How the Merger of HDFC and HDFC Bank  affects the nifty benchmark

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Following all necessary regulatory clearances, the merger of Housing Development Finance Corporation (HDFC) and HDFC Bank will be completed, and the portfolio of your mutual fund schemes comprising these stocks may alter.

The merged entity’s weightage in the NSE benchmark Nifty is projected to be over 10% based on the existing weights of both heavyweights individually. If all regulatory approvals are received, the merger is expected to be finalized in the next 15-18 months. Active fund managers may find it challenging to outperform the market benchmark Nifty50 because diversified mutual fund schemes are not permitted to invest more than 10% in individual stocks.

HDFC Bank and HDFC have 8.43 percent and 5.66 percent weightage on the Nifty50, respectively, as of March 31, 2022, for a total of 14.09 percent.

Active fund managers find it difficult to surpass the benchmark if a firm with more than 10% weighting in the major indices outperforms since they have a 10% cap. Something similar happened in 2020 when Reliance Industries’ weighting in the Nifty soared to a new high of 14%.

Fund managers are optimistic about the merger, believing that it will benefit the new organization, HDFC Bank, in the long run.

“HDFC Ltd. will contribute lower credit costs and lower operating costs to the combined firm following the merger. On the other hand, because the cash reserve ratio and statutory liquidity requirements will be applied to the new entity’s overall capital base, there may be some impact on margins “According to a fund manager who requested anonymity, HDFC Bank will have substantial economies of scale after the merger, he noted.

On February 28, 2022, 454 mutual fund schemes held HDFC Bank shares worth Rs 1.01 lakh crore, accounting for 5.35 percent of the mutual fund industry’s total equity assets. According to ACE MF data, 328 mutual fund schemes possess HDFC shares worth Rs 45,403 crore, representing 2.39 percent of the mutual fund industry’s overall equity assets.

HDFC Bank and HDFC are responsible for roughly Rs 1.46 lakh crore in mutual fund investments. 16 equity funds have a total allocation of more than 10% to the HDFC twins.

The proposed merger calls for granting HDFC Bank shareholders 42 shares of HDFC Bank with a face value of Rs 1 apiece in exchange for 25 HDFC Bank shares with a face value of Rs 2. HDFC will own 41% of the resulting firm, HDFC Bank.

Active fund managers will only act if there is sufficient information about the merged entity’s future, changes in benchmark indices, and the relative attractiveness of market investment opportunities. Passive funds, on the other hand, can continue to imitate the underlying index and modify their allocations as new entities are added to the index.

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