 "HDB Financial Services faces regulatory hurdles amid $1.5 billion IPO plans")
HDB Financial Services is under scrutiny for a possible violation of the Companies Act, 2008, as it prepares for a $1.5 billion initial public offering (IPO). The Securities and Exchange Board of India (SEBI) discovered that HDB issued shares to over 50 employees of its parent company, HDFC Bank, through a private placement. This could breach legal thresholds that classify such issues as public, requiring SEBI clearance, according to a report by Mint.
Under the Companies Act, private placements cannot exceed 50 investors. SEBI may now refer the matter to the Ministry of Corporate Affairs (MCA). If confirmed, HDB could face penalties or be required to amend its IPO filing. Experts say the company might need to pay fines or provide additional disclosures before its IPO proceeds.
According to the report, HDB filed its draft red herring prospectus (DRHP) in November 2024. It plans to raise Rs 2,500 crore through fresh shares, while HDFC Bank will sell shares worth Rs 10,000 crore to meet Reserve Bank of India (RBI) rules on listing upper-layer non-banking financial companies (NBFCs). HDFC Bank currently owns 94.36 per cent of HDB and will eventually need to reduce its stake to below 20 per cent, aligning with RBI guidelines to separate bank and subsidiary businesses.
In January 2008, HDB allocated 12 million shares to 410 HDFC Bank employees, including then-CEO Aditya Puri. Legal experts note that the case hinges on whether this issue is classified as an employee stock ownership plan (ESOP) or a public issue. If treated as an ESOP, SEBI approval wouldn’t have been required. However, if deemed public, HDB may need to settle the issue or face delays.
HDB Financial has also faced challenges in its financial performance. For the quarter ending December 2024, the company reported a 20 per cent drop in net profit to Rs 472.3 crore due to increased credit costs. Stress in unsecured loans, commercial vehicle financing, and construction equipment portfolios led to higher non-performing assets (NPAs), which rose to 2.25 per cent from 2.1 per cent in the previous quarter.
Despite these concerns, industry experts believe HDB’s IPO won’t face significant roadblocks due to the strong reputation of its parent, HDFC Bank. SEBI is expected to act after receiving feedback from MCA, and the matter may be resolved through penalties or settlements.