Merged HDFC Bank could get fresh FPI flows of up to $3 billion

Mumbai: The merged entity of HDFC Bank and parent Housing Development Finance Corp (HDFC) could witness fresh overseas fund flows of $2.5-3 billion if the room for foreign investment holdings in the combined firm stays above 15%, said analysts.

At the end of the December quarter, the combined foreign ownership of HDFC-HDFC Bank stood at roughly 61%, according to Nuvama Alternative & Quantitative Research. This translates into an additional investible room available to foreign funds at 17.5%, it said.

HDFC Bank shares rose 1.8% to ₹1,636.95 on Wednesday. The benchmark BSE Sensex gained 0.6% to close at 61,045.74.

Analysts said the room for foreign investments in the merged entity must be above 15% for index provider MSCI to consider including a stock in an index, assigning weightage and making weight revisions. Foreign passive funds decide their stock portfolio construction on the basis of such indices.

"It is critical for the additional investible foreign room to be above 15% till the merger gets completed," said Abhilash Pagaria, head-alternative and quantitative research at Nuvama Institutional Equities.

At the end of September 2022, foreign investors cumulatively owned about 61.1%, similar to the ownership in the December quarter, exchange data showed.

HDFC Bank is not part of the MSCI India Standard index. HDFC carries a weightage of nearly 6% in this gauge.

Higher weightage on the index and additional foreign investable room could attract higher inflows into the merged lender. However, in a scenario where the investible room falls below 15%, there would be no incremental inflows.

"The forthcoming shareholding pattern becomes all the more crucial to ascertain the probable weight increase in the MSCI Standard Index," said Pagaria.

In November last year, MSCI announced revisions to its methodology for considering mergers and acquisitions. Then, analysts said HDFC would be replaced by HDFC Bank in the index.

"Alongside with the higher total/free float market cap, the weightage would be much higher than the latest weight of 5.73%. The combined weightage could double to approximately 12% plus as the adjustment factor of 0.5x should not apply and 1x adjustments factor will be considered," read the MSCI announcement in November 2022.

While HDFC - a non-banking finance company (NBFC) - is allowed to have 100% in foreign ownership, its banking arm HDFC Bank has a maximum permissible foreign limit set at 74%, as per Reserve Bank of India norms.

In the past six months, both stocks have yielded 21% returns and have outperformed the benchmark indices.