IDFC-Shriram merger: Top management speaks about the deal

Thyagarajan: Growth, if it has to be achieved, you need more and more partners to assist you in the growth and that is how we have grown all these years; it was not one single individual trying to create an enterprise, it was not like that. We had a series of partnerships over the years and each one of them has helped us to grow further and further. So this is going to be the latest partnership that we will be entering into and it will assist us grow still faster and be more useful to the community and that is our prime objective.

Q: Why this merger and what do you get with Shriram Group merging with IDFC and IDFC Bank?

Lall: This merger works at many different levels. As far as IDFC Bank is concerned, first and foremost it accelerates our retailisation process because it adds Rs 20,000 crore odd to just our retail book and improves our average yields. It improves our return on equity (RoE) and therefore those are the financial aspects of it but more importantly directly through absorbing Shriram City Union Finance (SCUF) and indirectly through the association with other group companies that come under the umbrella of the joint group - IDFC Bank will gain access to over 10 million customers. On top of that we gain access to over 1,000 new points of presence for distribution. So distribution, new customers means that it accelerates also, quite apart from retail assets, our ability to grow our retail liabilities franchise. Those are the key things for IDFC Bank.

As far as IDFC Limited is concerned, IDFC Limited becomes an owner of a much stronger bank. IDFC Limited was obliged by regulation by next year to reduce its stake from its current 53 percent to 40 percent. This merger allows it to do that very elegantly in a very construct way. IDFC Group will inherit the earnings, all the earnings of what will become 100 percent subsidiary which is a Shriram Transport Finance Corporation and that means therefore IDFC Limited shareholders, they will have much greater visibility to dividend payouts in the future than in the past. It will acquire a very significant stake in the life insurance and the general insurance companies of the Shriram Group and therefore as a financial conglomerate we expect two things to happen for IDFC Limited shareholders - one is that we expect this transaction to be earnings per share (EPS) accretive for them and second, for the holding company discount to become smaller than it is and therefore it is a win-win for both IDFC Limited and IDFC Bank shareholders.

Q: It is a complex structure and some of nitty-gritty need to be understood, but as an investor as well, a big one in Shriram Group, you are going to stay on in the merged entity even after the merger and what do you see in this merged entity, what is the rationale for you as an investor also to be in it?

Piramal: As an investor and I think I speak on behalf of the whole Shriram Group because all of us have invested in it. I think there are several advantages. One is clearly the cost of the liabilities will come down. Today Shriram has a book in excess of Rs 100,000, it is a book which is rapidly growing every year and we add almost Rs 20,000 crore as a loan book every year and if the costs can come down, that is a significant advantage. That is one thing.

Second thing is, today Shriram has more than 1 crore of customers all over the country. These customers are those who only take loans from us. However, now with coming together of the IDFC Group and us, we can now offer other products to the customers. We can offer savings products, we can do wealth management, we can do so many other things and these are customers who till now have not been even touched by the general banking system, so these are the underserved customers and if we can provide a larger bouquet of products that will be beneficial to the customer first, and to us as well. So, these are some of the clear advantages I see.

Third, I think this just maintains that over the long run this will be an institution that will survive over several centuries. A bank, it is in the black swan event, a non banking financial company (NBFC), that is where you fall back upon a bank and this gives us an opportunity to do that as well.

Q: Speaking from the Shriram Group shareholders' point of view, what is the rationale that you could tell them apart from the ones enumerates by Ajay Piramal because minority shareholders are going to play a very important role. Once the boards approve, your due diligence is over, if you take it to the minority shareholders, the majority of the minority shareholders to approve and you have a huge institutional investor base?

Thyagarajan: When you create wealth faster which is what we think this merger will lead to, investors get benefitted. Minority shareholders, majority shareholders, everybody gets benefitted when the enterprise creates more and more value as we go along. The value creation process will be accelerated because of this merger is what we believe, and therefore our investors should be happy to welcome this kind of an initiative.

