MUMBAI – Long-term Institutional bond investors, including insurance companies, will now seek a regulatory dispensation as the proposed merger between HDFC Ltd and HDFC Bank will hit the sectoral limits of those investments, hitherto falling under the separate categories of housing-infrastructure and banking.
Insurance companies, which have a larger share of HDFC Ltd bonds, have held internal meetings for a possible realignment of portfolios, said three people familiar with the matter. They are said to have approached the Insurance Regulatory and Development Authority (IRDAI), the regulator for insurers, requesting a meeting.
Total outstanding bonds/non-convertible debentures of HDFC Ltd and HDFC Bank stand nearly Rs 2.12 lakh crore, show data from Prime Database, an analytics firm. The largest mortgage lender has sold bonds worth Rs 1,74,356 crore, with the bank raising Rs 37,452 crore.
An insurer invests in HDFC Ltd bonds under the combined category of “housing and infrastructure” that mandates a minimum of 15% of the assets under management.
However, an insurance company has a cap of 25% when it comes to investing in the banking and financial services sector.
Hence, the exposure of insurers to HDFC Ltd may be counted under BFSI after the mortgage-lender is merged with the bank.
This is billed as a passive breach of investment norms, which should prompt the regulator to permit a dispensation the way it did in the case of the IDFC and IDFC Bank merger about four years ago. It had obtained a three-year timeline.
“A realignment of bond portfolios is expected,” said Gopal Kumar, Partner, Radgo & Company, an actuary firm based out of Mumbai. “It is natural that insurance companies are seeking regulatory intervention as sector caps may be hit once both HDFC Ltd and HDFC Bank are merged to become a banking entity.”
Both entities are triple-A rated.
Furthermore, there are some restrictions for an insurer buying a parent company’s bonds. However, rules allow some space on listed bonds in the secondary market, dealers said.
HDFC Life Insurance is promoted by HDFC Ltd. It is said to have subscribed to bonds of both the entities, in compliance with regulatory norms.
“HDFC Ltd bonds were subscribed by insures and those were not treated as banking exposures,” said Ajay Manglunia, managing director and head of debt capital market at J M Financial. “With the proposed merger, a regulatory clarification is required for those long investors. CIOs from insurance companies are likely to raise this matter.”
HDFC Bank issued mostly tier-II or infrastructure bonds, which added to their capital base.
HDFC Ltd is one of the top issuers of the local corporate bond market. Every year, it sells about Rs 40,000-50,000 worth of bonds.
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