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FII limit hike may better India's position

Sangita Shah

India's weightage in global indices is likely to increase after corporates avail themselves of the proposed increase in FII investment limits.

If the government goes ahead with the proposal to allow foreign portfolio investors to hold 74 per cent of a company's equity, it will definitely have a positive impact on the second round of the MSCI index adjustment due in May 2002, fund managers said.

However, Morgan Stanley officials were not available for comment.

"Hiking the investment limit for FIIs is a sensible reform and it will increase India's weightage in various world indices.," John Band, chief executive officer, ASK Raymond James said.

The change in Morgan Stanley Capital International index will be implemented in two phases, the first commencing end-November and the second in May 2002. A few foreign funds use the MSCI index to make country allocations.

"While there will be no short term impact, it will have positive long term implications," said Anup Maheshwari, fund manager DSP Merrill Lynch.

The new MSCI Provisional Index series show a sharp drop in India's weightage in all major indices. In the Emerging Market Free index, India's weightage has dropped from 6.5 per cent to 3.5 per cent, making it the biggest loser among all constituent countries.

Analysts said besides adjusting the index to reflect the availability of floating stock (non-promoter holdings), the decrease in country's weightage was also due to restrictive foreign ownership laws.

Reliance Petroleum, HDFC Bank and VSNL have been included in the new index. Indeed, Reliance Petroleum will be a big component of the index with a weightage of over 6 per cent. The other two stocks to be included are Britannia and Dabur.

The biggest gainers in terms of weightage among the earlier constituents are Infosys, Wipro, Dr Reddy, ICICI and Satyam. The weightage of Infosys and Wipro has increased by 2 per cent and 1.75 per cent respectively. The weightage of remaining three stocks has increased by around 1 per cent, each.

HLL and Reliance Industries are the two biggest losers. HLL's weight has decreased sharply from 14.6 per cent earlier to 10.3 per cent.

The weight of Reliance Industries in the index has also slipped sharply from 12.62 per cent to 9.68 per cent.

SBI and ITC too have lost around 1.5 per cent each in their respective weights.

With the increase in overall FII investment limits, these companies should see further investment by portfolio investors.

"The general FII investment pattern displays buying in select stocks and the current limits are almost exhausted (in these companies) giving less room for further investment. Thus hike in the investment limit, especially in the companies covered under global indices would see a marked rise in FII investments," a head of research of a prominent Europe-based fund said.

However, fund managers are also of the view that increase in India's weightage though imminent may not be immediate as not only the procedure by the government would take some time, the study of its impact by the index compilers will also add to the time lag.

Various India dedicated funds follow domestic indices like the S&P CNX Nifty, Sensex, BSE-200 and others. MSCI is usually followed by regional funds and their total investments are about 20-22 per cent of the FIIs' total investments.

The Reserve Bank of India (RBI) has permitted 8 companies to raise their FII investment limit to 49 per cent. The companies are Crisil, Global TeleSystems, HDFC, Infosys Technologies, NIIT, Reliance Industries, Reliance Petroleum and Satyam Computer Services.

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