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Fitch: Proposed Merger Has No Immediate Impact on Shriram Transport's Ratings
July 14, 2017 / 8:44 AM / a month ago

Fitch: Proposed Merger Has No Immediate Impact on Shriram Transport's Ratings

(The following statement was released by the rating agency) MUMBAI/SINGAPORE, July 14 (Fitch) The ratings of Shriram Transport Finance Company Limited (BB+/Stable) are not immediately affected by a recent announcement that the IDFC Group and Shriram Group intend to explore the possibility of a merger, Fitch Ratings says. Shriram Transport, the flagship company of the Shriram Group that provides financing for used commercial vehicles, is unlikely to be affected based on the proposed group structure. The proposal will maintain Shriram Transport as a separate subsidiary that will be 100% owned by the merged entity, alongside IDFC Bank, the main operating entity under IDFC Group. However, the structure itself may encounter stiff regulatory challenge. The IDFC Group and Shriram Group said on 8 July 2017 that they have agreed to exclusively discuss a merger plan over a 90-day period. During this time, the managements would look to finalise details such as the swap ratio, and seek the requisite approvals from various regulators overseeing the banking, insurance, and capital markets. Fitch believes regulatory approval from the Reserve Bank of India (RBI) will be the biggest hurdle to the proposed merger. The RBI had previously taken the view that banks cannot undertake any business activity through a separate entity that can be done within the bank; and the proposed structure of having a non-bank financial institution alongside the bank could be a significant barrier to the merger. While the managements believe that the RBI's on-tap bank licensing guidelines issued in 2016 take a more considered view on this aspect, we believe the central bank has not fundamentally altered its stance. Shriram Transport's main business is used commercial vehicle financing, which is also undertaken by various other banks. In the event the merger proceeds, Fitch would review the final terms of the merger and assess the impact on the rating based on the final structure, the role of Shriram Transport within the larger IDFC Group and any potential synergies that Shriram Transport may derive from the merger. Any changes that materially alter or impact Shriram Transport's standalone profile could lead to a review of its rating. While it may be difficult to assess the impact of the merger now, the agency is cautious about the potential benefits for Shriram Transport, which has a unique business model, and a different customer base and distinct culture compared with IDFC Group, which transformed from an infrastructure finance company to a commercial bank in 2015. The proposed merger also includes the combination of various other Shriram Group entities with IDFC Group companies. Shriram City Union Finance, the group's consumer finance arm, would be merged with IDFC Bank, which would put IDFC Bank on a par with Shriram Transport in terms of loans. Shriram Group entities have significantly better valuations than IDFC Group entities, which makes the pricing crucial for the merger to proceed. The managements of the two sides have indicated that the merger, should it happen, will take at least 12 months to complete. For more details on Fitch's rating on Shriram Transport, please see <a href="https://www.fitchratings.com/site/pr/1018663">Fitch Affirms India's Shriram Transport Finance's 'BB+' Rating, published 7 February 2017. Contact: Jobin Jacob Associate Director +91 22 4000 1773 Fitch India Services Pvt. Ltd, Wockhardt Tower, Level 4, West Wing, Bandra-Kurla Complex Mumbai. Ambreesh Srivastava Senior Director +65 6796 7218 Saswata Guha Director +91 22 4000 1741 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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