MSCI Index Recast

Morgan Stanley Capital International (MSCI )is a leading provider of global indices and benchmark related products and services to investors world wide. Globally it has been used as an accepted benchmark for global asset allocation and especially for emerging markets. MSCI equity indices are constructed in a consistent manner across all countries, encompassing a total of 23 developed markets and 28 emerging markets. While preparing the index the market capitalization, liquidity, free float of the stocks etc., are considered. MSCI indices are considered performance benchmarks for FII's and fund managers' investment strategy. As FIIs play a very vital role in Indian stock markets, great importance is attributed to MSCI index and the market was eagerly waiting for the same.

Morgan Stanley Capital International (MSCI) Index is finally out with additions of 14 companies and deletion of 10 companies in the list. The major companies which were included are Zee, DSQ Software, Silverline Industries, Pfizer, Global Telesystems, Jaiprakash industries etc., The deleted list includes erstwhile blue chips like Bombay Dyeing, Reliance Petroleum, Thermax etc.,

What surprised the market was adding of Jaiprakash Industries and deleting Reliance Petroleum. MSCI had also reduced India's weight from 9.08% to 7.45%, mainly due to re-inclusion of Malaysia and increase in weightage of China. Apart from the inclusions and deletions, MSCI had changed the weightage of Wipro from 100% to 30% by applying market capitalization factor of 0.3 as its liquidity is relatively modest for its size and its float is between 15% and 20%. The share price of Wipro has eroded more than 70% in 3 months.

Due to the inclusion of Global Telesystems and Himachal Futuristic the shares got a boost and ended with high margins towards the end of the week. The worst hit was Reliance Petroleum with a loss of 11.91% standing as top loser in the game. Wipro also shed points substantially since FIIs were investing largely  in Infotech counters. Therefore, most of these companies already feature in their buying list.

The impact of the MSCI index is clearly seen in the market. FIIs that follow the MSCI index will now buy the 14 new stocks included in the revised index. This is expected to see more money being pumped into the markets. An important fact to be noted is that the India-dedicated funds account for roughly 25% of total FII inflows and no India-dedicated fund follows the MSCI index. Of the remaining 75%, only 10 to 15 per cent follow the MSCI index as a benchmark. This means that only a miniscule percentage of FII inflows may actually be affected by the MSCI recast.

But there are some pertinent questions raised by the MSCI decision to recast the composition. Why was the inclusion of so many ICE stocks done at a time when the tech stocks are at the lowest? Was it a deliberate attempt to downgrade Indian weightage without making it look so? Was it more reactive rather than a proactive measure? Morgan Stanley itself being a major investor in the Indian markets, does such a recast lead to a distinct conflict of interest between the index activities and the investing activities of Morgan Stanley? The coming days will perhaps give some answers to these pressing questions.

C Sekhar