In January 1998, a meeting was scheduled between the representatives of Nadar Mahajana Bank Share Investors' Forum (NMBSIF)1 and Shashi Ruia, the Managing Director of the Essar Group of companies. The meeting, arranged by the then Tamil Nadu Chief Minister M. Karunanidhi, was held to put an end to the tussle over the control of Tamilnad Mercantile Bank (TNMB). At the meeting, the Nadars were surprised to learn that Sivasankaran (Siva) the Chairman of Sterling Computers would be attending the meeting instead of Shashi Ruia. Siva revealed that he had bought the Ruias’ stake in TNMB in October 1997 in the meeting. The Nadars were taken aback by the secret deal between Siva & Ruia and they took out a massive rally in Chennai to submit a memorandum to the Reserve Bank of India (RBI) to stop the transfer of TNMB shares to Siva a few days after the meeting. The rally turned violent as the Nadars went on a rampage, damaging public/private vehicles and shops. The violence in the rally was another dramatic twist in the story of the Nadar community's struggle to retain control over TNMB. The issue attained political overtones in Tamil Nadu as the Nadars had strong political backing. (The Nadars constitute a significant percentage of the electorate in southern Tamil Nadu). Apart from Sharath Kumar (a Nadar actor turned politician) of Dravida Munnethra Kazhagam (DMK), J. Jayalalitha, the All India Anna Dravida Munnetra Kazhagam (AIADMK) leader also campaigned for the Nadars’ cause. The TNMB issue was even included in the election manifesto of AIADMK in the 1998 parliamentary elections in Tamil Nadu. The controversy was the first of its kind in India never before had a community fought so relentlessly with the corporate sector to wrest control of a business, reportedly for ‘sentimental’ reasons.

TNMB was incorporated as ‘Nadar Bank’ in 1921 and it became a scheduled bank in 1935. In 1962, the name was changed to 'Tamilnad Mercantile Bank.' The bank’s major shareholders were G Kathiresan, and Vetrivel of Tuticorin Spinning Mills (TSM) – 23%, C S Rajendran of Ayannar Coffee – 8%, VVD oil Mills – 3%, Sivakasi Ayya Nadar – 4%, Virudhunagar MSP Group – 13% and ARARS, Tuticorin – 3%, and the remaining 46% was held by the public. From just 4 branches in Tamil Nadu in 1947, by 2001TNMB had 6 regional offices, 14 extension counters and 163 branches, spread all over India. Of the 163 branches, 140 branches were fully computerized. The profit had increased from Rs 6,984 in 1921 to Rs 0.505 million in 1971 and to Rs 500 million in 2001. Due to the high profitability, the bank’s reserve base reached Rs 2.76 billion by 2001. In March 2001, its Earnings Per Share (EPS) was around Rs 1772 – the highest among all private sector banks. The bank's performance over the years attracted the attention of the Essar Group, which was planning to enter the banking business as part of its diversification plans. The Ruias had reportedly bought the stake in TNMB by taking advantage of in fighting between the promoters of the bank. Kathiresan and Vetrivel, they sold 12% of their stake in TNMB to a minority (1%) shareholder, Pioneer Group in 1984 following a misunderstanding. By 1994, the Pioneer Group had acquired 15% of TNMB's equity. However, frustrated at not being able to get management control of the bank, Pioneer sold its stake to the Ruias in October 1994. Citing the same reason of management control, another Nadar faction, MSP Virudhunagar sold 10% of its stake to the Ruias in the same month. Before these deals, the TNMB share had been quoting at Rs 800, while the Ruias bought the shares at Rs 3000. Alarmed at the equity going out of the Nadar community, Kathiresan persuaded two fellow Nadars, Sreenivasa Reddy of Balajee Distilleries (Balajee) and A C Muthiah of Southern Petrochemicals and Industries (SPIC) to make an offer of buying TNMB shares at Rs 5000. The idea was to acquire 20% of the equity from the market, to be