Sahara India Pariwar, the Lucknow-based industrial conglomerate, is planning to restructure its financial arm and has appointed audit firm Ernst and Young (E and Y) to chalk out the strategy.
Senior E and Y executives, who did not want to be named, told Mint that one way of restructuring the finance business could be to convert Sahara India Financial Corp., India’s largest residuary non-banking finance company (RNBC), into a commercial bank.
“The Reserve Bank of India has a better control on banks than on non-banking finance company (NBFC) or an RNBC which is into parabanking,” said one E and Y executive.
In an email answer to Mint’s queries, Abhijit Sarkar, head, corporate communications, Sahara India Pariwar, said: “We wish to confirm that as a part of ongoing exercise, we have appointed Ernst and Young for advising us on further strengthening of our financial businesses and optimization of our resources, including widespread infrastructure and large manpower spread throughout the country.” However, he declined to offer details of the firm’s plan, saying, “Since the exercise is in the initial stages, we are unable to offer any comments on the possible outcome of the same.”
The latest move comes on the heels of Sahara selling Sahara Airlines Ltd to Jet Airways Ltd for Rs1,450 crore. Sahara India has businesses ranging from finance, entertainment, real estate and media, including a Hindi-language paper that competes in some markets with Hindustan, published by HT Media Ltd, which also publishes Mint.
Mint reported on 5 April that Sahara India Financial was asked by the banking regulator to call back all its investments in various group companies to comply, in stages, with investment guidelines governing RNBCs. Sarkar had declined to comment for that article.
The E and Y executive said that the brief given to them goes beyond the parabanking firm and they are looking into all financial activities of the group. “We are taking a look at the customers, markets and products offered by all financial firms of the group as well as its image. It can transform itself into a universal bank meeting all financial needs of borrowers under one roof,” the executive said.
A commercial bank is indeed under greater regulatory glare of RBI as it needs to invest 25% of its liabilities in government bonds and keep 6.5% of deposits with the banking regulator in the form of cash reserve. Besides, 40% of all loans are directed loans, given to agriculture and small industries. The banking regulator also has the final say on the appointment of the chairman. In the case of an RNBC, its investments are regulated, but RBI does not have any control on its deposit mobilization. An NBFC’s exposure to public deposits is linked to its capital, but its lending activities are not controlled by the regulator directly.
However, if Sahara India Financial is to convert itself into a bank, the Sahara Pariwar, which holds 100% stake in the company, will have to dilute its stake to 10% as RBI norms do not allow any promoter to hold more than 10% stake in a bank. Kotak Mahindra Bank Ltd and Yes Bank Ltd are two private banks that received RBI licences in this century. The promoters of both the banks at this point hold more than the stipulated 10% stake in their ventures, but they are required to pare their stakes within a timeframe agreed upon between the banks and the regulator.
The Sahara group has four businesses in the financial space—parabanking, asset management, life insurance and housing finance. Four firms that run these businesses are Sahara India Financial, Sahara Asset Management Co., Sahara India Life Insurance Co. and Sahara Housing Finance Corp. Ltd. While Sahara India Financial is the country’s largest RNBC, the other outfits are relatively smaller entities in their space. For instance, as on 31 March, the mutual fund arm had Rs180 crore of assets under its management. The total assets under management of 30 Indian mutual funds on that date were Rs3,26,388 crore.
Similarly, up to February 2007, the individual single premiums collected by Sahara Life were Rs15.20 crore, the lowest among 16 life insurance players in India. It has covered 4,042 life insurance policies under single premium scheme up to February against the overall industry figure of 58,06,158. Sahara’s housing finance activities, too, are modest. In 2005-06, total assets of the housing finance company were Rs72.89 crore on an equity capital of Rs7 crore, and reserves and surplus were Rs10.23 crore.
Sahara Mutual Fund was set up on 18 July 1996 with Sahara India Financial as the sponsor. The group’s life insurance company—Sahara India Life—was granted licence by the insurance regulator on 6 February 2004. Sahara India Life is the first domestic firm to enter the Indian life insurance market without any foreign collaboration. It was launched with an initial paid-up capital of Rs157 crore.
Sahara India Financial has a deposit liability of close to Rs20,000 crore at the end of 2006-07 and the entire corpus is invested in securities approved by the banking regulator. It has also been under the scanner of the income-tax department for some time and the department treats part of its deposits as undisclosed income. Sahara India Financial’s 2005-06 balance sheet mentions a disputed income-tax of Rs1,945.01 crore.
RBI had, two years ago, appointed audit firm KMPG to conduct a special audit on Sahara India Financial’s books. The findings of the audit are not known as the banking regulator never made them public, but it has progressively tightened investment norms for all parabanking firms to reduce overall systematic risk in the financial year.
While KPMG was appointed by RBI to look into the parabanking firm’s activities, the promoters have now appointed E and Y for the repositioning of its financial activities.
Under the existing financial sector regulations, four different finance arms of the Sahara group cannot be merged under one umbrella as they come under four different regulators. While RBI oversees parabanking activities, mutual funds are regulated by the capital market watchdog, Securities and Exchange Board of India; the regulator for insurance firms is the Insurance Regulatory and Development Authority and housing finance firms are governed by the National Housing Board. “All four firms cannot come together, but if RBI allows the parabanking company to become a bank, it can hold limited stakes in other arms. However, to do that, the bank’s equity must be widely held,” said a banking consultant who is not attached to E and Y and who did not want to be named.