CLSA, an MNC broker, said in a note that the proposal to raise FPI limit to the FDI ceiling is expected to increase India’s neutral weight in EM and AxJ benchmark indices by 80-100 basis points.
ET Intelligence Group: India’s weightage on the Emerging Market index and several global indices could potentially increase by 80-100 basis points after the budget proposed raising the free float of stock in locally listed companies.
India’s current weight on the MSCI EM index stands at 8.4 per cent. Barring mainland China shares, India has the lowest public float proportion among the top 10 nations by market capitalisation, according to data compiled from Bloomberg. The average free-float market capitalisation of the Nifty is 50.17 per cent. Comparable figures for global indices such as Dow Jones, S&P 500, DAX, CAC-40, and FTSE 100 are 95.3 per cent, 95 per cent, 86.6 per cent and 90.4 per cent, respectively.
There is an argument that lower public float is a deterrent for some foreign funds seeking to increase allocation to Indian equities. Smaller free float results in higher volatility in the prices due to a large order of buying or selling. So, they prefer to invest in stocks with higher free float.
Most of the global index provider firms, such as MSCI, give higher weight to free float while constructing an index. For instance, MSCI takes into consideration several parameters, including Foreign Inclusion Factor (FIF), for determining weights. FIF indicates the total proportion of shares in a company readily available for FPI buying. Therefore, an increase in free float would translate into higher weights on the MSCI EM, and MSCI Asia ex-Japan — measures used by global fund managers to evaluate their performance in dollar terms.
CLSA, an MNC broker, said in a note that the proposal to raise FPI limit to the FDI ceiling is expected to increase India’s neutral weight in EM and AxJ benchmark indices by 80-100 basis points. Higher inflows from passive funds due to higher weightage could offset the overhang of equity supply worth Rs 4 lakh crore ($57 billion) in the next few years owing to the increase in minimum shareholding criterion.
Passive funds account for 11-15 per cent of the total assets under management by foreign portfolio investors (FPI). FPIs’ total AUM stands at $425 billion as on June 15, 2019, according to NSDL data.
