MSCI To Tweak Foreign Ownership Limit For Indian Stocks

MSCI Inc. announced that it will implement changes in foreign ownership limit for Indian securities in its global indices, paving the way for possible inflows into some stocks.

The changes coincide with MSCI’s November 2020 semi-annual index review and will be effective Dec. 1, 2020, according to the website of the world’s largest index compiler—that has assets worth close to $15 trillion benchmarked to its indices.

MSCI also said it welcomed the recent disclosure of foreign investment limits for Indian securities by National Securities Depository Ltd. and Central Depository Services Ltd. addressing concerns on timeliness, quality and standardisation of data.

The foreign ownership for securities in the MSCI India Equity Universe will be equal to the limit as per the ‘automatic route' except:

• The 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

What that means is MSCI will consider sectoral limits set by the Indian government for determining free float limits in a stock. But the free float limit is subject to approval by the company’s board. If the free float limit of a stock moves up, weights move up, leading to inflows.

Morgan Stanley expects MSCI India to see passive inflows worth $2.5 billion, and its weight in MSCI Emerging Market to increase to 8.7% from 8.1%. MSCI India’s free float factor, according to the research, will increase to 43.2% from 40%. Morgan Stanley analysts Ridham Desai and Sheela Rathi, in a note dated Oct. 27, said stocks that are being included in MSCI tend to outperform in the run-up to their inclusion in key indices.

The FPI holding in stocks like Adani Green Energy Ltd., Kotak Mahindra Bank and Larsen & Toubro Ltd. is very close to the current permissible limit. While there may be a potential to see an increase in overseas ownership as it’s pegged to the automatic sectoral route, the limit is subject to the decision of companies’ boards.

Emkay Global, purely on account of changes in the foreign ownership limit, expects inflows of more than Rs 2,000 crore in Kotak Mahindra Bank and nearly Rs 800 crore in Adani Green Energy.

Adani Green

• Current FPI holding: 22.43%
• Current Limit: 24%
• Potential Limit: 100%

Kotak Mahindra Bank

• Current FPI holding: 42.23%
• Current Limit: 45%
• Potential Limit: 55%

Larsen & Toubro

• Current FPI holding: 17.89%
• Current Limit: 24%
• Potential Limit: 100%

Source: MSCI