| The recent merger of Overseas Sanmar Financial Limited
(OSFL) with Calcutta based Nicco-Uco Alliance Limited has been hailed
all round as a unique and trendsetting event in the history of financial
services in the country, for the tremendous concern for shareholders,
employees, depositors and customers, indeed everyone likely to be
affected by the move, shown by the Sanmar group. P Viswanathan, President,
OSFL spoke to Matrix on the rationale and nitty gritty of the operation
in a freewheeling conversation, excerpts of which we present here. |
| Exit managing the business; don’t exit the
business |
| We had a few objectives in mind before going ahead
with the merger. The first of these was that we should get out of
the management of the financial services business, as it is not our
core business, in line with the recent restructuring of the group.
Getting out of the business was not itself a serious option, as we
had created a brand in OSFL, and a good branch network and we had
good, committed people. |
| Profit and loss have nothing to do with the decision |
| The decision to exit was not made because the business
was not profitable. The financial services business could improve
in the foreseeable future, and we have the wherewithal to manage it,
but we decided at a corporate level to exit non-core businesses. |
| A merger between equals |
| We were looking at a company that would bring a
certain synergy. We felt it must be a merger between equals. Nicco
Uco expressed an interest and we realised that a merger with Nicco
Uco would bring in the requisite synergies in the merged entity. This
was essentially because Nicco Uco had a strong base in the East; it
was not well known in the South, they were strong on corporate leases
and not in truck hire purchase. They had also identified financial
services as their core business. |
| Thus we felt there was no apparent conflict of interest
between the two companies and the merged entity would benefit greatly
as it would have a well-proportioned funds-and non-funds-based business;
a corporate as well as retail business; and a strong Southern and
Eastern spread. |
| Also, they had the money, we provided an excellent
landing facility, they the resources, and access to low cost funds,
we the high profit deployment avenues. They were worried about their
corporate lease exposure to midsize companies, the bane of NBFCs,
we provided them the retail outlet to offset that. Given this complementarity
between the two merging entities, we still had to sit across the table
as equals. To ensure that, we had to do some cleaning up first. |
| Protecting the interests of all concerned |
| We had four constituents in mind—shareholders,
depositors, staff and customers. |
| Shareholders |
| The best way to protect shareholder interests was
to ensure a merger ratio of 1:1. This meant cleaning up the operations
of OSFL before it was sold through aggressive reduction of overheads,
substantial reduction of interest rates, rationalisation of branches
and tackling the non-performing assets or NPA. |
| We went about it systematically. We reduced the
number of people from 183 to 126. Today it’s less than 100,
and we aim to go down to 75. What it has done is to save Rs. 2 crore
on overheads on an annualised basis. |
| We followed up closely with the banks and reduced
interest rates, going through the FCNRB route. I expect the interest
savings to be about Rs. 5 crore. |
| That left the issue of the NPAs to be tackled. We
formed an ARC, an assets reconstruction company, which bought the
NPAs of Rs. 37 crore for Rs. 17 crore. As a result, the merger ratio
of 1:1 became easy. This protected the interests of the shareholders. |
| Employees |
| We insisted and it’s been agreed upon that
all employees will be carried on the rolls of the new entity. Their
service conditions will be protected, continuity of service will be
maintained. |
| Depositors |
| We adopted an aggressive strategy that when we announced
the merger we would present Nicco-Uco as a stable, healthy financial
services company, but if the depositor had any reservations, then
he would be free to withdraw his deposits. We provided the cash flow
muscle to meet this contingency. |
| Actually we had provided liquid funds close to Rs.20
crore in OSFL on the day of the announcement. This liquidity was generated
jointly by us and Nicco-Uco. We felt that such a joint infusion of
a substantial amount would be the primary step in building depositor
confidence. I am sure, after the initial reaction, depositors on independent
evaluation, will come to the conclusion that their money will be as
safe in the merged entity as it was in OSFL. |
| The depositors are getting to know about Nicco-Uco.
Our letter to them explaining the rationale of the merger has been
very well received. A certain credibility has been established both
for OSFL and Nicco-Uco. |
| By paying them on time, we have protected the depositors’
interests. We are ready to pay out as and when the investors want
their money. But I feel the investor will increasingly start evaluating
Nicco-Uco on its merits and some migration of OSFL deposits will occur. |
| I feel that the overall impact of this merger on
the deposits will not be critical. |
| Customers |
| So long as the rate of interest is okay and the
branches remain, and the people they deal with are the same, there
should be no problem in retaining the customer base. |
| Promoters’ commitment |
| One significant feature of this proposal, I feel,
is the commitment of the promoters to the outside shareholders. The
potential bad assets of Rs.37 crore could have been adjusted in the
swap ratio, which would have affected all the shareholders as they
are the joint owners of the company. However, keeping in view the
interests of the outside shareholders, the promoters decided to bring
in the money which ensured the swap ratio of 1:1. |
| Even in bringing in the money for potential bad
debts, the promoters took over the entire burden of Rs.17 crore while
they needed to bring in only 68% of this. This step, I feel, is an
extraordinary commitment and a clear communication of high ethical
values – through conduct. I felt that in all the press coverage
the merger has received, this point had been grossly understated.
I feel that not only has a certain trend been set for the merger strategy
in the NBFC field, but also an important lesson in corporate governance
has been quietly implemented. |
| When many companies, including financial institutions,
talk about ARCs, focused collection, biting the bullet and so on,
we actually did it. The whole concept of an ARC has been brought in. |
| Win-win for all |
| In summary, it’s been a win-win situation
for all concerned. We are now back in business. We have disbursed
close to Rs.60 lakh in a week. By recognising our NPAs and segregating
them, by cleaning up the business, we have demonstrated our commitment
to the business, inspiring employees, depositors and rating agencies
alike. It’s an exit with honour, and benefits to all concerned,
an exit with our heads held high and a very clear conscience, that
we took good care of all the constituents affected by it. |
