1. In IDFC merger plan, for Shriram Transport, short term benefit unlikely

In IDFC merger plan, for Shriram Transport, short term benefit unlikely

Shriram City Union, a financier of small businesses and two-wheelers, would be merged with IDFC Bank. The life and general insurance businesses of the Shriram Group would also become subsidiaries of IDFC, which would hold 75% stake in them.

By: | Mumbai | Published: July 15, 2017 5:18 AM
Shriram Group, IDFC, MD & CEO Umesh Revankar, Shriram City Union, Shriram Group, IDFC,  Shriram Transport Finance Company, SFTC, RBI The life and general insurance businesses of the Shriram Group would also become subsidiaries of IDFC.

The proposed merger between the Shriram Group and IDFC may not hold any immediate benefit for Shriram Transport Finance Company (STFC), but in the long-term, it would be extremely beneficial for the company, MD & CEO Umesh Revankar said on Friday. According to the details of the proposed merger shared by the two companies, STFC, a leading financier of pre-owned commercial vehicles, would be de-listed and would become a wholly owned subsidiary of IDFC. Shriram City Union, a financier of small businesses and two-wheelers, would be merged with IDFC Bank. The life and general insurance businesses of the Shriram Group would also become subsidiaries of IDFC, which would hold 75% stake in them.

“In the short run, the benefits may not be visible, but in the long run, it will be extremely beneficial because we will be able to retain the customers and have healthy margins. When you retain a customer for long, there is huge benefit on the cost of operation. The cost of operation comes down significantly,” Revankar said in a call with investors. IDFC Bank, with asset under management (AUM) of Rs66,500 crores, would have found it difficult to absorb the assets of STFC, which has an AUM of Rs80,000 crore and has hence decided to leave the company outside the purview of the bank. “If we had diluted our equity capital too much, we would have violated the RBI’s licensing conditions,” Rajiv Lall, MD & CEO of IDFC Bank, had told reporters while explaining the contours of the proposed merger.

Allaying investors’ concerns on benefits of the deal, Revankar said being a part of a larger conglomerate would help bring down the cost of funds and increase the fee income through cross-selling a variety of products and services. However, he did not share any details on the quantum of the likely benefits. “We feel that even a 25-basis-point reduction in the cost of funds will have a substantial impact on our bottom line. Even a 10-15 basis points reduction can make a difference in our bottom line. Also, we will have the advantage of added revenue from cross selling,” Revankar said.

He said that if there is a bank within the group, retaining customers becomes easy because one can offer customers multiple services. “So in the long run, shareholders will benefit much more if they are part of the conglomerate,” he said, adding that he does not foresee any challenge in the two groups coming together and that the integration is likely to happen seamlessly.
Revankar said that although the process of obtaining necessary regulatory approvals has started, some of the regulatory clearances make take time. Analysts have said the key risk to the deal stems from the fact that the Reserve Bank of India could have objections with IDFC holding STFC as a standalone NBFC since it violates the RBI’s guidelines.

“The general principle is that no financial services entity held by the NOFHC would be allowed to engage in any activity that a bank is permitted to undertake departmentally,” the RBI had said in its final guidelines for licensing of new banks in the private sector issued in February 2013. Shares of STFC closed at Rs1029.40 on Friday, up 0.30%. Shares of IDFC closed at Rs56.10, down 0.71%.

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