HDFC- HDFC Bank Merger

V.K. Unni
Professor
Indian Institute of Management Calcutta
E-mail: unniv@iimcal.ac.in

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 HDFC- HDFC Bank Merger 2022-23
• HDFC incorporated in 1977, is a deposit taking Non Banking Finance Company (NBFC), and
its principal business is to provide finance to individuals, corporates for the purchase, of
houses/apartments/commercial properties and is registered with National Housing Bank
(NHB)
• HDFC is the promoter entity/holding company for investments in its subsidiary and associate
companies such as HDFC Life, HDFC Bank and the shares of HDFC are listed on BSE and
NSE
• HDFC Bank incorporated in 1994 is a banking company that provides a range of banking and
financial services including retail banking, wholesale banking and treasury operations,
• The shares of HDFC Bank are listed on BSE , NSE and its American Depository Shares
(ADS) of are listed on New York Stock Exchange
• The Director Boards of both HDFC and HDFC Bank decided to merge on 4th April 2022.
• As per the merger scheme HDFC the promoter entity will merge into its associate company
HDFC Bank
• Post the merger, HDFC will cease to exist and shareholders of HDFC will be issued shares of
HDFC bank according to the ratio 25:42 (for every 25 shares of HDFC, 42 shares of HDFC
Bank will be issued)
• Valuation was arrived at by following the Market Approach method (50% weightage to
Comparable Companies Multiple Method and 50% weightage to Market Price method )
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 HDFC- HDFC Bank Merger 2022-23
• Before the announcement of merger, HDFC along with other promoter entities owned
25.73% shares of HDFC Bank, while the remaining was with the public
• Out of this HDFC held 19.10% shares and HDFC Investments held 6.63% shares
respectively in HDFC Bank while HDFC Holdings had no shareholding in HDFC Bank
• HDFC is a financial giant with 15 direct subsidiaries and 2 associate companies
• Out of the 15 direct subsidiaries, 12 are fully owned subsidiaries and they include HDFC
Investments and HDFC Holdings
• In the remaining 3 subsidiaries, HDFC has shareholding ranging from 47% to 53% and there
are 2 listed subsidiaries i.e HDFC Life and HDFC AMC, the one remaining subsidiary is an
unlisted entity i.e HDFC Ergo
• Some of HDFC’s subsidiaries like HDFC Life have their own fully owned subsidiaries , thus
HDFC has a total of 20 subsidiaries i.e 15 direct subsidiaries and 5 step down subsidiaries (i.e
subsidiaries of HDFC Life, HDFC Holdings etc)
• HDFC also has 2 associate companies i.e HDFC Bank and Renaissance Investment ARC
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 Why this Merger ?
Some Benefits of the Merger
• The merger will help HDFC Bank to build its housing loan portfolio and enhance its
existing customer base;
• being a private sector bank with a large base of over 6.8 Crore customers, the bank
platform will provide a well-diversified low cost funding base for growing the long
tenor loan book acquired through this merger
• HDFC Bank has access to funds at lower costs due to its high level of current and
savings accounts deposits (CASA), after the merger HDFC Bank will be able to offer
more competitive housing products
• the loan book of HDFC is diversified having financed over 90 lakh dwelling units,
with this kind of leadership in the home loan arena, HDFC’s merger with HDFC Bank
would give the latter substantial ability to provide to customers flexible mortgage
offerings in a cost-effective manner;
• As per Bloomberg the market cap of HDFC Bank post merger is around $172 billion,
making it the 4th largest in the world in terms of market capitalization
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 Why this Merger ?
• the Merger is based on leveraging significant complementarities that exist amongst the
parties to the Merger Scheme
• the Merger would create meaningful value for various stakeholders including respective
shareholders, customers, employees, as the combined business would benefit from
a) increased scale,
b) comprehensive product offering,
c) balance sheet resiliency and
d) the ability to drive synergies across revenue opportunities, operating efficiencies and
underwriting efficiencies
• Cross-selling: 70% of HDFC customers are not customers of HDFC Bank; of the 71 million
customers of HDFC Bank only 2% have mortgage from HDFC
• Cancellation of shares of HDFC Bank held by HDFC - will be EPS accretive for HDFC
Bank; provide leg room for foreign shareholding
• In 2021, RBI issued the a regulatory framework which to a great extent eliminated the
regulatory arbitrage for NBFCs compared with the banks.
