5/4/12 Shriram dreams big for its non-finance business, engineers new ownership structure - Economic Ti…

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Shriram dreams big for its non-finance business, engineers newownership structureV Balasubramanian & Sanjay Vijayakumar, ET Bureau May 2, 2012, 01.48PM IST

CHENNAI: The Chennai-based Shriram group, known primarily for its strengths in the financial services

space, is all set to give a big push to its non-finance businesses, whose growth it had to curtail more than a

decade back because of regulatory concerns.

To start with, Shriram's non-finance businesses - represented by about 10 companies that make everything

from flexible packaging materials to guitars, and from supply chain management solutions to buildings - will

come under a new ownership and management Trust. Together, these companies generate about Rs 4,000

crore in revenues per year.

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"The non-financial services should grow like the financial services business," said R Thyagarajan, founder

chairman of the group.

After almost four decades of operations, Shriram's financial services businesses manage assets of over Rs

40,000 crore and services 6.5 million clients. They operate in areas such as truck finance, SME finance,

insurance, broking and chit funds. More significantly, they have attracted a slew of top-notch private equity

players.

"The focus will be on EPC (the group's interests are in Shriram EPC), IT (Take Solutions) and properties

(Shriram Properties)," said HR Srinivasan, Vice Chairman & Vision Holder, Take Solutions. For example, he

said, "the technology business is Rs 700-800 crore in size and we could take it to Rs 4,000-5,000 crore in

the next five years. The EPC business is now Rs 1,400 crore; we can take it to Rs 15,000-20,000 crore."

Shriram Properties MD M Murali said he sees a huge scale-up in the coming years. In the last 12 years, he

said, the company has delivered 7 million sq ft. In the next two-and-a-half years, it is targeting 9 million sq ft.

The new non-finance business Trust, named the Shriram Enterprises Trust, is a consequence of the Shriram

Ownership Trust, set up in 2006 to recognise as owners all the top officials who built the numerous financial

businesses of the group.

The Trust structure is handy in that more partners can be added at a later date and it is also free from tax

and regulatory issues. Group director S Natarajan, the architect of this uncommon ownership model, said

that there are 36 members in the Shriram Ownership Trust. Each is in the level of an MD, CEO, ED or

President. While the senior-most members have been given a 2.5% stake, the others have a 1% stake.

The total comes to 55%. Until they retire at the age of 60, the Trust doesn't yield them anything. They just

have to draw remuneration from their respective companies. Once they turn 60, they immediately get a 20%

return on what they are eligible for. The remaining flows to them over eight years.

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That still left 45% of the Trust stake unallocated. It was therefore decided to allocate 20% for future leaders. It

was the remaining 25% that was transferred to Shriram Enterprises Trust. In this, the top brass of Shriram's

non-finance businesses are eligible to join.

The group has also separated both Trusts, so that those in the ownership Trust can stay unaffected from the

fortunes of the enterprise Trust if they want to. That's because the nature of business and therefore the risk is

different. However, those such as Thyagarajan and Natarajan have opted to be part of the enterprise Trust as

well.

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Also, the group is in the process of creating a holding company for the non-finance business, much in the

same vein Shriram Capital for its finance businesses.

Srinivasan said, "The non-financial services business is not new to the group. What is new is the orientation we

are giving now." He said the idea is to build them as entrepreneurial initiatives. "We will provide the required

capital and management bandwidth to support their growth, as we want to push them to the next orbit."

It was in the early '90s, nearly two decades after starting out, that the Shriram group decided to foray into the

industrial sector. Thyagarajan had two reasons for such a foray. One, even if the financial services were

generating a return of 19%, shareholder value was being eroded because of high inflation of 12%. So, a cushion

was needed. Two, assets in the industrial sector usually create value in 7-8 years.

So, "We set apart 10-15% of the resources, including deposits, to set up industrial ventures," said

Thyagarajan. "It did not involve risk for the finance companies as they had only given loan to the ventures with

the equity coming from promoters."

But many of the non-business forays didn't last long. "The diversification was strongly disapproved by the RBI,

as they thought we are siphoning off money. We were under tremendous pressure to move out of the

businesses."

The group eventually had to exit businesses such as Sembawang Shriram Integrated Logistics, Hi Tech Arai

and Medicorp Technologies between 1999 and 2001.

The group, however, managed to retain interest in some small businesses such as Victory Laminations (into

flexible packaging materials) and Rambal (auto parts). Also retained were a cooling tower business and an

engineering services business, which were merged to form Shriram EPC in 2005. It is led by Thyagarajan's son

T Shivaraman.

Shriram Properties was started in 1995. Take Solutions was started in 2000. Both property and EPC

businesses have attracted PE interest. Shriram Properties has investments by TPG, Walton Street Capital and

Starwood while Shriram EPC has investments by ChrysCapital, UTI Ventures and Bessemer.

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