Foreign ownership limits: MSCI India to see passive inflow of $2.5 billion

Morgan Stanley Capital Investment (MSCI) has said it will implement the new regime on foreign ownership limits (FOL) in the MSCI Global Indexes containing Indian securities coinciding with the November 2020 Semi-Annual Index Review.

Based on an analysis by Ridham Desai, head of India research and India equity strategist at Morgan Stanley and Sheela Rathi, their equity research analyst, the MSCI India index could see passive inflow to the tune of $2.5 billion due to this development.

Back in April 2020, the investment legroom for foreign investors in several Indian companies had gone up following the government’s decision to automatically treat the sectoral limit as the FPI limit. For instance, if the FPI investment limit in a company was set at 49 per cent, but the sectoral cap was 74 per cent, under the new framework that came into effect from April 1, the limit in such a company would increase to 74 per cent, unless the company decides to cap it lower. Yet, MSCI had deferred its decision in April and July 2020 and said it would wait and see how the implementation of the new limits plays out before making changes.

However, MSCI will now implement changes in FOL in the November 2020 Semi Annual Index Review (SAIR) at the close of November 30, 2020, effective December 1, 2020. The FOL for securities in the MSCI India Equity Universe would be equal to the limit as per the automatic route, except cases where a higher limit is approved under the government route, or the cases where a lower limit is approved by the company's Board of Directors and its General Body.

“Ceterus paribas, MSCI India's weight in MSCI EM will increase to 8.7 per cent (weight increases for current constituents) and 8.8 per cent (new additions) from the current level of 8.1 per cent, and passive inflows of $1.93 billion and $0.6 billion, respectively,” Desai and Rathi wrote in a co-authored October 27 note.

The MSCI India index is reviewed quarterly — in February, May, August and November. During the May and November semi-annual index reviews, the index is rebalanced and the large-and mid-cap cutoff points are recalculated.

Asian Paints, Britannia Industries, Larsen & Toubro, Nestle India, Maruti Suzuki India, Biocon, Hero MotoCorp, Mahindra & Mahindra, Jubilant Foodworks and Avenue Supermarts are among the 39 stocks Desai and Rathi feel that could be impacted favourably from the foreign limit increase. On the other hand, it lists Kotak Mahindra Bank, PI Industries and IPCA Laboratories as potential inclusion candidates.

“Stocks that are being included tend to outperform in the run-up to their inclusion in key indices. Further, we observe that MSCI India index tends to outperform before and post the announcement,” Desai and Rathi said.

Among the lot, Kotak Mahindra Bank jumped 10 per cent to Rs 1557 levels, while Nestle India rallied around 4.5 per cent to Rs 16,980 levels in trade.