Private sector lender HDFC Bank hopes for Aramco-like MSCI inclusion

The private sector lender HDFC Bank is hopeful that the proposed merger with the parent HDFC Ltd will pave the way for its entry into global indices such as the MSCI and FTSE.

The country’s largest bank in terms of market value – and the seventh largest in the world – is currently not part of any major global indices due to limited investment space for foreign portfolio investors (FPIs).

In an investor presentation, the bank has made a case for inclusion in the MSCI and FTSE indices.

“Index providers may consider both free float percentage and free float value,” it said. This means that even if the headroom for FPI investments in the merged entity will be lower than the threshold set by MSCI and FTSE in percentage terms, it will be large in absolute terms for the stock to be included.

Global index providers had included Saudi Aramco in their indexes, even though the oil giant had a free fleet of only 0.5 percent.

The presentation by HDFC Bank said that index providers MSCI and FTSE are currently considering whether the combined entity can become a new participant in their indices. Although the completion of the merger is 18 months away, index providers are expected to issue communications in this regard soon.

Currently, the headroom for FPI investment in HDFC Bank is 7.5 percent. Assuming the FPI shares do not change much, the headroom after the merger will expand to 10.1 percent – less than the required 15 percent and 20 percent set by MSCI and FTSE, respectively. However, the market capitalization of the merger is expected to be $ 180 billion. At that level, 10 per cent headroom would create an investment opportunity of $ 18 billion (Rs 1.37 trillion). Experts say this makes a strong case for inclusion.

While MSCI, for the purpose of index continuity, HDFC Bank may maintain with a post-issue adjustment factor of 0.5 (if room is lower than 15 per cent but higher than 7.5 per cent; post-review adjustment factor), but it will be sensitive “Therefore, a lot will depend on the availability of foreign rooms, because the process also takes more than a year to complete,” said Sriram Velayudhan, Vice President – Alternative Research, IIFL- Institutional Equities said in a note.


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