IDFC Ltd and Shriram Group announced a merger today to create a new financial conglomerate “IDFC Shriram” worth USD 10 billion, which IDFC’s Rajiv Lall referred to as a “marriage made in heaven” since the two group businesses complement each other.
Ajay Piramal said that the idea was to create a mass retail financial conglomerate.
Shriram General Insurance is one of the most profitable general insurance companies in India and IDFC Bank launched in October 2015 was a retail banking franchise driven by technology and also intended to focus on rural markets through its “Bharat Banking Division”.
The group is still expecting approvals from RBI, SEBI, IRDA, Competition Commission of India and stock exchanges for the merger to come to fruition.
This will be a complex transaction and will be hard to execute, with Deepak Parekh adding that Retail Transport Financing is a difficult business.
Parekh also said that IDFC needs more Retail Assets whereas Shriram Group requires Wholesale Assets.
The two groups have now entered a 90-day exclusivity talks period.
10 key takeaways from the IDFC-Shriram Merger-
#The new entity, named ‘IDFC Shriram’ is grand in scale and is a USD 10 billion worth financial behemoth
#The Shriram Group and IDFC have now entered into 90-day exclusive talks for the merger and no financial transaction has been finalised yet
# Shriram City Union Finance’s businesses will now be merged with IDFC Bank. Life and general insurance businesses will become subsidiaries of IDFC Limited. Shriram’s Transport and Finance business will remain as a standalone NBFC. Both the groups’ operating businesses will now come under IDFC.
#The merger is still waiting for the nods from Competition Commission of India, SEBI, Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority (IRDA)
# The merger is expected to help IDFC Bank enlarge its retail portfolio, as it is maintaining ownership shares at 40 percent. Shriram Transport holds a leadership position in commercial vehicle financing, while Shriram City Union offers small loans to a large base of customers across micro, small and medium enterprises in rural and semi-rural areas.
# The end ambition of the group is to build India’s largest mass retail banking franchise, with Lall adding that it should have DNA and ability to service the wholesale corporate community. IDFC Shriram will have a wide range of products under Savings, Investments and Security.
# Financial consultant Macquarie has said to expect 40 shares of IDFC Bank are expected for every one share of Shriram City Union Finance, and 18 shares of IDFC Bank for every share of Shriram Transport Finance.
# The companies have previously given out statements that the merger process will be "enormously complex" and the transition period may see competitors capture market share easily, further suppressing returns, the report said. Returns may also be corroded due to the burden of maintaining statutory liquidity ratio and cash reserve ratio as a bank.
# Shriram Transport will be able to increase its Pan-India reach post the merger, as per a statement by Sanjiv Bhasin from IIFL Markets.#
IDFC Bank’s total credit disbursal stood at Rs 85,172 crore in FY2017, while Shriram Transport and Shriram City Union boasted of assets under management worth Rs 78,760.93 crore and Rs 23,132 crore respectively.