Updates from the two most valuable HDFC group companies, HDFC Ltd and HDFC Bank, about the status of foreign shareholding show there is plenty of room for investors to buy in.
Foreign investors held 68.56 percent in Housing Finance Development Corporation Ltd and 66.55 percent in HDFC Bank as on May 13, stock exchange notices showed. Further, the foreign institutional investor (FII) shareholding in HDFC Bank included 20.98 percent owned by HDFC Ltd and its units.
Both firms have been receiving queries from investors seeking information on their aggregate foreign shareholding.
HDFC Bank shares’ tepid performance over the past year had led the street to believe there was little room left for foreign investors, given that demand for the stock from this class of investors was strong compared with that from domestic investors. Foreign shareholding is capped at 74 percent for HDFC Bank.
The proposed merger between HDFC Bank and HDFC was expected to free up room for foreign investors to buy. Through the merger, every HDFC shareholder will get 42 shares of HDFC Bank for 25 shares they hold in the mortgage giant.
Post-merger, foreign shareholding in HDFC Bank is expected to be 66 percent and may dip further. Since the merger announcement, HDFC Bank and HDFC have fallen over 20 percent and 17 percent, respectively. In comparison, benchmarks Sensex and Nifty lost a little over 10 percent each over this period.
However, analysts believe the inclusion of the merged entity in the MSCI India index may be difficult, as it requires a larger FII headroom (from cap) for inclusion.
Analysts said based on the current methodologies being used for index construction, the weight of the merged entity could be 15 percent in the Nifty 50 and that in the MSCI India index could be very low, assuming no meaningful change in shareholding between now and the merger date. This would make it difficult for both domestic money managers (who are benchmarked to the Nifty) and foreign money managers who are benchmarked to MSCI.
HDFC has said that index providers (MSCI, FTSE) are reviewing the transaction especially in the context of the merger vis-a-vis consideration of combined entities as new entrants and may consider both free float percentage and free float value.
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