Inside the tangled web of the Shriram Group

Surprisingly, the change-agent for the Shriram group is sought to be played by the grand old man who founded it several summers ago along with two others. So much so, R. Thyagarajan, or RT as he is popularly called, remains the face of the group. Well into his 80s, he continues to be the chief communicator. RT is an adroit connector who is engaged now in the deft job of developing a thread to link the past, present and future. How to ensure a smooth transition of the group to the future?

That is easier attempted but riddled with bumps of assorted kinds to navigate. That succession has been the talk within and outside speaks of the journey of this group, in general, and the tenacity of RT, in particular, in driving it through trials and tribulations.

There is a sense of urgency now to acquire a new image makeover. And, there is also a desire to seek a wider acceptance. After all, this one group continues to be an enigma for many. For laypersons, the group is simple. The reality, however, is that it has been built around a complex web. The group today is everywhere. Chit funds, truck financing, SME (small and medium enterprises) lending, consumer loans, insurance (both life and non-life), private equity—you name the field, the group is just there. It did explore the bank option but was unsuccessful.

A range of factors—cross-holdings in group companies, diverse operating fields, varied regulatory authorities—have all combined to complicate the structure of the group. The pressures from investors, dynamic demands of regulators and the changing imperatives of the business world have all forced the group to go in for a massive structural reorganization.

On 13 December, the group announced a scheme of amalgamation with three components: demerger of life and general insurance and other non-lending financial subsidiaries of Shriram Capital, the group holding arm; the merger of Shriram City Union Finance (consumer and SME financing) with Shriram Transport Finance (truck financing); reverse merger of the remaining undertakings of Shriram Capital with Shriram Finance.

Will all this result in a simplified structure? We will come back to this point and the group’s tangled structure in a bit.

First, let’s dive into the conglomerate’s beginnings and its early convulsions.

Three musketeers

Shriram Group had its humble beginning with the chit fund business in 1974. R Thyagarajan, AVS Raja and T Jayaraman were the “three musketeers" who founded the group. Not many at that time would have even remotely predicted that this small chit fund business in Chennai would transform into the kind of a financial conglomerate that Shriram is today.

Interestingly enough, there was a complete division of functions among the three. If one were to go by a source close to one of the founders, RT was assigned the advisory function. He continues to do so even today. The two other co-founders have long slipped into oblivion. Somewhere along, when the chit business was growing, it was decided—at the suggestion of RT, of course—that the kids of the founders would not be allowed to join the group.

You need people with different strengths to run a diverse group such as Shriram, RT told this correspondent a few days ago. “We always moved in that direction. And, we are now moving faster towards that," he said, explaining the rationale for constituting a management committee in the Shriram Ownership Trust, which would now be the promoter of the group.

By nominating long-time employees to the committee, the succession issue seems to have been set at rest. Questions nevertheless persist on the ownership. One thing is obvious. RT, the guide, appears to be the decider always!

The convulsion of the ‘90s

The 90s had seen a huge convulsion in the non-banking finance companies (NBFC) sector in the wake of havoc caused by the finance companies of unincorporated variety. These companies enticed unsuspecting depositors among the middle-class to park their hard-earned money into their companies by offering unimaginable rate of interests and freebies of all kinds. When the Reserve Bank of India (RBI) woke up, the regulator introduced a slew of prudential norms and provisioning for bad debts. That caught many NBFCs off-guard. Such was the quality of their assets, many ended up in losses due to high level of provisioning.

Shriram group, too, was in a similar situation then. Fearing that a big loss would trigger a run on its deposits, it chose not to implement the RBI norms and the auditor qualified the same in his report. And, the group came under the regulator’s lens. It took the group a while to clean up and get its house in order.

Since Shriram had become a household name by then, everybody–even its staunchest critics–wished it to tide over the trying times. “If it had (Shriram) failed, it would have been a catastrophe for the entire NBFC industry in the south,’’ said a top industry expert who declined to be quoted. When rating became mandatory, Shriram managed to get a ‘right rating’, cashing in on the intense competition from nascent rating agencies.

However, crisis chased the Shriram group at regular intervals. It did see its mutual fund venture run aground after incurring the wrath of the Securities and Exchange Board of India (Sebi).

Darling of PEs

Shriram has come a long way since then, and somewhere along, became the darling of private equity (PE) players.

The statistician–turned-financial stalwart, RT struggled to measure the moves of regulators and yet succeeded in attracting copious investments by scores of PE players such as ChrysCapital, TPG Capital, Merrill Lynch, Cambridge, ICICI Ventures and New Bridge Capital.

