Mitsubishi UFJ Financial Group (MUFG) is poised to make a strategic $4.45 billion investment in India's second-largest non-banking finance company, Shriram Finance, marking one of the largest foreign direct investments in the country's financial services sector. This significant move is expected to pave the way for MUFG's eventual acquisition of the company.
Background and Context
The talks between MUFG and Shriram Finance began in June and were fast-tracked after the Reserve Bank of India clarified that banks can have equity ownership in non-banking finance companies. Following the approval by the MUFG board in Japan, Shriram Finance directors are set to approve the transaction, which will see MUFG invest ₹40,000 crore ($4.45 billion) as primary capital for a 20% stake in the company.
Details of the Investment
MUFG will pay ₹842 per share, a 3.44% discount to Thursday's close of ₹869.20. The investment will result in the dilution of the promoter group's stake from 25.39% to 20.05%. The current management, including the CEO and chairman, will remain unchanged, and MUFG will get two board seats to start with. However, the Japanese bank is keen to increase its holding and take majority control of the company in the future.
Impact on Shriram Finance and the Market
The investment is expected to facilitate an immediate ratings upgrade for Shriram Finance, coupled with access to cheap Japanese capital, which is likely to bring down the company's borrowing cost by 50-60 basis points. Most industry analysts see this move as a strategic play by MUFG to capitalize on the growth potential of India's non-banking finance sector.
Shriram Finance has become a more diversified vehicle financier, offering SME, personal, two-wheeler, and gold loans. It has a large market share in the used commercial vehicle financing market and focuses on customers without access to bank financing. Total assets under management were ₹2.81 lakh crore at the end of the September quarter, up 16% from the year earlier.
MUFG's Expansion in India
This is MUFG's second attempt at getting a large holding in a fast-growing non-banking finance company in India, after unsuccessfully seeking a stake in HDB Financial Services last year. The MUFG senior leadership team is traveling to India to mark the occasion and is scheduled to meet Prime Minister Narendra Modi, reaffirming Japan's commitment to India.
Remember, this is a significant development in the financial sector, but it's essential to do your own research and consider multiple perspectives before making any investment decisions.
Key Facts:
- MUFG to invest $4.45 billion in Shriram Finance for a 20% stake
- Investment to be used as primary capital
- No secondary sale of shares by any investor
- MUFG to pay ₹842 per share, a 3.44% discount to Thursday's close
- Current management to remain unchanged, with MUFG getting two board seats