MSCI recast: What does it imply?

The Morgan Stanley Capital International (MSCI) recast has stirred up an apprehension of the expected money flows into emerging markets, particularly India.

This was because of the proposed change in weightages for companies. Presently, constituents are included at 60% of the current market capitalisation. This would go upto 85% of the free float–adjusted market capitalisation.

MSCI has announced that it would publish the index constituents for each of MSCI’s Standard country indices and their inclusion factors under the new methodology before June 30, 2001. We take a look at the basic methodology and what it could mean for the top Indian stocks.

MSCI has defined free float as the proportion of share capital that is deemed to be available for purchase in the public equity markets by international investors (FIIs). As a general rule, the free float of a security is its total number of shares outstanding less the holdings of the strategic investors (read promoters).

	Company A	Company B
Total O/s shares	10,000,000	10,000,000
No. of strategic shares	4,100,000	8,780,000
Strategic shareholding	41.0%	87.8%
Free Float	59.0%	12.2%
Inclusion factor	0.60	0.12
Source: www.msci.com

For countries, such as India, where the government has imposed a limit on FII shareholding (40%), the free float available to the shareholders is the lesser of the free float as defined earlier and the foreign ownership limit. Since most of the Indian companies have yet to pass resolutions allowing the limit of foreign shareholding to be raised to 40%, the inclusion factor for them could be lower. This explains the rush on the part of Reliance to raise its FII limit to 40%.

	Company C	Company D	Company E
Total O/s shares	10,000,000	10,000,000	10,000,000
No of strategic shares	8,100,000	4,000,000	4,000,000
Those held by foreigners as strategic	1,000,000	1,000,000	–
Strategic shareholding (%)	81.0%	40.0%	40.0%
Free Float	19.0%	60.0%	60.0%
Foreign ownership limit	33.3%	33.3%	33.3%
Foreign limit less Foreign strategic holding	23.3%	23.3%	33.3%
Free Float available to FIIs	19.0%	23.3%	33.3%
Inclusion factor	0.20	0.25	0.33
Source: www.msci.com

Infact in quite a few Indian companies, the promoters’ holdings themselves seem to exceed over 60%. In companies such as Wipro, the promoters’ holding exceeds 75%. Such companies could see a rather sharp reduction in their weightage over the next one year.

Indian Companies	Promoters holding
IOC	91.0%
Nalco	87.0%
Dabur	78.5%
Wipro	75.0%
UTI Bank	73.2%
Sun Pharma	73.0%
Pidilite	72.5%
IDBI	72.0%
Corporation Bank	68.3%
Zee Television	66.6%
BPCL	66.0%
P & G	65.0%
ICICI Bank	62.2%
IPCL	60.0%
SBI	60.0%
Aptech	46.0%
Mastek	45.0%
For PSU's it signifies government holding

Overall, it could mean that the Indian markets would have to rely on domestic liquidity or new inflows into foreign mutual funds rather than asset allocation to the region.