IDFC Ltd’s proposed merger with the Shriram group has raised a lot of questions from the reason to delist Shriram Transport to the potential benefits to who will be chairman of the new entity.
In an interview, IDFC Bank Ltd chief Rajiv Lall explains the rationale behind the deal. Edited excerpts:
What’s the rationale behind the decision to delist Shriram Transport Finance Co. Ltd (STFC)?
It’s a simple regulatory rationale. Merging Shriram Transport into the bank at this stage is regulatory-wise not possible because it would have implied a more than allowable dilution of the promoter entity (IDFC) which has an ownership stake in the bank. You cannot violate that.
Second, in terms of people, distribution, the transport finance business is very large. (It has) Rs80,000 crore in advances. In the bank, we have only Rs60,000 crore advances. With Shriram City Union Finance (SCUF) assets, we have the same size of assets in the bank as we have in STFC. When you financially merge two entities, the bank has to replace the liabilities of the NBFC. Banks cannot do bond financing. Expanding the balance sheet in one shot by Rs25,000 crore (i.e. SCUF), we believe we can do. But to do another Rs80,000 crore will be very challenging.
Third, this buys us valuable time. Nothing prevents us in fullness of time to contemplate a merger of the transport finance company into the bank. We have two, three, four years to figure out… technology integration, cross-selling of liabilities from bank to STFC customers, culture issues, people issues. Let’s make all that work first. And when that works, then we may be ready from a regulatory point of view to merge the two.
Why do you want to delist the shares of the firm? Will it happen soon?
That will happen immediately. It will become a 100% subsidiary of IDFC Ltd, but it will be listed through IDFC. So, all its profits and earnings will be captured in IDFC. That should be powerful for IDFC shareholders.
Over a period of time, do you intend to run down the book of STFC?
We will do whatever makes sense for shareholders. It’s too early to say how business is going to pan out. You could take the view that beyond a point, how far can just a transport finance business keep growing? From a much larger base, its growth will slow down, I imagine.
When Shriram wanted to apply for a banking licence, RBI had wanted the group to convert the NBFC (non-banking finance company) into a bank. There is some confusion whether RBI has changed its stance now…
When we got our banking licence, we were allowed to maintain one NBFC under NOFHC (non-operating financial holding company), that is IDFC Ltd. It is a monoline entity and cannot do all kinds of infrastructure lending. The regulation allows for the flexibility for a monoline NBFC to coexist as part of the group, provided the bank does not do the same business. So, the bank will not do any lending of the kind that the transport finance company is doing. We are such a young bank that we haven’t done any transport finance, so it is easy to say we will not do it and, therefore, meet the RBI condition.
How do you expect to grow your CASA (current and savings account) through small value customers of STFC?
There are 5-6 million customers of Shriram Transport who have a bank account somewhere. Even if each customer has an average balance of Rs20,000 in a bank account, we are gaining market share. They are small businessmen. If not savings, they will have a current account, working capital needs.
You seem to be in a hurry to grow the bank.
Why would you want to wait? If I’m buying five years of hard work organically, then why wouldn’t I do it? Shareholders keep complaining your revenues are not growing fast enough. You will have to carry all stakeholders. If I were an unlisted company, I’d take all the time in the world. But I’m not.
The Piramal Group had plans of merging Piramal Enterprise’s financial services business with Shriram Capital. Ajay Piramal said this in an interview to Mint that the possibility still exists. Have you discussed this?
It is not part of this structure.
You looked at many other transactions before finalizing on Shriram. Why didn’t the others work out?
Some had crazy valuations. (There were) culture, people (issues). Also, there was no alignment of purpose. R. Thyagarajan (Shriram group founder) repeatedly said he is dedicated to serving the community and this is what I’ve been trying to say. We want to do it in a profitable manner that creates value for all shareholders.
Piramal Enterprises joining hands with Shriram Capital has not translated into success. There was a lot of discontentment down the line. How will you ensure it doesn’t happen?
For making something work, it boils down to people. Time will tell that the commitment that senior people have to making this intent become reality. Our belief is that we can very much do it. Having learnt from previous experiences on both sides, there is a lot of thinking that has happened before we decided to pursue this.
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