Directors’ Report

TO THE MEMBERS

Your directors are pleased to present the forty-fourth annual report of your Corporation with the audited accounts for the year ended March 31, 2021.

Impact of COVID-19

The financial year ended March 31, 2021 marked a full year since the World Health Organisation declared the outbreak of COVID-19 as a pandemic. Countries across the globe continued to face drastic economic and social disruptions along with tragic loss of lives and livelihoods. Eruptions of new waves and variants of the virus necessitated restrictions and lockdowns.

As regards the Corporation, a fortified balance sheet, continued demand for housing, leveraging technology for the convenience of customers, remote working and adhering to social distancing norms and hygiene protocols enabled full business continuity since the outbreak of the pandemic.

In April 2021, India witnessed a second wave of infections. Details of the impact of COVID-19 are elucidated in the Management Discussion and Analysis Report (MD&A).

Dividend

The board assessed the performance of the Corporation during the year under review in light of the on-going pandemic. The board recognised the need to strike a balance between being prudent and conserving capital in the Corporation, whilst also meeting expectations of shareholders. The board after assessing the capital buffers, liquidity levels and the impact of COVID-19 on the operations of the Corporation, recommended payment of dividend for the financial year ended March 31, 2021 of ` 23 per equity share of face value of ` 2 each compared to ` 21 per equity share in the previous year.

The dividend pay-out ratio for the year ended March 31, 2021 is 34.5%.

The dividend recommended is in accordance with the principles and criteria as set out in the Dividend Distribution Policy. The Dividend Distribution Policy is placed on the Corporation’s website.

Issue of Securities on Qualified Institutions Placement Basis

Pursuant to the approval of shareholders by way of a postal ballot on July 21, 2020, the Corporation completed its Qualified Institutions Placement (QIP) of equity shares and secured, redeemable non-convertible debentures simultaneously with warrants in August 2020. The QIP was in accordance with applicable provisions of the Companies Act, 2013, rules framed thereunder and the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Equity and Warrants

Under the QIP, the Corporation raised ` 10,000 crore through the issue and allotment of 5,68,18,181 equity shares of face value of ` 2 each at an issue price of ` 1,760 per equity share (including a premium of ` 1,758 per equity share).

The Corporation also raised ` 307 crore through the issue and allotment of 1,70,57,400 warrants at an issue price of ` 180 per warrant which was paid upfront. The warrants carry a right exercisable by the warrant holder to exchange each warrant for one equity share of face value of ` 2 each of the Corporation at any time on or before August 10, 2023, at a warrant exercise price of ` 2,165 per equity share, to be paid by the warrant holder at the time of exchange of the warrants. As at March 31, 2021, no warrants had been converted into equity shares.

The maximum equity dilution on account of the aforesaid QIP issue, assuming full conversion of all the warrants into equity shares at the warrant exercise price is 4.23%, based on the enhanced share capital.

Non-Convertible Debentures (NCDs)

Further, the Corporation raised ` 3,693 crore through the issue and allotment of 36,930 secured, redeemable NCDs at par having a tenor of 3 years, carrying a coupon rate of 5.40% payable annually. The NCDs are rated by CRISIL Ratings Limited (CRISIL) and ICRA Limited (ICRA) and are assigned the highest ratings, ‘CRISIL AAA Stable’ and ‘ICRA AAA/Stable’ respectively.

The equity shares, warrants and NCDs are listed on BSE Limited (BSE) and National Stock Exchange of India Limited (NSE).

MD&A, Report of the Directors on Corporate Governance and Business Responsibility Report

In accordance with the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) and directions issued by National Housing Bank (NHB) and Reserve Bank of India (RBI), the MD&A and the Report of the Directors on Corporate Governance form part of this report.

In accordance with the Listing Regulations, the Business Responsibility Report (BRR) has been placed on the Corporation’s website. The policy on Business Responsibility is placed on the Corporation’s website.

Regulatory Guidelines

In August 2019, the central government conferred the powers of regulation of Housing Finance Companies (HFCs) to RBI from NHB. NHB continues to carry out the function of supervision of HFCs.

