MC Explains | Will HDFC group go ahead and acquire 9.5% stake in all the 6 banks?

While RBI’s approval is sentimentally positive for the six stocks in the near term, it does not mean that HDFC’s stake will necessarily go up to 9.5 percent in those six banks

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HDFC Bank group on February 6 received the Reserve Bank of India’s approval to hike its stake up to 9.5 percent in six banks, including Yes Bank and IndusInd Bank, over the next one year.

While this is sentimentally positive for the six stocks in the near term, it does not mean that HDFC’s stake will necessarily go up to 9.5 percent in these lenders .

We spoke to analysts and looked into past trends of such RBI approvals. Here is what we found:

What is the RBI approval all about?

The HDFC group as a whole, including HDFC Life, HDFC AMC and HDFC Ergo, can now acquire up to 9.5 percent stake each in six banks – IndusInd Bank, Yes Bank, Axis Bank, ICICI Bank, Suryoday Small Finance Bank and Bandhan Bank.

A business group cannot hold more than 10 percent stake in a bank. Therefore, approvals are sought for 9.99 percent, the maximum limit.

Despite the perceived intent, it does not mean that full 9.99 percent stake will be acquired. Since it does not make sense to seek RBI approval for every 1-2 percent stake, companies tend to ask for the maximum 9.99 percent.

How much does the HDFC group currently hold in these banks?

At the end of the December quarter, it held 3.43 percent in ICICI Bank, 2.57 percent in Axis Bank, 4.48 percent in IndusInd Bank and 3 percent in Yes Bank.

Why is RBI approval needed?

The RBI’s approval is a must for anyone looking to acquire more than 5 percent stake in a bank as it is a highly regulated sector, said Vijay Singh Gour, lead analyst, Choice Broking.

Also Read: China’s market restrictions won’t help, may be bad for EMs, no immediate impact on India

What is the validity of the approval?

The approval is valid for a year and if HDFC fails to acquire the shareholding within that period, the approval stands cancelled.

If the holding stands at sub-5 percent before the year-end, then RBI’s approval will be required again to increase it to 5 percent or more.

Is this sign of merger?

No. It is simply an approval for investment purpose, clarified Jignesh Shial of Incred Equities.

Other examples…

LIC on January 24 received the RBI’s approval to acquire up to 9.99 percent in HDFC Bank. In December 2023, ICICI Prudential AMC got RBI nod to acquire 9.99 percent in Federal Bank.

In October 2023, HDFC AMC got the RBI’s go-ahead to acquire 9.5 percent in DCB Bank, Equitas Small Finance Bank, The Federal Bank, Karur Vysya Bank and City Union Bank.

Also Read: Credit growth to moderate to 13%; Paytm and lower-rated NBFCs at risk: Macquarie’s Suresh Ganapathy

Any instances where RBI approval has lapsed before a 9.9 percent stake acquisition?

Yes. In November 2021, LIC got approval to hike stake in Kotak Mahindra Bank to up to 9.9 percent. A year later, its stake in the lender had gone up to 6.25 percent from 4.96 percent.

In May 2023, SBI MF received similar approval for HDFC Bank. Three months to go for the validity to lapse and SBI MF holds about 5.57 percent stake in the bank.

What does it mean for the six stocks?

It is a sentimentally positive news, said Nitin Aggarwal, head–BFSI research, institutional equities, Motilal Oswal Financial Services. “Flows should come in over the medium term,” he said.

What do back-to-back RBI approvals indicate?

Domestic institutions, including LIC, are eyeing to increase stake in private banks. Since October 2023, domestic institutions have created over Rs 1.4 lakh crore headroom to buy stakes.

With the general election unlikely to throw a surprise and expectations of private capex picking up, domestic institutions are waiting on the sidelines to hike stakes in banks and financials.

Banking stocks are seen as a reasonably valued bets at a time when the market sits on high valuations, analysts said.