The $4.4 billion transaction between Shriram Finance and Japan's MUFG Bank has created a divide between rating agencies and proxy advisors, with the former providing upgrades while the latter raise governance concerns ahead of the January 14 shareholder vote.

Rating Agencies Provide Strong Support

Major credit rating agencies have responded positively to the deal announcement, viewing it as a significant boost to Shriram Finance's financial profile. The upgrades reflect confidence in the transaction's ability to strengthen the NBFC's market position.

Care Ratings became the first to upgrade the domestic lender, citing improved creditworthiness following the deal announcement. Icra emphasized that the transaction will significantly improve Shriram Finance's capitalization profile, providing a sizeable buffer for growth and managing asset quality volatility given the target borrower profile.

Moody's upgrade on January 9 highlighted that MUFG's proposed investment will provide a stronger capital base, access to global expertise and funding channels, and improve funding diversity and risk management practices over time. The agency noted that the positive outlook reflects expectations of strengthened business and financial profiles supported by a strong strategic shareholder and significant capital increase.

Brokerage Firms Echo Optimism

Brokerage firms have issued bullish calls on Shriram's stock since the deal announcement. Key recommendations include:

• Jefferies: Increased target price by 8.00%
• Nomura: Hiked target price by 5.00%
• CLSA: Maintained 'outperform' rating with ₹1,030.00 target price

Proxy Advisors Raise Governance Concerns

Despite positive market reception, two prominent proxy advisors have flagged concerns about three key resolutions requiring shareholder approval:

Stakeholders Empowerment Services (SES) has opposed all three proposals, while Institutional Investor Advisory Services (IiAS) has opposed only the third resolution. InGovern Research Services has supported all resolutions.

SES Arguments on Control Transfer

SES contends that MUFG is seeking de-facto control of Shriram Finance, which should trigger a mandatory open offer under Indian takeover regulations. The proxy advisor argues that despite falling below the 25.00% threshold mandated by India's takeover regulation, the arrangement bypasses the spirit of the law by placing MUFG in the "driving seat jointly with the promoter."

The firm invokes the "commercial reality" doctrine, suggesting that governance rights are structured to replicate control while avoiding open-offer obligations. SES argues that MUFG is acquiring influence through board seats and additional rights that exceed those of original promoters.

Shriram Finance has rejected these claims, maintaining that no control, legal or practical, has shifted. The company argues that rights granted, including two board nominations and secondment rights for key appointments, are "protective and reactive" rather than "proactive," intended solely to preserve MUFG's proportionate holding without preferential voting or economic advantages.

Non-Compete Payment Controversy

Both SES and IiAS have flagged the $200.00 million non-compete payment to the Shriram Ownership Trust as a significant governance concern. The payment is intended to bar promoters from launching a rival lending entity, but advisors question its necessity and transparency.

Key concerns include:

• Lack of clarity on ultimate beneficiaries and allocation mechanisms
• Questionable need for non-compete premium when promoters aren't exiting
• Information asymmetry between insiders and public shareholders
• Concentration of financial windfall in specific trust rather than broader deal terms

IiAS argues that as long as promoters remain at the helm and retain significant stakes, their interests should already align with the firm's success. The advisor questions why protection is required when competing against their own company would harm promoters' economic interests given their comparable shareholding with MUFG.

Market Perspective on Shareholder Decision

Equity strategist Kranthi Bathini from WealthMills Securities suggests that governance issues are often based on individual advisory perspectives and can typically be resolved. He emphasizes that shareholders with long-term perspectives should recognize Shriram Finance as a legacy business with strong fundamentals, noting that MUFG's investment will provide increased visibility and stronger outlook, ultimately benefiting minority shareholders.

The extraordinary general meeting for shareholder approval is scheduled for January 14, with e-voting having commenced on January 11.

India's largest inbound financial sector deal has put regulatory spotlight on an unprecedented $200 million non-compete fee arrangement that could test the country's securities regulations. Mitsubishi UFJ Financial Group (MUFG) Bank has agreed to pay this fee to Shriram Finance promoters as part of a $4.4 billion investment to acquire a 20% stake in the Chennai-based shadow bank.

Unusual Deal Structure Raises Questions

The non-compete payment, amounting to nearly 5% of the deal value, is designed to prevent Shriram Ownership Trust (SOT) from launching rival lending businesses under the Shriram brand or any other name. However, this arrangement differs significantly from typical M&A transactions where such fees are paid to promoters who exit after selling their stakes.

Unlike historical precedents such as Holcim's acquisition of Gujarat Ambuja Cement in 2006, where non-compete fees were paid to exiting promoters, SOT will continue as promoter, retain management control, and remain a significant shareholder even after MUFG's investment.

Regulatory Compliance Concerns

The arrangement has drawn scrutiny from investors and analysts questioning why SOT receives separate financial benefits while similar terms are not offered to non-promoter shareholders. India's Securities and Exchange Board of India (SEBI) mandates equitable treatment for all shareholders and prohibits extra payments to promoters "by whatever name it may be called."

Regulation 26(6) of SEBI's listing rules specifically states that promoters cannot enter agreements to receive compensation from securities transactions unless approved by the board and public shareholders. Additionally, rules mandate that non-compete fees paid to promoters must be factored into open offer prices for public shareholders.

Shareholding and Control Structure

MUFG will acquire its stake through preferential allotment of new shares and will be classified as a public shareholder. Following the issuance, SOT's direct and indirect holding will be diluted to 20% from approximately 25% currently. The Japanese bank will receive special rights including anti-dilution protection, board nomination rights for two directors, and secondment rights to place up to six personnel across SFL functions.

Industry Expert Analysis

Shareholder advisory firm IiAS questioned the rationale for the non-compete fee, stating: "Given SFL's market dominance and its ability to leverage its existing network, the rationale for paying a non-compete fee to Shriram Group remains unclear—especially as the group will continue as promoter, retain management control, and hold a 20% post-money stake."

SOT, established in 2006, operates as a private discretionary trust with 44 beneficiaries, all Shriram Group executives, several of whom are part of SFL's senior leadership. Legal experts note that employment contracts typically prohibit executives from participating in competing businesses, raising questions about the fee's necessity.

Unprecedented Terms and Duration

Ketan Dalal, founder of Katalyst Advisors, highlighted unusual aspects of the agreement, particularly the duration of non-compete restrictions. The restrictions remain in effect until MUFG's stake falls below 10%, significantly longer than typical three to five-year periods. Given MUFG's stated intent as a long-term strategic investor, this effectively creates indefinite restrictions on SOT beneficiaries.

The non-compete payment partially offsets promoter equity dilution from MUFG's investment—a benefit unavailable to public shareholders. While proxy advisory firms IiAS and SES have recommended voting against the non-compete resolution, InGovern and ISS have supported the arrangement. The deal represents a potential test case for India's regulatory framework governing equitable treatment of shareholders in major corporate transactions.