HDFC Bank has rejected a proposal by Japan's Mitsubishi UFJ Financial Group (MUFG), the world's second-largest bank holding company, for the purchase of a stake in its non-banking subsidiary HDB Financial Services. 

What Happened: MUFJ was looking to buy a 20% stake in the unit for $2 billion (₹16,781 crore), which the Indian financial giant has refused, The Economic Times reported. The board has now approved a plan to move forward with HDB's listing in order to adhere to Reserve Bank of India (RBI) regulations.

The Japanese government had recently expressed its interest in the deal to the Indian Prime Minister's Office, External Affairs Minister S. Jaishankar and finance ministry officials. This was viewed as a way to strengthen the economic and strategic ties between two key members of the Quadrilateral Security Dialogue (QSD) bloc.

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However, the decision to cancel the plan is expected to displease Japan, the report suggested. Japan will likely express its frustration to the Indian government over the abrupt reversal.

The Japanese financial giant was also poised to become a co-promoter of HDB alongside HDFC Bank. Partnering with HDB would have provided MUFJ the access to one of the fastest-growing economies.

Negotiations between the two parties have been ongoing intermittently since late 2021 and gained momentum earlier this year. The decision was initially expected to be approved by the board that month but was delayed to June and then to this week, the report said.

The move has also highlighted a rift within the private lender's senior leadership, according to the report. The board was reportedly kept in the dark about the negotiations. Some directors believed that a listing would be the preferable option for price discovery. Others saw MUFG's involvement as a significant advantage as the bank has been experiencing margin pressure following its merger with its housing loan sister firm HDFC Ltd.

Price Action: Shares of HDFC BANK were down 0.15% to ₹1,628.85 on Friday.

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