MC Explains | The case of MSCI's review of Adani Group stocks

Index provider MSCI has said it will review the free-float status of Adani Group-linked stocks and their eligibility in its indexes.

“MSCI has received feedback from a range of market participants concerning the eligibility and free-float determination of specific securities associated with the Adani Group for the MSCI Global Investable Market Indexes (GIMI),” it said on February 8. “Any changes in the review affecting the calculations of the Indian conglomerate’s free float will be announced and implemented along with the index’s February review, due on February 9.”

A decision by MSCI to reduce the number of free-floating shares of Adani companies is likely to negatively impact the stocks.

Adani Group stocks fell on February 9, triggered by news of MSCI’s review. The freefall of the conglomerate’s stocks had subsided in the past couple of days following the recent rout after the Hindenburg report.

Also Read: Adani Group shares fall following MSCI's review of its free float, Adani Enterprises drops 15%

What is MSCI?

MSCI (Morgan Stanley Capital International) is an investment research firm that provides stock indexes and governance tools to global institutional investors.

The MSCI indexes are considered a benchmark for global institutional investors like index funds, hedge funds and exchange-traded funds to assign their allocations. Any change in the MSCI index composition can result in huge inflows or outflows in the stock markets.

When does the MSCI review happen?

The MSCI indexes are reviewed quarterly, while the rebalancing of the indexes takes place bi-annually. Stocks are included or excluded from the MSCI indexes based on the rebalancing and can trigger substantial inflows and outflows.

Foreign investments worth Rs 9,010.41 crore flowed in on November 30, 2022, when the inclusion of six Indian stocks in the MSCI Global Standard Index became effective.

Additionally, the results of the re-calculation of the free float of Adani-linked stocks will be released along with the February Index review of MSCI.

As per MSCI, all affected securities will also be considered under the 'Full Country Float Review' during the May 2023 Index Review.

Why is MSCI recalculating the free float of Adani Group company shares?

Justifying the review of Adani Group stocks in its indexes, the index provider said, “MSCI has determined that the characteristics of certain investors have sufficient uncertainty that they should no longer be designated as free float pursuant to our methodology.”

In India, regulatory measures prohibit promoters of listed firms to hold more than 75% stake in their companies. That means any listed company must have 25% of its stake reserved for trading between public shareholders.

"However, what has happened is that the Hindenburg report raised allegations that the money coming in for that 25% stake in Adani Group companies is not through genuine sources which has brought the group stocks under the scrutiny  of MSCI," said a head of institutional broking at a domestic brokerage who did not wish to be named.

"There is also no precedence for such a case so far to analyze whether seeking investors feedback is normal for the MSCI or not. One thing is clear though, index operators like MSCI and NSE are very particular about stocks under their jurisdiction following the compliances laid out. So I think it, the Hindenburg report did trigger some suspicion," the head of institutional broking said.

In  a report published on January 24, US based short seller- Hindenburg Research accused the Adani Group of multiple allegations including brazen stock manipulation, money laundering, and accounting fraud.

Responding to the development, Hindenburg Research's founder Nathan Anderson reportedly said MSCI's latest release on Adani validates the research firm's findings on offshore stock parking by the Indian conglomerate.

What is a free float?

Technically, free float is the number of outstanding shares of a company available for trading to the public. MSCI considers free float as the proportion of outstanding shares available for purchase in the public equity markets by international investors.

Which Adani Group stocks are part of MSCI's indexes and what will be the impact of any changes in free float calculations?

Eight stocks – Adani Enterprises, Adani Ports, Adani Total Gas, Adani Green, Adani Transmission, Adani Power, Ambuja and ACC – are constituents of MSCI's indexes.

The stocks that are a part of the MSCI India index are: Adani Enterprises (71 basis points: $430 million), Adani Ports (40 basis points: $240 million), Adani Total Gas (55 basis points: $330 million), Adani Green (37 basis points: $220 million), Adani Transmission (48 basis points: $290 million), Adani Power (18 basis points: $100 million), Ambuja (32 basis points: $190 million) and ACC (21 basis points: $125 million).

“On the back of investors’ feedback, MSCI has decided to reassess the free float and will likely lower the Foreign Inclusion Factor of the Adani Group companies at the upcoming February review. This will result in likely weight reductions,” Abhilash Pagaria, head of Nuvama Alternative and Quantitative Research, said in a note. “The most impacted stocks will be higher-weighted names in the index. As the free float will reduce, few names will have a risk to get deleted from the index while others can see a reduction in weightage in forthcoming reviews.”

Also Read: MSCI reviews free float status of Adani Group stocks: What could be the impact?

A reduction in weightage or exclusion from MSCI indexes can tip off outflows in these stocks, which is likely to intensify the rout for Adani Group shares. The intensity of outflows can only be determined after the results of MSCI's review are out.

The prices of stocks linked to the Indian conglomerate nosedived over the past two weeks after US-based short seller Hindenburg Research accused the Adani Group of fraud and stock manipulation.