Mumbai: The Chennai-based Murugappa Group is in talks to buy the 37.5% stake held by partner DBS Group Holdings Ltd in their financial services joint venture Cholamandalam DBS Finance Ltd, according to two people familiar with the situation.
The Murugappa Group currently has an equal stake in the non-banking finance company (NBFC), with the remaining 25% held by the public. The joint venture between the Murugappa Group and Singapore’s largest bank was formed in 2005.
New role soon: Murugappa Group vice-chairman A. Vellayan.
The move comes as the Murugappa Group restructures its financial services business. Last week, the $3 billion (Rs14,400 crore) group sold DBS Cholamandalam Asset Management Co. Ltd, a joint venture with DBS, to Larsen and Toubro Finance for Rs45 crore. The asset manager reported a Rs38 crore loss for the year ended March.
The relationship between the partners has had its “highs and lows” for two years, said an adviser to the Murugappa Group on mergers and acquisitions on condition of anonymity. The group has the right to purchase the DBS stake in a so-called inter se transfer of shares, in which stock changes hands among promoters, the same person said.
Such a transfer of shares won’t trigger the Securities and Exchange Board of India (Sebi) takeover code, provided the offer price is not more than 25% above the floor price, the stock has been owned by the promoters for at least three years and regular filings have been made to the regulators, says an investment banker who has advised similar transactions. His bank does not allow him to speak to the media.
The floor price is based on 26-week or two-week average, whichever is higher. The Sebi takeover code stipulates that an investor who acquires more than a 15% stake should make an open offer for another 20% from the public.
Cholamandalam DBS Finance shares closed at Rs74.35 on Friday on the Bombay Stock Exchange, giving it a market value of Rs388 crore.
The Economic Times had reported on 11 September that the Murugappa Group had reached an understanding to sell its equity stake in Cholamandalam DBS Finance to DBS, citing sources.
Both the promoters declined to offer any comment for this story. “We do not comment on market speculation,” Chandrika Raman, the Murugappa Group’s assistant general manager for corporate communications, said in an email reply. “As a policy, we do not comment on market speculation. India remains a key market for DBS and we continue to look at ways to expand our business there,” DBS spokesperson in India said in an email reply.
The deal is expected to coincide with the change of guard at the Murugappa Group, says one of the persons cited above. A. Vellayan, the group vice-chairman and director, strategy, will take over as chairman from M.A. Alagappan later this year, the same person said. He declined to be quoted as he is not authorized to speak to the media.
The Indian group’s plan is to acquire the “DBS stake and refocus on core strengths—the vehicle finance business that has been our bread and butter business for 19 years”, said a person who has access to the top management.
Others familiar with the group said it would focus on vehicle finance with its established base in south India and pull back in other areas.
Cholamandalam Investments and Finance Co. Ltd, incorporated in 1978 as an NBFC and the precursor to the current venture, started business by offering loans to small and medium companies to purchase equipment. In 1990, the firm diversified to provide corporate loans, truck finance and mortgages. The NBFC had to scale down its corporate mortgage finance business due to the stock market crash following the global financial crisis, Alagappan told shareholders in last year’s annual report.
The challenging economic environment in the financial year ended March led to delays in the collection of receivables and a steep deterioration of asset quality in the personal loan segment, he said at the time.
The NBFC’s net profit dropped to Rs42.75 crore last year from Rs59.37 crore in the year before.
While DBS and Murugappa are exiting from mutual funds, another vehicle financier Mahindra and Mahindra Financial Services Ltd, which finances 15,000 vehicles every month, is entering the space.
“As a financial services company, we will look at mutual funds as an emerging opportunity,” Ramesh G. Iyer, managing director of Mahindra and Mahindra Financial, told Mint in an interview.
The company will focus only on rural markets with specific products tuned to rural investors that now invest in post office savings schemes, he said.
Cholamandalam DBS Finance also owns DBS Chola Distribution Ltd, which offers wealth management services and sells third party products from mutual funds to fixed-income instruments. Another unit, DBS Cholamandalam Securities, offers broking and equity advisory services to institutional investors.