MSCI's New Rules May Lead to Removal of MicroStrategy and Metaplanet from Global Indexes

MSCI has announced new eligibility rules that could result in the removal of MicroStrategy (MSTR) and Japan's Metaplanet from its global equity indexes. This decision follows a consultation aimed at classifying companies with limited operational activities. The changes will take effect at the close of November 30, with a final list of affected companies expected on November 11.

The index provider's new methodology will classify qualifying non-operating companies as ineligible for inclusion in its Global Investable Market Indexes. This could lead to substantial selling pressure from passive investment funds that track these indexes. Analysts at JPMorgan have estimated that MicroStrategy could face approximately $2.8 billion in stock outflows if it is removed from MSCI indexes.

MSCI's screening process evaluates companies based on their operating assets, expenses, cash flow, and reliance on external financing. Companies that do not meet the operating asset test and fail at least four out of five additional financial screens will be deemed ineligible. Existing index constituents must fail these tests across two consecutive annual assessments before removal.

MicroStrategy has opposed these proposed restrictions, arguing that its Bitcoin treasury business should not disqualify it from major equity benchmarks. The company contends that its Bitcoin treasury operations represent a distinct business segment, and the proposed financial screens could misclassify its activities.

The potential exclusion from major indexes could diminish demand for MicroStrategy shares and complicate future capital raising efforts. However, MSCI's approval of the new methodology does not guarantee the removal of every company identified in its initial assessment. The final determination regarding MicroStrategy's status will be made on November 11.

Following the announcement, MicroStrategy shares experienced a decline of up to 4.3% in after-hours trading but later recovered some losses, ending down 1.5% in extended trading.