Cazenove sees India hit by MSCI index changes

MUMBAI: India will be one of the worst hit markets in Asia from the proposed

changes in the Morgan Stanley Capital International (MSCI) index, due to

restrictions on foreign ownership in the country, Cazenove & Co. said.

The changes, which will take effect in two phases, would reduce India's

weight in the index to 5.2 per cent from 8.03, the securities firm said in a

research note dated December 11 and made available to Reuters on Thursday.

Under the present rules, foreign institutional investors are allowed to hold

up to 24 per cent equity in Indian firms. This limit can be hiked to 40 per cent

after approval by a company's board.

MSCI said under the free-float system it would weigh stock indices using the

number of shares available for open trade instead of solely on the basis of

market capitalization.

Analysts say this would shift billions of dollars from Asia to the US and the

UK, as funds tracking MSCI indices for asset allocation realign their

portfolios.

Cazenove said there would be no immediate impact of the changes in weightage

on India as it takes effect in two phases - the first on November 30, 2001, and

the second, on May 31, 2002.

But over the medium to long term, foreign capital inflows into India could be

affected by these changes, analyst Abhay Modi wrote in the report.

Various research houses, including Cazenove, expect the government to start

easing foreign portfolio investment limits in Indian firms in line with

liberalization in the policy on foreign direct investment.

Few benefits



Cazenove said India could benefit from a move by MSCI to increase the target for
market capitalization within each industry group. MSCI plans to raise the

capitalization target to 85 per cent from 60.

"We expect a number of stocks from the old economy to be added to the

MSCI indices," it said.

But the same move could adversely affect the software sector, where some

stocks would have to be deleted to re-balance portfolios to the 85 per cent

target, it added.

Cazenove's expected list of inclusions in the rejigged MSCI index were

state-run Videsh Sanchar Nigam Ltd. in the telecom sector, India's largest

private oil refiner Reliance Petroleum and state-run Gas Authority of India Ltd.

in the oil and gas sector.

The firm also expected software firm HCL Technologies, which was listed on

the stock exchanges in January 2000, to be included in the MSCI index.

(C) Reuters Limited 2000.