MUMBAI: Billionaire Ajay Piramal’s decision to finally bow out of Shriram Capital caps years of unsuccessful attempts to harness Shriram Group’s key strengths to the advantage of his own financial services business.

On Tuesday, Shriram Capital Ltd, the holding company of Shriram Group, said Piramal Enterprises Ltd (PEL) and private equity firm TPG Capital have decided to sell their stakes in the company.

No potential buyers were mentioned, but two people aware of the development said requesting anonymity that at least three bulge bracket private equity funds are in talks to buy out these stakes.

Piramal Enterprises, with a market value of over $5 billion, began investing in Shriram Group in May 2013 when it acquired about 9.96% stake in Shriram Transport Finance Co. Ltd. in an open market purchase of 1,636 crore. According to exchange filings, Piramal sold the stake to its unit PHL Capital in March 2014 in an off-market transaction. In April 2014, Piramal bought a 20% stake in Shriram Capital Ltd, the holding entity for all Shriram Group companies, for 2,014 crore.

The investments were strategic in nature and were done with the intent to merge Shriram Capital, the holding company of Shriram Group with Piramal Enterprises, then an emerging financial services conglomerate with large ambitions of its own.

But the planned merger never took off, simply because of the sheer difference in size. Although Piramal had begun taking effective control of Shriram Group soon after making the investments by replacing key management employees across group companies, a merger would have potentially resulted in a large stake dilution in the merged entity for Piramal Group, which was not acceptable. Last week, Piramal sold its entire 10% stake in Shriram Transport Finance, Mint reported. The stake sale fetched Piramal approximately 2,300 crore.

At the time, Piramal Group chairman Ajay Piramal said the divestment was part of PEL’s plan announced in April 2019 to exit from its investments in Shriram and use the proceeds to “leverage the huge opportunities for strategic growth in its own financial services business".

The Shriram Group comprises listed entities Shriram Transport Finance, Shriram City Union Finance Ltd, Shriram Asset Management Co. Ltd and Shriram EPC Ltd, besides unlisted entities including its insurance businesses. Shriram Group has an overall customer base of around 19 million, over 75,000 employees across 3,800 branches, with assets under management (AUM) in excess of 1.5 trillion.

Next, the Shriram Group tried a merger between Shriram Capital and IDFC Bank Ltd in July 2017. The proposed merger, which would have created a $10 billion financial services business, fell through as the two entities failed to agree on a mutually acceptable swap ratio for the merger.

“Despite taking management control at the top, Piramal Group had persistently struggled with managing the vast workforce of Shriram Group," said the first person cited above, adding “a large portion of group insiders were not favourably disposed towards corporate control given the group’s long-standing history where the ownership had rested with the employees via the Shriram Ownership Trust, an employee trust which held 45% stake in Shriram Capital."

With the impending exit of Piramal and TPG, the ownership is poised to revert to the employees yet again. “If and when definitive documents for such a transaction are executed, appropriate disclosures will be made in accordance with applicable laws," Shriram Group said on Tuesday. Going ahead, the Shriram Group will be governed and managed by the Shriram Ownership Trust, said D.V. Ravi, managing director, Shriram Capital & Managing Trustee, in a statement on Wednesday.

Piramal’s decision to sell stake in Shriram Group companies is also linked to the tightening of liquidity in the short-term money market in the aftermath of the collapse of Infrastructure Leasing & Financial Services (IL&FS).

Piramal’s housing finance business got caught in the line of fire, as 78% of its wholesale book accounted for real estate loans, including its exposure to large developers.

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