Open Access Research Article
MERGERS AND ACQUISITIONS IN FINANCIAL SECTOR: ANALYSING THE HDFC CASE AND ITS IMPACT ON CREDIT AVAILABILITY AND LENDING POWER BY: V. V. BADARINATH & P. V. S. S. SRINIVAS
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Article Details
MERGERS AND ACQUISITIONS IN FINANCIAL SECTOR: ANALYSING THE
HDFC CASE AND ITS IMPACT ON CREDIT AVAILABILITY AND LENDING POWER
AUTHORED BY:
V. V. BADARINATH & P. V. S. S. SRINIVAS
(5TH YEAR
STUDENT B.A.LL.B)
ABSTRACT
As a part of Corporate Restructuring
many Companies and Corporations resort to Mergers and Acquisitions in order to
achieve different objectives. This phenomenon is not just limited to specific
sector, in the recent times the financial sector in India has witnessed quite a
few Mergers and Acquisitions the most prominent one among all is the merger of
HDFC limited and HDFC Bank. While such consolidation builds synergies to
operate more efficiently in a complex environment the impact of such mergers on
crucial aspects like credit availability and lending power cannot be
understated. While the Mergers and Acquisitions are not new in the financial
sector the merger of HDFC limited and HDFC Bank holds a special position due to
the market position of both the companies individually and collectively. This
research paper will examine the above discussed merger through legal framework
and undertakes a meticulous examination scrutinising the intricate legal
aspects and regulatory implications along with the market impact of this
significant corporate consolidation.
Key words: Corporate
Restructuring, Companies, Corporations, Mergers and Acquisitions, HDFC limited,
HDFC Bank, financial sector, legal framework and market impact.
INTRODUCTION
Restructuring is nothing but to
rearrange something to make it work better. Corporate restructuring is a
process that involves reorganizing company’s operations, finances and
management to work in a better way. As the time passes and company expands in
many cases the need for corporate restructuring increases. Generally corporate
restructuring is needed to expand business of the company, carrying out
business more economically, focus on its core strengths, to avail tax benefits
and lastly to get competitive edge in the market. Also, the objectives of such
corporate restructuring include improve growth prospects, maximize utilization
of available resources, improve their market presence, reviving a sick company
and get operational advantage[1].
Merger is one out of many forms of
corporate restructuring. Merger is
combination of two or more companies into a single company. Merger can take
place either by absorption or consolidation. Some types of mergers include[2]
·
Horizontal merger
·
Vertical merger
·
Conglomerate merger
·
Cross-border merger
·
Market-Extension merger
·
Product-Extension merger
·
Reverse merger
·
De-merger
In a horizontal merger two or more
companies producing same type of goods or services gets merged. In vertical
merger two or more companies producing different products or services for one
final product gets merged. Conglomerate merger is a merger between unrelated
companies while cross-border merger between companies belonging to different
nationalities. Meanwhile, market-extension merger is a merger between two or
more companies producing same goods and services in different markets gets
merged to expand their business and product-extension merger is a merger
between two or more companies producing related products in same market. It is
also important to know about reverse merger. The reverse merger is a type of
merger where the private company gets merged with a public company and becomes
a public company and de-merger is a case where one company divides into two or
more companies.
LEGAL FRAMEWORK
In the recent times HDFC merger has
been in news. Actually there are four entities involved in the process those are
HDFC Investments limited (Transferor company – T1), HDFC holdings limited
(Transferor company – T2), HDFC limited (Amalgamating company/Transferee
company) and HDFC bank limited (Amalgamated company) and accordingly the
sanction for amalgamation was sought under section 230 to section 232 of
Companies Act, 2013 by all the companies mentioned above. The proposed scheme
of amalgamation provides for amalgamation of T1 and T2 with and into
amalgamating company and the consequent dissolution of transferor companies
without being wound up. Followed by amalgamation of Transferee
company/Amalgamating company with and into the amalgamated company and
consequent dissolution of Transferee company/Amalgamating company without being
wound up as well as the issuance of new equity shares to equity shareholders of
Transferee company/Amalgamating company in accordance with Share Exchange Ratio
as provided in the scheme[3].
