Zomato shares drop: Eternal shares drop 4.5% on foreign shareholding cap

Mumbai: Shares of Eternal, formerly Zomato, fell 4.5% as the company’s decision to cap its foreign shareholding at 49.5% could lead to selling by overseas passive funds. According to Nuvama Alternative & Quantitative Research, the decision could lead to drop in the stock’s weightage on benchmarks of global index providers MSCI and FTSE, resulting in outflows in the range of $820 million to $1.3 billion over the next few days.

Changes in stock weights in indices of MSCI and FTSE result in passive flows because trillions of dollars in global funds track their benchmarks. When a stock is added or removed or if its weights are increased or decreased, index-linked ETFs and mutual funds are forced to buy or sell to mirror the index composition.

Nuvama said the reduction of weights on MSCI Standard, likely on May 30, could lead to outflows of $520 million from its index.

The cut in the stock’s weight to half on FTSE Emerging Market Index, likely on May 27, could result in $300 million worth of selling, said Abhilash Pagaria, Head of Alternative & Quantitative Research at Nuvama Wealth.

Eternal secured 99% shareholder votes in favour of a proposal to convert itself into an Indian Owned & Controlled Company (IOCC), according to Jefferies in a recent note. This change would provide flexibility to run a 1P or first party inventory model for subsidiary Blinkit, it said. This will allow the e-commerce firm to buy and hold inventory before selling them. The government has put restrictions on foreign companies operating the 1P model.

Nuvama said if the stock comes under pressure, a strong tactical entry zone is around ₹215-220. Eternal shares closed at ₹226.65 on Monday.