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MSCI recast: What does it imply?

Dec 11, 2000

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

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

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.

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