By Express News Service

MUMBAI: Infra lender IDFC which entered into banking late 2015 and the Piramal Group-backed financial services major Shriram Group today agreed to merge and create the largest retail-focused bank in the country.

The boards of two groups met here today and at an evening press announcement, addressed by Ajay Piramal of Piramal Enterprises, R Thyagarajan of Shriram Group and Rajiv Lall of IDFC Bank, said the managements have been given 90-day period to complete due diligence and explore merger, and if all goes well, within 12 months a formal merger will take place.

"The boards of Shriram Group and IDFC have entered into an exclusivity arrangement for 90 days to jointly explore an opportunity for a merger. No transaction has been approved by the boards.

"Now, diligence will take place, we will discuss on the valuations and the respective boards will then meet and then a proposal will be made. If more time is needed then will extend the exclusivity period by another 60 or even 90 days," Piramal said.

The proposal is subject to approvals from the RBI, Sebi, Irdai, CCI and stock exchanges, Piramal and Lall said.

"Our ambition, hope and intent is to together make the country's largest mass retail banking franchise with a universal bank at its core," Lall said.

Piramal said: "It is really a chance to create a financial conglomerate with a universal bank at the centre that we believe will become the country's largest mass retail universal bank."

They did not say what could be the name of the merged entity, but added that the brand Shriram will be retained while almost all key businesses of the Shriram Group will be merged with either IDFC Bank or IDFC.

However, later, to a journalist's question, Piramal said since IDFC already has a banking licence, they will go with the name IDFC and not Shriram.

Currently, Shriram Group has a loan book of over Rs 80,000 crore while IDFC and its banking arm IDFC Bank together have loan book of over Rs 60,000 crore. The total assets of the merged entity will cross Rs 9 trillion.

Though Piramal, chairman of Shriram Capital and Piramal Group, and Rajiv Lall, MD & CEO of IDFC Bank, did not specify the valuation or share swap ratio, analysts say that at the current share prices, the merger ratio could be around 1:40, i.e., 40 IDFC shares for one Shriram Capital share.

Shriram Capital includes listed firms Shriram Transport Finance (STFC) and Shriram City Union Finance (SCUF), and unlisted life and general insurance arms which will get merged with IDFC.

With over Rs 40,000 crore in AUM, STFC is the largest financer of commercial vehicles, SCUF is into home, auto and personal loans; and both are held by Shriram Capital which is headed by Piramal as chairman since 2015 when he invested around Rs 5,000 crore in the Chennai-based group which is owned partly by the global private equity major TPG Capital.

Other private equity majors like Apax Partners own 20.37 per cent in SCUF since 2015, while STFC has Temasek, GIC and Abu Dhabi Investment Authority among its shareholders.

IDFC owns 52.86 per cent in IDFC Bank which was launched in October 2015 in the latest round of bank licences by taking over all its parent's assets. IDFC Bank is the seventh-largest private lender in the country now. Piramal owns 20 per cent in Shriram Capital and 10 per cent each in both Shriram Transport and Shriram City Union.

Analysts pointed out that the proposed merger may not be an easy deal given RBI's stance of not allowing a corporate entity into banking, and also its norms capping promoters'

stake under 10 per cent. Another hurdle could be Piramal Group's large and successful real estate business.

"It will be very difficult for the regulator RBI to overlook these facts and approve the merger, as if done so, the central bank could be accused of ignoring its own regulations," an industry observer told PTI.

Another observer told PTI that the merger is forced by poor showing of both entities. While Shriram Capital has been struggling to grow following changes in the truck finance business in recent years, conversion of IDFC into a bank has not done anything great to the infra lender so far.

Also, given the huge under-valuation that may be forced on the shareholders of Shriram group, they are unlikely to clear the proposal, he added.

Asked about fund infusion post-merger and the need to meet the SLR requirement, Lall said, "We are not only taking into account the SLR complication, there are also other regulatory obligations... Details on how we meet will unfold in the next 90 days but we are quite confident that we will be able to meet all of them."

On the proposed contours of the merged entity, Lall said, "It will be a conglomerate. All the operating businesses of two groups, including IDFC Bank and operating businesses of Shriram Capital, notably STFC, SCUF and insurance arms will come together under IDFC Ltd."

The retail-centric business of SCUF will be absorbed directly into IDFC Bank to expand the balance sheet by Rs 20,000-25,000 crore to help the retailisation of the bank, and it will have 1,000 retail branches, Lall said.

Asked about possible allegations of making backdoor entry into banking, Piramal strongly denied any such plan, saying, "I will meet all the regulatory requirements to ensure that the deal goes through."