Sebi hurdle for distributor quota in HDFC Mutual Fund's Rs 35-billion IPO

Fund house may go for pre-IPO placement instead

The Securities and Exchange Board of India (Sebi) is unlikely to accept HDFC Mutual Fund’s plea to allow a special quota for its distributors in its proposed Rs 35-billion initial public offering (IPO). 

The country’s leading asset manager has requested the market regulator to allow it to reserve 720,000 shares—2.8 per cent of the 25.5 million shares to be offered in the IPO—for its “empaneled distribution partners.” 

While special carve-outs for employees and shareholders are common in IPOs, this is the first time a company is seeking special reservation for its business partners.

“Sebi is not in favour of allowing a special reservation for distributors. The regulator is worried that it could set a wrong precedent and prompt similar requests from other issuers in the future,” said a person with the direct knowledge of the development. 
 

HDFC MF has empaneled around 60,000 distribution partners across India. 

Sources say if the request for reservation is not accepted, HDFC MF will make a pre-IPO private placement to its distributors.

An HDFC MF spokesperson refused to comment on the issue citing regulatory restrictions.  

In the offer document filed with Sebi, HDFC MF has made a provision for private placement for up to 1.6 million shares, aggregating to Rs 2.1 billion.
 

Industry players say distributors are an important part of the MF ecosystem and it is therefore important for fund houses to reward them.

“HDFC MF owes its success to its distributors. Therefore, to reserve shares for them in the IPO is a good way to acknowledge their contribution. However, this is not a stock option and distributors will have to pay the market rate,” said Dhirendra Kumar, CEO, Value Research.

Nearly 70 per cent of HDFC MF’s total assets under management (AUM) are garnered from distributors, while the remaining comes from direct plans. The distributors’ share is even more pronounced in the equity segment at 85 per cent.

In the offer document, the fund house has emphasised the importance of distributors to its business.

“If we fail to maintain third-party distribution channels, our business could be adversely affected,” HDFC MF has said in its offer document under one of the risk factors titled ‘Failure to continue with our existing distribution relationships’.

Investment banking sources say Sebi’s approval for HDFC MF’s IPO is likely later this month and the issue could hit the market in June.
 

HDFC MF’s IPO will be a secondary share sale by parent Housing Development Finance Corp (HDFC) and the UK’s Standard Life Investments. Currently, HDFC owns a 57 per cent stake in HDFC MF, while Standard Life owns 38 per cent. In the IPO, HDFC will pare 4 per cent stake, while Standard Life will divest 8 per cent. 

HDFC MF is the country’s second-biggest fund house in terms of AUM. As on March 2018, HDFC MF managed assets worth Rs 3 trillion, slightly below ICICI Prudential MF, which managed assets worth Rs 3.1 trillion. 

HDFC MF posted 31 per cent year-on-year growth in net profit to Rs 7.23 billion for the financial year ended March 2018. Its revenue rose 17.8 per cent year-on-year to Rs 18.7 billion. 

“A lot of distributors who buy in the IPO will hold the shares for the long term as their business is aligned with the fund house,” said Kumar.