Upper layer NBFC HDB Financial Services prepares for IPO

New Delhi: After the mega public issue of Bajaj Housing Finance, another upper layer NBFC, HDB Financial Services has initiated the process to tap the IPO market and is expected to file draft papers soon to meet the RBI's mandatory listing requirements.

HDB Financial Services last week received approval from the board of its parent company, HDFC Bank, to begin the process of going public.

The board approved an initial public offering (IPO) consisting of a fresh issue of shares worth up to Rs 2,500 crore and an offer for sale (OFS) by existing shareholders.

HDB Financial Services is expected to file the draft papers with the Securities and Exchange Board of India (Sebi) soon, merchant bankers said.

Considering the strong demand in the capital market for high-quality businesses, and depending on valuations, many non-banking financial companies (NBFCs) are expected to pursue listing, the experts said.

This is not only to meet the RBI's listing requirements but also to enable companies raise funds for growth more easily after being listed, they added.

The RBI introduced a revised scale-based regulation (SBR) framework in October 2021 to address systemic risk and strengthen governance. This came against the backdrop of the collapse of IL&FS in 2018, followed by the downfall of DHFL, which had a ripple effect on the entire financial system, particularly causing significant liquidity challenges.

Under the SBR framework, NBFCs were categorised into four layers -- base layer, middle layer, upper layer, and top layer-- based on their size, activities, and risk levels. Also, RBI mandated that NBFCs categorized as upper layer (UL) NBFC have to be listed within three years of them being designated as an UL NBFC.

The RBI identified 15 major NBFCs as part of UL under the SBR framework. These are -- LIC Housing Finance, Bajaj Finance, Shriram Finance, Tata Sons, L&T Finance, Indiabulls Housing Finance, Piramal Capital & Housing Finance, Cholamandalam Investment and Finance, Mahindra & Mahindra Financial Services, PNB Housing Finance, Tata Capital Financial Services, Aditya Birla Finance, HDB Financial Services, Muthoot Finance, and Bajaj Housing Finance.

Of these, 10 are already listed on stock exchanges with the most recent being Bajaj Housing Finance.

Bajaj Housing Finance was listed earlier this month after receiving an overwhelming response to its Rs 6,560 crore IPO. Moreover, the remaining five --Tata Sons, Tata Capital Financial Services, Piramal Capital and Housing Finance, HDB Financial Services, and Aditya Birla Finance -- are required to list by September 2025 due to their inclusion in Reserve Bank of India's (RBI) list of UL NBFCs.

Of these, Piramal Capital and Housing Finance will merge with Piramal Enterprises and Tata Sons is likely to consider all options to avoid listing, Sachin Mehta, Director, Investment banking, Anand Rathi Advisors, said.

According to officials, all companies in the UL list, except Tata Sons, have either complied with or begun the process to meet the listing requirement.

Moreover, Tata Sons in its annual report mentioned that it has voluntarily surrendered its registration certificate to the RBI. Given the increasing importance of NBFCs in the country's financial system, listing of Tata Sons could improve transparency, attract capital, and place the firm among other listed NBFCs, market experts said.

Recently, RBI in its report titled 'Peeling the Layers: A Review of the NBFC Sector in Recent Times' stated that the NBFC sector in India remains resilient under the SBR framework.

At end-December 2023, the sector continued to exhibit double-digit growth in credit, adequate capital and low delinquency ratio.

Since the implementation of SBR in October 2022, NBFC performance metrics have shown strong improvement.

Gross non-performing asset (NPA) ratio has significantly declined from a range of 4.4 per cent to 10.6 per cent in December 2021 to 2.4 per cent to 6.3 per cent by December 2023, reflecting better asset quality and risk management.

The report also highlights a steady increase in profitability, with gains in return on assets (RoA) and return on equity (RoE). Additionally, the extension of Prompt Corrective Action (PCA) norms to government-owned NBFCs is expected to strengthen the sector further by promoting financial discipline and risk management, it added.