MSCI Index Rule Changes Drive Rally For HDFC Twins

Shares of HDFC Bank Ltd. and mortgage lender Housing Development Finance Corporation Ltd. jumped by over 6% each on Friday, prompted by a change in rules governing mergers in the the MSCI Index.

While previous rules led market participants to believe that HDFC would have to exit the index following its merger with HDFC Bank and automatic entry of HDFC Bank in the index, the new rules indicate that HDFC Bank’s free float factor would automatically increase in the index. The changes essentially imply that HDFC Bank’s fully diluted equity, after issuing shares to HDFC shareholders, will be considered after the merger.

The MSCI India index has 118 constituent stocks, the index covers approximately 85% of the Indian equity universe by value. HDFC is currently the index’s fourth largest constituent and has a current index weight of 6.1%.

“The (combined) weightage in the index is likely to go up since the adjustment factor is 1x instead of the previously assumed 0.5x,” Asutosh Mishra, banking analyst at Ashika Broking, told BQ Prime.

A person familiar with the matter told BQ Prime that it can’t be said if the bank’s weight would double in the index, but it will certainly remain a constituent and its index weight will increase.

The bank’s MSCI weight post-merger can go up from 5.78% to 13%, according to a report from a foreign brokerage. The shares of HDFC Bank and HDFC were up more than 6% as of 1:10 p.m. on Friday.

The two stocks were leading gains in the Nifty 50, which is up 1.63% for the day.