Transferor companies are wholly-owned
subsidiaries of Transferee company/Amalgamating company and entire paid-up
capital of Transferor companies is held by Transferee company/Amalgamating
company. It is mentioned that Transferor companies and Transferee
company/Amalgamating company are the promoters of Amalgamated company. It is
also mentioned that T1 and T2 are systematically important Non-Deposit taking
Non-Banking Financial Companies registered with Reserve Bank of India (RBI) and
are primarily engaged in the making investments in equity shares, preference
shares, venture funds, mutual funds and other securities. Meanwhile the
Transferee/Amalgamating Company is engaged in the business of providing finance
to individuals, corporates and developers for the purchase, construction,
development and repair of houses, apartments and other commercial properties in
India supported by robust network of agents for sourcing loans as well as
deposits. The Amalgamated Company is a banking company registered with Reserve
Bank of India (RBI) under the provisions of Banking Regulation Act of 1949. Accordingly,
the requisite permissions for the scheme of amalgamation were taken by the
above mentioned companies from Bombay Stock Exchange (BSE) & National Stock
Exchange (NSE), Competition Commission of India (CCI), Reserve Bank of India
(RBI), Securities and Exchange Board of India (SEBI) and various other
authorities including National Company Law Tribunal (NCLT)[4].
Just like any other kind of
amalgamation this one too has some rationale and benefits behind some of those
include[5]
·
The scheme of amalgamation shall enable amalgamated
company to build its housing loan portfolio and enhance its existing customer
base.
·
It is based on leveraging significant
complementarities that exists amongst the parties to the scheme. The scheme
would benefit or would be beneficial for various stake holders as the combined
business would benefit from the increased scale, comprehensive product offering
balance sheet resiliency and ability to drive synergies across the revenue
generating opportunities, operating efficiencies and under writing efficiencies
amongst others.
·
The Amalgamated company is a private sector bank and
has a large base of over 68 million customers. The bank platform will provide a
well-diversified low cost funding base for growing the long tenor loan book
acquired by the Amalgamated company pursuant to amalgamation.
·
The combination of Amalgamating company and
Amalgamated company is entirely complementary to, and enhances the value
proposition of the Amalgamated company.
·
The scheme of Amalgamation would allow the Amalgamated
company to disburse larger ticket loans and also enable greater credit flow
into the Indian economy
·
With the Amalgamating company’s leadership in the home
loan arena that has been developed over 45 years, the Amalgamated company would
be able to provide customers with flexible mortgage offers in a cost-effective
and effective manner
·
Amalgamating company’s rural housing network and
affordable housing lending is likely to qualify for Amalgamated company as
priority sector lending and will also enable a higher flow of credit into
priority sector lending, including agriculture
·
This scheme will also result in reduction of
Amalgamated company’s exposure to unsecured loans
·
The Amalgamating company has built technological
capabilities to evaluate credit worthiness of customers and it has also
developed unique skills in financing various customer segments. These
capabilities will help Amalgamated company to take advantage of such expertise
in underwriting and financing of mortgage.
·
Transferor companies being systematically important
non-deposit taking Non-Banking Financial Companies (NBFCs) whom are wholly
owned subsidiaries of Amalgamating company this scheme of amalgamation shall
result in simplified and better organized corporate structure.
The merger of HDFC limited and HDFC
bank came into effect on 1st of July, 2023. This meant that HDFC
limited which is India’s largest pure play home loan provider now ceases to
exist as a company and will be delisted from the stock market. Now, the
shareholders of HDFC limited will be allotted with the shares of HDFC bank.
This merger will transform HDFC bank into financial services conglomerate that
offers a full suite of financial services, from banking to insurance and Mutual
Funds through its subsidiaries. Till now HDFC bank acted as a distributor for
these products. Post merger the entity i.e. HDFC bank will be a gigantic and
will also become 4th largest lender in terms of equity market cap
behind J.P Morgan Chase, Industrial and Commercial bank of China and Bank of America.
Here in India, the market cap of HDFC bank will be more than the market cap of
all other private sector lenders put together and it will be indifferent even
when market cap of HDFC bank is compared to public sector lenders combined.
When it comes to assets HDFC bank will fall just behind SBI. The larger net
worth of HDFC bank will translate into greater credit flow into the Indian
economy[6].
Merger and amalgamation is a complex
procedure involving many regulators and governmental bodies like National
Company Law tribunal (NCLT), Securities and Exchange Board of India (SEBI),
Competition Commission of India (CCI), Reserve Bank of India (RBI), Bombay
Stock Exchange (BSE) & National Stock Exchange (NSE), Registrar of
Companies (ROC) among others. Section 230 to 240 of the Companies Act, 2013
contains provisions regarding compromise, arrangements, mergers and
amalgamations etc. Most importantly Section 230, 231 and 232 play a major role
in such compromise or arrangement.
