IDFC’s $12 billion merger plan with Shriram Group has been called off over share swap ratio differences.

In a board meeting called to discuss its quarterly results, IDFC said it was discontinuing discussions of merger with Shriram Group. Shriram Employee Trust, Piramal Group and Sanlam Group, which are large shareholders in Shriram Capital, were to become the largest holders in IDFC and drive the business, but the deal would have hurt the government, which owns a 16.38 per cent stake in IDFC.

Market experts said a complex structure proposed by deal makers was the key reason for the talks getting scuttled. BusinessLine had reported on October 17 that Holding company discount could mar shareholder value of IDFC if it went ahead with a merger deal with Shriram City Union Finance (SCUF) in the proposed manner.

IDFC Group and Shriram Group had entered into an exclusivity agreement (for 90 days) to evaluate a merger of certain financial services businesses in the Shriram Group with the IDFC Group.

Under the proposed structure, IDFC will remain the holding company, SCUF will be merged with IDFC Bank and Shriram Transport Finance Company (STFC) will be an unlisted fully-owned subsidiary of IDFC.

In India, most listed holding companies are quoting at a 30-70 per cent discount and IDFC being the holding company of its group suffers the same fate. Therefore, in a merger deal the dilution of IDFC shareholders would have been more.

Another issue was that Shriram Capital, which is the holding company of SCUF, and STFC is unlisted, and hence, does not suffer from holding company discount. Since the whole of Shriram Capital is likely to be absorbed by IDFC Bank, experts said the valuation metrics for both holding companies should be similar or it could end up hurting IDFC shareholders.

Assuming the merger happened at the current prevailing market prices, IDFC Financial Holding’s stake in IDFC Bank would have dropped to 30.3 per cent from 52.9 per cent and Shriram Capital would have held 14.4 per cent.

Since the whole of Shriram Capital was planned to be absorbed within IDFC, the combined shareholding of IDFC Financial Holding in IDFC Bank would have been 44.7 per cent, under the proposed deal.