HDFC Bank – HDFC Ltd Merger Facing Challenges

A win win situation for all shareholders of HDFC


Credits: Google Images

Siddhi Jojare

Bengaluru: India’s largest private money lender, HDFC Bank, and the Housing Development Finance Corporation Limited (HDFC) on April 4 announced that the two entities would merge. This merger is expected to be beneficial to the shareholders of HDFC Ltd and the stakeholders of the HDFC Bank.

However, financial analysts say that there will be a few obstacles to the procedure going smoothly. HDFC Bank's management has said that it has asked the regulator for clarity on complying with the rules, but analysts believe it may not be easy to come by.

A 2015 notification of the Reserve Bank of India (RBI) has set guidelines for the banks to run insurance businesses. It has advised that the banks may undertake insurance business by setting up a subsidiary/joint venture. As per this notification, the HDFC Bank will face some challenges with regard to the subsidiary groups of HDFC Ltd – HDFC ERGO and HDFC Life.

The RBI is not likely to be comfortable with the volume of insurance operations that will have to be dealt with if this deal comes through. "Considering several subsidiaries need to be merged, there could be some regulatory overhang, particularly in the insurance business where the central bank is not very comfortable with banks increasing their stake," said an analyst at a domestic brokerage house, as per a Reuters report.

The shareholders of HDFC Ltd will now receive 42 shares of HDFC Bank for every 25 shares held in the company. Adding to this, the public shareholders will hold 100% of HDFC Bank and the current shareholders of HDFC Ltd will own 41% of the bank.

This merger is expected to bring in a handful of benefits to the stakeholders of HDFC. The bank stated that there would be benefits including a robust asset portfolio mix and the ability to better cross-sell with a full suite of financial products. This will be inclusive of life insurance, general insurance, health insurance, credit cards, and personal loans.

Along with this, the bank will be able to broaden its geographical base to reach urban, semi-urban, and rural geographies and engage a growing customer range. The deal is expected to take another 12 to 18 months to execute. The merged entity will have a net worth of Rs 3.3 lakh crore and will boast of a collective advance book of Rs 17.86 lakh crore.

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