Kolkata: The election of a new board of directors at Tamilnad Mercantile Bank (TMB)—an 88-year-old institution founded and controlled by the Nadar business community—has seemingly led to a change of heart towards investors from “outside the community”.
Also See Change of Stance (Graphics)
No longer does the board shun such investors, whose purchase of a 23.6% stake in the bank two years ago triggered vehement protests by the Nadars.
Although two former TMB directors, both Nadars, got these investors to buy shares in the Tuticorin-based bank from serial investor C. Sivasankaran’s Sterling Group, members of the community strongly opposed the share transfer and moved the Madras high court to cancel the deal.
But feuding within the Nadar community seems to have led to a change in stance towards investors such as Ramesh Vangal, another serial investor whose Katra Group’s business interests range from Ayurveda to Scotch whisky. Key shareholders of TMB, who elected a new board, do not see these investors as “predators” any more, according to two TMB directors.
Interestingly, one of the two directors responsible for bringing in the outside investors now seems to have turned against them.
The new board isn’t opposed to investors “from outside the Nadar community” as long as they do not try to wrest control of the bank, according to T. Raja Kumar, one of the 10 newly appointed directors, who were elected by shareholders in two annual general meetings held together last year, but couldn’t join the board until the Madras high court on 26 November set aside a petition challenging their election.
“But if ever they wish to sell their shares in the bank, we expect them to offer their shares to us,” Raja Kumar added. “We will find buyers for their shares from within our community.”
To be sure, critics of non-Nadar investors in the TMB saga, which dates back 15 years, haven’t been totally silenced.
Not only are the new directors “favourably disposed” towards Vangal and other non-Nadar investors, some directors are the nominees of such investors, according to B. Ramachandra Adityan, a former director of the bank, who was instrumental in getting Vangal and others to buy shares of the bank.
“Investors led by Vangal have at least four people on the board, and they can easily influence the others… Eventually they might take over the management of the bank,” said Adityan, who now wants Vangal and other investors who bought TMB’s shares in 2007 pressured to sell their stake in the bank.
“Yes, there could be (some representatives of Vangal and other investors on TMB’s board),” said G. Nagamal Reddy, the bank’s managing director. “I don’t know for sure who represents whom on the board. But we have a new board and it should help expand the business of the bank.”
The Nadar community has reached “an agreement of sorts with Vangal and his associates” on running the bank, according to C.S. Rajendran, another former director of the bank.
“We expect the Nadar community’s interests, such as preference to people from the community in recruitment and loan disbursement, to be protected for a few years at the least,” added Rajendran, who owns 4% of the bank and whose son was recently appointed a director of TMB.
It was during Rajendran’s tenure as director that fighting within the Nadar community led to some 229 shareholders together selling 191,455 shares of the bank, around 67% of its Rs28.44 lakh equity capital, to the Essar Group.
The TMB board opposed the sale of shares, which took place in 1994, and refused to register Essar Group arms as shareholders. Though the Company Law Board said the TMB board’s decision was “illegal”, the shares sold to the Essar Group weren’t in the end transferred to it because the Reserve Bank of India (RBI)—the banking regulator—said it was opposed to industrial groups controlling banks.
Unable to take control of the bank, the Essar Group sold its 67% stake to the Sterling Group in 1996. RBI refused to grant permission for the transfer of shares to the Sterling Group, which in 2003 sold around 96,000 shares, or around 33.74% of the bank’s equity capital, to some 27,000 investors from the Nadar community.
The next year, the Sterling Group agreed to sell its remaining stake in the bank—some 95,400 shares—to more investors from the community, but the deal fell through because the Nadars couldn’t stump up the cash. Eventually, in March 2006, Adityan and M.G.M. Maran, another director of the bank, reached an agreement with the Sterling Group to find a buyer for the remaining stake.
By the end of that year, Adityan and Maran got nine non-resident Indians and foreign institutions to agree to acquire 13.6% of the bank’s shares. Together with them, some Indian investors were to take a 10% stake in the bank. The remaining shares were to be transferred to various investors from the Nadar community, including some to Adityan and Maran.
On obtaining clearance from RBI’s foreign exchange department, the transaction was completed in 2007, but it was challenged in the Madras high court by shareholders who opposed the entry of outsiders. Some of these shareholders eventually ousted Adityan and Maran from TMB’s board.
Now, these shareholders seem to have had a change of heart regarding outside investors.
Though RBI had earlier cleared the share sale to Vangal and other non-resident investors from the “Fema (Foreign Exchange Management Act) angle”, the central bank said in a recent order that it wants to examine the acquisition of shares in 2007 to understand whether the people who bought shares were “acting in concert”.
If the so-called “fitness and propriety” test of RBI reveals that they were indeed partners in the transaction, the banking regulator could block the deal.
Vangal couldn’t be contacted for comment. Gokul Patnaik, vice-chairman of his Katra Group, said: “I wouldn’t comment on matters relating to Tamilnad Mercantile Bank until we have answered some questions from the RBI.”
TMB, which, in fiscal 2009 posted a net profit of Rs150.21 crore, could issue bonus shares to expand its equity base, according to Reddy. “To expand the bank’s business, we have to shore up the equity base through bonus shares and rights issue,” he said. “In the medium term, we should also look to list the shares of our bank on the stock exchanges.”
Reddy added that the newly appointed board would decide on the details of equity expansion.
The bank, which had an earning per share of Rs5,594 in fiscal 2009, had an outstanding loan portfolio of Rs6,571 crore and a deposit base of Rs9,566 crore as of 31 March.
It has 215 branches and around 2.5 million customers. Its cash reserves exceed Rs900 crore, according to Reddy, which means the bank has at least Rs32,000 in cash per share.
TMB’s board on Saturday cleared a proposal to add 66 new branches, according to Raja Kumar, who wants the bank to expand aggressively, but is opposed to listing its shares on the stock exchanges because it would allow people from outside the community to tighten their grip.
“Until 1962, this bank was called Nadar Bank. It’s a private bank of the community. We don’t want that character to change,” he said.
Rajendran, however, said it was not “logical” to expect the bank to remain the exclusive preserve of the Nadar community for a long time. “People from north India are buying into the bank. They already own some 2-3% stake,” he said.
Though not listed, TMB’s shares are changing hands in off-market trades. “The bank’s shares are currently selling for around Rs24,000 apiece,” said Narottam Dharawat, a dealer in illiquid shares. “Interest in the Tamilnad Mercantile Bank’s shares has shot up since the recent Madras high court verdict in anticipation of a bonus issue.”
Graphics by Ahmed Raza Khan / Mint