The Housing Development Finance Corporation is one of the leading home loan providers in India, and HDFC Bank remains the largest private lender in the country. The merger of these twins into one entity promises a major disruption in the Indian home loan market and has been in the spotlight for weeks.
But ahead of the much-awaited amalgamation, shares of HDFC and HDFC Bank have crashed by more than 6 per cent, due to a selloff.
Why are investors spooked?
The stocks have suddenly fallen out of favour with investors, because of an MSCI report, which has given lower than expected weightage to the new entity to be formed.
The adjustment factor decides the value that a stock will hold in a particular index, and this sways investor confidence towards it.
Morgan Stanley Capital International has assigned 0.5 as the adjustment factor to the new firm that will be formed once the HDFC twins come together.
This is 50 per cent less compared to the weightage of 1, which the markets were expecting from MSCI.
What it means for the merged entity
The move has created a possibility that while there won't be any incremental inflows, as much as $200 million will flow out of HDFC.
This has happened becuase MSCI tweaked its methodology to calculate weightage for HDFC, in order to avoid volatility.
But the decision has also resulted in investors exiting the stock and hence HDFC and HDFC bank stocks ended the week in the red zone.