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Mumbai: JM Financial Ltd, a Mumbai-based financial services firm, said on Thursday that it would nominate former Citigroup Inc. chief executive officer (CEO) Vikram Pandit as non-executive chairman of an entity it proposes to start to enter the 75 trillion banking industry.

Pandit and his business partner Hari Aiyar are also making a strategic investment by taking a 3% equity stake in JM Financial through an issue of warrants, the company said in a statement on Thursday. Both will also have the right to purchase shares up to the amount prescribed by the Reserve Bank of India (RBI) in the proposed bank.

Under current norms, an entity or individual can purchase a stake of up to 5% in a commercial bank without RBI’s prior permission.

JM Financial said its board had decided to apply for a banking licence. Its move comes even as several companies prepare to meet RBI’s deadline for filing applications by 1 July.

Several companies have expressed interest in setting up banks. These include L&T Finance Holdings Ltd, India Infoline Ltd, Religare Enterprises Ltd, Aditya Birla Financial Services Group, Mahindra and Mahindra Financial Services Ltd and LIC Housing Finance Ltd.

JM Financial’s businesses include investment banking, institutional equity sales, trading, research and broking, private and corporate wealth management, equity broking, non-banking finance products, and private equity.

Nagpur-born Pandit became the CEO of Citigroup in December 2007, just ahead of the global economic downturn. Between 2009 and 2010, he took a salary of $1 per year (with no bonus) as he struggled to return the bank to profitability. Under him, Citigroup posted five consecutive quarterly profits and in May 2011, the board awarded him $23.2 million as a retention bonus.

On 16 October, Pandit left after a clash with the board over strategy and performance, according to a 17 October Wall Street Journal report. Pandit’s resignation came after a series of missteps left some directors feeling that the company wasn’t being managed effectively and that the board wasn’t kept adequately informed, the report said.

“JM Financial and Vikram Pandit have known and worked with each other extensively for many years since the early days of the growth of financial services in India. We share similar values and are confident that the proposed association will create strong domestic financial services businesses with global best practices and reach," said Nimesh Kampani, chairman of JM Financial Group, in a statement.

Experts say bringing a financial expert who has the experience of running large organizations will add to JM Financial’s market standing.

Getting Pandit as a board member is a big thing for JM Financial, considering its ambition in banking, said Hemendra Kothari, founder and chairman of DSP BlackRock and founder and ex-chairman of DSP Merrill Lynch Ltd.

“A stake in JM means Pandit will have his own interests and he can guide the company towards growing it into a commercial bank. Nimesh, who himself is a good strategist, along with Pandit can shape up a good future for the company," added Kothari.

Kothari, along with Kampani and Kotak Mahindra Bank Ltd’s Uday Kotak, made up the three Ks who ran the bulge bracket investment banks that dominated India’s deals landscape in the 1990s and part of the 2000s.

“Pandit has the experience of a running a huge organization. This will be a great help for JM in creating a bank and making it work. RBI has also said that a strong and experienced management is a prerequisite for setting up a bank," said the head of financial services at a large consulting firm who didn’t want to be identified.

On 22 February, RBI announced norms for the entry of a third set of private banks into India’s 75 trillion banking sector, three years after the government first announced the plan and nine years after the central bank issued the last round of licences.

The apex bank has set a minimum capital requirement of 500 crore and capped foreign shareholding in the new banks at 49% for the first five years.

The guidelines stipulate that new banks should be set up under a non-operative financial holding company. The deadline for applications is 1 July. Promoter groups should have a past record of sound credentials and integrity, should be financially sound, and have a successful track record of running their business for at least 10 years, RBI said.

JM Financial will also nominate Pandit as non-executive chairman of its non-banking financial company. The company is looking at expanding its lending and financing businesses by issuing $100 million of capital to global funds raised and managed by a firm led by Pandit.

“I continue to believe in the long-term growth prospects of India. I have known Nimesh and JM Financial for over two decades and believe that, given the opportunity, JM Financial can provide the banking and financial services that the country needs," said Pandit in the statement.

JM Financial and Pandit will also jointly form a distressed asset fund with an initial target capitalization of $100 million.

Vikram Hosangady, head of private equity at audit and consulting firm KPMG India, said India is not insulated from distress situations and investors would try to cater to that need. “Today, India offers several opportunities in the distress market, specially in the infrastructure sector. Hence it’s only sensible to have an investment vehicle for this and such an asset class will be highly valued," he said.

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