IDFC-Shriram group merger a win-win situation for IDFC Bank: Vinod Rai

IDFC Ltd is the parent company of IDFC Bank and is the one which is going to drive IDFC-Shriram merger forward.

In an interview to CNBC-TV18, Vinod Rai, Non-Executive Chairman of IDFC spoke about the same.

IDFC Bank is a very strong entity. They did not have retail footprint and did not have too many retail customers. So merging with the Shriram Group was a terrific win-win situation for the IDFC Bank, he said.

“We are confident of being able to get the regulatory clearances,” he added.

Shriram Transport Finance Corporation is an excellently structured and very professionally managed company.

He believes, the roadmap for this has been worked out keeping this regulatory concern in mind.

“At present, IDFC holds about 53 percent in the bank and as per the listing agreement, we are required to bring it below 40 percent after three-year period which is where this merger will get us to,” he further mentioned.

Below is the verbatim transcript of the interview:

Nisha: You were conspicuous in your absence in the press conference as well but you are the parent company of IDFC Bank. IDFC Limited is down almost 4 percent in trade currently, after the exclusive talk announcement has been done on Saturday and IDFC Bank is also showing tepid gains in trade today, if you can explain the rationale and also in terms of how you are going to take it forward. What is in it for IDFC Limited shareholders, so that they take some cues and are positive about it?

A: I was absent in the press conference because I was travelling between London and Singapore.

As far as IDFC Limited and IDFC Bank are concerned, you are aware that the bank demerged from the IDFC Limited last year. It is a strong entity but of course they had good corporate book and a very good infrastructure. They did not have retail footprint and they did not have too many retail customers, so merging with Shriram Grou was a win-win situation for the IDFC Bank.

As far as IDFC Limited is concerned, it is a holding company which after the bank demerged had to go in for an entirely new business model. So the life insurance and the general insurance, we have been pursuing for a more than a year-year-and-a-half and the one that we have now hit upon along with Shriram Group is an ideal fit and I find that this business model going forward will be very suitable to both the groups.

Latha: You have been banking secretary also in the past and have very close links with how Reserve Bank of India (RBI) handles banks. Do you think this will get regulatory comfort considering that the RBI has in the past said that all lending businesses -- anything a bank can do should be done by the bank and not by a group entity?

A: Absolutely right. We have some element of confidence in being able to get the regulatory clearance for this and that is why after exploring all the angles of this only we decided to go forward and hence these 90 days exclusivity period in which we propose to consult with all the regulators and only upon getting the green signal that we will be moving ahead.

Latha: So RBI did give you some informal comfort?

A: I am not committing that they gave us an informal comfort but we are confident of being able to get the regulatory clearances.

Nisha: We see on the market that the Shriram Transport Finance Corporation stock has been punished in the trade today after the announcement. How do you give that kind of a comfort because the investors into Shriram Transport Finance are bothered about the merger with IDFC Limited? If you could give more clarity on how this is going to go ahead and what is in it for Shriram Transport Finance's shareholders as well?

A: Not being in India now, I am not sure which way the market been going and today the trade also, I believe, were disrupted for a short while, but Shriram Transport is an excellently structured and very professionally managed company and obviously merging with the new entity, the stakeholders would be concerned about which way it would be going but when we were negotiating this and thinking about it, we found that in terms of philosophies of the two institutions and the philosophy of Shriram Group is an excellent philosophy and they have a model which is very ethical and very well premised on robust transparency. So I guess what you are seeing today in the market is only a temporary uncertainty which happens just about after every merger brought out in public domain.

Going forward, I think, on both the sides, the IDFC stakeholder side as well as Shriram side, there will be good comfort arising. As far as IDFC is concerned, we will be having our annual general meeting (AGM) towards the end of the month and we will get an opportunity to be able to explain to our shareholders directly about what the merger is going to bring in for them.

Latha: What maybe Ajay Piramal's personal stake in the merged entity which is IDFC Bank?

A: I cannot make a commitment about IDFC Bank because I do not have that figures with me right now.

Latha: I agree because the swap ratio is not announced either for IDFC-Shriram Capital or for IDFC Bank-Shriram City Union Finance. I take your point that we will not know the exact stake but however you do the math; it looks like Mr. Piramal personally will have between 5-10 percent stake in the bank. The RBI's discomfort with allowing a conglomerate to have over 5 percent stake in a bank is well-known. Did you get any comfort on that area?

A: On that the Chairman and the Director of the bank because I am not a Director on the IDFC Bank. So I will not be able to give you clarity on it but I am reasonably certain that the roadmap for this has been worked out keeping this regulatory concern in mind.

