Global index provider MSCI has maintained status quo on Asia during its annual market classification review. It was widely expected that South Korea would be put on watch list, a precursor for an upgrade from emerging market (EM) to 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 biggest stock market globally in terms of market capitalisation – is also classified as EM by the MSCI.
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‘Market accessibility’ is a key factor for a country to get 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 Provider Brian Freitas of Periscope Analytics, who publishes on Smartkarma, analyses five key impediments with the Indian market when it comes to ‘market accessibility’. Here they are:
Foreign Ownership Limit Level: Several companies are still subject to foreign ownership limits ranging 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 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 of the need to pre-fund trades to reduce settlement risk.