KKR close to buying 10% stake in Shriram Capital for around Rs 2,000 crore, confirms top official

Restructuring plans

The group is in the midst of simplifying its overall structure. Shriram Capital is set to spin off its insurance and other businesses into a separate company. Then it will merge its remaining financial vertical with an amalgamated entity of two of its listed entities–Shriram Transport Finance and Shriram City Union Finance.

As of now, the general insurance business is owned largely by Shriram Capital (formerly known as Shriram Financial Holdings Pvt. Ltd.) with 19,85,95,747 shares, representing 76.63 per cent of the paid-up capital of the company. Sanlam Emerging Markets (Mauritius) Limited holds 5,94,04,203 shares, representing 22.92 percent of the paid-up capital. Total public holding is 11,62,800 shares, representing 0.45 per cent of the paid-up capital, according to figures published in its latest annual report.

The stake sale to KKR will be from Shriram Capital’s kitty. 

Shriram Capital itself has a diverse ownership. Shriram Ownership Trust (SOT), which will emerge as the holding company of the group’s financial services business, has a stake of 29.7%. TPG holds 9.4 percent; the Shriwell Trust holds 13.2 percent; Piramal holds 20% and Sanlam 26%. 

Changed environment

The company’s annual report said that the general insurance industry is struggling to make profits. 

“The non-life insurance industry has grown over 6% in 2020-21. The gross written premium of the industry for the year ended March 31, 2021 was around Rs. 198736.21 crore as against Rs. 186712.58 crore in the previous year. But the growth of GWP is not coming with underwriting profits for the industry. Stiff competition and high infrastructure cost are hurdles to generate underwriting profits,” read the annual report.

Shriram General Insurance’s gross written premium (GWP) was Rs.2,139 crore for FY21, a fall from Rs.2,455 crore in FY20. The profit after tax stood at Rs.592 crore for FY21, down from Rs.741 crore in FY20.

The stake dilution should also be seen in light of policymaking that is friendlier to foreign ownership.

In February this year, the Union Finance Minister Nirmala Sitharaman began enabling the increase in the foreign investment limit in insurance companies in India from 49% to 74%, and allowing foreign investors control in the running of Indian insurance companies. 

The Indian government had begun opening the insurance sector to foreign players in 2000, by permittinga 26% FDI investment. In 2015, as the economy and the sector matured, the government increased the FDI limit to 49%. A year later, FDIs were allowed to raise their stake to 49% without government or central bank’s approval, through the Automatic Route. In 2021, Consolidated Foreign Direct Investment Policy of 2020 (FDI Policy) was amended to increase the FDI limit in the insurance sector to 74% and through the Automatic Route. The latest amendment meant the foreign investors could control the running of their joint ventures with Indian partners.

Most of the players in the insurance sector are joint ventures between overseas insurers and Indian partners. Until the FDI limit was raised to 74%, overseas partners had been hesitant to raise their shareholding to the earlier limit of 49%. Their reluctance was understandable, since the earlier limit did not give them operational or management control, which would remain with the Indian partners. Moreover, joint-venture agreements required foreign partners to acquire any increased stake from the Indian partners through purchasing shares. 

In such a scenario, the foreign investors were unable to infuse capital in the Indian insurance company, for example, for technological development or product innovation.