On Monday, HDFC Bank announced that the RBI has approved its petition to merge with its parent company HDFC Ltd.
A $40 billion acquisition between HDFC Bank and the largest domestic mortgage lender was announced on April 4 and is being hailed as the largest transaction in corporate history of India. This would create a financial services behemoth.
According to a regulatory filing by the bank, “HDFC Bank has received a letter dated July 04, 2022 from the Reserve Bank of India (RBI), whereby the RBI has awarded its “no objection” for the Scheme, subject to certain restrictions as indicated therein.
The National Company Law Tribunal (NCLT), other appropriate authorities, as well as the respective shareholders and creditors of the firms, as well as a number of statutory and regulatory clearances, are still needed for the merger plan to go through, according to the statement.
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HDFC Twins’ Merger Deal
To form a banking empire with a combined balance sheet of nearly Rs 17.87 lakh crore, the HDFC twins announced corporate India’s largest merger. The unexpected announcement of the merger of India’s largest housing financing business, HDFC Ltd, with its top private lender, HDFC Bank, caused the Sensex to increase by 1,335 points and the Nifty by 382 points.
The acquisition will enable HDFC Bank to rival State Bank of India for the top spot in retail housing. As on the record date, HDFC Limited shareholders will exchange their 25 HDFC Limited shares for 42 HDFC Bank shares. The regulatory authorities have not yet given their approval to the deal.
The combined entity’s 14.34% combined weight becoming the largest stock on the Nifty will also be considered by SEBI. It sets a 10% single stock exposure cap for mutual funds out of caution. By the second or third quarter of FY24, the deal is anticipated to be finished.
Following the closing of the transaction, existing HDFC Ltd shareholders would control 41% of the bank, and public shareholders will own 100% of HDFC Bank, according to a pre-market filing from the two businesses. With HDFC Ltd. holding a 41% interest, HDFC Bank will be able to grow its housing credit portfolio and attract more clients.
Sashidhar Jagdishan, the CEO of HDFC Bank, could serve as the combined company’s CEO, while Deepak Parekh, the chairman of HDFC Ltd, and Keki Mistry, the CEO of HDFC Bank, will either retire or continue as independent directors. According to Jagdishan, the potential agreement is worth $40 billion.
“HDFC has a $60 billion market cap. The deal’s value, according to Jagdishan, comes to $40 billion if you subtract the percentage of their (HDFC’s) ownership in us (HDFC Bank). HDFC Bank can expand its customer base and increase its housing loan portfolio after the acquisition. It has already revealed strong credit growth, driven by a positive rebound in retail loans.”
The commercial banking and corporate segment also experienced significant traction, which is likely to underpin development, according to a note from Motilal Oswal Financial Services. After the merger, HDFC Bank will be twice as big as ICICI Bank, which is currently the third-largest bank.
This is the second reverse merger in the banking industry, following an amalgamation between ICICI Ltd. and its banking arm, ICICI Bank, in October 2001.
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How Did HDFC Group Convinced The Regulator For The Merge?
Something between two and three items. The first is, of course, the significant synergy that can be achieved. The combined balance sheet would be a significantly larger balance sheet, and the market valuation of the merging business would be one of the maybe largest ones that we would have really come across.
There is now a great deal of synergies present between these organisations; but, in the future, agility and the use of an increasing amount of digital technology will play an extremely essential role.
In the field of technology known as credit cards, HDFC Bank had showed a significant level of competence. I believe that this news will go down in history as a watershed moment because of how significantly it will alter the competitive environment of the banking industry.
HDFC Twins’ Merger: Impact On The Mutual Funds
According to the most recent data that was made available, the number of schemes across all AMCs holding HDFC Bank higher than 10 percent in their portfolios was 32 schemes, but HDFC Ltd only held positions in four schemes.
According to Kavalireddi, who was speaking to CNBC-TV18.com, once the HDFC Bank and HDFC merger is finalized, there will be only one entity left standing.
At that time, mutual fund managers of diversified equity schemes will be expected to make the necessary adjustments to their respective portfolios, bringing the maximum holding percentage down to equal to or less than 10 percent. As a direct consequence of this, mutual funds may reorganise the holdings in their portfolios.
HDFC Twins’ Merger: Impact On The Customers
Up until the time of the merger, which will be in 12 to 18 months, HDFC Ltd. and HDFC Bank will continue to be independent legal entities. According to experts, the merged company will benefit from the merger’s synergies.
According to Shivaji Thapliyal, Lead Analyst, Institutional Equities, YES Securities, “the mortgage industry will benefit from the low-cost funds of the bank and the bank would benefit from HDFC’s skill in mortgage lending.”
Since HDFC Bank has a reduced cost of capital, after the merger, some of this benefit might be passed on to HDFC Ltd customers who have house loans with lower interest rates.
According to Raj Khosla, CEO of MyMoneyMantra, “the new house loan consumers could acquire a home loan at a similar or lower interest rate following merger.” But according to other experts Moneycontrol spoke with, the ultimate merger is still roughly 12 to 18 months away, making it difficult to anticipate the benefits in terms of interest rates.
Additionally, the degree of the advantage to borrowers, if any, will depend on the interest rates in effect at the time. According to former banker and financial advisor VN Kulkarni, it is premature to discuss interest rates in detail at this time.
Aside from this, cross-selling prospects exist for both organisations, as senior management representatives of HDFC Ltd. and HDFC Bank have noted. Before requesting a personal loan or credit card from HDFC Bank, consumers of HDFC will have options to consider.
Similar to this, current HDFC Bank clients will favor applying for a home loan through the combined mortgage business organization, according to Khosla.
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