The merger of HDFC into HDFC Bank is likely to create the third-largest entity in India when it comes to market capitalisation. In an exchange filing, HDFC announced that the company will merge itself with HDFC Bank following a union of subsidiaries HDFC Holdings and HDFC Investments. A similar announcement was made by HDFC Bank in a separate exchange filing.

“The proposed transaction would create meaningful value for various stakeholders including respective shareholders, customers, employees, as the combined business would benefit from increased scale, comprehensive product offering, balance sheet resiliency, and the ability to drive synergies across revenue opportunities,” HDFC said in an exchange filing.

HDFC said that its shareholders will get 42 shares of HDFC Bank for every 25 shares of the non-banking lender held by them.

Based on the market capitalisation of HDFC and HDFC Bank as of April 1, the market value of the merged entity will be close to Rs 12.8 lakh crore. HDFC said that it will hold a 41 percent stake in the merged entity.

HDFC Bank soared nearly 9 percent while HDFC jumped close to 10 percent following the announcement.

“This is a merger of equals. Over the last few years, various regulations for banks and NBFCs have been harmonised, thereby enabling the potential merger,” Deepak Parekh, chairman of HDFC said in a press statement.

Analysts suggested that the merger will create the biggest stock in terms of weight in the Nifty50 index, easily surpassing Reliance Industries’ current weight of 11.9 percent. As of March 31, HDFC Bank’s weight on the index was 8.4 percent while that of HDFC was 5.66 percent.

Analysts said that the merger benefits parent HDFC given the rise in costs of funds for non-banking entities in India as compared to lenders. With interest rates expected to rise going ahead, the merger reduces the cost of funding for HDFC.

Some market participants suggested that the move has been forced by the weak stock performance of HDFC and HDFC Bank over the past 18 months even as the wider equity market surged in the COVID bull run.

Prior to the merger, HDFC’s shares were languishing near its 52-week low while HDFC Bank’s stock has risen merely 4 percent in the past year.

At 9:37, shares of HDFC were up 10.75 percent at Rs 2,716 on the National Stock Exchange, while those of HDFC Bank were higher by 9 percent at Rs 1,641.