Latha: You are by far the most knowledgeable person in the whole area, you know how finance ministry thinks, you have a very good idea how Reserve Bank of India (RBI) thinks, given your long innings both in the finance ministry and in the Bank Board Bureau. I will tell you a lot of conglomerates want to get into the banking business, so this will be a test case. If Ajay Piramal is allowed, why not Ratan Tata, why not Kumar Birla, there will be others who will want to walk the similar path. So what is your sense, would RBI be comfortable allowing Mr Piramal 7-8 percent in the bank?

A: I am totally cognizance of the regulatory concerns on this issue. I am very conscious about it and I am also conscious of the fact that we have a roadmap as a consequence of which the regulatory concerns will be taken care of. So anything that has been mapped out, it is still early for me to make a commitment on that and you will get to know by the bank’s CEO or the directors that regulatory concerns has been factored into the merger process and we will take it forward with total comfort to the regulator.

Nisha: What is the path going ahead for IDFC Bank with only Shriram City Union Finance being merged into it and how will this work as a separate entity when it comes to Shriram Transport Finance?

A: You are asking about the bank. While IDFC is the promoter of the bank, I wouldn’t want to be holding forth on issues concerning the bank.

Though I am privy to some of them, the details of course is best to ask either the directors in the bank or the CEO.

As far as IDFC Ltd is concerned, the general insurance and the life insurance aspects of a model – we have been very conscious of and last year we have been looking to either merge with or espouse insurance businesses. We were told that the licensing agreement will not allow us to get into this businesses over a three period limit. Three year limit ends next year. That is the time when we find that this merger is going to add a huge amount of value as far as IDFC Ltd is concerned.

To that extent, I think it is a win-win for both the entities.

Latha: Shriram Transport will remain a listed entity, right?

A: No, it will delist after a while. It will not be a listed entity totally.

Latha: It will get delisted?

A: It is a standalone non-banking financial company (NBFC) as of now and it will continue to be a standalone entity itself. It is too early for us to be telling about which way it will play out.

Latha: What about Shriram-IDFC Ltd merger? Shriram Capital is not a listed company, IDFC Ltd is listed, any idea whether you all will merge completely?

A: The holding companies don’t merge. The SCUF goes into the bank.

The holding companies stays separate. As far as we are concerned, the IDFC will be merging only with Shriram Transport, Shriram Life Insurance and the Shriram General Insurance.

Nisha: The licensing agreement and as per the RBI regulations, IDFC Ltd holds 53 percent stake in IDFC Bank, what are the terms? By October 2018, you have to bring it down to 40 percent. Is that one of the aspects that has been one of the key drivers for this large transaction?

A: Yes, we have been looking at wanting to get into a model arrangement where this stake-holding of the IDFC in the bank reduces to below 40 percent and that is exactly what is going to happen with this kind of a merger.

Latha: IDFC will have to hold 40 percent in IDFC Bank for the first three years, right? The promoting entity cannot reduce its stake below 40 percent. So the dilution to that extent is capped, you cannot dilute shares beyond a point?

A: At present IDFC holds about 53 percent in the bank and as per the listing agreement, we are required to bring it below 40 percent after a three year period which is where this merger will get us to.

Latha: Other question about IDFC Bank is what it needs is liabilities, it needs deposits, it needs branch network and people who can get these liabilities, that is not answered by this merger?

A: You are asking me again about the bank.

Latha: In IDFC, what is the jewel in IDFC’s crown? IDFC Bank. Surely you will have a view and you are not getting liabilities, you are only getting more assets from Shriram?

A: Exactly the point I am making to you. It is a jewel in the crown but the people who carry that jewel are better placed to answer this. I shouldn’t be answering on their behalf. That is all the point that I am making.

As far as Shriram Transport is concerned, it will list through the IDFC Ltd so it is not an issue at all.

Latha: I wanted to know what are the announcements we should expect from IDFC and Shriram? What we will get to know, what will we get to know in the next 90 days, only the swap ratio between Shriram City Union and IDFC Bank, is that the first of the announcements?

A: No, this is a fairly complex merger and we have to work with three or four regulators in this and you will soon be hearing announcements about how we are dealing with each of the regulators. Swap ratio of course is something which is very important as far as the market is concerned.

Nisha: Market is waiting to know how good the swap ratio could be in favour of Shriram group companies and that is why probably those stocks have taken a bigger knock than your own companies?

A: That is why I said, I am not watching the market from here but I am certain that it is going to be win-win for both the entities and this is the period immediately after the announcements so it is only very natural that there will be some uncertainty in the minds of the shareholders and the market would also perceive it in that sense but going forward, as more announcements come forward, the confident in the merger process will get built into the shareholders.

Latha: Is there any chance of a takeover code getting triggered and then open offer having to be made for any of the companies?

A: No, why should that happen. I do not see that happen.