HDFC Bank is likely to see $150-200 million in outflows, said Nuvama Alternative & Quantitative Research, as the index aggregator MSCI in an update to clients said it will use an adjustment factor of 0.50 to compute HDFC merged company weightage. This is against an earlier expectation of $3 billion in inflows.
HDFC is part of a global index with a weight of 6.74 percent. HDFC Bank, on the other hand, is not a part of the index. That said, it was expected that the merged entity would be a part of this index. The market was expecting the combined entity to see net inflows of $3 billion on account of getting a full adjustment factor of 1x.
But now, as per the MSCI update, the adjustment factor stands at 0.5x. As a result, the combined entity would have a weight of 6.5 percent in the index against the current weight of HDFC at 6.74 percent. Therefore, the combined entity is expected to see marginal outflows.
Nuvama noted that the private bank is subject to a Foreign Ownership Limit (FOL) of 74 percent and has a current foreign room below 15 percent. Based on the latest available shareholding disclosure, the foreign room of the post-acquisition entity is expected to be marginally above 15 percent, it said.
Shares of HDFC Bank were trading 5.56 percent lower at Rs 1,631 in Friday’s trade.
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Adjustment factor of HDFC Bank
Nuvama said that based on the estimated post-event foreign room of HDFC Bank, MSCI intends to add HDFC Bank to the Large Cap segment of MSCI Global Standard Indexes with a Foreign Inclusion Facto (FIF) of 0.37 after applying an adjustment factor of 0.5.
This will lead to no incremental inflow but slight outflows of $150 million to $200 million, Nuvama noted.
Nuvama noted that MSCI intends to further review the adjustment factor of HDFC Bank at a scheduled index review following the completion of the transaction and in accordance with section 18.104.22.168 of MSCI GIMI methodology.
“We had estimated the foreign room for the merged entity to be around 18 percent, which is above 15 percent and above the MSCI threshold to maintain stock with full factor.
As per the current methodology, the weighting of the merged entity would be again reduced in the next quarterly index reviews if the foreign room would have come below 15 percent.
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