Holdings Waiver Unlikely For Mutual Funds after HDFC Bank- HDFC Merger: Report
India's market regulator is unlikely to grant special exemptions to mutual funds if they violate the maximum permitted holdings norms following the merger of HDFC Bank and HDFC, two sources with direct knowledge of the matter told Reuters.
The merger, expected to be finalised in the coming weeks, aims to establish India's second-largest financial institution by assets, trailing the State Bank of India. However, the pressure on mutual funds to reduce their holdings or face limitations on increases could potentially impact the stock of the merged entity.
Under the regulations of the Securities and Exchange Board of India (SEBI), mutual fund schemes are prohibited from investing more than 10 per cent in a single security, although exceptions are made for exchange-traded funds and sector-specific funds.
As of Wednesday, at least 60 equity mutual fund schemes were projected to exceed the 10 per cent cap in their combined exposure to HDFC Bank and HDFC. Both HDFC Bank and SEBI declined to comment on the matter.
One of the sources mentioned that SEBI might categorise this overshoot as a "passive breach," indicating no deliberate violation of the rules. In such cases, mutual funds are given a 30-day period to rebalance their portfolios, which can be extended by an additional 60 days.
Failure to comply with these timelines may result in regulatory action against the mutual funds. The second source clarified that regulatory intervention is warranted only if there is a broader impact on the market, which is not anticipated in this scenario. As the sources were unauthorized to speak to the media, they requested anonymity.
The Association of Mutual Funds in India (AMFI) has been approached regarding this matter, as reported by two mutual fund executives. Last week, officials from AMFI and industry executives analysed the merger's implications and assessed the amount of stock that would need to be sold to adhere to regulatory limits.
Deven Choksey, the founder of KRChoksey Holdings Ltd, a brokerage firm, stated that the regulatory requirements would necessitate some mutual funds to sell, leading to short-term pressure on the stock. However, lower prices could create opportunities for retail and domestic investors to purchase the stock. An executive from a large fund house estimated that funds may need to offload 30-40 billion rupees (USD 364.9 million) of the combined company's stock. The executive emphasised that HDFC Bank and HDFC are highly liquid stocks with significant demand, and the same holds true for the merged entity, assuring that funds requiring sell-offs would find buyers.
However, the CEO of another large-sized mutual fund cautioned that this clause could restrict fund managers' ability to incrementally increase exposure to the banking sector. Selling stocks to meet regulatory requirements might be perceived as a desperate move by some market participants, potentially resulting in fewer buyers at favourable prices and consequently impacting the fund's performance.
