Global index providers have taken note of the government’s decision to virtually increase foreign ownership in listed companies. After MSCI, FTSE Russell has proposed to increase India’s weight on its global indices, which are tracked by funds with billions of dollars in corpus.

On Tuesday, the UK-based entity issued a new methodology to compute the weight of the country and individual stocks in its indices.

The move could increase India’s weight on the widely-tracked emerging market (EM) indices by as much as 156 basis points (bps). This could result in $2 billion of passive inflows into the Indian markets, say experts.

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With effect from April 1, the foreign ownership limit (FOL) in several domestically listed firms has risen, following the Centre’s decision to treat sectoral limits as the foreign portfolio investor (FPI) investment limits.

FTSE has said the decision to increase India’s weight will be taken during its quarterly review in June. The index provider has sought public feedback on the new methodology to compute India’s weight, by May 1.

“The FOL for Indian companies will be updated to their respective sectoral limits, based on the ‘automatic route’, unless otherwise approved for the ‘government route’ as indicated by the information published by National Securities Depository (NSDL) and Central Depository Services (CDSL), or at a limit approved by the company’s board of directors and its general body,” FTSE has proposed.

Even though the government has said that the sectoral limit could act as the FPI limit, it has given the option to companies to restrict the limit at a lower threshold, by way of board approval.

The NSDL and CDSL have published the new issued foreign investment limits for Indian companies. Barring a few, most have decided not to restrict FPI limits.

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FTSE has also proposed that the weight could be decided, based on the investment legroom.

“Indian index constituents impacted by this update with a headroom adjustment will have their respective FOL increased in two 50-per cent tranches, subject to the headroom remaining at 20 per cent or above, in accordance with the foreign ownership restriction and minimum headroom requirement policy,” it has proposed. Earlier this month, MSCI said it would take a decision on increasing India’s weight at its quarterly review slated for August.

On April 6, Morgan Stanley had published a note in which it has said that India’s free-float market cap would increase from $356 billion to $385 billion, on account of changes made to the calculation of FPI investment limits. The brokerage has said this had the potential to attract over $7 billion in foreign inflows, both from actively and passively managed funds.

Morgan Stanley had highlighted Larsen & Toubro, Asian Paints, Bajaj Finance, Nestlé India, and Divi’s Laboratories as those with maximum scope for increase in FOL.