Shriram-MUFG Deal Faces Proxy Firm Opposition
The proposed $4.4 billion investment by Japan's Mitsubishi UFJ Financial Group in Shriram Finance has become a major talking point in India's financial sector. While credit rating agencies have welcomed the deal with upgrades, two prominent proxy advisory firms are raising significant concerns ahead of a crucial shareholder vote.
Rating Agencies Give Thumbs Up
Credit rating agencies have responded positively to the deal announcement. Care Ratings upgraded Shriram Finance to 'AAA; stable' from 'AA+; stable' and reaffirmed its commercial paper rating. Icra placed the company's AA+ rated lending instruments on watch with positive implications, noting the transaction will significantly improve capitalization and provide buffers for growth.
Moody's upgraded the company's outlook to positive from stable on January 9, affirming its Ba1 long-term corporate family rating. The agency stated that MUFG's investment will provide stronger capital, access to global expertise, and improved funding diversity.
Brokerage firms have also been bullish on Shriram's stock since the deal announcement. Nomura increased its target price by 5%, Jefferies raised its target by 8%, and CLSA maintained an 'outperform' rating with a target price of ₹1,030.
Proxy Advisors Raise Red Flags
Despite these positive assessments, proxy advisory firms Stakeholders Empowerment Services and Institutional Investor Advisory Services have flagged concerns about three resolutions Shriram Finance seeks to pass at its extraordinary general meeting on January 14.
The company needs shareholder approval for issuing 47.1 crore shares worth ₹39,618 crore to MUFG through preferential placement, granting certain controlling rights to MUFG Bank, and approving a $200 million non-compete payment to promoter Shriram Ownership Trust.
Governance Concerns Take Center Stage
SES has opposed all three proposals, arguing that MUFG is seeking de-facto control of Shriram Finance that should trigger a mandatory open offer. The firm contends that despite the massive capital infusion, minority investors are being denied an exit opportunity typically required when control shifts.
While the deal falls below the 25% threshold mandated by India's takeover regulation, SES maintains the arrangement bypasses the spirit of the law by placing MUFG in the "driving seat jointly with the promoter." The advisory firm cites the "commercial reality" doctrine, which allows regulators to look beyond literal legal text when governance rights are structured to replicate control while avoiding open-offer obligations.
Shriram Finance has rejected these claims, maintaining that no control has shifted and that rights granted to MUFG are "protective and reactive" rather than "proactive." The company emphasizes these measures preserve MUFG's proportionate holding without offering preferential voting or economic advantages.
Non-Compete Fee Draws Scrutiny
Both SES and IiAS have opposed the $200 million non-compete payment to the Shriram Ownership Trust. The advisories question why promoters who are retaining management control and a 20% equity stake need such a payment to avoid competing with their own company.
IiAS notes there is little clarity on the size and beneficiaries of the Shriram Ownership Trust, creating information asymmetry between insiders and public shareholders. The firm questions the commercial logic of paying a premium to prevent promoters from competing against a company they continue to lead and own significantly.
Shriram Finance defends the arrangement as a strategic safeguard that protects the value of its lending business by legally restricting promoters from using their industry expertise to build competing platforms.
Shareholder Considerations
Proxy advisories emphasize that their evaluations extend beyond commercial considerations to include governance standards and legal compliance. While the transaction may be commercially significant, governance issues remain paramount in their assessments.
Equity strategists note that governance concerns can often be resolved through dialogue and that fundamentally, Shriram Finance represents a legacy business with strong fundamentals. MUFG's investment is expected to provide greater visibility and a stronger outlook that could ultimately benefit minority shareholders.
The divergent views highlight the complex balance between commercial opportunity and governance standards in major corporate transactions. As shareholders prepare to vote, they must weigh the deal's financial benefits against the governance concerns raised by independent advisory firms.
