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Three Proposals That Morgan Stanley Says Could Fetch India $25 Billion In Foreign Investments

Morgan Stanley says India to get $25 billion from foreign investors—only if it implements three key budget proposals.

A file photo of the Mumbai skyline. (Photographer: Abhijit Bhatlekar/ Bloomberg News)
A file photo of the Mumbai skyline. (Photographer: Abhijit Bhatlekar/ Bloomberg News)

India stands to receive $25 billion in global inflows at a time a higher tax on the super-rich has spooked foreign investors, according to Morgan Stanley, but only if the country implements three budget proposals.

The government proposed three key market-related changes in Budget 2019:

  1. Raising foreign shareholding limit from 24 percent to the maximum permissible sector limits for all companies that are part of MSCI’s Emerging Markets Index.
  2. For non-financial public sector companies, the government will include the stakes of government-controlled institutions in computing its 51 percent stake. Public shareholdings of all the remaining listed state-run companies will be increased to 25 percent.
  3. A proposal to the market regulator to examine the case to increase the minimum public shareholding in a listed company from 25 percent to 35 percent.

“Our estimates imply inflows of $25 billion, a 146-basis-point increase in India’s weight in the MSCI Emerging Market index, and a 7-percentage-point rise in India’s foreign free float if all three proposals are implemented,” Morgan Stanley said in a report.

Foreign free float is an important determinant of India’s weight of 8.8 percent in the MSCI Emerging Markets index, which has always been lower compared to its peers’. Yet, the newly introduced higher tax surcharge on the super rich is already impacting inflows, with foreign investors pulling out Rs 4,954 crore from equities in the first 15 days of July 2019. That’s the highest monthly selloff this year.

Morgan Stanley is optimistic. Increasing foreign holding limit to sectoral caps is expected to bring in $14.2 billion, with industrials and materials gaining the most weight, the bank said. This will translate into a higher weight of select stocks—Larsen & Toubro Ltd., Bajaj Finance Ltd., Bajaj Finserv Ltd., Hero MotoCorp Ltd. and Asian Paints Ltd.

Three Proposals That Morgan Stanley Says Could Fetch India $25 Billion In Foreign Investments

The plan to raise public shareholding in all state-owned companies will increase India’s weight by 175 basis points, the report said. “For the current MSCI India constituents, a government sell-down would increase India’s index weight by 40 basis points with active and passive flow implications of $5.1 billion and $1.3 billion, respectively, totaling $6.4 billion.”

If public float is raised to 35 percent, controlling stakeholders of the BSE 200 constituents would need to supply about $30 billion of stock for all the companies in the index to hit a 65-percent threshold, Morgan Stanley said. For the current MSCI India constituents, the index weight would rise by 41 basis points with a flow impact of $4.9 billion, it said.

The proposal is likely to be stretched out by the process of attaining approval by the Securities and Exchange Board of India, it said.

To be sure, all three proposals are exposed to risks of delay and dilution, Morgan Stanley said. Companies may or may not choose to increase foreign investment limits and the government may stretch diluting its stake over a few years, the bank said. Another risk, according to the report, is a negative change in foreign investor view on India’s growth story, which would lower active inflows despite a higher weight in the MSCI EM index.

(Corrects an earlier version that misstated the budget proposal on foreign shareholding limits.)