A Bank for the Buck20 min read . Updated: 19 Nov 2012, 10:41 AM IST
A chapter from Tamal Bandyopadhyay’s book on the untold story of HDFC Bank
A chapter from Tamal Bandyopadhyay’s book on the untold story of HDFC Bank
Merger, merger on the wall
Akira Kurosawa’s 1950 crime drama film Rashomon opens on a woodcutter and a priest sitting beneath the Rashomon gate at the southern end of Suzaku Avenue between the ancient Japanese cities of Heijo-kyo (Nara) and Heian-kyo (Kyoto) to stay dry in a downpour. When a commoner joins them, they begin recounting to him a disturbing story that they had witnessed.
The woodcutter claims to have found the body of a murdered samurai three days ago while looking for wood in the forest. The priest says he saw the samurai and a woman travelling the same day the murder happened. Both men are then summoned to testify in court, where they meet a captured bandit, who claims responsibility for the rape and murder.
The film narrates the bandit’s story, the wife’s story and the samurai’s story—told through a medium. Every story lends a fresh perspective to what had happened, adding new layers of truth and dimensions to complete the picture.
The dramatis personae involved in Times Bank’s merger with HDFC Bank in 2000 also tell us different stories. Or different pieces of the same story. They are no less dramatic than Kurosawa’s Rashomon. Collectively, they present the big picture of the most fascinating merger in Indian banking history, complete with the minutest details.
Let’s hear their stories.
Deepak Parekh’s story
‘Ashok Jain (then chairman of Bennett, Coleman and Co. Ltd, the promoter of Times Bank) was known to me. We used to play bridge regularly at [former petroleum minister] Murli Deora’s house on Breach Candy and later Peddar Road. Jain would come every Saturday and Sunday, if he was in Bombay. He always felt that his group didn’t know how to run financial companies and told me to take his bank.
‘I was ready to pay cash and take it but he would never sell it for cash. He wanted shares. We kept talking about this occasionally on the bridge table. When he fell ill and was admitted at AIIMS (All India Institute of Medical Sciences) in Delhi, I got a message that he wanted to see me. I took a flight and went there. Samir (Jain), Vineet (Jain) and Amit (Judge) were standing beside his bed. (Samir and Vineet are Jain’s sons and Amit is his son-in-law.)
‘He said that he had told all three to get out of the bank and sell it to me, but only for shares. I heard him; subsequently, I spoke to Aditya (Puri) about it. Both of us felt the time was right for such a deal...’
‘Chase Capital, headed by my friend Anil Ahuja, owned about 15% of HDFC Bank at that time. Anil called me one day and said he wanted to discuss something. He was on the HDFC Bank board. I didn’t know Aditya at all but knew his wife Smiley through Satsang. (Satsang is a philanthropic organization founded by Shree Shree Thakur Anukulchandra. It has hundreds of centres in the form of mandirs and viharas spread all over India and Bangladesh.)
‘Anil suggested a merger. He did not actually use the word merger but said something on those lines. The next day, I hosted a lunch at my house on Malabar Hill (in Mumbai). By that time, Nimesh Kampani had done all the numbers because we were sort of getting into an equity agreement with the Old Mutual Group of South Africa and Nimesh was our investment banker. I had with me all the numbers.
‘We discussed the merger over lunch. Aditya knew his numbers and proposed a ratio. I calculated my own ratio. There was a small difference. I remember after we finished lunch and were washing our fingers, Aditya said, “Look, what should we do?" I said, “Let’s go half–half." He said, “Fine." I told him it would be difficult to do a formal due diligence because everybody would come to know. Aditya said, “I trust you."
‘On a Sunday, we drew up the agreement, just a two-pager. The next week we merged.’
‘One day Amit and I were playing golf at the US Club in Colaba, just the two of us. While playing, we did discuss the bank and the opportunity for Times Bank to merge with HDFC Bank. One person who figured out something was happening while two of us were playing was Rana Kapoor (of Yes Bank Ltd). He, in fact, actually commented: “You guys are cooking something."
‘It was a complicated process. I remember having meetings with Nani Javeri, the CEO of Times Bank, and there was a lot of discussion on how the board would react to such a merger. Obviously, the key issue was valuation.
