| MSCI - Full marks to Free Float |
MSCI index is typically a benchmark index consisting of a basket of stocks from various countries. From an investor perspective this is an index that indicates the available investment opportunities around the globe. It is a guide for investment managers to decide where to invest and in what proportion.
Free float as defined by MSCI is the total outstanding shares excluding shares held by strategic investors such as governments, corporations, controlling shareholders, and management and shares subject to foreign ownership restrictions. In simple terms a free float of shares is one which is outside the management holding.
Here is an interesting statistics. The International Monetary Fund estimates that the share of emerging markets in the MSCI All Country World Index could come down from the current 5.5 to about 4.4 per cent. This is because of the fact that emerging markets typically have a lower free float than developed markets. In the case of our country, the share in the MSCI Emerging Markets Index is expected to come down from 7.5 to 4.25 per cent.
And the fact that almost 90 per cent of the global portfolio managers track these indices for their investment decision, looks even more interesting. Hence any changes in the weightage of a country in the index, no doubt will have a rippling effect on that country’s capital market. But do these fund managers blindly follow the MSCI or do they take their own investment decisions? A question to think!
On the other side MSCI’s intentions have sent some clear messages to our corporates and the government. For the corporates, the message is that, to raise the quantum of their shares that foreign institutional investors can hold. A company like Reliance Industries has already announced to raise its FII limit to 40 per cent. More companies are expected to follow. It also tells governments to remove restrictions on foreign investments and divest their stakes. In India, the government allows FIIs to hold a maximum of 40 percent. In few cases like SBI where the FII limit is 20 per cent, the impact is expected to be adverse. A step in a meaningful direction is expected from the government.
So as of now, though it looks like India is a likely loser, the fact that the changes are going to be phased in over a two-year time frame, gives the corporates and the government time to reduce this damage. Let us look forward for the better.
Karthik Raj
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