Sebi expresses concerns over $1.5 billion HDB Financial Services IPO

The Securities and Exchange Board of India (Sebi) found that the bank issued shares in a private placement to more than 50 employees of its parent HDFC Bank in 2008, one of three people familiar with the matter said. The regulator now plans to refer the matter to the Union Ministry of Corporate Affairs (MCA) as it could be a violation of the Companies Act, the person said on condition of anonymity.

Under the Companies Act, issue of shares to more than 50 persons is considered a public issue and requires mandatory Sebi approval. Preferential issues like HDB’s are private placements and such issues cannot be issued to more than 50 investors without Sebi’s approval. The 50-person threshold was added to the Companies Act, 2000.

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“If Sebi is found to have violated existing laws at any time after Sebi’s incorporation, the issuing company may be required to pay a penalty or be completely barred from the market for a period of time. In such a case, the company may be required to pay a penalty before it can get an IPO Approval of application,” the person added.

Queries emailed to HDB, HDFC Bank, MCA and Sebi remained unanswered.

HDB submitted draft IPO documents in November. Parent HDFC Bank to sell its value $The sale offer is for Rs 10,000 crore to comply with RBI norms regarding mandatory listing of so-called upper tier NBFCs. Meanwhile, HDB Financial will issue new shares to raise capital $25 billion rupees. HDFC Bank owns 94.36% of the shadow bank.

According to the Draft Red Herring Prospectus (DRHP), HDB allotted 12 million shares on a preferential basis to 410 employees of HDFC Bank on January 12, 2008. Some of the employees included HDFC Bank’s then CEO Aditya Puri and other senior officials.

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However, another person said that given the company’s origins, the matter may not hinder the IPO and may be resolved.

“HDB is yet to hear from Sebi. We understand that Sebi will take action once we receive feedback from MCA on the matter,” the second person added. “Whether HDB’s issue can be considered an Esop issue or a public issue is a matter of legal interpretation. If it was interpreted as an Esop issue, then the company would not have asked for Sebi’s approval,” he added.

Sumit Agrawal, partner at Regstreet Law Advisors, said: “In the corporate world, it is not uncommon for preferential allocations to employees or related parties and each case will be assessed on the basis of the specific facts and circumstances. “ At the time of the IPO, a review will be conducted for material compliance, including any issuance or transfer of shares since the company’s inception.”

HDB IPO Application

Agrawal, a former Sebi official who has handled such cases in the past, said HDB Financial may need to amend its IPO documents to specifically mention the shares that are considered a public issue or adjust the structure of the offering. “Furthermore, upon receipt of the show-cause notice, HDB Financial Services may apply for settlement and Sebi, as a prerequisite to resolution of the securities law violations, may direct the company to approach the NCLT or the Regional Director for compounding of the violations under : Section 67(3) of the Companies Act, 1956. This has been Sebi’s approach in past cases such as the IPO documents of Utkarsh Small Finance Bank and RBL Bank Ltd. Unless Sebi A different approach in the case would have resulted in delays or the need for additional disclosures,” he added.

Agrawal added that lenders should work with Sebi to submit necessary disclosures regarding allocations and strive to resolve any issues in full compliance with existing regulations.

“The capital structure established by the company (HDB Financial) was in compliance with the prevailing corporate laws applicable at the time,” a fourth person familiar with the matter said.

last month, Fund control HDB has reportedly restarted talks with Mitsubishi UFJ Financial Group (MUFG) to acquire a 20% stake in the company after a brief pause. HDB Financial Services’ board initially rejected MUFG’s proposal last year because top management was divided over selling shares to the Japanese financial group ahead of its initial public offering.

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HDFC Bank will also have to reduce its stake in HDB Financial Services below 20% in future to comply with the Reserve Bank of India’s (RBI) draft norms governing the banking group’s operations. Draft rules issued by the central bank last year aimed to eliminate any overlap in the business carried out by banks and their subsidiaries. HDB Financial Services (a non-bank financial company) and HDFC Bank offer similar products but target different borrower segments. HDB provides loans primarily to first-time borrowers and underserved customers.

Housing and Development Board Financial Conditions

The company’s net profit fell 20% month-on-month $4,723 million as at end-December 2024, mainly due to higher credit costs.

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Macquarie Research said the non-bank lender’s credit costs increased amid pressure on its unsecured, commercial vehicle and construction equipment loan portfolios. As the total NPL ratio increased from 2.1% at the end of the second quarter to 2.25% at the end of the third quarter, credit costs increased 70 basis points quarter-on-quarter to 2.5%.

Credit costs reflect the actual financial impact of credit risk by including provisions, charge-offs, collection charges, loan restructuring costs and lost interest income.