Explanation of how the HDFC Bank HDFC merger would affect equities mutual funds

SEBI may need to address the problem of equity mutual funds with more than 10% exposure to HDFC Bank shares as a result of the HDFC twins merger.

HDFC Bank DHFC merger: Following the merging of the HDFC twins, a large number of equity mutual funds will have more than 10% stock exposure in HDFC Bank shares. Invesco India Tax Plan, Bandhan Large Cap Fund, Tata Equity P/E Fund, Sundaram Large Cap Fund, and other equity mutual fund schemes are available. However, according to SEBI regulations, no mutual fund scheme can have more than 10% exposure to a single stock. As a result of the HDFC twins merger, SEBI now has a task to look into, as overnight stake selling may result in an artificial drop in HDFC Bank’s share price.

Mutual fund SEBI rules and regulations

“Under current SEBI (Securities and Exchange Board of India) rules and regulations for mutual funds, all equity mutual funds with exposure of more than 10% in HDFC Bank shares after the HDFC twins merger will have to cut down their stake in the stock up to 10% within 30 days,” said Pankaj Mathpal, MD & CEO at Optima Money Managers.

On the HDFC Bank HDFC Ltd merger and the choices available to SEBI in terms of equity mutual funds, Kartik Jhaveri, Director of Wealth at Transcend Capital, stated, “SEBI rule states that one mutual fund scheme cannot own more than 10% of a stock.” However, SEBI makes some exceptions in certain cases. In the event of the HDFC twins merger, SEBI may provide some relief by establishing a time frame within which mutual funds must reduce their exposure to HDFC Bank following the merging of HDFC Ltd.”

On why SEBI should provide a deadline instead of overnight selling, SEBI-certified investing expert Jitendra Solanki stated, “Sometimes, mutual funds’ exposure in a stock exceeds 10% due to stock appreciation.” In that instance, SEBI instructs mutual funds to reduce their exposure over a specified time period. Mutual funds’ exposure to HDFC Bank has increased as a result of both HDFC Bank and HDFC Ltd share price growth and the merger of the HDFC twins. 

As a result, SEBI must address both scenarios. Asking mutual funds to sell their shares immediately may cause an artificial drop in HDFC Bank shares, despite the fact that the stock’s fundamentals have improved significantly since the merger with HDFC Ltd. As a result, SEBI must be aware of this, and I anticipate a reduction in exposure within a reasonable time frame.”

However, Transcend Capital’s Kartik Jhaveri stated that SEBI may allow mutual funds to continue holding above 10% stake with some terms and conditions because it has the authority to soften its regulations in specific cases. He cautioned retail HDFC Bank shareholders to be on the lookout for SEBI’s next step regarding mutual fund exposure exceeding 10% following this merger.

The merger of HDFC twins

Last Thursday, HDFC Bank and HDFC Ltd announced a successful merger that would take effect on July 1, 2023. The merged entity, among other things, brings together significant complementarities that exist between the entities and is poised to create meaningful value for various stakeholders, including respective customers, employees, and shareholders, through increased scale, comprehensive product offering, balance sheet resiliency, and the ability to drive synergies across revenue opportunities, operating efficiencies, and underwriting efficiencies. According to the merger scheme’s share exchange ratio, HDFC Bank will issue and allot to eligible shareholders 42 new equity shares of Rs. 1/- each, credited as fully paid-up, for every 25 equity shares of Rs. 2/- each fully paid-up held by such shareholder in HDFC Ltd. as of the Record Date, July 13, 2023.