has been given time till 2013, bank officials feel that he would have to bring down the stake in the next few months. He further said losses of Rs 44.7 crore in the third quarter ending December 31, 2009, were due to provisions for next year s wage revision.