The largest foreign direct investment (FDI) proposal in the country's financial services sector, which involved the leading banks in Japan and India by market capitalisation, has now collapsed. HDFC?s board rejected a proposed $2 billion purchase by Japan?s Mitsubishi UFJ Financial Group (MUFG), the world's second-largest bank holding company, of a 20% stake in its non-banking subsidiary HDB Financial Services. Instead, the board decided to proceed with HDB's listing to comply with Reserve Bank of India (RBI) regulations, HDFC Bank executives revealed under conditions of anonymity due to the confidential nature of the matter. The decision to cancel the plan is expected to cause disappointment in Japan, according to sources familiar with the situation. The Japanese government had recently expressed its support for the deal to the Indian Prime Minister?s Office, External Affairs Minister S. Jaishankar, and officials from the finance ministry. The deal was perceived as a step to further strengthen the economic and strategic ties between two key members of the Quadrilateral Security Dialogue (Quad). Japan is expected to express its dissatisfaction with the Indian government over the last-minute reversal, the sources added. The move also highlighted a divide within the senior leadership of the private lender, they noted. MUFG?s pre-IPO investment had valued the NBFC at $9 billion and would have unlocked value for HDFC Bank, which has been grappling with synergy issues following its merger with housing loan parent company HDFC Ltd. Besides business synergies, it would have also established a valuation benchmark for the shadow bank. The Japanese financial giant was also poised to become HDB?s co-promoter alongside HDFC Bank. For MUFG, which has held a 20% stake in Wall Street investment bank Morgan Stanley since 2008, an alliance with HDB would have provided access to one of the fastest-growing economies. Due to sluggish growth in Japan, some of its biggest lenders and financial services groups have been seeking inorganic growth opportunities across Asia. HDFC Bank owns 94.7% of the shadow bank, with employees holding the remaining 5.3% as stock options. MUFG and HDFC Bank did not respond to queries before press time. HDB, which has been classified by the central bank as one of the 16 'upper-layer' non-banking finance companies (NBFCs) subject to increased regulatory scrutiny, has been preparing for an eagerly anticipated initial public offering (IPO). Scheduled for the last quarter of 2024 or the first quarter of 2025, this will make it the first HDFC subsidiary to be listed following the merger. This complies with RBI regulations that require it to be listed before September 2025. Before the merger, HDFC Asset Management Co and HDFC Life, both subsidiaries of the former HDFC Ltd, were the last to be listed. In July, the Indian lender's board had given in-principle approval to initiate HDB?s public listing. The company was initially expected to debut on the stock market nearly five years ago, and it had then unsuccessfully sought to bring in a strategic investor, mandating Morgan Stanley to assist in finding a partner. ?It was never an either-or decision... MUFG's investment was expected to complement the IPO plans, bolstering pre-IPO capital,? a banking sector analyst remarked. ?The stake sale to a prestigious name would have also provided the parent with some liquidity.? Last month, HDFC Bank Managing Director Sashidhar Jagdishan expressed disappointment over the bank's deposits in the quarter to June, a period when volatility in current account flows had caught the bank off guard. HDB Financial, a non-deposit-taking lender and a significant player in the retail financing sector, offers personal, business, home, auto loans, and loans against property, among other products, to 14.6 million customers through a network of 1,680 branches spread across 27 states and 4 union territories.