Index provider Morgan Stanley Capital International (MSCI) announced it will cut the weightings of four Adani Group companies, including flagship firm Adani Enterprises, in its indices after reevaluating the number of shares that are freely traded. In addition to Adani Enterprises, MSCI said it plans to cut the weightings for Adani Total Gas, Adani Transmission, and ACC.
ACC – which is not one of the group's main seven listed firms – is a major Indian cement company the Adani Group acquired from Holcim last year .
The development comes after U.S. short-seller Hindenburg Research on January 24 released a report accusing the Adani Group of stock manipulation and improper use of offshore tax havens. The group, however, has denied any wrongdoing.
The Hindenburg report led to the group firms losing some $110 billion in value.
The four companies mentioned by MSCI had a combined 0.4 percent weight in the MSCI Emerging Markets Index as of January 30. The changes come into effect on March 1.
The review comes after MSCI sought feedback from market participants in January on the group's overall status and said it was closely watching the developments that could prevent the conglomerate’s securities from being eligible for its gauges.
Given the reduction in weightage, Adani Transmission (-$145 million), Adani Total Gas (-$110 million) and Adani Enterprises (-$161 million) might see the heaviest outflow among all, according to Nuvama Research.
Since the Hindenburg report, Adani Enterprises has tanked 44 percent, Adani Total Gas has cracked 68 percent, Adani Transmission has shed 57 percent and ACC has declined 19 percent.
The MSCI India Index is reviewed quarterly—in February, May, August, and November—with an aim to reflect changes in the underlying equity markets in a timely manner while restricting undue index turnover.
The index, in the semi-annual reviews in May and November, is rebalanced with the large and mid-capitalization cut-off points recalculated.
How are stocks included/excluded?
The MSCI indexes are market cap-weighted indexes, meaning the stocks are weighted as per their market capitalization. The stock with the largest market capitalization stands with the highest weighting on the index.
This depends on 3 parameters: stock returns, company turnover and market capitalisation.
In the case of Adani Group, since the Hindenburg allegations, group stocks have been tanking and almost half of the group's market cap wiped out following the report. Now, since the market cap of the firms has declined massively, the MSCI has also announced a reduction in their weights.
How does weight reduction impact the stocks?
It is important to note that most foreign investors follow MSCI indices to decide where to invest since they include a comprehensive list of stocks from a variety of countries.
Usually, FPI inflows in a stock depend on its weightage in the MSCI index and if the weightage is reduced, it showcases a possibility of FPIs withdrawing funds from these stocks to put in more stable ones. Most FPIs follow MSCI indices as a benchmark for their investment, so a weight reduction can lead to a sell-off by FPIs as they, too, readjust their portfolios in a similar way.
Similarly, in case a stock is included or its weightage is increased, more foreign investors are likely to invest in the same.
This is true not only for foreign investors but for mutual funds and other institutional investors as well as high net-worth investors.
Other MSCI changes
Other stocks that are likely to witness a reduction in weightage in the Feb MSCI India review are HCL Technologies (-$97 million), Jindal Steel & Power (-$19 million), Shriram Finance (-$14 million), and ACC (-$12 million), noted Nuvama.
Meanwhile, Bank of Baroda and CG Power & Industrial have been included in the MSCI India Index, while Biocon has been excluded from the index, said MSCI in a release.
With this, CG Power and Bank of Baroda could witness inflows of around $161 million and $145 million, respectively, Nuvama stated. Whereas Biocon could see an outflow of $68 million, it added in the note. These changes will take place as of the close of 28th February, 2023, MSCI informed.
(With inputs from Reuters)