Inside the tangled web of Shriram Group

Surprisingly, the role of change-agent for Shriram Group is played by the grand old man who founded it together with two others over several summers. Not only this, R. Thiagarajan, or RT, as he is popularly called, remains the face of the group. Well into his 80s, he remained the main communicator. RT is an accomplished connector that has now engaged in the clever work of developing a thread to connect the past, present and future. How to ensure the smooth transition of the group into the future?

It’s an easy endeavor but filled with a mixed variety of bumps to navigate. That succession is a matter of this group’s journey in and out, in general, and RT’s tenacity, in particular, in driving it through trials and tribulations.

There’s a sense of urgency now to get a new image makeover. And, there is also a desire to gain wide acceptance. After all, this one group remains an enigma to many. For laymen, the group is simple. However, the reality is that it is built around a complex web. Groups are everywhere today. Chit funds, truck financing, SME (small and medium enterprise) lending, consumer credit, insurance (both life and non-life), private equity – you name the sector, the conglomerate is just there. It explored the bank option but failed.

Several factors—cross-holding in group companies, diverse operating sectors, different regulatory authorities—have all combined to complicate the structure of the group. Investor pressure, dynamic regulatory demands and changing business imperatives have forced the group to undergo a massive structural restructuring.

On 13 December, the group announced a plan of amalgamation with three components: the merger of Life and General Insurance and Shriram Capital’s other non-lending financial subsidiary, the group holding arm; Merger of Shriram City Union Finance (Consumer and SME Financing) with Shriram Transport Finance (Truck Financing); Reverse merger of remaining ventures of Shriram Capital with Shriram Finance.

Will all this result in a simplified structure? We’ll come back to this point and a little more to the entangled structure of the group.

First, let’s dive into the group’s beginnings and its early convulsions.

three Musketeers

Shriram Group had its humble beginning with the Chit Fund business in 1974. R Thiagarajan, AVS Raja and T Jayaraman were the “Three Musketeers” who founded the group. At that time not many people even remotely predicted that this small chit fund business is in India. Chennai will turn into the kind of financial conglomerate that Shriram is today.

Interestingly, there was a complete division of tasks between the three. If one had to turn to a source close to one of the founders, the RT was assigned the advisory task. He continues to do so today. Two other co-founders have long been in oblivion. Somewhere, when the chit business was on the rise, on the suggestion of the RT, it was decidedly decided that the children of the founders would not be allowed to join the group.

You need people with different strengths to run a diverse group like Shriram, RT told this correspondent a few days ago. “We have always moved in that direction. And, now we are moving fast in that direction,” he said, explaining the rationale for setting up a management committee in Shriram Ownership Trust, which will now be the promoter of the group.

Nominating employees to the committee for a long time seems to have put the matter of succession to rest. The question nonetheless persists over ownership. One thing is clear. RT, the guide, always seems to be decisive!

90s cramp

The Non-Banking Financial Companies (NBFC) sector in the 90s had seen a lot of turmoil due to the ravages of the unincorporated type of financial companies. These companies entice depositors among the middle class to park their hard earned money in their companies by offering unimaginable rates of interest and all kinds of freebies. When the Reserve Bank of India (RBI) woke up, the regulator introduced several prudential norms and made provisions for bad loans. This caught many NBFCs off-guard. Such was the quality of their assets, many went into losses due to high levels of provision.

The situation of Shri Ram group was also similar then. Fearing that a huge loss would make a run on its deposits, it decided not to apply the RBI norms and the auditors qualified it in their report. And, the group came under the purview of the regulator. It took some time for the group to clean up and organize their house.

Since Shriram had become a household name by that time, everyone—even its staunch critics—wanted it to tide over the tough times. “If it (Shriram) had failed, it would have been a catastrophe for the entire NBFC industry in the South,” said a top industry expert. When ratings became mandatory, Shriram managed to get the ‘perfect rating’, capitalizing on intense competition from nascent rating agencies.

However, crisis followed the Shriram group at regular intervals. It saw its mutual fund venture collapse following the wrath of the Securities and Exchange Board of India (SEBI).

Pei’s Darling

Shriram has come a long way since then, and has, somewhere or the other, become the darling of private equity (PE) players.

Statistician-turned-financial giant, RT struggled to gauge the regulators’ moves and yet managed to attract copious investments from several PE players such as Chris Capital, TPG Capital, Merrill Lynch, Cambridge, ICICI Ventures and New Bridge Capital.

