Fresh troubles: Adani Group stocks decline on MSCI free float review

Index provider questions 'characteristics' of investors; validation, says Hindenburg chief

Adani Group stocks resumed their fall on Thursday ahead of a possible reduction in their weighting in MSCI indices after the global index provider said earlier in the day that it will not consider the entire public shareholding in Adani Group firms as free float.

Depending on the quantum of the reduction in free float, passive funds tracking the MSCI indices will have to prune their exposure to Adani stocks to realign with the new composition of the index, which will be announced in the early hours of Friday.
 

“MSCI has determined that the characteristics of certain investors have sufficient uncertainty that they should no longer be designated as free float pursuant to our methodology,” MSCI said early on Thursday.

The free float of a security is the shares that are freely available for the public — international investors in the case of MSCI — to buy and sell. Lowering the free float will reduce weighting on the index.

On January 27, the index provider had initiated market feedback on the treatment of Adani Group stocks, following allegations of stock manipulation and accounting fraud made by US-based short-seller Hinden­burg Research in a report published on January 24. 

The Adani Group has denied the allegations.

Following the MSCI statement, Hindenburg founder Nathan Anderson tweeted: “We view this as validation of our findings.”

Shares of group flagship Adani Enterprises fell as much as 20 per cent on Thursday before recouping some of the losses to finish at Rs 1,927.3 apiece, down 10.7 per cent over the previous day’s close. Apart from Adani Wilmar, which is not part of any MSCI index, all Adani Group firms’ shares ended with losses. The group lost nearly Rs 59,000 crore in market capitalisation on Thursday, almost wiping out gains made over the previous two days. The cumulative market cap for the Adani group stood at Rs 9.83 trillion, down Rs 9.36 trillion since January 24.

At present, eight out of 10 Adani Group stocks are part of the MSCI index, with nearly $2 billion of passive investments in them.

“Based on our analysis from the December 2022 shareholding pattern and reclassifying ‘friendly’ investors from float to non-float, there could be selling from Adani Enterprises, Adani Total Gas, and Adani Transmission at the February index review,” said analyst Brian Freitas of Periscope Analytics, who publishes on financial research platform Smartkarma.

“If hypothetically MSCI reduces the float by 25 per cent, then Adani Enterprises will see outflow of a fourth of $430 million, which is $110 million,” said Abhilash Pagaria, head of alternative and quantitative research at Nuvama Institutional Equities, in a note.

Analysts ruled out the possibility of the MSCI completely removing any Adani stock from its indices immediately.

“We expect all Adani Group companies to avoid index deletion at the February review, but Adani Power, Adani Total Gas, and Adani Transmission could be deleted from the index in May,” Freitas said.

Experts said the reduction in weighting or deletion of the stocks will depend on the “real free float” determined by MSCI. The index provider might exclude shares held by certain Mauritius-based funds that are common shareholders in all Adani Group firms, they added.