MSCI (Morgan Stanley Capital International) planned to include Xiaomi (小米) in MSCI All-Country World Index later this month.
MSCI All-Country World Index (ACWI) tracks a large scale of securities of 2,400 across large and mid-cap size segments in 23 developed and 24 emerging markets. The indices to track developed and emerging markets are the MSCI World Index and MSCI Emerging Markets Index which Xiaomi will be included.
According to Seeking Alpha, Xiaomi is the first and the largest listed dual-class in the HK stock exchange. This time, there will be another two dual-class Chinese based companies included in MSCI Indexes such as Meituan Dianping (listed in HK) and Tencent Music (listed in the US).
Previously in 2017, MSCI has temporarily restricted dual-class structure companies be included in its indexes. Later in October 2018, it finally approves multiple class structure companies to stay. Meanwhile, it also provides substitute benchmarks excluding multiple class structures.
The other two biggest index compilers, namely FTSE Russell and S&P Dow Jones Indices holds negative attitudes for those multi-class companies. Take an extreme example of Snap, the parent company of a multimedia messaging app, which gives public investors zero voting right has been barred from S&P U.S. indexes and FTSE.
Why these index compilers have concerns on multi-class companies
According to the definition of multi-class structures, it gives shareholders the unequal voting rights compared to the “one vote, one share” under the traditional corporate governance. Usually, under this type of structure, the CEO or management team remain control and avoids pressure from investors’side.
However, investors sometimes have concerns over the structure due to no or low voting rights. Lack of voting rights means less control over the company and it will restrict the influences of investors have in the firm, which might mean decisions flavored by investors might not be able to get approved. Thus, investors are putting pressure on index compilers from adding dual class shares into indexes or regulators from approving corporates under this structure to be formed or to go public.
Xiaomi is not alone
Nowadays, overseas giants like Alphabet (Google’s parent company), Facebook, and Berkshire Hathaway etc. are under the multi-class share structure. Although dual class structure companies are not allowed to go public in the Chinese stock exchanges, they chose to be listed overseas such as Meituan Dianping mentioned earlier and Alibaba, the largest e-commerce company in the world, listed on the New York Stock Exchange
Benefits from being included
According to Chin Ping Chia, head of Research for the Asia Pacific at MSCI, thinks the 226 China Large-cap A shares been included in its Emerging Markets Index which could possibly bring roughly USD 22 billion of capital inflows into them.
It can be concluded that by joining MSCI could make it easier to attract investors’ attention and investments. MSCI claims that more than 85% of all international equity fund assets are benchmarked to MSCI indexes with total amount over USD 12.4 trillion and more equity ETFs track MSCI’s indexes than any other provider; therefore it provides an exposure opportunity for Xiaomi to be tracked by funds especially those passive ones. Passive funds are characterized by infrequent transactions, which will add stability to Xiaomi’s share price.
This time there are 17 companies to be added, nine of them (more than 50%) are dual-class shares companies. This, to some extent, sent a positive signal towards companies under dual-class structures. As a result, the share prices for Xiaomi and Meituan Dianping went up 2.24% and 2% respectively in the opening.
Last but not least, since Xiaomi has a plan to expand around the world, it could somehow increase Xiaomi’s awareness among professional investors and financial institutions across the world which could drive more stable capital inflow for long-term investments in Xiaomi.