Domestic infrastructure lender IDFC Ltd, which entered into banking in late 2015, and the Piramal Group-backed financial services major Shriram Group on Saturday agreed to merge and create the largest retail-focused bank in the country. On Saturday, the boards of two groups said the managements have been given a 90-day period to complete due diligence and explore a merger. A formal merger will take place within 12 months if all goes well.
As per the proposed plan, IDFC Ltd will be the holding company of the merged entity. Shriram City Union Finance will be merged with IDFC Bank and Shriram Transport Finance will become a fully owned subsidiary of IDFC, which will also acquire 75% stake in the life and general insurance arms of Shriram Capital.
Here are five most important things to know about the much-talked about consolidation move in India’s financial services space:
What’s in a name? Apparently, a lot
Since IDFC already has a banking license, the merged entity will go with the name IDFC and not Shriram, PTI reported citing Ajay Piramal, Chairman of Piramal Enterprises. However, there is still a lack of clarity on what could be the name of the merged entity, as Ajay Piramal has also said that the brand Shriram will be retained while almost all key businesses of the Shriram Group will be merged with either IDFC Bank or IDFC.
Banking on it
“It is really a chance to create a financial conglomerate with a universal bank at the centre that we believe will become the country’s largest mass retail universal bank,” Ajay Piramal has said on the merger. IDFC Bank is the seventh-largest private banking company in India.
Shriram Transport Finance Company has over Rs 40,000 crore in assets under management, which makes it the largest financer of commercial vehicles. On the other hand, Shriram City Union Finance has offerings in home, auto and personal loans. Both the companies are held by Shriram Capital which is headed by Ajay Piramal as chairman since 2015. Piramal owns 20% in Shriram Capital and 10% each directly in both Shriram Transport and Shriram City Union.
IDFC owns 52.86% stake in IDFC Bank which was launched in October 2015 in the latest round of bank licences by taking over all its parent’s assets. Shriram Group has a loan book of over Rs 80,000 crore while IDFC and its banking arm IDFC Bank together have a loan book of over Rs 60,000 crore. The total assets of the merged entity will cross Rs 9 trillion.
Share the wealth
Though Ajay Piramal of Shriram group and Rajiv Lall of IDFC Bank have not specified the valuation or share swap ratio, analysts say that at the current share prices, the merger ratio could be around 1:40, i.e., 40 IDFC shares for one Shriram Capital share.
The proposal of the merger is subject to approvals from the regulators RBI, SEBI, IRDAI, CCI and stock exchanges. Analysts have pointed out that the proposed merger may not be an easy deal given RBI’s stance of not allowing a corporate entity into banking, and also its norms capping promoters’ stake under 10%. “It will be very difficult for the regulator RBI to overlook these facts and approve the merger, as if done so, the central bank could be accused of ignoring its own regulations,” PTI reported citing an industry person. PTI also cited another industry person saying that Shriram Capital has been struggling to grow following changes in the truck finance business in recent years, while conversion of IDFC into a bank has not done anything great to the infra lender so far.
The shares of associated entities of IDFC and Shriram group traded mixed today after the merger talks. The shares of IDFC Ltd is trading down 5.76% at Rs 56.45 while IDFC Bank Ltd rose 0.62% to Rs 65.15. On the other hand, the shares of Shriram group companies are mostly down except Shriram Asset Management which got locked up in the upper circuit after rising 4.94% to Rs 51 while Shriram Transport Finance (down 3.47% at Rs 1052.75), Shriram City Union Finance (down 6.73% at Rs 2320).