The board of Housing Development Finance Corporation (HDFC), India's leading housing finance company with total assets under management of Rs 5.26 trillion and a market cap of Rs 4.44 trillion, has approved the firm's and its subsidiaries' merger with HDFC Bank, the country's leading private sector bank with a market cap of Rs 8.35 trillion. HDFC Investments and HDFC Holdings are the two wholly-owned subsidiaries of HDFC.
Stakeholding
HDFC said that the board approved a composite scheme of amalgamation for the merger. “The equity shares held by HDFC and HDFC Bank will be extinguished as per the scheme. As a result, upon the scheme becoming effective, HDFC Bank will be 100 percent owned by public shareholders, and existing shareholders of HDFC will own around 41 percent of HDFC Bank,” said Keki Mistry, vice-chairman and CEO, HDFC.
Stock movement
Soon after the announcement, as the market opened, HDFC shares gained 10 percent while HDFC Bank was up 8.3 percent.
'Deal thanks to regulatory changes'
"This is a merger of equals," said HDFC chairman Deepak Parekh. "Regulatory changes over the past three years have reduced barriers to a merger. NPA classification is now the same for NBFC/HFCs and banks. The upperlayer of NBFCs will have tighter regulations similar to banks. These measures have considerably reduced the regulatory arbitrage for the merger."
Share swap
The share exchange ratio shall be 42 equity shares, credited as fully paid up, of face value of Re 1 each of HDFC Bank for every 25 fully paid-up equity shares of face value of Rs 2 each of HDFC.
Timeline of transaction
The transaction completion--expected to be achieved by the third or fourth quarter of FY24--is subject to shareholders, creditors and regulatory approvals, including from RBI, IRDAI, CCI, SEBI and stock exchanges.
Sashidhar Jagdishan, MD and CEO of HDFC Bank, said: "This is a historic moment. It has still not sunk in, but the proof of the pudding would be how we can execute, which is our forte, over the next three years, and we are confident about all the remarks that Keki Mistry has mentioned. I think we can now fulfil the housing demand of many of our customers on a very seamless and efficient basis.”
What made deal easier?
At a press conference, Atanu Chakraborty, HDFC Bank chairman, said this transaction couldn't have come at a better time, after two years of the pandemic. "NBFC regulatory trajectory coming closer to banks makes this deal easier. Bank has grown its book well over the years; affordable housing also qualifies for PSL which makes merger attractive. Bank can now leverage its entire branch network; offer bouquet of services to HDFC customers," Chakraborty said.
MSCI index inclusion?
The merger could lead to HDFC Bank being included in the MSCI index. Currently, the lender is not included in the index as the stake of HDFC in the lender is considered as FII.
"Foreign holding will come down to 65-67 percent post the transaction," Mistry said, adding there can be 7-8 percent increase in foreign holding in combined entity post-merger.
The current combined weightage of both on Nifty is at 15 percent. Post-merger, it will become the highest weighted stock on the Nifty.
Leader of new entity
Announcing the merger, Mistry has said: "The CEO will continue to be the CEO of the bank. I am 67-and-a-half-year-old, and this merger will probably take another year-and-a-half. By that time, I will be 69, and the retirement age for people in a bank is 70. As I mentioned, every employee of HDFC, including all our senior people, will now occupy positions within the bank.”
What will change?
Post-merger, HDFC Bank will have an economic interest in HDFC Life. Both HDFC and HDFC Bank will continue operating independently until the merger date, and the job of each HDFC employee will be retained. All HDFC branches will be retained and may be converted into bank branches after the amalgamation.
Reactions to merger
Rajnish Kumar, former chairman of SBI, reacting to the announcement of the merger, said that there would be a positive impact as far as the net worth is concerned. However, he said the advantage might not be significant as the distribution network of HDFC Bank was being used for the home loan origination.
"In terms of business origination, there may not be a great impact but overall efficiency of allocation of resources and their utilisation... So, the combined entity is a gain,” Kumar said.
According to Ajay Srivastava, CEO of Dimensions Corporate Finance Services, the leadership of the stock will remain, but a lot more will depend on the leadership of the organisation.
"There is Keki Mistry on one side, Sashidhar Jagdishan on the other. So, I think you need to figure out what will happen to this company organisationally because that will dictate the fortunes," he said.
"If you look at the cost of funds HDFC Bank has vis-à-vis HDFC, I think this merger will stand HDFC better. If you look at HDFC Bank, their mortgage book is not that big, and if you have listened to the last few conference calls, they have spoken about growing their mortgage book in a very material way. In many ways, this vertical merger helps both entities," said Rahul Arora, CEO, Nirmal Bang Institutional Equities.
