ONGC weight in MSCI index to rise, shares may perk up

There is some indirect benefit to ONGC shareholders from the government’s disinvestment of its shares earlier this month.

[caption id=“attachment_253992” align=“alignleft” width=“380” caption=“The rise in free float has prompted the MSCI EM Index to increase ONGC’s weightage. Reuters”]  [/caption]

The 5 percent disinvestment, despite being substantially lapped up by Life Insurance Corporation, has resulted in a higher free float of ONGC’s shares in the market. Free float is the amount of non-promoter shares available for trading in the market.

Though the disinvestment was a bit of a farce, with LIC bailing out the issue, the fact remains that these shares can be sold into the market. The rise in free float has prompted the MSCI EM Index (Morgan Stanley Capital International’s Emerging Market Index) to increase ONGC’s weightage.

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A number of foreign institutional investors follow the MSCI Index and buy according to the weightage of each company in the index.

A report by Nomura on the subject says that MSCI will increase the foreign inclusion factor (FIF) in the index, which is a measure of free float, from 0.09 to 0.14 effective from 31 May 2012 to coincide with the Semi Annual Index Review.

As a result of this change in weights, FII fund managers who invest on the basis of the index are expected to buy around 13.75 million shares of ONGC to realign their portfolios according to the new weights. As a result of this, Nomura expects demand for the shares to the tune of $79.46 million from these index fund managers by May-end.

ONGC currently trades at Rs 267.10, down from Rs 303.67, the price at which government divested their 5 percent stake in the company to LIC.