The government is looking at ways to boost India’s weight in the MSCI
Emerging Markets Index.
It has appointed a team of officials from the finance ministry, the Reserve Bank and the Securities and Exchange Board of India (Sebi) to achieve this, said sources.
India’s weight in the index
has risen 180 basis points to 8.1 per cent, from 6.3 per cent only four years earlier. However, in the past month, it slid from an earlier high of 8.7 per cent, after demonetisation
and the resulting turmoil, said market players. “A case is being prepared to ensure India gets a higher share in the index,” said a person familiar with the matter.
An increase in weight will lead to a commensurate rise in flow from foreign portfolio investors (FPIs) since most large passive global funds apportion money to emerging markets depending on the index
weight of key global indices such as the MSCI
EM or the FTSE Emerging Markets Index.
consists of 23 countries, representing a tenth of world market capitalisation. It covers about 85 per cent of the free float-adjusted market capitalisation in each of these countries.
In the past, foreign brokerages such as CLSA
have said India deserved a higher share of weight in the MSCI
EM. It figures below South Korea and Taiwan in the index, although its total market capitalisation is higher than these two.
High promoter holding is the biggest hurdle in raising India’s weight, say experts. “It’s a legacy issue,” said Rakesh Arora, partner, Go India Advisors and former research head of Macquarie Capital Securities (India). “Most of the businesses are driven by individual promoters and they tend to hold majority stake, limiting the free float market capitalisation, a key criterion for assigning the MSCI
FPIs, one of the largest drivers of Indian equities, had invested about $410 billion in Indian shares, representing 27 per cent ownership, as of September. Controlling stake holders, or promoters, owned 47.4 per cent of the shares.
“Though India is much more important than the MSCI
weight suggests, our free-float capitalisation is much lower than other emerging markets,” said U R Bhat, managing director, Dalton Capital Advisors (India). “In several cases, Indian firms have not increased the FII
(foreign institutional investor)holding above the threshold of 24 per cent, which needs a special resolution by the shareholders.”
Promoters will dilute their stake only when the next stage of private sector investment
picks up, say experts. “They will raise money from the market when they see a growth opportunity, which will result in some dilution,” said Bhat.
The government’s stake sale in state-owned firms, either as strategic divestment or to meet Sebi’s minimum public shareholding (MPS) rule of promoter holding below 75 per cent, can help increase free float market capitalisation. A 10 per cent stake sale in Coal India, for instance, will free $2.5 billion in the free-float market cap. The government and its arms would need to sell shares worth at least Rs 1.26 lakh crore in listed state-owned entities in eight months to comply with the MPS norm.
put $4.2 billion in Indian shares, higher than in Indonesia ($1.5 bn), Thailand ($2.2 bn) and Brazil ($4.1 bn).