CONTRASTING SIGNALS FROM HDFC BANK SHAREHOLDING

CONTRASTING SIGNALS FROM HDFC BANK SHAREHOLDING

There have been enough reports about HDFC Bank being the biggest sell candidate for FPIs in the quarter to March 2026. However, this is not a one-off trend but something that has consistently happening over the last 30 months. For instance, the FII holding in HDFC bank has fallen from 52.1% to 44.1% over the last 30 months. That is a substantial drop of 800 bps in FII holdings in HDFC Bank. But who has been buying? DIIs are buying!

Remember, HDFC Bank is classified as a professionally managed company and does not have an identified promoter group. In this same period, the public shareholding in HDFC Bank has also fallen from 17.2% to 15.6%. Clearly, even retail and HNI investors have been cautious. But the big buying has come from domestic mutual funds and insurance companies. These DIIs raised their stake in HDFC Bank by 960 bps from 30.7% to 40.3% in these 30 months.

TREND IN HDFC BANK SHAREHOLDING OVER LAST 30 MONTHS

The table below captures how the holdings in HDFC Bank have shifted across each quarter. It covers a period of 30 months and has 12 data points. This includes August 28, the day after the HDFC Bank bonus record date.

The above table says it all. Between September 2023 and March 2026, the FII holding in HDFC Bank has gradually come down from 52.1% to 44.1%, a fall of 800 basis points. In the same period, the shareholding of domestic institutional investors like mutual funds and insurance companies has gone up sharply from 30.7% to 40.3%. This brings the holdings of FPIs and DIIs very closer to each other. Remember, the merger of HDFC Bank and HDFC was effective July 2023 and this table captures the post-merger scenario. While DFIs have been buying, the bigger question is why are FIIs selling in the HDFC Bank counter?

FIIs WERE UNHAPPY WITH THE MERGER SWAP RATIO

The merger swap ratio of 42:25 was not something that impressed the FIIs. They felt that considering the overall value that HDFC Bank had created for the group, the valuation was loaded in favour of HDFC Ltd. For every 25 shares held by investors in HDFC Ltd, they were issued 42 shares. This is despite HDFC Bank having a higher market cap. Even in terms of revenues and net profits, HDFC Bank scored above HDFC Ltd.

Apart from the swap ratio, the FPIs were also sceptical about the tangible long-term benefits of the merger. HDFC Bank already had a home finance business and the merger of HDFC Ltd would not add much value to it. Also, most of the home loans were of longer duration and for a bank relying largely on CASA deposits, this would have created a fairly serious maturity mismatch. There were also worried about margin pressure on the bank.

PERFORMANCE AND VALUATION IMPACT IN LAST 3 YEARS

As the FPIs had apprehended, the merger is taking much longer to show tangible benefits. Incidentally, the previous CEO of HDFC Bank, Aditya Puri, was not in favour of the merger as he did not see tangible benefits for the bank. In addition, the combination put pressure on the net interest margins (NIMs). Post the merger, the NIM of HDFC Bank slipped well below the NIM of ICICI Bank; an advantage it had long held over its competitor.

The other concern for FPIs has been the valuations post-merger. The weight of the merger has been gradually pulling down the P/E ratio of HDFC Bank and it currently trades at around 15.5X TTM earnings. Prior to the merger, the P/E ratio of HDFC Bank used to typically be in the range of 23X-25X. This loss of premium valuations for HDFC Bank post the merger, has been another major area of concern for the FPIs.

CORPORATE GOVERNANCE AND SHAREHOLDER ALIGNMENT

For a long time, HDFC Bank was known for its high standards of corporate governance and having a management aligned with shareholder value. Things have been changing in the last few years. Firstly, there was the rather unsavoury incident with Lilavati Hospital, wherein the name of the CEO came up personally. However, that was just the tip of the iceberg, and there were more corporate governance issues to come.

In 2025, the Dubai Financial Services Authority (DFSA) barred HDFC Bank from opening fresh accounts after it was found guilty of mis-selling Credit Suisse Additional Tier 1 (AT-1) bonds to NRIs. The DFSA decision came in the middle of 2025, HDFC Bank took action on the concerned officials only in March 2026; that too after the chairman had resigned.

The resignation of the chairman, Atanu Chakraborty, was one more event that rattled the FPIs. His resignation letter mentioned that recent developments at the bank did not align with his personal value system. Ironically, the three persons involved in mis-selling of AT-1 bonds in Dubai were terminated next day. These events have made FPIs uncomfortable.

WILL FPI BUYING IN HDFC BANK COME BACK?

To be fair, FPIs still hold a 44% stake in HDFC Bank, despite consistently reducing their stake over the last 30 months. That is fairly substantial. Also, HDFC Bank is among the top-3 most valuable companies in India by market cap, so any India exposure must have HDFC Bank. However, the question raised by the FPIs is on the spot. The tangible benefits of the merger were not visible in 2023, and even 3 years later, it is hardly visible. That is the FPI thought process that needs to change; and for that HDFC Bank has to demonstrate positive change!