The independent directors of Shriram Transport Finance Company Ltd (STFC) and Shriram City Union Finance Ltd (SCUF), the two listed companies of the Chennai-based Shriram group, with a cumulative asset size of approximately US$20bn (billion), themselves under the scanner in recommending a corporate restructuring scheme that raises many fundamental questions.
Shriram group, largely based in Chennai, having a dominant presence in a wide spectrum of financial services and being one of the largest lenders in the domain of commercial vehicles, has a very complicated ownership structure and is seeking to reorganise the group in what would qualify as one of the most convoluted corporate restructuring exercises.
Shriram Financial Ventures Chennai P Ltd (SFVCPL), Shrilekha Business Consultancy P ltd (SBCPL) and Shriram Capital Ltd (SCL) are unlisted and each has one significant external investor, respectively, being Sanlam group, Piramal Enterprises Ltd and TPG India Investments II Inc Mauritius and form the axis around which the group holding structure is built.
Investors like Sanlam of South Africa, and Piramals, who have recently been having their share of the limelight for the takeover of Dewan Housing Finance Ltd (DHFL) under the Insolvency and Bankruptcy Code (IBC) process. TPG India Mauritius, a PE outfit, had shaken hands with the Shriram group at various points in time to gain a strategic foothold in the group. They co-invested in the various private limited group holding companies and needed an exit which was not possible unless they swapped their investments with the shares of the listed entity.
It is essentially to facilitate this that a composite and complex scheme, which has different limbs, has been conceived and is the subject matter of the analysis herein.
The picture of the group structure and the composition of the shareholding in each of the companies is presented graphically.
Shriram Group Structure:
The various steps involved in the exercise under consideration are as follows. SBCPL first merges with SCL. After this, the shareholding that SCL gets in SFVCPL is cancelled for the given reason that SCL becomes a subsidiary of SFVCPL upon the merger and, under Section 19 of the Companies Act, 2013, a subsidiary cannot hold the shares of its parent. This view may be contentious but, on the surface, this action may not materially affect the outcome as this gets factored in the valuation of the shares.
After this, various ventures of SCL which are pre-existing, like its investment in life insurance, non-life insurance and other ancillary financial ventures, are demerged (hived off) into three resulting entities respectively for life insurance, non-life insurance and the rest.
With the above step accomplished, SCL has just two investments—one in STFC and the other, in SCUF. The next step planned is to merge SCL into STFC.
And, finally, SCUF is merged into STFC. The ultimate picture emerges with approximately the following shareholding pattern in STFC.
The audit committee and the independent directors of both the listed companies have approved the scheme and an illustrative extract of the recommendation is given.
“The Audit Committee noted that the Shriram Group management is of the view that re-organizing the Group's businesses by way of the proposed Scheme will aid in simplifying the holding structures and layers in the group which will help to focus on the evolving business strategies with a focused approach as is required for a particular line of business in a conglomerated entity having multiple businesses. The Shriram Group further believes that the proposed Scheme will help in facilitating further investment opportunities from strategic investors/financial investors depending on the particular business interests and risk appetite and also will help in achieving restructuring for shareholders of various group companies, in a manner which will unlock value for them. The proposed Scheme is expected to provide other intangible benefits that the Shriram Group has built over decades various businesses and exploit the synergies in the Group interests and risk perceptions.
The proposal in the Scheme to amalgamate SCUF with STFC, will also serve to be highly beneficial to all the stakeholders, by bringing together the capabilities and the presence of the Group in the categories of transport finance, and retail finance, and in the process create a larger financial lending entity with both these businesses combined, widen the range of services and products offered to customers and the resulting benefits of scale and synergies of operation. This proposed merger will further consolidate the leadership position of STFC in the 'Commercial Vehicle' market”.
Interestingly, the independent directors of both the companies used almost the same language to approve this, thereby giving credence to the existence of clairvoyance which has been in the news since the advent of the Himalayan yogi!
In an exercise like this, the only germane consideration can be the interest of the members (essentially non-promoter holders) of that particular company. The IDs of a company should not be keeping extraneous interests (logakshemam!) to evaluate this.
