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IDFC-Shriram Merger: Shriram Transport May Be The Spanner In The Works

Fitch may review the ratings of Shriram Transport if the merger receives RBI approval.



A company representative, left, shakes hands with a visitor during a fair in U.S. (Photographer: Daniel Acker/Bloomberg)
A company representative, left, shakes hands with a visitor during a fair in U.S. (Photographer: Daniel Acker/Bloomberg)

The proposed merger between IDFC Ltd. and two Shriram Group firms may face “stiff regulatory challenge” given the deal structure, according to ratings agency Fitch Ratings.

As part of the proposed structure, Shriram Transport Finance will become a subsidiary of the merged entity but operate as a standalone non-banking finance company. This Fitch said in a note, may not pass muster with the Reserve Bank of India. According to central bank rules, banks in India cannot undertake a business activity separately that can be taken care of within the bank itself.

Shriram Transport, the flagship company of the Shriram Group, provides financing for used commercial vehicles – something many lenders undertake directly.

The managements of both IDFC and the Shriram Group, had said at a July 8 press conference, pinned their hopes on the RBI's 2016 circular for on-tap bank licences, which they said, took a more considered view of the matter. Fitch, however, pointed out that the central bank has “not fundamentally altered its stance”.

Fitch is also cautious about any potential benefits for Shriram Transport from the proposed merger as it already has a “unique business model”.

Shriram Group entities have significantly better valuations than IDFC Group entities, which makes the pricing crucial for the merger to proceed.
Fitch Ratings 

Fitch will review its rating of Shriram Transport only if the merger proceeds, provided RBI gives the go-ahead. The ratings agency will then analyse the final terms of the merger, assess the impact of the rating on the final structure of the merger and determine the role of Shriram Transport within the larger IDFC Group, it said.

Both the managements have indicated that if the merger takes place, the process will take at least 12 months to complete.