It's time we stop over-dependence on 'fickle FIIs': Parekh

Raising concern about over-dependence of Indian capital markets on foreign institutional investors, eminent banker Deepak Parekh has said that something needs to be done to change this pattern.

"There is too much dependence on foreign institutional investors (FIIs), and I think we have exported our capital markets abroad. We have to do something to change this pattern," Parekh told a capital markets meet organised by the ISB in New Delhi over the weekend.

"Who is really benefitting from our well regulated equity markets? It is not the Indians, it is not our institutions, it is not our labour, it is not our retirees, but the FIIs," said Parekh, Chairman of mortgage giant HDFC.

FIIs' stakes in the Sensex companies hit an all-time high of over 27 per cent in June this year. Their holdings in the wider BSE 200 Index reached an all-time high at 24.5 per cent, as per BofA-ML's Jyotivardhan Jaipuria.

Incidentally, HDFC as also group firm HDFC Bank are among companies with very high FII holdings.

The companies where FIIs have exhausted their permissible investment limits include Axis Bank, HDFC Bank, IDFC, IndusInd Bank, Lupin, Maruti and Titan among others. The sectors where there is still some room comprise banks, cement, auto and consumer goods.

"We all know how fickle FIIs are. They move in and out of the markets effortlessly and there is a herd instinct. History is replete with examples of how sudden reversals in capital flows can cause extensive damage and volatility to a country's financial system," Parekh warned.

A vocal proponent of free market, Parekh also crticised the government for using the divestment as a tool to "plug the fiscal deficit," and said state-run firms like LIC should not take holdings in other PSUs as part of divestment programme.

He also expressed displeasure at no progress being made on the front as yet, saying bunching up of issues towards the end of the fiscal reduces market's absorption capacity. He also said the government has been "hanging on senselessly" with equity in many public sector companies such as BSNL and Air India as private companies have done very well in their sectors.

Alleging that investigating arms of the government like the CAG or CVC have "little understanding of valuations", Parekh also came out strongly over action taken against civil servants under whose leaderships such stake sales happen.

He further blamed the investment bankers and promoters for being greedy and commanding higher valuations in FY08, which saw a record initial public offerings and said that this behaviour has waned investor interest later.

"The cardinal rule is that one has to leave something on the table for investors, otherwise they will completely back out of such funding," he said, adding the number of issuances have been few even though we are in the midst of a bull-run in the market at present.