Indian share markets are almost certain to get billions of dollars in foreign fund inflows, with the regulatory changes allowing for higher foreign portfolio investment limits in various companies.
Indian share markets are almost certain to get billions of dollars in foreign fund inflows, with the regulatory changes allowing for higher foreign portfolio investment limits in various companies. The only thing that remains uncertain, and depends on an X-factor, is whether it will happen with the impending revision in MSCI indices in May, or sometime later in the next revision. Earlier, on Friday last week, depository institutions CDSL and NSDL notified changes to the foreign investment limits in individual companies, raising the same to their respective sectoral caps. The notification followed a finance ministry announcement last October.
Higher foreign investment limits in Indian companies would lead to MSCI (Morgan Stanley Capital Investment) to raise Indian companies’ weightage on its indices, brokerage and research firm Motilal Oswal said in a report. “Higher limits imply higher Foreign Investability Factor (FIF), and thus, higher weightage in the MSCI EM (Emerging Markets) index,” the report said. With this, shareholders of several Indian companies will suddenly have foreign buyers queuing up to buy those shares. For example, Kotak Mahindra Bank stakeholders, among the top winners, may see foreign fund inflows worth up to $1.58 billion, according to Motilal Oswal note.
However, India might have missed the current revision cycle of MSCI indices by a few weeks, or even days. Earlier last week, just a day before the CDSL/NSDL notification, MSCI said that it has deferred the changes to India’s weightage on its index, citing lack of visibility in the actual on-ground implementation of the revised investment limits. “MSCI will wait for the practical implementation of these changes and the systematic publication of the new sectoral limits applicable to Indian securities before making any changes to the MSCI Indexes. MSCI will therefore maintain the current FOL for Indian companies and will defer changes to the Foreign Inclusion Factors (FIF) resulting from Foreign Ownership Limit and Foreign Room changes as part of the May 2020 Semi-Annual Index Review (SAIR) and Corporate Events,” MSCI said in the press statement on Thursday last week.
MSCI revision of indices, which happens twice a year, is actually computed about eight weeks ahead of the implementation, Deepak Jasani, Head Retail Research, HDFC Securities told Financial Express Online. Thus, for the revision due on May 12, the process must have been completed way before the April 3 notification, he said. Further, at this time, when there is heavy redemption from funds all over, a change in the indices would not have resulted in heavy inflows of money into Indian equities any way, he added.
On the other hand, Motilal Oswal expects the revision to be effective May 12, and funds to flow in on May 29. “We expect the implementation to take place with rebalancing in May 2020. The rebalance will be announced on 12 May 2020, and flows will take place on 29 May 2020 (end of day),” the firm said in the note. Financial Express Online has sent an e-mail query to MSCI, and will update the story once it responds.
With a hike in foreign investment limit to the sectoral cap, India’s weightage in the MSCI indices could be brought up to 9.6% from the current 8.9%. The change will also help increase the weightage of various companies listed on MSCI indices. Among the biggest gainers will be Kotak Mahindra Bank, which could get between $601 million and $1.58 billion, depending on whether its limit is raised to 55% or 74%. L&T, Nestle, HDFC Life, Britannia will be among other top gainers, witnessing varying degrees of foreign fund flows into their stocks, according to the note.
The rebalance in MSCI indices might help cushion the blow of a massive sell-off on the Indian stock markets. Foreign Institutional Investors (FII) withdrew more than $15 billion from the Indian bourses in March alone. Morgan Stanley in a note in December last year had said that with the change in India’s weightage, could result in passive inflows of close to $2.5 billion. However, that may no longer be the case, owing to coronavirus, which became known later, said Jasani. He added, “Over the next few months, MSCI could rebalance MSCI India weights to reflect this change of rise in FPI limit along with removing the depository receipts in the Foreign ownership limits calculation. This could bring in FPI funds, but smaller than what was estimated in December.”
Estimated inflow of funds into various Indian company stocks post the MSCI index rejig, following the revision in foreign investment caps (Motilal Oswal research):
- Kotak Mahindra Bank: $601 million-$1.58 billion
- MRF: $105 million
- L&T: $443 million
- Britannia: $125 million
- NTPC: $128 million
- Divi Labs: $103 million
- Nestle: $155 million
- HDFC Life: $133 million
- Asian Paints: $154 million
- Titan: $118 million
- Tata: $93 million
- Trent: $81 million