Private sector lender HDFC Bank hopeful of Aramco-like MSCI inclusion

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 world’s seventh largest—is currently not part of any major global indices due to limited investment legroom 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 potentially may consider both free float percentage and free float value,” it has said. This means that even if the headroom for FPI investment 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 get included.
 
Global index providers had included Saudi Aramco in their indices even though the oil giant had a free float of just 0.5 per cent.
 
The HDFC Bank presentation said index providers MSCI and FTSE are currently reviewing whether the combined entity can become a new entrant into their indices. Although the completion of the merger is 18 months away, index providers are expected to soon issue a communication in this regard.
 
At present, the headroom for FPI investment in HDFC Bank is 7.5 per cent. Assuming the FPI shareholding doesn’t change much, post-merger the headroom will expand to 10.1 per cent — less than the required 15 per cent and 20 per cent set by MSCI and FTSE, respectively. However, the merged entity’s market cap is expected to be around $180 billion. At that level, 10 per cent headroom will create an $18 billion (Rs 1.37 trillion) investment opportunity.   Experts say this makes a strong case for inclusion.
 
“While MSCI, for the purpose of index continuity, might retain HDFC Bank with a post-issue adjustment factor of 0.5 (as room is lower than 15 per cent but higher than 7.5 per cent; post-review adjustment factor), but it will be sensitive to increase in FPI holding. Hence, a lot will depend on the foreign room availability as the process also entails more than a year’s time to complete,” said Sriram Velayudhan, vice-president – alternative research, IIFL-Institutional Equities said in a note.