Date:26/12/2005 URL: http://www.thehindubusinessline.com/2005/12/26/stories/2005122602210500.htm

Back FIIs find India hot ... for good reason

Rajesh Abraham

Mumbai , Dec. 25

THE year 2005 has been a remarkable year for stock markets — the indices scaled new peaks, the foreign inflows crossed an eye-popping $10.57 billion (crossing the $10-billion mark for the first time in a calendar) and a record number of IPOs hit the bourses.

It also shattered a myth that FIIs would press the sales button by year-end as the figures of November and December months showed that FIIs were in fact net buyers to the tune of $902 million and $1,858.60 million (till December 23) respectively.

The record inflows this year, which was the key driver of the benchmark BSE-30 index to the all-time high levels of 9400 levels, also raised concern, at least from some quarters, on the over-dependence of the Indian stock markets on the FIIs.

But experts and market analysts brush off the concern saying that FIIs are here as the Indian economy is growing and the foreign institutions would further infuse funds in the coming year as well, at the same pace and at same quantity, if not higher.

Says Mr Jamshed Desai, Head-Retail Advisory & Strategy, IL&FS Investsmart Ltd, "Fundamentals and nothing else matters eventually. Yes, global liquidity plays its part, but then not all emerging markets have fared well in this period."

"Foreign investors are not fools to stick money into non-performing economies. They didn't warm up between 1994 and 2003 barring the 2000 technology boom period. Now that they find India hot, and it's for good reason. The reasons for being bullish about India in 2006 are the same as they were in 2005," he says.

The foreign inflows began as a trickle in January, when the net foreign inflows stood at $101.20 million. But the FIIs made their intentions clear when they changed gears quickly to pump in as much as $3.62 billion in the next two months ($1.91 billion in February and $1.71 billion in March). Only two months in 2005 saw net sales by the FIIs - in April ($149.50 million) and in May ($261.30 million).

The net FII investments stood at $8.518 billion in 2004 calendar, $6.594 billion in 2003, $740.30 million in 2002 and $2.843 billion in 2001.

Mr Naresh Kothari, Head, Institutional Equities, Edelweiss Securities Pvt Ltd, explains that the FII inflows are for a much longer term than many would imagine. Large portion of the FII inflows come in broadly through four to five categories. The first comes through India-dedicated funds (which are raised from investors with a specific mandate to invest in the Indian markets). The second category of investments comes in as part of the allocation to India from emerging market funds. The third segment of inflows are through the hedge funds, which are also currently long-term investments, considering the Indian markets offer higher returns than any other market in the world. Further, there are long-term pension funds such as Fidelity, which also takes 5-7 year calls.

All these segments will stay invested for a longer term. Mr Kothari says only the money that comes in through the Promissory Notes (PNs) have a tendency to go out.

He says FIIs, in fact, are responsible for the high level of transparency and corporate governance standards among the corporate sector. "Last five years have seen FIIs playing a large part in making companies more transparent. This has resulted in huge benefits to the shareholders," adds Mr Kothari.

In fact, the so-called retail investors have proved to be the "fastest flipper" of the Indian stocks.

Says another analyst: "The retail investors no longer stays invested in a company. Why should one be concerned about the small investors, who anyway brings in only a small amount at the time of IPO (and no shareholder value) and exits at the time of listing to make a quick buck," he asks.

So what's in store for 2006?

"If the Government and bureaucracy deliver on the promise, the Indian industry is strongly positioned to deliver. And this will be reflected in the stock markets," forecasts Mr Kothari. "Indications are that more funds are waiting to enter in the new year."

Mr Andrew Holland, Executive Vice-president, DSP-Merrill Lynch, says much-expected IPOs from Reliance Infocomm and from other state-owned PSUs such as Indian Airlines could see further FII investments into the equity markets next year.

He says a main contributing factor for 2005's record inflows were aided by the "decent" IPOs especially ICICI Bank. Other IPOs that saw tremendous investor interest were Suzlon, HT Media, IDFC and Indiabulls.