LIC’s likely inclusion in MSCI indices could bring in $500 million

Edelweiss expects the issue’s free float which will be considered by index providers to be at 3.5%, less than the 5% which the government intends to dilute because the global indices do not include the lock in shares in the IPO.

Securities and Exchange Board of India (SEBI) regulations mandate that instiutional investors who buy shares in a pre IPO placement have to adhere to a six month lock in whereas anchor investors in the IPO have to adhere to a one month lock in.

As a result, Edelweiss estimates that the lock in the free float market cap will be Rs 37,100 crore or $4.98 billion, assuming that the stock lists at least at a total market capitalisation of Rs 10.7 lakh crore.

“Despite being a lower float name, there is a medium to high probability of stock getting fast entry in the MSCI Index. As in the case of bigger issuances, Index provider do not compulsorily require Minimum Length of Trading Requirement or Foreign Inclusion Factor (FIF) of 0.15. The most important aspect to be kept on radar will be the issue size and the final listing market cap as anything below Rs 10.7 lakh crore valuation at listing can make the inclusion difficult. Also Interim market size segment cut off will be an important level to watch out for,” Edelweiss said.

Many large global exchange traded funds use MSCI Indexes as the base, mirroring their stock holdings to the index. As a result inclusion in the index means investors automatically adding the stock to their portfolio.

Liquidity of a stock and least owner restrictions are both important parameters for the inclusion in the MSCI index. The LIC IPO may be at a disadvantage based on these two parameters.

“IPOs which are significant in size and meet all the MSCI inclusion criteria, an early inclusion, outside of the index reviews, may be considered for inclusion in the standard index. If the decision is made to include an IPO early, the inclusion is effective after the close of the security’s tenth day of trading. However, in certain cases, another date may be chosen for the inclusion to reduce turnover, for example, where the normal inclusion date is close to the effective date of the next index review,” Edelweiss said.

The brokerage believes that LIC’s inclusion in the FTSE Index will not happen before the Sep 22 review. It also does not expect the stock entering Sensex and Nifty 50 Index in the near term as criteria’s for those indices are more stringent.