India may get $1.3-bn passive flow

India may get $1.3-bn passive flow; MSCI EM weight may rise: Morgan Stanley

In October, the Indian government had issued a circular raising statutory foreign portfolio investor (FPI) limit of Indian companies to the sectoral foreign investment limit, effective April 1, 2020. 

Many listed companies have capped FPI limit much below the sector limit. So under the new framework, the investment legroom in these companies automatically increases to the sectoral limit.

To illustrate, many domestic banks have capped FPI limit at 49 per cent even though the sectoral foreign investment limit is 74 per cent. 

However, the government has given companies the option to restrict FPI limit through board approvals. This has led to ambiguity on whether the FPI investment limit would indeed go up.

“While the circular raises the statutory FPI limit to the sectoral foreign investment limit, it also provides an option for companies to restrict their respective FPI limits to a lower threshold, with the approval of the company's board of directors and its general body, before March 31, 2020,” MSCI said in a release.

“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 indices,” it said.

At present, the so-called FIF for the Indian markets is low, given the low free-float market capitalisation compared to global peers. While India is among the top 10 markets globally in terms of full market cap, it ranks 13th in terms of free-float market cap.

Some analysts were expecting India’s weighting in the MSCI Emerging Market index, widely tracked by foreign investors, to go up by 40 basis points following the change to the FPI limit.

MSCI has said it will re-assess the situation before its quarterly index review staled in August. However, it has said it will provide further communication on this issue by June 30.

An increase in FIF will give a boost to the domestic markets as it will lead to sharp FPI inflows. The Indian markets are grappling with the exodus of foreign funds. In March, the pull-out by FPIs was the highest-ever — nearly Rs 60,000 crore.

However, from 1 April 2020, India moved into a new regime on foreign limits whereby this FPI limit has been increased to the sector foreign limit.

"This change is an attempt to fix MSCI India's low float compared to global markets. Over the next few months, we expect MSCI to rebalance MSCI India weights to reflect this change along with removing the DR (depository receipts) in the FOL calculation. We estimate MSCI India's weight in EM to rise by 55 basis points (bps) and India's foreign inclusion factor (FIF) to rise from 0.39 to 0.42," wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley, in a co-authored report with Sheela Rathi.

As a result, Morgan Stanley estimates nearly a third of current constituents will see an increase in their stock weights whenever MSCI considers this particular rebalancing. A recent note by MSCI had suggested that they would notify the new weights by June 2020-end.

The top five beneficiaries of change in FPI limit to sectoral limits could be Larsen & Toubro, Asian Paints, Bajaj Finance Nestle and Divi’s — these stocks could see the most increase in their stock weights in the MSCI indices.

All the above mentioned stocks gained today related to the news