The board of HDFC Bank [Get Quote] on Monday approved issuance of one equity share for every 29 held in Centurion Bank of Punjab [Get Quote] for merger of the two financial institutions.

The board has approved the share swap ratio of one share of Rs 10 each of HDFC Bank for every 29 shares of Re 1 each held in Centurion Bank of Punjab, HDFC Bank said in a filing to the Bombay Stock Exchange.

The share swap ratio is subject to due diligence to be conducted in this regard, it said.

The board noted that in the event of the merger, it would consider making a preferential offer to its promoter, Housing Development Finance Corporation [Get Quote] Ltd, to enable HDFC to maintain its shareholding percentage in the bank.

HDFC Bank's board will meet on February 28 to consider the draft scheme of amalgamation, it said.

Earlier on Sunday, the boards of directors of HDFC Bank and Centurion Bank of Punjab (CBoP) separately gave their in-principle approvals for merger of the two banks. HDFC Bank is expected to pay Rs 10,000-Rs 12,000 crore (Rs 100-120 billion) in shares for absorbing CBoP.

Independent firms -- Dalal & Shah and Ernst & Young -- appointed by the two banks would work over the weekend to prepare their reports on the valuation of CBoP in time for boards of the two banks to consider when they meet again on Monday to consider the swap ratio for the all-stock deal.

The boards of both banks will meet on February 25 to consider the swap ratio and on February 28, to consider the draft scheme of amalgamation and any other matters as required. Consulting firm KPMG is the advisor to HDFC Bank and investment bank Ambit Corporate Finance to Centurion Bank.

"The swap ratio is expected to be around 1:25-30," said a banking source. The merger will make HDFC Bank the country's seventh largest bank after Bank of India [Get Quote] (BoI) and ahead of IDBI Bank, from the current 10th position.

The merger talks between the two banks began in January 2008 after the principal shareholders of CBoP -- Bank Muscat with 14.02 per cent stake, Sabre Capital with 3.48 per cent stake and Kephinance Investment (Mauritius) with 6.13 per cent -- decided to exit.

The three had signed a shareholders' agreement in 2003, which provided that any decision to sell the stake would be taken together.

HDFC Bank is hopeful of completing the integration process in about five to seven months. The merged entity will not offer home loans as this would lead to a conflict of interest with HDFC Bank's parent, Housing Development Finance Corporation. HDFC Bank will have the option to sell the home loan portfolio of CBoP to HDFC.

HDFC holds 23.28 per cent stake in HDFC Bank. Its holding is expected to fall below 20 per cent after the merger. Banking sources said HDFC would approach RBI to allow HDFC to maintain its stake at 20 per cent.

HDFC Bank, like in the past, could make a preferential offer to HDFC, which had earlier indicated that it would want to hold at least 20 per cent stake in the bank at all times.

A senior HDFC Bank official indicated that Rana Talwar, the chairman of Centurion, will have no role to play in the merged entity. Shailendra Bhandari, the managing director and CEO of Centurion will be appointed as a member of the merged bank and will have no role in the day-to-day operations of the bank. Bhandari will help in the process of integrating the two entities."

The official added, "There is no scope for appointment of a deputy managing director (in the merged entity)."

HDFC will continue to have two representatives on the board of the merged entity."

The merger will be a win-win situation for HDFC Bank as it would acquire around 400 branches and skilled personnel. The branch acquisitions will boost the presence of HDFC Bank in the northern and the southern regions.

CBoP has close to 170 branches in the north and around 140 branches in the south. While HDFC Bank has nearly 250 branches in the north and nearly150 branches in southern India. CBoP has a concentrated presence in the southern state of Kerala, where HDFC would have to consider reorganisation.

"We will also acquire a strong SME (small and medium enterprises) portfolio from CBoP. There is no overlapping of HDFC Bank and CBoP customers," the HDFC Bank official said.

The integration will be a challenge for HDFC Bank. Though the cultures of Centurion Bank employees would match with HDFC Bank but the culture of employees of Lord Krishna Bank and Bank of Punjab will definitely not be very similar to HDFC Banks.

Additional input: Business Standard