Will MSCI weightage rejig trigger further sell-off in Adani companies?

Outflow of half a billion dollars likely after MSCI index review and reduced weightage of four Adani group companies

By Nasrin Sultana

Published: Feb 10, 2023 02:25:20 PM IST

Updated: Feb 16, 2023 02:59:08 PM IST

Gautam Adani, Chairman and founder, Adani Group Image: Indranil Mukherjee/ AFP

Adani group companies are likely to see a possible further outflow of half a billion dollar foreign money in March as a consequence of an index review and rebalancing of weightage by MSCI. On Friday, the index provider reduced the weightage of four Adani group companies in the MSCI Global Standard index, which will be effective after closing of trade on February 28.

However, cuts in the four companies’ weightage are minor. Adani Enterprises, Adani Transmission, Adani Total Gas and ACC have seen a reduction of weightage in the index by 0.02 to 0.3 basis points. That would roughly work out to an outflow of $428 million, according to estimates by Abhilash Pagaria, analyst, Nuvama Alternative & Quantitative Research. “MSCI has also changed the Foreign Inclusion Factor (FIF) in a few names and the major downward revision has been seen in Adani Transmission, Adani Total Gas and Adani Enterprises. This will lead to meaningful outflows in these names,” Pagaria says.

Adani Enterprises and Adani Transmission may see an outflow of $161 million each by a sale of average 6.9 million and 9.6 million shares respectively on the index. Adani Total Gas may potentially face a sell-off of 6.9 million shares resulting in a drain-out of $110 million while ACC may see a cut of 0.5 million shares and sale of $12 million.

The MSCI India Index is designed to measure the performance of the large and midcap segments of the Indian market. With 113 constituents, the index covers approximately 85 percent of the Indian equity universe. This methodology provides coverage of the relevant investment opportunity with an emphasis on index liquidity, investability and replicability. The index is reviewed quarterly—in February, May, August and November—with the objective of reflecting change in the underlying equity markets in a timely manner, while limiting undue index turnover.

During the May and November semi-annual index reviews, the index is rebalanced and the large and mid capitalisation cut-off points are recalculated.

Typically, foreign passive index funds allocate money to the stocks depending on their weightage and constituents, hence a reduction in the weightage results in a direct outflow of funds from those stocks.

Earlier, MSCI had said that it will review free float of the Adani Group securities, following a massive sell-off of around $100 billion of Adani Group stocks in India, triggered by a report by US short-seller Hindenburg Research. The report accuses the Gautam Adani-led group company of stock manipulation and corporate misgovernance. However, the group has denied all allegations, and withdrew its oversubscribed follow-on offer of Rs 20,000 crore due to volatile market conditions.

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“MSCI has received feedback from a range of market participants concerning the eligibility and free float determination of specific securities associated with the Adani Group for the MSCI Global Investable Market Indexes. MSCI defines the free float of a security as the proportion of shares outstanding that is considered available for purchase in the public equity markets by international investors. MSCI has determined that the characteristics of certain investors have sufficient uncertainty that they should no longer be designated as free float pursuant to our methodology,” MSCI said in a statement.

This determination has triggered a free float review of the Adani Group securities by MSCI as it will implement the resultant free float changes and associated market capitalisation determinations in connection with the February 2023 Index Review using data as of cut-off dates as described, it had said.

MSCI will also review the treatment of non-neutral corporate events for the affected securities on a case-by-case basis and potentially defer their implementation. The treatment of any such non-neutral corporate event would be announced to all clients with advance notice through regular Index announcements. “For the avoidance of doubt, MSCI will continue implementing any neutral corporate events including ones requiring application of a Price Adjustment Factor (PAF). All the affected securities will be further reviewed as part of the scheduled Full Country Float Review during the May 2023 Index Review. MSCI will continue to monitor publicly available information that may impact the eligibility of the relevant securities for the Global Investable Market Indexes (GIMI) or estimates of their free float,” MSCI said.

Adani Transmission may see an outflow of $161 million each by a sale of average 9.6 million shares on the index Image: Shutterstock

What is in and what is out?

Overall, India is likely to see an outflow of $176 million after changes in the index are implemented by MSCI by end of February 28. MSCI has included CG Power and Bank of Baroda with an estimated inflow of combined $306 million and excluded Biocon (expected outflow of $68 million).

MSCI has increased the weightage of Reliance Industries, HDFC, Infosys, ICICI Bank and Tata Consultancy Services in the range of 0.1 to 0.04 bps. These additions will potentially fetch $144 million of foreign money.

However, in addition to Adani group companies, MSCI has reduced the weightage of three other companies--HCL Technologies, Jindal Steel and Power, and Shriram Finance. These cuts in weightage will possibly drain out $130 million.

For the MSCI India Domestic Small Cap Index, 24 stocks are added while five stocks were deleted.