HDB Financial Services is encountering regulatory obstacles as it moves forward with its $1.5 billion initial public offering (IPO) plans
HDB Financial Services is currently facing scrutiny for a potential violation of the Companies Act, 2008 as it gears up for a $1.5 billion initial public offering (IPO). The Securities and Exchange Board of India (SEBI) has uncovered that HDB issued shares to more than 50 employees of its parent company, HDFC Bank, through a private placement. This action could potentially breach legal thresholds that categorize such issuances as public, necessitating SEBI clearance, as reported by Mint.
According to the Companies Act, private placements cannot exceed 50 investors. SEBI is now considering referring the matter to the Ministry of Corporate Affairs (MCA). If the violation is confirmed, HDB may face penalties or be required to make amendments to its IPO filing. Industry experts suggest that the company might have to pay fines or provide additional disclosures before proceeding with its IPO.
As per the report, HDB submitted its draft red herring prospectus (DRHP) in November 2024. The company aims to raise Rs 2,500 crore through fresh shares, while HDFC Bank plans to sell shares worth Rs 10,000 crore to comply with Reserve Bank of India (RBI) regulations regarding the listing of upper-layer non-banking financial companies (NBFCs). Currently, HDFC Bank holds a 94.36 per cent stake in HDB and will eventually need to reduce its ownership to below 20 per cent, aligning with RBI guidelines to segregate bank and subsidiary operations.
In January 2008, HDB allocated 12 million shares to 410 HDFC Bank employees, including the then-CEO Aditya Puri. Legal experts emphasize that the crux of the matter lies in whether this allocation should be classified as an employee stock ownership plan (ESOP) or a public issue. If considered an ESOP, SEBI approval would not have been necessary. However, if deemed public, HDB may have to address the matter
HDB Financial Services has encountered challenges in its financial performance recently. In the quarter ending December 2024, the company experienced a 20% decrease in net profit, amounting to Rs 472.3 crore, primarily due to escalating credit costs. The rise in non-performing assets (NPAs) to 2.25% from 2.1% in the previous quarter was mainly attributed to stress in unsecured loans, commercial vehicle financing, and construction equipment portfolios.
Despite these setbacks, industry experts remain optimistic about HDB’s upcoming IPO, as the company benefits from the strong reputation of its parent company, HDFC Bank. The Securities and Exchange Board of India (SEBI) is anticipated to take action following feedback from the Ministry of Corporate Affairs (MCA), with potential resolutions involving penalties or settlements.
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