HDFC has decided to reward its shareholders on its 25th anniversary with a 1:1 bonus. It has also decided to go in for a buyback of five per cent of its equity capital subject to board approval in December 2002. It should also get an exemption from the central government under section 77A(2)(d) of the Companies Act, 1956 that restricts a company from buying back its shares if its debt equity ratio exceeds 2:1. The moot point however is why should HDFC return capital at a time when housing business is growing at a clip of 30 per cent per annum. Why not grow assets instead
HDFC says the move has been prompted by the reduction in risk weightage of mortgage securities from 100 per cent to 75 per cent. It may be reduced further to 50 per cent. This will result in higher profitability. And thus Capital Adequacy Ratio (CAR) too may go up from the current 13.9 per cent to about 16 per cent comprising only tier I capital. As and when the buyback is effected, the CAR is likely to come down to 12-13 per cent. The equity base will expand after the bonus issue.
However, buyback may help the company counter growing shareholder expectations of higher dividends as it may bring down the nominal rate of dividend. It must be mentioned that the dividend rate has been 250 per cent, 125 per cent and 190 per cent during the last three fiscal years. The move will also give a further fillip to active trading in the scrip.HDFC also kicked off its general insurance venture with Chubb Corporation which is a 26 per cent partner and brings in Rs 47.5 crore for the stake in addition to an interest-free loan of Rs 24 crore. The general insurance venture almost completes HDFCs portfolio of an entire gamut of financial services comprising mortgage business, banking, asset management, life insurance and call centres.
The domestic general insurance business is worth about Rs 11,000 crore in terms of premium income. It is expected to grow at 15 per cent per annum. The nascent market with little product sophistication has growth potential. However, the new venture may take quite some time to post substantial growth.Going forward, a strong demand for housing loans backed by fiscal incentives will only further HDFCs growth at least in the near term because of its sheer size and dominance of the mortgage market.