HDFC Bank-HDFC Merger: RBI Approves Proposed Corporate Structure

The Reserve Bank of India's "no objection" to the scheme of arrangement between Housing Development Finance Corp. Ltd. and HDFC Bank Ltd. has ensured that no holding company structure will need to be created to house the merged entity.

According to a person with direct knowledge of the matter, the banking regulator in its letter on Monday has said the scheme of arrangement being proposed can proceed as is. However, the regulator has also said that, post the merger, the entity should be in compliance with all extant regulations.

The scheme of arrangement has proposed a structure where HDFC Investments Ltd. and HDFC Holdings Ltd. are merged with HDFC, and then HDFC is merged with HDFC Bank.

"This implies that the RBI is fine merging the above-mentioned companies into HDFC Bank without needing to set up a holding company. The structure is kept simple removing a major overhang, in our view," Macquarie analysts Suresh Ganapathy and Param Subramanian said in a report on Tuesday.

With the "no objection" from the banking regulator, HDFC and HDFC Bank may now proceed to file the scheme of arrangement with the National Company Law Tribunal for final approvals, the person quoted above said. Apart from the tribunal, the scheme needs approvals from the Competition Commission of India, Securities and Exchange Board of India and the shareholders of both companies.

According to Macquarie analysts, the approvals could still take up to 12 months more.

The RBI, however, has not yet responded to requests for additional time sought by HDFC to meet the statutory liquidity ratio, cash reserve ratio and priority sector lending requirements.

Similarly, the request to increase promoter stake in HDFC Life by 2.2% and to keep HDB Financial as a separate lending arm have also not been addressed by the RBI yet. For that, the regulator will be responding through separate communication, the person quoted above said.

HDFC Bank declined to comment on queries mailed on Tuesday. HDFC and RBI did not respond to queries.

Analysts had previously estimated that the cost of maintaining SLR and CRR requirements on HDFC's book could work out to over Rs 1 lakh crore.

Similarly, the merged entity will need to ensure that priority sector requirements are met on HDFC's Rs 6-lakh-crore loan book. HDFC and HDFC Bank had sought additional time from the RBI to comply.

"SLR and CRR requirements should not be a drag. I think both institutions have enough excesses, which could qualify for that," Sashidhar Jagdishan, managing director and chief executive officer, HDFC Bank, had said while announcing the merger to the press on April 4.

"Nevertheless, of course, this is just a point in time. Over the next 18 months, assuming that's the time it will take for regulatory approvals to come through, both institutions will be growing, so the requirements will be larger," Jagdishan had said.