HDFC Bank’s Rs 24,000 Crore FDI Approval Comes As A Big Boost, More So For Promoter

The government’s move to accord its approval to HDFC Bank to raise Rs 24,000 crore as foreign direct investment (FDI) may prove to be a big positive for the bank from the stock market perspective.

This move may also prove to be beneficial to the bank’s parent company, housing finance major HDFC Ltd, to park the entire or a part of proceeds it receives from its proposed divestment of stake in HDFC AMC Ltd, which is expected to launch its initial public offering (IPO) in the second quarter of financial year 2018-19.

This approval was given to HDFC Bank at the cabinet meeting chaired by Prime Minister Narendra Modi on Wednesday in New Delhi. The announcement to this effect was made by Finance Minister Piyush Goyal, who said that the approval was given to the bank to fund its business growth.

According to agency reports, out of the total amount to be raised approximately 35.5 per cent or Rs 8,500 crore has to be allotted to the promoter HDFC Ltd on preferential basis. The current foreign holding in HDFC Bank is 72.62 per cent, leaving a headroom of 1.38 per cent. Foreign holding in Indian banks is capped at 74 per cent.

A section of market participants feel that though this is a “big” positive move, the stock will see its impact over a period of time. There already exists some head room in the counter that needs to be filled first. The stock price will play a major role in evincing investor’s interest.

The HDFC Bank stock price is currently ruling at the level of Rs 2,035. It marginally declined by 0.46 per cent or down Rs 9.50 to close the day at Rs 2,035.21. The stock moved in the range of Rs 2,054.90-Rs 2027. The stock is currently not trading far from its all-time high of Rs 2,170.

Raj Bhandari, CEO, Kantilal Chhaganlal Securities said, “Foreign investors generally enter in the HDFC Bank counter with a long-term perspective, as FDI investment comes with a lock-in of 12 months. So most of the investors putting in their money belong to the category of strategic investors and the like.”

This kind of investor typically has a long-term investment horizon and provide stability not only to the investee company (in this case, HDFC Bank), but also to its market price. This helps the stock to gain price, and in turn, increases its weightage in the index.

However, there is another angle to this development. This is related to the condition of 35.5 per cent of preferential allotment to the bank’s parent HDFC Ltd. According to informed sources, unless the issue of shares through the preferential allotment route is completed, the balance amount cannot be raised. The parent company will bring in this huge amount only when its asset management company (AMC) subsidiary, HDFC AMC comes out with its IPO.

According to market sources, HDFC Ltd owns 57.34 per cent in HDFC AMC while Standard Life owns 38.24 per cent, and the remaining 4.42 per cent is held by other investors. HDFC Ltd will disinvest some of its holding through offer for sale in the IPO, which is expected to hit in the later part of calendar 2018.

The current cabinet approval from the government may be used at that time to park its proceeds received from the divestment of stake in the bank and bring the promoter’s holding back to the 26 per cent. At present, as on March 2018, promoters hold 25.60 per cent in HDFC Bank.

As per the latest data, the total market capitalisation (M-Cap) of HDFC Bank is Rs 5,29,836.56 crore while its free float M-Cap stands at Rs 3,92,079.06 crore.