In October 2020, RBI issued the regulatory framework for HFCs in supersession of the corresponding regulations by NHB. The objective of the framework was to facilitate regulatory transition in a phased manner with least disruption.

During the year, RBI introduced certain regulatory changes for HFCs such as the principal business criteria for housing finance, definition of housing finance, minimum net owned fund requirements, guidelines on liquidity risk management framework and liquidity coverage ratio, amongst others.

Further, on February 17, 2021, RBI issued Master Direction - Non-Banking Financial Company - Housing Finance Company (Reserve Bank) Directions, 2021 (RBI HFC Directions). These directions came into force with immediate effect.

Key changes in the regulations are detailed in the MD&A.

The Corporation is in compliance with the applicable provisions of the RBI HFC Directions and other directions/ guidelines issued by RBI/NHB as applicable.

Lending Operations

The Corporation is a Non-Banking Financial Company - Housing Finance Company (NBFC-HFC) and is engaged in financing the purchase and construction of residential houses, real estate and certain other purposes in India. All other activities of the Corporation revolve around the main business.

Despite the challenges posed by the pandemic, lending operations of the Corporation continued seamlessly during the year.

The individual loan business began to see normalcy return from the month of September 2020 onwards, which coincided with the gradual easing of strict lockdown restrictions imposed to contain the spread of COVID-19. In the second half of the financial year, the demand for housing remained robust, with growth trends exceeding expectations. Growth in home loans was aided by low interest rates, softer or stable property prices, continued fiscal benefits on home loans and concessional stamp duty rates offered in certain states. The demand for home loans was from both, affordable housing and higher end properties.

De-growth in individual disbursements owing to the lockdown and restrictions imposed in the first half of the financial year was offset by recovery in the second half of the year. For most parts of the first quarter of the financial year, there was a complete lockdown and the second quarter entailed partial restrictions. Thus, individual disbursements in the first half of the financial year was 35% lower compared to the corresponding period in the previous year. With restrictions gradually easing in the second half of the financial year, individual disbursements were 42% higher compared to the corresponding period in the previous year. Consequently, during the year ended March 31, 2021, individual loan disbursements reported a growth of 3% compared to the previous year.

During the year, due to the prevailing uncertainties, the risk averse environment continued for non- individual loans and lending was restricted to select, high rated entities.

The Assets Under Management (AUM) as at March 31, 2021 amounted to ` 5,69,894 crore as compared to ` 5,16,773 crore in the previous year.

On an AUM basis, the growth in the individual loan book was 12%. The growth in the total loan book on an AUM basis was 10%.

The Corporation’s outstanding loan book stood at ` 4,98,298 crore as at March 31, 2021, compared to ` 4,50,903 crore in the previous year.

During the year, the Corporation assigned loans amounting to ` 18,980 crore compared to ` 24,127 crore in the previous year.

As at March 31, 2021, the outstanding amount in respect of individual loans sold was ` 71,421 crore. The Corporation continues to service these loans.

Further details of lending operations are provided in the MD&A.

Market Borrowings

The Corporation is in compliance with the provisions of the Housing Finance Companies Issuance of Non- Convertible Debentures on private placement basis (NHB) Directions, 2014 and RBI HFC Directions as applicable and has been regular in payment of principal and interest on the NCDs.

Details of market borrowings are provided in the MD&A and notes to accounts.

Deposits

Deposits outstanding as at March 31, 2021 amounted to ` 1,50,131 crore as compared to ` 1,32,324 crore in the previous year – a growth rate of 13%.

CRISIL and ICRA have for the twenty- sixth consecutive year, reaffirmed their ‘CRISIL FAAA/Stable’ and ‘ICRA MAAA/Stable’ ratings respectively for HDFC’s deposits. These ratings represent the highest degree of safety regarding timely servicing of financial obligations.

There has been no default in repayment of deposits or payment of interest during the year. All the deposits accepted by the Corporation are in compliance with the requirements of the regulations regarding deposit acceptance.

