CHENNAI: Murugappa Group has decided to terminate the Joint Venture by buying out DBS Bank of Singapore in Cholamandalam DBS Finance Ltd (CDFL).
The stake buy-out is being done by Tube Investments of India and New Ambadi Estates Private Ltd, constituent companies of the Murugappa Group.
The entire stake of 37.48 per cent at Rs. 91 per share held by DBS bank (worth around Rs. 160 Crore), representing a 1.2 per cent premium to Monday’s closing price of the company’s shares traded on the Bombay Stock Exchange (TII).
The Murugappa Group (New Ambadi Estates Private Ltd.) will also buy out the fully convertible preference shares (worth around Rs. 216 crore) of DBS Bank in the joint venture. The move will see the Murugappa Group fork out a neat Rs. 376 crore in all.
The change in the joint venture status will be reflected in the company and subsidiaries’ names and their respective boards upon completion of necessary formalities.
According to a top Murugappa Group official, the deal is expected to be completed on or before April 12. Both Murugappa Group and DBS Bank have two nominees each on the board of Cholamandalam DBS Finance.
The shareholding of Murugappa Group in CDFL will go up to 74.96 per cent after the completion of the Buy-out.
Choldamandalam DBS Finance’s traditional businesses are vehicle finance and corporate mortgage products. After the JV, Home equity loans as an additional product offering was added. The company, after its partnership in 2005 with DBS Bank, entered consumer loan business.
After the DBS JV, serious operational issues came up between the partners. On one hand, DBS decided to expand on the retail front, whereas on the other hand, Murugappas wanted to focus on asset lending. The Former Citi banker, Atul Pande was appointed as the CEO by the company as a DBS nominee to expand the business. When the recession hit the markets, the money lent to borrowers became sticky and the relationship between these parties turned sour.
DBS Chief Executive Officer Piyush Gupta said on their decision to exit was based on the bank’s new strategy to focus on affluent and mass-affluent retail customers in India. “We had discussions with our partners and they were keen on secured asset financing in the mass market segment. That was not in line with our strategy and, hence, we decided to part ways,” Gupta said.
As the experience in the said business had not been satisfactory, CDFL decided in September 2008 to exit the business and focus on core / traditional asset financing businesses. A ranking official of the Murugappa Group admitted “It’s a costly learning”. A combination of factors ranging from management failure to global financial meltdown and stock market crash had all done in CDFL. Consequently, it had to dip into the reserves to write off bad assets.
The move, sources said, should be viewed in these contexts. The buy-out decision was taken after a detailed discussion between the partners, who have finally chosen to go their separate ways. “The acquisition of stake and the investment made by the group signifies our firm intentions and focus for the NBFC business”, said one of the officials of Murugappa.
“We will grow this business aggressively exploiting the vast opportunity,” quoted A. Vellayan, Executive Chairman, Murugappa Group.
Piyush Gupta, chief executive DBS, said the bank has recovered its “carrying cost of investment” from the deal.
He also added, “We spent some time figuring out what was the best way to maximize our business opportunity here and realized that we are not going to focus on the consumer segment for the next few years,” Gupta said, explaining the rationale behind the decision to end the partnership.
It is believed that the transaction, which is to be completed by April 12, will not have any material impact on DBS’ financial performance.
For the fiscal year March 2008-09, DBS India reported PAT of Rs 259 crore and revenues of Rs 617 crore; meanwhile the headcount during the year has risen seven times to about 400.
DBS sources its 8% of total business from India, making India the third largest after Singapore and Hong Kong. The growth rate of company’s India business is seen growing at 20 per cent to 25 per cent in fiscal 2011.
Shares in Cholamandalam DBS ended up 0.2 per cent ahead of the announcement, while the main index fell 0.7 per cent.
Piyush Gupta commented DBS will now focus on the “corporate and top-end affluent segments in India”.