HDB Financial Faces Regulatory Hurdles in $1.5B IPO

HDB Financial Services is currently under scrutiny for a potential violation of the Companies Act, 2008, as it moves forward with its planned $1.5 billion initial public offering (IPO). According to a Mint report, the Securities and Exchange Board of India (SEBI) found that HDB had privately issued shares to more than 50 employees of its parent company, HDFC Bank. 

This action may have exceeded the legal limit for private placements, which could classify the issuance as a public offering, necessitating SEBI approval.

As per the Companies Act, private placements must not surpass 50 investors. Given this situation, SEBI might escalate the matter to the Ministry of Corporate Affairs (MCA). If the violation is confirmed, HDB could face penalties or be required to revise its IPO filing. Legal experts suggest that the company may need to pay fines or provide additional disclosures before moving forward with the offering.

HDB submitted its draft red herring prospectus (DRHP) in November 2024, aiming to raise ₹2,500 crore through fresh shares, while HDFC Bank intends to sell shares worth ₹10,000 crore to comply with Reserve Bank of India (RBI) regulations. RBI mandates that upper-layer non-banking financial companies (NBFCs) must be listed, and HDFC Bank, currently holding a 94.36% stake in HDB, will eventually need to reduce its shareholding below 20% to align with regulatory requirements.

In January 2008, HDB issued 12 million shares to 410 HDFC Bank employees, including then-CEO Aditya Puri. Legal analysts highlight that the classification of this share issuance—whether as an employee stock ownership plan (ESOP) or a public offering—will be crucial in determining compliance. If categorized as an ESOP, SEBI approval would not have been necessary. However, if considered a public issue, HDB may have to resolve the matter or face delays.

Additionally, HDB has been experiencing financial headwinds. For the quarter ending December 2024, the company reported a 20% decline in net profit, amounting to ₹472.3 crore, primarily due to increased credit costs. Rising stress in unsecured loans, commercial vehicle financing, and construction equipment portfolios contributed to a higher non-performing asset (NPA) ratio, which climbed to 2.25% from 2.1% in the preceding quarter.

Despite these challenges, industry analysts believe that HDB’s IPO is unlikely to face major obstacles, given the strong reputation of its parent company, HDFC Bank. SEBI is expected to take action after reviewing feedback from MCA, with the matter likely to be settled through penalties or other resolutions.