HDFC Bank to Discuss First-Ever Bonus Share Issue on July 19; Regulatory Hurdles Expected Due to Press Note 3?

The People's Bank of China (PBC) is facing a unique situation with its stake in HDFC Bank. As India's largest private lender prepares for its inaugural bonus share issuance, PBC's entitlements may be affected by regulatory uncertainties. This stems from Press Note 3, a circular issued by the Indian government in 2020 aimed at limiting Chinese investments in India.

HDFC Bank's board plans to discuss the bonus issue proposal on July 19, alongside the June quarter results. The confusion arises because Press Note 3 requires prior government security clearance for any new share allotment to Chinese entities.

Although a bonus issue does not involve fresh capital or alter shareholding percentages, experts suggest that the increase in shares held by PBC might technically activate this regulation.

What is Press Note 3? Understand Implications for HDFC Bank's Bonus Issue

Introduced in April 2020, Press Note 3 was part of India's broader effort to scrutinise and control foreign investments from countries that share land borders with India-most notably China.

The regulation mandates that any new investments, including share allotments or ownership changes involving entities from these countries, require prior approval from the Indian government. The policy, introduced amid rising geopolitical tensions, aimed to shield Indian companies from opportunistic takeovers and ensure national security.

While the bonus share issuance proposed by HDFC Bank does not involve any infusion of fresh capital, nor does it alter the proportional shareholding of investors, legal experts argue that it may still fall within the ambit of Press Note 3.

Even though bonus shares are given for free and do not change the ownership percentage, they still increase the total number of shares a person or organization owns. For the People's Bank of China (PBOC), getting more shares-even at no cost-might still be seen by the Indian government as increasing their investment. Because of this, it could require special approval under the rules that apply to Chinese investors.

The upcoming board meeting on July 19 will be crucial for HDFC Bank as it navigates these regulatory waters. The bank must ensure compliance with all necessary regulations while proceeding with its first-ever bonus share issuance. Legal advisors are likely to play a significant role in guiding the bank through this complex process.

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