Shares of Housing Development Finance Corp (HDFC) and HDFC Bank rallied up to 13% on Monday as investors cheered the merger of the mortgage lender with the bank. The board of HDFC in a meeting today approved the merger of HDFC with HDFC Bank following a union of subsidiaries HDFC Holdings and HDFC Investments. The merger is subject to requisite regulatory approvals.

“The Audit Committee and the Committee of Independent Directors, the Board of Directors of HDFC Bank, at its meeting held today, on April 04, 2022, approved a composite scheme of amalgamation, for the amalgamation of: (i) HDFC Investments Limited and HDFC Holdings Limited, into and with Housing Development Finance Corporation Limited (HDFC Limited); and (ii) HDFC Limited into HDFC Bank, and their respective shareholders and creditors,” HDFC said in an exchange filing today.

Boosted by the development, shares of HDFC gained as much as 12.83% to hit a high of ₹2,765.35 in the opening trade on the BSE. The stock opened 4% higher at ₹2,550, against the previous closing price of ₹2,450.95. There was a surge in buying activities as 4.67 lakh shares worth ₹125.42 crore changed hands over the counter on the BSE as compared to the two-week average volume of 1.02 lakh shares. The market capitalisation of the housing finance company soared to ₹4.99 lakh crore.

In a similar trend, HDFC Bank shares rose 10% to touch a high of ₹1,656.9 in the first hour of the day’s trade so far. The stock opened with a gain of 3.7% at ₹1,562.30, against Friday’s closing levels of ₹1,506.30 on the BSE. HDFC Bank, the third most valued company on BSE, saw its market cap rise to ₹9.15 lakh crore.

Meanwhile, the BSE benchmark Sensex rallied 1.9%, or 1,124 points, to 60,401, driven by a strong rally in index heavyweights HDFC, HDFC Bank, Bajaj Finance, Larsen & Toubro and Bajaj Finserv.

What lies ahead?

The amalgamation of HDFC into HDFC Bank will create the third-largest entity in India in terms of market capitalisation (₹12.79 lakh crore), after Reliance Industries (₹17.93 lakh crore) and Tata Consultancy Services (₹13.77 lakh crore). HDFC Limited, the country’s largest housing finance company, has total assets under management (AUM) of ₹5.26 lakh crore and a market cap of ₹4.44 lakh crore. Meanwhile, HDFC Bank, India’s largest private sector bank by assets, has a market cap of ₹8.35 lakh crore.

The share exchange ratio for the amalgamation of HDFC with and into HDFC Bank will be 42 equity shares of face value of ₹1. This means, shareholders of HDFC as on record date will receive 42 shares of HDFC Bank (₹1 each) for 25 shares of HDFC Limited (₹2 each).

Post the amalgamation, HDFC Bank will be 100% owned by public shareholders and existing shareholders of HDFC will own 41% of HDFC Bank.

The deal is subject to shareholders, creditors and regulatory approvals including from the Reserve Bank of India, Securities and Exchange Board of India, the Competition Commission of India, the National Housing Bank, the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory and Development Authority, the National Company Law Tribunal, SSE and the National Stock Exchange of India, and other statutory and regulatory authorities. The proposed transaction is expected to close within 18 months, subject to the completion of regulatory approvals and other customary closing conditions.

According to market experts, the timing of the merger has caught everyone by surprise. “With a tightening of the regulatory environment, especially with regards to the NPA recognition norms of the high-margin builder-lending book of HDFC and increased competition from public sector banks and new-age fintech companies, it is not entirely a merger of choice. The merger will be more beneficial to HDFC Ltd. since it has a lower profitable business and with HDFC Bank it can increase its product penetration,” says Abhay Agarwal, founder and fund manager, Piper Serica.

“While the markets have given a euphoric reaction to this news, we believe that the earnings of HDFC Bank could be downgraded in the near term and the onus will be on the management to prove the upside of the merger through operating performance,” Agarwal added.

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