How RBI triggered HDFC-HDFC Bank merger talks

Talks of a merger between HDFC Bank and parent HDFC Ltd had gained steam nearly eight years ago, when the Reserve Bank of India allowed banks to issue long-term bonds to fund infrastructure and affordable housing.

At that time, key executives at both entities denied any such proposal.

And today, the merger has been officially announced by the two players.

Back in July 2014, RBI had issued a notification saying banks do not have to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) for funds raised through the route, and also exempted them from meeting priority-sector lending targets on such funds.

Analysts and banking industry watchers had then opined that the regulatory move makes sense for the merger of the largest pure-play home financier with what was then the second largest private sector lender, to create what was reckoned as the second biggest financial sector entity in the country after SBI.

At that time, key executives at both the entities had acknowledged that a merger made sense but denied any such proposal.

Without going into exact details, they had also sought clarity to make such a merger more beneficial.

"There are some regulatory issues which need to be resolved to make the merger more beneficial.

"Partly, it has been resolved with the issuance of the circular on infra bonds, but there are a few more issues in which we are in discussion with the regulators," Aditya Puri, the then chief executive and managing director of HDFC Bank, had said in December 2014.

Keki Mistry, the vice chairman and chief executive of HDFC, had said a merger was possible "theoretically" and could be done at an appropriate time.

It can be noted that talks of a merger between the two entities had been floating for long, but people pointed to advantages of continuing as separate entities till the notification on infrastructure bonds came in.

Both the entities have been operating separately since 1994, when HDFC Bank started operations, led by Puri, who came in to lead the new bank leaving a job at foreign lender Citi on a request from HDFC Ltd's Deepak Parekh.

HDFC Bank has been sourcing home loans for its mortgage financier parent and earning fees and commissions against it every quarter.

A nominee of HDFC, which owns over 21 per cent in HDFC Bank, sits on the board of what has now become the largest bank in the private sector.

While both the lenders operate as independent entities, there were speculations of some quibbles at the time of choosing a successor to Puri.

However, Puri had himself come out to say that there were no differences between Parekh and him over who would lead the bank.

HDFC Ltd also had a nominee on the search committee to choose the successor. Sashidhar Jagdishan, a long-time executive at the bank, was chosen and appointed to lead the bank in October 2020.

As part of the merger, HDFC Ltd will merge into HDFC Bank and a share swap ratio has also been decided based on independent valuations.

The surprise merger announcement on Monday was welcomed by investors, with shares of both the entities showing high interest from buyers and both the scrips trading at gains of ten per cent on the bourses.