FPI legroom not enough for big MSCI boost, says Macquarie Capital

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A sharp fall in foreign institutional investor (FII) shareholding in both and Housing Development Corporation (HDFC Ltd) this year has increased the chances of the merged entity finding inclusion in the Index.

However, the legroom available may not be sufficient for a full-fledged entry of the merged in the widely tracked global index.

In a note, Capital has said that the foreign inclusion factor (FIF) — also called the adjustment factor — for will remain 0.5x unless the FII holding falls sharply from the current levels.

According to the latest June quarter shareholding data, the FII shareholding in HDFC Bank and has declined to 65.81 per cent and 67.7 per cent, respectively.

At the current levels, FII investment legroom in the merged entity works out to around 17 per cent — higher than the 15 per cent minimum threshold required for inclusion. However, this FII legroom will only result in the merged HDFC Bank’s inclusion in the Index with 0.5x FIF. For full inclusion, the FIF has to fall further.

“Will higher foreign room mean higher weight of the merged entity? Not really!” Suresh Ganapathy, associate director, Capital, said in a note.

“Foreign room increasing further does not lead to higher weight. Index weight will go up only if the adjusted factor goes up from 0.5x to 1x. That will happen at 25 per cent foreign room, which translates into 55.5 per cent FII shareholding,” added the note.

Shares of HDFC Bank and fell 1.2 per cent and 0.5 per cent, respectively, on Monday.

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