Section 230[7] in
general talks about power to compromise or make arrangements with creditors and
members. Section 230(1)[8]
speaks about power to compromise or make arrangements with creditors and
members. Section 230(2)[9]
speaks about application for such arrangement or compromise to be accompanied
with the affidavit and section 230(3)[10]
says that notice relating to such arrangement or compromise must be placed in
the website of the company while section 230(4)[11]
speaks about right to object such arrangement or compromise by a person holding
more than 10% of shares or 5% of debt. Another important provision is section
230(5)[12]
which says that notice of such arrangement or compromise has to be sent to
Government of India, Income tax department, Reserve Bank of India (RBI),
respective stock exchanges along with Competition Commission of India (CCI).
Creditors, shareholders, members of
company, liquidators and any other relevant person can apply for amalgamation
in National Company Law Tribunal (NCLT) with relevant facts. If no one objects
NCLT will pass the order with ancillary order after which Registrar of Company
(RoC) has to register within 30 days.
The tribunal also has special powers
under Section 231[13]
of Companies Act, 2013. The tribunal has the power to supervise or review terms
and conditions of Compromise/Arrangement. The tribunal may also give directions
or make any modifications in such compromise or arrangement as it may deem fit
for proper implementation of such arrangement or compromise. If the arrangement
or compromise is not implemented to the satisfaction of National Company Law
Tribunal (NCLT), it has power to order winding up of company.
If a compromise or arrangement leads
to merger and amalgamation then section 232[14]
comes into picture. It says that if a compromise or arrangement leads to merger
or amalgamation then along with the application one has to attach the scheme of
merger and amalgamation, effect of such merger and amalgamation on share
holders, valuation report and other disclosures as prescribed.
Competition Commission of India (CCI)
also needs to grant approval for mergers and amalgamations and it plays an
important in mergers, amalgamations and acquisitions. Section 5 and 6 of the
Competition Act, 2002 speaks about combinations and regulation of combinations.
In simple language, Section 5[15]
deals with mergers and acquisitions in India and aims to prevent
anti-competitive practices in the same. It applies to acquisition or control
over companies or enterprises along with mergers and amalgamations of companies
or enterprises. It is to be noted that the rules of competition law only
applies when the combined entity exceeds certain assets or turnover in the
present case of HDFC merger it crosses that threshold by a huge extent and
hence the regulations of competition law kicks in. The Competition Act
prescribes in such cases that a notification is to be sent to Competition
Commission of India (CCI) for review after thoroughly reviewing the same the
Competition Commission of India (CCI) may grant the nod with or without
modifications to the scheme of mergers and acquisition taking into account
competition in the market or totally block such mergers and acquisitions if it
adversely effects the combination.
Section 6[16]
of the Competition Act, 2002 regulates mergers and acquisitions in order to
prevent harm to the competition in the market. It prohibits such mergers and
acquisitions which create adverse effects on the competition. The most
important aspect is when mergers and acquisitions exceed certain threshold the
companies involved must notify Competition Commission of India (CCI) before
moving forward with the process. It is to be noted companies involved in such
mergers and acquisitions may proceed forward after 150 days of notifying
Competition Commission of India (CCI) or after receiving nod from Competition
Commission of India (CCI) whichever is earlier. It is also worth noting that
certain types of mergers and acquisitions like that of public financial institutions,
foreign portfolio investors, banks and specific investments funds are exempted
from certain conditions.
Another important approval in respect
of mergers and amalgamations is to be granted by Reserve Bank of India (RBI)
especially in banking sector. Mergers and amalgamations in banking sector are
mainly governed by Banking Regulation Act of 1949. The Banking Regulation Act,
1949 provides for procedure where in it says that individual approvals of both
amalgamating and amalgamated companies are required. Also Section 44A[17]
of Banking Regulation Act, 1949 states that the shareholders must be notified
as to the merger meeting and requires approval by a majority (in number)
representing two-thirds (in
value) of the shareholders present at meetings called for this purpose. Shareholders
who disapprove can
claim fair compensation for their shares, determined by the Reserve Bank
of India (RBI). After the approval of shareholders the merger scheme needs to
be submitted to Reserve Bank of India (RBI) which will approve or reject the
scheme based on many factors like financial stability and competition. Upon RBI
approval, the merged entity inherits all assets and liabilities of the
individual banks. The dissolving bank ceases to exist, and its name is
struck off the registration records.
Overall, approval from board of
directors, creditors, members, shareholders, Securities and Exchange Board of
India (SEBI) & Stock Exchanges (Listed companies), National Company Law
Tribunal (NCLT), Reserve Bank of India (RBI) and Competition Commission of
India (CCI) are required here in the above amalgamation of HDFC limited and
HDFC bank limited.
