HDB Financial Services’ right to use the HDFC Bank brand may have an expiry date, as it is operating under a trademark licence agreement with its promoter, HDFC Bank.
This agreement allows the use of the bank’s name and logo only till July 1, 2028, or the date on which HDB ceases to be a subsidiary of the bank, whichever falls earlier.
According to HDB Financial’s draft red herring prospectus (DRHP), the agreement, which was signed on December 19, 2023, is both time-bound and revocable.
HDFC Bank also reserves the right to terminate the licence with three months’ notice or under certain specified circumstances, according to HDB's DRHP.
This conditional arrangement has emerged as a key risk factor, as HDB noted in the prospectus: "Any termination of our rights to use the HDFC Bank logo or any reputational harm to the HDFC Bank brand could materially and adversely affect our brand recognition, business, financial condition and results of operations."
In the event of termination, the RHP noted that it may consider changing its legal name or corporate branding, subject to necessary regulatory approvals.
IPO plan
HDB Financial Services recently filed for an Initial Public Offering (IPO) at a valuation notably lower than market expectations. This licensing agreement becomes particularly significant in light of HDFC Bank’s plans to reduce its stake in HDB Financial from 94.6 percent to around 74 percent through a proposed offer for sale (OFS).
The dilution aligns with the Reserve Bank of India’s (RBI) October 2024 draft guidelines, which propose caps on banks’ equity holdings in non-banking financial companies (NBFCs).
The DRHP further added that HDB currently draws support from the low-cost borrowings and enhanced credit profile facilitated by its association with HDFC Bank. However, the document cautions that such support may not remain at the same level, post-dilution.
The DRHP also subtly distanced HDB’s situation from the historic case of HDFC Ltd and HDFC Bank, where the association between HDFC Ltd and HDFC Bank culminated in a full-scale merger in 2023, and not as a promoter-subsidiary relationship governed by time-bound contracts.
The co-branding agreement between the erstwhile mortgages lender and HDFC Bank, evolved rather naturally despite a holding company- subsidiary relation, than on a time-bound capacity such as the HDFC Bank - HDB Financial relationship.
Further, HDB Financial's DRHP flagged the risk of intra-group competition.
According to the prospectus, HDB operates in similar segments as its promoter and other group companies such as HDFC Sales and HDFC Securities. This overlapping product portfolio raises the potential for conflicts of interest, particularly as HDB becomes more autonomous.
“The interests of the promoter as our controlling shareholder may conflict with our interest or the interest of other shareholders,” the document noted.
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