This is why HDFC Bank shares will see huge demand tomorrow; stock already up 4% today

SEBI announced that it is discontinuing with the institutional trading series (6 lakh series) with effect from 1 July 2018 in the equity segment. The fact that the local window for FII buying will open on the same day, it will trigger huge demand for HDFC Bank stock in the domestic market tomorrow.

The FII limit is usually full in HDFC Bank at 75 per cent due to the huge demand among foreign investors. Image source: Reuters

HDFC Bank share price rallied nearly 4 per cent on Thursday on BSE after the bank's shares listed on New York Stock Exchange spiked a whopping 8 per cent overnight. The HDFC Bank American Depository Receipt (ADR) advanced as much as 8.6 per cent to $105.17 on NYSE.

The gains came after Securities and Exchange Board of India (SEBI) announced that it is discontinuing with the institutional trading series (6 lakh series) with effect from 1 July 2018 in the equity segment. The fact that the local window for FII buying will open on the same day, it will trigger huge demand for HDFC Bank stock in the domestic market tomorrow.

"The buying could be more than $1 billion on June 1. We expect the local stock to move up sharply," said Macquarie in a research note.

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The FII limit is usually full in HDFC Bank at 75 per cent due to the huge demand among foreign investors. The bank on Wednesday allotted fresh shares under employee stock options, resulting in a dilution of equity. This has open a fresh opportunity for FIIs to lap up the stock.

"Now that this will be the last opportunity for FIIs to buy HDFC Bank, we think that the scrapping of FII window will increase the quantum of buying that will come in on June 1," said Macquarie.

What is 6 Lakh Series?

6 Lakh Series is popularly known as the FII Trading Window, where only foreign investors trade among themselves. FII trading window comes into play when foreign investors are barred from trading in a stock.

This is how Macquarie explains it: There is a separate window on which only FIIs trade so that FIIs still have the option of buying the stock. Since the buyer will be purchasing from another FII, it ensures that there is no change in FII shareholding of the stock.

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Now that the window has been discontinued, FIIs cannot buy an FII restricted stock even by paying a premium. They can sell an FII restricted stock only to a local – which means they will realise no premium while selling.

"Note that as FIIs sell to locals, the FII shareholding will fall after a while and the concerned stock will come out of restriction again," said Macquarie.

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