HDFC Bank Bonus Issue Triggers Dilemma for China’s Central Bank Amid Investment Norms

The People’s Bank of China (PBC) may face compliance uncertainty regarding its stake in HDFC Bank, as India’s largest private-sector lender prepares to announce its first-ever bonus share issuance. Legal experts believe this could trigger regulatory scrutiny under the Press Note 3 (PN3) framework, which governs foreign investments from countries sharing land borders with India.

• PBC holds 3.4 crore shares in HDFC Bank, valued at $800 million

• HDFC Bank’s board will consider the bonus issue on July 19

• Press Note 3 restricts share allotments to Chinese investors without prior approval

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Press Note 3 May Trigger Concerns Despite No Change in Shareholding Percentage

Although a bonus share issuance does not lead to capital inflow or alter the percentage shareholding structure, legal experts caution that PN3’s literal interpretation might still bring the issuance under regulatory purview. Introduced in 2020 to curb opportunistic takeovers, PN3 mandates prior government approval for any investment—direct or indirect—by entities from nations bordering India.

• Legal grey area exists over passive corporate actions like bonus issues

• Experts argue the regulation lacks clarity on non-cash allotments

• Regulatory scrutiny possible even without change in ownership

Legal Experts Call for Urgent Government Clarification

According to Amit Singhania of Areete Law Offices, while bonus shares do not change ownership ratios, the resulting increase in the number of shares could technically breach PN3 guidelines. The situation remains ambiguous, with no formal guidance yet on whether such passive corporate actions require prior approval when Chinese entities are involved.

• Government has not yet clarified PN3’s applicability to bonus issues

• Concerns elevated due to PBC being a state-controlled entity

• Press Note 2 precedent highlights need for regulatory clarity

FPI vs. FDI: The Complex Regulatory Divide

While the PBC is registered as a Foreign Portfolio Investor (FPI), not a direct investor under FDI norms, the nature of the bonus issuance—shares being allocated by the company—might still fall under PN3’s scope. Legal practitioners argue that despite the technical distinction, the sensitivities around banking as a strategic sector could lead to a broader interpretation of the regulation.

• FPIs typically exempt from PN3, but not if shares are company-issued

• Sector-specific risks in banking add to regulatory concerns

• Passive gains may still be perceived as strategic influence

HDFC Bank and PBC Remain Silent Amid Legal Uncertainty

Neither HDFC Bank nor the People’s Bank of China responded to requests for comment on the regulatory implications. The ambiguity underscores the need for a clear government stance to avoid future disputes involving corporate actions and strategic investors from sensitive geographies.

• No official response from HDFC Bank or PBC

• Legal experts fear chilling effect on legitimate foreign portfolio investments

• Stakeholders await policy clarification from the Indian government

Legal and Industry Voices Push for Policy Clarity

Anupriya Saxena of JMJA & Associates noted that while bonus issues don’t alter control or influence directly, they could consolidate long-term foreign interest in Indian companies. She and other legal professionals argue that without a policy exemption, bonus shares could serve as a loophole for foreign strategic accumulation, particularly in sectors like banking.

• Bonus shares may be seen as a backdoor route to influence

• Industry seeks exemption clarification for corporate actions

• Recent PN2 interpretation sets hopeful precedent for resolution

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