Kolkata: In June 2008, India’s banking regulator, the Reserve Bank of India or RBI, set a three-year sunset window for Sahara India Financial Corp. Ltd, India’s largest residuary non-banking company, or RNBC, allowing it to accept fresh deposits maturing until 30 June 2011.
Business alliances: Peerless managing director Sunil Kanti Roy says the firm is exploring new partnerships. Indranil Bhoumik / Mint
Peerless General Finance and Investment Co. Ltd, the country’s oldest RNBC, has tasted RBI’s medicine before Sahara India, and is on the fast track to reposition itself as an asset management company, or AMC. It has also started selling financial products such as mutual fund units and insurance policies. According to RBI’s mandate, Peerless must stop taking public deposits from 1 April, 2011.
Founded in Narayanganj in Bangladesh in 1932 by Radhashyam Roy, a schoolteacher, and now headquartered in Kolkata, Peerless has had a chequered history. It has fought against the banking regulator as well as state governments at India’s highest court. And it has also loaned money to the state when it needed it most.
Unlike non-banking finance companies, or NBFCs, which are required to follow multiple regulations in terms of raising and investing money, RNBCs, created by an RBI directive in 1987, enjoy a lot of leeway on these dimensions and the only regulatory constraint they have to live with is investment norms. They are required to invest their deposits in government bonds, deposits in other banks, and corporate bonds with ratings of AA+ and above, indicating high safety.
The 1987 directive
The 1987 directive was a fallout of a legal battle RBI had fought with Peerless. Between 1987 and the mid-1990s, RBI fought three cases in the Supreme Court that changed the way so-called para-banks work.
First, RBI banned Peerless from accepting deposits but the company moved the Calcutta high court as well as the Supreme Court against the order. The apex court allowed Peerless to continue with its business, but told RBI to take steps to “prevent exploitation of ignorant subscribers” (to Peerless’ deposit schemes).
In May 1987, RBI issued its RNBC directive, asking Peerless to invest its deposits in government bonds and other securities to protect depositors’ interests. Peerless challenged this but the Supreme Court found nothing wrong in the RBI move. So, the RNBC started treating part of deposits as “processing charges” and “maintenance charges” to avoid investing its entire deposit liability in approved securities.
In 1993, RBI plugged the loopholes by amending its 1987 directions. Peerless again moved the Calcutta high court and got a ruling in its favour but the Supreme Court did not find fault with the RBI norms.