If there is more selling by foreigners, the merged entity (HDFC-HDFC Bank) could make it to the MSCI Index. For a stock to be eligible for inclusion in an MSCI Index, the proportion of shares still available to foreign investors compared to the maximum limit must be at least 15%. Currently, it is 13.7%, said Macquarie.
“What this means is that if FIIs (foreign institutional investors) sell 100 bp (basis point) more of the stock then it will be eligible for inclusion,” said Macquarie, which has a ‘buy’ rating on HDFC Bank with a target price of ₹2,005. Shares of HDFC Bank ended down for the fifth straight day on Monday, down 1.25% at ₹1,496 crore.
“Considering the merger is at least one year away, this is a real possibility now. However, it is too close to call out one way or the other now.”
As per the March quarter end shareholding data, HDFC’s foreign shareholding is down to 69.2% from 72.1% as of December 2021. HDFC Bank’s foreign shareholding has come down to 68.5% from 70% as on December 2021.
On a merged basis, foreign shareholding is down to 63.9% from 66.2% at the end of previous quarter, with FIIs having sold $3.4 billion of the two stocks in the March quarter. “If they sell $1.5 billion more between now and the merger, then HDFC Bank can get included in MSCI as per the rules. Looking at the amount of selling we have seen in the two stocks for the last one year, it is quite possible that this might play out,” said Macquarie. “MSCI inclusion is a real possibility of FIIs remain on the sell side,” said Macquarie.
Lack of clarity over MSCI inclusion of the merged entity is one of the key reasons the stocks have declined after ending up 10% on the day of the merger announcement. HDFC also ended lower on Monday, down 1.4% at ₹2,423.85.
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