HDFC Bank to raise ₹50,000 crore ahead of mega-merger with HDFC

India's largest private lender in terms of m-cap, HDFC Bank will decide on raising about ₹50,000 crore, in one of the biggest bond sales by an Indian bank to date. The funds are being raised to meet the higher reserve requirement before its mega-merger with housing finance giant HDFC Ltd.

HDFC Bank, in a stock exchange filing, said it'll issue perpetual debt instruments (part of additional tier I capital), tier II capital bonds and long-term bonds (financing of infrastructure and affordable housing) worth ₹50,000 crore in the next 12 months via private placement mode.

The fundraising plan will come up for discussion on April 16. "The board of directors would consider this proposal at its ensuing board meeting to be held on April 16, 2022. The bank will appropriately inform the exchanges after the conclusion of the board meeting," HDFC Bank said.

Perpetual debt instruments are debt funds that come with no maturity date. In this, the issuer of the bonds keeps on paying interest forever till either the company shuts down or the investor possesses these bonds.

In August last year, HDFC Bank had raised $1 billion by issuing perpetual debt instruments from foreign investors. Before that, HDFC Bank had raised issued perpetual bonds in May 2017 at a coupon of 8.85% from onshore investors.

Why high reserves are required

HDFC, which is India's largest housing finance company, this week had announced its merger with HDFC Bank, the country's largest private sector bank. The proposed merger is expected to take about two years to complete.

The merger of the two big entities means higher CRR and SLR requirements due to the bigger size of the balance sheet of the combined entity.

To get regulatory approvals for the mega-merger of the two biggest entities in their respective space, it’s estimated that the new company will need to buy bonds worth ₹80,000-90,000 crore.

This is because as per the norms, the banks are required to maintain SLR (statutory liquidity ratio) at 18% of the net demand and time liabilities. It is a minimum reserve requirement that needs to be mandatorily maintained by commercial banks. Also, CRR or cash reserve ratio is the percentage (about 4 per cent) of a bank's total deposit, and it also mandatorily needs to be maintained as liquid cash with the RBI.

Why HDFC, HDFC Bank are merging

The bigger, the better. The private bank believes the merger of HDFC and HDFC Bank will create a large balance sheet and net worth that would allow a greater flow of credit into the economy.

Post the merger, the shareholders of HDFC will receive 42 shares of HDFC Bank for 25 shares held in HDFC. The merger will also enable the underwriting of larger ticket loans, including infrastructure loans. It'll bring together the complementary strengths of the two organisations. For example, HDFC Bank's customers would be offered mortgages as a core product in a seamless manner, thereby improving the pace of credit growth.

HDFC Bank will also leverage the long tenor mortgage relationship to offer varied credit and deposit products, resulting in an enhanced value proposition and customer experience for all customers of the combined entity. The bank thinks the merger is expected to create long-term value for all stakeholders, including customers, employees and shareholders of both entities.

Once the merger is completed, HDFC Bank will be 100 per cent owned by public shareholders and existing shareholders of HDFC will own 41 per cent of the bank. The equity shares held by HDFC in HDFC Bank will be extinguished as per the scheme. The subsidiaries of HDFC will become associates of HDFC Bank.