MSCI defers call on hiking India’s weighting

MSCI has deferred the decision on increasing India’s weighting in its global indices. It was widely expected that the global index provider would hike the country’s weighting by assigning higher foreign inclusion factor (FIF) after the Centre’s decision to virtually increase investment limit meant for overseas investors in domestic companies.

In October, the government had issued a circular raising statutory foreign portfolio investor (FPI) limit of Indian companies to the sectoral foreign investment limit, effective April 1. Many listed companies have capped FPI limit much below the sector limit. So under the new framework, the investment legroom in these companies automatically increases to the sectoral limit.

To illustrate, many domestic banks have capped FPI limit at

49 per cent even though the sectoral foreign investment limit is

74 per cent. However, the government has given companies the option to restrict FPI limit through board approvals. This has led to ambiguity on whether the FPI investment limit would indeed go up.

“While the circular raises the statutory FPI limit to the sectoral foreign investment limit, it also provides an option for companies to restrict their respective

FPI limits to a lower threshold, with the approval of the company's board of directors and its general body, before March 31, 2020,” MSCI said in a release.

“MSCI will wait for the practical implementation of these changes and the systematic publication of the new sectoral limits applicable to Indian securities before making any changes to the MSCI indices,” it said.

At present, the so-called FIF for the Indian markets is low, given the low free-float market capitalisation compared to global peers. While India is among the top 10 markets globally in terms of full market cap, it ranks 13th in terms of free-float market cap.

Some analysts were expecting India’s weighting in the MSCI Emerging Market index, widely tracked by foreign investors, to go up by 40 basis points following the change to the FPI limit.

MSCI has said it will re-assess the situation before its quarterly index review staled in August. However, it has said it will provide further communication on this issue by June 30.

Experts said an increase in FIF will give a boost to the domestic markets as it will lead to sharp FPI inflows. The Indian markets are grappling with the exodus of foreign funds. In March, the pull-out by FPIS was the highest-ever — nearly ~60,000 crore.

Meanwhile, MSCI has provided some relief by continuing to include depository receipts (DRS) for calculating foreign ownership limits. A year ago, it had proposed to exclude DRS, raising concerns of outflows in stocks, such as Tata Motors, L&T, ITC, and Dr Reddy’s.

“MSCI will continue to include DRS in calculating the foreign ownership limit for Indian securities as per the MSCI Global Investable Market Indexes (GIMI) methodology,” the index provider has said.

Many were expecting India’s overall weighting to drop by 25 basis points if MSCI had gone ahead with the proposal to drop DRS from calculating foreign ownership limits.