HDFC Bank likely to take fund raising plan from Dalal Street to Wall Street

HDFC Bank is likely to take its fund raising plan from Dalal Street here to Wall Street.
 
Sources say the bank prefers an issue of American Depository Receipts (ADR) over Qualified Institutional Placement (QIP) for its Rs 15.5-billion ($2.2 billion) equity raising exercise. Attractive valuations and greater investor appetite is prompting the country’s highest-valued bank to go for overseas issuance.
 
However, the foreign institutional investment ceiling could force it to also do a fourth of its fund raising in the domestic market.
 
“Earlier, the bank wanted to go for a QIP. Given the ADR premium and investor preference, we advised it to opt for ADR issuance,” said a head of a foreign bank managing the share sale.
 
Another senior official of the bank confirmed the development. HDFC Bank refused to comment.
 
The premium between HDFC Bank’s ADRs traded on the NYSE and locally listed shares is currently 16 per cent.
 
“If the ADR is at quoting at a premium to the price of listed shares in India, it makes more sense to issue ADRs than  equity shares in India. In such a case, the bank will be able to raise the same quantum of money, with lower dilution for existing shareholders. For a company like HDFC Bank which has an existing ADR programme, raising money through this will be as convenient a QIP,” said Sudhir Bassi, executive director at law firm Khaitan & Co. “The cost of doing an ADR is a bit higher than domestic fund raising. However, the premium would justify an overseas issuance. The only thing the bank has to worry about is whether there is enough legroom to do an ADR. The FII (foreign institutional investor) shareholding in the bank is always near the threshold,” said consultant Harish HV.

 
The FII ownership in HDFC Bank is legally capped at 74 per cent and the current aggregate investment is 73.13 per cent.
 
According to the National Securities Depository, available investment room in the bank is 23.2 million shares, worth Rs 50 billion at the current rate. Technically, a little over 74 per cent of the new shares to be issued by the bank can be allotted to FIIs. ADR issuance would be entirely for foreign investors; while a mix of domestic and foreign investors can participate in a QIP.
 
Sources say apart from better valuation, investor preference is driving the ADR decision. “The new monitoring norms and discontinuation of the FII-to-FII trade window have miffed overseas investors. Most of them prefer to deal in the US markets for domestic stocks that are listed there,” said the banker quoted earlier.
 

Under the new FII monitoring norms, an investor is forced to sell shares in case there is a breach in the FII shareholding limit. The premium between ADRs and local shares has expanded, amid the regulatory changes and weakening of the rupee (see chart). Experts say the trend signals that investors are willing to pay a higher amount to buy shares in the US market, as opposed to the domestic market.

 
In December 2017, the bank’s board of directors announced a Rs 240-billion equity fund raising plan. This was cleared by the central government last month.
 
Earlier this month, parent Housing Development Finance Corporation invested Rs 85 billion through a preferential allotment, to maintain its shareholding in the bank. The remaining Rs 155 billion will be raised from institutional investors.
 
“An ADR issue will send a good signal to the market. We have not had many such issuances by an Indian company in quite some time,” said Harish.