MSCI tweak: What triggered the sell-off in HDFC twins?

MSCI tweak: What triggered the sell-off in HDFC twins?

Subject: Economy

Section: Monetary Policy

Context:

Market participants said MSCI intends to delete HDFC from MSCI Global Standard Index and at the same time add HDFC Bank to the large cap segment of MSCI Global Standard Indexes

This means that the weight of the merged entity will be lower than what HDFC Ltd currently has in the MSCI India Index.

Currently HDFC Ltd weight is 6.74 per cent in MSCI India Index and as per our preliminary calculations the merged entity would have slightly lower weight of about 6.5 per cent.

Background:

HDFC Bank will merge parent HDFC in its ambit to enable seamless delivery of home loans and leverage on the large base of customers of HDFC Bank.

The merger is to create a large balance sheet and net worth that would allow a greater flow of credit into the economy. It will also enable the underwriting of larger ticket loans, including infrastructure loans, an urgent need of the country.

What is MSCI India Index?

Morgan Stanley Capital International (MSCI) has set up many global indices, one of which is a composite of Indian stocks-the MSCI India index.

Many reputed Indian companies across sectors are included in the index. These companies amount to at least 85% of the total equity offered by Indian companies.

How is the MSCI India Index formed?

The MSCI India is a weighted index just like the Sensex. This means every stock on the index has a particular weightage, which depends on a number of parameters.

The three most important are: the returns (dividend) that investors receive on the shares; the company’s total turnover, and its market capitalization.

Why FIIs use MSCI India index?

• Foreign investors want international markets to invest their funds. They want to know more about the stability and volatility in the prices of shares.
• The MSCI India Index acts as an indicator of the soundness of the Indian capital market.
• The weightage of a company depends on its performance in different categories such as the total turnover, market capitalization and dividend return.
• Greater the weightage, higher will be the amount of foreign investment into the stocks. In simple words, the amount of funds that a foreigner will invest in an Indian share will be directly dependent on the stock’s weightage on the MSCI index. If the weightage of a company is reduced then there is always a possibility of foreign investors withdrawing their funds.