Contrary to Street's expectation of HDFC's merged entity commanding double the current weight in MSCI, the index provider tweaked the adjustment factor on May 5, indicating the weight will remain more or less the same.
"Previously, the adjustment factor for computing the weight of merged entity was 1x. Now, MSCI says it will be 0.5x. So, it was earlier expected that the merged entity would see $3 billion inflow. Now, MSCI's tweak could result in $150-200 million outflow," Abhilash Pagaria of Edelweiss Alternative Research told Moneycontrol.
At present, HDFC's weight is 6.74 percent in MSCI India Index and as per Pagaria's preliminary calculations, the merged entity will end up having a slightly lower weight of about 6.5 percent.
Both HDFC and HDFC Bank shares opened over 4 percent lower on May 5 after the MSCI tweak. At 9.20 am, HDFC was quoting at Rs 2,745 on the NSE, down 4.09 percent from the previous close and HDFC Bank shares were down 4.07 percent at Rs 1,657.50.
Why did MSCI bring down the adjustment factor?
Inclusion in MSCI index depends on a stock's foreign room. Foreign room is essentially the proportion of shares available to foreign investors relative to the maximum allowed. MSCI requires this to be at least 15 percent.
Based on the latest available shareholding disclosure, the foreign room of the merged HDFC entity is expected to be marginally above 15 percent.
"Due to volatile flows, if the foreign room comes below 15 percent by the next quarterly review, MSCI would have to change the weightage again. To avoid this, it has tweaked the adjustment factor," Pagaria said.
What was the expectation?
HDFC is a part of the MSCI index, while HDFC Bank is not as its foreign room does not meet the threshold.
After the merger, the non-index constituent, HDFC Bank in this case, will be considered for immediate inclusion. MSCI would have considered an adjustment factor of 1x, which could have doubled the free float market capitalisation of the entity.
This now stands changed.
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