Hindenburg report on Adani group: Index provider MSCI invites feedback

MSCI has invited feedback on the Adani group securities following a report by US-based Hindenburg Research, which has made scathing allegations of fraud and stock price manipulation.

"MSCI is aware of the reports recently published regarding the Adani group and associated securities. MSCI is closely monitoring publicly available information regarding the situation and the factors that may impact the eligibility of those relevant securities for the MSCI Global Investable Market Indexes. MSCI welcomes timely feedback from market participants on these issues," the index provider said in a statement.

Market watchers said adverse feedback could lead to a reduction in weightage --or worse, deletion-- of Adani stocks from the MSCI index. This could exacerbate the selling pressure in Adani group stocks, which have seen an erosion of $50 billion in market value in the past two trading sessions. Of the seven listed stocks with Adani name, all except Adani Wilmar, are part of MSCI global indices.

To be sure, the MSCI action will not happen immediately as the process of gathering feedback, its analysis and decision-making would take time, said experts.

The MSCI gives importance to parameters such as free float market cap and liquidity for including stock in its global index, which are tracked by exchange-traded funds (ETFs) with billions of assets.

"The main issue that MSCI should be looking at (and readers should be providing feedback on) is the free float of the companies given the holding from opaque Mauritius-based entities that share the same addresses and are likely controlled by the same entity," said Insight Provider Brian Freitas of Periscope Analytics who publishes on Smartkarma.

Freitas said deletion of any Adani group stocks from MSCI indices is unlikely, however, their so-called foreign inclusion factor (FIF) could get lowered.

MSCI assigns low FIF whenever it feels there isn't adequate public float in a stock.

"We do not see any issue with the Adani Group companies being eligible for inclusion in the MSCI Global Investable Market Indexes.

However, we do see an issue with the FIF for the stocks given that the real float is a lot lower than the published numbers," he said.

The reduction in FIF, if any, will depend on the market feedback. “If the price volatility ceases, the Index provider might not take any action and stocks will continue to be a part of the index,” said Abhilash Pagaria, Head - Alternative & Quantitative Research, Nuvama Institutional Equities. However, if MSCI reduces the weight by half it could “lead to cumulative outflow of $1.5 bn.”

"Selling will be focused on Adani Enterprises, Adani Total Gas and Adani Transmission with a total flow of $955 million. The impact will be especially high on Adani Total Gas and Adani Transmission, especially in terms of days of delivery volume to sell," Freitas wrote in a note on Friday.

Shares of Adani group firms had declined between 10 per cent and 27 per cent in the past two trading sessions, weighed down by Hindenburg's allegations, which the company has called "baseless and malicious".

Shares of Adani Total Gas, Adani Transmission and Adani Green hit their 20 per cent lower limit on Friday.

Adani Enterprises and Adani Ports, which are part of the derivatives segment and also part of the Nifty 50 index, dropped 18.5 per cent and 16 per cent, respectively.