Global rating agency, Fitch Ratings today said the proposed merger of the IDFC Group and Shriram Group is unlikely going to have any immediate impact on ratings of Shriram Transport Finance. Last week, the infra lender IDFC and the Piramal Group-backed financial services major Shriram Group had agreed to exclusively discuss a merger plan over a 90-day period. Over the period, the managements of both the companies would look to finalise details such as the swap ratio, and seek the requisite approvals from various regulators overseeing the banking, insurance, and capital markets. The proposal will maintain Shriram Transport as a separate subsidiary that will be 100 per cent owned by the merged entity, alongside IDFC Bank, the main operating entity under IDFC Group. “Shriram Transport, the flagship company of the Shriram Group that provides financing for used commercial vehicles, is unlikely to be affected based on the proposed group structure,” the rating agency said in a note today.
However, it said that the structure itself may encounter stiff regulatory challenge. The agency believes that regulatory approval from the Reserve Bank will be the biggest hurdle to the proposed merger. “The RBI had previously taken the view that banks cannot undertake any business activity through a separate entity that can be done within the bank; and the proposed structure of having a non-bank financial institution alongside the bank could be a significant barrier to the merger,” the note said.
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In case the merger proceeds, the rating agency said it would review the final terms of the merger and assess the impact on the rating based on the final structure, the role of Shriram Transport within the larger IDFC Group and any potential synergies that Shriram Transport may derive from the merger.