There are two components to this reorganisation. The first component is the merger of SBCPl into SCL and the demerger of SCL’ shareholdings of the non-listed companies in insurance. SCL, stripped of all assets other than STFC and SCUF shareholdings, is sought to be merged into STFC.
This is entirely to help Piramal (SBPCL) and TPG (SCL) get their shares swapped for STFC shares.
Shriram group’ private needs are not apparent as little is known about the ownership pattern of the group beyond the fact that a trust controls all the investments.
R Thiagarajan, founder of the Shriram group, has been often referred to in the press as the group chairman and the spokesperson, but his name is not visible in any of the public documents nor does he figure as a director in any of the private companies or as a trustee in the trust!
This seems akin to a few of the more illustrious cases in the country of a past chairman or a founder calling the shots from behind the curtains.
The chairman is not listed as KMP (key managerial personnel) or as a related party or as a promoter in any of the filings. Imagine if some compensation is paid to him or his relatives or to a company in which he is interested, it may not get picked up in any of the disclosures. All this may be perfectly legal and there is no insinuation of any violation in this comment.
What value and benefits have the IDs of SCUF and STFC seen accruing to the non-promoter shareholders out of the consolidation exercise in the first part? The two listed companies are capable of raising resources with no constraint and have been doing it respectively for about five decades in the case of STFC and about 30-odd years in the other case. The shareholding structure of the promoter company(ies) has little to do with the fortunes of the listed entities. This point is not laboured as the extract given above can be read and understood even by a layman as being grossly inadequate as an explanation.
It is quite important for the non-promoter shareholders to have clarity whether, in the event of any tax liability arising due to the restructuring, especially the demerger of the various investments in SCL, the promoters would indemnify the listed entity(ies)?
Equally, it looks unreasonable to have the listed entity bear the huge cost of the exercise, being the stamp duty and legal fees. The IDs report is silent on this.
The second leg of merging SCUF into STFC is not only far reaching but highly questionable as well. An exercise of such a magnitude cannot escape a microscopic detailing of the relative merits and demerits, alternatives evaluated and abandoned.
Blowing the common refrain that size provides synergy, etc, does serious injustice to the task assigned to IDs to independently evaluate the merits of the proposal.
These two entities are behemoths in their own right and the information given in the table below, along with two other similar companies headquartered in Chennai, may give an insight into various aspects of the business and the critical dissimilarities in the business models pursued by each entity.
It is not necessary that dissimilarity has to be explained as chalk and cheese only. It can be even between parmesan and parmigiana, which any connoisseur will smell and distinguish!
Both STFC and SCUF have long histories and the whisper on synergy has never surfaced any time before and seems a new discovery!
SCUF and STFC are considered as widely different by NBFC experts I spoke with and some were aghast that these two companies are being combined.
Without further labouring the point, is it impertinent to ask if the IDs are acting on the prompting of some disembodied voice whispering in their ears?
To wrap up this discussion, the low discounting for the two companies is a possible reflection of the market perception of the group. The quantum of related-party transactions is perhaps one reason. There are very many of them.
The most obnoxious is the payment of brand licence charges which has leapt magically in 2020-21 to Rs174 crore in STFC and Rs63 crore in SCUF, both showing a jump of almost 100% over that in the preceding year. The recipient is a private company, SVSL, whose details may be beyond public consumption and nobody knows how much this company spends on brand building to justify this payment.
A practice which, when Tatas put into practice, was felt to be an abusive way of taking money from publicly held companies into private hands!
Very surprisingly, the proxy advisory firms who have been vehemently opposing excessive managerial compensation have not spotted this issue!
Is Shriram serving a strange soup, sour, salty and sweet? Market should settle this issue, finally, how palatable it is!
Diogenes, the cynic, was the one walking the streets of Athens in broad daylight with a lantern in hand, purportedly looking for an honest man! He didn’t leave his record behind of how many he saw, if at all.
He would have needed a searchlight, if he was looking for independent directors who put their foot down when confronted with untenable proposals clothed as if they are in the interest of non-promoter shareholders!
( Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies