The Outsider

With its briny sea breeze and a history of pearl-diving, the port town of Tuticorin near the southern tip of India hardly looks like a corporate battlefield.
Yet, over the last decade-and-a-half, takeover titans have been raiding the town, attempting to grab its crown jewel: Tamilnad Mercantile Bank (TMB). At the core of the strife is that unique Indian institution called caste.

With 60 percent of its business and 90 percent of its work force coming from one community, called the Nadars, TMB is a ferociously protected institution; caste members think no one else has the right to own it. Two corporate invaders have already beaten a retreat. So, in May 2007, when outsider Ramesh Vaikuntanathan Vangal, 56, and a few other investors, bought a stake in it, they knew they were walking into a minefield.

Vangal, who had won his first struggle against protectionism two decades ago when he brought Pepsi into India, knows a thing or two about marrying global capital with domestic business ethos. He isn’t likely to suffer culture shock either; he owns homes in three countries and has a Polish wife.
Nevertheless, in the last two years, this MBA grad from London Business School has struggled to convince the Tamil-speaking, dhoti-clad clansmen who zealously guard TMB to let his nominees into the board. He has not been able to dispel the Nadar fear that the 25 percent stake he and his associates own is a bid to take over the community bank and strip it of its ability to serve their caste.

Image: Gireesh G V for Forbes India

COUNT ME IN: Vangal says parts of his roots are in the Nadar Land of Tamil Nadu. Will this connection win the community over?

“I see the TMB delays as being connected to local issues and not any opposition to foreign investment,” says Vangal. The founder of Katra group paid four times the price that Nadars paid for the shares. He is still waiting for an end to the dispute, in which every single member of the caste seems to have something to say.

In TMB’s Tuticorin headquarters sits an equally worried-looking man. Managing Director Nagamal Reddy wants to take a slew of decisions to respond to economic challenges and nudge the business forward. TMB needs to open new branches, finalise a national expansion strategy, quickly hire at least 600 people, issue bonus shares to capitalise its huge reserves, and draw up plans for an initial public offering. He can’t do any of this, because he doesn’t have a board to take these plans to. Well, two nominees of Reserve Bank of  India keep him company, but a full-fledged board that has the power to take these decisions has not been allowed to take charge.

At stake is not only TMB’s ownership but the larger question about community banks in India. These banks, which combine traditional forms of relationship-based financing with modern banking, came as a boon to communities discriminated against by untouchability. That was a long time ago; today, community-based banking is becoming impractical. With access to capital and their customer base both limited to niche groups, many have been devoured by larger banks. Some have got nationalised, others sidelined; a few, like TMB, have pressed on, but have found their communities unable to feed their hunger for resources and professional management.

“Finance is a business of size,” says banker K. C. Chakrabarty, now deputy governor of the RBI. “So long as the community is ready to support TMB, there is no problem. But you can’t run an institution on that premise,” he says. If niche markets like the Nadars go away, “small banks have no future.”
Within the community, TMB is a family affair, and opening it up to outside ownership is betrayal. The Nadars today face a dilemma: Should they free the bank from the shackles of caste and risk losing its social commitment? Or firewall it from outsiders and endanger its  very survival?

Burden of History
The strife at this small community bank reverberates along Chennai’s Ranganathan Street, easily Tamil Nadu’s premier High Street. Dotted with shops selling everything from white goods to clothes to toys, it is so busy that vehicles are banned from its length.

If one lumbers through the human maze, it is easy to notice that most shops are run by white-dhoti-clad men with a distinctive twang in their accents. These are the Nadars, a trader community that keep accounts the traditional way. Business worth crores of rupees is done with little or no documentation; their words are their bond. And they bank with TMB.

Sivasamy (name changed) was one such loyal customer. The capital for his small store hawking wheat, jaggery and pulses came from the bank. More than a decade ago, when outsiders had acquired a majority stake in the bank and the Nadars rallied to recover it from them, he even bought two shares in the bank as his contribution. Today, though, he is a bitter man, disenchanted with an institution so heavily influenced by caste leaders who don’t own even a single share. He no longer banks with TMB.
Started by a few wealthy Nadars in 1921, TMB elevated a community once identified with toddy-tapping to a merchant class. When a young Nadar man was set up in business, TMB brought in the capital. If he wanted a job instead, it gave him one. So, the Nadars resolved to never let their patron be owned by an outsider. In time, it rose to be one of the best-run banks in the country.
But, as frequently happens, the closed approach brought its own problems. Fraternal fights over boardroom control exposed the bank to invasion by outsiders.