‘The defining meeting was held at Amit’s house on Malabar Hill. We went to wash our fingers after our meal and that’s when Amit and Aditya said this was something that they should definitely try and do.
‘I still remember there was a final phone call that I made—I was speaking to Deepak Parekh on one side and Amit Judge on the other, and trying to get them to agree to the merger ratio because there was a range of valuations that were floating around. No merchant banker was involved in the deal.’
RBI deputy governor S.P. Talwar’s story
‘After Times Bank was set up, the RBI observed that there were certain regulatory issues pertaining to its promoters. We were not very comfortable with them. It was informally discussed with the chairman of the bank who volunteered to step down from the board of directors. In course of time, the bank was persuaded to voluntarily merge with some other bank.’
—These are different parts of the same story. Let’s see how the merger actually happened. But before that, a word about Times Bank. Bennett, Coleman and Co. Ltd, which runs India’s largest media house, was the promoter of the bank. The RBI approved the bank, in principle, in December 1993; the company was incorporated in July 1994; it got a banking licence in April 1995, and opened its first branch on D. N. Road, Mumbai, on 8 June 1995. For the fiscal year that ended March 1999, it had a deposit base of ₹ 3,012 crore, advances of ₹ 1,312 crore and investments of ₹ 1,043 crore. Its net profit for the year was ₹ 27.06 crore. For the same year, HDFC Bank had deposits of ₹ 2,915 crore, advances of ₹ 1,401 crore and investments of ₹ 1,904 crore. Its net profit for the year was ₹ 82.40 crore. Times Bank’s net NPA, a key ratio to gauge a bank’s health, added up to 3.01% of advances. For HDFC Bank, it was 1.25%. Times Bank had 541 employees in March 1999, 35 branches and 34 ATMs, whereas HDFC Bank had 827 employees, 57 branches and 77 ATMs.
HDFC Bank had its IPO in March 1995, within two months of opening shop. Times Bank made the public offering on 30 June 1999—four years after it opened the first branch. Its ₹ 35-crore IPO, at par, was subscribed six times. It was listed on 20 September 1999 at a hefty premium of ₹ 14.70.
It seems that Times Bank did sound out HDFC Bank and there were preliminary discussions ahead of its IPO but they did not lead anywhere. HDFC Bank had, in fact, done due diligence when Old Mutual was talking to Times Bank for a possible equity stake.
When the issue resurfaced again, HDFC Bank’s chief risk manager Paresh Sukthankar led a small team for another round of due diligence, quietly and informally. Usually, deals are done with an understanding that they will be subject to due diligence. But, in this case, due diligence—however informal—was done before the deal was closed.
So far, the RBI had brokered all bank mergers in India, mainly to protect the interests of depositors. In the case of HDFC Bank and Times Bank, the RBI did not play the matchmaker. So nobody knew how the RBI would react to such a friendly merger.
Paresh’s team had Kaizad Barucha, G. Subramanian, Samir Bhatia and Luis Miranda.
Five of them would travel together in a car and get off somewhere near the Bombay Municipal Corporation (now known as the Brihanmumbai Municipal Corporation or the Municipal Corporation of Greater Mumbai) headquarters, and then walk down to the Times Bank office at the Times of India building, opposite Victoria Terminus on D. N. Road. After getting off the car, they would walk down separately, pretending not to know each other. Anyway, it was hardly a couple of minutes’ walk and no one would be dressed like a banker, in striped shirts and grey suits. Even the driver didn’t know where they were heading.
They were coordinating with Arun Arora, then CEO of Times Music and The Economic Times, and president and executive director of India’s largest media conglomerate with interests in newspapers, magazines, radio, television, Internet, music, multimedia and home entertainment.
Sitting in a conference room close to Arun’s cabin, they would ask for all sorts of details, and Times Bank’s executive director Pradip Pain would bring the documents in sealed envelopes. There were apprehensions about the quality of assets as Times Bank had a slightly different business model, heavy on retail and SMEs.
‘What are you doing here?’
Paresh once ran into a lady who had till recently been working with HDFC Bank before shifting to Times Bank. ‘Oh! Hello! What are you doing here?’ she asked when Paresh was about to enter the building. He mumbled something and almost ran to come back after half an hour. Nobody got a whiff of the merger till the day both the banks gave notices to the exchanges saying they were meeting to consider a potential merger—26 November 1999.