As at March 31, 2021, public deposits amounting to ` 890 crore had not been claimed by 43,680 depositors. Since then, 5,629 depositors have claimed or renewed deposits of ` 148 crore.

Depositors were intimated regarding the maturity of deposits with a request to either renew or claim their deposits. Where the deposit remains unclaimed, reminder letters are sent to depositors periodically and follow up action is initiated through the concerned agent or branch.

Deposits remaining unclaimed for a period of seven years from the date they became due for payment have to be transferred to the Investor Education and Protection Fund (IEPF) established by the central government. The concerned depositor can claim the deposit from the IEPF. During the year, an amount of ` 4 crore was transferred to the IEPF.

Capital Adequacy Ratio

As at March 31, 2021, the Corporation’s capital adequacy ratio (CAR) stood at 22.2%, of which Tier I capital was 21.5% and Tier II capital was 0.7%.

As per regulatory norms, the minimum stipulated capital adequacy ratio to be achieved on or before March 31, 2021 was 14% and the minimum Tier I capital was 10%. The minimum capital adequacy ratio for HFCs would increase to 15% on or before March 31, 2022.

Corporate Social Responsibility (CSR)

During the year, the Corporation’s CSR activities focused primarily on COVID-19 relief, education, healthcare, livelihoods and supporting persons with disabilities. Other interventions taken up during the year included support for senior citizen homes, support for Olympic athletes including para-athletes and environmental programmes supporting solid waste management, green energy and ecological restoration for urban and rural communities.

The Corporation prioritised key sub- thematic areas within each of these sectors to ensure that the CSR interventions were targeted most optimally. The Corporation contributed directly and through the H T Parekh Foundation to the identified social sectors.

Further details on the prescribed CSR spend under Section 135 of the Companies Act, 2013 and the amount spent during the year under review are provided in the Annual Report on CSR activities annexed to this report.

Subsidiary and Associate Companies

In accordance with the provisions of Section 136 of the Companies Act, 2013, the annual report of the Corporation, the annual financial statements and the related documents of the Corporation’s subsidiary companies are placed on the website of the Corporation.

Shareholders may download the annual financial statements and detailed information on the subsidiary companies from the Corporation’s website or may write to the Corporation for the same. Further, the documents shall also be available for inspection by the shareholders at the registered office of the Corporation.

The merger of the Corporation’s subsidiaries, HDFC ERGO Health Insurance Limited (formerly Apollo Munich Health Insurance Company Limited) with and into HDFC ERGO General Insurance Company Limited (HDFC ERGO) was approved by the National Company Law Tribunal (NCLT) on September 29, 2020. The final approval for the merger by the Insurance Regulatory and Development Authority of India (IRDAI) was received on November 11, 2020. The appointed date of the merger was March 1, 2020 and the effective date was November 13, 2020. Consequently, HDFC ERGO Health Insurance Limited was dissolved with effect from the said date.

RBI had directed the Corporation to reduce its shareholding in its insurance companies to below 50%. Shareholders’ approval for the same was obtained at the Annual General Meeting (AGM) of the Corporation held on July 30, 2020.

During the year, the Corporation sold 1.43% of its shareholding in HDFC Life Insurance Company Limited (HDFC Life). As at March 31, 2021, the Corporation’s shareholding in HDFC Life stood at 49.97%.

Accordingly, HDFC Life and its subsidiaries, HDFC Pension Management Company Limited and HDFC International Life & Re Company Limited ceased to be subsidiaries of the Corporation, under the Companies Act, 2013.

However, for the purpose of consolidated financial statements, the above-mentioned companies will continue to be accounted as subsidiary companies. As per Indian Accounting Standards, the Corporation consolidates a subsidiary when it controls the said company.

As per RBI’s directive, the Corporation has to reduce its shareholding in HDFC ERGO to below 50% by May 12, 2021.

HDFC Credila Financial Services Limited, a wholly owned subsidiary of the Corporation was converted into a public limited company (from a private limited company) with effect from October 8, 2020.

The Corporation has not made any loans or advances in the nature of loans to any of its subsidiary or associate company or companies in which its directors are deemed to be interested, other than in the ordinary course of business.

