FPI outflows likely as MSCI plans to exclude DRs in calculating FOL

MSCI has proposed changing its calculation methodology regarding foreign ownership limits (FOL) for Indian securities.

MSCI plans to exclude depository receipts (DRs) in calculating the FOL, making it equivalent to the foreign portfolio investment (FPI) limit. According to the index provider, many of the DRs have low levels of liquidity and are not easily accessible to investors.

MSCI will consider the lower of foreign institutional shareholdings (excluding DRs) set off against the FPI limits, or all foreign shareholdings (including DRs) set off against the sectoral limits.

If the proposal gets a nod, India’s weight in the MSCI Emerging Market index could reduce by 0.23 per cent to 8.55 per cent.

“We estimate a potential outflow of $1 billion from MSCI India constituents, with stocks like Larsen & Toubro and ITC getting hit the most,” said brokerage Emkay in its research note.

Currently, MSCI calculates FOL using the FPI limit — the extent to which foreign portfolio investors can invest in any Indian firm. 

For companies that have issued DRs such as ADRs or GDRs, the FOL calculation includes the percentage represented by the DRs. 

MSCI defines the percentage represented by DRs as — number of shares represented by DRs issued at the time of initial offering adjusted for subsequent corporate events, divided by the total number of shares outstanding. 

“MSCI proposes not to include DRs in the calculation of FOL in India in order to better align with the depositories,” says a note put by the index provider on its website.