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.