The Corporation is in compliance with the provisions of Foreign Exchange Management Act, 1999 with respect to downstream investments made by it/by its subsidiaries during the year. Further, as required by the Foreign Exchange Management (Non- debt Instruments) Rules, 2019, the Corporation has obtained a certificate from statutory auditors on the same.

A review of the key subsidiary and associate companies of the Corporation form part of the MD&A which forms part of this report. Further, a statement containing salient features of financial statements of the subsidiaries and associates of the Corporation in the prescribed Form No. AOC-1 is provided elsewhere in this annual report.

Particulars of Employees

HDFC had 3,226 employees as of March 31, 2021. During the year, 15 employees employed throughout the year were in receipt of remuneration of ` 1.02 crore or more per annum and 1 employee employed for part of the year was in receipt of remuneration of ` 8.5 lac or more per month.

In accordance with the provisions of Rule 5(2) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the names and particulars of the top ten employees in terms of remuneration drawn and of the aforesaid employees are set out in the annex to the Directors’ Report. In terms of the provisions of Section 136(1) of the Companies Act, 2013 read with the rule, the Directors’ Report is being sent to all shareholders of the Corporation excluding the annex. Any shareholder interested in obtaining a copy of the annex may write to the Corporation.

Further disclosures on managerial remuneration are annexed to this report.

Prevention, Prohibition and Redressal of Sexual Harassment of Women at the Workplace

The Corporation has a policy on prevention, prohibition and redressal of sexual harassment of women at the workplace and has an Internal Complaints Committee (ICC) in compliance with the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013. The Corporation’s policy on the same is placed on the Corporation’s website. The ICC comprises majority of women members. Members of the Corporation’s ICC are responsible for conducting inquiries pertaining to such complaints.

The Corporation on a regular basis sensitises its employees, including outsourced employees on the prevention of sexual harassment at the workplace through workshops, group meetings, online training modules and awareness programmes which are held on a regular basis. The Corporation also conducted a special training programme for the members of the ICC. During the year, two complaints were received by the ICC. One case was reviewed and disposed of while the other case which was received in the month of March 2021 was being investigated by the ICC as at March 31, 2021.

Particulars of Loans, Guarantees or Investments

Since the Corporation is an NBFC-HFC, the disclosures regarding particulars of the loans given, guarantees given and securities provided is exempt under the provisions of Section 186 (11) of the Companies Act, 2013.

As regards investments made by the Corporation, the details of the same are provided in notes to the financial statements of the Corporation for the year ended March 31, 2021 (note 10).

Particulars of Contracts or Arrangements with Related Parties

The particulars of contracts or arrangements with related parties as prescribed in Form No. AOC–2 is annexed to this report. Details of related party transactions are given in the notes to the financial statements.

The policy on Related Party Transactions of the Corporation ensures proper approval and reporting of the concerned transactions between the Corporation and its related parties.

The policy on Related Party Transactions is published elsewhere in the annual report and is also placed on the Corporation’s website.

Particulars Regarding Conservation of Energy, Technology Absorption and Foreign Exchange Earnings and Outgo

During the year ended March 31, 2021, earnings in foreign currency stood at ` 2 crore and expenditure in foreign currency stood at ` 782 crore (largely pertaining to interest on foreign currency borrowings).

The Corporation is in the business of housing finance and hence its operations are not energy intensive. The Corporation is cognisant of the importance of imbibing measures towards optimum energy utilisation and conservation.

Employees Stock Option Scheme (ESOS)

The stock options granted to the employees operate under various schemes. There has been no variation in the terms of the options granted under any of the schemes and all the schemes are in compliance with SEBI (Share Based Employee Benefits) Regulations, 2014 (SBEB Regulations).

