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 The MSCI announced that it was considering changing its rules last
week, but did not explain the reason for the changes: questions from
investors amid the Alibaba initial public offering, Reuters has
learned from financial industry sources.
The investors argued that MSCI's ignoring stocks such as Alibaba
prevents them from accurately tracking the performance of
international companies, according to sources involved in the
discussions, who wished to remain anonymous because they are not
permitted to speak to the media.
Alibaba, a Chinese online retailer, plans to sell some $24 billion
worth of shares next week on the New York Stock Exchange in a
listing that could be the biggest ever IPO.
Under MSCI's rules, a company cannot be included in its biggest
indexes if it is based in one region and its shares are listed in a
different region. Because Alibaba is not listed anywhere in Asia and
is listing in New York, it would be excluded from big MSCI indexes.
Any changes to the MSCI rules will probably have to wait until at
least March 2015, according to a person familiar with the situation
who declined to be named because he is not authorized to speak to
the media.
An MSCI spokeswoman declined to comment.
The rule changes under consideration could result in investors
pouring billions of dollars into shares of companies like Alibaba
and Chinese online search engine Baidu Inc. <BIDU.O>
Funds that track the performance of the MSCI Emerging Markets index
and manage some $210 billion could be forced to buy Alibaba shares
when the rules change. Funds with some $1.3 trillion in assets aim
to duplicate the performance of the MSCI Global Investable Market
indexes.
The top 30 companies by market value that could be added to MSCI
indexes if rules change include besides Alibaba and Baidu, also
Italian fashion company Prada SpA, <1913.HK> which lists its shares
in Hong Kong, and Samsonite International SA, <1910.HK> a luggage
company founded in the United States but listed in Hong Kong.
The total market value of those 30 companies, excluding Alibaba, is
just over $410 billion. Alibaba's expected market value is $160
billion.Under current rules, Alibaba does not qualify for inclusion
in any major global indexes from any provider, although it does
qualify for smaller indexes.
FUND PRESSURE
Institutional investors have also pressured another major
international index provider, FTSE Group, to consider changing its
rules to include companies that only list abroad, the sources said.
FTSE reiterated on Thursday that under its current rules, Alibaba
would not be added to its Global Equity Index Series, which includes
its well known FTSE Emerging Markets Index.
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Those indexes exclude shares from companies that have American
Depository Receipts on a U.S. exchange, but no underlying listed
shares in their local markets.
But a spokesman added that the index provider keeps updating its
rules based on investor feedback. FTSE said it relied on external
advisory committees to ensure that users' views and any other
practical considerations were taken into account.
Alibaba will be included in five smaller FTSE indexes. However, some
fund executives believe that FTSE may change its rules if MSCI does.
FTSE Group is a unit of the London Stock Exchange Group <LSE.L>
Investors have raised this issue with index providers before, but
the upcoming Alibaba IPO has brought it to a head, one of the
sources said.
"MSCI wants to make sure that its indexes are a good measure of the
market performance. It's a bigger issue than just Alibaba, but the
Alibaba IPO is a symptom of this problem." said another fund
executive.
Dennis Hudachek, a senior specialist with ETF.com, an expert on
exchange-traded funds said several major Internet companies listed
in the United States but based in China were affected by current
index rules.
"But make no mistake about it, this is not a coincidence that they
are announcing this consultation weeks before the (Alibaba) IPO."
Alibaba does not meet the criteria for other major indexes that U.S.
investors track: the Standard & Poor's 500 Index is only for U.S.
based companies, for example, and the Nasdaq 100 is only for shares
listed on Nasdaq OMX Group Inc's <NDAQ.O> exchange.
MSCI said on Sept 4 that it was soliciting feedback on possible rule
changes, and is seeking feedback by Nov 28.
(Reporting By Jessica Toonkel, additional reporting by Ashley Lau in
New York, editing by Dan Wilchins and Tomasz Janowski)
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