The positive factor was Times Bank’s insistence on a share swap deal. ‘We were very clear that if there were things we didn’t know that the seller didn’t want us to know, he wouldn’t have asked for a share swap. He would have gone for cash. They were interested in continuing to be part of the bank, but didn’t want to manage the bank as owners,’ Paresh told me.
On 25 November, a day before both the banks gave notices to the exchanges for the board meeting on the proposed merger, Times Bank’s share price closed at ₹ 18.30 apiece and that of HDFC Bank at ₹ 90 apiece. Both banks’ shares had a face value of ₹ 10 each. Since there was a price discovery in the market, both banks felt it should be fair to go by that. That’s how the swap ratio was worked out—twenty-three shares of Times Bank for five shares of HDFC Bank—with a very small control premium.
‘Is Paresh okay?’
Those seven days when they were checking the books, tension and stress were palpable on Paresh’s face. He was not eating or talking to anybody. His wife, Sangeeta, felt something was terribly wrong with Paresh. She called up Aditya and asked, ‘Is there something troubling Paresh at work?’ Aditya, in his usual way, told her to relax.
The books were checked at three places—the Times of India building, a lawyer’s office and an empty HDFC Bank flat on Napean Sea Road. ‘We spent almost two weeks in the small flat, calling for all relevant files from the bank. Had we have sat in their office for long, people would have figured out,’ Samir told me.
Relatively new in the organization, Sashi Jagdishan found the secrecy of it all quite amazing. On a Sunday, at a colleague’s wedding, he got a call from his boss Vinod Yennemadi asking him to rush to a lawyer’s place. For the next three days, no one in the bank knew where he was.
Sashi, Vinod and company secretary and head of legal affairs Sanjay Dongre, along with Paresh and Samir, did the desktop due diligence at the office of Wadia Ghandy and Co., at Fort, opposite the University of Mumbai. They were trying to figure out how the balance sheet would look after the merger.
There weren’t any nasty surprises. And, on day one, this was an accretive merger for the bank. In other words, there was no dilution in return on equity and earnings per share for HDFC Bank after it offered a stake to the Times Bank promoters. It was beneficial for the shareholders. The Jains got a stake of around 7.7% in HDFC Bank, which they sold in stages, making pots of money.
‘Even after knocking off whatever extra provisions we made on some of the loans that we felt may not be good, we came out well. It was day-zero accretive for the merged entity,’ Sashi says. The combined entity had higher earnings per share—something rare in the history of mergers and acquisitions in India.
No wonder then that the markets gave a thumbs up to the merger. The HDFC Bank stock started hitting the circuit breaker almost every day after the announcement. Between 26 November 1999 and 26 February 2000, when the merger took effect, the stock rose, from ₹ 98.90 to ₹ 227.50.
‘We weren’t as bad as projected’
Deepak Maheshwari, who was vice-president in charge of credit and risk management at Times Bank in 1999, and went on to head corporate credit risk management at HDFC Bank, said the popular perception that Times Bank’s loan portfolio was not as good as that of HDFC Bank was true only to some extent. The NPA ratio of HDFC Bank was better simply because it used to set aside money to provide for 80–90% of bad assets, something that Times Bank did not do. But gross NPAs of both the banks were in the same range.
He also pointed out that Times Bank had long-dated government bonds in its investment portfolio, bought when interest rates peaked. By the time the merger was happening, interest rates started coming down and the bond value started appreciating. That was a huge plus for HDFC Bank.
The biggest gain was Times Bank’s thirty-nine branches, about two-thirds of HDFC Bank’s own branch network then. It was adding about twenty branches a year at that time. At one stroke, the merger took the bank forward by two years.
H. N. Sinor, then managing director of rival ICICI Bank (it was still a subsidiary of the project finance institution, ICICI), had told me when I reported the merger that they also looked at Times Bank and did not find it attractive, but they missed its branch network. This is very critical when the regulator is not liberal in giving branch licences.
Maheshwari was reporting directly to Nani, managing director of Times Bank. He recalls being summoned by Nani one day and being told that the promoters were trying to sell some of their stakes in the bank and HDFC was buying a 20% stake. ‘I knew that the 20% figure was not correct. If they were to buy the bank, they would buy entirely. The MD asked me why I was looking so nervous. In my heart, I knew that the bank was being sold,’ Maheshwari said.
