These passive funds mirror MSCI indices for their investment. For a stock to remain on an MSCI index, international investors must have a minimum headroom of 15%, with an adjustment factor of 1, to purchase the shares on the public market.
The foreign holding of what would be the merged entity has come down slightly to 60.5%, as per the shareholding pattern at the end of the March quarter, from 61% as of December last year. Hence, the foreign headroom, after factoring in the approved foreign holding limit, in the merged entity would be 18.23% against 17.6% as on December 31.
“If the merged entity continues to have foreign room above 15%, then as per our preliminary calculations, the incremental inflow could be about $3 billion,” said Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research. “If the merged entity’s foreign room goes below 15% before the MSCI weightage consideration, then any incremental inflow is unlikely as the combined entity will remain in index with a 0.5 factor.”
The merger of mortgage lender HDFC Ltd with HDFC Bank was announced on April 4 last year. Under the terms, shareholders of HDFC Ltd would receive 42 shares of HDFC Bank for every 25 shares held.
The merger is expected to be completed by June-July 2023. Approvals from the National Company Law Tribunal and stock exchanges are in place. The proposal awaits the nod from other regulators, including the Reserve Bank of India, Securities and Exchange Board of India, National Housing Bank and the Insurance Regulatory and Development Authority.
As on March 31, 2023, foreign intuitions held a 66.2% stake in HDFC and 32.24% in HDFC Bank. HDFC, HDFC Investment and HDFC Holdings together own a 25.59% stake in HDFC Bank, which has been considered as indirect foreign holding.As per the MSCI Global Investable Market indexes methodology, foreign room level for existing constituents will be reviewed every quarter coinciding with the regular MSCI index reviews. If foreign room post-inclusion moves below 15%, the stock will be at risk of outflows as the factor would be 0.5. In that case, analysts expect a change in the index methodology.
“As this is a big merger, so we won’t rule out the index provider considering modifying the methodology and implementing a more pragmatic way of dealing with any kind of excessive churning,” said Abhilash Pagaria.
