HDFC to pare stake for foreign investment in bank

MUMBAI: Parent HDFC will pare its stake in HDFC Bank to create room for foreign investors. HDFC, the country’s oldest mortgage lender which owns 22.5 per cent in HDFC Bank, will not step in as a buyer when the bank issues shares to local and foreign investors to raise Rs 10,000 crore, said three people aware of the decision.

The institution will let its stake dip to a little over 20 per cent in HDFC Bank where `foreign ownership’, as defined by the government, is close to the maximum permissible 74 per cent. “HDFC will not participate in the share purchase but will, in fact, sell shares to make way for other foreign investors,” said one of the persons. In the past whenever there has been a share dilution in HDFC Bank, HDFC had always purchased shares to preserve its holding in India’s most valuable lender.

HDFC Bank shareholders have approved a proposal to raise Rs 10,000 crore capital by July 2015. The bank has appointed investment banks Bank of America Merrill Lynch, Credit Suisse, HSBC, JP Morgan, Morgan Stanley and Citi Group as advisors to the proposed fund raising. HDFC’s decision is driven by the government’s stand that the institution’s holding in HDFC Bank should be treated as foreign ownership because more than 51 per cent of HDFC’s stake is with offshore investors.

On November 14, the Foreign Investment Promotion Board, a government panel which clears foreign investments in Indian companies, cleared the bank’s revised proposal to increase foreign investment in the bank to 74 per cent. But the board’s decision did not leave headroom for more foreign investment in HDFC Bank as the combined stake of HDFC, foreign portfolio investors and holders of ADR and GDR receipts in the bank is close to 74 per cent. “HDFC Bank’s proposed fund raising would be a combination of ADRs and local share issuance to mutual funds and insurance companies. Since the headroom available is slim, a local share sale without parent’s participation will allow space for foreign investors,” said a person familiar with the plan.

“The fund raising exercise is still some time away. A decision on the timing of the issue will be taken in December and money will be raised only next year,” said an investment banker. Analysts appear to have factored in HDFC’s decision not to participate in any share purchase. ”HDFC Ltd may not be able to participate in a fresh issue of shares or restore its holding to 22.5 per cent as the FIPB turned down the bank’s plea to not treat the promoter stake as foreign investment,” said Dinesh Shukla, banking analyst at brokerage Sharekhan.

A 20 per cent stake will allow HDFC to consolidate in its balance-sheet the proportionate net profit of HDFC Bank.