On September 4, 2020, the Corporation approved the grant of 3,83,96,531 stock options and on February 2, 2021 approved the grant of 25,000 stock options -- each stock option representing one equity share of ` 2 each to eligible employees and directors of the Corporation under Employees Stock Option Scheme - 2020 (ESOS-20). The exercise prices were determined based on the market price defined in the SBEB Regulations i.e. the latest available closing price of the equity share on the NSE, prior to the dates of the respective meetings of the Nomination and Remuneration Committee at which the options were granted. Subject to fulfilling the conditions specified in ESOS-20, 50% of the options granted shall vest on the completion of one year from the date of grant or upon completion of three years of service with the Corporation, whichever is later. The remaining 50% shall vest on completion of one year thereafter. The options are exercisable over a period of five years from the date of their respective vesting. None of the options granted have vested during the year and consequently, no options have been exercised under ESOS-20.

The stock options granted to employees pursuant to the Corporation’s stock option schemes are measured at fair value of the options at the grant date using Black-Scholes model. The fair value of the options determined at grant date is recognised as employee compensation cost over the vesting period on straight line basis over the period of the option, based on the number of grants expected to vest, with a corresponding increase in equity.

The disclosures as required under SBEB Regulations have been placed on the website of the Corporation.

Unclaimed Dividend and Shares

As at March 31, 2021, dividend amounting to ` 24.22 crore had not been claimed by shareholders of the Corporation. The Corporation takes various initiatives to reduce the quantum of unclaimed dividend and has been periodically intimating the concerned shareholders, requesting them to encash their dividend before it becomes due for transfer to the IEPF.

Unclaimed dividend amounting to ` 2.30 crore for FY13 was transferred to the IEPF on September 1, 2020. Further, in compliance with the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 as amended, the Corporation transferred 65,928 equity shares of ` 2 each (corresponding to the dividend for FY13 and remaining unclaimed for a continuous period of 7 years) in favour of the IEPF. However, the concerned shareholders may claim the unclaimed dividend and unclaimed shares from IEPF, the procedure for which is detailed on the Corporation’s website.

The unclaimed dividend in respect of FY14 must be claimed by shareholders on or before August 20, 2021, failing which the Corporation would be required to transfer the unclaimed dividend and the corresponding shares to the IEPF within a period of 30 days from the said date.

Directors

In accordance with the provisions of the Companies Act, 2013 and the Articles of Association of the Corporation, Mr. Keki M. Mistry is liable to retire by rotation at the ensuing AGM. He is eligible for re-appointment.

The board at its meeting held on May 7, 2021, approved the re-appointment of Mr. Keki M. Mistry as the Managing Director (designated as the Vice Chairman & Chief Executive Officer) of the Corporation for a period of 3 years with effect from May 7, 2021. The re-appointment is subject to the approval of the members of the Corporation at the ensuing AGM. Mr. Keki M. Mistry continues to be liable to retire by rotation.

The necessary resolution for the re-appointment of Mr. Keki M. Mistry and his brief profile has been included in the notice convening the ensuing AGM.

All the directors of the Corporation have confirmed that they satisfy the fit and proper criteria as prescribed under the applicable regulations and that they are not disqualified from being appointed as directors in terms of Section 164(2) of the Companies Act, 2013.

The details on the number of board/ committee meetings held are provided in the Report of the Directors on Corporate Governance, which forms part of this report.

Auditors

At the 40^th AGM of the Corporation held on July 26, 2017, the members had appointed Messrs B S R & Co. LLP, Chartered Accountants, (firm registration number 101248W/W-100022) as the statutory auditors for a term of 5 consecutive years and to hold office until the conclusion of the 45^th AGM.

The details of remuneration paid by the Corporation to Messrs B S R & Co. LLP, chartered accountants are provided in note 34.1 of the financial statements. The non-audit fees paid to the statutory auditors by the Corporation does not exceed the audit/ limited review fees.

During the year, Messrs B S R & Co. LLP, chartered accountants and all entities in the network firm of which the statutory auditor is a part received a total remuneration of ` 9.02 crore from the Corporation and its certain subsidiaries. The remuneration pertains to fees for audit, internal financial control reporting, limited reviews, tax audits and taxation services, certifications and other matters.

In accordance with applicable laws, during the year, the audit partner was rotated.

The auditors’ report annexed to the financial statement for the year under review does not contain any qualifications.

