HDB Faces Legal Challenges Before IPO

HDB Financial Services is facing legal scrutiny before launching its IPO. When the NBFC arm of HDFC was preparing for its $1.5 Billion IPO, the Securities and Exchange Board of India (SEBI) discovered a possible violation under the Companies Act.

Details of Alleged Violation

SEBI discovered that HDB has issued shares to over 50 employees of its parent company, HDFC Bank, through a private placement. Under the Companies Act, private placement cannot exceed 50 investors. This could breach the legal thresholds that classify such issues as public and require SEBI's clearance.

SEBI may recommend this matter to the Ministry of Corporate Affairs (MCA), if confirmed SEBI may face penalties or amend its IPO filing. Experts say the company might need to pay fines or give additional disclosures before proceeding with its IPO.

HDB IPO Details

HDB Filed its Draft Red Hering Prospectus(DRHP) on Nov 24. This initial public offer is for Rs 12,500 crore, where Rs 10,000 crore is an offer for sale (OFS) and Rs 2,500 crore is a fresh issue, accruing to around 10% of HDB’s equity.

On October 8, 2023, the Reserve Bank of India issued a circular named “Form of business and prudential regulations for investments” which says the bank and its subsidiaries cannot operate similar lines of business. And if they do, the holding companies are required to reduce their stake in the subsidiary within 2 years.

Although banks have requested more time, this is a major compliance to be done by HDFC.

Potential Effect of Regulatory Issues

Despite these legal hurdles, experts believe this development won't majorly affect HDB IPO, due to the strong reputation of its parent company HDFC. However, HDB's situation is now dependent on MCA findings and SEBI giving the green flag to HDB. This can be resolved through fines & penalties.

Slightly Downward Financial Performance

HDB has faced a slight downward performance in the latest quarter ending on Dec 24.

• The Quarterly Interest income grew from Rs 3,431 crores in the Sep 24 Quarter to Rs 3,517 crores in the Dec 24 quarter.

• Total quarterly income grew from Rs 4,007 crores to Rs 4146 crores in Dec quarter.

• HDB reported a 20% decline in net profit from Rs 591 crore in the Sep 24 Quarter to Rs 472 crore in the Dec 24 quarter. This was primarily due to the increasing credit costs.

• Earnings per share (EPS) fell from Rs 7.45 per share to Rs 5.95 per share.

• NPAs also jumped from 2.1% to 2.25% in the September and December quarters respectively.

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