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.