As per the guidelines issued by RBI on April 27, 2021 for the appointment of statutory auditors, NBFC-HFCs with an asset size of `15,000 crore and above are required to have a minimum of two audit firms. The guidelines have to be adopted from the second half of FY22 onwards.

The guidelines also require rotation of audit firm after a period of 3 years. Since B S R & Co. LLP, chartered accountants has completed the specified time period as the statutory auditors, the Corporation would have to appoint two new audit firms for conducting the audit for FY22. The Corporation is in the process of identifying suitable audit firms and the requisite approval of the members will be sought at a future date.

Secretarial Audit

Pursuant to the provisions of Section 204 of the Companies Act, 2013 and the Companies (Appointmentand Remuneration of Managerial Personnel) Rules, 2014, Messrs Parikh & Associates, practicing company secretaries undertook the secretarial audit of the Corporation for the FY21. The Secretarial Audit Report is annexed to this report and does not contain any qualifications.

The Secretarial Compliance Report as prescribed by SEBI is provided elsewhere in the annual report.

The Board of Directors of the Corporation at its meeting held on May 7, 2021, appointed Messrs BNP & Associates, practicing company secretaries as the secretarial auditors to undertake the secretarial audit of the Corporation for FY22.

Orders Passed by Regulators

During the year, there were no significant or material orders passed by the regulators or courts or tribunals against the Corporation.

In September 2020, NHB imposed a monetary penalty of ` 1,50,000 on the Corporation for non-compliance with two provisions of the Housing Finance Companies (NHB) Directions, 2010 pertaining to FY 2018-19.

The Corporation paid the penalty on October 8, 2020. The Corporation maintains that this is not significant or material in nature.

Directors’ Responsibility Statement

In accordance with the provisions of Section 134(3)(c) of the Companies Act, 2013 and based on the information provided by the management, your directors state that:

1. In the preparation of annual accounts, the applicable accounting standards have been followed;
2. Accounting policies selected have been applied consistently. Reasonable and prudent judgements and estimates have been made so as to give a true and fair view of the state of affairs of the Corporation as at March 31, 2021 and of the profit of the Corporation for the year ended on that date;
3. Proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of the Corporation and for preventing and detecting frauds and other irregularities;
4. The annual accounts of the Corporation have been prepared on a going concern basis;
5. Internal financial controls have been laid down to be followed by the Corporation and such internal financial controls are adequate and operating effectively; and
6. Systems to ensure compliance with the provisions of all applicable laws are in place and were adequate and operating effectively.

Internal Financial Control

The Corporation has put in place adequate policies and procedures to ensure that the system of internal financial controls is commensurate with the size and nature of the Corporation’s business. These systems provide a reasonable assurance in respect of providing financial and operational information, complying with applicable statutes, safeguarding of assets of the Corporation, prevention and detection of frauds, accuracy and completeness of accounting records and ensuring compliance with corporate policies.

Annual Return

The Form No. MGT-7 for FY21 is uploaded on the Corporation’s website.

Material changes and commitment, if any, affecting the financial position of the Corporation from the financial year end till the date of this report

There are no material changes and commitments affecting the financial position of the Corporation which have occurred after March 31, 2021 till the date of this report.

Acknowledgements

The directors place on record their gratitude for the support of various regulatory authorities including NHB, RBI, SEBI, IRDAI, Pension Fund Regulatory and Development Authority, Ministry of Housing and Urban Affairs, Ministry of Corporate Affairs, Registrar of Companies, Financial Intelligence Unit (India), the stock exchanges, National Securities Depository Limited and Central Depository Services (India) Limited.

The Corporation acknowledges the role of all its key stakeholders - shareholders, borrowers, channel partners, depositors, deposit agents and lenders for their continued support to the Corporation.

Your directors place on record their appreciation for the hard work and dedication of all the employees and support services of the Corporation and the co-operation of all its subsidiary and associate companies, especially during the difficult times of the pandemic.

Last and most importantly, your directors remain extremely grateful to the medical fraternity, frontline workers and other first-hand responders who continue to work tirelessly in an endeavour to overcome the pandemic.

On behalf of the Board of Directors