Japan?s Mitsubishi UFJ Financial Group, Inc. (TSE:8306) (MUFG), the world?s second-largest bank holding company, is in advanced negotiations to buy a 20% stake in HDB Financial Services Limited (HDB), a non-banking subsidiary of HDFC Bank Limited (NSEI:HDFCBANK), at a $9 billion - $10 billion valuation, said people aware of the matter. Once finalised, the $2 billion investment will be among the largest financial services sector deals involving lenders of the two countries. It will also unlock value for parent HDFC Bank, India?s largest bank by market capitalisation, which has been dealing with synergy issues following the $60 billion merger with housing loan parent company HDFC Ltd. (Housing Development Finance Corporation Limited).

The final decision on the proposed investment is likely next week during HDFC Bank?s board meeting. The lending unit, which has been categorized as one of the 16 ?upper-layer? non-banking finance companies (NBFCs) by the central bank that are subject to greater regulatory scrutiny, has also been preparing for a much-anticipated initial public offering (IPO).

This is set for the last quarter of calendar 2024 or the first quarter of 2025 and will make it the first subsidiary to be listed after the merger. This is in line with Reserve Bank of India (RBI) regulations that require it to list before September 2025. Before the merger, HDFC Asset Management Co.

and HDFC Life, belonging to the erstwhile HDFC Ltd, were the last subsidiaries to be listed. On January 17, HDFC Bank?s Chief Financial Officer Srinivasan Vaidyanathan had said preparatory work on the IPO would begin shortly. The MUFG transaction will also set a valuation benchmark, said analysts who track the space.

The Japanese company may be given the option to hike its stake in HDB subsequently, added one of the persons. It?s likely to get a board seat as well. The final negotiations over rights and disclosures before the listing exercise are being worked out.

HDFC Bank owns around 94.7% of the shadow bank and employees own 5.3% as stock options. The discussions have been ongoing for at least two years but gathered momentum in the last few weeks. MUFG declined to comment.

HDFC Bank did not respond to ET?s queries. ET broke the story online on April 12, 2024. Shares of HDFC Bank, which closed in the red, recouped some of the morning losses after the news about the deal talks became public.

It closed at INR 1,518.90, down 1.1%, on the BSE on April 12, 2024.