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 Salient Features of the Merger Scheme
• The merger involved a composite scheme consisting of Two stages
• In stage One, 2 fully owned subsidiaries of HDFC , i.e HDFC Holdings and HDFC
Investments, merged into HDFC
• It is interesting to note that HDFC Holdings and HDFC Investments are promoter entities of
HDFC Bank with HDFC Investments holding about 6.6% shares in HDFC Bank
• Here no equity shares shall be issued to anybody and the shares held by HDFC in these
wholly owned subsidiaries shall stand cancelled
• HDFC Holdings and HDFC Investments are the investment arms of HDFC and they are
non-deposit taking NBFCs registered with RBI.
• In stage Two, HDFC merged into HDFC Bank, where shares of HDFC Bank will be issued
to the shareholders of HDFC once the Scheme became effective, with the share exchange
ratio being 25:42 After the merger HDFC Bank will be the holding company/promoter entity
for the remaining 13 subsidiaries of HDFC like HDFC Life, HDFC Ergo, HDFC AMC etc.
• Renaissance Investment ARC will become the Associate Company of HDFC Bank

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 Salient Features of the Merger Scheme
• Deloitte Touche Tohmatsu and Mr. Ruparelia (Registered Valuer) were appointed as valuers
by HDFC Bank, while Bansi S. Mehta & Co. and Ms. Drushti Desai (Registered Valuer)
were appointed as valuers by HDFC
• Morgan Stanley provided fairness opinion to HDFC Bank on the above said valuation while
Bank of America Merrill Lynch provided fairness opinion to HDFC regarding the above said
valuation
Transfer and Vesting of HDFC’s undertaking in HDFC Bank
• The merger scheme provides for the transfer of the HDFC’s undertaking and vesting the same
in HDFC Bank
Undertaking of HDFC according to the Merger Scheme means
• HDFC together with the undertakings of HDFC Investments and HDFC Holdings transferred
to and vested in HDFC the upon the effective date of stage 1 merger and includes all the
business, undertakings, assets, properties, investments and all liabilities of HDFC of
whatsoever nature and kind on a going concern basis
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 Salient Features of the Merger Scheme
• thus all the assets and properties (tangible or intangible, moveable or immovable) of HDFC
including computers, equipment, offices and other premises, furniture, fixtures, interiors,
deposits, all stocks, assets, investments of all kinds, insurance policies, IPRs, cash balances or
deposits with banks, loans, advances, contingent rights or benefits, book debts, receivables,
Taxes paid, actionable claims etc of HDFC is covered by the term undertaking
• All contracts of HDFC including agreements with respect to the immovable properties being
used by HDFC by way of lease, agreements, agreements with customers, entitlements,
licenses, including the licenses granted by any Governmental Authority for the purpose of
carrying on the business permits, permissions, incentives, approvals Tax benefits, subsidies,
concessions, grants etc
• All debts and liabilities of HDFC, both present and future, including all secured and unsecured
debts (whether denominated in Indian rupees or a foreign currency), liabilities including
deferred Tax liabilities, contingent liabilities) of every kind, nature and description
• All of HDFC’s employees who are on its payrolls, including those employed at its offices and
branches, including overseas offices, employees/personnel engaged on contract basis
interns/trainees
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 Salient Features of the Merger Scheme
• all the proceedings by or against HDFC pending as on the Effective Date, shall not abate or be
discontinued or be in any way prejudicially affected in any way by reason of the Scheme but
the Proceedings shall be continued, by or against HDFC Bank in the same manner as they
would have been continued against HDFC
Share Exchange Ratio
• According to the Merger Scheme, shareholders of HDFC shall be allotted shares of HDFC
Bank as per the ratio 25:42 as on the record date (13/7/2023)
• Shares held by HDFC in HDFC Bank will be cancelled
Accounting Treatment
• Once the merger scheme becomes effective, HDFC Bank will record the assets and liabilities
of HDFC as vested in HDFC Bank in accordance with the accounting standards notified under
relevant provisions of the Companies Act 2013 – CA 2013 (Sec. 133)
• Presently HDFC Bank is following IGAAP and accordingly the merger of HDFC with HDFC
Bank will be accounted using the “Pooling of Interests” method prescribed in AS-14,
“Accounting for Amalgamations”
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 Legal and Regulatory Aspects of the Merger
• From the date on which the Director Boards of HDFC and HDFC Bank approve the Merger
Scheme until the Effective Date, both companies shall carry on their respective business with
reasonable diligence and business prudence and both companies can also raise capital during
this period
Dissolution of HDFC
• HDFC will be dissolved from the effective date without following the usual procedure of
winding up
Legal and Regulatory Aspects of the Merger
• Since this is the merger of an NBFC with a private sector bank the relevant legal provisions
would be CA 2013, along with the provisions of RBI Amalgamation/Merger Directions –i.e
RBI (Amalgamation of Private Sector Banks) Directions, 2016 read with provisions of
Banking Regulation Act 1949
• When an NBFC is proposed to be merged into a private sector bank, the latter should obtain
the approval of RBI after the scheme of amalgamation/merger is approved by its Director
Board of both companies but before it is submitted to the NCLT for approval.
