FPI limit hike paves way for foreign fund flows into Indian shares, after MSCI defers raising India weight

The Ministry of Finance in October 2019 has published a circular raising the statutory FPI limit of Indian firms to the sectoral foreign investment limit.

After Morgan Stanley Capital Investment (MSCI) deferred the decision to rejig India’s weightage in its global indices, National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL) on Friday revised the Foreign Portfolio Investment (FPI) limits for all listed shares on the stock exchanges. A change in the weightage of India in the MSCI indices could lure in more foreign investments into the country during a time when FII’s pulled out more than Rs 1 lakh crore from the bourses in the month of March alone.

Earlier this week, MSCI deferred the decision to increase India’s weightage in its indices, citing the lack of visibility in the actual implementation of the proposed changes. “MSCI will wait for the practical implementation of these changes and the systematic publication of the new sectoral limits applicable to Indian securities before making any changes to the MSCI Indexes. MSCI will therefore maintain the current FOL for Indian companies and will defer changes to the Foreign Inclusion Factors (FIF) resulting from Foreign Ownership Limit and Foreign Room changes as part of the May 2020 Semi-Annual Index Review (SAIR) and Corporate Events,” it said in a press release. It be noted that the companies have the powers to keep their FPI limits unchanged before the new rules kicked in.

The Ministry of Finance in October 2019 has published a circular raising the statutory FPI limit of Indian firms to the sectoral foreign investment limit. The move was supposed to increase foreign portfolio investment limits in all publicly traded companies in India, except if individual companies’ boards and shareholders passed a resolution against it before the new norms came into play. 

Morgan Stanley, in a note last December had said that the increase in MSCI India’s weightage in the MSCI Emerging Markets index alone could result in an foreing investment of $2.5 billion. Currently India’s weightage in the MSCI index is at 8.9% with a change it could end up going close to 9.6%. China’s weightage in the index is close to 30%.