Fresh rules from Nov; Bharti, SBI may benefit, ICICI Bank could lose out
The MSCI global indices, a popular benchmark among international investors, will change its ‘inclusion norms’ from November, impacting many Indian bellwether stocks.
MSCI has reworked the weighting in its indices, based on the legal room for foreign ownership of stocks. A quick reading of the new norms suggest the revision may benefit stocks such as Bharti Airtel and State Bank of India (SBI), while ICICI Bank may lose its weightage.
| NEW ADJUSTMENT FACTORS |
| FOR NEW INDEX CONSTITUENTS |
| * If the Foreign Room is equal to or higher than 25%, the adjustment factor equals 1 |
| * If the Foreign Room is less than 25% and equal to or higher than 15%, the adjustment factor equals 0.5 |
| * If the Foreign Room is less than 15%, new securities will not be eligible for index inclusion and no adjustment factor increase will be considered for existing constituents |
| FOR EXISTING CONSTITUENTS |
| * If the Foreign Room remains above 15%, the adjustment factor remains unchanged |
| * If the Foreign Room decreases below 15% and remains equal to or higher than 7.5%, the adjustment factor equals 0.5 |
| * If the Foreign Room decreases below 7.5% and remains equal to or higher than 3.75%, the adjustment factor equals 0.25 |
| * If Foreign Room of an existing constituent decreases below 3.75% and then the security does not have liquid eligible Depository receipt (DR) then the adjustment factor is 0 |
MSCI is aiming to include only those stocks with 25 per cent or a quarter of the permissible limit (sectoral cap) available for foreign investment. Even existing securities (with foreign holding restrictions) will see their weightage change, if the constituents have little or no foreign investment room left.
The new norms are significant for all listed Indian companies that have foreign ownership caps, as their weightage on the MSCI indices will change, depending on available headroom. For instance, if a sector has a foreign ownership cap of 49 per cent, then foreign investors cannot own more than that in a company. So if a stock has to be included in the MSCI standard segment, then at least 25 per cent of the permissible foreign ownership should be “free for investment” before its inclusion. According to MSCI’s July notification, “Existing constituents with little or no foreign room may continue to remain in the index, but their weight is reduced by the application of an adjustment factor of 0.5.
If a stock’s ‘foreign room’ is less than 25 per cent, MSCI will use an adjustment factor reflecting the actual level here, to adjust the final foreign inclusion factor. For instance, the available headroom for ownership in Bharti Airtel is 31.41 per cent, while for ICICI Bank it’s 10.39 per cent. Consequently, Bharti’s weightage goes up and ICICI Bank’s may well come down.
Following this new rule, Anand Rathi Retail Research says Bharti Airtel would be partially added to the MSCI Emerging Market Index, with an adjustment factor of 0.5. The weight of SBI would be increased through the application of an adjustment factor of 1.0 (currently at 0.5). On the downside, the weight of ICICI Bank would be reduced through an adjustment factor of 0.5 (currently at 1.0).
Brokerages believe those stocks which are impacted due to these changes may see some demand-supply movements. Clearly, if ICICI Bank’s weightage falls on the MSCI Emerging Market Index, then funds mirroring the index would decrease their ownership of these stocks and increase ownership of stocks whose weightage has gone up. Most Indian market participants believe this could be counter-productive, as candidates with higher headroom would be ripe for inclusion. But once this happens, there would be buying in these stocks and they could automatically become candidates for exclusion if the 25 per cent headroom is breached.
In many countries, the foreign ownership limit is an absolute one. When this is reached, foreign investors are either automatically barred from any further purchase (as in Korea, UAE, Qatar) or forced to sell if beyond the limit (Australia, Ireland). In some other markets, shares bought by foreign investors in excess of the limit are simply stripped of their voting rights (Malaysia, Japan). To prevent this, the new norms have been put in place.
