MSCI to Consult Fund Managers Before Decision on India Weightage

MSCI to Consult Fund Managers Before Decision on India Weightage

To assess whether decision by Indian bourses would hinder access to domestic markets Rajesh Mascarenhas & Reena Zachariah

MSCI will check with global fund managers before deciding on whether to cut India’s weight in its indices in the wake of the move by domestic exchanges to bar the use of local derivative products on overseas bourses. The USbased index provider, said a senior executive, will start the process of getting feedback from international investors on this matter as the exchanges and authorities get into a huddle to decide their next step.

The US-based index provider said late last week that the joint decision by Indian exchanges to stop providing licences and data to foreign bourses was “anticompetitive.” It warned that this could impact India’s weightage in the indices, which are used by overseas asset managers to construct exchangetraded funds (ETFs) and benchmark portfolios. A reduction in the country’s weight could potentially lead to sharp portfolio outflows.

MSCI will survey asset managers, stock brokers and dealers in various markets to assess their regions on whether the decision by Indian bourses would hinder access to domestic markets. India’s largest exchange NSE has a contract with the Singapore Exchange (SGX) that allows Nifty futures and options to be traded there.

The Nifty futures contract, which will cease to exist after August, is popular in Singapore among those foreign investors that prefer a dollar-denominated product and the more relaxed tax laws that prevail in the island nation.“Our decision will be based on global investors’ perception of the impact of this step on access to India,” said a senior MSCI official. “We will compile the responses and decide on the basis of the findings.”

MSCI’s next review of its indices is scheduled in May.The MSCI official said the firm hadn’t talked to the Indian exchanges or the regulator before issuing its release late last week. Exchanges, led by NSE, are in no mood to blink first either. “This (MSCI’s warning) amounts to blackmail and I do not see any reason why we should succumb to this. But no decision has been taken yet,” said a senior exchange official on condition of anonymity.

A senior regulatory official said, “India is concerned about an orderly development of the market. Everybody has a right to protect their turf. They (MSCI) are also trying to protecting their turf. There is no restriction imposed on anybody from trading in our markets. People are free to trade. All that exchanges are saying is data feed will be provided in some systematic form.”MSCI to Consult Fund Managers Before Cutting India Weightage

The reaction would be adverse if MSCI decides to go ahead with a reduction in India’s weightage in its emerging markets index, warned the MSCI official. India is currently classified under emerging markets and it has a weight of 8.8% in the MSCI EM index. The country has the fourth highest weightage in the EM index after China, South Korea and Taiwan.

“Any changes in MSCI EM index will have a direct impact on the Rs140 billion of money invested by the foreign portfolio managers in India who track MSCI EM index,” the official said.MSCI didn’t respond to questions. BSE and NSE declined to comment.Fund managers are hoping that the Indian government will step in to resolve the issue given the implications of reduced weightage on the stock market and the rupee.

“I don’t think the Indian government will allow this to happen, and if it happens it will be a big embarrassment for India,” said a fund manager based in Singapore.MSCI kept China mainland-listed shares out of its key emerging market indices for several years citing obstacles such as restrictions on market access, the need for greater alignment of the China A shares market with international market accessibility standards and curbs on moving capital in and out of the country.

The Mint, New Delhi, 20th February 2018