IMPACT ON CREDIT AVALIABILITY AND
LENDING POWER
After the merger the market
capitalization HDFC bank will exceed 14 lakh crore rupees. The merger of HDFC
limited and HDFC bank limited will benefit the customers of HDFC limited and
HDFC bank limited alike. Due to this merger HDFC bank will have an improved
product portfolio and will be able to offer new range of services like retail
banking, digital banking, digital loan processing, working capital, project
financing on a large scale, multimedia-management, supply chain financing,
deposits on a wholesale basis on a large scale, correspondent banking,
construction finance, foreign asset liability finance among others. This merger
greatly resulted in the boost-up of the technological infrastructure, achieve
economies of scale and improve operational efficiency of HDFC bank which
majorly helped the bank in saving the costs[18].
Merger of HDFC limited with HDFC bank
has pushed credit off-take by astounding 500 points to 19.7% on year to reach
148 lakh crore rupees for the fortnight to July 28 excluding which the system
wide lending growth was only at 14.7% on-year. Here, credit off-take means
total amount of loans and advances disbursed by banks to various sectors during
a specific period. This was primarily driven by impact of HDFC limited and HDFC
bank merger as well as growth in personal loans along with loans to NBFCs. It
represents and acts like a key indicator of economic activity. Generally,
increased credit off-take refers to economic expansion while decreased credit
off-take indicates economic slowdown leading to less demand for credit. Deposits
also witnessed a healthy growth of 12.9% without considering merger it stood at
12.3%. Going forward the deposits are only expected raise as banks looks to
shore up their liability franchise and ensure that deposits does not constrain
credit off-take. Another important point to be noted is that credit to deposit
ratio which has been hovering above 75% since, December of 2022 declined by 40
basis points and stood at 77.2% in the reporting fortnight but annualized
growth was around 440 basis points due to the impact of merger. Thus credit
availability increased in the market due to merger and the outlook in this
regard looks positive. Also, increasing deposits in the bank will give scope
for the bank to lend more money and thereby increase its lending power in the
market[19].
The immediate impact of the merger is
also significant. This merger has made space for the bank into the list of top
100 lenders in the world in terms of assets. It has a balance sheet of 32 lakh
crore rupees next only to State Bank of India’s (SBI) 55 lakh crore rupees as
of 31st March, 2023 while ICICI stands at 3rd position
with 16 lakh crore rupees. When it comes to balance sheet, the share of
unsecured loans has reduced from 30% to 22% due to addition of low-yield
mortgages. This gives the bank more room to advance unsecure loans and credit
cards. There is also a change from short term loans to retail loans in the
bank’s book. Before merger the bank’s portfolio consisted of auto loans with
the highest tenure of four years followed by personal loans with two years,
two-wheeler loans with one year and credit cards with the shortest tenure of
one month. Due to merger the bank has gained access to parent company’s (HDFC
limited) forty five plus years in mortgage origination and loan servicing
processes which provides golden opportunity to the bank because earlier only
one-third of bank’s branches offered home loans. Now the network is all set to
expand leaps and bounds thereby, increasing overall credit availability in the
market and lending power of the bank but an important thing to be noted in this
regard is that the bank has to comply with regulatory requirements in regard to
Cash Reserve ratio (CRR) and Statutory Liquidity Ratio (SLR). HDFC limited
being a mortgage lender does not have to comply with the above said regulations
which provided HDFC limited with extra cash that it can use to lend in the
market but as a bank irrespective of merger HDFC bank is obliged to comply with
those regulations[20].
IMPACT ON COMPETITION
The merger will bring about
significant changes into credit landscape of banking sector. While home loans
constitute one-fifth of the total credit disbursed by the bank the merger will
result in expanding its housing loan portfolio. It becomes even more important
as the housing market is poised for substantial growth. HDFC bank’s huge
balance sheet will enable to underwrite large ticket loans in housing loans
segments. Despite being a banking giant HDFC bank holds a meager two percent
market share this merger will give it a unique advantage by leveraging
extensive network of branches in rural and semi-urban areas. By tapping into a
market with huge potential HDFC bank through merger may wield its dominance to
penetrate into housing loan market adversely affecting the competitors.
Expansion of HDFC bank’s customer base through cross-selling will only add to
the concerns. Hence Competition Commission of India (CCI) has to be vigilant to
prevent potential market disruptions[21].
