MSCI warns India, four other emerging markets against restrictive policies

MSCI’s popular indices such as the MSCI Emerging Markets Index and the MSCI Asia Pacific ex Japan Index are tracked by funds with trillions of dollars of investments | Illustration: Binay Sinha
Global index provider MSCI has warned India and four other emerging markets (EMs) against restrictive policies, and reiterated that any move that impedes overseas investment could lead to a downgrade.

“Low ratings continue to persist for the availability of investment instruments in the market accessibility criteria for Brazil, China (A shares), India, Korea, and Turkey. Global market participants expect that stock exchanges should not directly or indirectly restrict the availability of investment instruments domestically or globally,” MSCI said in a release, where it stripped Argentina of its EM status owing to the country’s continued capital controls.

MSCI’s popular indices such as the MSCI Emerging Markets Index and the MSCI Asia Pacific ex Japan Index are tracked by funds with trillions of dollars of investments. As a result, any change in the weighting of a country or stock results in millions of dollars of churn.

China, South Korea, and India are among the top markets in the EM basket. Given the status of these markets, experts said, it is improbable that MSCI would cut the EM status, but it could reduce the so-called foreign inclusion factor (FIF), which will result in lower weightings and hit foreign inflows. 

India currently has about 10 per cent weighting in both the MSCI EM and Asia Pacific ex Japan indices.

“As a reminder, any anti-competitive policy put forth by any exchange in any market in the world that restricts the availability of investment instruments and results in deterioration of the accessibility of an equity market could potentially lead to a downgrade in market classification. Exchanges and regulators should note that anti-competitive policies or practices that restrict the availability of indexed investment instruments have become increasingly problematic to global investors,” the MSCI release further said.

An email sent to MSCI, seeking more details on the issue, went unanswered.

In a separate note released earlier this month on market accessibility review, MSCI highlighted key issues pertaining to the Indian markets. These included less legroom available for foreign portfolio investors (FPIs) in several Indian stocks, lack of formal mechanism that allows FPIs to trade among themselves, no offshore currency market and constraints on the onshore currency market, and a complex framework for governing foreign investments.

MSCI also highlighted restrictions imposed on the use of stock market data as a concern.

In 2018, India’s bourses had ended their data-sharing pact with their global counterparts in a bid to curb trading in Indian securities in the overseas market.

While India is the second-biggest market in Asia (excluding Japan and Hong Kong) and the EM pack, issues surrounding access to FPIs have constrained India’s weighting. As a result, in the Asia Pacific ex Japan Index, Australia, Taiwan and South Korea enjoy a higher weighting compared to India.

Sivananth Ramachandran, director of Capital Markets Policy (India), CFA Institute, said given the changing landscape of investment flows, these issues were getting increasingly complicated.

“Regulators are increasingly placing market development high on their list of priorities. It is important to manage any resulting cross-border issues taking into account the interests of end investors. The other issue is, market classification decisions are becoming increasingly complicated. In this scenario, when investment flows are directed based on decisions of a dominant index provider, it increases the risks for markets as well as investors,” he said.

Last year’s move by the Indian government to raise the statutory FPI limit of Indian companies to the sectoral foreign investment limit was hailed by MSCI and FTSE. Both index providers had increased India’s weighting in its global indices, a move that had helped boost foreign flows.

“Although the changes were significant and the percentage of the affected Indian equity market by foreign ownership limits has been reduced to 13 per cent, these limitations still affect more than 10 per cent of the Indian equity market,” MSCI has said.

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