HDFC’s stake in its subsidiaries, especially its insurance arms, could prove to be an irritant for the smooth merger of the housing finance giant with private sector lender HDFC Bank, according to experts.

Deepak Parekh, Chairman, HDFC, on Monday said they have written to the Reserve Bank of India on whether they can hold on to the stake or increase it.

“The RBI rule says either you have above 50 per cent or 30 per cent. We are at 48 in our life insurance subsidiary. We have writtento the RBI and we hope to get a reply sometimes sooner, permitting us to keep the stake as it is or they may tell us to buy that 1 per cent, which we can easily buy in the market to make it compliant to the banking regulation of 50 per cent,” said Parekh.

HDFC holds 47.82 per cent stake in HDFC Life Insurance. Besides, it also holds nearly 50 per cent stake in HDFC Ergo, which is its general insurance subsidiary. 

“We  have to comply with RBI regulations on this.  If there is a change, we will accept the change,” Parekh told reporters.

HDFC has also written to the RBI, seeking time to be compliant on SLR and CRR requirements on its existing assets in a period of two to three years.

“But all new loans will be compliant with the SLR, CRR regulations.This is also one of the requests made to RBI to give us time for the PSL because we don’t have MSME loans, we don’t have agriculture loans in our books. We have a large amount of affordable housing loans, but not of these two. We have to work out and see,” said Parekh.

Macquarie Research said the RBI’s approvals will be a key monitorable for merger while the priority-sector requirements and SLR, CRR may be a drag on the profit and loss.

“RBI’s approval will also be key monitorable, as the bank will end up owning 48 per cent in the life, about 50 per cent in the general insurance and 69 per cent in the AMC entities of the group,” it said, noting that very recently the RBI did not allow Axis Bank to directly own  over 10 per cent in Max Life, and ICICI Bank was asked to bring down shareholding in ICICI Lombard to less than 30 per cent.

According to the report, HDFC Bank will have an excess SLR/CRR asset requirement of  about Rs 700 billion to Rs 800 billion and will also need an incremental  about Rs 900 billion agriculture portfolio to meet PSL norms. “These low-yielding portfolios could be a drag on the merged entity’s profit and loss,” it said.

Srinath Sridharan, corporate advisor and independent markets commentator, noted that approval from all financial regulators because of the size and structure of the deal.

“This is one of the few instances where the parent is merging with the subsidiary. But there are sufficient precedences of a bank holding multiple other financial entities under it,” he said, adding that given the size, scale and market influence of the merged entity, the CCI process could take time.

“The one crucial question is on the life insurance subsidiary. Under the current RBI norms, a bank can not hold over 30 per cent stake in an insurer. One has to see what is done on this,” he further noted.

Shriram Subramanian, Founder and MD, proxy advisory services firm InGovern, said there are no red flags in the transaction per se.

“Obtaining regulatory approvals will be a long drawn process. The CCI may scrutinise closely for the collective market share of the merged entity and pricing power,” he said, adding that one question that remains is the likely composition of the board of the merged entity.

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