Chennai: Shriram Transport Finance Ltd’s board has approved a proposal to merge with its unlisted parent Shriram Holdings Madras Pvt. Ltd, in which US-based TPG Capital owns 49%, to make it easier for the private equity firm to sell its stake.

Funding costs: R. Sridhar, MD, Shriram Transport, says interest rates have been a challenge. File photo

Based on the share swap ratio, TPG Capital will hold about 20% in the merged, listed company.

TPG Capital wanted to exercise its right for an exit option from Shriram Holdings Madras, according to an agreement entered six years ago when it picked up the stake in the parent company, said R. Sridhar, managing director of Shriram Transport Finance.

TPG Capital had then invested $100 million.

The board’s decision of the amalgamation is subject to the approval of the Madras high court, regulatory authorities and shareholders, the company informed the Bombay Stock Exchange.

“This move has been made by Shriram Transport Finance to provide a smooth exit option for its private equity partner TPG," said a Mumbai-based analyst tracking non-banking financial companies, who did not want to be named.

TPG Capital’s spokesperson declined to comment on the development.

TPG Capital operates as Newbridge Capital in Asia.

Shares of Shriram Transport Finance fell 0.78% to end trading at 464.70 on BSE Ltd.

The exchange’s benchmark Sensex gained 3.36%.

A couple of months ago, Sridhar said TPG was looking to sell its investment in the company and Japan’s Orix Corp. had evinced interest in buying it.

“TPG Capital would get a higher liquidity for its shares by having a stake in the listed entity like Shriram Transport Finance than an unlisted entity such as Shriram Holdings Madras," said K. Ramakrishnan, executive director of Chennai-based investment bank Spark Capital.

While TPG Capital may exit the transport finance business, it still has investments in Shriram Capital, the holding company of Shriram group and Shriram Retail Pvt. Holdings.

TPG acquired the assets of Vishal Retail for 70 crore through Shriram Retail in March.

It has also invested $100 million in Shriram Properties, the real estate arm of the group.

A month ago, Shriram Transport Finance halved its loan growth forecast for this fiscal year citing rising interest rates that have discouraged prospective borrowers from buying new or used vehicles.

“The company is facing multiple challenges in terms of higher interest rate, which has led to rise in cost of funds," said Sridhar after announcing the company’s second-quarter earnings in November.

“Liquidity in the market is okay but demand has still been sluggish and regulatory changes expected from RBI (Reserve Bank of India) will impact the company’s performance in coming quarters."