TMB strives for growth despite troubles

There seems to be no end in sight for the boardroom battles of the Tuticorin-based Tamilnad Mercantile Bank (TMB). The 93-year-old bank founded by a group of Nadar families to foster development of the community is in fresh trouble with the Enforcement Directorate issuing a show-cause notice last week to the bank for violating foreign exchange rules in the transfer of TMB shares in 2007.

The shares were sold by businessman C Sivasankaran to a clutch of foreign investors led by Rajat Gupta, Ravi Trehan and Cuna Group Mauritius, among others. This led to a few non-Nadars being included on the board of the bank for the first time in its history, even though the Nadars still hold a controlling stake.

The foreign investors, who shelled out nearly four times more than the original buyers, have infused around Rs 150 crore in the bank, and their investment is believed to have grown three fold. However, according to the Enforcement Directorate, the shares of the bank were transferred without the permission of the Reserve Bank of India and, therefore, violated the Foreign Exchange Management Act (Fema), 1999. With similar transfers in December 2011 and June 2012, overall, the Fema violations are estimated to be around Rs 608 crore. The bank refused to comment on the issue.

The bank's problems started in 1994 when a factional feud within the Nadars led to two shareholder groups selling their 25 per cent stake to the Ruias of Essar. Subsequently, the Ruias raised their stake to 67 per cent with an eye on management control. However, in view of RBI's objection to an industrial group holding a stake in a community-led bank, the Ruias decided to rethink their plan. As the Nadars didn't have the money for the buyback, businessman C Sivasankaran stepped in on behalf of the community and bought Essar's stake for Rs 65 crore. His plan was to sell the shares back to the Nadars for Rs 155 crore. For nearly 10 years, the Nadars struggled to pay him off and in 2007, Sivasankaran sold the share to a clutch of FIIs, sparking a string of protests and legal battles at the bank.

For investors, TMB is one of the most sought-after banks for its steady profitable streak since inception. Despite a string of problems, including RBI restrictions on opening branches in metros and Tier I cities because of its ongoing ownership battles, the bank's profit has shot up from Rs 6,984 in 1921 to Rs 301 crore in 2013-14. Its reserve base and earnings per share remain among the highest in the country. TMB declared a dividend of 1,000 per cent for 2005-06 and 2006-7, and of 5,000 per cent in 2007-08. The dividends, however, have not been paid yet because of a case pending at the Madras High Court on the constitution of the bank's board.

Analysts say the reason for TMB's success, which has a paid-up capital of Rs 26 lakh and net worth of Rs 1800-1900 crore, has been its focus on non-corporate banking, which has helped it keep its non-performing assets in check. A former managing director and CEO of the bank says TMB has a banking system that runs on "autopilot". "The well placed systems, including the way the loans are disbursed, ensures that the bank's operations are not affected by its ownership."

TKR Thamilarasu, a former director and a member of one of the founder families, says the strong emotional connect that the Nadar community still has with the bank is another factor in its success. He says about 80 per cent of the bank's 3,500 employees are from the community. TMB has been behind the success of many entrepreneurs in the region. The seed money for many companies, including the Rs 2,500-crore Hatsun Agro, which owns Arun ice cream brand, and the Idhayam Group of companies, which makes branded sesame oil, was provided by TMB.

Still, the future is not without any bumps. The bank's profit dropped 31 per cent in 2013-14. "The bank would have become one of the top most in the country if there were no legal issues facing it," says Thamilarasu.

One of the directors, who did not want to be named, says the ownership issue has slowed the bank's expansion plans, which is reflected in its growth. TMB has been unable to list itself at the stock exchange because of the legal issues facing it. Senior officials are also worried about the lack of succession planning, especially at the top level.

As TMB gets mired in fresh trouble, bank officials say they will focus on smaller cities beyond the metros where income levels and prosperity have been on the rise to get the first-mover advantage. They are also hoping for a speedy end to the ongoing legal issues for the bank to be able to file for a public issue. A senior official says TMB will initiate the process as soon as its court cases are resolved.

"It is not for money that we will go to the market, its more to meet RBI's compliance and to expand the board," says a senior executive.