HDFC, which was formed in 1977, has grown to become one of IndiaÆs leading providers of housing finance with a client base of one million borrowers. It also has a presence across the financial services space with subsidiary or associate companies in mutual funds, commercial banking, life insurance and general insurance.
HDFC will price the 18 million shares, which represent 7.11% of its expanded capital, at Rs1730 per share. The shares are being issued on a preferential allotment basis and the price represents a 7% premium over the average weekly high and low closing share price of HDFC over the past six months.
HDFC intends to invest the Rs31 billion it raises in growing its banking, life insurance and mortgages businesses. Some of the proceeds will be used to participate in a share sale being conducted by its subsidiary HDFC Bank. The bank has announced plans to raise around $1 billion through a share sale and HDFC, which owns around 22% of HDFC Bank, will invest in the issue so that its ownership is not diluted in the process.
Under the terms of the deal announced on Friday, Citi, which is currently the largest single shareholder in HDFC, will invest Rs4.7 billion to maintain its holding at current levels. Citi owns 12.3% of the business.
Carlyle, meanwhile, will invest Rs26 billion to purchase 5.6% of HDFC. The private equity fund will route the investment through Carlyle Asia Partners and become the second largest investor in the professionally-managed Indian company. This marks the first investment by Carlyle's India buyout team, headed by Rajeev Gupta.
"This is an investment based on trust, a partnership. Both parties know each other well and have a high degree of comfort with each other," says Gupta, in an exclusive interview with FinanceAsia.
The PIPE nature of the investment (which means private investment in public equity) confirms how difficult sourcing and closing traditional private equity deals is becoming, across Asia, given the intense competition among the many firms operating in the region. In India specifically, the situation is exacerbated by a booming stock market which provides companies with a viable alternative to raise equity, often preferred by companies as capital markets funding comes without the covenants that private equity typically demands.
"Carlyle was very pleased to be invited by HDFC to make this important investment for both companies. While I cannot at this stage share concrete details, there are various opportunities for us to work with the HDFC group to enhance the well-established and highly respected franchise HDFC has created in the financial services space in India. As you know, Carlyle has been a very active investor in the financial services industry, especially in Asia. We believe our experiences in this regard will be beneficial to this partnership," explains Gupta.
SEBI guidelines on preferential allotments stipulate a lock-in of 12 months on shares issued via this route. "We have agreed to an 18-month lock-in, longer than the statutory 12 months, but this does not suggest we have an 18-month view on this investment. We see this as a long-term investment. HDFC represents an opportunity for us to participate in India's secular growth story across a series of high growth businesses such as housing, insurance and banking," adds Gupta.
A Citi India spokesperson says: "We are continuing to maintain our principal investment in HDFC at the 12.3% level that we acquired in May 2006." Last year, Citi acquired Standard LifeÆs 9.3% stake in HDFC, taking its total holding, including shares held through the foreign institutional investor route, to 12.3%. Along with the stake, Citi negotiated the right to appoint a director. In October, Citi appointed Vijay Kelkar, former senior bureaucrat and chairman of IDFC Private Equity, as its representative on the HDFC board.
The transaction is subject to routine regulatory approvals.
Investors cheered the news and HDFC shares gained a shade less than 4% on Friday to close at Rs1819.
Carlyle was advised by DSP Merrill Lynch on the transaction.
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