Exclusive: MSCI global indices may include Alibaba after investor queries

Reuters News
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Posted: Sep 12, 2014 1:54 PM

By Jessica Toonkel

(Reuters) - Stock index provider MSCI Inc <MSCI.N> is considering changing its rules to allow shares of Alibaba Group Holding [IPO-BABA.N] and other companies that list their shares in faraway markets to be included in its widely used indexes.

The company 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. 

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 next year, according to an individual familiar with the situation who declined to be named because he is not authorized to speak to the media.

But 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.

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

In recent months, institutional investors have been pressing MSCI and another major international index provider, FTSE Group, to consider changing their rules to include companies that only list abroad, according to sources involved in the discussions, who wished to remain anonymous because they are not permitted to speak to the media. The investors argued that ignoring stocks such as Alibaba prevents them from accurately tracking the performance of international companies.

While the issue has been debated for some time, 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.

"There is a whole slew of major Internet companies that are listed in the United States but are based in China that are affected by these rules," said Dennis Hudachek, a senior specialist with ETF.com, an expert on exchange-traded funds. "But make no mistake about it, this is not a coincidence that they are announcing this consultation weeks before the (Alibaba) IPO."     

An MSCI spokeswoman declined to comment.

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.

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 kept tweaking its rules for indexes, when appropriate, based on investor feedback.

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>

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 from the industry about a proposal to change its rules. The firm is seeking feedback by Nov 28, according to an MSCI presentation about the proposal on its Web site. If the company decides to change its rules, Alibaba could be added to MSCI's indexes as early as March, one of the sources familiar with the discussions told Reuters.

(Reporting By Jessica Toonkel, additional reporting by Ashley Lau in New York, editing by Dan Wilchins and Tomasz Janowski)