MSCI Inc has cut the amount of stocks it considers freely tradable in the public market for four Adani Group companies in its indexes, a move analysts say will result in lower weightings for them in MSCI’s indexes. 

MSCI said in response to a Bloomberg query that shares held by certain Adani investors should no longer be designated as freely tradable in the public market and it will implement free float changes on Adani Enterprises Ltd, Adani Transmission Ltd., Adani Total Gas Ltd and ACC Ltd, effective February 28. 

The weighting of Adani Enterprises will be reduced by 30 basis points to 0.5 per cent in the MSCI Global Standard Index, Nuvama Wealth Management analyst Abhilash Pagaria said in a note, based on his calculations. The weightings on the other three stocks will also come down, he said, adding the move would result in hundreds of millions of dollars in outflows from these stocks.  

Stocks linked to the Adani Group, however, have escaped removal from MSCI indexes in its quarterly review, as the Indian conglomerate continues to deal with the impact of a short-seller campaign that wiped out almost half of its market value in just over two weeks.

The MSCI review has directed market attention back to a key allegation by Hindenburg Research: that offshore shell companies and funds tied to the Adani Group comprise many of the largest “public,” or non-insider, holders of Adani shares.  

“The weighting cut will lead to outflows and further increase the odds of exclusion for Adani Power, Adani Total Gas and Adani Transmission in MSCI’s May review,” Brian Freitas, an analyst who publishes on Smartkarma, said by phone. He estimates the cut in free float will lead to outflows of around $570 million across the three stocks.

Stock meltdown

Billionaire Gautam Adani’s companies have suffered a stock meltdown that at one point erased $117 billion in market value after Hindenburg accused the company of accounting fraud and market manipulation, allegations the group has furiously denied. Adani Enterprises, the flagship firm of the conglomerate, was forced to pull a key share sale in the 11th hour and shelve its first-ever public sale of bonds.

“Corporate governance, which EM generally scores poorly in across all regions, is a risk that investors need to make sure they get properly compensated for,” Citigroup Inc. debt strategists including Eric Ollom wrote in a note February 9. “Many real money investors in Adani debt securities have decided they didn’t want to wait around to find out how severe the risks are” and they’re likely to avoid moving back in, they wrote.

Many of the group company’s dollar bonds have the lowest investment-grade rating from Moody’s Investors Service, Fitch Ratings and S&P Global Ratings at BBB- or its equivalent, meaning a cut would push them into junk territory.

There is a “real possibility” that rating companies may cut Adani debt to junk, if the Hindenburg allegations are proved, which would trigger a bout of selling by passive investors too due to the exclusion of the notes from high-grade indexes, Citigroup strategists wrote.  

Twelve of 15 Adani dollar bonds were trading lower on Friday, according to data compiled by Bloomberg. 

Adani Group has in recent days stepped up measures to reassure investors and banks by repaying loans and pledging to reduce debt ratios. The slump in the group’s dollar debt has attracted buyers such as Oaktree Capital Management and Davidson Kempner Capital Management. 

The ramifications of the selloff are spreading far and wide as concerns grow about the exposure that financial institutions and investors have to Adani. The tumult has disrupted parliament and India’s main opposition party is ramping up pressure on Prime Minister Narendra Modi over his silence on the issue.

All Adani group entities, except for Adani Wilmar Ltd. and New Delhi Television Ltd., are part of MSCI’s key gauges for Asia Pacific, emerging markets and India, according to data compiled by Bloomberg.