Mumbai: Sahara India Financial Corp., the country’s largest residuary non-banking finance company (RNBC) may have to pare its deposits from around Rs20,000 crore at the end of 2006-07 to around Rs3,000 crore. That’s because India’s banking regulator Reserve Bank of India wants it to convert itself into a non-banking finance company (NBFC).
Sahara India Financial, a para-banking company that’s part of the influential Sahara Group—which is in a range of businesses from entertainment and media to airlines—was previously asked by the banking regulator to call back all its investments in various group companies to comply, in stages, with investment guidelines governing RNBCs. (The group has a Hindi-language paper that competes in some markets with Hindustan, published by HT Media which also publishes Mint.)
When contacted, Sahara India Pariwar, as the group is known, responded after four days through an email from Abhijit Sarkar, head, corporate communications, that said: “In response to your queries kindly note that the discussions between RBI and the company are confidential in nature and we do not wish to make any comment on the same.”
The issue of Sahara India Financial becoming an NBFC came up for discussion at a recent meeting of the company’s managing worker and chairman Subrata Roy with senior officials of RBI at the banking regulator’s headquarters in Mumbai. If Sahara India Financial Corp. complies with RBI’s suggestion, it will have to bring down its deposit portfolio by more than 80%.
Under current RBI regulations, the maximum amount of money a deposit-taking NBFC can raise from the public is four times its net-owned funds (the sum of its equity and reserves).
Sahara India Financial had an equity of Rs93.03 crore, preference capital of Rs300 crore, and reserves and surplus of Rs313.84 crore on 31 March 2006, taking its net owned funds to Rs706.87 crore. Even assuming that its reserves went up in financial year 2006-07 following a transfer of part of its net profit, the company will be able to maintain a deposit portfolio of around Rs3,000 crore (assuming its net owned funds is in the region of Rs750 crore). The company’s balance sheet for financial year 2006-07 isn’t available yet.
Analysts in the finance business who did not wish to be identified said RBI had taken a two-stage approach to control the unbridled growth of the finance company, which has been under the scanner of the income-tax department for some time. The department treats part of Sahara’s deposits as undisclosed income of the company. Its 2005-06 balance sheet mentions a disputed income-tax demand of Rs1,945.01 crore.
“First, the banking regulator made sure that the entire deposit kitty of the large finance company is invested in securities approved by RBI so that no group company can get the benefit. In the second stage, the regulator is now trying to cut down its dependence on public deposits,” said a banking analyst who did not wish to be named. Since Sahara India Financial is not listed on bourses, brokerages do not track the company.
Both NBFCs and RNBCs are financial intermediaries, but the difference is that while an NBFC cannot raise limitless deposits, an RNBC can. On the investment front, however, an RNBC is handicapped. It is required to invest its entire deposit kitty in government bonds, deposits in other banks and corporate bonds with ratings of “double A+” (AA+) and above.
The Sahara directors’ report for 2005-06, a copy of which is available with Mint, says, “… as anticipated and also conveyed to RBI, the new regulations have affected margins of the company and have restricted its ability to spread its risks in different class of securities. Your company is quite confident and hopeful that for ensuring the long-term viability of RNBCs ..., RBI would be favourably considering the request of your company.”
RBI had earlier extended Sahara’s deadline for complying with its investment norms to 31 March 2007.
Sources close to the development who did not wish to be identified said Sahara India Financial has fulfilled these norms. The banking regulator has progressively tightened the investment norms for RNBCs to reduce overall systemic risk in the financial sector.
Sahara apart, there are two more RNBCs, including the Kolkata-based Peerless General Finance and Investment Co., that are subject to the same regulations. However, both of them are smaller than Sahara. In 2004-05, RBI allowed these companies 20% of their deposits for discretionary investments; this was reduced to 10% in 2005-06 and 5% last year. From 1 April 2007, RNBCs cannot make any discretionary investment.