The Indian Business community was caught off guard when two of India’s biggest entities, The Housing Development Finance Corporation Limited (HDFC) and HDFC Bank, called for a merger. The two will have a merger of around Rs 14 Lakh Crore. Both the financial institutions are yet, to begin with, the formal audit of the systems. The chairman of HDFC, Deepak Parekh, who is said to be the brains behind the deal, called it a merger of equals.
What led to the merger between the two giants (HDFC & HDFC Bank)?
HDFC Chairman Deepak Parekh points the finger toward the Reserve Bank of India’s(RBI) policy on non-banking financial companies (NBFC) to work like banks. This rule aimed to diminish the arbitrage enjoyed by the NBFCs proved to be the final nudge that was needed to make the merger. Also, these rumours of the union have been around since 2014.
Is HDFC Bank merging into HDFC or vice versa?
No, it is HDFC that is merging into the HDFC Bank. The bank will make an all-stock offer for a 100% stake in the parent company (HDFC). The transaction also involves the merger of two separate subsidiaries of HDFC, known as HDFC Holdings and HDFC Investments. These two subsidiaries own 21% of the share capital in the bank. After the merger, both the companies and the parent will only be owned by HDFC Bank.
How are shareholders going to be affected post the merger?
The shareholders will benefit from the merger, as for every 25 shares held in HDFC Limited, 42 shares of the bank will be allotted to the stakeholders. As a result, the swap ratio is 1:1.68. Also, HDFC limited will now hold almost 41% of HDFC Bank post the merger.
Can the deal face a regulatory hurdle?
According to Reuters, the RBI is looking into the details of the deal and is cautious about the bank’s ownership stake in the company’s insurance entity known as HDFC Life Insurance and HDFC Ergo.
HDFC Life deals in life insurance while HDFC Ergo deals with general insurance. Currently, HDFC owns about 48% of HDFC Life. However, the bank has cleared this doubt and assured the banking regulator that it is complying with all the necessary rules and regulations.
How big will HDFC Bank become post the merger?
Post the merger, HDFC Bank will become India’s second-largest bank and will be behind the largest bank in India (State Bank of India). Also, even on the valuation basis, HDFC Bank is still behind SBI significantly by almost ₹6-7 Lakh Crore. On the private sector side, HDFC bank will almost be double the size of ICICI Bank with a mammoth evaluation difference of ₹ 10-Lakh Crore.