Mint Explainer | Inside the Shriram–MUFG deal: Why proxy firms are pushing back

Touted as India’s largest cross-border deal in the financial sector, the $4.4 billion transaction has been positively received by credit rating agencies such as Care Ratings, Icra and Moody’s Ratings, putting the NBFC in an advantageous position to secure cheap borrowing.

But the deal faced scrutiny from two prominent proxy advisors. Mint takes a deeper dive into the deal and its implications for shareholders.

What rating agencies say

Following the deal announcement, Care Ratings became the first company to upgrade the domestic lender to ‘AAA’; ‘Stable from AA+’; stable’. The rating agency also reaffirmed the ‘A1+’ rating of the company’s commercial paper.

Enforcement also put AA+ rated credit instruments under monitoring with positive results. He said the transaction will significantly improve Shriram Finance’s capitalization profile, providing a large buffer to manage fluctuations in growth and asset quality given the target borrower profile. “This will strengthen the credit risk profile and lead to improvement in financial flexibility and earnings performance,” the institution said.

Moody’s, the last of the rating agencies, raised the company’s outlook from stable to positive on January 9, while also confirming its Ba1 long-term corporate family rating. It was stated that the investment proposed by MUFG will provide a stronger capital base, access to global expertise and financing channels, and will improve Shriram’s financing diversity and risk management practices over time.

In the rating justification, “The positive outlook reflects our expectation that YDYO’s business and financial profile will strengthen, supported by a strong strategic shareholder and a significant capital increase.” The statement was included.

Brokerages have also been making bull calls on Shriram’s shares since the deal was announced. Jefferies, Nomura and CLSA issued new ratings on Shriram Finance in December. Nomura increased its target price on the scenario by 5% and Jefferies increased its target by 8%. CLSA maintained its ‘outperform’ rating with its target price ₹1,030.

What do proxy advisors say?

Despite all the positive aspects, two leading proxy advisors have flagged the resolutions Shriram Finance wants to pass.

NBFC is seeking shareholders’ approval for three decisions:

• Issuance of shares worth 47.1 crore ₹39,618 crore to MUFG through preferential issue on private placement basis.
• Granting certain control rights to MUFG Bank.
• One-time, non-recurring payment of $200 million by MUFG to the promoter of Shriram Ownership Trust for non-competition and non-solicitation obligations.

Governance research firm Stakeholder Empowerment Services (SES) opposed all three proposals and Institutional Investor Advisory Services opposed the third. InGovern Research Services supported all decisions to sign the agreement.

The decisions will be submitted to shareholders for approval at the extraordinary general assembly meeting to be held on January 14. E-voting for the same started on January 11.

What is SES’s argument?

SES claimed that the Japanese banking giant wanted de facto control of Shriram Finance, which should have triggered a mandatory open offer. Proxy advice challenged the first two decisions, arguing that despite the large capital infusion, minority investors were deprived of the exit opportunity that is often required when there is a change of control.

Although the deal fell below the 25% threshold mandated by India’s takeover regulations, SES argued that the regulation bypassed the spirit of the law by placing MUFG “in the driver’s seat jointly with the promoter.”

The first decision is opposed by the SES on the grounds that “the preferential issue should be followed by an open offer, which is not currently foreseen.” The second decision is opposed on the grounds that “control rights were acquired without an open offer, the Investor (MUFG) was given special treatment, and existing investors were treated unfairly.”

The firm argued that MUFG gained influence through board seats and additional rights that exceeded the rights of original supporters. SES said in its note that “commercial reality” often outweighs actual legal texts, citing precedent decisions from market regulators and the judiciary.

“Commercial reality allows the regulator to lift the corporate and contractual veil when governance rights are structured to replicate control while avoiding open offer liability,” said Raheel Patel, partner at Gandhi Law Associates. Mint. The “commercial reality” doctrine put forward by SES finds echo in the current Securities and Exchange Board of India (Sebi) regime.

In response to the SES, Shriram Finance rejected the advisory’s allegations, arguing that no control, legal or practical, had changed.

The company argued that the rights granted, including two board nominations and secondment rights for key appointments, were “protective and reactive” rather than “proactive.” He emphasized that these measures were only aimed at preserving the MUFG’s proportionate existence and did not offer any preferential votes or economic advantages.

However, SES argued in an addendum dated January 7 that while a literal reading might suggest compliance, a “holistic approach” found that collective bargaining rights provided material impact to MUFG.

IiAS marks non-compete bonus

IiAS supported the first two decisions but joined the SES in opposing the third decision, which sought a non-compete fee in favor of the company’s existing promoters. Both advisories flagged payout, which aims to prevent promoters from setting up a rival lender, as a key governance concern with poor transparency.

Doubts focus on the deal’s outlook: Shriram Group retains management control and a 20% equity stake post-investment. Additionally, the Shriram Ownership Trust, which receives the payment, is overseen by the group’s own current and former leaders. IiAS believes that there is little clarity about the size and beneficiaries of the Shriram Ownership Trust.

“Lack of clarity on ultimate beneficiaries and allocation mechanisms creates information asymmetry between insiders and public shareholders,” warned Supreme Court lawyer B. Shravanth Shanker.

IiAS also questioned why a non-compete bonus was necessary for a group of promoters who did not actually leave. The firm questioned why this financial windfall was concentrated on a particular trust rather than integrated into broader deal terms for all shareholders.

Shriram Finance argued that the regulation was a strategic safeguard for its investor base. In response to IiAS, the company argued that the fee served to protect the value of its lending and credit business. The company claims the move protects the long-term interests of all stakeholders by legally restricting the promoter group from leveraging its deep industry expertise to create a rival platform.

But IiAS argued that as long as the promoters remained at the helm and retained a significant stake, their interests should already be aligned with the firm’s success. He argued that unless an entrepreneur is completely divested, paying a bonus to prevent him from competing with his own company lacks business sense and seems unnecessary.

“It is not clear why such protection is necessary,” the SES said. “If Shriram were to set up a rival business, this would be detrimental to his own economic interests as well as MUFG’s, given their similar shareholdings.”

IiAS also said that there is no clarity on the increasing businesses that the Shriram group will set up and that will compete with Shriram Finance.

“The company has stated that the group plans to enter the digital lending space,” IiAS said. he said. “During the conference call, the company stated that it plans to leverage MUFG’s digital play to enhance its platform.” Therefore, it seems unlikely that the group will develop a digital lending platform other than Shriram Finance.

What should shareholders do?

While the transaction is commercially prudent and significant in scale, the recommendations do not base decisions solely on commercial considerations. Their assessments are based on broader concerns such as governance standards and legal compliance.

“Management issues are mostly based on the perspectives of individual recommendations, and they can almost always be resolved,” said Kranthi Bathini, equity strategist at WealthMills Securities.

“Fundamentally, a shareholder with a long-term perspective needs to understand that Shriram Finance is a legacy business with strong fundamentals,” he said. He said having MUFG on board as an investor would give the company greater visibility and a stronger outlook, both of which would ultimately benefit minority shareholders.