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.

Peerless has since moved on. Based on the advice of Monitor Group, a US-based consulting firm, Peerless started distributing insurance policies two years ago. It distributes products of insurers such as Max New York Life Insurance Co. Ltd and Iffco-Tokio General Insurance Co. Ltd, and AMCs such as ICICI Prudential Asset Management Co. Ltd, Tata Asset Management Ltd, SBI Funds Management Pvt. Ltd, Reliance Capital Asset Management Ltd and Sundaram BNP Paribas Asset Management Co. Ltd.

Alongside, Peerless is also looking to launch its own AMC, for which regulatory clearances are pending. It will be the first AMC based in eastern India.

There are 35 asset management firms operating in India with Rs6.38 trillion worth of assets under management in end May, according to Association of Mutual Funds of India, or Amfi. Reliance Capital leads the pack in terms of assets managed, followed by HDFC Management Co. Ltd.

Distribution of financial products is an obvious revenue stream for Peerless as it has a customer base of around 50 million depositors and a wide network of offices, built over past 53 years. “More partnerships are being explored," says Sunil Kanti Roy, Peerless managing director. “Peerless has some 50,000 field workers who go door-to-door and collect deposits… Companies are keen to use Peerless as a distribution channel because of our reach."

High overheads

But as the company grew, its overheads, too, went up—it was around Rs120 crore in 2007-08, the latest audited figures available for Peerless. “Can Peerless as a distribution company generate enough revenue to carry on with such huge overheads?" asked a person familiar with Peerless’ financials, who did not want to be identified. “Even if costs were met, its profits would definitely take a beating."

Peerless posted a net profit of Rs143 crore in 2007-08—Rs40 crore less than what it did the previous year.

“Maintaining this scale of operation even when we are out of the small-savings business is the challenge facing the management team," Roy says.

According to Peerless chairman Dipankar Basu, the company has already started examining ways of cutting “staff and maintenance costs". “But at the same time, all overheads need not be borne by the FPD (financial products distribution) business," Basu adds.

Typical of deposit-taking companies, Peerless has been earning huge sums on unclaimed deposits, says the person familiar with its finances and mentioned earlier in this story. The company’s balance sheet for 2007-08 reveals it had Rs1,385 crore of “unclaimed maturity dues" as of 31 March 2008. “Though most of this amount is going to get paid (out) eventually, Peerless has always held deposits on which it didn’t have to pay anything, whereas income from these deposits was substantial."

Every year, Peerless even writes back to its profit and loss account as exceptional income some unclaimed deposits if it is determined that they wouldn’t ever be claimed. In 2007-08, it wrote back Rs36.63 crore of unclaimed deposits. Unlike other financial intermediaries, it does not need to transfer unclaimed deposits more than seven years old to the ministry of corporate affairs-administered Investor Education and Protection Fund.

Margins in the distribution business aren’t big. “Commission on selling mutual funds ranges from 0.1% to 1.5%. On insurance policies, it’s 20% of first year’s premium, and 5% for the second and third years," says Rajiv Bajaj, vice-chairman and managing director of Bajaj Capital Ltd, one of the leading financial products distributors in the country. Bajaj Capital collected Rs125 crore in insurance premium in 2008-09 and most of it was first-year premium.

Reliving 1956

This is the second time Peerless is looking to transform itself. In 1956, the company, which was then called Peerless Insurance Co. Ltd, had to stop selling risk products because the Union government seized control of private insurers. It quickly launched the “small-savings business", and became a household name in West Bengal by offering schemes under which investors could deposit small amounts daily.

“The niche business that Peerless entered in 1956 has lived its life," says Basu. “The small-savings business was launched in a certain economic environment…at a time when banks and financial institutions hadn’t penetrated the rural market. But now things have changed."

D.N. Ghosh, Peerless chairman till 2006, had anticipated that regulations would be tightened, said Basu. “We had asked Monitor Group to advise us on how the company could be transformed, and were prepared to face the challenge when the RBI directives were issued."

The main allegations against Peerless were that its deposits were not invested in safe instruments and that it was exploiting the ignorance of small investors and not paying them a fair return on their deposits.

These are very similar to RBI’s allegations against Sahara India. RBI is in favour of the winding down Sahara India’s close to Rs20,000 crore public deposit base in seven years. It has directed Sahara India to repay the deposits as and when they mature and bring down the aggregate liability to depositors to zero on or before 30 June 2015.

In contrast, Peerless is very small, roughly one-fifth of Sahara’s size. Its public deposit base is only Rs4,300 crore and for the past few years, its entire corpus is invested in debt instruments approved by RBI.

No easy transformation

Even then its transformation may not be easy. Its proposed asset management business is crucial to the turnaround, and the challenge is to convert its depositors into mutual fund investors. “Peerless will definitely try to convert its deposits into mutual fund assets, and encourage its depositors to invest in its mutual funds through SIPs (systematic investment plans)," said another person close to the company who also did not want to be identified.

Besides financial services, Peerless has interests in the real estate, healthcare and hospitality sectors. For the past 15 years, it has been building residential properties across West Bengal under a joint venture with the state government. Its real estate business wasn’t hurt by the downturn because it hadn’t used borrowed funds, claims Roy. Peerless also runs four hotels and at least five more are under construction.

Sahara India is part of the Subrata Roy-led Sahara group that has interests in finance, entertainment, real estate and media. Sahara group also publishes a Hindi-language paper that competes in some markets with Hindustan, published by HT Media Ltd, which also publishes Mint.