IDFC Ltd and the Shriram Group have decided to abandon the merger plan worked out in July this year as shareholder pressure and dilution fears force them to examine a new, less complicated structure.
People close to the situation said the two sides are planning to work on a new formula to salvage the deal that was supposed to bring two non-banking financial companies, one bank and an infrastructure finance company under one roof.
Fears of a sharp dilution in IDFC Ltd and IDFC Bank and protests by shareholders of Shriram Transport FinanceBSE 4.03 % (STFC) over the prospect of suffering ‘holding company discount’ have prevented the parties from continuing with the previous arrangement.
“IDFC Ltd was concerned with the valuation and higher dilution of stake in the merger, while shareholders of STFC were opposed to a merger with IDFC Ltd for fear of holding company discount,” one of the three persons said.
“We are examining other structures to work out a possible merger, including keeping the insurance venture out. Even the current structure being deliberated is not necessarily the final one.”
IDFC Bank declined to comment, saying an appropriate decision will be taken and communicated before October 6. Shriram Group did not respond to emails seeking comment.
The two groups had signed a deal in July to explore a complex combination of the various companies to create a mega lending-cum-insurance business. 
Shriram City Union FinanceBSE 1.59 % was supposed to be merged with IDFC Bank, while STFC, the Chennai-based group’s highly successful transport finance venture, was to be delisted and made a subsidiary of IDFC Ltd — the parent of IDFC Bank. IDFC Ltd was to be the group holding company that was to also own shares of Shriram’s insurance ventures.
The agreement was valid till October 8.
People close to the situation said a new structure will have to be worked out and it is possible that STFC will remain independent in the revised scheme.
Holding companies in India usually trade at a discount to similar large-sized firms and STFC shareholders, such as Government of Singapore and Oppenheimer Funds, may not have been happy with the proposal.
“This will help STFC shareholders own shares in a focused transport business rather than a diversified financial services entity,” said one of the people involved in the deal.
Unlisted Shriram Capital may be merged with IDFC Ltd, which is also a holding company. The combination of Shriram City Union Finance with IDFC Bank may progress as planned, said the second person.
The two companies may extend the exclusive negotiation period that ends on October 6.
“Both of us have developed a comfort level in the past three months and we think a merger will be beneficial to shareholders, stakeholders and community as both companies are complementary with lots of synergies,” said another person involved in the transaction. Shares of IDFC Bank have slipped 12.2 percent since the announcement.
IDFC Ltd is up 6.5 percent while STFC is down 4.5 percent. IDFC shareholders were also unhappy as the deal would have involved a dilution of nearly 72 percent in IDFC and 43 percent in IDFC Bank, as per analyst estimates.
Industry analysts and executives had questioned the deal due to its complexity and the potential regulatory hurdles, such as having an NBFC and a bank under the same non-operative financial holding company.
One of the conditions for awarding a bank licence to IDFC Ltd was that all lending activities of the group will be folded into the banking subsidiary and no separate lending business would be held outside the bank. The earlier proposal to make the transport finance business a subsidiary of IDFC Ltd and keep it outside IDFC Bank breached this condition.
Announcing the merger in July, IDFC Bank CEO Rajiv Lall had called it a “marriage made in heaven”. Founder chairman Deepak Parekh had said IDFC would get “readymade branches” and “hope the marriage happens”.
“This is a complex transaction,” Lall had said. “Our expectation is that the whole transaction that is perceived as single scheme of amalgamation will be approved only once by our boards, but it will take 12 months.”
