Bharti Airtel, MSCI EM Index And An Error That Wasn’t

Reduction in Bharti Airtel Ltd.’s weight in the MSCI Emerging Market Index sparked speculation that the world’s biggest index compiler may have made a mistake. That may not be correct.

In the latest review, Bharti Airtel’s weight fell by 15 basis points in the emerging market index, according to MSCI’s statement. MSCI has assets worth close to $15 trillion benchmarked to its indices and this cut in the telecom operator’s weight would cause outflows.

Some brokerage notes reviewed by BloombergQuint called this an error citing, among other reasons, that MSCI picked up incorrect information from the National Securities Depository Ltd., which stores shares in electronic form.

Confusion around this hurt Bharti Airtel’s shares that recovered from the day’s low but still ended 2% lower on Thursday compared with an almost unchanged Nifty 50.

MSCI and Bharti Airtel declined to comment on the matter. But BloombergQuint’s conversations with related parties, who didn’t want to be identified citing confidentiality, suggested that it’s not an error. Here’s why:

Foreign ownership in telecom companies is capped at 49% under the automatic route, and requires government approval beyond that level. The telecom operator sought approval to raise foreign ownership beyond 49% to 100% and received the nod in January. Meaning, foreign investors can increase their holding in the carrier from the current 20% to 74%.

But the regulatory approval came with a condition. All downstream subsidiaries of the telecom operator, such as Bharti Infratel Ltd., and its DTH and broadband units, should be compliant with foreign ownership limits.

Because, foreign ownership of more than 50% in Bharti Airtel would make it a foreign-owned company. Consequently, its shareholding in subsidiaries would also be labelled foreign and cause them to breach the foreign ownership caps in their sectors.

Bharti Airtel is in the process of getting the required approvals from the respective regulators for its subsidiaries, a company official told BloombergQuint.

More importantly, the operator is yet to file with the NSDL to increase its foreign ownership limit. Until Bharti Airtel completes compliance, NSDL will continue to classify its foreign ownership at 49%. MSCI acknowledged this.

In case of India, MSCI said it would consider potential increases in foreign ownership limit based on data published by Central Depository Services Ltd. For securities that are not covered by the list provided by the CDSL, foreign ownership will be determined based on publicly available data.

MSCI weightage review in August is based on available public data which states foreign ownership through automatic route is 49% for Bharti Airtel and it will remain at that level till the company complies with the conditions.

Promoters, including SingTel, owned 56.23% of Bharti Airtel, while the public held the remaining 43.76% as of June. Foreign investors held 20.15%.

So the speculation that MSCI made an error and outflows stemming from the reduction in weightage in the emerging market index may be reversed may not be correct.

One of the immediate triggers for the Bharti Airtel stock could be what timeline the Supreme Court agrees to paying pending dues as opposed to technical adjustments on the MSCI index.

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