FIIs take a break after record investments

Foreign institutional investors have taken a break after buying a record Rs 90,950 crore worth of shares in the first three quarters of the current financial year. As a result, a return to the peak level of FII stakes in Indian companies will take a while.

From January this year, FIIs sold shares worth Rs 10,555 crore. This trend might increase, since FIIs generally have cut their weight on Indian markets since the Sensex moved closer to 18,000-levels in the first week of January.

In fact, the latest survey of global fund managers by Merrill Lynch for emerging equity markets indicates that 59 percent are underweight on India for the current month, up from 40 per cent in January.

Even after record investments in the first three quarters, FII ownership in the free-float segment -- that is, excluding promoters' shareholding -- was 36.44 percent, much lower than the peak of 47 percent in the September quarter of 2007.

Ravi Kapoor, head, capital market and origination, Citi South Asia, said the Budget would be an important trigger for FII flows returning to India.

"If things remain calm in global markets and the Budget is positive to neutral for markets, then there are fair chances of FII flows resuming. Most FIIs are sitting on cash and they are waiting for the dust to settle in global markets. They cannot remain on cash for long and will have to put liquidity to work in markets which offer growth and returns," he said.

Things were, however, quite bright in the first three quarters of 2009 when the total holdings of FIIs in Indian companies including investments through Global Depository Receipts and American Depository Receipts was up 150 basis points to 16.50 percent.

In the first three quarters, the secondary market accounted for 36 percent of the total FII investments, a marked change from the previous three financial years when FIIs were net sellers (see table)  Placements with institutions have been the most prominent source of their investments followed by initial public offers and conversion of foreign currency convertible bonds.

Saurabh Sonthalia, head of Global Capital Markets, DSP Merrill Lynch, said FIIs buying through the primary market was a function of the choice that was available. "The strong primary, qualified institutional placement and block deal pipeline facilitated this," he said.

Citi's Kapoor said "One of the reasons for this trend could be that shares in primary offerings like IPOs and QIPs are offered at a discount so FIIs may have preferred this route to put money. QIPs tend to increase free float which increases the weight in indices like MSCI and could lead to incremental FII flows.

FIIs also preferred to buy shares from other FIIs through block deals to minimise the acquisition cost. No wonder, block deals within FIIs totalled Rs 30,000 crore in the nine months of 2009.

Domestic institutional investors such as banks and insurance companies preferred to remain on the sidelines in a rising market. Their ownership of India Inc moved up just 62 basis points in the past three quarters. Mutual funds increased their shareholding from 3.76 percent to 3.92 percent. The DIIs preferred mid-cap and small-cap stocks to large-cap ones.