The Chennai-based Shriram Group is likely to take over the cash-strapped front-end retail company of Vishal Retail Ltd, after leading private equity investor Texas Pacific Group takes charge of its wholesale division. This will be subject to approval from all stakeholders and regulators.
Three persons involved in the transaction said an associate company of Shriram Trust was likely to be the vehicle for this initiative. Shriram Trust owns 100 per cent of Shriram Capital, the group's holding company. It will also mark entry of the Shriram Group in multi-brand retailing. Shriram Group will pump in the initial Rs 50 crore and invest more as and when the capex requirement arises. The retail company will enter into different lease agreements to consolidate and expand the business.
Delhi-based Vishal Retail, under financial stress for one-and-a-half years, had approached its lenders to restructure its Rs 740 crore loans.
Under the debt restructuring agreement hammered out by the lenders and the company, VRL's business operations are being trifurcated. TPG came in as the strategic financial investor to run the wholesale business, with an 82 per cent stake and the remaining equity getting scattered among leading lenders like SBI and HDFC. TPG has agreed to make an upfront payment of Rs 200 crore in the new wholesale company and also put in an additional Rs 300 crore for funding future growth requirements. It has also agreed to take the entire liability of VRL into the wholesale company it will run.
The real estate assets -- including properties in Dehradun, Hubli, Kolkata and Jabalpur -- and other residual assets and liabilities were to continue under VRL. But VRL's management was planning to realise Rs 75 crore by selling all of that, including Vishal Water Park, a group company to repay the secured lenders.
VRL and the creditors were also supposed to have brought in a domestic investor for the front-end retail division and get it approved by the lenders doing the corporate debt restructuring. But with Shriram's name doing the rounds now, eyebrows are being raised. TPG has been a big financial investor in the Shriram Group and has deep business ties with them.
TPG has already invested close to Rs 1,000 crore in two different Shriram Group entities -- Shriram Transport Finance (STFC) and Shriram City Union.
It has also been the frontrunner to invest another Rs 1,000 crore for a 20 per cent stake in Shriram Capital, the holding company of the group that houses six of its different financial business verticals, including Shriram City Union, Shriram Transport Finance, Shriram Life and Shriram General Insurance. The Shriram Capital deal has not yet been closed.
TPG's stake in STFC is routed through Shriram Holdings (Madras), an intermediate holding company that has a 43.88 per cent stake in the transport finance company on behalf of the promoters. TPG owns 49 per cent of Shriram Holdings.
By virtue of its stake in Shriram Retail Holdings (SRH), an intermediate holding company, TPG also has an interest in Shriram City Union. SRH houses the promoters' 53.91 per cent stake in Shriram City Union. TPG's cumulative investment for 49 per cent stakes in each of these two entities stands at Rs 980 crore. In both the holding companies, the balance equity is being held by Shriram Capital.
Many are asking whether Shriram is giving a back door entry to TPG into front-end retailing, at a time when foreign direct investment (FDI) is not allowed in multi-brand retail companies. TPG is a foreign private equity (PE) fund and its investment will be considered as FDI.
"Retail is not the traditional business of Shriram Group. Why, then, are they entering into a business at a time when most players are bleeding? Also, TPG will be the back-end operator, as they will be running the show. The front-end retail entity will also be sourcing from TPG Keeping in mind the existing relationships between TPG and Shriram, this arrangement is too close for comfort," said a senior retail industry player, who did not want to be identified.
Shriram Group said it had not been approached by anybody to run the retail company of VRL. "Yes, we have a close relationship with TPG, but so far nobody from either TPG or Vishal has approached us. At this point, there is no dialogue, no discussion that has taken place on the subject," R Thyagarajan, group chairman, Shriram, said. "Maybe something will emerge in the future; we don't know now."TPG officials could not be reached for comments.
When asked, R C Aggarwal, chairman and managing director of VRL, said: "Yes we have signed an MoU with TPG under the CDR programme. The proposals are still under consideration. Due to the confidentiality agreement that we have signed with TPG and the lenders, at this point we cannot comment or talk about specific details or disclose any names and investments."
But investment bankers familiar with the transaction said even if Shriram Group invests, there will be no link between TPG and the final group entity that will come in as the domestic investor. "TPG will have absolutely no economic ownership in the front end, directly or indirectly.
It will be like a franchise arrangement and, therefore, will not be violating any laws of the land. Even though the sourcing will happen from the TPG-run wholesale company, all transactions will be at an arms length and will follow all the rules relating to sourcing from group companies," said an investment banker in the know.
"Also, there is still no guarantee that Shriram Group will be the eventual investor. They may still walk out, as it's not yet a done deal."
Added another banker familiar with the development: "Shriram Group has historically been like a VC (venture capital) fund or like an angel investor. It's entirely their call if they see an upside in retail and actually decide to invest in the space.
In any case, they have a retail interface in many of their financial services' verticals and have enough expertise in managing branch business. Front-end retail to a large extent is only that."
The legal community, too, is very clear that TPG is violating no rules but lawyers accept the deal structuring may raise questions. "If an Indian company is investing in a multi-brand retail company, then as long as it's under the four corners of Press Note 2 guidelines of 2009, there is no non-compliance," said a leading Mumbai-based corporate lawyer.