L&T Finance, the subsidiary of engineering and construction major Larsen & Toubro, has acquired 100% stake in the asset management business of Cholamandalam DBS Finance Ltd for a consideration of Rs 45 crore.

With this deal, L&T Finance gets to deepen its offerings in the financial services segment while Cholamandam DBS’ exit from asset management business will allow it to focus on its core areas. L&T recently raised $200 million from an issue of non-convertible debentures (NCDs).

The transaction indicates how valuations have dropped in the Indian mutual fund space. Valuations have come under greater pressure after capital markets regulator Securities and Exchange Board of India announced a move to abolish front-end or entry fees charged by mutual funds from August.

Cholamandam DBS is a joint venture between Murugappa Group and Singapore’s DBS Bank. The acquisition includes 100% stake purchase by L&T Finance of DBS Cholamandalam Asset Management Ltd (DCAM), DBS Cholamandalam Trustees Ltd. (DCTL) as well as involves the transfer of DBS Chola Mutual Fund (DCMF) and the schemes under the fund. DCAM has average assets under management of Rs 2,893 crore as of August 31, 2009. The transaction has happened at little more than 1.5% of the assets of the fund.

Earlier reports indicated that DBS, the largest bank in Singapore, will buy the partner’s stake in the whole venture. Equirius Capital advised L&T Finance while Edelweiss was sole advisor to Cholamandalam DBS.

Recent transactions in the industry like Nomura's stake buy in LIC Mutual Fund and Religare Enterprises' buyout of Lotus India Fund also happened at low valuations. LIC-Nomura deal happened at 2.5% of the funds assets while Lotus-Religare deal happened at 1-2% of the funds assets. Lotus India was owned by Singapore's sovereign wealth fund Temasek and private equity firm Sabre Capital Worldwide.

Compare this to peak valuations of 2007-08. In March 2008, Standard Chartered sold its Indian asset management business to Infrastructure Development Finance Co for $205 million, valuing the firm at about 6% of its assets under management. In December 2007, Reliance Capital sold about 5% of its fund unit for Rs 500 crore, valuing India’s largest fund firm at 13% of total assets.

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