HDFC Ltd to merge into HDFC Bank in mega banking deal

In a move that would go down as a surprise announcement, HDFC Ltd announced its merger with HDFC Bank. It would be another case of a reverse merger wherein the stakeholder (HDFC Ltd) merges into the investee company (HDFC Bank).

The possibility of such a deal was first announced by Mr. Deepak Parekh back in 2015, but back then the deal had not been pursued since the regulatory framework was not supportive of such a move.

In the last few years, the regulatory environment has shifted to become more conducive to such reverse mergers.

Also, both HDFC Bank and HDFC Ltd see tremendous synergies from the merger in terms of the refinement of the business model, cost of funds, yield on business and in terms of asset quality.

The subsidiaries and associates of HDFC Ltd will now become a part of HDFC Bank Ltd under the composite scheme of amalgamation.

Key points to know about the HDFC Ltd / HDFC Bank merger

Here are some important takeaways from the mega merger deal between 2 companies that rank among the most valuable companies in India.

1) The deal will entail the merger of HDFC Ltd into HDFC Bank Ltd, post which HDFC Ltd will cease to exist as a listed entity. The deal is subject to shareholder and regulatory approval. As of now, only the two boards have approved the merger deal.

2) The swap ratio for the shareholders of HDFC Ltd will work out as under. Shareholders of HDFC Ltd will get 42 shares of HDFC Bank (FV Rs.1) for every 28 shares of HDFC Ltd (FV Rs.2). There will be no cash flows and the total deal will be by way of stock swap.
 

3) Once the merger deal is completed, HDFC Bank will become a 100% publicly owned company with no identifiable promoter group. Post the merger deal, the existing shareholders of HDFC Ltd will own 41% stake in HDFC Bank.

4) The deal will be consummated by the issue of requisite number of shares (as explained above) by HDFC Bank Ltd to the shareholders of HDFC Ltd. All equity shares of HDFC Ltd will be extinguished and cease to exist post the merger deal.

5) As a result of the deal, the overall exposure of HDFC Bank to unsecured loans will sharply reduced since the entire mortgage business owned by HDFC Ltd is currently backed by assets created or assets pledged.

6) HDFC Bank will convert all the branches of HDFC Ltd into HDFC Bank branches progressively over a period of time. The merger with HDFC also gives the bank access to long tenor assets and long tenor liabilities.

Currently, HDFC Ltd owns 21% stake in HDFC Bank and post the merger the shareholders of HDFC Ltd will own 46% of the capital of HDFC Bank Ltd. The deal is subject to the approval of the RBI, NCLT, SEBI, stock exchanges and the Competition Commission of India (CCI).