As the Housing Development Finance Corp. and HDFC Bank Ltd. merge, indices will have to find a replacement for HDFC that will cease to trade on stock exchanges.
In normal course, stocks are added or deleted from indices every six months. The next review is scheduled for September, with the cut-off date being July-end.
HDFC shares will tentatively trade for the last time on July 12, with the record date being July 13. Index providers will have to replace HDFC with an ad hoc stock a day prior to the ex-date when the merged entity starts trading—tentatively July 17 in this case.
The exchange will announce the replacement at least three days ahead of the ex-date, including for indices with futures & options.
According to the guidelines, indices with a fixed number of constituents need to find a replacement, but those with variable constituents are not required to do it.
HDFC and HDFC Bank are institutional stocks or part of the benchmark indices in India and globally. In India, HDFC's exit will have an impact on:
Nifty 50
Nifty Next 50 Index
Nifty 100 Index
S&P BSE SENSEX Index
Nifty Bank Index
Here's how the merger is likely to change the indices:
Nifty 50
According to Brian Freites, an analyst who tracks global index rebalancing, LTIMindtree Ltd., Bharat Electronics Ltd., Pidilite Industries Ltd. and Shriram Transport Finance Ltd. rank on top by average free-float market cap and are part of Nifty Next 50 Index—the two conditions that will decided a replacement.
Odds, however, are lilted in the favour of LTIMindtree since it has higher free-float market cap among the four.
LTIMindtree rose on Tuesday after the HDFC management announced tentative merger dates. It was trading over 3% higher at 10:15 a.m. on Wednesday compared with a 1% rise in the benchmark Nifty 50.
Nifty Next 50 Index
If LTIMindtree is added to Nifty 50, that will open a spot in Nifty Next 50. Jindal Steel and Power Ltd. and TVS Motor Ltd. are the top contenders here.
S&P BSE Sensex Index
In the Sensex, the contenders to replace HDFC are JSW Steel Ltd., Grasim Industries Ltd., Adani Enterprises Ltd. and ONGC Ltd. The scales, however, are in the favour of JSW Steel.
Nifty Bank Index
The merger will lead to increase HDFC Bank's weight in Nifty Bank Index to more than 46%. The exchange will have to cap the private bank's weight at 33%—the maximum allowed—to ensure that the top three stocks in the index do not breach the 62% limit. The exchange will also have to cap weights ICICI Bank Ltd., Kotak Mahindra Bank Ltd., State Bank of India, and Axis Bank Ltd., according to Freitas.
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