$3 bn inflows into merged entity likely if foreign investment room in HDFC Bank remains above MSCI limit

The merger of the entities is widely expected to be completed by the end of June.

The latest shareholding also implies that the room for foreign investment in the merged entity is at 17.6% — higher than the stipulated minimum requirement of 15% to remain a part of the MSCI index.

According to Nuvama Wealth, if the merged entity continues to have foreign investment limit above 15%, one could see incremental inflows of close to $2.5-3.0 billion ahead of the adjustment of the weightage in the MSCI index.

However, if the foreign investment room goes below 15% before the weightage consideration by MSCI, any incremental inflows is unlikely, the brokerage said.

In November 2022, global index aggregator MSCI Inc had modified its methodology for considering mergers and acquisitions.

The new rules implied that Bank will be considered as an extension of HDFC Ltd after the merger, and the foreign headroom requirement will be that of an existing constituent. This effectively would increase the weightage of HDFC Bank sharply in the MSCI global index post the merger.

The weightage of HDFC twins can go to 13% from 5.78%, and this removes the overweight problem of FIIs, which was a technical overhang.

Nuvama Wealth had earlier said the implementation by MSCI should happen around the completion of the merger.

NSE indices had also sought representations on treatment of mergers in index constituents.

These steps are widely expected to lead to smooth implementation, given that FII holdings in the stocks are very high.

All the regulatory approvals for the merger are yet to be received by the entities. On Tuesday, HDFC Bank announced that the Financial Services Commission, Mauritius, has granted approval for the proposed transfer of shares of Griha Investments, a wholly owned subsidiary of HDFC Holdings and a foreign step-down subsidiary of HDFC, to HDFC Bank as part of the merger deal.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)