Vangal and his associates (including Ravi Trehan and former global managing director of McKinsey, Rajat Gupta) are actually the third set to buy into the bank in 15 years.

The first battle for TMB was fought with the Essar group. Two shareholder groups at TMB, unable to wrest control from a third group, were preparing to sell their 25 percent stake. All hell broke loose when it emerged that the Ruias had pocketed that shareholding, and bought more shares from others, quietly amassing 67 percent stake. Shashi Ruia was clearly eyeing management control.

The Nadars erupted in protest; a barrage of petitions to RBI followed. The central bank stepped in and rejected the deal, ruling that an industrial group can’t be allowed to run a bank. Shashi Ruia agreed to sell back the Essar stake, but at a price he named. The fractured Nadar community was unable to scrape together the cash.

Chinnakannan Sivasankaran, an enigmatic gentleman with the uncanny knack for buying businesses at low prices and selling them at huge profits, bought the Essar stake for Rs. 65 crore. He immediately started negotiations with the Nadars to sell it back to them, but for Rs. 155 crore. For the next 10 years, the Nadars struggled to pay him off but garnered only half the money needed. Sivasankaran sold back half the stake and waited for the rest. By 2007, the time was ripe for a new batch of outside investors to take their chances.

White Knights
Over the years, the movement to retrieve TMB from the feared outsiders had thrown up its own Nadar leaders. In the vanguard, though not always shoulder-to-shoulder, were two brothers: Sivanthi Adityan, who runs the largest selling newspaper in Tamil Nadu, Daily Thanthi, and his older brother Ramachandra Adityan, who runs a less spectacularly successful newspaper business.
Sivanthi Adityan’s initial efforts fizzled out, Ramachandra Adityan continued to  champion the cause for more than a decade. His detractors saw his dedication as cover for his desire to build a business empire to rival his younger brother’s; whatever his motives, Ramachandra Adityan’s next move started the third war for TMB.

The elder brother struck a deal with Vangal and his consortium. They were meant to be white knights holding their stake on behalf of the community. The 8.6 percent holding still with Sivasankaran, was transferred to the custody of Ramachandra Adityan, to be sold to community members. This looked like a resolution.

“TMB represents an opportunity to invest behind the Nadars, a respected, successful Tamil local community. With scale and professionalism, TMB can become a major banking platform, an HDFC of the South,” says Vangal.

There were protests against Vangal, but that was almost taken for granted. Nobody was prepared for what followed.

Reversal of Roles
In a bizarre turn of events, all the parties to the dispute changed their stands.  Vangal fell out with Ramachandra Adityan, who promptly reverted to his anti-outsider position; neutral members of the caste say that each felt that the other would take control of the bank and stall his agenda. An assortment of Nadars,  including the Sivanthi Adityan group and some large shareholders who had spoken against Vangal, began supporting him. They figured they could increase their strength.
“It has turned to family war,” said a lawyer representing Ramachandra Adityan.
Things came to a boil in July last year, when TMB held successive annual general meetings after missing them for three years due to the wrangling. The pro-outsider group walked away with eight seats on the 13-seat board. RBI nominees apart, there were two seats left. The group of new investors would have easily won the two seats, but the outgoing board members, all anti-outsiders, blocked the formation of the new board with resolutions over voting rights of the new investors and a volley of court cases. This is the tangle that continues till date. The AGM for 2007-08 has not been held and the next one will miss its deadline too.

“I am supposed to be attending board meetings,” says T. Rajakumar, a new director, “but in the last many months, I am only making trips to court.”

The Nadars must find a resolution. Time is not on their side: the economic slowdown will put the bank’s performance under pressure. In time, it will be sidelined by nimbler, more robust competitors.

Unshackling TMB
Which way should the Nadars take TMB? Let us consider Path A. This is the opening up option. Traditionally, Nadar merchants have been TMB’s main customers.
“We have to take a call on that. We can’t forever be bankers only for traders and merchants,” says MD Nagamal Reddy. The bank can also look outside for capital and talent. The benefits are obvious.
The bank will have access to a much larger pool of investors and can thus fund its growth into new business areas. And it can attract the best professionals. Its success so far has come from doing business with known faces in its own backyard. “To grow, it will have to look beyond the four walls,” says Vangal.

