HDFC Bank tells SEC of possible conflict of interest with parent

HDFC Bank has admitted that there could be a conflict of interest with its principal shareholder the Housing Development Finance Corporation.

The bank has said this in its prospectus for the forthcoming American depositary shares (ADS) issue filed with the US Securities Exchange Commission (SEC).

HDFC and subsidiaries owned 24.1 per cent of HDFC Bank's equity as of September 30, 2004, and will continue to hold more than 20 per cent of it after the proposed $300 million ADS float.

"Although we currently have no agreements with HDFC or any other HDFC group companies that restrict us from offering products and services that are offered by them, our relationship with these companies may cause us not to offer products and services that are already offered by other HDFC group companies. This may effectively prevent us from taking advantage of business opportunities."

As a result, any conflict of interest could adversely affect our business and the price of our equity shares and ADS, it added.

So long as HDFC and its subsidiaries hold at least 20 per cent equity stake in HDFC Bank, HDFC is entitled to nominate the directors who are not required to retire by rotation to our board, including the chairman and our managing director, subject to Reserve Bank of India's approval.

Accordingly, HDFC may be able to exercise substantial control over the bank's board and over matters subject to a shareholder vote.

Just over a year ago HDFC Bank made an entrance into the home loan market in which it hawks the parent, HDFC's products and also builds a mortgage-backed securities portfolio.

Through the arrangement of selling home loans, the bank earns a sourcing fee and 70 per cent of the loans are securitised into the bank's books.

The bank earned Rs 91 lakh from HDFC in fiscal 2004 as fees for selling these loans.

Under this arrangement HDFC approves and disburses the loans, which are booked in the books of HDFC, and we are paid a sourcing fee.

HDFC offer the bank up to 70 per cent of the fully disbursed home loans sourced under the arrangement through the issue of mortgage-backed pass-through certificates (PTCs); the balance is retained by HDFC.

The bank purchases the mortgage backed PTCs at the underlying home loan yields less a fee paid to HDFC for administration and servicing of the loans.