In a move that could change the face of India’s non-banking financial services sector, Japan’s largest bank Mitsubishi UFJ Financial Group (MUFG) is in advanced talks to buy up to 19% stake in HDB Financial Services, the non-banking arm of HDFC Bank, for INR 12,000 crore.
This deal would value HDB Financial between INR 71,000 crore to 75,000 crore (~USD 8–8.5 billion). This comes at a critical time for HDFC Bank as it navigates new RBI guidelines and prepares for the IPO of its subsidiary.
Back to the Table with Momentum
This is not the first time MUFG and HDFC Bank have been in talks over HDB Financial. An earlier attempt to close the deal in April 2024 failed due to valuation issues. But with renewed urgency – triggered by RBI guidelines – both parties are back to the table with HDFC Bank showing more flexibility on pricing.
“The discussions between HDFC Bank and MUFG are in the final stages, MUFG will pick up 17–19% stake,” according to some insider reports. The deal could be done in a month.
Regulatory Drivers for Stake Sale
The talks were triggered by RBI’s draft circular on 4 October 2024 which says banks should reduce their stake in subsidiaries that operate in overlapping financial services. Specifically, the circular disallows multiple entities in the same group from doing similar lending businesses – a situation that affects HDFC Bank and HDB Financial.
Under the circular, banks have a two-year window from the date of implementation to reduce such stakes. HDFC Bank currently owns 94.54% in HDB Financial. A stake sale to MUFG would be a strategic move to pre-empt RBI guidelines and avoid complications around the IPO.
Valuation Headwinds and Financial Performance
HDB Financial’s valuation has come down from USD 10–12 billion to USD 8–8.5 billion due to RBI’s increased scrutiny on upper-layer NBFCs, rising NPAs and delayed SEBI clearance for IPO.
For Q3FY25, HDB Financial reported 19% YoY decline in net profit to INR 530.9 crore. Gross stage 3 assets (bad loans) increased to 2.26% from 1.90% a year ago. Return on assets fell to 1.8% from 3% indicating growing stress in unsecured lending.
In the unlisted market, HDB’s stock price has fallen from INR 1,525 last year to around INR 900 now due to investor concerns over regulatory and operational risks.
Implications for the IPO and Broader Market
The MUFG deal could shake up the IPO plans for HDB Financial. Originally, the bank was set to raise INR 12,500 crore through an offer-for-sale and fresh issuance. That could change if MUFG secures a 19% stake. HDFC Bank’s shareholding would then fall to around 75%—and that could ease some of the pressures that come with dilution after an IPO.
There’s a good chance the IPO itself might be scaled down or postponed. Some insiders say MUFG’s entry could make HDB Financial rethink the size and timing of the public offer—or even skip the pre-IPO placement altogether.
SEBI still needs to clear HDB’s draft red herring prospectus (DRHP). The regulator has concerns about previous share transactions that may have breached norms for unlisted companies. That review could lead to penalties or a requirement for the company to repurchase certain shares.
Strategic Fit for MUFG
MUFG wants to expand its presence in Asian markets that are growing fast. India’s retail and small business lending are areas where long-term investors like MUFG can really make a profit. HDB Financial, with its pan-India reach and the HDFC brand, offers a ready platform for MUFG to tap into that growth.
A minority stake lets MUFG participate in India’s retail credit growth without taking on the regulatory exposure or complexity of launching a new entity from scratch.
Future Outlook
HDFC Bank shares have been volatile lately, but investors remain optimistic about the bank’s long-term strategy. The unsecured lending segment has shown signs of resilience, with stocks like SBI Cards and Bajaj Finance doing well this year.
That INR 12,000 crore infusion from MUFG would not only provide a capital cushion to HDB Financial but also be a vote of confidence in India’s NBFC sector—despite the regulatory scrutiny it’s facing.
The fact that MUFG is re-entering negotiations shows just how convinced they are in HDB Financial’s long-term growth. For HDFC Bank, a timely stake sale could ease regulatory compliance, give them more flexibility with the IPO and bring in a globally respected partner—all critical factors in today’s uncertain financial environment. For more details related to IPO GMP, SEBI IPO Approval, and Live Subscription stay tuned to IPO Central.