Maheshwari was not the only person at Times Bank who did not know what was happening. Sudhir Joshi, head of treasury, couldn’t in his wildest dream think this could happen. Just a month ago he had accompanied Nani Javeri on a three-week road show overseas. They were looking for ways to increase lines of credit from foreign banks.
After listing, Times Bank also took up a fancy office at Kamala Mills.
‘There had been talks, but my sense was that had fizzled out. The African group also came to buy a stake but it didn’t work out,’ Sudhir told me. After (Ashok) Jain passed away, Nani officially told some of his senior colleagues that Jain’s younger son was being groomed to eventually take interest in the bank.
An SBI den
Times Bank was a den of bankers poached from SBI.
N. G. Pillai, its first managing director, came from SBI. So did Pradip and Sudhir and quite a few other senior executives. Nani, though, was a former Grindlays hand.
There were people from other banks as well, but the culture was predominantly that of SBI. Suranjan Ghosh and Ujwal Thakar came from Standard Chartered. Suranjan was to head corporate banking but later was shifted to administration, whereas Ujwal was heading the retail business. Ujwal left before the merger to join BNP Paribas N. V. and Suranjan within three months of the merger. Pradip took six months to resign.
Nani was the first to leave, as one bank cannot have two heads. He was followed by Rama Sridhar, the head of direct banking.
But not all senior employees left the bank. Quite a few stayed back with larger responsibilities. Uma Krishnan was one of them. Relatively new at Times Bank—she had come from Standard Chartered as a replacement for Ujwal—Uma was made the head of retail branch banking at HDFC Bank till she decided to move to Chennai. As head of credit cards, she launched the credit card business at HDFC Bank. Mandeep Maitra, head of human resources at Times Bank, was another senior executive. Maheshwari came on board to head corporate credit. Sudhir was initially made the head of financial institutions and government groups but a few months later when Luis moved on, Sudhir got into his shoes. Anil Nath, regional head of corporate banking at Times Bank, went on to head business banking at HDFC Bank. Suresh Prabhu, head of money markets at Times Bank, continued in the same role at HDFC Bank.
This is what Luis told me: ‘When the merger was announced, I went straight to the dealing room of Times Bank and I told the guys—I knew the treasurer Sudhir Joshi, and had worked with him in an RBI committee—I didn’t want any of them to leave. I required people. They didn’t believe me.
‘I told them, “Just because HDFC Bank is taking over your bank it doesn’t mean that you guys will have to report to the HDFC Bank people. I’m going to be very clear that whoever is best suited for that job will be running it." But a lot of Times Bank people didn’t believe me. There were quite a few whom I wanted to retain but they left. Almost as a tribute, when I left, Sudhir took over from me. That’s reflective of the fact that we wanted to build a culture of meritocracy—just because someone came from the conqueror’s side doesn’t mean that he will always remain on top.’
Maheshwari said that the HDFC Bank employees were equally apprehensive: ‘An army of people from another bank— and many of who were better paid and more qualified—were entering their bank. This would hurt their prospects too. The feeling was mutual on both sides; even HDFC Bank’s staffers were under some stress.’
It took a few years for normalcy to return. But Aditya was on the job from day one. The first meeting on integration took place at the Times Bank boardroom at Kamala Mills. The boardroom was very impressive, equipped with the latest gadgets. The HDFC Bank boardroom wouldn’t have accommodated so many people. It’s another story that the bank quickly got rid of this office as it was too expensive. HDFC Bank had its office in the same compound at half the rental.
Sudhir attended the meeting, and recounts, ‘Aditya gave a very positive spin to the whole thing. Till the merger, HDFC Bank was primarily a corporate bank and Times Bank was evolving more as a retail bank. He explained the synergies and the first people he took on board were from the retail segment. He told us how HDFC Bank looked at business and its strategy. I do remember telling him that we also have a lot to contribute and not all our strategies are wrong.’ At the meeting, Aditya unveiled the business strategy for the combined bank.
