Editorial: MSCI’s flip-flop on Adani stocks is questionable

Listed stocks of the Adani group have witnessed an erosion of between 40- 70 per cent of their value since the explosive report from the activist short-seller, Hindenburg Research was released towards the end of January. But around a quarter of these losses have occurred after the index provider MSCI reacted to the report and announced on February 9 that it was going to review the free-float market capitalisation of the eight stocks belonging to the Adani group, with the intention of adjusting the weights of these stocks in its indices.

Domestic and foreign investors take MSCI’s moves seriously and it seems doubtful if the index provider conducted a thorough review before announcing its intention to adjust weights of Adani stocks because it recanted on it within a week. The original act of the index provider is particularly questionable since it was prompted by a research report issued by a short-seller with a vested interest in causing a decline in the stock prices.

MSCI had then said that it had determined that ‘the characteristics of certain investors (of Adani stocks) have sufficient uncertainty that they should no longer be designated as free float pursuant to our methodology.’ Interestingly, MSCI defines free-float as proportion of outstanding stocks accessible for purchase by international investors. Stocks of Adani group do not appear to fall short on that criteria. The moot question is, what prompts the index provider to start such reviews? Does it do so when the stock prices decline to a certain extent or whenever a brokerage or research house issues a negative report on a stock? If that were the case, then indices would see very frequent churns. It is not apparent why MSCI had to jump the gun and decide to announce its review of the weights of these stocks when no regulatory indictment has been issued yet on this matter. MSCI needs to have clearly defined policies about the events which trigger such index constituent reviews and that should be communicated clearly to all investors through its website. Findings of its investigations regarding such issues also need to be disclosed on its websites.

MSCI’s latest statement signals that its response to the Hindenburg allegations was probably a knee-jerk one. The index provider has decided to postpone the index weight changes to Adani Total Gas and Adani Transmission to the May benchmark review. It has also decided to apply a different treatment for all Adani Group’s stocks in MSCI indices; that is, their weight will be frozen at current levels. Given that the funds tracking the MSCI indices have assets under management worth billions of dollars, changes in weight of any stock in the indices can lead to heavy selling. MSCI needs to act in a more responsible manner, issuing such statements about review of stock weights only after firmly establishing irregularities through its own investigation or after the regulators of the jurisdiction have charged the company.

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