After the completion of the merger of HDFC and HDFC Bank, the weight of the merged entity could be double that of HDFC in MSCI, Macquarie has said in a sales note on Friday.
HDFC is part of MSCI indices whereas HDFC Bank is not. MSCI requires the proportion of shares available to foreign investors relative to the maximum allowed being at least 15% and HDFC Bank fails to meet this criterion. Despite the heavy FII selling earlier this year, HDFC Bank’s “foreign room” as of September end stood at 11%, as per Macquarie.
MSCI has come up with new rules on how to handle corporate events like mergers & acquisitions and that will remove the technical overhang of HDFC Bank, Macquarie said. What these new rules imply is that HDFC Bank will be considered as an extension of HDFC post the merger and the foreign headroom requirement will be that of an existing constituent.
According to the new rule, when there is a corporate event affecting index constituents, non-index constituents that are involved in the event are considered for immediate inclusion in the MSCI Global Investable Market Indexes, as long as they meet all the index constituent eligibility rules and guidelines, with the exception of the length of trading and liquidity screens and minimum foreign room requirement.
Despite the foreign institutional investment headroom being between 15-25%, adjustment factor of 0.5x will not apply and it will be at 1x adjustment factor.
Hence, the weight of the HDFC twins can go from 5.78% to 13%. This removes the overweight problem of FIIs, which was a technical overhang, Macquarie said.
This implies free float-adjusted market capitalisation of $126.3 billion for the merged entity, which is more than twice of HDFC’s current free float-adjusted market capitalisation of $55.9 billion, said the Macquarie note.