Investing in stocks with high FII interest can give good returns. For instance, the FII holding in HDFC has been 58-60% since 2008. Similarly, the FII holding in ICICI Bank has been 38-40% for years. Between March 2008 and 29 September 2011, HDFC Bank and ICICI Bank have risen 35% and 20%, respectively.
37 2.12 PRESENT SCENARIO (2010-2011)
Recent Trends in Foreign Institutional Investment
Foreign Institutional Investors play an important role in Indian securities markets.Since 1992-93, when FIIs were allowed entry into Indian financial markets, foreign institutional investment has increased over the years except in 2008-09. In tandem with the boom in stock markets and a better global scenario, investments by FIIs into India were quite high in last few years, particularly since 2003-04. FIIs made a record investment in the Indian equity market in 2010-11, surpassing the 2009-10 inflows.
Chart: Trends in Foreign Institutional Investment
The gross purchases of debt and equity by FIIs increased by 17.3 percent to 9,92,599 crore in 2010-11 from 8,46,438 crore in 2009-10 (Table 2.50). The combined gross sales by FIIs also increased by 20.2 percent to 8,46,161 crore from ` 7,03,780 crore during the same period in previous year. The total net investment of FII was 1,46,438 crore as compared to of 1,42,658 crore in 2009-10. This was the highest net FII investments into Indian securities market in any financial year so far.
38 Table : Investment by Foreign Institutional lnvestors
Cumulative investment by FIIs at acquisition cost, which was US$ 89,335 million at the end of March, 2010, increased to US$ 1,21,561 million at the end of March, 2011. During 2010-11, FIIs invested 1,10,121 crore in equity and 36,317 crore in debt as compared to an investment of 1,10,220 crore in equity and 32,438 crore in debt during 2009-10 respectively (Table 2.51 and Chart 2.12). Month-wise, the net FII investment was the highest in equity segment in October, 2010 (28,563 crore) followed by September,2010 ( 24,979 crore) and November,2010 (18,293 crore). In debt segment, FII investment was the highest in January, 2011 (10,177 crore) followed by July, 2010 (8,107 crore) and September, 2010(7,690 crore).
39 The FIIs have been permitted to trade in the derivatives market since February, 2002. The
cumulative FIIs trading in derivatives was 5,34,748 crore as on March 31, 2011 as compared to 3,88,310 crore as on March 31,2010. Open interest position of FIIs in index options was the highest at 11,33,838 crore by end-March 2011, followed by stock futures( 6,22,875 crore), index futures (2,83,890 crore) and stock options ( 22,547 crore) (Table 2.52).
40 Chart: Net Institutional Investment (crore) and Monthly Average Nifty
Registration of Foreign Institutional Investors and Custodians of Securities
There was a small increase in the number of Foreign Institutional Investors (FIIs) registered with SEBI. As on March 31, 2011, there were 1,722 FIIs registered with SEBI as compared to 1,713 a year ago, showing an increase of 0.53 percent during the year. There were 5,686 sub-accounts registered with SEBI as on March 31, 2011 as compared to 5,378 as on March 31, 2010, an increase of 5.73 percent The number of custodians registered with SEBI under the SEBI
(Custodian of Securities) Regulations, 1996 was 19, as on March 31, 2011, as compared to 17 a year ago. Status of registration of FIIs, sub-accounts and custodians during 2010-11 is provided in below Table
41 The Indian economy has successfully proved its mettle time and again in terms of financial stability and economic sustainability as it has resiliently weathered global financial turmoil. Where majority of emerging economies are experiencing huge capital outflows by foreign institutional investors (FIIs), Indian markets have managed to hold their confidence as well as investments during such times. A report titled 'Doing Business in India' by Ernst & Young (E&Y) further supports the fact by highlighting India as the second most preferred destination for foreign investors, next only to China.
Overseas entities are among the important drivers for Indian stock markets. FII flows account for about 45 per cent of the market free-float.
The overview further discusses recent developments, investments, facts & figures and Government initiatives pertaining to foreign investments in India.
FII – Recent Developments
According to the data released by Securities and Exchange Board of India (SEBI), FIIs purchased stocks worth Rs 600,000 crore (US$ 113.81 billion) during 2011. FIIs were also seen attracted to the debt market in 2011 wherein they infused Rs 42,067 crore (US$ 7.98 billion). This intense interest in debt markets helped India get a net FII inflow of Rs 39,353 crore (US$ 7.46 billion) for the year (taking both- debt and stocks- into account). Global rating agency Moody's has uplifted Indian bond market by upgrading credit rating
of the Indian government's bonds from the speculative to investment grade. The move is expected to attract higher investments from FIIs and help companies raise funds at competitive rates abroad.
