HDFC Bank's $40-bn deal may face regulatory hurdles over insurance

Mumbai, April 5

HDFC Bank’s $40-billion acquisition of its biggest shareholder (HDFC Ltd) could face regulatory hurdles due to the stake it would give the bank in the insurance sector, analysts said. Sources said the RBI, which acts as a regulator for the financial industry, wants banks to limit ownership stakes in insurance companies.

Clarity on rules sought

• The Reserve Bank of India (RBI) wants banks to limit ownership stakes in insurance companies
• HDFC Bank’s buyout of HDFC will create an entity that will include the target’s insurance and financial subsidiaries
• HDFC Life and HDFC ERGO are among the leading life and general insurance companies in the private sector
• The bank has sought clarity on rules from the RBI, but analysts believe it may not be easy to come by

HDFC Bank’s acquisition of HDFC Ltd., announced on Monday, will create an entity with a combined balance sheet worth $237 billion and will include the target’s insurance and other financial subsidiaries.

HDFC Life and HDFC ERGO are among the leading life and general insurance companies in the private sector, and analysts say the RBI is unlikely to be comfortable with the size of the insurance operations the deal will give the bank.

HDFC Bank’s management said on Monday they have asked the regulator for clarity on complying with its rules, but analysts believe it may not be easy to come by.

“Considering there are a lot of subsidiaries that need to be merged, there could be some regulatory overhang, particularly in the insurance business where the central bank is not very comfortable with banks increasing their stake,” said an analyst at a domestic brokerage house.

HDFC Bank did not immediately respond to a request for comment on Tuesday. The RBI also did not respond to a request for comment.

One way of folding the subsidiaries into HDFC Bank could be to create a holding company structure, but that could have a negative impact on the balance sheet in the short term, analysts said.

“If the holding company structure is enforced, the equation changes. Cost goes up as stamp duties and taxes will go up,” Macquarie said in a note on Tuesday.

In the short term, return on equity (RoE), a key financial metric, will also go down as a result of meeting certain regulatory requirements, the Macquarie note said. — Reuters

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