Invest In India

Foreign institutional investors preferred QIPs, IPOs to secondary market.

Only one-fourth of FII investments was routed to the secondary market.
Monthly inflows from FIIs were negative in six out of nine months this year.
Domestic institutional investors put in twice the amount invested by FIIs in 2009.

Contrary to popular belief, foreign institutional investors (FIIs) are not the prime driving force behind the recent stock market rally. FIIs have preferred to buy equity stakes directly from promoters through qualified institutional placements (QIP) and primary market offerings, rather than secondary market investing for most part of 2009.

Instead, it has been the domestic institutional investors (DIIs), including mutual funds, banks and insurance companies, which have been the mainstay of the secondary market this year. Net investments made by the DIIs since the beginning of this year has been almost twice the amount invested by the FIIs.

Data disseminated by the market regulator, Securities and Exchanges Board of India (SEBI), show overseas investors ploughing in about Rs 47,000 crore or $9.8 billion into Indian equities in 2009. This figure (that has become synonymous with liquidity) is often cited driving stock prices higher.

But it needs to be remembered that not all of these funds find their way to the secondary market since SEBI’s data include investments made into qualified institutional placements (QIPs), initial public offerings (IPOs), rights issues and so on.

FII flows into the secondary market alone, captured in the category-wise turnover data published by the BSE, were only one-fourth of the above number reported by SEBI.

Specific sectors

Moreover, monthly FII flows were negative in six out of nine months this year. These investors presciently bought Indian equities in April and May in the period preceding and just after the Lok Sabha elections. They withdrew into a shell thereafter and were net sellers in June, July and August. During this period, domestic institutions such as mutual funds and insurance companies powered the rally. They bought over Rs 13,000 crore of stocks in the three months from June, even as foreign investors were net sellers.

A large portion of FII funds has been routed to the QIP issues that have flooded the market this year. The absence of lock-in period on such investments, speed and the ability to corner a chunk of equity at a small discount to the market price, seem to have made QIPs popular among overseas investors.

That FIIs preferred such placements also shows that they took a positive view on specific sectors such as construction, infrastructure, and power, even while retaining a cautious outlook on Indian markets as a whole. Interestingly, even in 2008, the FIIs had ploughed in over Rs 48,000 crore into Indian equity through IPOs, rights issues and so on, even as they pulled out over Rs 1 lakh crore from the secondary market.

In fact, if the secondary market investments of FIIs appear promising at all, that is mainly on account of inflows over the past two weeks. A net inflow of Rs 9,000 crore which is about 70 per cent of the inflows received since this January, came in after September 7. Inflows into the secondary market up to September 6 stood at less that $1 billion.