FIIs trade frantically

S. Vaidya Nathan

The year 2000 has seen trading activity by institutional investors -- mutual funds and foreign institutional investors (FIIs) -- of a level not seen at any time in the past.

FIIs bought and sold stocks at levels almost equal to what they did in the entire period since 1993 (when they entered into the Indian markets) till 1999. For instance, in 2000, FII purchases were Rs 74,875 crore and sales Rs 68,572 crore. The net inflows were Rs 6,303 crore.

Between them, FIIs and mutual funds bought and sold stocks aggregating close to Rs 2,00,000 crore during the year. But, at the net level (purchases minus sales), FIIs have been net buyers. On the other hand, mutual funds have been net sellers to the tune of Rs 738 crore.

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The latter comes despite the fact that mutual funds have had net inflows of over Rs 6,000 crore. They seem to have been active in the private placement market and also faced a high degree of losses in the process. Even the secondary market activity of FIIs and mutual funds through the year points to taking losses across the way, as there has been a broad-based decline in stocks and a steep decline in technology stocks.

It is difficult to read much into the mutual fund numbers as comparable data for the preceding years is not available. But a comparison with the net inflows (see table 1) shows that they may be holding cash and have heavily moved into private placements. The portfolio turnover (trading activity as a percentage of net assets) has not been very high.

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The FII trading numbers, which are of considerable importance, show that FIIs have been active traders, churning their portfolios at regular intervals, and there is a high degree of intra-FII and inter-FII activity. There is also the possibility that a high level of trading may be resorted to to throw operators off-guard to the extent possible.

In the past, FIIs were facing considerably higher costs on account of front-running by market operators and brokers. This may still be the case to a lesser extent. But it has increasingly become difficult to gauge the direction of FII activity, both in terms of sectoral and stock preferences.

The other significant aspect from the long-term point of view may well be that the trends of 1999 and 2000 are a precursor of what is to come. All these years, FIIs were building to a critical mass. With Pokhran-led 1998 halting that process, 1999 and more particularly 2000, point to FIIs being big traders in the marketplace without net flows in line with the levels of activity.

Today, the net flows are a smaller percentage of total trading activity vis-a-vis 1994-1996 period, when close to Rs 21,500 crore came on the back of trading activity of Rs 42,000 crore. Contrast that with net flows of Rs 6,303 crore on total trading by FIIs of Rs 1,43,447 crore. The numbers tell the tale and trying to follow the FII lead may be an increasingly risky investment approach.