Q: If you could enumerate more for the benefit of probably the Shriram Transport Finance shareholders. What do they have in this particular setup because it is still going to be a separate NBFC which will be closely held by IDFC Limited, it probably will rule out all the benefits that would come as the overall banking space because the low cost current account and saving account (CASA), gungibility of the low cost deposit may not be available because of the structure that you have put under and on the other hand the bank will not get the priority sector lending (PSL) benefit. So how do you explain the rationale of a merger of this company and delist.

Lall: I will just complement some points that Ajay Piramal was making which is that the Shriram Transport Finance company, at the end is just providing asset products to very large number of - what are essentially small entrepreneurs. These entrepreneurs are in tier-III, tier-IV, tier-V of India and from a banking perspective, they are underserved. So, if we have an opportunity to now provide state of the art, convenient banking services, liabilities products to that customer base, I think it will help cement an already strong relationship into an unbreakable relationship between the service provider and the customer. The great strength of HDFC has been on a narrow suite of products, to develop such a deep and lasting relationship with their customer by adding a suite of banking products.

Q: So their retail branches would also be benefited by the bank under this kind of a setup because there is no merger, will you be able to really gain from the synergies. What are those synergies in particular which can come from Shriram Transport Finance on the bank?

Lall: One of the most fundamental and important changes that has happened in Reserve Bank of India (RBI) regulations, is to allow a bank to distribute liabilities products through a banking outlet or through a banking correspondent. There is no reason why the same arrangement cannot now be fashioned systematically between the distribution points of Shriram Transport Finance and the bank.

Q: Would you also be looking at a separate structure where you could reach out to RBI to merge this NBFC and seek a special permission, maybe in future?

Piramal: Let me add one more benefit, actually if the overall cost of funds for the merged entity, the bank and SCUF comes down, that effect will come on to Shriram Transport as well. I can see that the liabilities will come down because the banks, I think whoever they are borrowing from will bring down the cost of funds, so that is going to be a significant advantage.

Second thing I just want to clarify that it will still be a listed entity, Shriram Transport will be part of a listed entity which is IDFC Limited and because it is a 100 percent listed subsidiary, there should not be any, in our view, too much of a holding company discount or there should be no holding company discount because there is no loss, there is no leakage of tax. The dividend that is upstream into the holding company will not be subjected to any additional tax. So, that also I need to clarify.

Q: Here we have addressed the Shriram Transport Finance shareholders questions and IDFC Limited's company's concerns.

Piramal: In the future obviously there is an option available and I think in some ways to make such a mega merger you need to take a step wise approach. So, this is the first step to get into the SCUF business and the IDFC Bank Limited. As and when that is successful over a time, I think it would be natural to look at this; after all, it will be the same group.

Q: The prime driver was IDFC Limited's holding as a parent company in the bank as well, the restriction, 40 percent till October 2018 and thereafter you can go lower. So, that is the structure that you will maintain till that time?

Lall: I am not sure that structuring can be a prime driver of any conversation like this. Structuring is a -- you have to do to make something you intend to happen. So, it is a philosophical meeting of minds, alignment of purpose, you have not touched alignment of purpose.

Q: You are going to continue as the investor, but your shareholding that you have of course depending on the valuations, it would be above 5 percent in the bank.

Piramal: I don't know what the valuation is unless you are privy to something which I don't know. I can only just say one thing, that whatever in letter and spirit the RBI will permit, that is what we will do.

Q: This is not a backdoor entry that many may say, but your banking dreams, are you into realise your banking dreams through this by any means?

Piramal: I don't know how you went into my dreams yet, but we never applied for a banking licence till now; let me just clarify that.

Q: Last question on cultural integration and that is something that you both have tried to tackle between Piramal and Shriram and that is very well known in the market as well that it is not easy, the cultural integration is not easy. When it comes to IDFC and Rajiv Lall, how is that going to play out because in any merger that is the most important thing for the success?

Thyagarajan: Ajay was mentioning as to how he has managed in his various acquisitions and all that, how he has managed it very well, this cultural integration. The relationship between the Piramal Group and the Shriram Group, we again achieved the same integration, very pleasant manner, it has been very good. I am sure that with the kind of person that Rajiv Lall is, this process is also going to be very pleasant and pretty smooth, I don't think there will be much of a problem in cultural integration.