Some in the community think so too. “I think it is okay for others to pick up stake in the bank,” says S.R. Arvind Kumar, a new Nadar director who is waiting to take charge. “But the majority ownership should be within the community. The bank cannot depend on just one community, but let this go on for 10 to 15 years.”

Some welcome a bigger say for shareholders. “So far, the board had only people who did not have a real stake in the bank,” says S. Ashok, the first community member to sell stake to an outsider, through his 1994 deal with Essar.
The key challenge of choosing to open up is protecting the community focus of the bank. Outsiders may not relate to the idea of serving one caste and may bring business school top graders to implement a Wall Street model. TMB could collapse under the impact. The Nadar roots are its social capital. It can’t afford to lose that.

Path B is the fire-wall option. While this will keep the bank within the inner circle, the risks are many. Not all Nadars bank only with TMB. As their businesses grow, their banking needs cross boundaries. They need a wider array of services. If TMB isn’t able to meet those needs, it will  lose them.
The new directors say they will vote for a bonus share issue once they take charge. That will spread out the reserves, Rs. 858 crore, over a bigger share capital than the current Rs. 28 lakh.
The bank has also been planning an initial public offering. That would help reveal the real price of the share that Shashi Ruia bought first at Rs. 3,000 each and for which Vangal and friends had to pay Rs. 24,182. But it is a decision only a full board can take. “There is no question of even talking about IPO in the present situation,” says Reddy.

Vangal has promised not to interfere with the operations. In fact, he says he will boost the Nadar focus. “One of our key tasks would be to look for a higher share of business from the community members and ultimately, from others.”

Call of the Clan
Community banks in India have been in a state of flux in recent years, having to choose between growth capital and social capital.

Catholic Syrian Bank has been serving the eponymous Christian denomination for decades. The Archdiocese of Thrissur still has significant influence over the bank. An attempt to merge it with Federal Bank has sparked off a controversy.

City Union Bank was started by Brahmins in Kumbakonam. The community still holds a big stake, but the bank has opened up, recently welcoming Larsen & Toubro as a shareholder.

Development Credit Bank was started as a cooperative bank to cater to Bohra Muslims. It became a commercial bank in 1995. The Aga Khan Foundation continues to be the single largest shareholder. The management is professional.

Bank of Madura was started by a Chettiyar, and remained closely associated with that community.  It got merged into ICICI Bank after community members sold their stake.
Vysya Bank (Vysyas) and Dhanalakshmi Bank (Brahmins) are other examples of community banks that went mainstream.

Indian Bank, Indian Overseas Bank and Syndicate Bank were community banks that became secular with nationalisation.

Changing facades of Tamilnad Mercantile Bank over the years

1994 - Essar picks up 67% stake; Nadars protest
Capital: Rs. 28 lakh
Reserves: Rs. 38.7 crore
Business: Rs. 1,221 crore
EPS: Rs. 364.2
Share price: Rs. 3,000

1996 - Nadars unable to buy back shares; Essars sell them to C. Sivasankaran
Capital: Rs. 28 lakh
Reserves: Rs. 79.2 crore
Business: Rs. 1,813 crore
EPS: Rs. 845.5
Share price: Rs. 3,500

1998 - Sivasankaran agrees to sell back 51% to the Nadars, the balance to FIs for Rs. 155 crore
Capital: Rs. 28 lakh
Reserves: Rs.186 crore
Business: Rs. 3,027 crore
EPS: Rs. 1,232
Share price: Rs. 7,580

2003 - C. Sivasankaran
transfers 33.74% to the Nadars and transfers
the rest to custodians
Capital: Rs. 28 lakh
Reserves: Rs. 397 crore
Business: Rs. 6,045crore
EPS: Rs. 2,242
Share price: Rs. 8,440

2007 - Vangal and seven other investors buy a 25% stake
Capital: Rs. 28 lakh
Reserves: Rs. 759 crore
Business: Rs.10,067 crore
EPS: Rs. 3,718.70
Share price: Rs. 24,180


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