Move raises India’s weight in globally-tracked market indices.
The government’s decision to increase the public shareholding in all listed companies to a minimum of 25 per cent would increase India’s weightage in the globally tracked emerging market indices. This, in turn, should lead to an exponential rise in the quantum of foreign inflows allocated to India, as the free float market capitalisation would increase.
Free float market capitalisation refers to the product of the current market price and the number of shares held by the non-promoter entities. In other words, the shares readily available for trading. Free float methodology has been adopted by most of the world’s major indices, including the Dow Jones Industrial Average, S&P 500 and FTSE.
The government on Friday raised the minimum threshold level of public holding to 25 per cent for all listed companies. Existing listed companies that have less than 25 per cent public holding will have to reach the minimum level by an annual dilution of at least five per cent. A higher public holding will increase the free float market capitalisation of the Indian market. Global index providers, including MSCI, factor in the free float market capitalisation before deciding on the country-specific weightages.
Free float weightage
“Our indices are weighted by free float. India has significant foreign ownership limits that will keep down its free float and therefore weight,” Frank Nielsen, executive director and head of applied research at MSCI Barra had told Business Standard in May.
Many of the leading active and passive funds of the world mirror the index weightages while deciding on the allocations for various countries. India has a weightage of about eight per cent in the MSCI Emerging Markets (EM) Index, one of the most widely used benchmarks for institutional and retail funds worldwide. A higher weightage would attract more foreign inflows into India.
“It is a positive move that will increase the free float of the Indian market and, hence, attract higher global inflows,” says Sanjay Sakhuja, CEO, Ambit Corporate Finance Pte. “The India allocations of various foreign institutional investors (FIIs) would go up, as those are based on the free float market capitalisation.”
He is also of the view that the impact on the secondary market would be minimal, as the dilution would be done in a staggered manner.
“Many funds that track the MSCI EM Index will have to increase the India exposure as and when our weightage goes up,” says an institutional dealer with a domestic brokerage. “When news of REC making it to the EM index came out in May this year, there was a spurt in the institutional activity around the stock. It also touched a new high on that day,” he adds. According to rough estimates, the size of funds tracking the MSCI indices is pegged around $50 billion.
MSCI indices are reviewed every quarter, with the last one having done in May. “In general, a security must have a Foreign Inclusion Factor equal to or larger than 0.15 to be eligible for inclusion in a Market Investable Equity Universe. This rule is referred to as the Global Minimum Foreign Inclusion Factor Requirement,” says the inclusion criteria document of MSCI.
Interestingly, in March this year when the follow-on offering of NMDC was not attracting enough investors, a note sent by the India Equities Trading Strategy team of a foreign brokerage mentioned an innovative investment rationale. “We feel both MSCI and NIFTY inclusion for NMDC, though not very obvious, looks likely down the road and sizable flows can come on the back of it,” it said. The reasoning was based on the premise that after divestment, the free float of NMDC would be 10 per cent, which would make it eligible for inclusion in both Nifty and MSCI.
