About two-and-half years ago I was happy to receive a call from my stockbroker saying "Sir, you have been lucky to get some HDFC shares." The allotment was done by lottery and since the IPO was 11 times over-subscribed, I thought I was lucky. But I do not think so now and regret being a shareholder of the HDFC Bank due to the following reasons.

The bank share price has dropped drastically by about 50% from its originally issued price due to reasons including HDFC’s failure to comply with their prospectus undertaking to split each hundred-rupee share into ten-rupee shares.

Although the prospects said in 2005 that the share split has already commenced, 33 months later that obligation had not been met. I wrote to the company secretary about this last April and I was told then that the share split was being done but we are now in September and this has still not happened. This limits trading of HDFC shares on the CSE.

The prospectus also said that construction of a head office building was expected to begin in 2006 and HDFC announced in its annual report for 2005 that they intended to build a seven-storey building costing Rs.125 million. The 2007 annual report also said the same thing but construction has not yet begun and the cost estimated in 2005 is repeated now.

The Central Bank in its last annual report said that the banking sector had grown in 2007 as proved by the banks listed in the CSE through their results as well as unlisted government owned banks. But this does not apply to HDFC although it is not exposed to high risk commercial banking activities.

HDFC Real Estate Development Limited, a much vaunted subsidiary with BOI approval, has become a white elephant posting continuous losses and reducing group profits.

The bank has also had problems finding loan funds. Its main source of loan funding were the Government of Sri Lanka, loans under foreign credit lines and re-finance borrowings. The 2007 annual report indicates a clear drop from all these sources because it is well known that the government is limping with regard to its daily cash needs. So how can anyone expect the government to advance loan funds at this juncture?

The notice of the last HDFC AGM has given the venue of the meeting as the National Chamber of Commerce but no address. Does it mean that shareholders were not welcome at the meeting?

I fail to understand why a state owned bank cannot do the right thing and act in a more responsible manner in meeting its obligations. I request the Government of Sri Lanka which is the major shareholder to buy back, at the IPO price, the shares it does not own which I think is possible under the new Companies Act or alternatively sell government’s stake to the private sector which will undoubtedly be able to do better.

A depressed shareholder

Editor’s Note: The writer who sent us an April 2008 letter from the GM/CEO of HDFC to him saying that steps were taken to amend the HDFC Act No.7 of 1997 (amended by Act NO.15 of 2003) as referred to in the prospectus in order to permit the bank to split its shares.

Consequently, a Cabinet Paper has been presented for this purpose and approved by the Cabinet on February 21, 2008. The necessary amendments will be drafted by the Legal Draftsman’s Department and thereafter submitted to Parliament by the Finance Minister.

The GM/CEO, while appreciating the shareholder’s concern regarding the share split, assured that there is no non-compliance of the SEC rules as stated in the complaint as the bank’s management has already taken appropriate action to amend the HDFC Act.