Shriram Capital, IDFC boards enter into 90-day exclusive talks for merger
Mumbai: The board of directors of Shriram Capital and IDFC Ltd on Saturday announced exploratory merger talks between the two groups, to be discussed over a 90-day period. The proposed merger, both IDFC and Shriram Capital, claimed will create India’s largest mass retail platform with a universal bank at its core. However, the merger is still subject to multiple regulatory approvals which include Reserve Bank of India (RBI), Securities and Exchanges Board of India (Sebi), Insurance Regulatory and Development Authority (Irda) and the stock exchanges.
Mint had reported on Thursday on the merger plans of the two groups, citing people directly of aware of the discussions.
According to the proposed terms of merger, all retail consumer lending business of Shriram Capital; Shriram City Union Finance Ltd will be merged with IDFC Bank, while the commercial vehicle finance arm Shriram Transport Finance Company (STFC) will continue to operate as a 100% subsidiary of IDFC Ltd and will be eventually delisted once the merger takes place.
Similarly, the insurance business of Shriram will be transferred to IDFC Ltd, with IDFC holding close to 75% in both life and general insurance businesses. The merger is expected to take anywhere up to 12 months for internal and regulatory approvals. The integration process itself is likely to take another 18 to 24 months, top officials said.
Explaining the rationale behind keeping STFC as a standalone business and not merging with IDFC Bank, Rajeev Lall, managing director and vice-chairman of IDFC Bank said “Merging STFC which has a very large asset base would resulted in large dilution for IDFC Limited in IDFC Bank below the mandatory 40% requirement”. Also the without a matching liability base by IDFC bank the merger would have not met regulatory requirements on capital norms” he added.
STFC has a AUM of almost Rs80,000 crore as of 31st March, while IDFC Bank has a AUM of Rs66,500 crore. SUF which will be potentially merged with the bank has AUM of Rs23,000 crore.
“Diligence will take place now, we will discuss on valuations. The transaction is also subject to various regulatory approval including RBI, Sebi, IRDA,stock exchanges and competition commission” said Ajay Piramal, chairman of Shriram Capital, whose Piramal Enterprises owns 20% stake in Shriram Capital. “We have 90 days to finalize the scheme, post which we will go back to both the boards for their approval” Piramal added.
Lall said that there are multiple synergies between two groups.
“We believe there is an alignment of purpose and complementarity of businesses between the two groups” said Rajiv Lall, managing director and vice-chairman of IDFC.
“We will be able to combine the core strength of IDFC, which is wholesale lending with Shriram’s understanding and management of deep retail and with insurance and asset management added to this, you can serve the whole gamut of financial services products,” Lall added.
For IDFC bank the merger is expected shore its up retail operations and potentially help build up a retail deposit base by tapping into Shriram Capital’s over 2000 customer touch points with a customer base of over 1 crore.
Billionaire Ajay Piramal, chairman Shriram Capital, who owns 20% stake as the single largest shareholder in the company maintained that merger discussions are not an attempted backdoor entry for the group into the banking sector.
“Nothing is backdoor and it is naive to assume that the regulators will see through any such attempt” Piramal said. Piramal declined to comment on how much stake Piramal Enterprise will end up owning the merged entity or whether he will have a board seat in IDFC Bank once the merger approved.
“We will follow in letter and spirit what the RBI guidelines say “ Piramal said.
Shriram group, founded in 1974 by Ramamurthy Thyagarajan, A.V.S. Raja and T. Jayaraman,and is co -owned by a employee trust will continue as a separate brand post merger. “ The intent is to leverage the power of both brands, subject to regulatory approval,” Lall added.
On Friday, shares of Shriram Transport closed at Rs1,090.65 a piece, down by 1.56%, while Shriram City Union shares closed at Rs2,487.5, down by 1.3%, on the BSE. IDFC Ltd too declined in Friday trading and closed at Rs59.9, down 1.16%. Shares of IDFC Bank, however, closed higher as investors cheered the proposed merger. IDFC Bank closed at Rs64.75, up by 2.2%.