ith 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.
Image: Gireesh G V for Forbes India
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.
“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.
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