The proposed merger between IDFC and the Shriram Group to create a mass retail franchise with a universal bank at its core hinges on a crucial approval from the Reserve Bank of India (RBI), which could be hard to come by, analysts said. “It meets most shareholding requirements, but the RBI could have objections with IDFC holding Shriram Transport Finance Company as a standalone NBFC,” Nomura Global Markets Research said in a note on Monday.
As per the details of the merger announced by the two companies, Shriram Transport Finance, a leading financier of pre-owned commercial vehicles, would remain a standalone NBFC that would become a subsidiary of IDFC. This move could face a regulatory hurdle since the RBI’s regulations do not allow the holding company of a bank to run another entity that engages in a business that the bank can undertake.
Most analysts have raised concerns over this issue.
“We believe the final deal could potentially be complex given involvement of three large listed entities. We also see potential regulatory hurdles as there could be issues in having an NBFC and a bank under the same NOHFC,” Jefferies Equity Research India said in a note.
In its final guidelines for licensing of new banks in the private sector issued in February 2013, the RBI had laid down detailed rules regarding promoters who are eligible to set up new banks through a wholly owned non-operative financial holding company (NOFHC) as well as the corporate structure of the NOFHCs.
“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. Specialised activities such as insurance, mutual funds, stock broking, etc. would have to be conducted through a separate subsidiary or a joint venture or an associate structure, the central bank had mandated.
IDFC Bank and Bandhan Bank were the only two organisations that had received permission to start banking operations according to the new guidelines. While IDFC Bank began operations in October 2015, Bandhan Bank started in August 2015.
IDFC Bank, with assets under management (AUM) of Rs 66,500 crore, would have found it difficult to absorb the assets of Shriram Transport, which has an AUM of `80,000 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, told reporters on Saturday, while explaining the contours of the proposed merger.
However, both the Shriram Group and IDFC are hopeful of getting the necessary regulatory approvals. While Lall said he is confident that the RBI will allow the deal, Ajay Piramal said the two groups are committed to following what the RBI exactly says.
Apart from this, the other key regulatory hurdle that analysts foresee pertains to the Piramal Group’s stake in Shriram Capital. Piramal Enterprises owns a 20% stake in Shriram Capital and a 10% stake each in Shriram Transport and Shriram City Union. Ajay Piramal, chairman of the Piramal Group, became the chairman of Shriram Capital in 2015.
“The thought process of the RBI while awarding banking licence was not to allow business houses to apply – if that is the case will RBI allow this structure given indirect holding of Piramal Group?” Edelweiss Securities said in a note.
In its draft guidelines for licensing of new banks issued in August 2011, the RBI had said entities that have 10% or more income or assets from real estate and broking activities in the last three years shall not be eligible to promote banks. Although it softened its stance in the final guidelines and removed this clause, it remains cautious on the issue.
The contours of the deal are expected to be worked out over the next 90 days and apart from an approval from the RBI, the merger would be subject to approvals from the Securities & Exchange Board of India, the Insurance Regulatory and Development
Authority and the Competition Commission of India.
As part of the deal, Shriram City Union, a financier of small businesses and two-wheel vehicles with an AUM of about Rs 23,000 crore, would be merged into IDFC Bank. The life and general insurance businesses of the Shriram Group would also become subsidiaries of IDFC Ltd, which would hold 75% stake in them.