IDFC, Shriram enter 90-day merger talks
IDFC and the Chennai-based Shriram group on Saturday said they had entered 90 days of merger talks.
Under the tentative arrangement, IDFC Ltd will be the holding company of the merged entity; Shriram City Union Finance, the retail lending arm of Shriram Capital, will be merged with IDFC Bank; and Shriram Transport Finance will be a fully owned subsidiary of IDFC, which will also own 75 per cent of the life and general insurance arms of Shriram Capital. Disclosing this, Rajiv Lall, managing director of IDFC Bank, said it was a “complex transaction”.
“This is an exclusive arrangement for 90 days to jointly explore a merger. No transaction has taken place and valuations have not been fixed,” said Ajay Piramal, chairman of Shriram Capital.
“This gives us an opportunity to create a financial conglomerate with a universal bank at its centre, whose focus will be to provide a full range of products to millions of small customers and entrepreneurs,” Piramal said.
The groups are clear that the merger should be beneficial for shareholders. “If it is not going to benefit all shareholders, we will not pursue it,” said R Thyagarajan, founder of the Shriram group.
After the merger, the mutual fund arm of IDFC would be integrated with Shriram Asset Management and could be listed, Lall said. Shriram Transport Finance, which has assets under management of ~80,000 crore and a customer base of 1.4 million, may be delisted, postmerger. The merger would provide IDFC Bank, floated in October 2015, a deeper retail presence and the Shriram group would benefit from lower cost of funds and the wholesale banking exposure of IDFC, said Deepak Parekh, former chairman of IDFC.
IDFC Bank’s network will expand by more than 2,000 points of presence through this merger.
The Shriram group had backed out after applying for a universal bank licence in 2013. The Reserve Bank of India does not allow a non-banking finance company and a bank with similar business under one holding company. Post-merger, the transport finance arm will act as an independent NBFC.
Piramal clarified this was not a “backdoor entry” into banking by Piramal Enterprises. The RBI does not allow industrial houses to own banks. “We will follow in letter and spirit whatever the RBI rules and guidelines are. We are not so naive,” Piramal said.
Even as the holding company would be IDFC, the brand names of Shriram would continue, Piramal said.
The addition of Shriram City Union Finance will expand the assets of IDFC Bank by ~23,000 crore and by 4 million customers.
Once the proposal is cleared by shareholders, the groups will approach regulators. The approval process was expected to take 12 months and integration could take another 24 months, Lall said.
When asked despite being much larger in size among the two, why it is not ideally Shriram Holding taking over IDFC Ltd, instead of the vice versa, Ajay Piramal said, “We will work it out. IDFC is already a Banking license holder.”
On Piramal’s entry into Banking through the Merger, Piramal said all rules will be complied
“As far as Piramal group is concerned, we are strategic investors in it (Shriram Capital), and we will continue to remain so. We will only do something whatever the RBI permits, we cannot go beyond that,” Piramal said.