In a bid to enhance its presence in the financial services segment, Ajay Piramal led Piramal Enterprises is all set to acquire 20 percent stake in Shriram Capital, Chennai-based arm of Shriram Group for over Rs 2,000 crore. Speaking exclusively to CNBC-TV18's Shereen Bhan, he said this acquisition will give the company two seats on the board, but no decision has been made yet on who will be on board. "We are in no hurry to decide who will be on the board; it is irrelevant," Piramal said.
Sharing views on this deal, R Thyagarajan, founder chairman of the Shriram Group said that Piramal Enterprise will support the company in this long-term partnership. When asked if the Piramal Group will exercise joint control post the deal, Thyagarajan said one should be not be pre-occupied with question of control. "The question of control does not arise if business is being run well," he added.
Mumbai-based Piramal Enterprises had picked up 10 percent stake in Shriram Transport Finance for Rs 1,700 crore in May last year. Piramal said that he has no plans to hike stake just yet.
Piramal Enterprises, which operates in the pharmaceutical, financial services and information management sectors aims to remain to invested and expand in these three segments. Earlier this month, Piramal Enterprises offloaded its 11 percent stake in Vodafone India to Britain's Vodafone Group Plc for Rs 8,900 crore.
Meanwhile, speaking about banking licence, Piramal said that Shriram Group will look into banking licence if rules made easier. He also feels that the group's entry into banking would not have been profitable under current guidelines. Thyagarajan added that banking was not a pre-occupation for the group and he wouldn't lose sleep over not having a banking licence. Shriram Capital was of the 25 applicants who were in the fray to get a banking licence.
Below is the edited transcript of the interview
Shereen: You said that discussions with the Shriram Group started much before the Shriram Group actually put in its application or expressed any desire to put in its application for a bank licence so this decision has in a sense been independent of Shriram Group's aspirations for a bank licence. What then has been the big lever for you to do a deal with the Shriram Group because you have your own non-banking financial company (NBFC), you have your own real estate investment company (REIT), you have already in that sense made your foray into the financial services spaces; what was the big driver for this deal?
Piramal: Shriram Group is uniquely positioned today. If you look at it across the four companies of the Shriram Group which form part of Shriram Capital, the assets under management today are Rs 75,000 crore and this is just the loan book of Rs 75000 crore. They have a leadership position as far as financing of second hand commercial vehicles is concerned. They also are leaders in other fields as far as the general insurance and life insurance is concerned. Shriram is unique, and from year one they have been making profit and whereas I see that most of the other insurance companies are actually starved of capital, here is a company which has enough capital to grow further.
Shriram is really well positioned to take advantage of the growth story that is India through its financial services space. They have 56,000 people across 2,600 branches. So, there was no way that we could have recreated this. It would have taken us several decades and they have been doing it for a long time. They have also given very good returns to their shareholders over the last several decades and that is why we decided to become part of this.
Shereen: You have said that this is a long-term partnership and this is not merely a financial investment. You are clearly confident of the kind of role that you see the Shriram Group playing in the financial services sector. I would then assume that you wouldn't be satisfied with only 20 percent?
Piramal: The way we look at it is, it is a partnership and if both the partners, Shriram Group and us decide that we should increase the shareholding we will be more than happy to do that.
Shereen: By how much could your shareholding go up by? I understand that you have a right of first refusal (RoFR) as far as TPGs 10 percent stake is concerned. How soon can we actually expect you to hike your stake from the current 20 percent which is what you hope to do and how much appetite do you have at this point in time?
Piramal: We have enough of an appetite to meet the needs of the growth story of the Shriram Group. How soon and all, lets see now. We have just taken the first step. We will move together in tandem and decide what we need to do.
Shereen: Has TPG expressed its desire to exit and how soon can we perhaps see TPG consider exiting that 10 percent stake and selling that stake to the Piramal Group?
Thyagarajan: TPG is just now not in a hurry to exit Shriram Capital. We suggested to them that they could take this opportunity to exit because it is about two years since they have made that investment and they could get some returns if they exit is what we suggested at this time/ However TPG wanted to stay on for some more years to come. They said they are not in a great hurry to exit and they would like to continue. So, they are continuing with us.
Shereen: Are they hoping for a better valuation which is why they decided not to exit this time around?
Thyagarajan: One of the things that influenced their decision was the depreciation of the Indian rupee. Their investment had been done at a time when the rupee was much better off. Therefore, the returns when you provide for the depreciation of the currency, came down. As far as increasing the shareholding of the Piramal Group I would say we treat our partners as equal partners irrespective of the quantum of investment or the percentage of investment that they have. As and when the business requires more funds for its growth or for creating excellence, I am sure the Piramal Group will be supporting the Shriram Group and gradually over a period of time it would become even on the basis of investment a sort of an equal partnership between the Shriram Group, the Piramal Group and the Sanlam Group.
Shereen: While it may not be a partnership of equals in terms of equity at this point in time, but what about control? Will the Piramal Group exercise joint control with 20 percent?
Thyagarajan: When we are working together as partners the question of who is controlling whom normally doesn't arise. We have had a few partnerships in the past. We have had some partnerships with the Telco and Ashok Leyland during early 90s. We have had partnership with Citi Bank. The question of who is going to control the business has never surfaced as long as the business is being run very well. I am sure that in this case of partnership also the question of who is controlling is not going to be a pre-occupation either for us or for the Piramal's or for Sanlam.
