HDB Financial Services Investigated by SEBI Amid USD 1.5 Billion IPO Plans

HDB Financial Services is under scrutiny for potential violations of the Companies Act, 2008, as it prepares for its highly anticipated $1.5 billion initial public offering (IPO). Concerns have been raised by the Securities and Exchange Board of India (SEBI) over a private placement of shares that may have violated regulatory thresholds, calling into question the company’s compliance with laws governing private and public share issuances.

Possible Violation of Private Placement Rules

Reports indicate that SEBI has flagged HDB Financial for issuing shares to over 50 employees of its parent company, HDFC Bank, through a private placement back in January 2008. The Companies Act limits private placements to a maximum of 50 investors. Exceeding this limit could reclassify the issue as public, requiring prior approval from SEBI.

Legal experts warn that if SEBI’s findings are validated, the case could be referred to the Ministry of Corporate Affairs (MCA), potentially resulting in penalties or the need for HDB Financial to revise its IPO filing. The company may also be required to make additional disclosures or pay fines before proceeding with the public offering.

IPO Plans and RBI Compliance

HDB Financial filed its draft red herring prospectus (DRHP) in November 2024, aiming to raise ₹2,500 crore through fresh equity. Meanwhile, its parent, HDFC Bank, plans to sell ₹10,000 crore worth of shares to comply with Reserve Bank of India (RBI) regulations that govern the listing of non-banking financial companies (NBFCs) that are part of banking groups.

HDFC Bank holds a 94.36% stake in HDB Financial but must reduce this to below 20% in order to comply with RBI guidelines that separate banking businesses from their subsidiaries.

Controversial 2008 Share Allocation

The investigation centers around the 12 million shares issued to 410 HDFC Bank employees, including then-CEO Aditya Puri, in January 2008. The key question is whether this issuance qualifies as an employee stock ownership plan (ESOP), which would not require SEBI approval, or whether it should be treated as a public offering, triggering regulatory scrutiny.

If classified as a public issue, HDB Financial could face delays or penalties. However, if deemed an ESOP, no approval would be needed from SEBI, thus avoiding any potential setbacks for the IPO.

Financial Performance and Rising NPAs

HDB Financial is also grappling with financial challenges. For the quarter ending December 2024, the company reported a 20% decline in net profit to ₹472.3 crore, mainly due to higher credit costs. Its non-performing assets (NPAs) rose to 2.25%, compared to 2.1% in the previous quarter. The main areas of concern are unsecured loans, commercial vehicle financing, and construction equipment portfolios.

Industry Outlook and Next Steps

Despite these challenges, industry experts believe that HDB Financial’s IPO will likely proceed without major disruptions, given the strong backing of its parent company, HDFC Bank. SEBI is expected to take action after reviewing feedback from the Ministry of Corporate Affairs. It is anticipated that the issue will be resolved through penalties or settlements, allowing the IPO to move forward.

HDB Financial’s IPO is a crucial step for both the company and HDFC Bank as they navigate complex regulatory requirements and work towards meeting market expectations.