Mumbai: As IDFC Ltd and Shriram group prepare to begin their 90-day exclusivity deal talks this week, R. Thyagarajan, founder of Shriram group, lays bare the rationale behind the proposed merger, his choice of Ajay Piramal as his natural successor and why this deal will be lucrative for Shriram group shareholders. Edited excerpts from an interview:
What was the trigger to merge Shriram Capital with IDFC Ltd?
Over the years, there have been suggestions from investment bankers and other well-meaning intermediaries that we should merge with finance companies so that our size goes up and we will be able to do much better. Even our people believed that we should create bigger entities which are good for the economy. Such proposals had been coming. One or two banks also discussed with us. Already (our size is) Rs1 lakh crore (Rs1 trillion). When it goes to Rs2 lakh crore, you can’t remain a non-banking financial company (NBFC). Partly you become a bank, or closely associate with a bank. One thing was clear to me: once you become large, it is best to be closely linked to a bank. Banking is a core sector. The regulator and the government will not allow you to fail. An NBFC is dispensable.
When did the talks with IDFC begin?
One to one-and-a-half months back. We were just getting to know people. There was no serious discussion. Even today we are not clear. Actually, the dialogue will start in next two-three days (This interview happened on Thursday).
Is there a desperation at your end for this merger?
No desperation. We would have continued doing our job and moved into Rs2 lakh crore assets in the next three years or so. By also adding banking services, there is a benefit to our organization in the sense that you create another revenue stream for shareholders without having to spend the kind of money to start your own bank.
Is the employees’ trust in agreement with the deal?
They will be quite comfortable. Most are happy. Some anxiety, uncertainty will be there at certain levels of the organization. We will communicate once the structure becomes very clear.
What was the alternative plan you were looking at?
There wasn’t any. We were quite comfortable. Something came along, we thought the IDFC’s proposal was good.
Some of your senior managers in the employee trust had aspirations for banking.
The employee trust people had no dreams. They were not thinking like entrepreneurs. If at all somebody was thinking, it was Ajay Piramal. What we need in the long run was a entrepreneurial-decision taking person. Otherwise it will be managing the status quo. Every organization that has to survive in the long run has to change its course.
Did you overlook some of your senior managers to choose Ajay Piramal as the chairman of Shriram Capital?
I did overlook, including myself. I don’t mind replacing others if I felt there was somebody better. I have always held this view that when you find a better person, it is your moral responsibility to bring that person. It is not as if you are condemning the person who is occupying the position today. We had our ideas about—in what position (R.) Sridhar can do better. The fact that he was doing well in STFC (Shriram Transport Finance Co.) doesn’t mean he could have handled the position of CEO of Shriram Capital equally well. For the leadership of Shiram Capital, we felt that Ajay Piramal would be a better person.
According to many analysts, Ajay Piramal tried to change the culture with the appointment of McKinsey and Co.
Ajay Piramal felt that with the way the environment is changing we have to do certain things to change ourselves. It is precisely for this reason that we requested Ajay Piramal to come in. It is not to change the organization, but to equip the organization. Bringing in McKinsey was good.
Many see this deal as an exit option for private equity investors.
The deal is not designed to give an exit to TPG (Capital). They were quite happy with the way we were making progress in valuation, in our insurance ventures. In Shriram Transport Finance, it is difficult to increase valuation because of the big base. In insurance, we have created very large value in the past six-seven years and will be creating value quite aggressively.
Do you think STFC has reached a saturation limit in growth?
Had it been a stand-alone entity, purely based on EPS (earnings per share) increase, it can’t be more than 10-15% per annum. SCUF (Shriram City Union Finance) may have a greater increase for some time. But eventually finance companies will settle down to a 10-12% growth in EPS. Beyond that, it will be difficult. The insurance business can grow for the next five-six years. The valuation can go up by 20-30% per annum.
The minority shareholders of Shriram Transport Finance and Shriram City Union Finance feel short-changed after the deal.
People should feel bad when the structure is finalized. Today there is no structure. Our aim will be to give a fair deal to everybody. I was running the company for the sake of community. But I’m also aware that I have no moral right and I have to run it for the sake of shareholders.
We are not going to change that. We have to do whatever is in the interest of shareholder only.