What made MSCI Act on Adani Stocks?

What’s in today’s article?

• Why in News? 
• What is MSCI?
• What are MSCI Indices?
• What is MSCI India Index?
• MSCI’s Action on Adani Stocks
• What is Free Float?
• Impact of MSCI’s Action on Adani Stocks

 

Why in News? 

• Global index provider MSCI has changed its weightage for four Adani Group stocks in its various widely tracked indices.

 

What is MSCI?

• MSCI, or Morgan Stanley Capital International, is owned by the multinational investment management and financial services company Morgan Stanley.
• It is an investment research firm that provides stock indexes, portfolio risk and performance analytics, and governance tools to institutional investors and hedge funds.
• It is a leading provider of critical decision support tools, including stock indexes, and services for the global investment community.
• MSCI indices facilitate the construction and monitoring of portfolios in a cohesive and complete manner, avoiding benchmark misfit. It has over 160,000 indices in its portfolio.

 

What are MSCI Indices?

• MSCI has indexes for countries, regions, emerging markets, developed markets, small cap, all cap and even Islamic indexes. 
• It selects stocks for its equity indexes that are easily traded and have high liquidity, with companies having high free float getting more weightage.
• It prefers stocks that have active investor participation, and are without owner restrictions.

 

What is MSCI India Index?

• The MSCI India Index is designed to measure the performance of the large and mid-cap segments of the Indian market. 
• With 113 constituents, the index covers approximately 85% of the Indian equity universe, MSCI says.
• As on January 31, 2023, Reliance Industries has a weightage of 9.89, Infosys 7.13, HDFC 6.25, ICICI Bank 5.92 and TCS 4.24.
• The index is reviewed quarterly.

 

MSCI’s Action on Adani Stocks

• Recently, MSCI announced that it will reduce the free float designations for four Adani Group companies in multiple indices. 
• The decision follows MSCI’s decision to review the free float status of companies belonging to the Adani Group following investor concerns.
• Apart from Adani Enterprises, the MSCI will cut the free floats assigned to Adani Total Gas, Adani Transmission, and ACC.

 

What is Free Float?

• Free float refers to the proportion of the total outstanding shares of a publicly listed company that is readily available for trading in the market. 
• Generally speaking, shares held by promoters and large institutional investors are normally not freely traded in the market. 
• The free float of a company can sometimes give investors a rough idea about the likely liquidity of the company’s shares in the public market. 
• It should be noted that the weightage given to a company’s stock in certain indices is based on the company’s market capitalisation.
• A company’s market capitalisation is calculated based on the free float of the company and also the market price of the company’s stock. 
• So, a drop in the number of freely floating shares of a company can cause a drop in its market capitalisation and reduce its weightage in indices.

 

What is the impact of MSCI’s Action on Adani Stocks?

• The decision to reduce the free float assigned to the Adani stocks comes in the wake of a report released last month by Hindenburg Research.
  • Hindenburg had alleged that more than 75% of the outstanding shares of various companies of the Adani Group were owned by their promoters.
• MSCI’s decision will adversely affect the amount of capital flowing into the Adani stocks. 
• Many passive investors invest in the indices that are constructed by bodies such as the MSCI. 
  • So, a cut in the weightage of the four Adani stocks in the Emerging Markets Index, which stood at 0.4% as of January 30, will likely reduce the amount of money flowing into these stocks. 
• In fact, Goldman Sachs believes that India’s weight in the MSCI’s emerging markets index itself could drop by 20-30 basis points following the resultant reduction in weight of Adani stocks.
• Due to MSCI’s decision, some estimates by analysts say that there could be an outflow of about $500 million from Adani stocks. 
• All this can adversely affect the group’s efforts to raise capital from investors, whether it is in the form of equity or debt offerings.

 

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Q1) What is the difference between Equity and Debt?

With debt finance you're required to repay the money plus interest over a set period of time, typically in monthly instalments. Equity finance, on the other hand, carries no repayment obligation, so more money can be channelled into growing your business.

 

Q2) What are Shares Outstanding? 

Shares outstanding are all the shares of a corporation that have been authorized, issued and purchased by investors and are held by them. They are distinguished from treasury shares, which are shares held by the corporation itself, thus representing no exercisable rights.

 

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Source: Explained | What made MSCI act on Adani stocks?  |  Indian Express