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Why is MSCI examined almost Adani stock’s free-float market cap

Before going to float market capitalization, we need to understand the market capitalization of a stock. It is the current market value multiplied by the outstanding shares issued by the company. For example, Reliance Industries has a market capitalization of ₹15.80 Lakh Crore (It has outstanding shares of 658.01 Crore, and the current market price is ₹2336.50).

Total market capitalization includes shares issued to everyone, including developers and large institutions and governments. The free float is the share of non-promoters, and the free-float market capitalization is the share price multiplied by the outstanding shares with fewer promoters. Thus, excluding the promoters who held Rs 332.27 crore in shares, the free-rolling capitalization of RIL came down to Rs 8.04 crore.

When many exchange-traded and index funds opened in the late 1990s, Easily selected the shares of the holding companies of the top promoters and the index was manipulated so that the funds tracking the index could buy the stock, under-valuing it.

If the public widely holds a stock, then manipulating the stock is difficult. So the concept of free-float market capitalization evolved to ensure that indices included only widely held stocks.

FTSE, a significant worldwide index provider, 1999 first introduced it in. After that, MSCI and the S&P 500 tracked suit.

The BSE Sensex switched to the free-floating m-cap methodology in 2003, while the NSE took almost six years (June 2009).

However, the high free float does not guarantee the entry of Indian stocks into the MSCI index, as it considers another important metric called the foreign inclusion factor.

Security FIF is defined as the proportion of outstanding shares available on public stock exchanges by international investors. A stock in which the government prohibits the purchase of foreigners or limits their purchase to a certain extent (such as insurance, aviation, telecommunications or banks) will not enter the MSCI index.

Will stocks in the Adani group fall short of completing the free-float criteria? How?

Based on the records made available to the stock exchanges, Adani Group shares have not failed the free float rule. However, after a Hindenburg Research report raised suspicions that some non-promoters held in various tax havens geographies, such as Mauritius, the Cayman Islands and Bermuda, might be anonymously held by Adani, MSCI downgraded some of its shares and reduced the load.

In addition to the declared outstanding shares held by the promoters, MSCI excluded some institutional holdings in calculating the weight. Consequently, it reduced its indices’ weighting of Adani stocks such as Adani Enterprises, Adani Tota Gas, Adani Transmission and ACC.

What will impact the removal of Adani stocks from the MSCI indices?

According to reports, the aggregate weight of the four companies was 0.4% in the MSCI EM Index. Market analysts predict this could result in a 500 million rupee (or around 4,000 crores) outflow.

A stock entering any index generates money inflows and even lends legitimacy, especially if it is included in significant global indices like MSCI, S&P, and FTSE. So, this will impact the sentiment towards Adani’sAdani’s mainly when they go for further fundraising.

Is it possible that the Indian index providers would likewise exclude Adani equities from their indices?

When the Satyam Computer Scandal came to light in January 2009, Nifty removed it almost immediately from the index. However, that possibility appears minimal in this case, as no serious frauds (such as cooking up books or diverting funds) have emerged.

These stocks would be removed from the index in the upcoming revision due to the steep decline and volatility: Nifty updates its index every six months (January and July end). As a result, one might anticipate Adani stocks leaving the Nifty by month’s end. The Sensex does not list any stocks from the Adani group.

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