India's foreign exchange reserves stood at US$ 297 billion as on December 30, 2011. According to the data available with the Bombay Stock Exchange (BSE), FIIs have
consolidated their holdings in 11 out of the 30-Sensex firms during the July-September quarter of 2011. They majorly enhanced their holdings in auto stocks such as Mahindra & Mahindra, Maruti Suzuki, Hero MotorCorp and Bajaj Auto.
The number of FIIs registered with SEBI stood at 1,749 as of October 2011, while the number of FII sub-accounts was 6,058 during the month. The statistics revealed that there were 1,743 FII accounts and 6, 028 sub-accounts at the end of September 2011
FII- Key Investments
FIIs have bought stakes in BSE and National Stock Exchange of India (NSE) recently. Argonaut Ventures (a US-based private equity firm) increased its stake in BSE from 2.54 per cent at the end of May 2010 to 4.75 per cent at the end of June 2011, while couple of SEBI-registered FIIs and sub-accounts bought stakes in NSE.
42 India-based micro-lender SKS Microfinance has raised investment limit for foreign
institutional investors in the company to 74 per cent from 24 per cent and the company plans to raise funds of up to Rs 5 billion (US$ 94.84 million) through a share sale to institutional investors by March 2012.
World Bank's private equity arm IFC has made its single-largest country exposure to India at 8.8 per cent of total committed portfolio in fiscal 2011. Also, India is expected to take the lead during the fund allocation for the current fiscal (year ending June 2012), when IFC's approved funding is estimated at US$ 10 billion. According to market insiders, IFC plans to scale up equity investments over debt funding in private firms in India.
According to data released by auditing and consultancy firm KPMG, first three quarters of 2011 witnessed a 31 per cent increment in private-equity (PE) investment to US$ 7.89 billion. Private equity firms like Blackstone India and Kohlberg Kravis Roberts & Co (KKR & Co) are betting high on Indian markets. The Blackstone India chief was reported to have said that he intends to close 5-6 deals a year in India whose financial valuations would revolve around roughly US$ 100 million to US$ 120 million each.
As on October 31, 2011, FIIs injected Rs 41,253 crore (US$ 7.82 billion) in Government securities (G-secs) and Rs 68,289 crore (US$ 12.95 billion) in corporate bonds.
Government Initiatives
Government of India keeps taking different initiatives in order to attract FII investments. For instance, investment limit in infrastructure bonds was raised from US$ 5 billion to US$ 25 billion in March 2011. Similarly, in November 2011, the Ministry of Finance enhanced
investment limit for FIIs in G-secs and corporate bonds by US$ 5 billion each, increasing the cap to US$ 15 billion and US$ 20 billion respectively. The Government intends to increase capital flows in Indian markets through such measures that would eventually increase the availability of resources for Indian corporate.
Also, along with the debt instruments issued by infrastructure companies, FIIs can now also invest in debt instruments issued by non-banking financial companies (NBFCs) categorised as 'Infrastructure Finance Companies' by the Reserve Bank of India (RBI).
In a bid to attract more FII funds into the Indian infrastructure sector, the Government is
considering a trim on the lock-in-period in the corresponding bonds to one year from three years. The Government's top priority seems to be the enhancement of investor base for the Indian markets. That is why the Ministry of Finance started 2012 with a happy announcement by allowing foreign nationals, trusts and pension funds to invest directly in the country's listed companies from mid-January 2012.
43 EPISODES OF VULNERABILITY IN INDIA
There have been some episodes of vulnerability in India, which are negative shocks affecting the economy, and influencing the behavior of investors. These are: the East Asian crisis in 1997, the Pokhran Nuclear explosion (May 1998) and the attendant sanctions, the stock market scam of early 2001, and the Black Monday of May 17, 2004. The investment behavior of the FIIs vis-à- vis the movements of the stock market indices during these episodes
FII investment behavior during these four specific events indicates that these events did affect the behaviour of the foreign portfolio investors. But, these events did affect domestic investors‘ behaviour as well. The critical question to ask is: whether there was any perceptible difference, particularly with a bias towards destabilization, in the behaviour of the FIIs vis-à-vis that of domestic investors?
Table 7: India: FII Behaviour During East Asian Crisis
44 Table 9: India : FII Behaviour during the Stock Market Scam 2001
Table 10: India: FII Behaviour around Black Monday, May 17, 2004
These experiences show that FII outflow of as much as a billion dollars in a month which corresponds to an average of $40 million or Rs.170 crore per day – has never been observed. These values – Rs.170 crore per day – are small when compared with equity turnover in India. In calendar 2004, gross turnover on the equity market of Rs.88 lakh crore contained Rs.5 lakh crore of gross turnover by FIIs. This suggests that as yet, FIIs are a small part of the Indian equity market. Transactions by FIIs of Rs.5 lakh crore in a year might have been large in 1993, but the success of a radical new market design in the Indian equity market have led to enormous growth of liquidity and market efficiency on the equity market. Through this, India‘s ability to absorb substantial transactions on the equity market appears to be in place.