Shereen: It may not be a pre-occupation but let me ask you this and the reason why I ask you the question of control is because of the takeover code. It may not be a pre-occupation but effectively what I seem to be getting from the Chairman of the Shriram Group is that you will effectively be in joint control.
Piramal: I don't think that is a question. We are not violating any takeover code. It is Thyagarajan's way of saying that once you are in a company it is not of control, it is just of consultation with each other. So, it is not that we are going to control and appoint the Managing Director and we are going to do all that; I don't think that is the thing. It is limited by an agreement which is not as widespread as you would have got if there was control.
Shereen: Can you share with us what rights you will have? I know you get two board seats, have you decided who is going to be on the board? Will it be you to start with and what rights will you have a long with the board representation?
Piramal: We have not yet decided on who will be on the board. As I keep saying, this is really a unique relationship where I say that Thyagarajan is our nominee as far as we are concerned in the joint partnership. So, who will be on the board is irrelevant and over time we will decide. We are not in a hurry. I will give you an example.
We had a right to appoint a Director in Shriram Transport, the investment we had made about a year ago. We have not yet appointed anybody because we feel that the company is doing well and we didn't feel the need to appoint anybody. So, that is how we are taking this whole relationship. It is an open relationship; it is a relationship of trust and of mutual understanding.
Shereen: You spoke about Shriram Transport where you bought 10 percent stake. Are there any plans to hike your stake in Shriram Transport at this point in time?
Piramal: As I said, if and when the Shriram Group feels that there is a need, we will be there. Otherwise at the moment there are no plans to do so.
Shereen: Would you think that you will need the money sooner rather than later and how much would you be looking for as far as Shriram Transport is concerned?
Thyagarajan: Everything will depend on how the economy grows and how the companies grow. If the company needs growth capital we feel very comfortable that we will have the support from the Piramal Group. When it will happen will depend on so many other factors including the way the economy is going to grow. However, we feel comfortable that it will be available and the support will be available whenever we need it.
Shereen: I want to go back to the question of the shareholding. Currently the Shriram Ownership Trust holds 64 percent in Shriram Capital, 10 percent is held by TPG and 26 percent by Sanlam your insurance partner. You spoke about in the past situation where you would like to see equal partnership not just in terms of decision making but also in terms of equity. What has been the response of Sanlam as far as this particular transaction is concerned? Also have they expressed their intent or their desire to up their stake?
Thyagarajan: Sanlam's increasing the stake in Shriram Capital will depend on the government's decision about allowing foreign ownership in insurance companies.
Shereen: That I totally understand and that is capped today at 26 percent but have they expressed, were the rules to change, have they expressed the desire to be able to hike that stake?
Thyagarajan: What we feel and what we realized during our interaction with Sanlam is that they are quite comfortable with the concept of an equal partnership over a period of time between the three of us. They feel quite comfortable.
They have met Ajay Piramal, they have had interactions with us, we feel very comfortable with each other and with the concept of the three of these entities working together irrespective of the level of shareholding which each one of us has.
Shereen: Would there be a situation in the near future where you would perhaps consider diluting your stake even further and post this transaction can you give me a sense of the accurate ownership structure because there is 10 percent fresh equity and you are diluting 10 percent?
Thyagarajan: We focus on how to build an excellent enterprise and the needs of the enterprise will guide us to know how much shareholding each one of the three partners will be bringing in and at what point of time the private equity would like to exit
All these things will be determined by the way the businesses are growing which again is dependent on the way the economy is also going to grow. So, I think these are the things which will be determined by the needs of the enterprise.
Shereen: Is there a floor beyond which the Shriram Ownership Trust will not dilute its stake in Shriram Capital?
Thyagarajan: Shriram Ownership Trust is extremely flexible in its approach to ownership. The prime priority or the prime consideration for us is to build sound, excellent, model enterprises in the financial services area and to build the same not only within India, but wherever we can. So, in this we will have no constraints in decision-making.
We will be able to accommodate different partners. All the three partners we will have a harmonious relationship and in this there will be no constraints. We are not going to say that Shriram Ownership Trust should have a minimum of so much of ownership, that is not the way we look at it.
Shereen: Will you consider exiting all together? Is that even a possibility?
Thyagarajan: If it is going to benefit all these enterprises, then that option also would be considered. We will look at what is good for the enterprise.
Shereen: You are not averse to exiting the business all together?
Thyagarajan: We are all in it only to build a business. So, the exiting the business doesn't arise. However, reducing our ownership stake is something about which we have not been very particularly concerned.
The priority right now is how we build these enterprises, how useful these enterprises are going to be for the community. That is our focus.
Shereen: Let me ask you about the future now as far as the aspiration for a bank licence is concerned. While this transaction may have been independent of that decision we have already seen two approvals been given out by the Reserve Bank of India (RBI). You now have the differentiated on-tap route to explore. What are your thoughts from hereon?
Piramal: If there are certain conditions which are met for Shriram Group, which is that they don't have to fold in their non banking financial companies (NBFCs) and convert that into a bank, then the Shriram Group would be interested in getting a bank licence.
On the present guidelines, it doesn't make economic sense for the group to do that. We must appreciate when the RBI talks about priority sector lending as Shriram is actually almost everything in priority sector. So, it has to be looked at differently and if it follows what some of the expectations that the group has, then the group would go into banking.
