MSCI puts on hold Adani firms’ review

The index company will grant special treatment to eight Adani stocks in non-market cap weighted and custom indices like ESG beginning in February.

The reasons for the postponement and special treatment until May’s index review were attributed to potential replicability issues due to the impact of price limit mechanisms and ongoing uncertainty related to input data for index construction for the group stocks.

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Changes by MSCI are watched closely by investors as they influence the price of stocks. Any cut in weightings or exclusions could trigger selling by passive investors as they mimic the changes in the indices.

However, the effect of MSCI’s most recent measures on Adani Group stocks is expected to be short-lived, given that Adani Total and Adani Transmission have been hitting lower circuits almost daily since the release of the Hindenburg Research report on 24 January, with investors unable to sell their shares as trading gets halted because of extreme volatility, according to analysts. “It’s only a deferment, not a cancellation of the FIF (foreign inclusion factor) update, so the impact will be short-lived,” said a market source. “If the prices of some stocks continue to hit lower circuits daily and sellers find exits from them difficult, deletions at forthcoming reviews can’t be ruled out.” On Thursday, the 10 listed Adani Group stocks saw investor wealth fall to ₹2,553.91 crore against ₹32,442 crore in the preceding two sessions, partly because of the deferment by MSCI and short covering in Adani Enterprises, Adani Ports, Ambuja Cements and Adani Wilmar.

However, since 24 January, the stocks have lost a combined ₹10.55 trillion in market value to ₹8.64 trillion on 16 February. After US short seller Hindenburg released its report alleging accounting fraud and stock price manipulation by the group promoters, Adani stocks have witnessed excessive volatility, resulting in domestic exchanges halving the daily price limits on some securities and placing them under additional surveillance measures (ASM), like increasing margins to trade to 100% from around 30-40% to curb heavy intraday speculation.

Adani Enterprises has rebutted the allegations terming them “discredited” and “maliciously mischievous.”

However, on 8 February, MSCI said it reviewed the free float status of Adani Enterprises, Adani Total Gas, Adani Transmission and ACC. The weights of these four stocks were reduced, with expected foreign fund outflows of $428 million effective 28 February, according to Nuvama Alternative and Quantitative Research. Free float refers to the proportion of shares available freely for purchase by international investors. Based on the free float, the stock is assigned a weight. Adani Transmission and Adani Total Gas were then estimated to see outflows of $255 million.

The stocks are traded only on the cash market segments of NSE and BSE, while Adani Enterprises and ACC are traded on both cash and derivatives segments.

The Hindenburg impact led to the National Stock Exchange and BSE, in consultation with Sebi, placing additional surveillance measures on certain Adani stocks, which have, among others, raised trading margins to 100% in Adani Total Gas and Adani Transmission and 65% in Adani Enterprises. Besides this, price bands in Adani Total Gas and Adani Transmission have been halved to 5% to curb excessive price swings.

This has resulted in these stocks remaining locked at the lower circuit on many days, even after the MSCI’s 8 February review and expected weight cuts, with investors being unable to sell and exit the counters. In the case of Adani Enterprises, too, delivery volumes as a percentage of turnover have been low, reflective of heavy speculative activity.