All of them have investments in Shriram Transport Finance, Shriram City Union Finance and the group holding arm, Shriram Capital. In addition, the group managed to attract investments from strategic investors such as Citicorp, Axis Bank, Reliance Capital and FMOs of the Netherlands. Shriram Transport Finance Company and Shriram City Union Finance had raised more than once 2,000 crore from the capital market by way of non-convertible debentures.

Maybe some people have cashed out. Nevertheless, there are still some with the group. Ironically, the private equity players are, in a way, the cause of the latest developments—the concussion—around Shriram Group.

tangled web

Shriram group is a tangled web. And, the presence of wholesale investors in the unlisted holding company, Shriram Capital and other listed entities of the group has made it more complicated.

What is meant by amalgamation of groups?

Simply put, it allows the unlisted Shriram Capital, the holding company, to become a listed entity. It has a dual purpose. One, it opens an exit window for wholesale investors. It also provides members of the Shriram Ownership Trust (SOT), which has a stake in Shriram Capital, a mechanism to monetize their stake.

Does this mean that members can leave the SOT by encashing their holdings? If so, this could have a major ownership impact for SOT.

SOT is an idea born out of a desire to democratize group ownership. This largely includes the former and present key employees of the Shriram Group. The direct purpose of the SOT is to ensure that no individual or family owns or controls the group. The SOT is positioned as the ultimate promoter vehicle with a group of key people having a beneficial interest in the trust.

Will the scheme provide an exit option for the investing community as a whole? Answer is not clear. The unlisted holding company, Shriram Capital, will get listed through the reverse merger process. However, its other subsidiaries—life insurance, general insurance and others—will be merged and remain as unlisted entities. The demerger of the insurance business has become more necessary due to regulatory constraints. RBI may not allow insurance business to be merged with any NBFC. There are also regulatory-stipulated equity restrictions on any NBFC in any insurance venture. In view of this, the group has no option but to liquidate the insurance business before merging Shriram Capital with the merged NBFC.

Shriram Capital has diversified ownership. The presence of massive investors has reportedly put tremendous pressure on the founders to open an exit window in some way or another.

As CRISIL notes, as of March 31, 2021, Shriram Capital’s shareholders include: SOT (29.7%), Shrivel Trust (13.2%), Sanlam (26%), Piramal (20%), TPG Capital (9.4%), and individuals (1.7%).

These wholesale investors have become frustrated because an unlisted holding company with diversified listed subsidiaries is not an attractive proposition for any new investor. Clearly, wholesale investors are feeling ‘trapped’ in the holding company. Read against this background, reverse merger of the holding company with an integrated listed NBFC is inevitable and logical. But the new context will further add to the illusion of ownership in the group. If SOT is the new promoter group for its financial services business, there will be separate holding companies in different insurance and other ventures.

SOT (including Shrivel Trust) holds 42.9% stake in Shriram Capital. Shriram Capital holds 26% stake in Shriram Transport. Shriram Capital holds 34.6% stake in Shriram City Union Finance.

Given this, what is the holding of SOT in these two companies? Simply put, this means that SOT has an effective stake of 11.2% in Shriram Transport; SOT has an effective stake of 14.8% in Shriram City Union Finance. After the merger of the two NBFCs, the holding position of SOT will see a decline. Shriram Capital’s stake in the merged entity may be around 28.3%. Therefore, the effective share of SOT in the merged NBFC could be around 12.2%.

Once Shriram Capital is reversed with the amalgamated NBFC, the SOT holding company may turn further downstream to allow exemption. What makes this a complex amalgamation exercise?

In simple words, it provides a window for private equity investors to sell their shares in the stock market. Deep down, however, the question still remains to be answered: Who owns the Shriram Group? In the emerging context, can SOT really be called a promoter? With substantially diluted holdings, what control can the SOT hold over the amalgamated NBFC?

RT is still driving the directional course of the group. Until amalgamation-triggered integration is fully implemented, it may have to work at hand. After all, he is respected among Shri Ram employees. But what does the future hold for the group? Many are inevitable. What if the membership profile of the trust changes? What if the members of the trust choose to withdraw cash?

One can give a cryptic corporate nomenclature for this grand exercise. After spreading itself across multiple sectors and involving various investors, the Chennai-born group is trying to come up with new compulsions. How will it carefully cultivate the mass middle class clientele? Although it is easy to guess.

KT Jagannathan is a senior journalist based in Chennai.