HDFC Merger: A Challenging Job Ahead For Fund Managers 

India’s largest private bank announced a merger with its parent company HDFC. Post this merger, all associates and subsidiaries of HDFC will become subsidiaries of HDFC Bank. Currently, both the entities—HDFC Bank and HDFC—are listed separately on stock exchanges with a market capitalisation of about Rs 8.91 lakh crore and Rs 4.75 lakh crore, respectively, as on April 5, 2022. Both of them are not only constituents of various indices such as NSE-Nifty and S&P BSE Sensex but also carry significant weightage in the indices. For instance, HDFC Bank constitutes 8.43 per cent and HDFC 5.66 per cent in NSE-Nifty as on March 31, 2022.  

There are many mutual fund (MF) schemes, especially large-cap schemes that hold both these stocks in their portfolio. As the combined weight of these two entities is little over 14 per cent in NSE-Nifty, so if the underlying benchmark of the scheme is NSE-Nifty, its holdings for these two companies will be more or less similar. 

What’s The Catch? 

To protect the interest of investors and prevent overexposure to a particular security, the capital market regulator, Securities and Exchange Board of India (Sebi), has a maximum prescribed limit of 10 per cent in a particular stock. This technically means that no scheme can hold any stock beyond 10 per cent. So, say, a scheme has 8 per cent of its portfolio in HDFC Bank and 5 per cent in HDFC, after the merger, the combined allocation in the new entity will be 13 per cent. The allocation will be 3 per cent above the maximum ceiling of 10 per cent prescribed by Sebi. Logic suggests that the fund manager will trim the exposure by 3 per cent to meet the regulatory requirement. But that may not happen. 

Fund Manager’s Action 

In reality, things may be different. Outlook Money reached out to four fund managers who have both the stocks in the portfolios of the schemes they manage. All the fund managers said they see value in the merger. “We have enough time to take action on this,” says one of the fund managers, requesting anonymity.  

As fund managers are not allowed to comment on a particular stock, they did not say much about the stocks, but what emerged is that this would be a passive breach in holding. The compliance head of a mid-size fund house said, “If the deal goes off, and the allocation in a scheme goes beyond 10 per cent, the breach is not due to an action of a fund manager but because of corporate action.” Therefore, it is not necessary to trim the portfolio.  

Typically, underexposure to a stock with a significant weight in the index leads to underperformance by the scheme if that stock has a sharp run up.  

It is to be seen how fund managers react after the HDFC Bank-HDFC merger takes place. The entire process is estimated to take 15-18 months. S