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India MSCI weight to fall on foreign fund limit

India's weighting in the emerging market index could fall when MSCI publishes later this week a broader index weighted more on a free-float system, mainly because of restrictive foreign ownership laws, analysts said.

India upped the share ownership limit of foreign institutional investors to 49 per cent from 40 per cent in February, but this was still a limiting factor, since market capitalisation would now be adjusted for free float, they said.

"The reduction in India's weighting would have been more severe had it not been for the higher limit," said Bobby Surendranath, portfolio manager at Zurich India Asset Management.

Estimates for the new weighting vary quite widely, but are unanimous in their direction - down from around 9 per cent to between 4.6-6.2 per cent.

Morgan Stanley Capital International, global share index compiler, will unveil on Saturday at 1100 GMT a provisional series of indices to show how its current standard indices will look next May, after a two-stage shift to the new criteria.

Under the new method, MSCI will increase its coverage in its globally-tracked indices to 85 per cent of the free float adjusted market capitalisation within each industry group in each country from the present 60 per cent of total market value.

Free float is described by the index compiler as total shares outstanding excluding shares held by strategic investors such as governments, corporations, controlling shareholders and management and shares subject to foreign ownership restrictions.

At present the MSCI covers 18 industry groups representing 71 companies in India. India falls under the MSCI AC Asia Free ex-Japan Index.

MSCI said the change would take place in two phases, the first half of the weighting changes come into effect at the end of November and the other half effective from end May, 2002.

"The provisional series may be used by clients who wish to measure performance based on the enhanced methodology ahead of MSCI's official schedule," MSCI said at the time of making the announcement last December.

Analysts were unable to estimate how much of the $14 billion portfolio investments in India made by foreign funds were made on the basis of MSCI indices, but said that the outflows on account of the revamp will not cause much volatility.

"Funds have enough advance notice to make these changes, the impact will be at the lower end of expectations," said Anup Maheshwari, fund manager at DSP Merrill Lynch Asset Management overseeing Rs 12 billion.

Surendranath said the impact will be more stock-specific and would not hurt the overall market sentiment in a big way.

VSNL, Reliance Petro seen gainers

Analysts expect Videsh Sanchar Nigam Ltd, overseas telephony monopoly, Reliance Petroleum, India's largest private refiner and HDFC Bank, the country's No 2 private sector bank, to be included in the index.

"We estimate MSCI currently captures 47 per cent of telecom sector in India only...we believe there is scope to include VSNL," said UBS Warburg in a report.

Amongst the sectors likely to lose out are the software and consumer durables segments, where the weightings are limited by the free float ceiling.

"The largest indicative loser is Hindustan Lever, which is predicted to fall to 12.1 per cent from 14.7 per cent" in terms of the stock's weightage within India's allocation, Salomon Smith Barney said in its report.

According to JP Morgan, Videocon International and Apollo Tyres, could be deleted from the index.

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