Shriram Capital halts 3-way merger after RBI request

Industry:    January, 2020

Shriram Capital Ltd. has held off a plan to merge with its shadow lending arms after the Reserve Bank of India requested the group to cut its stake in its insurance business, according to people familiar with the matter.

The unlisted Shriram Capital, which counts billionaire Ajay Piramal and private equity firm TPG Capital as investors, was planning to combine with its publicly traded units Shriram Transport Finance Co. and Shriram City Union Finance Ltd. The proposal would have effectively turned the merged entity into a shadow lender along with a 77% stake in life and general ventures.

The central bank was concerned because insurance business isn’t typically the remit of a non-bank financier, said the people, who asked not to be identified as the discussions were private. The banking regulator has recommended non-bank financiers including Shriram to lower their holdings in insurance business to 50% or below, the people said.

The RBI’s direction is part of heightened scrutiny over the country’s troubled shadow lending sector after a major infrastructure financier defaulted on series of debt repayments, leading to severe cash crunch and sharp jump in bad loans.

Shriram Capital is considering to review the merger plan and could still revive the proposal, the people said. Representatives for RBI and Shriram didn’t immediately respond to requests seeking comment.

A deal would have given TPG and Piramal an opportunity to exit from Shriram Capital. Piramal Enterprises Ltd., which bought TPG’s stake in Shriram’s transport finance unit in 2013, tried and failed to combine the Chennai-based group with IDFC Ltd. more than two years ago.

Shriram Transport provides loans for new and pre-owned trucks, while Shriram City Union lends to borrowers to buy consumer goods and motorcycles.