The imminent merger between Housing Development Finance Corporation (HDFC) and HDFC Bank could lead to a churn of nearly ₹48,000 crore in the benchmark Nifty50 index, a report by Business Standard stated. Currently, both the financial blue chips have considerable weightage in the 50-share index.
Closer to their effective merger date, both HDFC and HDFC Bank will be removed from the Nifty, strategists at ICICI Securities told the market daily, citing a rule around index computation methodology. The rule says any entity which undergoes a scheme of merger gets excluded from the index, noted the report.
For instance, in 2016, Grasim was removed from the Nifty index ahead of its merger with Aditya Birla Nuvo (ABNL) and more recently, NMDC was removed from the Nifty CPSE index due to a de-merger scheme, stated BS.
“The HDFC merger will likely result in an unprecedented 14 percent of the Nifty 50 weight (HDFC plus HDFC Bank) getting replaced by two new incoming stocks with a combined weight of 1 percent. The remaining 13 percent weight getting distributed amongst the existing 48 stocks in the index at that time. The HDFC merger-related index changes can potentially result in buying and selling of stocks worth above ₹48,000 crore based on July end-prices,” said Vinod Karki and Niraj Karnani, equity strategists at ICICI Securities in a note.
Karki said if index providers make a special exemption in the case of HDFC, then the churn theory will not hold. If not, then it will be a large boost for other Nifty50 components as HDFC twins’ weightage will get distributed among them.
To be sure, the stocks that were previously removed had far less weightage than the HDFC twins. It has never happened that a stock with such a large weightage has got removed from the index, noted BS.
Analysts at other brokerages tracking index changes said it is a wrong interpretation that both HDFC and HDFC Bank will get removed from the index, said BS. They said the resultant/merged entity will remain in the index, with a significantly higher weightage, it added.