• Decision of merger shall be approved by two-third majority of the total Director Board
members (not just of those present and voting) of the Bank and NBFC, i.e HDFC Bank and
HDFC
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 Legal and Regulatory Aspects of the Merger
• When according its approval to the Scheme, the Director Boards of both companies should
give consideration to the matters and examine whether:-
a) HDFC has violated any of the RBI/SEBI norms
b) HDFC complied with the 'Know Your Customer' norms for all the accounts, which will
become accounts of the Bank after the merger
c) HDFC has availed of credit facilities from banks/Financial Institutions (FIs) and if so,
whether the loan agreements mandate HDFC to seek consent of the bank/FI concerned for
the proposed arrangement /amalgamation
• After the Director Boards of both companies approve RBI’s permission is required and there
after the Merger Scheme is filed before the concerned NCLT Bench , i.e the NCLT Mumbai
Bench
• NCLT dispensed with the meeting of shareholders of HDFC Holdings and HDFC
Investments (Stage 1 of the Merger) because both are fully owned subsidiaries of HDFC
• For Stage 2 of the Merger, meetings of shareholders of HDFC and HDFC Bank were held in
on the same day in November 2022 where the resolutions were approved with the requisite
majority
• Since both are listed companies they have to comply with some more additional stipulations
of SEBI like SEBI Master Circular on Scheme of Arrangement by Listed Entities
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 Legal and Regulatory Aspects of the Merger
• In the case of HDFC Bank it is majority in number and 3/4th of the value of all shareholders,
furthermore the total votes cast by public shareholders in support of the Scheme should be
more than their votes against the Scheme (Public Shareholders means shareholders other than
the promoter group)
• This additional requirement regarding public shareholders is there because the scheme of
merger involved promoter entity and its associate company
• In the case of HDFC it is majority in number and 3/4th of the value of all shareholders,
because HDFC has no promoter and the entire shares are held by public
• NCLT had dispensed with the need to hold creditors meeting of both companies
• In the case of HDFC, 96% of the secured creditors by value had given their no objection to
the merger
• NCLT noted that there will also be an excess of assets over liabilities to the tune of Rs.3.32
lakhs crore in HDFC Bank after the merger gets completed
• In the case of HDFC Bank, there were no secured creditors
• Since both the companies had no preference share holders , NCLT directed both the
companies to hold only the meeting of equity shareholders for taking the approval for the
merger scheme
• Scheme of Merger was also accompanied by the auditors’ certificate to the effect that the
accounting treatment contained in the Merger Scheme is in compliance with all the
Accounting Standards specified by the Central Government
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 Merger Scheme – Important Timelines
• The Scheme of Merger being a very complex one needed the approvals from the RBI, SEBI,
CCI, the National Housing Bank (NHB), the Insurance Regulatory and Development
Authority of India, the Pension Fund Regulatory and Development Authority (PFRDA), the
National Company Law Tribunal (NCLT), BSE, NSE, respective Director Boards, respective
shareholders and creditors, under applicable law
• Director Boards of HDFC Holdings and HDFC Investments approved the scheme of their
mergers with HDFC on 3rd April 2022
• Director Boards of HDFC and HDFC Bank approved the scheme of their merger on 4th April
2022
• BSE and NSE gave their No Objection Certificate (NOC) on 2nd July 2022 (applicable for
HDFC and HDFC Bank since they are listed companies)
• RBI gave its NOC to the merger scheme on 4th July 2022
