September 13, 2014 / 3:37 AM / in 3 years

Exclusive: MSCI global indices may include Alibaba after investor queries

An employee sits next to a logo of Alibaba during a media tour organised by government officials at the company's headquarters on the outskirts of Hangzhou, Zhejiang province, June 20, 2012.Carlos Barria

(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 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.

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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