Japan's MUFG Group To Invest Rs 40,000 Crore For 20% Stake In Shriram Finance

Japan’s Mitsubishi UFJ Financial Group (MUFG) will invest nearly Rs 40,000 crore or $4.5 billion for a 20% stake in Shriram Finance Ltd, marking the largest strategic investment by a foreign lender in India's non-banking financial company (NBFC) sector. According to the deals of the transaction, Japan's MUFG will acquire 47.1 crore shares at a floor price of Rs 840.93 per share.

"The Board of Directors of Shriram Finance Ltd (SFL) at their meeting held today approved entering into definitive agreements with MUFG Bank Ltd. for an investment of Rs 39,618 crore (~$4.4 billion ) in SFL through a preferential issuance of equity shares. This investment will result in MUFG Bank acquiring a 20.0 % stake on a fully diluted basis," said India's second-largest retail NBFC in a regulatory filing to the stock exchanges on Friday, Dec. 19.

As part of the deal, Japan's MUFG will subscribe to 47.1 crore shares at Rs 840.93 per share, which is a 5% discount to the current market price (CMP) of Rs 898. After the stake acquisition by Japan's MUFG Bank, Shriram Finance's promoter stake will come down to 20.3% from 25.4%.

Additionally, the existing public shareholder stake will dilute to 59.7% from 74.6% after the deal. Post the fund infusion, the book value increases to Rs 425.2 per share from Rs 321 per share, which is a growth of 32%. At a floor price of Rs 841, this translated to a price-to-book value of 2x.

The investment will be made through a preferential issuance of equity shares. MUFG will pay a one-time, non-recurring, non-compete and non-solicit fee of $200 million to Shriram Ownership Trust. MUFG also will have the right to appoint two nominee directors on the board of Shriram Finance.

Shriram Finance's Board will convene an Extra Ordinary General Meeting Of Shareholders On Jan. 14. The board has also approved certain minority protection rights in favour of MUFG. These rights will lapse if MUFG's stake falls below 10% on a fully diluted basis. Shriram Group's flagship company will explore possible restructuring of its holdings in businesses.

Shriram Finance said the deal would improve its capital adequacy, bolster its balance sheet, and offer long-term growth capital. It will also aid in accessing low-cost liabilities and strengthening credit ratings, the non-bank lender noted. Shriram Finance, owned 24.9% by the Shriram Group, stated that the transaction is subject to regulatory approval.

"The entry of MUFG as a key investor reinforces global confidence in India’s financial services sector and our role as a leader within it," said Umesh Revankar, Executive Vice Chairman, Shriram Finance Ltd on this deal.

Shares of Shriram Finance Ltd. rallied in trade to hit a 52-week high of Rs 910.80 after announcing the stake acquisition and the deal with MUFG Bank. Shares of Shriram Finance rallied 4.81% so far in the session to hit a record high. The NBFC stock has risen 55.7% on a year-to-date basis and 54% in one year. Since talks of the MUFG deal were first reported in early October, the non-bank lender's shares have jumped about 46%.

The landmark transaction will be the largest foreign direct investment in a financial services company in India and reflects foreign banks bet on Indian growth story. According to the filing, the investment in Shriram Finance will be MUFG Bank’s parent entity's largest investment in India so far.

Commenting on the current deal, Hironori Kamezawa, Group Chief Executive Officer, Mitsubishi UFJ Financial Group said, “MUFG is proud to enter into this transaction and become a strategic partner of Shriram Finance, one of India’s most respected financial institution.''

Japanese banks increasingly investing in local Indian financial institutions. In the past few quarters, foreign investors have lined up to buy a piece of India's financial institutions. Earlier this year, IDFC First Bank received Rs 7,500 crore from Warburg Pincus & ADIA.

Yes Bank saw Sumitomo Mistsui Banking Corp buying over a 24% stake. RBL Bank recently sold 60% stake to Emirates NBD for $3 billion, and Federal Bank will raise Rs 6,200 crore equity from Blackstone for 9.99% stake.