HDFC Bank diluted 0.7 per cent stake while raising about Rs 10,000 crores from selling American Depository Receipts (ADRs) and India-listed shares to qualified institutional investors in the largest follow-on offer by a private sector firm in February. The bank also made a fresh issuance of 8.6 crore shares. As a result, total number of paid-up shares stood at 250.35 crore at the end of February 10. Total number of paid-up shares at the end of December stood at 241.74 crore. Prior to issuance promoters held 22.47 per cent stake in the bank. Following issuance, promoters holding in the bank have come down to 21.70 per cent.As per an US Securities and Exchange Commission filing, the company has raised $1,270.72 million (about Rs 8,000 crore) by issuing 22 million ADS to the global investors. The bank had approved a issue price of $57.76 per ADR to eligible investors in the ADR Offering. Besides, the bank has raised about Rs 2,000 crore from a QIP (Qualified Institutional Placement) in the domestic market. The issue price for QIP was Rs 1,067 per share to be allotted to eligible qualified institutional buyers.The share sale is among the largest by a private sector entity and marks the second large-scale fund-raising in the secondary market in the January-March quarter after the bumper Rs 22,500 crore Coal India issue last week by the government.As per HDFC management that this capital issue will not be used to issue more rupee shares to create foreign headroom. The capital raising is likely to be book value accretive and would help to expand loan book amid revival in economy, hence positive for the stock. The capital raised by HDFC bank has increased its equity base , hence EPS is likely to fall. However, HDFC Bank's book value had risen because of the infusion of equity, which proved to be good from a valuation point of view. The analysts were bullish about the bank and considered this move positive which would help the bank to expand loan book amid revival in economy.

The funds thus raised had planned to be used to boost its capital adequacy ratio and for lending. It definitely had an effect on the EPS but this is not a requirement that generally the banks have for strengthening capital adequacy; HDFC Bank already had a superb capital adequacy ratio. It was more to do with having a little breadth over the foreign institutional investors (FIIs) space and that is a reason why they went for this capital infusion. Secondly, this move definitely strengthened their adequacy further, giving them a little more headway towards expanding towards a riskier sector or higher risk weighted sectors or corporate lending part for the bank, which was to be another booster for the bank. So on that basis, this will be another advantages. This would help the bank to ramp up the credit growth faster than the others.This move was the combined impact of falling inflation, a stable government, robust consumer confidence and expectations of further interest rate cuts, which is expected to aid consumption and retail loan growth for Indian banks. The successful launch of HDFC Bank's fund-raising comes within a week of Coal India's share sale, which raised ~22,600 crore. While Tata Motors was planning a ~7,500-crore rights issue, State Bank of India had announced a ~15,000-crore rights issue. Many other companies are planning QIPs and initial public offerings of shares. This is the start of a bull run in India. With a pro-business government at the Centre, things will only be positive for investors. HDFC Bank is adequately capitalised and further capital raising of Rs10,000 crore will boost its capital ratios and help to tap the growth opportunities going ahead. The bank is likely to maintain healthy RoE of 19-20% and RoA of 1.8% on a sustainable basis. Therefore, we expect the valuation premium that it enjoys compared with the other private banks to expand further.

Industry OverviewIntroductionThe Indian banking sector, according to the Reserve Bank of India (RBI) is well regulated, adequately capitalised and strong. With a a steady growth in the disposable income and explosive growth in transactions through ATMs, Internet and Mobile Banking, it is poised to be the fastest growing sector with new policies in 2015. Indian economic and financial indicators are healthier than in many other economies in the world. Past performances combined with liquidity, market and credit risk show that Indian banks are resilient and have taken the global downturn well.As the economy is infused with a positive sentiment, the banking industry expects that 2015 will bring better growth prospects. This optimism is a result of factors such as a stable Government pro- industrial growth in the country and the RBI initiating measures to restructure the banks to help them in the long run. Overview of the financial system in India

Source: CRISIL Research, RBI

Structure of scheduled commercial banks in India (March 2013)

