Mumbai, Nov. 27: The Tatas have dropped a bombshell on Mint Road by deciding to withdraw their application for a banking licence that they filed on July 1.
The ostensible reason for the surprise decision was that the rigid corporate structure that the Reserve Bank of India had mandated for all financial services companies made it unworkable for the $100-billion group with over 1,000 companies with operations spread across the world.
Almost 64 per cent of the group’s revenues come from overseas operations.
Tata Sons was one of the 26 aspirants for the new banking licence. This is the first time since 1969 when banks were nationalised that industrial houses have been given the opportunity to own a large, well-capitalised bank.
The Tatas said the biggest stumbling block was over the RBI’s insistence that the promoter group would be permitted to set up a new bank only through a wholly owned non-operative financial holding company (NOFHC), which will not only hold the bank but also all other regulated financial services companies within the group.
The RBI had worked this proviso into its draft guidelines because it wanted to ring fence the “regulated financial services activities of the group” from its other commercial activities. The central bank believes that this was the only way to erect a Chinese wall between the financial services businesses and other industrial operations to head off a situation where the promoter might be tempted to use the bank to finance the group’s business.
But the proviso has always been contentious and the Tatas said today that “after prolonged deliberations and detailed analysis, Tata Sons has decided to withdraw its application dated July 1 from the current round of licensing”.
The RBI said it had accepted the withdrawal of the Tata Sons application.
Explaining the rationale for its decision, Tata Sons said in a statement that the group’s existing financial services operating model best supported the current needs of both its domestic and overseas strategy, and provided adequate operating flexibility to its companies, while securing the interests of the group’s diverse stakeholder base.
A spokesperson for Tata Sons said the NOFHC structure posed some difficulties for a group such as the Tatas.
“The operating companies with overseas operations at times need to provide financing solutions to their customers. Since all financing companies in the group need to be under the NOFHC, there could be situations, wherein a given country is not a priority for the proposed bank or NOFHC but extremely important for an operating company,” he added.
He further pointed out that overseas financing was further complicated as the law in some countries required the operating company to partner a local bank to set up a financing company.
Therefore, under the existing guidelines, meeting requirements such as all financial services entities in the group should necessarily be owned by the NOFHC and no group company can have a direct shareholding in these entities will not be possible.
Sources added that Tata Sons had sought clarifications from the RBI on matters which it felt impacted the group, particularly the industrial and services operations.
The RBI had issued the clarifications on June 3 and the last date for filing the application was July 1, giving the group only a three-week window to identify all issues and put in place solutions.
“Given that we have more than 1,000 companies in the group, it was impossible to complete a detailed assessment, seek the requisite approvals from various affected Tata companies prior to filing our application. Some of these companies may have needed to make statutory filing with stock exchanges and call for formal board meetings to discuss this matter,” the official added.
Following the application, the group carried out detailed evaluation of the guidelines and it came to the conclusion that the current model would best serve the group and its customers apart from the shareholders.
The Tata group is the second major industrial house after the Mahindras to withdraw from the race for new banking licences. Mahindra Finance had dropped out of the race before July 1, which was the last date for various contenders to submit their applications.
The list has changed since then with K.C. Land & Finance, a Chandigarh-based company, being included and Value Industries, a unit of Videocon Industries, withdrawing its application on September 26.
However, Tata Sons isn’t slamming the door on its ambition to own and run a bank. The group said in its statement that it still “looks forward to participating in the banking sector at an appropriate time.”
Incidentally, RBI governor Raghuram Rajan has talked about the possibility of offering on-tap licensing, which means that it could be a continuous process.
In the past 20 years, the RBI has licensed 12 banks in the private sector in two phases. Ten banks were licensed on the basis of guidelines issued in January 1993. Kotak Mahindra Bank and Yes Bank were the last two entities to get banking licences from the RBI in 2003-04.
FACTORS BEHIND EXIT
Tata group’s existing financial services structure necessitated reorganisation for the banking licence
Tata group has over 1,000 companies; it was impossible to complete
a detailed assessment and seek the requisite approvals from various affected Tata companies before filing application
Many companies would have had to make statutory filing with the bourses and call board meetings
After detailed evaluation, Tatas concluded that the group’s current financial services operating model best supported the needs of its domestic and overseas strategy
64% of the group’s revenue are from abroad. Companies with overseas operations need to provide financing solutions to their customers. RBI rule meant that all financing companies in the group would have to come under the NOFHC
No group company can hold direct shareholding in the financial services entities