TMB banks on public float for growth

Tuticorin, one of the driest parts of the country, 540 km south-west of Chennai, has been in the eye of a storm for over 15 years as various interest groups, including some big corporate houses, fight to take control of the 92-year-old Tamilnad Mercantile Bank (TMB).

Among those who have shown interest in acquiring the bank, set up by the Nadars to serve their community, include the Ruias-the promoters of the Essar group- maverick businessmen C Sivasankaran and Ramesh Vangal, former Mckinsey chief Rajat Gupta and some people from the Nadar community itself.

These suitors, drawn by the bank's robust performance, have also caused legal cases to pile up. TMB's shareholding pattern is under dispute with several cases being fought by the bank in courts across the country. But despite the legal hassles which have hobbled its growth plans, the bank is now looking to the future. The privately-held bank is readying for an initial public-offering (IPO) that should enable it to expand beyond Tamil Nadu.

The bank's conservative holding, while ensuring that its financials remained robust, has come in the way of its expansion plans. It was denied permission by the Reserve Bank of India to open branches in the metro cities because of its legal trouble and lack of public equity. As a result, TMB has in recent years lost out to competition. For instance, the market for low-cost current account and savings account (CASA) deposits is there only in the metros; so, its cost of funds is higher than other banks. TMB's pay-out ratio, or the earnings paid as dividend to shareholders, at 11 per cent is also below other banks like Karur Vysa Bank, City Union Bank and others (17-25 per cent).

About 10 years back, TMB used to be the benchmark in terms of revenue generated per employee and employee productivity, says one of the board members, but Karur Vysa Bank has overtaken it in the last four to five years. Again, experts say, it is because TMB is going "rather slow on expansion."

At a time when other banks were expanding aggressively, TMB, hemmed in by its own limitations, had to be content with being only a state player. In 2009, TMB had 213 branches and only three new branches were added in the whole of 2010. That too came up in Tier II and III cities that do not require RBI permission.

TMB officials say RBI's reservations have also brought some advantages for the company. The bank has said that going forward, the future would be in Tier II to VI cites as the metros are getting saturated. Also, with income level and prosperity of people in non-metros rising, the bank is set to benefit as it has the first-mover advantage, says K B Nagendra Murthy, managing director and chief executive officer of TMB.

However, the bank will have to contend with another issue before the IPO can be floated: resolve its legal cases which came along as the bank grew in stature. Cobbled together in 1921 by a few influential people from the Nadar community, the bank soon acquired a reputation of being a one-stop shop to meet all the requirements of the Nadars: when a young man from the community wanted to set up a business, TMB gave him the capital; if he wanted to take up a job, the bank turned into his employer. These measures, while ensuring the bank was never short of business, also made it hugely successful. It started reporting profit from the very first year of its operations: Rs 6,984 in 1921, Rs 5.05 lakh in 1971 and Rs 440 crore as of last year.

The bank's performance has been the envy of others. Despite all the shortcomings -lack of a strong board and no capital dilution- the bank has a net worth of Rs 1,800-1,900 crore on a paid-up capital of only Rs 26 lakh. It is also among the few banks with a high reserve base and the only bank in India to consistently declare higher than average revenue.

TMB declared a dividend of 6 per cent in 1921 (first year of operations) and since then rate of dividend has increased manifold. It announced a dividend of 1,000 per cent in 2005-06 and 2006-07. The dividend proposed for 2007-08 was 5,000 per cent and an interim dividend of 9,000 per cent was announced in October 2011. Last year, the bank's dividend payout was 16,000 per cent. A major chunk of the dividends, however, has not been paid because the bank has not been able to hold its AGM for the last four years due to legal hassles. The bank's share price (in the private market) has been quoted at around Rs 63,000, says an analyst.

With such robust performance, TMB has always had a steady stream of suitors and, as an accompaniment, legal troubles. It all started in 1994 when the Essar group quietly bought the stake of some influential Nadar groups in the bank. A legal battle has been going on ever since as the Nadar community is fiercely protective of the bank and does not want outsiders to stake claim to what its considers a community organisation. To buy back the shares, the community floated the Nadar Mahajan Bank Share Investors Forum to pool in money. Some influential businessmen-C Sivasankaran and foreign institutional investors (FIIs)-too pitched in with funds to help the community in return for a place on the board.

Sources in the board say that the FIIs have infused around Rs 150 crore in the bank in order to bail out the Nadars. Today, the investment of these FIIs has grown three times, says the source. The current status of the board is not clear and the legal battles between various stakeholders are still going on in various courts.

A senior official from the bank says that the board expects the court cases would get over in four or five months and the IPO will follow within two months after that. TMB has appointed SBI Caps as the advisor for the IPO. In the meantime, the bank has proposed to go for a bonus issue to bring down its share price since the current price (Rs 63,000 apiece) is too high for investors.

An IPO will definitely help the bank in widening its presence, and as the locals says, "All they need to do now is to end the infighting."