able to counter the Essar Group. Balajee and SPIC issued post-dated cheques to investors for their shares. Meanwhile, the share price increased to Rs 5000. Balajee and SPIC could not afford to buy the shares at this price. They returned the shares, collected back the post-dated cheques and opted out of the deal. The Ruias then contacted Kathiresan, claiming to have acquired 40% of the bank’s equity. Kathiresan refused to accept this and proposed to run the bank jointly with the Ruias. The Ruias wanted absolute control of the bank and they refused to accept the proposal and offered to buy shares from Kathiresan himself. In a move that surprised everyone concerned, Kathiresan sold his shares to the Ruias at Rs 3500, on the condition that if the Ruias sold their stake in the future, the first offer would have to be made to Kathiresan. After this deal, Ruias’ stake in TNMB went up to 67%. The deal triggered a wave of agitation in the Nadar community, which set up the TNMB Share Retrieval Trust (TNMB-SRT), under the leadership of media baron S Adityan, a prominent Nadar. The agitation resulted in a violent outburst at the January 1995 Annual General Meeting (AGM) of the company. Ruias' representatives at the AGM were forced to leave as a result. In February 1995, the TNMB board refused to transfer the shares in the name of the Ruias. The board argued that the takeover by Essar would go against the purpose of the bank that of catering to the welfare of the Nadar community. Nadars felt that by foregoing management of the bank to some other community, they would lose control over the cash rich bank and it would also defeat the purpose of the bank itself. Following this, the Ruias approached the Tamil Nadu High Court to get the shares transferred in their name. In November 1995, the High Court ruled in favor of the Ruias. At this point, shareholders holding 16% of the Ruias’ 67% stake, refused to honor the sale deed saying that the Ruias had deceived them by misrepresenting their intention. The bank board once again refused to transfer the shares due to the new development. The High Court then ordered the bank board to appear in court for 'contempt of court'. The TNMB board however moved the Supreme Court against the High court verdict. The Supreme Court upheld TNMB's claim and decided to refer the whole issue to the Company Law Board (CLB). In May 1996, the CLB directed the TNMB Board to transfer the shares in the name of Essar. The Ruias then approached the RBI for permission to take over TNMB’s management. However, in October 1996, the RBI refused to allow the Ruias to take over TNMB, because it did not want big corporate houses to have the management control of banks. RBI’s decision grounded the Ruias’ plans to take over TNMB and they had to give up the idea of owning the bank. In May 1996, the Ruias agreed to sell back the stake to the Nadars for Rs 900 million. (The Ruias had reportedly invested around Rs 500 million in the TNMB equity). The Nadars had to give a down payment of Rs 200 million, and the remaining Rs 700 million was to be paid by August 1996. However, TNMB-SRT failed to raise the down payment money within the stipulated time and the Ruias had to withdraw their offer. Following this, the TNMB-SRT was replaced by NMBSIF, under the leadership of S. Adityan's brother Ramachandra Adityan (R Adityan) in June 1996. In June 1997, NMBSIF struck a deal with the Ruias at Rs 1 billion, to be paid by December 1997. NMBSIF then began a fund mobilization drive to buy the stake from the Ruias. However, by December 1997, it could manage to collect only Rs 650 million. NMBSIF then decided to pay an advance of Rs 500 million and sign a new agreement with the Ruias to pay the remaining money. The January 1998 meeting was scheduled to discuss to these issues. However, the Nadars' hopes of ending the fight for TNMB’s control were dashed as they saw Siva sitting at the meeting instead of the Ruias.