CONCLUSION
The merger of HDFC limited and HDFC
bank is a unique event in the industry. It is going to have significant impact
on all the stakeholders involved and the economy at large. It is evident that
the credit off-take has surged which indicates easier access to credit. Also
the larger balance sheet inherently allows HDFC bank to lend more money in the
diverse segments. When it comes to lending power, this merger enabled HDFC bank
to enter into top 100 in terms of assets strengthening its financial position
also gaining access to HDFC limited expertise in mortgage origination and
servicing will further strengthen its lending power. However, one has to take
into account Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)
regulations into picture as these regulations have the ability to limit lending
power. On a whole one can say that the merger has positively impacted credit
availability and lending power but the in the long term access to improved
credit availability depends on how the merged entity i.e. HDFC bank will
navigate the challenges like regulatory compliance, integration complexities
and competition (considering HDFC bank being in a dominant position with
significant market tapping abilities it may indulge in anti-competitive
practices) in the market.
[1] Corporate Restructuring course by
Ledx
[2] Corporate Restructuring course by
Ledx
[3] Company scheme petition no.243 of
2022 connected with company scheme application no.200 of 2022 among HDFC
investments, HDFC holdings, HDFC limited and HDFC bank limited, last visited on
09-02-2024
[4] Company scheme petition no.243 of
2022 connected with company scheme application no.200 of 2022 among HDFC
investments, HDFC holdings, HDFC limited and HDFC bank limited, last visited on
09-02-2024
[5] Company scheme petition no.243 of
2022 connected with company scheme application no.200 of 2022 among HDFC investments,
HDFC holdings, HDFC limited and HDFC bank limited , last visited on 09-02-2024
[6] Gyanendra Keshri, DH Deciphers | How will HDFC twins merger impact
customers, shareholders and employees, https://www.deccanherald.com/business/dh-deciphers-how-will-hdfc-twins-merger-impact-customers-shareholders-and-employees-1233364.htmlhttps://www.deccanherald.com/business/dh-deciphers-how-will-hdfc-twins-merger-impact-customers-shareholders-and-employees-1233364.html,
last visited on 10-02-2024
[7] Section 230 of Companies Act, 2013
[8] Section 230(1) of Companies Act,
2013
[9] Section 230(2) of Companies Act,
2013
[10] Section 230(3) of Companies Act,
2013
[11] Section 230(4) of Companies Act,
2013
[12]Section 230(5) of Companies Act,
2013
[13]Section 231 of Companies Act, 2013
[14] Section 232 of Companies Act, 2013
[15] Section 5 of Competition Act, 2002
[16] Section 6 of Competition Act, 2002
[17] Section 44A of Banking Regulation
Act, 1949
[18] HDFC Ltd’s Merger into HDFC Bank: What does it mean for you?, Paytm
money, https://www.paytmmoney.com/blog/hdfc-ltds-merger-into-hdfc-bank-what-does-it-mean-for-you/, last visited on 12-02-2024
[19] HDFC merger helps boost
credit off-take to 19.7 per cent in fortnight ended Jul 28: Report, The economic times,
https://economictimes.indiatimes.com/industry/banking/finance/banking/hdfc-merger-helps-boost-credit-offtake-to-19-7-per-cent-in-fortnight-ended-jul-28-report/articleshow/102731352.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst last visited on 12-02-2024
https://economictimes.indiatimes.com/industry/banking/finance/banking/hdfc-merger-helps-boost-credit-offtake-to-19-7-per-cent-in-fortnight-ended-jul-28-report/articleshow/102731352.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst last visited on 12-02-2024
[20] HDFC Ltd-HDFC Bank merger: Behind Sashi Jagdishan's big plans for HDFC
Bank, business today, https://www.businesstoday.in/magazine/the-buzz/story/hdfc-ltd-hdfc-bank-merger-behind-sashi-jagdishans-big-plans-for-hdfc-bank-390643-2023-07-20 last visited on 12-02-2024
[21] Ambuj Gupta, Examining the
Competition Law Implications of HDFC Bank & HDFC Ltd Merger, https://taxguru.in/company-law/examining-competition-law-implications-hdfc-bank-hdfc-merger.html
last visited on 12-02-2024
Article Information
MERGERS AND ACQUISITIONS IN FINANCIAL SECTOR: ANALYSING THE HDFC CASE AND ITS IMPACT ON CREDIT AVAILABILITY AND LENDING POWER BY: V. V. BADARINATH & P. V. S. S. SRINIVAS
Authors: V. V. BADARINATH, P. V. S. S. SRINIVAS
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/02/13
- Issue 7
About Journal
International Journal for Legal Research and Analysis
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