MSCI cuts weight of Adani group stocks in key indices

The MSCI (Morgan Stanley Capital International) Index, which is the benchmark for allocation of global capital to India, has cut weights of Adani stocks. The good news is that the MSCI decided not to remove any of the Adani stocks from the index. However, the reduction in weight would also have an impact of institutional selling. But first, what is this weight downsizing all about?

The key word to understand here is Foreign Inclusion Factor (FIF). This FIF must reach a certain threshold. Now, free float (non-promoter holdings) is one of the key criterial to decide on an acceptable FIF. While Adani group stocks had a low free float all along, this has got compounded after the recent allegations made in the Hindenburg report against Adani group. Hindenburg has alleged that most of the Adani free float constitutes cross holdings through connected entities. That has been the trigger.

Now, the MSCI wants to wait till that audit is completed and the actual findings of the audit are out. If it emerges that these are actually cross holdings, then the weight may remain at these levels or may even be lowered or stocks may be excluded from the index altogether. However, if the audit dismisses the allegations, then MSCI can restore the old weights of the Adani group companies. The impact of this downsizing is to be felt in select group stocks.

Due to the reduction in weightage, Adani Transmission is likely to see outflows of $145 million, Adani Total Gas could see outflows of $110 million while Adani Enterprises may see outflows of $161 million. While others would also see outflows, these would be the most prominent. Index funds and ETFs peg their portfolios to the MSCI India indices and tweak holdings in tandem.