Siva launched Sterling Computers Ltd. in 1983, which produced personal computers (PC) for Indian and international markets. The company went public in 1989, and by 1990, it had become India's fourth largest PC producer. In 1998, Siva promoted DishnetDSL Ltd. to provide Internet services in India. He also promoted cellular telephone services Sterling Cellular in Delhi and Aircel Ltd. in Tamil Nadu. The group also had plans to enter the satellite television business in India and had incorporated Sterlingsat Television Limited in Mauritius, Singapore, and Sivasat TV Comm Limited in Chennai. In October 1997, Siva sold 80% of Sterling Computers’ equity to the Ruias. The Ruias gave the 67% stake in TNMB to Siva as part consideration as against a total price of Rs 2.12 billion. This deal shocked the Nadars, who vehemently opposed the validity of the stake transfer to Siva. According to the deal between the Ruias and Kathiresan, the Ruias were to sell their stake only to the Nadars. As there was no written agreement between the NMBSIF and the Ruias, the Nadars couldn't force the Ruias to stick to the agreement they entered with them. The development sparked off yet another round of legal battles. This time round, the issue even reached Prime Minister Atal Bihari Vajpayee, who said that the government expected to let the courts and RBI decide on the issue. In September 1998, the Ministry of Finance issued a statement clarifying that the Siva’s ownership could be approved only with the approval of the bank’s board. The Nadars challenged the transfer of stake by the Ruias to Siva in the Madras High Court. There were reports about Siva having approached the RBI for transferring the control of TNMB to Sterling Computers. However, RBI denied the permission on the grounds that it could not take a decision while the matter was still in the courts. The Nadars then invited Siva for talks regarding the buy back of shares in the bank. Siva quoted a price of Rs 2.3 billion, while NMBSIF stuck to the earlier price of Rs 1 billion, as per the agreement with the Ruias. In April 1999, Siva met NMBSIF representatives, with noted political commentator Cho Ramaswamy and politician Gurumurthy acting as facilitators , to sort out the issue. Both sides agreed to have a two-member auditor panel to evaluate the value of the TNMB stake. In May 1999, Siva scaled down his price from Rs 2.3 billion to Rs 1.86 billion, even as some sections of the Nadar community were reportedly ready to settle for Rs 1.5 billion. Siva then said that he was willing to sell the stake to the Nadars for Rs 1.55 billion. In addition to that, he asked the Nadars to pay an additional Rs 510 million, which he had declared in the May 1999 Voluntary Disclosure Income Scheme3 (VDIS). In June 1999, NMBSIF agreed to buy 50.01% of the TNMB stake from Siva for Rs 1.10 billion to be paid by March 2000. It was agreed that the Nadars would first pay Rs 200 million and pay the remaining Rs 900 million within the specified period, following which the share transfer would be effected. The Nadars also had the option of buying the remaining TMB shares with the Sterling Computers (17.28%), for Rs 450 million. Otherwise, these shares were to be sold to various financial institutions. It was also decided that the agreement would lapse if NMBSIF failed to mobilize the required amount within 9 months. By June 1999, the forum had collected around Rs 500 million from its members. Siva asked the Nadars to pay 15% interest for the 9 month period. The Nadars insisted that they would pay interest only after the management of the bank was handed over to them. Investors who had invested at the earlier price of Rs 5,500 per share – had to pay about Rs 7,500 per share after the deal with Siva. In July 1999, three directors of the Bank belonging to the Kathiresan group objected to the sale of shares to NMBSIF by Siva. They claimed that they had sold stake to the Ruias on the condition that if the RBI refused to transfer the shares in their (Ruias’) name, then they had to return the shares to the original shareholders (i.e. Kathiresan). They also claimed that due to above clause the Ruia-Siva as well as the Siva-NMBSIF deals were not valid. Moreover, they also opposed fact that NMBSIF was buying the shares at Rs 8500 while the market price was Rs 3500. In the same month, Kathiresan appointed an arbitrator to resolve the issue, following which, the Ruias also appointed an arbitrator. Kathiresan approached the court to appoint arbitrator following disagreements between him and the Ruias. Kathiresan claimed that the transfer of shares would not be possible while the arbitration process was on. However, analysts opined that Kathiresan's arguments did not carry weight as the shares were already in NBMSIF’s possession. Meanwhile, Siva handed over the shares to NBMSIF. By January 2001, NMBSIF paid Rs 600 million to Sterling Computers and Siva transferred the power of attorney of his shares to the Nadars. With the transfer of the power of attorney, the battle seemed to have ended atleast for the time being. However, the perennial in fighting within the Nadar community raised doubts regarding the bank's future.

1. 'The Ruias had skillfully exploited the in fighting among the Nadars to garner the stake in TNMB.' Do you think that the in fighting within the Nadar community was more at fault in the TNMB controversy rather than the Ruias' (and later Siva's) involvement? Give reasons to support your answer. 2. Ruias sold their TNMB stake to Siva inspite of the fact that the shares had not been transferred to them and RBI had not granted them permission to take over TNMB's management. Do you think that Ruias were justified in selling their stake to Siva? Why/Why not? Also comment on the role of the RBI in the TNMB controversy.