In a surprise move, HDFC Bank, India’s largest private sector bank, has restarted talks with Japan’s financial giant Mitsubishi UFJ Financial Group (MUFG) for a sizeable stake sale in its non-lending subsidiary, HDB Financial Services.

Sources aware of the matter said the norms proposed by the Reserve Bank of India, which were unveiled on October 4,  may have forced HDFC Bank to rethink a possible stake sale ahead of HDB Financial’s initial public offering (IPO).

HDFC Bank has offered 20 percent stake in HDB Financial to MUFG and is said to be more amenable when it comes to deal valuations.

“Officials of the bank are once again in touch with senior management of MUFG,” one of the sources said. It is learnt that talks are still in initial stages and it is too soon to say if a deal will be reached.

An email sent to HDFC Bank, HDB Financial and MUFG seeking comments on the latest developments remained unanswered till publishing the article.

MUFG and HDFC Bank held talks around April for a 20 percent stake sale in HDB Financial. The discussions could not be taken ahead and the talks fell through on differences over valuation.

This time, HDFC Bank may be more flexible in negotiating valuations, sources said.

Sources said the objective of reinitiating talks with MUFG is to ensure that if the draft circular on "form of business and prudential regulations for investments" issued on October 8 assumes finality, a stake sale ahead of the IPO may smoothen the process for further stake dilution in future.

The draft circular says banks would have two years from the date of its implementation to pare stakes in its subsidiaries. However, bank officials say two years would not be enough to hive off subsidiaries.

“For something like HDB Financial which is commanding about Rs 80,000 crore of valuation, to pare significant stake in two years may be very difficult,” an investment banker said on condition of anonymity. “It would make it easier for HDFC Bank to bring in a large investor ahead of HDB Financial’s IPO and then divest stake if required,” he added.

HDFC Bank holds 94.36 percent in HDB Financial. HDB Financial’s proposed IPO consists of a Rs 10,000 crore of offer for sale and Rs 2,500 crore of fresh issue. This would represent a little over 10 percent stake held by HDFC Bank in HDB Financial.

If talks with MUFG are successful this time, HDFC Bank may end up reducing its stake to about 61 percent.

“Given that it’s the second time HDFC Bank is engaging with MUFG for a stake sale in HDB Financial, it would be too premature to say which way the talks will go,” a banker aware of the deal said.

At 11.22 am, the HDFC Bank share was trading at Rs 1,861.35 on the National Stock Exchange (NSE), down 0.56 percent from the previous close.