Citigroup ups ante in India buying out Standard Life stake in HDFC

Citigroup buys 9.3% stake in HDFC, one of India's leading providers of mortgage finance, from Standard Life taking total holding to 12.3%
Citigroup further consolidated its position in the financial services arena in India late last week buying out Standard Life's 9.3% stake in Housing Development Finance Corporation Limited ("HDFC"). Citigroup did not disclose the consideration paid to acquire the stake. As per the prevailing market price of HDFC - which hovered around Rs1300 levels - the value of the stake is around $675 million. HDFC is the second largest provider of home loans in India. HDFC has also spawned a presence across the financial services space with subsidiary or associate companies in mutual funds, commercial banking, life insurance, general insurance, realty and other areas.

After this transaction, Citigroup - which already owned about 3% in HDFC through the foreign institutional investor (ôFIIö) route - will hold around 12.3%, making it the largest single shareholder. The new investment will be made through the foreign direct investment (ôFDIö) route. As per SEBI regulations an acquisition in excess of 15% triggers an open offer under the Takeover Code hence it is likely that the Citigroup stake will stay at near about this level for the time being. Citigroup will also nominate a director on the 13 strong board of HDFC, a right Standard Life had not exercised.

Sanjay Nayar. Citigroup Country Officer India comments: ôWe are pleased to have the opportunity to make this investment in a leader in Indian financial services and to build a long term relationship with the management team that has established HDFCÆs record of success.ö

Citigroup has not announced any strategic intent regarding the transaction. Speculation regarding its motivation with respect to the acquisition attributes different motivating factors. Some feel that the deal heralds consolidation in the financial services space in general and particularly in India's mortgages industry. With a burgeoning middle class, rising disposable incomes and increased willingness to borrow, home loans are showing a healthy rate of growth. The real estate space is attracting interest from a number of global players. HDFC, which was set up in 1977, has a well defined niche in this area.

However, another school of thought exists that CitigroupÆs interest is in HDFCÆs commercial banking subsidiary, HDFC Bank. India is a priority market for Citigroup and it has examined various options to further establish its presence. Citigroup has operated in India since 1902 and currently has a branch network across 18 cities. It is widely perceived to be one of the more aggressive foreign banks operating in the country.

HDFC Bank is generally regarded as one of the best run private sector banks in the Indian banking industry. However, Reserve Bank of India (ôRBIö) guidelines - which will be in force until 2009 - state that foreign banks with branches in India are not allowed to own more than 5% of the equity of Indian commercial banks. This was the guideline which recently forced HSBC to exit its stake in UTI Bank, another one of IndiaÆs new generation of private sector banks. HDFC owns about 22% of HDFC Bank. Both institutions are professionally managed with no defined controlling shareholder group. CitigroupÆs stake in HDFC gives it an indirect interest in HDFC Bank.

((According to sources, it is okay for Citi to buy more than 5% in HDFC Limited because the same rules do not apply. HDFC Limited is a housing finance company. The RBI's 5% rule only applies to commercial banks.)

The sale marks the exit of Standard Life, which is EuropeÆs largest mutual life insurer, from the shareholding of HDFC. Standard Life plans to IPO this summer in what will probably be the United KingdomÆs largest IPO in five years. In advance of the flotation it seems to be setting its financials in order. Standard Life at one point owned around 14% of HDFC. Standard Life acquired the stake in HDFC in three tranches in 1995, 2000 and 2003 through a combination of foreign direct investment ("FDI") and market purchases. In June 2005 Standard Life had a 4.9% stake in HDFC for $234 million to CLSA which acted in concert with Calyon and others.

Standard Life continues to own 18.2% stake in HDFC Standard Life Insurance Company, a joint venture. As per norms of the Insurance Regulatory and Development Authority ("IRDA"), India's insurance regulatory organisation, a foreign partner cannot own more than 26% in an insurance joint venture. Standard Life's earlier proposal to increase its stake in HDFC Standard Life had come under scrutiny thanks to its holding in HDFC and hence indirectly in the insurance subsidiary. Standard Life is keen to own the maximum permissible under Indian regulations. Indeed, HDFC Chairman Deepak Parekh commented that Standard Life would increase its stake to 49% as soon as regulation permits.

The sale is subject to approval from India's Foreign Investment Promotion Board ("FIPB") and other regulators.
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