William M. Mercer Ltd (now Mercer LLC), a human resource and related financial services consulting company, oversaw the human resource aspects of the integration process. It was done systematically, branch by branch, employee by employee, amid redeployment, relocation of branches and large-scale resignations. The smartest move was making Mandeep the chief of human resources in the merged entity.
Typically, in any merger, integration of people is as important as integration of business, if not more. By making Mandeep the head of human resources, HDFC Bank sent a strong signal that it believed in a fair process of evaluating people.
‘Marriage of your vision and my provision’
When they were discussing the merger, Amit told Aditya, ‘You are a bank with a vision and I am a bank with a provision. My provision with your vision will get on well.’ He used to look after the non-banking finance company of the group, Times Guaranty Financials Ltd, before coming on the board of the bank. A commerce graduate from St Xavier’s College in Kolkata, Amit, a serial entrepreneur, is in the business of buying and selling companies.
There were professional managers for Times Guaranty but Amit was looking after it on behalf of the shareholders. He himself did not believe in the non-banking finance company model though—‘an unnecessary appendage into the financial system, something that should have never even existed’, says Amit.
He also found banking very boring. Times Bank was not going anywhere because there wasn’t enough capital and competent employees. Amit, who many believed came to the board with a mandate to sell the bank, scrapped the plan to sell a 20% stake in the bank to the South African group when they came very close to signing the deal. ‘Mere equity partnerships were not the answer...Mr (Ashok) Jain had enough money to put in. That wasn’t the issue. It was to get intellectual bandwidth as well as commercial capital and relationships. I put my foot down,’ he told me.
Incidentally, Times Bank was not Bennett, Coleman and Co. Ltd’s first foray into banking. The company’s first Indian owner, Ramakrishna Dalmia, had a controlling stake in PNB. He sold the publishing house to his son-in-law—and business partner—Sahu Shanti Prasad Jain in 1948. Until 1969, when fourteen major Indian private banks with a deposit base of at least ₹ 50 crore were nationalized, Shanti Prasad and his nephew, Sahu Shital Prasad Jain, had a controlling interest in PNB. Shanti Prasad served as PNB’s chairman and managing director between 1954 and 1959, and his nephew was a director on the PNB board. The Jains exited the business in 1969.
Amit joined the board of the merged entity but quit after a year as he found the board meetings ‘absolutely boring’. Before every board meeting, a courier would come with so many papers and he didn’t even read them. Ashok Jain’s son Vineet joined the board in his place. ‘Vineet never interfered,’ Deepak said.
The merger of Times Bank with HDFC Bank was a landmark deal in the Indian banking industry in many ways. It was the first friendly merger in the banking space and the first done through the share swap route. It catapulted HDFC Bank into the big league in terms of business as well as market valuation.
That’s one way of looking at it. The merger also tells us that the banking regulator often did not pick the right candidates for banking licences.
The RBI withdrew the in-principle nod it had given to CRB Capital Markets Ltd for the eleventh new bank when it came to light that its promoter, Chain Roop Bansali, had defrauded at least 200,000 investors and the SBI of ₹ 1,200 crore. But this alertness was missing when it picked up the first ten candidates to issue the licences.
In fact, the Parliamentary Standing Committee on Finance, headed by former Odisha chief minister Biju Patnaik, was not happy with the RBI policy of giving licences to some banks. The committee wanted to know why the RBI had given a licence to Times Bank. Apparently, the promoter of the bank had a sick company, Rohtas Industries Ltd, in the group. (The report of the committee is not in public domain, but an RBI official told me this.)
In retrospect, three banks floated by financial institutions— HDFC Bank, ICICI Bank and Axis Bank (UTI Bank renamed)—have done well. The fourth one, IDBI Bank, with which its promoter project finance company IDBI merged, hasn’t done too badly either. IndusInd Bank was a laggard till a new management put it on a growth path. Among the rest, Ramesh Gelli’s Global Trust Bank crumbled under bad assets after getting too bold in stock-market play and was forced to merge with public sector Oriental Bank of Commerce. Bank of Punjab couldn’t get its act together and offered to merge with Centurion Bank. And Centurion Bank, renamed Centurion Bank of Punjab after that deal, merged with HDFC Bank. That story is no less dramatic than the Times Bank merger story.
A Bank for the Buck, published by Jaico, will be released in Mumbai on 24 November by finance minister P. Chidambaram.
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