HDFC Bank's arm HDB Financial Services files for ₹12,500 crore IPO; here is why the NBFC is going public

Earlier in October, HDFC Bank said its board had approved a share sale worth ₹12,500 crore. 

The initial public offering (IPO) will be for such number of equity shares of face value of ₹10 each of HDB Financial Services aggregating up to ₹12,500 crore comprising a fresh issue of ₹2,500 crore and an OFS aggregating up to ₹10,000 crore, HDFC Bank said in a regulatory filing.

The price and other details of the proposed IPO will be determined in due course by the competent body.

After the proposed IPO, HDB Financial Services will continue to be a subsidiary of the bank. 

HDB Financial Services closed the June quarter with a net worth of about ₹13,300 crore.

The decision to list HDB Financial Services follows the Reserve Bank of India's mandate in October 2022, requiring NBFCs in the upper layer to list on the stock exchanges.

HDB Financial Services is planning to launch its IPO after the successful listing of Bajaj Housing Finance.

The two other NBFCs that are likely to float public issues are Tata Capital Financial Services and Aditya Birla Finance, as per news reports. 

Overall, Tata Sons, Tata Capital Financial Services, Piramal Capital and Housing Finance, and Aditya Birla Finance are required to list in a year due to their inclusion in the Reserve Bank of India's (RBI) list of 'upper layer' NBFCs.

According to the RBI rule, NBFCs in the upper layer (UL) must list their shares on a stock exchange within three years of being classified as such. This is asked to ensure greater transparency and public accountability for these larger NBFCs.

What are "upper layer NBFCs"?

Over the years, the NBFC sector has shown tremendous growth. However, due to the stress observed in the NBFC sector and the contagion risk it posed to other entities due to the interconnectedness of NBFCs in the financial system, there was a need to protect the deposits that investors placed with the NBFCs.

To develop a strong and resilient financial system, in October 2021, the Reserve Bank of India (RBI) prescribed a 'scale-based regulation’ for the NBFC sector. The scale-based regulatory (SBR) approach renders the regulation and supervision of the NBFCs to be a function of their size, activity and perceived riskiness. Subsequently, RBI has issued clarifications on various provisions of the SBR. These regulations would apply to NBFCs effective 1 October 2022. 

However, an amendment about the ceiling on IPO funding is applicable from April 1, 2022, as per a note by KPMG. 

The upper layer has been conceived as a new category of NBFCs, in which a chosen few, systemically significant NBFCs would be specifically identified by RBI through parametric analysis of certain quantitative and qualitative criteria, which will be reviewed periodically.

Accordingly, entities that meet the specified criteria will move from the middle layer to the upper layer of the scale-based framework. The top 10 eligible NBFCs in terms of their asset size will always reside in the upper layer, irrespective of any other factor.

Higher prudential regulations and intensive supervision will be applicable for such entities proportionate to their systemic significance, the RBI mandate says.

Book-running managers

JM Financial Ltd., BNP Paribas, BofA Securities India Ltd., Goldman Sachs (India) Securities Pvt. Ltd., HSBC Securities and Capital Markets (India) Pvt. Ltd., IIFL Securities Ltd., Jefferies India Pvt. Ltd., Morgan Stanley India Co. Pvt. Ltd., Motilal Oswal Investment Advisors Ltd., Nomura Financial Advisory and Securities (India) Pvt. Ltd., Nuvama Wealth Management Ltd. Ltd. and UBS Securities India Pvt. Ltd. are the lead book-running managers.