'FIIs have virtual monopoly of stock markets'

By Oommen A. Ninan

MUMBAI, APRIL 14. The recent developments on Indian bourses should be an eye-opener to the financial institutions and commercial banks which should participate more actively in the capital market where the foreign institutional investors have a virtual monopoly.

``In order to minimise the impact of the operations of FIIs on the Indian market, we have to deepen and widen our own market,'' said Mr. M. R. Mayya, former executive director of Bombay Stock Exchange. The financial institutions including the Life Insurance Corporation of India, Industrial Development Bank of India and commercial banks should be more actively involved in the day-to- day operations of the market. In fact, a small portion of 5 per cent of the annual accretions to provident funds, gratuity funds and pension funds should also be permitted to be invested in equities.

Mr. Mayya pointed out that the LIC is not actively churning its portfolio which is essential in a fast changing market like the present Indian stock market. Although commercial banks can invest about 5 per cent of incremental deposits in equities and debentures of Indian companies, the actual amount invested is less than one per cent, he said.

On April 4, the Bombay Stock Exchange 30-share sensitive index (Sensex) plunged by 361.48 points or 7.15 per cent - the second largest fall in the history of the Indian capital market - following a panic reaction to the Income-tax Department notice to some Mauritius-based FIIs. After the clarifications by the Finance Ministry, the index recovered by over 350 points by Friday. This points to the sentiment unleashed by developments relating to FIIs. On the day it crashed, the total traded value was Rs. 1,442.40 crores, the lowest in the current year and when it gained 352 points on Friday the total traded value was Rs. 1,607.69 crores.

The gyrations witnessed in the stock market are a clear evidence that the stock markets are dominated by the FIIs, Mr. Mayya said. Although their cumulative net investment of $11.237 billion accounts for a mere 5 per cent of the total Indian market capitalisation of about $215 billion, in terms of purchases and sales all of which result in delivery, the FIIs easily account for more than 50 per cent of the total deliveries.

Moreover, their operations are confined to scrips of 100 or 150 leading companies which are liquid. It is this large percentage of deliveries by one single group which gives them the muscle- power to influence the market greatly. Moreover, unlike the financial institutions and mutual funds in India, their operations are of shorter duration. Mr. Mayya felt that ``In a way they have become mere traders than long term investors in the Indian market.''

Historically, the financial institutions and banks have been mainly repositories of money. They were not allowed to trade in the secondary market. Even though there are no such constraints at the moment, the mindset of banks and institutions has not changed. They are averse to taking risks on the bourses. ``The Government should encourage these institutions to take active participation in the market which can provide the much required depth and breadth to give the push to the market.'' said Mr. V. R. Srinivasan, managing director, R. K. Chari Stockbroking. He added that the Securities and Exchange Board of India should also allow mutual funds to participate in the forward markets through specially designed schemes.

In addition, the regulatory mechanism of the stock exchanges needs to be more proactive. Whenever a steep fall in prices is anticipated, stiffer margins on sellers should be announced even before the market opens. Likewise, stiffer margins on buyers can be prescribed in anticipation of a sharp rise in prices. This can moderate to a great extent the volatility in the stock markets.

All this does not mean a curb on the inflow of FII investments. But the focus will have to shift to foreign direct investment which is still low around $3 billion a year. More than FII investments, FDI will accelerate the developmental process of the economy, Mr. Mayya said.

``It needs also to be noted that we need not be apprehensive of any sudden withdrawal of funds by the FIIs as our foreign exchange reserves can easily take care of our import requirements for about nine months,'' he said. Moreover, large scale withdrawal by FIIs is unlikely as Indian markets today are among the best performing markets. Given all the favourable factors - excellent growth rate in GDP, revival in industrial growth, rising level of exports, sustained low level of inflation, rising corporate profits, booming infotech sector which have attracted global attention and a stable government at the Centre - the bullish undertone in the market will continue for quite some time, according to Mr. Mayya.

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