Market SizeThe Indian banking sector is fragmented, with 46 commercial banks competing for business with dozens of foreign banks as well as rural and co-operative lenders. The size of banking assets in India reached US$ 1.8 trillion in FY14 and is expected to touch US$ 28.5 trillion by FY25. State banks control 80 percent of the market, leaving relatively small shares for private rivals. At the end of February, 13.7 crore accounts had been opened under Pradhanmantri Jan Dhan Yojna (PMJDY) and 12.2 crore RuPay debit cards were issued. These new accounts have mobilised deposits of Rs 12,694 crore (US$ 2.01 billion).Standard & Poors estimates that credit growth in Indias banking sector would improve to 12-13 per cent in FY16 from less than 10% in the second half of CY14.Investments/developmentsThere have been many investments and developments in the Indian banking sector in the past few months. A memorandum of understanding has been signed by the United Economic Forum (UEF), an organisation that works to improve socio-economic status of the minority community in India with Indian Overseas Bank (IOB) to help financing the entrepreneurs from backward communities to set up businesses in Tamil Nadu. Third-party white label automated teller machines (ATM) have been allowed by RBI to accept international cards, including international prepaid cards. The ATMs can also tie up with any commercial bank to gain access to cash supply. The objective of this move is to increase investment opportunities for Indian alternative investment funds (AIFs). To gave a boost to the infrastructure sector and banks financing long gestation projects, RBI extended its flexible refinancing and repayment option for long-term infrastructure projects where the existing total exposure of lenders is more than Rs 500 crore (US$ 78.98 million). Syndicate Bank plans to open 300-500 branches in the next financial year. RBI governor Mr Raghuram Rajan has signed an memorandum of understanding with the European Central Bank President Mr Mario Draghi which aims to provide a framework for regular exchange of information, policy dialogue and technical cooperation between the two institutions. RBL Bank has recently announced that it would be the primary investor in Trifecta Capitals Venture Debt Fund, the first alternative investment fund (AIF) of its kind in India with a total corpus of Rs 50 crore (US$ 7.89 million). This move aims to support the emerging venture debt market in India. The RBI has now allowed banks to become insurance brokers, thus allowing them to sell policies of various insurance firms subject to terms and conditions. Bandhan Financial Services Pvt. Ltd has successfully raised Rs 1,600 crore (US$ 252.69 million) from international institutional investors seeking help to convert their microfinance business into a full service bank. Bandhan was one of the two entities to get a banking licence in April 2014 along with infrastructure finance company IDFC Ltd. Yes Bank Ltd and the US governments development finance institution Overseas Private Investment Corp (OPIC) signed an MOU to invest US$ 220 million of financing to lend to MSME sector in India. Bonds issued by multilateral financial institutions like the Asian Development Bank, World Bank Group and the African Development Bank in India has been allowed by RBI as eligible securities for interbank borrowing. The move will strengthen the corporate bonds market. The merger of ING Vysya Bank with Kotak Mahindra Bank has been cleared by the Competition Commission of India (CCI). It would lead to the formation of fourth largest private lender. The proposed deal of Rs 15,000 crore (US$ 2.36 billion) is not likely to have any adverse effect on the competitive environment.Government InitiativesThere have been a lot of government initiatives in the Indian banking sector. A capital infusion of Rs 6,990 crore (US$ 1.1 billion) has been announced by the Government in nine state run banks, including State Bank of India (SBI) and Punjab National Bank (PNB), with strict covenants on the efficiency parameters such as return on equity and return on assets. The establishment of the US$ 100 billion New Development Bank (NDB) envisioned by the five-member BRICS group has been approved by the Union Cabinet of India. Imports of gold, including coins, on a consignment basis has been allowed by RBI to certain nominated banks to certain nominated banks, extending its clarification issued in November 2014, which had eased certain categories of gold imports. To help Micro Small and Medium Enterprises (MSME), RBI has permitted setting up of an exchange-based trading platform to facilitate financing of bills raised by such small entities to corporate and other buyers, including government departments and PSUs.Road AheadThe Indian economy is now on the threshold of a major transformation, with expectations of policy initiatives being implemented. Positive business sentiments, improved consumer confidence and more controlled inflation should help boost the economic growth. Higher spending on infrastructure, speedy implementation of projects and continuation of reforms will provide further impetus to growth. All this translates into a strong growth for the banking sector too, as rapidly growing business turn to banks for their credit needs, thus helping them grow.Also, with the advancements in technology, mobile and internet banking services have come to the fore. Banks in India are focusing more and more to provide better services to their clients and have also started upgrading their technology infrastructure, which can help improve customer experience as well as give banks a competitive edge.Many banks, including HDFC, ICICI and AXIS are exploring the option to launch contact-less credit and debit cards in the market soon. The cards, which use near field communication (NFC) mechanism, will allow customers to transact without having to insert or swipe.