Author- Aryan Radhakrishnan
Introduction
The mortgage lender HDFC Ltd. announced a merger with HDFC Bank on April 4, 2022. A number of legal and regulatory approvals, including those from the respective shareholders and creditors of the companies, the Competition Commission of India (CCI), the National Company Law Tribunal (NCLT), and other pertinent authorities are reportedly required for the merger, according to HDFC Bank.
With its unmatched partnerships, connections, and underwriting abilities, HDFC Ltd. is the leading provider of home loans in India. Yet, the greatest bank in the private sector is HDFC Bank, which has a significant customer base spanning many years. In addition to 6,342 branches and a range of credit, liability, and distribution products, it has about 68 million customers. After the merger, it is predicted that the company’s combined asset base will be close to 18 lakh crores of Indian rupees.
The Central Bank of India (RBI), the Insurance Regulatory and Development Authority of India (Irdai), and the Pension Fund Regulatory and Development Authority have all given their general assent to the merging of the two organisations (PFRDA). The acquisition was approved by the stockholders as well. Both the Competition Commission and the stock markets have given their clearance for the deal. In what has been called the largest deal in Indian economic history, HDFC Bank and the top mortgage lender in the nation announced their plan to merge on April 4. A financial services goliath with a market cap of close to $40 billion was created as a result of the merger. A close to Rs 18 lakh crore asset base would make up the projected corporation. Depending on regulatory permissions, the merger should be finished by the second or third quarter of FY24. Once the agreement is in place, the general public will control 100% of HDFC Bank.
Dominance abuse: hdfc ltd. and hdfc bank
Abuse of dominance happens when a company that already occupies a dominant position in a pertinent industry takes action to eliminate current rivals or discourage possible new ones from entering the market. A dominant activity, a relevant market, and anti-competitive behaviour are required for dominance abuse to exist.
A company’s dominance, in this example that of HDFC Bank, can only be evaluated within the parameters of the relevant market. In Shri Pravahan Mohanty v. HDFC Bank Ltd, the CCI found that while evaluating a dominant position, it is critical to identify the relevant product market.
According to Section 2(t) of the Act, a “relevant product market” is any market for goods or services that the customer considers interchangeable or substitutable due to the attributes, price, or intended purpose of the goods or services. Based on alternatives and other elements stated in Section 2(t) of the Act, the “market for retail loans by financial institutions” and the “market for housing loans” are the pertinent markets.
HDFC Bank is a prime example of dominance.
The term “dominant position” is described in Explanation (a) below Section 4(2) as “a position of strength enjoyed by an enterprise in the relevant market in India that enables it to operate independently of competitive forces prevailing in the relevant market; or affect its competitors, consumers, or the relevant market in its favour.” The Commission may take into consideration the factors listed in Section 19(4) of the Act to determine an enterprise’s dominant position, including but not limited to the enterprise’s size, industry, and market share.
The entity’s economic power is a factor of dominance under S. Act Section 19(4) (d). Financial success might indicate a company’s supremacy. The EU Commission in Servier saw Servier’s sizable “economic rents” as indisputable evidence of its predominance. As a result, in circumstances similar to Michelin, an entity’s financial security and profitability have been seen as determinants of supremacy. With a profit of more than 38150 Crore in the fiscal year 2022 (FY 22), HDFC Bank would have the greatest profitability of all Indian banks (public sector banks and private sector banks combined). It should be emphasised that, most notably in the instance of Intel, the Commission has in the past determined a company’s dominance in the EU based on its profitability.
For the company’s financial stability, HDFC Bank is praised once more. The Bank has more assets than any of its rivals in the market, as well as a sufficient capital buffer and tier 1 capital ratio, according to a study by the renowned worldwide rating agency Standard & Poor. This demonstrates how strong HDFC’s current financial position is.
A relationship between two entities may also be a sign of power in addition to other things. Because of its “link-up” with France Télécom (HDFC Limited and HDFC Bank in our instance), which they utilised to maintain their supremacy, the EU General Court concluded in France Télécom that Wanadoo had an advantage over its competitors. Similarly to this, the alliance between HDFC Limited and HDFC Bank would grant HDFC Bank considerable strategic benefits in the home lending sector, supporting its dominance (which would be supported in the following section). If any S. If the “link-up” element is not addressed, the CCI may be concerned. The same information can be found in 19 and below S. (4). 19(4)(m), as it allows the government the opportunity to consider any other elements. When all of these influencing factors are taken into account, HDFC Bank may be said to be the market leader in the concerned area.
Competition Commission of India.
Market abuse occurs when a corporation takes use of its dominant position in one market to enter or maintain its control in another sizable market. The business succeeds in doing so by exploiting the competitive environment there, even though it may not be the market leader in another. This behaviour in the undominated market represents a misappropriation of its dominant market position. It frequently does not imply a relationship between the dominant position and the abusive behaviour when the behaviour in a market distinct from the dominated market affects the niche market.
Home loans now make up one-fifth of all bank lending as a result of the merger between HDFC Ltd and HDFC Bank, altering the composition of credit in the banking industry. HDFC Bank would be able to expand the size of its housing loan portfolio thanks to the contentious merger. The housing loan market is supported by the real estate sector, which offers a solid, secured asset class with particularly enticing risk-adapted returns. As a result, HDFC Bank would have a larger balance sheet and be able to sanction large loans in the housing loan market.
Although being a significant player in the banking sector, HDFC Bank only accounts for 2% of the mortgage market. Given that almost 50% of the bank’s branches are located in rural and semi-urban areas, the merger will provide HDFC Bank with a once-in-a-lifetime opportunity to capitalise on the markets covered by this network of branches. The Bank will be able to offer housing loan products at a substantially cheaper rate than its competitor’s thanks to its access to a sizable pool of low-cost funds and its ability to draw on the expertise of HDFC Ltd. The government’s programmes for affordable housing include HDFC Limited, which plays a vital role in providing home loans to people from middle-class and low-income households. By pooling its resources, HDFC Bank will have access to this market and be able to offer low-interest home loans. This will stand as a prime example of how HDFC Bank entered the mortgage lending sector using a merger and market dominance. This could herald the eventual monopolisation of the whole house loan market by HDFC Bank, which would be bad news for its competitors.
The acquisition would expand HDFC Bank’s clients in addition to solidifying its position within the housing financing sector. According to reports, 70% of HDFC Limited’s customers do not bank with HDFC Bank. Yet, as a result of the merger, the bank would be able to cross-sell its banking products to HDFC Limited customers. As a result, other competitors’ consumer bases will gradually decline.
Conclusion and the way forward
Retail loans, which are expanding at a pace of 14% annually while corporate loans are declining at a rate of 4% annually, are the key forces behind the expansion of the credit market, according to statistics from the RBI. Market regulators like the Competition Commission of India (CCI) must keep a closer eye out for anti-competitive behaviour in a growing industry. The disputed merger is currently up for discussion at the CCI. Before deciding to accept the deal, CCI must conduct an impact-based assessment. HDFC Ltd. and HDFC Bank, respectively, control the banking and mortgage lending sectors. When two titans come together, there will be ripple effects, and CCI needs to be vigilant enough to recognise them in order to keep the market stable.
