Voting advisory firms back MUFG's $4.4 bn investment in Shriram Finance

Shriram Finance has secured the backing of voting advisory firms on its resolutions pertaining to a $4.4 billion investment by Japan’s MUFG Bank, the largest foreign direct investment in India’s financial services sector, for a 20 per cent stake in the country's second-largest retail non-banking finance company.

 

The special resolutions will be put to vote between January 11 and 13, with an extraordinary general meeting (EGM) scheduled for January 14. US-based Institutional Shareholder Services (ISS) and domestic proxy firm InGovern have issued reports recommending a ‘for’ vote on multiple resolutions to be taken up.

 

The first two resolutions are the preferential allotment of shares of 20 per cent shareholding to MUFG Bank and the grant of special rights to it. These are special resolutions requiring 75 per cent of votes cast. The third resolution is the $200 million (approximately ₹1,680 crore) non-compete fee being paid by MUFG to the promoter entity Shriram Ownership Trust (SOT). This resolution is an ordinary resolution, with promoters abstaining from voting. This prevents promoter affiliates from competing in lending, digital lending, fintech, or using the 'Shriram' brand in competing businesses (except existing activities), effective until the investor holds less than 10 per cent stake. Both voting advisory firms are unanimous in their view that the investment will improve access to funding.

 

As of now, foreign institutional investors (FIIs) have 49.61 per cent and Domestic Institutional Investors (DIIs) hold 18.65 per cent shares in the company, with many FIIs and DIIs being long-term investors. Promoters hold 25.39 per cent and non-institutional public investors hold 6.34 per cent. Post the issue of 20 per cent to MUFG, promoter stake will come down to 20 per cent, FIIs to 39 per cent, DIIs to 15 per cent, and public to 5 per cent.

 

ISS noted that there are no known issues surrounding the proposal for the $200 million paid to SOT and it is only to be paid upon completion of the preferential issue of equity shares to the investor, in accordance with the terms of the Investment Agreement. ISS also noted that the non-compete fee is being paid for a genuine restraint applied to the promoters to enter into any competing business and the agreement provides for scope of the application and duration. The promoters are being paid directly by MUFG and hence, concerns of any value leakage are mitigated.

 

InGovern noted that the non-compete fee is a one-time, fixed fee, not paid by the company, and is paid by MUFG directly to SOT, and is proportionate to the investment size and protects the core business and brand of Shriram Finance from group conflicts, with clear scope and sunset clauses.

 

The markets have been cheering the MUFG investment as the stock price has run up 20 per cent, even touching ₹1,010 per share from the ₹840.93 per share investment price. On Wednesday, it was seen at ₹995.9 per share at around 4 pm. Interestingly, CARE Ratings has upgraded the credit rating on Shriram Finance's non-convertible debentures and subordinate debt worth ₹2,500 crore to “CARE AAA; Stable” from “CARE AA+; Stable”.