How HDFC-HDFC Bank Merger Impacts Mutual Funds?

The unexpected merger of HDFC Bank and HDFC may have taken you by surprise. Rumours of a merger between India’s biggest private sector bank and the country’s largest housing finance company were floating way back in 2014. However, the HDFC twins will now merge in a $40 billion deal, with the amalgamation taking 15-18 months. It will help customers, investors and the banking community in India. The HDFC-HDFC Bank merger is a two-step process. HDFC Investments Ltd and HDFC Holdings Ltd, wholly-owned HDFC subsidiaries, will merge into HDFC. HDFC will then merge with HDFC Bank. Let’s understand how the HDFC-HDFC Bank Merger impacts Mutual Funds. 

How does the HDFC-HDFC Bank Merger impact shareholders?

If you are a shareholder of HDFC Ltd or HDFC Bank, you must pay close attention to the HDFC-HDFC Bank merger. All shareholders of HDFC Ltd will receive 42 shares of HDFC Bank for every 25 shares of HDFC held. Moreover, shares held by HDFC Ltd in HDFC Bank will be extinguished, and HDFC Bank will be a full-fledged company.

The HDFC-HDFC Bank merger has to stand the test of regulators such as RBI, SEBI and IRDAI, the insurance regulator in India. Shareholders of the joint entity post-merger will have multiple benefits. The company’s mortgage business procures funds at a lower cost than before the HDFC-HDFC bank merger. Moreover, the company’s mortgage business will leverage the distribution network of HDFC Bank to dominate the mortgage sector in India. 

How does the HDFC-HDFC Bank merger impact mutual funds?

HDFC and HDFC Bank have a combined weightage of 14% in the Nifty 50 stock market index. However, as per rules, mutual fund scheme portfolios must have a 10% holding limit towards individual stocks. As the diversified mutual fund schemes cannot invest more than 10% in individual stocks, active fund managers will find it difficult to outperform the Nifty 50. 

If a stock with more than 10% weightage in significant stock market indices outperforms, active fund managers struggle to beat the index. It is because of the 10% cap on individual stocks in the scheme’s portfolio.

As per data on February 28, 2022, close to Rs 1.46 lakh crore worth of mutual fund investments ride on the back of HDFC and HDFC Bank. For instance, 16 equity mutual fund schemes have more than 10% allocation towards HDFC and HDFC Bank. 

Before the merger, asset managers could hold stocks of two significant players in the financial services sector. However, after the merger, asset managers will have stocks of a single entity within regulatory limits, thereby limiting exposure to the HDFC group. 

The merger of the HDFC twins is a gigantic move for the mutual fund industry. For instance, according to ACE MF data, 454 mutual fund schemes hold HDFC Bank shares worth Rs 1.01 lakh crore. It accounts for 5.35% of the total equity assets of the mutual fund industry. Moreover, 328 mutual fund schemes hold HDFC shares worth Rs 45,403 crore, accounting for 2.39% of the total equity assets of the mutual fund industry.

Active fund managers are keeping a close eye on the merger of the HDFC twins. Moreover, they will act after clarity emerges around the changes in the benchmark stock market indices. Passive funds will continue to track the stock market indices and adjust allocations after including the new entity in the stock market index. In a nutshell, the merger of HDFC and HDFC Bank impacts the mutual fund industry in India.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in

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