MSCI maintains status quo on annual market classification review in Asia

Global index provider MSCI maintains its status quo on Asia during its annual market classification review. It was widely expected that South Korea would put on the watch list, an upgrade from the emerging market (EM) to the developed market (DM). This could delay the nation’s ambition to be classified as a DM until 2025, say analysts. In the Asia Pacific region, MSCI classifies Australia, Hong Kong, Japan, New Zealand and Singapore as DMs. Meanwhile, China, India, Indonesia, South Korea and Taiwan are classified as EMs. India – The sixth largest stock market globally in terms of market capitalization – is also classified as EM by the MSCI.

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‘Market accessibility’ is a key factor for a country to be classified as DM. MSCI gives importance to criterions such as openness to foreign ownership; ease of capital inflows / outflows; efficiency of the operational framework; Availability of investment instruments and stability of the institutional framework. In a note, analyst Brian Freitas of Periscope Analytics, who publishes Smartkarma, analyzes five key impediments with the Indian market when it comes to ‘market accessibility’. Here they are:

Foreign Ownership Limit Level: Many companies are still subject to foreign ownership limits from zero to 74 per cent. Currently, these limitations affect more than 10 per cent of the Indian equity market, says Freitas.

Foreign Room Level: The equity market is significantly impacted by foreign room issues and there is no active formal foreign board allowing foreign investors to trade among themselves. More than 1 per cent of the MSCI India Investable Market Index (IMI) is impacted by low foreign room, he adds.

Foreign Exchange Market Liberalization Level: There is no offshore currency market and there are constraints on the onshore currency market.

Investor Registration & Account Set Up: Registration is mandatory and subject to the Securities and Exchange Board of India approval.

Clearing and Settlement: There is no nominee status and omnibus structures are not available. In addition, overdraft facilities are prohibited. The shift to a T + 1 settlement cycle has raised concerns about the need for pre-fund trades to reduce settlement risk.

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