HDFC mega merger on July 1 to place Indian company among world's top banks

Bengaluru: With the merger of the two financial behemoths Housing Development Finance Corporation (HDFC) and HDFC Bank on July 1, the firm will take its place among the world's top banks.

The two firms may set July 13 as the record date for swapping shares, HDFC said in an exchange filing.

With a valuation of $172 billion, the merger will place HDFC in the fourth position in equity market capitalisation behind JPMorgan Chase & Co., Industrial and Commercial Bank of China Ltd. and Bank of America Corp, according to Bloomberg. This is the first time an Indian company is occupying one of the top positions in the global banking sector.

HDFC Chairman Deepak Parekh had said in a CNBC-TV18 report that both the boards will meet on June 30, which would also be the last board meeting of HDFC, and its shares will go off market effective July 13.

However, these dates are tentative and will depend on the completion of certain formalities, HDFC said in the filing.

Once the board of directors of HDFC and HDFC Bank finalizes the effective date of the scheme as well as the record date, it would be intimated to stock exchanges, it added.

HDFC had, in April last year, announced a $40 billion deal to merge with HDFC Bank, the country's biggest ever, which will create a financial services titan to better tap the rising demand for credit.

As per the deal, shareholders in HDFC will receive 42 shares of the bank for every 25 shares held, giving them ownership of 41% in the lender.

The merger has already been approved by the Reserve Bank of India, National Company Law Tribunal, Pension Fund Regulatory and Development Authority (PFRDA), Securities and Exchange Board of India (SEBI), the Competition Commission of India and India's stock exchanges.

Indian insurers are awaiting clarity on how Housing Development Finance Corp's bonds will be categorised after the lender is folded into HDFC Bank, as they assess the impact of the merger on their debt portfolios.

There is uncertainty whether HDFC's bonds will be classified under housing and infrastructure after the merger, and we are awaiting clarification from regulators, Arun Srinivasan, head of fixed income at ICICI Prudential Life Insurance, told Reuters.

"In case it does not get classified as housing and infra, insurance companies will have to classify their entire exposure to the HDFC group as investments in the BFSI sector within the permissible limits, which stands at 30%."

Indian insurers await classification of HDFC bonds

The RBI will issue a clarification on HDFC's bonds' classification, and the Insurance Regulatory and Development Authority (IRDAI) of India will follow, according to fund managers.

The IRDAI stipulates insurers can invest a maximum of 30% of their assets under management in banking, financial services and insurance (BFSI) firms, while there is a 15% limit for investing in bonds of housing and infrastructure companies.

HDFC's outstanding bonds are estimated to be worth 2.64 trillion rupees ($32.18 billion), while HDFC Bank has outstanding bonds worth around 487 billion rupees, according to Crisil and Reuters data.

"Once the merger is effective, HDFC bonds will be converted into bank bonds and be counted in the 30% BFSI investment limit," said Aneesh Srivastava, chief investment officer of Star Health and Allied Insurance.

"We may see crowding in BFSI sector, and hence spreads for bank and NBFC bonds may harden with lower incremental demand."

According to market participants, around 40% of HDFC's bonds, amounting to around one trillion rupees, are held by insurance companies and these bonds are currently classified under housing and infrastructure category.

A change in classification could also impact demand for bank bonds at a time when lenders are looking to raise capital to spur growth.

Some fund managers, requesting anonymity as they are not authorised to speak to the media, told Reuters that they have requested IRDAI to allow "grandfathering" their current exposure to HDFC bonds for around two years, which would allow them to absorb the impact.

Grandfathering refers to a provision that will allow insurance companies to hold the bonds over and above the stipulated norms for a certain period, which will be defined by the RBI.

Insurers have also suggested that some bonds of longer duration could be classified as infrastructure bonds, which will allow them to keep their holdings under housing and infra category.

IRDAI did not immediately reply to a Reuters email for comment.

(With Reuters inputs.)