Fat finger error? MSCI downgrades Airtel on wrong data; market miffed

NEW DELHI: Brokerages and market analysts tore into MSCI, the global index services provider, for a grave error that led to Bharti Airtel’s weight being cut by half in the MSCI India and MSCI EM indices.

Samir Arora, founder and fund manager, Helios Capital, even went as far as to suggest that MSCI should be sued for the error.

“If MSCI turns out to be wrong (which is quite likely) in all these calculations on shareholding limits, etc., they should be sued,” the Singapore-based investor said. He said he owns US-listed shares of MSCI.

Shyam Sekhar, a Chennai-based value investor who runs iThought Financials, said if MSCI can be gamed, it only shows the state of credibility of our brokerages and media. “The rot runs too deep,” he tweeted.

Shares of Bharti Airtel traded 1.38 pe cent down at Rs 541 on BSE on Thursday.

What happened?
As per reports in media and from brokerages, MSCI has reduced the weight of Bharti Airtel in its two indices by half. The index service provider reduced telco’s weight from 3.5 per cent to 1.8 per cent in MSCI India index and from 0.285 per cent to 0.144 per cent in MSCI EM Index.

All this, apparently, happened based on erroneous information.

Where did MSCI go wrong?
As per a Macquarie report circulated in the media, MSCI picked incorrect information from the NSDL website about the FDI limit in the company.

Bharti Airtel told exchanges in June that it had received government approval to increase foreign ownership in the company by 100 per cent. Earlier this limit stood at 74 per cent.

But the NSDL website still mentions the limit as 49 per cent via the automatic route. “Ideally, NSDL should mention it as 74 per cent as Bharti’s press release clearly stated that ‘the aforementioned approval read together with the RBI approval dated July 03, 2014 granted to the company allows FPIs/FIIs to invest up to 74 per cent of the paid-up capital of the company.”

“As the limits are defaulted to sectoral limits since April 1, whenever MSCI considers this change, this 74 per cent would have gone to 100 per cent,” Macquarie said in its note.

This is not the first time NSDL has put out wrong information. In March, it red-flagged Airtel as it considered the FPI limit at just 24 per cent, Macquarie pointed out.

So, the bottom line is, MSCI was not vigilant enough, JPMorgan pointed out in a note.

ETMarkets.com has sent a detailed query on this to MSCI. A reply is awaited on the same and will be updated once received.

How does this affect MSCI calculation?
As MSCI considered foreign ownership limit at 49 per cent instead of earlier 74 per cent, the free float changed from 45 per cent to 23 per cent, according to Macquarie. This led to the weight reduction.

What does MSCI say?
As per Macquarie, when its index analyst Shan Lan had a chat with MSCI, they said, “in their understanding this limit increase to 100 per cent has not been implemented and some approvals were still pending.”

However, that also does not explain why the limit should go down to 49 per cent from 74 per cent in its calculation.

What now?
As per Macquarie, the decision will likely be reversed as it is based on wrong information, the same way the red flag error had been resolved earlier. “Bharti Airtel and NSDL have a precedence of miscommunication and last time it was resolved the same way,” the broker said.

Why should you be concerned?
Many foreign funds make their investment decisions for India based on these indices. A number of India-focussed ETFs also follow these indices. So, if MSCI does not reverse its decision soon enough, fund managers will be forced to cut their stake in Bharti Airtel accordingly, which will put pressure in its share price.