Chennai:

The agreement was signed in Chennai by Jackson Tai, vice chairman and CEO of DBS Group Holdings, and M A Alagappan, chairman of CIFCL. The transaction is subject to regulatory and shareholder approvals.

DBS Bank and the Murugappa Group will be equal shareholders in CIFCL, one of India's largest domestically-owned non-banking financial companies. The Murugappa Group, a Rs6,500-crore conglomerate with diversified interests in agro industries, engineering, finance, insurance and bio-products, currently owns 55 per cent of CIFCL principally through Tube Investments of India Ltd (TI).

The Rs38.01-crore equity-based Cholamandalam Investment, a leading non-banking finance company, (NBFC) is part of the Chennai-based Murugappa group. Last fiscal the company grossed a total income of Rs230 crore and a profit of Rs30.83 crore on an asset base of Rs1,959 crore.

Detailing the deal signed with DBS Bank, Alagappan said that the Singapore bank's investment will be in three stages. Firstly it will buy 15.1 per cent from the group company Tube Investments of India Limited (TI) that holds nearly 55 per cent.

In line with the laws, DBS Bank will make an offer to buy back the 20 per cent shares held by the public. "Subsequently a preferential offer will be made to DBS Bank so that its total stake in Cholamandalam Investment comes to 37. 5 per cent. The quantum of preferential issue will depend on the shares the bank gets as a result of the public offer."

In all, the DBS Bank is expected to invest up to Rs228 crore on the basis of the value of the franchise. This amount represents a price multiple of 1.82 times of the company's book value as on 31st March 2005.

"Both the joint venture partners will have the right to nominate an equal number of members to the board. The managing director will be nominated through joint consultation," remarked Alagappan.

As a result of this deal, the company will be renamed as Cholamandalam DBS Finance Limited. The company's subsidiaries will also be renamed.

With the introduction of a new partner into the company, Cholamandalam DBS (the new name) will continue with the existing business of vehicle financing and will also enter other areas of retail financing such as personal loans and housing finance.

When asked about the value that DBS Bank would bring to the table Alagappan said, "We don't have the requisite experience in retail and home finance that DBS Bank has and will share with us." He also said that a private equity investor does not add much value unlike a joint venture partner.

However, Tai avers, "We will offer the technology and the distribution expertise."

Will getting into a joint venture foreclose the option of the Murugappa group converting the NBFC into a bank, which seems to be the industry trend? "If you look at the financial sector, even big banks like CitiBank has a financial services arm-Citi Financials. There is space and business for NBFCs," Alagappan says.

According to Rajan Raju, managing director, Head of Southa and South-east Asia, DBS Bank, the partners are yet to draw up the new business plans. When that is done, the funds requirement will be known. "As of now the company has a capital adequacy ratio of 18 per cent which is sufficient for the current business plans."

After the preferential allotment, the net worth of the NBFC will go up by Rs45 crore. Speaking about the impact on the company's cost of funds as a result of roping in a new partner, managing director M Anandan asserts, "The cost of funds will be competitive."

CIFCL has outstanding ratings of 'FAA' and 'P1+' on its various debt obligations from CRISIL and has been assigned the highest safety ratings to instruments issued under its securitisaton programme.