Traders, clerks and brokers speak on telephones on the trading floor. (Photographer: Luke MacGregor/Bloomberg)

MSCI’s Proposal To Tweak Foreign Ownership Limit May Trigger $1-Billion Outflow From India

Indian stocks may see a $1-billion outflow as the MSCI plans to change how it computes foreign ownership limits, ultimately lowering the weight of domestic companies on its indices, according to Emkay Global Research.

The world’s largest index compiler proposes to exclude depository receipts while computing the foreign ownership cap in Indian securities, according to its consultation paper. What that means is the weight of Indian stocks on MSCI indices will be equivalent to the foreign portfolio investment limits in India.

Larsen & Toubro Ltd. and ITC Ltd. will be the most hit, according to Emkay Global.

Most global investors—including hedge and pension funds—benchmark their investments to MSCI indices. Its India benchmark allows them to invest in one of Asia’s largest markets.

The new system for monitoring foreign investment limits in India came into effect from June last year. MSCI still calculates foreign ownership cap using the FPI limit, including depository receipts. Many of the depository receipts have low levels of liquidity and are not easily accessible to investors, according to the consultation paper.

Since depository receipts are part of sectoral limits, MSCI is currently allowed to club them with FPI limit to calculate the total exposure overseas investors can have on Indian stocks through its indices. It now proposes on to only consider the FPI limits set by India’s regulators.

The results of MCSI’s consultation process will be announced on March 29. The proposals, if accepted, will be implemented in May.

Impact on Indian Markets

  • Once changes are accepted, this will reduce India’s weight on MSCI Emerging Market Index by 0.23 percent to 8.55 percent, according to the MSCI.
  • The estimated $1-billion outflow from MSCI India constituents could trigger a selling of $135 million from Larsen & Toubro and $96 million from ITC.
  • Other stocks that could be impacted are Tata Motors Ltd., Mahindra & Mahindra Ltd., Dr. Reddy’s Laboratories Ltd., Gail (India) Ltd., Hindalco Industries Ltd., Bajaj Auto Ltd., Tata Steel Ltd. and LIC Housing Finance Ltd.

Also read: FPI Outflow Crosses Rs 4,000 Crore In January So Far