Citigroup''s buyout of 9.27 per cent of the HDFC stake from Standard Life for over Rs3,000 crore may have significant ramifications for the Indian banking industry after the promised liberalisation after 2009. It is no secret that overseas banks, especially US-based banks, are keen on acquisitions in India. The US government has been urging the Indian government to further open up the Indian financial services sector for quite some time now.

For Citigroup, a sizeable stake in one of the largest home mortgage companies in the country makes good sense. After the stake acquisition, Citi would become the single largest shareholder in HDFC and would have a nominee on its board.

Citigroup held a 3.59-per cent stake in HDFC as on 31 March 2006 though Citigroup Global Market, Mauritius.

Foreign investors, other than Citigroup Global Market, held more than 64 per cent of HDFC as of 31 March 2006. Most of these overseas investors are financial investors who may not have any strategic interests in holding on to their investments. They may be willing to sell out at a future date at the right price.

Domestic institutional investors, including mutual funds, held only around 6 per cent of HDFC as on 31 March, 2006. Hence, Citi would not have much difficulty in acquiring a controlling stake in HDFC as and when RBI allows such acquisitions. Based on the current roadmap of RBI, acquisitions by foreign banks would be allowed after 2009.

HDFC also holds 22 per cent of HDFC Bank, the second-largest private sector bank in the country. Consequently, if RBI permits it, Citigroup may be looking at a grand acquisition and merger of both HDFC and HDFC Bank with its Indian operations after 2009.

Standard Life''s decision to sell its 9.27-per cent stake in HDFC is seen as a move to increase its holdings in its insurance JV with HDFC — HDFC-Standard Life. As per current FDI norms, foreign companies can hold up to 26 per cent of domestic insurance companies, either directly or indirectly. HDFC Standard Life is the second-largest private sector life insurance company in the country after ICICI Prudential.

Standard Life''s direct stake in the insurance company is currently around 18 per cent with another 8 per cent being controlled indirectly through its holding in HDFC. After the stake sale in HDFC, Standard Life can now raise its direct holdings in the insurance company to 26 per cent.

It is expected that Standard Life would raise its stake in HDFC Standard Life beyond 26 per cent as and when the FDI limit in the sector is increased.