Emkay Global Financial Services expects a potential outflow of around $1 billion from MSCI India constituents following its proposed changes to foreign ownership investment limits.

Global provider of capital market indices, MSCI, has proposed changes to foreign ownership investment limits for India securities following the SEBI diktat on FII/FPI limits.

According to the broking firm, stocks such as L&T and ITC would be impacted the most. Once the changes are accepted, this will reduce India’s weight in the MSCI Emerging Market index by 0.23 percentage points to 8.55 per cent from 8.78 per cent.

Constituent stocks of the MSCI Market Index may get impacted, with the proposed changes to computing calculation methodology for foreign ownership limits (FOL), as mentioned in a consultation paper released, said Emkay in a release. The outcome of the consultation will be announced on March 29 and if the proposals are accepted, they will be implemented from May, Emkay Global said.

On April 5, 2018, SEBI, in consultation with RBI, had announced a new system for monitoring foreign investment limits, which came into effect starting June 1, 2018. According to the new system, two depositories — National Securities Depository and Central Depository Services — have been appointed to monitor foreign investments.

Subsequently, NSDL and CDSL have started publishing changes in foreign room in the form of a ‘Breach List’ and ‘Red Flag/Caution List’ on their websites. Currently, MSCI deletes securities from the MSCI India indices that are appearing on the breach list and appearing on the Red Flag/Caution list and have foreign room below 3.75 per cent.

MSCI proposes not to include depository receipts (issued by Indian companies as ADR/GDR) in the calculation of FOL in India to better align with the depositories. Currently, MSCI calculates FOL using the FPI limit, i.e., extent up to which foreign portfolio investors can invest in any Indian company.

Tata Motors, M&M, Dr Reddy’s Laboratories, GAIL, Hindalco, Bajaj Auto, Tata Steel and LIC Housing Finance may also face the impact of change in India weight in the MSCI Emerging Market Index.