Mutual funds may not get holdings waiver post HDFC Bank - HDFC merger - sources

Housing Development Finance

14/06/2023 11:06

(Adds HDFC Bank's stock performance in paragraph 17)
    By Jayshree  P Upadhyay
       MUMBAI, June 14 (Reuters) -    India’s markets
regulator is unlikely to give special exemption to mutual funds
if they breach the norms for maximum permitted holdings in a
security after the merger of HDFC Bank  HDBK.NS  and HDFC
 HDFC.NS , two sources with direct knowledge of the matter told
Reuters.
    HDFC Bank and HDFC - both heavily owned by mutual funds -
are set to conclude a merger in the next few weeks to create
India's second-largest financial institution by assets after the
State Bank of India.
    However, pressure on mutual funds to reduce their holdings
or any limitations on increases could be an overhang on the
stock of the merged entity.
    As per the rules of the Securities and Exchange Board of
India (SEBI), a mutual fund scheme cannot invest more than 10%
in a single security. However, exchange-traded funds and funds
that invest in particular sectors are exempt.
    At least 60 equity mutual fund schemes will see their
combined exposure to HDFC Bank and HDFC overshoot the 10% cap as
of Wednesday.
    HDFC Bank and SEBI did not reply to emailed requests for
comments.
    SEBI could consider this overshoot as a "passive breach,"
implying no deliberate attempt to flout rules, one of the
sources said. In such cases, the funds have 30 days to rebalance
their portfolio, which can be extended by another 60 days,
failing which the mutual funds may face regulatory action, the
source added.
    Regulatory intervention is warranted if there is a wider
impact on the market, which is not the case here, said the
second source.
    Both sources declined to be named as they are not authorised
to speak to the media. 
    The matter has been referred to the Association of Mutual
Funds in India (AMFI), according to two mutual fund executives.
    Last week, AMFI officials and industry executives analysed
the impact of the merger and how much of the stock the industry
would need to sell to adhere to regulatory limits, the
executives said.
    "Considering the regulatory requirement, there will be some
mutual funds that would need to sell which will create
short-term pressure on the stock. However, with the prices
reducing, it will create more opportunities for retail and other
domestic investors to buy," said Deven Choksey, founder of
KRChoksey Holdings Ltd, a brokerage firm.
    Funds may have to offload 30 billion rupees ($364.9 million)
to 40 billion rupees of the combined company's stock, said an
executive with a large fund house.
    "HDFC Bank and HDFC are fairly liquid stocks and have a lot
of demand. This will hold true for the combined entity, too,"
the executive said, adding that funds that need to sell will
find buyers.
    This clause could curtail the ability of fund managers to
take incremental exposure to the banking bellwether, the chief
executive of another large-sized mutual fund pointed out.
    “Selling to meet the regulatory requirements could be seen
by some in the market as a desperate act and the fund managers
would not get good buyers at the right price," the person said.
"This will impact the fund's performance."
    Shares of HDFC Bank have risen 6.5% since April 1, 2022, but
have still underperormed the broader BSE Bankex, which is up
17%.
        
  

($1 = 82.2075 Indian rupees)

 (Reporting by Jayshree P Upadhyay; Editing by Varun H K and
Dhanya Ann Thoppil)
 ((Jayshree.Pyasi@thomsonreuters.com; 9920092491; Reuters
Messaging: Twitter: @jaysh88))