HDFC Bank-HDFC Merger: MSCI Assigns Lower Weight For Merged Entity Against Street Expectation
The index provider will delete HDFC from the MSCI Global Standard Indexes at the close of the stock's last trading day.
Index provider MSCI will add HDFC Bank Ltd. to the large-cap segment of MSCI Global Standard Indices following its merger with Housing Development Finance Corporation Ltd.
"Based on the estimated post-event foreign room of HDFC Bank and pursuant to the MSCI Corporate Events Methodology (Section 1), to reduce the risk of reverse turnover, MSCI intends to add HDFC Bank to the Large-Cap segment of MSCI Global Standard Indexes with a foreign inclusion factor of 0.37 after applying an adjustment factor of 0.5," MSCI said in a statement.
The inclusions is expected to leading to no incremental inflows, but slight outflow of up to $200 million, according to a Nuvama Alternative & Quantitative Research.
Addition of HDFC Bank in MSCI India with a weight of ~12% would have translated into inflows of ~$3bn. However applying adjustment factor of 0.5 would mean HFDC Bank gets added with weight similar to HDFC (~6.7%) in the index.IIFL Alternative Research
Consequently, MSCI intends to delete HDFC from the MSCI Global Standard Indexes at the close of the stock's last trading day.
Currently, HDFC Limited accounts for 0.93% and 6.74% of the MXEF Index and MXIN Index respectively. The merged entity might take up 0.90% and 6.47% of the two indices respectively, as per calculations from Macquarie Research.
The index provider said it plans to further review HDFC Bank's adjustment factor at a scheduled index review after the transaction is completed.
Last April, HDFC and HDFC Bank agreed to merge, wherein shareholders of HDFC will receive 42 new HDFC Bank shares for every 25 shares held.
As per the MSCI Corporate Events Methodology, listed non-index constituents acquiring index constituents with newly issued shares or through the exchange of shares are generally considered for immediate inclusion in the MSCI Indexes at the time of the event, according to MSCI.
The index provider has evaluated the lender for inclusion into the MSCI Indexes at the time of the event, it said.
"Based on the estimated post-event company full and float-adjusted market capitalization, HDFC Bank is expected to satisfy the size criteria to be added to the large-cap segment of the MSCI Global Standard Indexes," MSCI said.
HDFC Bank is subject to a foreign ownership limit of 74% and has current foreign room below 15%, MSCI said. The foreign room of the post-acquisition entity is expected to be marginally above 15%, MSCI said, citing disclosed shareholder data.
"As per the current methodology the weighting of the merged entity would be again reduced in the next quarterly index reviews if the foreign room would have come below 15%," Nuvama stated in its note.
Share of the HDFC Bank and HDFC Limited were down by 4.64% and 4.45% respectively as of 9:45 AM on Friday. The benchmark Nifty Bank index was also down 0.67% at the same time.
