Private sector lender HDFC Bank hopes to be included in Aramco-like MSCI

Private sector lender HDFC Bank hopes the proposed merger with parent company HDFC Ltd will pave the way for it to enter global indexes such as the MSCI and FTSE.

The country’s largest bank by market value – and the world’s seventh largest – is currently not included in any major global indices due to limited investment room for foreign portfolio investors (REITs).

In a presentation to investors, the bank argued for its inclusion in the MSCI and FTSE indices.

“Index providers can potentially consider both percent free float and free float value,” he said. This means that while the REIT investment margin in the merged entity will be below the threshold set by MSCI and FTSE in percentage terms, it will be significant in absolute terms for the stock to be included.

Global index providers had included Saudi Aramco in their indexes, even though the oil giant had a free float of just 0.5%.

HDFC Bank’s presentation said index providers MSCI and FTSE are currently considering whether the combined entity can become a new entrant in their indices. Although the completion of the merger is 18 months away, the index providers are expected to publish a communication in this regard soon.

Currently, the headroom for the REIT investment in HDFC Bank is 7.5%. Assuming the REIT’s shareholding doesn’t change much, post-merger headroom will drop to 10.1%, less than the 15% and 20% required by MSCI and FTSE respectively. However, the market capitalization of the merged entity is expected to be approximately $180 billion. At this level, a 10% headroom will create an $18 billion (Rs 1.37 trillion) investment opportunity. Experts say this makes a strong case for inclusion.

“Although MSCI, for the purposes of index continuity, may retain HDFC Bank with a post-issue adjustment factor of 0.5 (because the margin is less than 15% but greater than 7.5%; factor post-review adjustment), but it may be sensitive to the increase in FPI holdings. Therefore, much will depend on the availability of foreign chambers, as the process also takes more than a year to complete,” said said Sriram Velayudhan, Vice President – Alternative Research, IIFL-Institutional Equities, said in a note.

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