They have all invested in Shriram Transport Finance, Shriram City Union Finance and the group holding arm, Shriram Capital. In addition, the group managed to attract investment from strategic investors such as Citicorp, Axis Bank, Reliance Capital and FMO of the Netherlands. Shriram Transport Finance Company and Shriram City Union Finance once had raised more than ₹2,000 crore from the capital market through non-convertible debentures.

Some may have cashed out. Yet, there are still a few with the group. Ironically, the private equity players, are, in a way, the cause of the latest happenings— convulsions—around the Shriram group.

Tangled web

The Shriram group is a tangled web. And, the presence of bulk investors in the unlisted holding company, Shriram Capital, and other listed entities of the group have only complicated it further.

What does the group’s amalgamation mean?

Simply put, it allows the unlisted Shriram Capital, the holding company, to become a listed entity. This has a twin objective. One, it opens up an exit window for the bulk investors. This also provides the members of the Shriram Ownership Trust (SOT), which has a stake in Shriram Capital, a mechanism to monetize its stake.

Does this mean that members could quit SOT by cashing out their holdings? If yes, it could have a larger ownership implication for SOT.

SOT is an idea born out of the desire to democratize the ownership of the group. It largely comprises key employees of the Shriram Group, past and present. The ostensible intent of SOT is to ensure that no individual or family owned or controlled the group. SOT is positioned as the ultimate promoter vehicle with a set of key people having beneficial interest in the trust.

Will the scheme provide an exit option for the investing community as a whole? The answer is a clear no. The unlisted holding company, Shriram Capital, will list through the reverse merger process. Its other subsidiaries—life insurance, general insurance and others—will, however, de-merge and remain as unlisted entities. The demerger of insurance business is necessitated more due to regulatory roadblocks. The RBI cannot possibly allow insurance business to be merged with any NBFC. There are also regulator-prescribed equity restrictions on any NBFC in any insurance venture. Given this, the group has no other alternative but to de-merge the insurance business before amalgamating Shriram Capital with the merged NBFCs.

Shriram Capital has a diverse ownership. The presence of bulk investors who have turned fidgety has reportedly put tremendous pressure on the founders to somehow open up an exit window for them to cash out.

According to a Crisil note, as on 31 March 2021, shareholders in Shriram Capital include: SOT (29.7%), the Shriwell Trust (13.2%), Sanlam (26%), Piramal (20%), TPG Capital (9.4%), and individuals (1.7%).

These bulk investors have turned desperate since an unlisted holding company with diverse listed subsidiaries isn’t an attractive proposition to any new investor. Obviously, the bulk investors are feeling ‘stuck’ in the holding company. Read against this backdrop, the reverse merger of the holding company with an amalgamated listed NBFC is inevitable and logical. But the new context is bound to further add to the ownership confusion in the group. If SOT is the new promoter group for its financial services business, the de-merged insurance and other ventures will have different holding companies.

SOT (including Shriwell Trust) holds 42.9% in Shriram Capital. Shriram Capital holds 26% in Shriram Transport. Shriram Capital holds 34.6% in Shriram City Union Finance.

Given these, what is the holding of SOT in these two companies? Simply put, it means that the effective stake of SOT in Shriram Transport is 11.2%; the effective stake of SOT in Shriram City Union Finance is 14.8%. In the wake of the merger of the two NBFCs, the holding position of SOT will see downward change. The stake of Shriram Capital in the merged entity could be in the vicinity of 28.3%. Therefore, the effective stake of SOT in the merged NBFC could be around 12.2%.

Once Shriram Capital is reverse-merged with the amalgamated NBFC, the SOT holding could further alter downward if one were to allow for holding company discount. What does one make of this a rather complicated amalgamation exercise?

In simple terms, it provides the private equity investors a window to sell their shares on the stock market. Deep down, however, one is still left searching for an answer to the question: who owns the Shriram group? In the emerging context, can the SOT be truly termed the promoter? With a largely diluted holding, what control—nay say—SOT can have on the amalgamated NBFC?

RT is still driving the directional course of the group. He may have to play the hand-holding job until the amalgamation-triggered integration is fully in place. After all, he commands respect among Shriram employees. But what does the future hold for the group? There are several imponderables. What if the membership profile of the trust changes? What if the members of the trust opt to cash out?

One can give esoteric corporate nomenclature for this grand exercise. Having spread itself into one too many areas and brought on board assorted investors, this Chennai-born group is trying to come to terms with the new compulsions. How will this pan out for its carefully-cultivated largely middle-class clients? That is easier guessed, however.

K.T. Jagannathan is a senior journalist based in Chennai.