Inflow of $25-billion foreign cash riding on three key FPI proposals

These include increasing the public float in listed companies to 35 per cent from 25 per cent, increasing the minimum statutory limit for FPI investment in a firm from 24 per cent to the sectoral foreign investment, and lowering government holding in listed public sector undertakings.

The domestic equities market could expect an overseas flow bonanza to the tune of $ 25 billion (Rs 1.72 trillion at the current exchange rate) if the government is able to implement three key proposals pertaining to foreign portfolio investors (FPIs).

These include increasing the public float in listed companies to 35 per cent from 25 per cent, increasing the minimum statutory limit for FPI investment in a firm from 24 per cent to the sectoral foreign investment, and lowering government holding in listed public sector undertakings.

Foreign brokerage Morgan Stanley says India’s weight in the MSCI Emerging Market (EM) index could increase by 146 basis points (bps) if all these measures are implemented.

“In the Budget, Finance Minister Nirmala Sitharaman made an explicit effort to lift free float of Indian stocks.

"The announcements, if converted into policy, will have a far-reaching impact on India’s free float, its weight in the MSCI indices, foreign flows, and supply of equity,” said equity strategists Sheela Rathi and Ridham Desai in a note.

The brokerage says the proposal to increase free float by 10 percentage points itself could yield over $14 billion in FPI flows - $11.4 billion in active and $2.8 billion in passive inflows.

The brokerage adds that the increase in public float will help address the mismatch between India’s aggregate market cap rank and free-float market cap rank.

Despite, being the sixth-biggest equity market globally in terms of total market cap, India is ranked 13th in terms of free-float market cap. Switzerland and Australia have a higher weight in the MSCI global indices despite their total market cap being below India’s.

This is on account of low ‘foreign free float’ of 38 per cent assigned by MSCI to India.

In comparison, the US, Australia and Switzerland have foreign free float of above 90 per cent. India’s weight in the MSCI EM index is 8.8 per cent, lower than its peer group, and its market cap is not concurrent with its GDP.

“This under-representation in index weight versus GDP is unique to India and a consequence of a low foreign free float factor of 38 per cent,” said the report.

The proposal to increase the free float in listed firms is being examined by the Securities and Exchange Board of India.

In the note, Morgan Stanley has highlighted key risks to its projections of the $25 billion in FPI flows.

Some of them include dilution of the proposals, a delay in adoption, as well as a “change in foreign investors’ view on India’s growth story”.

It says L&T, Bajaj Finance, Bajaj Finserv and ­Hero MotoCorp could see the highest increase in their MSCI weight if the proposal to subsume FPI investment limit with foreign sectoral limit goes through.

Photograph: Kham/Reuters