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India’s Adani Faces A New Risk As Index Compiler MSCI Evaluates Changes To Some Group Stocks

India’s Adani Faces A New Risk As Index Compiler MSCI Evaluates Changes To Some Group Stocks
MSCI, the financial index provider, announced on Thursday that a few of the Adani securities should no longer be assigned as free float, following market participants' worries about the Indian conglomerate's companies' eligibility for some of its indexes.
Billionaire tycoon Gautam Adani's seven main Indian-listed stocks have already lost $110 billion in less than two weeks following a scathing Jan. 24 report by a U.S. short seller accusing the conglomerate of improper use of offshore tax havens and stock manipulation.
According to analysts, a change in free float status may cause weightings of MSCI index constituents to change, which could lead to further shifting of positions by funds, as many investments globally are aligned to such indexes.
"Some investors follow MSCI index as a gauge," said Neeraj Dewan, director at Quantum Securities. "Depending on the outcome of the MSCI review, we could see more pressure on select Adani group stocks."
India's opposition parties have also seized on the issue, loudly chanting slogans demanding an investigation into the allegations against the Adani group as Prime Minister Narendra Modi spoke in the upper house of parliament on Thursday.
Pointing to opposition leaders, Modi said their sloganeering was "habitual," adding, "No matter how much mud you sling, the lotus will keep blooming," alluding to his party's election symbol, the lotus flower.
The Adani group has denied Hindenburg Research's allegations of stock manipulation, saying they have "no basis" and are based on a misunderstanding of Indian law.
A number of market participants have provided feedback regarding how to determine a security's eligibility and free float, according to MSCI, the American company that makes popular stock indices.
"MSCI has determined that the characteristics of certain investors have sufficient uncertainty that they should no longer be designated as free float ... This determination has triggered a free float review of the Adani Group securities," it added.
Changes to Adani securities linked to its MSCI Global Investable Market Indexes are expected to be announced later on Thursday as part of the company's monthly review for February.
MSCI defines a security's free float as the proportion of outstanding shares that international investors consider available for purchase in public equity markets.
The Adani Group did not respond to a request for comment.
"We view this as validation of our findings," Hindenburg founder Nathan Anderson tweeted in response to the MSCI statement.
Some Adani shares had recovered this week, but fell again on Thursday following the MSCI announcement. Adani Enterprises dropped 11.2% after losing up to 20% in early morning trading.
Adani Transmission, Adani Total Gas, and Adani Power all fell 5%, while Adani Ports and Special Economic Zone fell nearly 2.9%.
"The sentiment is affected by the MSCI announcement. It will lead to outflows if MSCI removes certain stocks," said Ambareesh Baliga, a Mumbai-based independent market analyst.
The MSCI announcement is Adani's most recent setback. Due to the market crash, his flagship company Adani Enterprises had to cancel a $2.5 billion stock offering.
Politics is also escalating around the issue.
As the Adani Group and the government both deny the accusation, the opposition parties in India see the situation as an opportunity to put Prime Minister Modi in a difficult position as he seeks a third term in office.
There have been sporadic demonstrations across the nation as opposition parties call for investigations into the allegations against the conglomerate by a joint parliamentary committee or a panel appointed by the Supreme Court.
The attack on short sellers and the cancellation of the share sale have damaged Adani's reputation.
An individual with direct knowledge of the situation told Reuters this week that the Securities and Exchange Board of India, India's market regulator, is looking into the market meltdown.
The share price declines could affect the group's ability to raise capital, according to Moody's rating agency, which has also warned that India's central bank is monitoring lenders' exposure.

Christopher J. Mitchell

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