HDFC Ltd. in a regulatory filing announced that it has received in-principle approval from SEBI for a change in control of HDFC Asset Management Company (HDFC AMC), a subsidiary of HDFC Ltd., and the asset management company of HDFC Mutual Fund. HDFC Ltd. and arbdn Investment Management who own 52.6% and 16.2%, respectively are the sponsors of the fund house.
What does ‘change in control’ mean?
SEBI defines ‘control’ as, inter alia, the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
In this case, there will be a shift in control from HDFC Ltd. to HDFC Bank. The change in control at HDFC AMC is part of HDFC’s merger with HDFC Bank.
As you may be aware, in April 2022, India’s largest private housing finance company, HDFC Ltd., announced its merger into its subsidiary HDFC Bank, the country’s largest private sector bank. HDFC will acquire 41% stake in HDFC Bank through the merger, in addition to the 21% stake it already owns. Under the proposed deal, shareholders of HDFC will receive 42 shares of the bank for 25 shares held.
Post the merger, HDFC Bank will be entirely owned (100%) by public shareholders. The merger is subject to regulatory approvals and is expected to be completed in the second or third quarter of the financial year 2024.
Will the change in control have any impact on the investment processes at the fund house?
The change in control is not expected to have any impact on the day-to-day operations of HDFC AMC. HDFC AMC has a strong team of skilled and experienced fund managers who will continue to be at the helm of the schemes. The investment process and philosophy that the fund house follows is unlikely to undergo changes after the change in control.
Mr Navneet Munot, MD & CEO of HDFC AMC, in a media interview expressed that the merger of HDFC Bank with HDFC Ltd. will result in HDFC AMC being a part of a much bigger entity with a much wider distribution network. He also stated that the Indian mutual fund industry is poised for exponential growth and being part of a bigger and stronger entity will help HDFC AMC to be an integral part of this growth thereby creating wealth for investors.
Notably, Mr Munot who took over the leadership of HDFC AMC in January 2021 was responsible for the transformation at SBI Mutual Fund, taking it to new highs. His expertise in the investment field can prove to be rewarding for the investors in the schemes of the fund house. Thus, the merger the HDFC-HDFC Bank merger will potentially give a boost to its asset management business.
Will the change in control have any impact on the schemes of HDFC Mutual Fund?
The change in control will not directly impact the way the schemes of HDFC Mutual Fund are managed — their investment objective, the fund management style, etc. However, it may indirectly impact the schemes that hold high exposure to the two companies. Here is how…
As of July 31 2022, the combined weightage of HDFC Bank and HDFC is 14% in the Nifty 50 index.
We need to evaluate what the weightage of the merged entity would be in the index. Broadly, we expect it to be similar to what it is currently.
That being said, owing to the regulatory ceiling (of 10%) on single-stock exposure, funds with exposure to the merged entity may slow a bit on the returns. This is opposed to the current situation wherein they benefited by investing in both HDFC Ltd and HDFC Bank.
Moreover, owing to the processes, systems, strategy, and policies at the fund house level, if a decision is taken to have an exposure much less than 10%, say 4-5%, then it may have a further weigh down on the returns of those schemes. This is particularly true in the large-cap and/or large & mid-cap category.
Nevertheless, most fund managers are sanguine about the benefits of the merger of HDFC Ltd and HDFC Bank. They say it will unlock value for shareholders.
If the index generates returns and the merged entity massively outperforms its competitors, diversified equity funds owing to the mandatory regulatory cap of 10% holding in a single stock may underperform.
But if HDFC Bank underperforms post-merger, the same regulatory cap could safeguard the investors’ interest.
What should investors do?
A change in control at the AMC does not warrant any portfolio action. HDFC AMC boasts of a strong performance track record backed by a strong fund management team. As mentioned earlier, the fund house and the schemes are likely to continue with existing systems and processes.
As an investor, you should only look for alternatives if you find the performance of a fund unsatisfactory over a longer duration compared to the peers and the benchmark, based on qualitative and quantitative parameters. Further, you can consider switching to another fund if the scheme’s investment objective and/or investment strategy undergoes changes and is no longer in congruence with your investment objectives.
This article first appeared on PersonalFN here