Zomato's foreign ownership cap may lead to MSCI exit, says Jefferies; stock falls 3%

Stock Market Today: Eternal, formerly known as Zomato, saw its share price decline by more than 3% in intraday trade on Tuesday, after the company announced receiving approval for a foreign ownership cap, prompting worries about possible exclusion or weight reduction in the MSCI index. 

Eternal announces approval for foreign ownership cap

Eternal, also known as Zomato, on Monday, post-market hours, informed the exchanges that shareholders of the company have duly passed the special resolution pertaining to the cap on aggregate foreign ownership to 49.50%.

Jefferies expectation on MSCI weightage and outflows

According to Jefferies, while this development could provide flexibility to run a 1P (inventory) model for Blinkit, it raises the possibility of an MSCI weight cut or even a possible exclusion.

Jefferies said that Eternal (Zomato) has secured an overwhelming majority of more than 99% shareholder votes in favour of the proposal to convert itself into an Indian owned & controlled company (IOCC). This change, as per Jefferies, would provide flexibility to run a 1P (inventory) model for Blinkit. The capping is perhaps to protect from potential regulatory risks, even while Q/C models (Quick Commerce, referring to its service called Blinkit) conform to current law.

However, Jefferies expects that this move may result in an MSCI weight cut.

An MCSI weight cut refers to a decrease in a company's weighting within the MSCI Emerging Market Index. This also leads to certain outflows as market participant adjust their ownership in a company shares.

MSCI rule, as per Jefferies, is that for a stock where there is a cap, if the FPI holding is within 3% below the maximum permissible limit, the stock comes under the red flag list.

The exchanges/depositories would then release exact FPI holdings data every evening. If the FPI limit is breached, the foreign investor shall divest their excess holdings within five trading days from the date of settlement of trades, by selling shares only to domestic investors.

According to MSCI, switching to IOCC would likewise result in a weight reduction or total exclusion.

If foreign ownership limit is not breached prior to implementation, then in such a case, based on MSCI’s foreign ownership room calculation, Eternal could either face immediate exclusion from the MSCI index—triggering estimated outflows of approximately $1.3 billion or there would be a reduction in index weight, which as per Jefferies would be leading to outflows of around $650 million during the August-25 rebalancing.

If the foreign ownership limit was breached before implementation, this would result in a definitive exclusion from MSCI. However, the impact on liquidity from FPIs remains uncertain and is hard to quantify, added Jefferies.

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