• As both companies are registered as Point of Presence for the National Pension Scheme, the
Scheme needs the approval of the PFRDA,PFRDA approval came on 7th July 2022
• NHB gave its NOC to both stages of merger on 8th August 2022, NHB approval is in
accordance with the provisions dealing withVKthe refinancing facilities availed by HDFC from
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NHB
 Merger Scheme – Important Timelines
• CCI approved the merger of HDFC with HDFC Bank on 12th August 2022, it also
approved the merger of HDFC Holdings and HDFC Investments into HDFC
• PFRDA has granted its approval for proposed change in promoter of HDFC Life,
sponsor of HDFC Pension due to proposed merger i.e. change in promoter from HDFC
to HDFC Bank on 11th November 2022
• NCLT approved both stages of the scheme on 17 March 2023 (for this purpose meetings
of shareholders of HDFC and HDFC Bank were held on 25th November 2022 where the
resolutions were approved with the requisite majority)
• SEBI’s approval was primarily related to change in control from HDFC to HDFC Bank
regarding HDFC AMC a listed subsidiary of HDFC, SEBI’s approval came on 10 May
2023
• On 23rd June 2023,IRDAI permitted transfer of the entire shareholding (i.e 50.5%) of
HDFC in HDFC Life and HDFC ERGO to HDFC Bank (RBI permission for the same
was granted on 20th April 2023)
• On 30th June 2023, Director Boards of HDFC and HDFC Bank met and announced 1st
July 2023 as the effective date of the merger
• 13th July 2023, shall be the record date for determining the shareholders of HDFC who
will be the shares of HDFC Bank according to the share exchange ratio of 25:42
• Shares of HDFC will stop trading after market hours on 12th July 2023
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 Merger Scheme – Important Timelines
• HDFC Bank’s authorised capital will increase from Rs 650 crores to Rs. 1190 crores after the
merger
• Post the merger, 2 directors of HDFC joined the Director Board of HDFC Bank
• After the merger gets completed, HDFC Bank will not have any promoter and its shares would
be completely owned by the public
• Since the deal is structured as a Merger, the transaction would be tax neutral under the relevant
tax law (Income Tax Act 1961 Sec. 2 (IB))
Thus a merger is tax neutral if
• all the properties of transferor company (HDFC) becomes the properties of HDFC Bank
(transferee company)
• all the liabilities of transferor company (HDFC) becomes the liabilities of HDFC Bank
(transferee company)
• the shareholders holding not less than 3/4th (three – fourth) in value of shares in the transferor
company (HDFC ) becomes shareholders of the transferee company (HDFC Bank)
• Since this merger satisfies all the conditions it will be tax neutral
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 Merger Scheme – Important Timelines
Implications from a Global Regulatory Perspective
• Since HDFC Bank’s shares are listed in New York Stock exchange (NYSE), US law is also
applicable (i.e US Securities Act, 1933)
• But approval is not required if the following 3 conditions are satisfied
1) the transfer of security is in a form of exchange for securities and no cash is paid
2) the transfer should be approved by a court or authorized governmental entity in its place
of incorporation
3) issuer must provide appropriate notice of the hearing in a timely manner and file the
relevant form with NYSE
• HDFC Bank satisfied all the 3 conditions, as this merger is only through exchange of shares
(i.e share exchange ratio 25:42), all relevant regulators including CCI, NCLT, RBI have
approved the Merger and HDFC Bank had informed NYSE on 4th April 2022 by filing all
the relevant details of the draft Merger Scheme
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HDFC- HDFC Bank Merger

V.K. Unni
Professor
Indian Institute of Management Calcutta
E-mail: unniv@iimcal.ac.in

VK Unni IIMC