MUFG’s $4.45 Billion Investment in Shriram Finance: A Landmark FDI for India

Mumbai | Kolkata: Mitsubishi UFG Financial Group (MUFG) is poised to disclosure a significant $4.45 billion investment in Shriram Finance, India’s second-largest non-banking finance company (NBFC), acquiring a 20% stake. This move indicates a potential full acquisition as major Japanese firms continue to enhance their presence in local assets.

Following the approval from MUFG’s board in Japan, Shriram Finance directors are set to meet to finalize the transaction, which will mark the largest foreign direct investment in India’s financial services sector. Recent clarification from the Reserve Bank of India, allowing banks to have equity stakes in NBFCs, has expedited discussions that began in June.

MUFG Meeting with Modi
ET was the first to bring news of these negotiations on October 1. Following this announcement, the share price of Shriram Finance surged by 42%. Under the agreed terms, MUFG will inject ₹40,000 crore ($4.45 billion) as primary capital without any secondary sale of shares. Reports indicate that MUFG plans to pay ₹842 per share, reflecting a 3.44% discount to Thursday’s closing price of ₹869.20. Consequently, Shriram Finance’s market capitalization stands at ₹1.63 lakh crore, making it the second largest among shadow lenders, trailing Bajaj Finance.

After the capital infusion, the stakes of the promoters, Shriram Ownership Trust and the South African firm Sanlam, will drop from 25.39% to 20.05% based on the increased capital. The Trust primarily holds shares through the holding company, Shriram Capital, while the remainder is distributed among public and institutional shareholders, such as the government of Singapore, Kotak Mahindra MF, Fidelity, and others.

Current management, including the CEO and chairman, is expected to remain intact, along with the promoter group. MUFG will initially receive two board seats but intends to increase its ownership and gain majority control through an open offer in the future.

Representatives from MUFG and Shriram Finance have not provided comments at this time. MUFG’s senior leadership team is traveling to India for the investment announcement and will meet Prime Minister Narendra Modi, emphasizing Japan’s commitment to India. This marks the second investment announcement involving a Japanese financial services firm within a week; Mizuho recently disclosed its acquisition of Avendus, while SMBC purchased a 20% stake in Yes Bank for $1.6 billion.

This is MUFG’s second attempt to secure a major stake in a rapidly growing NBFC in India, following an unsuccessful bid for HDB Financial Services last year. An anonymous source indicated, “The strategies for Yes Bank and Shriram are expected to be quite similar, aiming for majority control over time.”

JP Morgan, AZB, and Wadia Gandhi are acting as financial and legal advisors for this transaction.

Many analysts believe that MUFG’s investment will lead to an immediate upgrade in Shriram’s ratings, alongside access to lower-cost Japanese capital, which could reduce Shriram’s borrowing costs substantially.

Shriram Finance, formerly known as Shriram Transport Finance Co., underwent a name change post its merger with Shriram City Finance and Shriram Capital in November 2022. The firm has diversified its operations to include SME, personal, two-wheeler, and gold loans, focusing particularly on underbanked customers. By the end of the September quarter, Shriram Finance reported total assets under management (AUM) of ₹2.81 lakh crore, marking a 16% increase year-over-year and positioning it as the second largest after Bajaj Finance.

“The synergy between MUFG and Shriram Finance is notable, with no direct overlaps; MUFG primarily engages with large corporates and financial investors, while Shriram targets retail and MSME financing,” the source stated.

During the last fiscal quarter, Shriram Finance disbursed ₹43,019 crore, reflecting a 10.24% increase from the previous year, boosted by the surge in sales of commercial vehicles and other automotive segments. Shriram Finance’s executive vice chairman, Umesh G. Revankar, expressed optimism about maintaining this momentum moving forward.

In Q2, the NBFC recorded an 11.4% increase in net profit, rising to ₹2,307 crore, resulting in earnings per share improving from ₹11.02 to ₹12.27 year-over-year.