Shriram-MUFG Deal Tests Regulatory Rules on Non-Compete Fee for Promoters

India's largest inbound financial sector deal has put regulatory spotlight on an unprecedented $200 million non-compete fee arrangement that could test the country's securities regulations. Mitsubishi UFJ Financial Group (MUFG) Bank has agreed to pay this fee to Shriram Finance promoters as part of a $4.4 billion investment to acquire a 20% stake in the Chennai-based shadow bank. Unusual Deal Structure Raises Questions The non-compete payment, amounting to nearly 5% of the deal value, is designed to prevent Shriram Ownership Trust (SOT) from launching rival lending businesses under the Shriram brand or any other name. However, this arrangement differs significantly from typical M&A transactions where such fees are paid to promoters who exit after selling their stakes. Deal Parameter: Details Total Investment: $4.4 billion MUFG Stake: 20% Non-Compete Fee: $200 million Fee as % of Deal: ~5% Acquisition Method: Preferential allotment Unlike historical precedents such as Holcim's acquisition of Gujarat Ambuja Cement in 2006, where non-compete fees were paid to exiting promoters, SOT will continue as promoter, retain management control, and remain a significant shareholder even after MUFG's investment. Regulatory Compliance Concerns The arrangement has drawn scrutiny from investors and analysts questioning why SOT receives separate financial benefits while similar terms are not offered to non-promoter shareholders. India's Securities and Exchange Board of India (SEBI) mandates equitable treatment for all shareholders and prohibits extra payments to promoters "by whatever name it may be called." Regulation 26(6) of SEBI's listing rules specifically states that promoters cannot enter agreements to receive compensation from securities transactions unless approved by the board and public shareholders. Additionally, rules mandate that non-compete fees paid to promoters must be factored into open offer prices for public shareholders. Shareholding and Control Structure MUFG will acquire its stake through preferential allotment of new shares and will be classified as a public shareholder. Following the issuance, SOT's direct and indirect holding will be diluted to 20% from approximately 25% currently. The Japanese bank will receive special rights including anti-dilution protection, board nomination rights for two directors, and secondment rights to place up to six personnel across SFL functions. Shareholding Changes: Before Deal After Deal SOT Holding: ~25% 20% MUFG Stake: 0% 20% Control: SOT retains SOT retains Industry Expert Analysis Shareholder advisory firm IiAS questioned the rationale for the non-compete fee, stating: "Given SFL's market dominance and its ability to leverage its existing network, the rationale for paying a non-compete fee to Shriram Group remains unclear—especially as the group will continue as promoter, retain management control, and hold a 20% post-money stake." SOT, established in 2006, operates as a private discretionary trust with 44 beneficiaries, all Shriram Group executives, several of whom are part of SFL's senior leadership. Legal experts note that employment contracts typically prohibit executives from participating in competing businesses, raising questions about the fee's necessity. Unprecedented Terms and Duration Ketan Dalal, founder of Katalyst Advisors, highlighted unusual aspects of the agreement, particularly the duration of non-compete restrictions. The restrictions remain in effect until MUFG's stake falls below 10%, significantly longer than typical three to five-year periods. Given MUFG's stated intent as a long-term strategic investor, this effectively creates indefinite restrictions on SOT beneficiaries. The non-compete payment partially offsets promoter equity dilution from MUFG's investment—a benefit unavailable to public shareholders. While proxy advisory firms IiAS and SES have recommended voting against the non-compete resolution, InGovern and ISS have supported the arrangement. The deal represents a potential test case for India's regulatory framework governing equitable treatment of shareholders in major corporate transactions. We’re building Scanx - to help you express your trading & investing idea, to help you analyse the markets better. 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