Karnataka Bank Shares Slide 6% After CEO and Executive Director Resignations

The stock price of Karnataka Bank tumbled nearly six percent on Monday, June 30, following the resignation of the bank’s Managing Director and CEO Srikrishnan Hari Hara Sarma and Executive Director Sekhar Rao.

Both top executives stepped down citing personal reasons, sparking concern among investors.

The development was confirmed by the Mangaluru-based private sector lender through a filing with the exchanges on June 29. Sarma’s resignation will take effect from July 15, while Rao will leave his post on July 31.

Differences Over Expenditure Spark Concern

According to Moneycontrol, differences reportedly emerged between Sarma, Rao, and the bank’s board regarding a certain expenditure by the bank, which is believed to have contributed to the CEO’s decision to step down.

The issue is said to have originated in May when the statutory auditors of the bank raised concerns in their notes about an expenditure of Rs 1.53 crore related to engaging a consultant and other associated costs.

The auditors pointed out that this expenditure exceeded the authority of the bank’s whole-time directors and had not been ratified by the board. They also noted that the amount is recoverable from the concerned directors.

It is understood that the consultancy expenses were intended for technological upgrades and revamping of the credit verticals within the bank.

Regulators’ Attention Drawn to the Matter

The auditors’ remarks reportedly caught the attention of regulators. However, a source familiar with the development stated that all necessary steps to address the issue highlighted by the auditors have been taken.

“Whatever had to be done is done,” the source added, while also stating that the regulators have been informed of the actions undertaken.

Experienced Banker Steps Down Amid Leadership Changes

Srikrishnan Hari Hara Sarma, with over four decades of experience in the banking sector, became Karnataka Bank’s first external CEO in May 2023.

His appointment followed a formal search process led by headhunters who made recommendations to the bank’s board.

In his resignation letter, Sarma cited personal reasons, including his decision to relocate to Mumbai, for stepping down. His resignation takes effect from July 15.

Executive Director Sekhar Rao, whose resignation will be effective from July 31, stated that his decision was influenced by his inability to relocate to Mangaluru, along with other personal reasons.

Bank Forms Search Committee for Top Positions

In response to the leadership vacuum, Karnataka Bank has set up a search committee tasked with identifying suitable candidates for both the CEO and Executive Director positions.

In addition, the bank has announced the appointment of a senior, experienced banker as the Chief Operating Officer (COO), who will assume charge on July 2.

The name of the new COO has not been disclosed. Substitute arrangements are also being made for other leadership roles, subject to approval from the Reserve Bank of India (RBI).

Bank Addresses Stakeholder Concerns

Amid the leadership changes, the bank issued a statement addressing concerns related to the expenditure flagged by the auditors.

“On the notes to accounts contained in the audited financial statements for FY25 leading to the emphasis of matter in the auditor’s report, the bank states that it has been discussed and amicably resolved,” the bank said.

The bank further assured stakeholders of its operational stability, adding, “The bank continues to take necessary steps to ensure operational stability and assures various stakeholders that it is well capitalised and continues to be sound as hitherto. The transformational journey embarked upon by the bank will continue unhindered.”

Shares Decline as Market Reacts

Following the announcement of the resignations, Karnataka Bank’s shares dropped as much as 7% in early trade on Monday. By 9:30 a.m., the stock was down 5.8% at Rs 195.78 on the National Stock Exchange compared to the previous session’s closing price. Later, the stock traded at Rs 193.97, marking a 6.6% decline for the day.

The stock is currently down 21% from its 52-week high of Rs 245, reflecting market apprehension following the sudden leadership exits and concerns over internal differences within the bank’s management.

Karnataka Bank now faces the task of filling key leadership roles while restoring investor confidence and maintaining its operational stability.