Lack of succession plans pushing Shriram towards merger, say staff

IDFC Bank MD Rajiv Lall (left) and Shriram Capital Chairman Ajay Piramal in Mumbai on Saturday. Photo: Kamlesh Pednekar
The proposed merger of Shriram group finance companies with IDFC has raised several questions inside the group. Shriram group insiders are questioning whether the merger is required at all considering cultural difference would be a major issue. They are also questioning why the Shriram group needs IDFC when it can become a bank on its own. They have attributed lack of proper succession planning as one of the key reasons behind the management wanting the merger.

Former and current executives of the group and a few investors have agreed that there are challenges in terms of cultural synergy, apart from the regulatory challenges.

Shriram group founder R Thyagarajan did not respond to Business Standard’s request for comment. Phone calls were made to his secretary.

On Saturday, Shriram Capital Chairman Ajay Piramal agreed that cultural issues would be a challenge, but could be addressed. Thyagarajan said when Shriram partnered with Piramal, similar issues came up but were managed. He was confident it could be done again.

But Shriram group employees pointed out that when Piramal moved Umesh Revankar from the post of Shriram Transport (STFC) CEO and brought in another official, nearly 7,000 people resigned in less than six months. Revankar was reinstated later.

Employees said people did not leave in the event of internal succession. Key faces of Shriram — G S Sundararajan, who was Shriram Capital (SCL) managing director (MD) and group director and, Subhasri Sriram, MD of Shriram City Union Finance (SCUF) — left after Piramal. They had been with the group for several years.

“One of the major problems was that we (Shriram group) did not have a succession plan and the founder believed in an outsider (Piramal). Partnership and leadership are different things,” insiders and a former executive said. Piramal took over despite the group having many senior leaders, who had been with the company for decades. 

Over the years, Thyagarjan has said that the group progressed because of partnerships. He now feels the IDFC partnership will take the group to the next level of growth. 

Thyagarajan had earlier said he was happy for the company to be known as Piramal’s enterprise. A book released on him has quoted him as saying: “There has to be only one identity: An enterprise driven and led by Ajay Piramal.”

The Shriram group has over 50,000 people and has assets under management of around Rs 1 lakh crore.

Employees are also questioning why Shriram would want to merge with someone who has no experience with borrowers from the bottom of the pyramid — a segment that is Shriram group’s stronghold. IDFC is an infrastructure finance company, managed by somebody who has experience in infrastructure lending, how is he going to help a grass-roots-level lender, some have asked. 

Employees rue the group was taking them to a different organisation without seeking opinion from even those who have been with the group for 25-30 years. “We feel sad… even if it is co-branded, why do we need somebody else in the brand?” said a former executive.

If the management was really concerned about employees and customers, they should have merged SCUF and Shriram Capital with STFC. STFC is a listed vehicle and there will be liquidity for investors who want to go out. This structure could have gone to the RBI and sought a licence, they pointed out.

They pointed out that keeping STFC separate, under a non-operating holding company, going by Shriram-IDFC merger structure, is against RBI regulations — a bank and a NBFC cannot co-exist.

For Shriram Capital investors, the merger would be good as they would have an exit route and get liquidity. They would also get stake in the listed entities, including in the bank.

Piramal Enterprises owns 20 per cent of Shriram Capital, while Shriram Ownership Trust holds 45 per cent and South African Insurer Sanlam has 26 per cent. The balance is held by other investors, including US private equity fund TPG Capital. 

In SCUF, promoters hold 33.77 per cent, Apax partners, through Dynasty Acquisition FPI, holds 20.35 per cent, Piramal holds 9.98 per cent and the balance is held by foreign portfolio investors, mutual funds and others. In STFC, promoter and promoter group holds 26.08 per cent, Piramal holds 9.96 per cent, foreign portfolio investors, including funds, Sanlam Life Insurance, hold 47.47 per cent and the balance is held by other public shareholders and mutual funds.

Macquarie Research said that for Shriram shareholders, there was no benefit that can come out of the merger. “We think there are certain businesses, like old commercial vehicle lending, that are done better by a niche NBFC. Thyagarajan was very clear that the group does not want a banking licence…they did not even apply for a banking license in the last round. Hence, the move now is clearly a reflection of Piramal exerting its influence. Near-term merger ratios might warrant a trade, but, fundamentally, the group will become ‘avoid’ just like IDFC group,” it said.

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