After two sleepless nights in Mumbai, the top management of HDFC Ltd decided to merge India’s first housing finance company with its subsidiary, HDFC Bank.

 HDFC chairman Deepak Parekh called it a merger of equals.  “This is a merger of equals. We believe that the housing finance business is poised to grow in leaps and bounds due to the implementation of RERA, infrastructure status to the housing sector, government initiatives like affordable housing for all, amongst others,” he said.  

 Post the merger, HDFC Bank will be twice the size of ICICI Bank. The behemoth will have a combined balance sheet of Rs 17.87 lakh crore and a net worth of Rs 3.3 lakh crore.

 The merger will benefit the economy as a larger balance sheet and capital base will allow greater flow of credit into various sectors, Parekh said.

 It was HT Parekh, Deepak Parekh’s uncle, who first set up the mortgage finance company way back in the seventies when loan for a home was a novel concept. None of the public sector banks gave retail loans.

 The merger of HDFC Ltd with HDFC Bank is like a son taking over his father’s business when he grows older. “As the son grows older, he acquires the father’s business. This is a friendly merger. We won’t be thrown out. After 45 years of housing finance and 9 million homes provided to Indians, we had to find a home for ourselves. We have found it within our own family and in our own bank,” Parekh told reporters in a press conference.

The merger will offer significant cross-selling opportunities. Only 30% of HDFC customers have a bank account with HDFC. "So now, mortgage customers can access a range of financial services under the HDFC roof. The combined entity can come out with offerings more competitive," Parekh said.

With the upper layer of non-banking financial companies having tighter regulations similar to banks, HDFC Bank has, on April 1, requested the Reserve Bank of India (RBI) for a phased-in approach regarding statutory liquidity ratio (SLR), cash reserve ratio (CRR), priority sector lending (PSL) and grandfathering of its balance sheet.

Macquarie has expressed concern over the impact the merger will have on the merged entity’s profit and loss. “While the merger will increase the bank’s product portfolio and ability to cross-sell, we think there will also be a drag on its P&L due to priority sector lending (PSL) requirements and higher SLR/CRR requirements,” it said in a note.

As per regulation, banks can either hold either over 50% stake or under 30% stake in insurance subsidiaries. “We hold a little under 50% in our insurance companies. We will apply to the regulator to increase our stake in insurance companies to over 50%," he said.

For the merger of HDFC Ltd with HDFC Bank, the RBI’s approval will be a key monitorable as the bank will end up owning large stakes in the life-insurance, general-insurance and AMC (asset management company) businesses.

Post-merger, HDFC Bank will own 48% in the life, ~50% in the general insurance and 69% in the AMC entities of the group. Recently, the RBI did not allow Axis Bank to directly own more than 10% in Max Life while ICICI Bank was asked to bring down shareholding in ICICI Lombard to less than 30%.

As of today, HDFC Ltd, along with two of its wholly-owned subsidiaries (HDFC Investments Ltd and HDFC Holdings Ltd), holds 21% of the paid-up equity share capital of HDFC Bank.

 Under the proposed deal, shareholders of HDFC Ltd will receive 42 shares of the bank for 25 shares held. Existing shareholders of HDFC Ltd will own 41% of HDFC Bank. Shares held by the housing finance company in HDFC Bank will be extinguished.

 HDFC Bank will be 100% owned by public shareholders. The transaction is expected to be completed within 18 months, subject to regulatory approvals.

 The merger is likely to have direct implications for the financial sector as it increases competitive intensity, Macquarie said. There is also a clear read-through that larger NBFCs will have to convert into banks to thrive as the regulatory gap between banks and NBFCs gets rationalised further, it added.

 HDFC Bank has a customer base of 6.8 crore and a branch network of 6,342.The merger will immediately offer HDFC an increased customer base and better reach specially in the semi-urban and rural areas. HDFC has 651 offices, including 206 outlets of HDFC sales.

 Parekh assured that the job of each HDFC employee will be retained. All HDFC branches will also be retained and may be converted into bank branches after the amalgamation.

 HDFC Bank has net advances of Rs 12,68,863 crore, 26% of which is corporate loans and 24% retail loans. HDFC Ltd has net advances of Rs 5,25,806 crore.

 Morgan Stanley India were financial advisors to HDFC Bank. Bank of America Merrill Lynch (BofA) Securities were financial advisors to HDFC Ltd for the proposed transaction.