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The deal will create long-term value: Ajay Piramal

Interview with Ajay Piramal, Chairman, Piramal group, and R Thyagarajan, Founder of Shriram group

Piramal Group announced on Thursday it was, for Rs 2,014 crore, taking a 20 per cent stake in Shriram Capital, thus valuing the latter at Rs 10,000 crore. Ajay Piramal, chairman of Piramal Group, and R Thyagarajan, founder of the Shriram Group of companies, talks about the rationale for the deal, what lies ahead and their thoughts on the economy, in an edited interview with Aneesh Phadnis & Dev Chatterjee. Edited excerpts:

The Reserve Bank did not clear Shriram’s application for a banking licence in this round. Will you apply again?

Piramal: The issue of a banking licence was never a consideration when we decided to invest into Shriram Group. This is my personal view, that a banking licence is not as attractive as made out to be. A bank might not make money for the first 10 years. I am happy that Shriram Group has taken a very conservative view of banking. Most people outside think we will replicate existing private banks but that does not happen. The guidelines for the licences this time are different. I would have been worried if a banking licence was granted to Shriram under the present guidelines. I can now sleep at night in peace.

Thyagarajan: We are not obsessed about a banking licence. We made our application to RBI but its guideline regarding merging a bank with the non-banking finance business within a group in 18 months is not practical. We asked for an exemption but it hasm't happened. RBI governor Raghuram Rajan has spoken about differential licences. As and when RBI comes out with guidelines on this, we will look at it.

What was the need for Shriram Capital to raise funds from Piramal, considering the company and its subsidiaries are doing quite well?

Thyagarajan: Shriram Capital is growing quite rapidly and requires fresh funds to expand our business. Half the funds infused from Piramal will be used by the company in its businesses. All our underlying businesses are doing very well. The life insurance and general insurance businesses were able to make money in the first year itself.

What is so exciting about this deal?

Piramal: If India has to progress, the financial sector has to grow. Shriram Group is present in those areas where growth will be higher. They have a good team, a good organisation and a stable management. They are in the right sectors and with a consistent record. Look at the second-hand commercial vehicle financing segment; they are market leaders. Many companies tried to beat them but have not succeeded. Look at their insurance business. They are profitable from the first year.

What are the prospects of a non-bank finance company's (NBFC's) business now and how do you see the transition from a pharmaceutical company, venturing into various business areas?

Piramal: Our economy is capital-starved. The banking sector has a large overhang of non-performing assets. RBI has got tougher. Banks are hesitant to lend. Many do not have enough capital. Can the government keep funding them? As far as such companies are concerned, even public markets are not supportive. It is, then, institutions like ours that can meet the funding gap. There are solid reasons for entering the Shriram Group and I am excited about it. As far as our financial business is concerned, it is now tied up with Shriram Group and I am confident it will create long-term value.

How will Piramal investment help in growing the Shriram Group?

Thyagarajan: The coming together of entrepreneurial talent will help us build bigger and better institutions. It will bring support to venture in business areas which our people may have thought as adventurous. To give an example, expanding the insurance business in Thailand. There is a hesitation from our side, as we are not entrepreneurs. This could now change.

Piramal already has a full-fledged financial services business. Will that compete with Shriram and what opportunities do you see in financial services?

Piramal: Our NBFC business is not competing with Shriram Group. We have a private equity fund and a real estate fund, investing in big-ticket infrastructure projects. We see a lot of opportunities in the economy and once it picks up pace, the financial services business will grow at an average (annual) rate of 17 per cent. The economy is starved of capital. Banks are stretched and unable to reach customers. There is a great need for financial products in this country and Shriram, with its 53,000 employees and Rs 78,000 crore of assets under management, is in the right place to exploit this opportunity.

How optimistic are you about revival of the Indian economy?

Piramal: I am optimistic. About 65 per cent of the population is below 35 years. Every Indian is aspiring that the next generation will do better. The growth rate in India has come down to half of what it was. This cannot continue. There are too many forces within the country which will push the growth rate. It will happen especially if we have a stable government which is decisive and which believes economic growth can be brought about by entrepreneurs. Poverty will come down. This is not about the rich and poor.