HDB Financial $1.5 Billion IPO Under SEBI Eyes for Compliance Issues

HDB Financial Services is under investigation for potential violations of the Companies Act, of 2008, as it prepares for its highly anticipated $1.5 billion initial public offering (IPO). The Securities and Exchange Board of India (SEBI) flagged concerns over a private placement of shares that may breach regulatory thresholds, raising questions about compliance with laws governing private and public share issuances.

Potential Violation of Private Placement Limits

According to a news report, SEBI discovered that HDB Financial issued shares to over 50 employees of its parent company, HDFC Bank, through a private placement in January 2008. Under the Companies Act, private placements are limited to a maximum of 50 investors. Exceeding this threshold could classify the issue as public, requiring prior SEBI approval.

Legal experts highlight that if SEBI’s findings are confirmed, the matter could be referred to the Ministry of Corporate Affairs (MCA). HDB may face penalties or be required to revise its IPO filing. Additionally, the company could need to provide further disclosures or pay fines before proceeding with the public offering.

IPO Plans and RBI Compliance

HDB Financial filed its draft red herring prospectus (DRHP) in November 2024. The IPO aims to raise ₹2,500 crore through fresh equity, with its parent, HDFC Bank, selling shares worth ₹10,000 crore to comply with the Reserve Bank of India’s (RBI) rules on listing upper-layer non-banking financial companies (NBFCs).

HDFC Bank currently owns 94.36% of HDB Financial but is required to reduce its stake to below 20% to align with RBI guidelines that separate bank and subsidiary businesses.

Controversial 2008 Share Allocation

The investigation revolves around 12 million shares allocated to 410 HDFC Bank employees, including then-CEO Aditya Puri, in January 2008. Whether this issuance qualifies as an employee stock ownership plan (ESOP) or a public issue remains a contentious point. If classified as an ESOP, SEBI approval would not have been required. However, if deemed public, HDB could face delays or penalties.

Financial Performance and Rising NPAs

HDB Financial is also dealing with financial pressures. For the quarter ending December 2024, the company reported a 20% decline in net profit to ₹472.3 crore, primarily due to higher credit costs. The company’s non-performing assets (NPAs) rose to 2.25%, up from 2.1% in the previous quarter. Key stress areas included unsecured loans, commercial vehicle financing, and construction equipment portfolios.

Industry Outlook and Next Steps

Despite these challenges, industry experts believe that HDB Financial’s IPO is unlikely to face major obstacles, given the strong reputation of its parent, HDFC Bank. SEBI is expected to act after receiving feedback from the MCA. Observers anticipate that the issue will be resolved through penalties or settlements, allowing the IPO to move forward.

HDB Financial’s IPO is viewed as a critical step for both the company and HDFC Bank as they navigate regulatory requirements and market dynamics.

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