The Reserve Bank of India has asked private equity firm Warburg Pincus to bring down its stake in mortgage lender Home First Finance to 20% or lower before completing the proposed acquisition of Shriram Housing Finance, according to two people involved in the transaction.
“Warburg has to divest 3% of their stake in Home First; they currently have around 23%. The regulator has asked them to keep it at 20% or below because they are competing HFCs (housing finance companies),” the person quoted earlier told Mint on the condition of anonymity. “They’re trying to sell that out.”
In preliminary discussions
Another person privy to the transaction said that the regulator is in the preliminary stage of discussions with all stakeholders to figure out the contours of the deal and ownership transfer.
Shriram Housing Finance and Home First Finance are affordable housing-focused non-bank lenders. Shares of Home First Finance are listed on the exchanges, while Shriram Housing Finance is unlisted.
Shriram Finance had in May 2024 announced the sale of its housing finance subsidiary to Warburg Pincus’s affiliate company Mango Crest Investment. The proposed transaction is valued at ₹4,630 crore for equity and convertible instruments of the housing financier.
Shriram Finance holds a controlling stake in Shriram Housing, while private equity firm Valiant Partners L.P. (Valiant), Mauritius, owns the rest. As a part of this transaction, Valiant will also completely divest its stake to Warburg Pincus.
Shriram Finance, which is believed to have received the final go-ahead from the central bank last week, is now waiting for Warburg Pincus to complete the partial divestment of its stake in Home First Finance so that the Shriram Housing sale can go through, the person quoted earlier said.
“We have received approvals from all the regulatory authorities for divesting our stake in Shriram Housing Finance Limited, subject to compliance with certain conditions specified. We expect to complete the transaction before end of December 2024,” a spokesperson for Shriram Finance said in response to a query.
Pact for fundraising
Home First Finance had entered into an agreement with Warburg Pincus’ affiliate company Orange Clove Investments BV in October 2020 to raise around ₹700 crore through a combination of primary fundraise and secondary sales by existing shareholders. With this, Warburg Pincus joined existing PE firm shareholders True North and Bessemer Venture Partners and currently holds 22.9% stake in the company.
Home First Finance declined to comment, while emails to Shriram Finance, RBI and Warburg Pincus remained unanswered at the time of going to print.
According to Sonam Chandwani, managing partner at law firm KS Legal, one possible concern might be related to governance and control, as RBI is generally reluctant for NBFCs to transfer majority ownership to foreign investors. “This reluctance stems from the risk of capital flight during economic crises, which could destabilize the financial sector,” said Chandwani.
The RBI might not be comfortable with one entity holding large stakes in two similar or competing companies in the financial sector, said an analyst tracking non-bank lenders who spoke on the condition of anonymity. “This would be akin to two promoters holding large shares in two banks.”
According to another industry expert, “There are a lot of entities which are holding majority stake in one fund and are also have stake, maybe not as a promoter but as a strategic investor, in another NBFC. So there does not seem to a regulatory framework around this.”
Better business sense
However, he said, for Warburg Pincus, too, it might make better business sense to reduce its stake or exit its shareholding in Home First Finance.
“If they have the option to hold the entire or controlling stake in one housing finance company, why would they want a 20% stake in another competing entity,” he said. “So even in terms of business sense and optics, it makes sense for the PE to exit the other entity, if not immediately then over a period of time as part of ongoing corporate governance.”
Home First had assets under management (AUM) of ₹11,229 crore as of September. The housing financier recorded the highest-ever quarterly disbursements of ₹1,177 crore in the second quarter ended September, posting a net profit of ₹92 crore.
In comparison, Shriram Housing Finance had an AUM of ₹15,236 crore as of September. The company posted a net profit of ₹66 crore for the second quarter, with net interest income (NII) at ₹112 crore.
Source: Mint