45 RECENT DEVELOPMENTS
FII investment limit in government securities, bonds hiked
The finance ministry on Nov 18, 2011 decided to increase investment limit of Foreign Institutional Investor (FIIs) in government securities and corporate bonds by $5 billion as the current limit for this year has almost been exhausted. Now, an FII can invest up to $15 billion in government securities , and for the corporate bonds the cap has been enhanced to $20 billion. The changes will be effective in the next few days after the Securities and Exchange Board of India issues a circular and notifies it.
FII investment in India has reached its current limit for both government papers and corporate bonds, reflecting confidence of foreign investors in Indian economy. As on October 31, 2011, FIIs have invested more than Rs 41,000 crore in government papers and Rs 68,000 crore in corporate bonds. The present ceiling for government securities is Rs 43,650 crore and for the corporate bonds it is 74,000 crore. The changes are likely to enhance capital flows and investments at lower cost. Indian corporates also have enough room to borrow through the External Commercial Borrowing route where the cap is $30 billion, of which, so far, this year's borrowings have touched $21 billion.
In September, the government had relaxed norms for FIIs investment in long-term infrastructure bonds, reducing the residual maturity period to one year for investments of up to $5 billion. Though the government had raised investment limit of FIIs in long-term infrastructure bonds from $5 billion to $25 billion in the 2011-12 Budget, investments under this scheme had a minimum residual maturity of five years and were subject to a minimum lock-in period of three years.
From the table below, we can see that as on October 31, 2011, FIIs have nearly exhausted the investment limit in government securities and corporate bonds. This move will further give an investment opportunity of approximately Rs 25000 cr in each, government security and corporate bond (assuming a conversion rate of Rs 50). However, the investment in long term infrastructure bonds is merely Rs 2837 cr (in the first 7 months of FY12 ) versus the limit of Rs 112095cr
Since infrastructure is a key area where India is still lacking, the government should bring in reforms and attract investments in infrastructure, which can further boost the country's economic growth. The move will help in cooling the 10-year government bond yields, and will reduce the borrowing cost for the government. Further, this will also help in developing our bond market.
46 We further feel that this move will attract a lot of FIIs, as the interest rate cycle in India is almost at its peak. Going forward, there could be a rise in the prices of the bonds, leading to better capital gains. It will also ease some pressure from the government with respect to the rupee, which has depreciated in the past couple of quarters.
Overall, the move has multiple purposes. such as moving a step ahead for developing the bond market, helping the rupee stabilise, a cool off in the 10-year bond yield to some extent and attracting foreign investment in the country.
Particulars New Cap for
Investment (In USD bn)
Old Cap for Investment (In USD bn) Investment limit according to old cap (Converted into INR Cr) Investment made by FII according to old cap (Converted into INR Cr) Additional Investment could be made (Assuming Conversion rate of Rs 50) in INR Cr Government Securities 15 10 43650 41253 25000 Corporate Debt 20 15 74416 68289 25000 Corporate Debt - Long Term Infra 25 25 112095 2837 -
47 2.13 FII activity in 2012
The investment by overseas investors into Indian stock market since the beginning of 2012 has crossed $7 billion level, out of which more than $5 billion were pumped in the month of February. Foreign Institutional Investors (FIIs) purchased equities and debt securities worth a gross amount of Rs 76,548 crore in January 2012, while their gross sales for the month were worth Rs 50,219 crore, translating into a net inflow of Rs 26,329 crore, as per data compiled by the market regulator Sebi.
Overseas investors poured in over Rs 26,000 crore ($5.08 billion) in Indian markets in January 2012, the highest one-month net inflow in 16 months, as sentiments got a boost from easing inflation concerns and attractive valuations.
The Foreign Institutional Investors (FIIs) infused a net amount of $ 5.12 billion (about Rs 25,212 crore) during February, taking the total for 2012 so far to $7.16 billion for the Indian stocks. Market analysts attributed strong FII inflows to signs of a reversal in RBI‘s monetary policy and the subsequent impact of improved liquidity position. They expect the positive trend to continue further, given that the liquidity conditions remain strong.Market analysts attributed strong FII inflows to signs of a reversal in RBI's monetary policy and the subsequent impact of improved liquidity position.
During February, FIIs were gross buyers of shares worth Rs 79,898.6 crore, while they sold equities amounting to Rs 54,686.6 crore, translating into a net investment of Rs 25,212 crore ($ 5.12 billion), as per data available with market regulator Sebi. This is the highest monthly net investment by FIIs in equities since October 2010, where they had infused Rs 28,563 crore. The foreign fund houses also infused Rs 1,0016 crore ($2.03 billion) in the debt market last month. This takes the overall net investments by FIIs into debt markets to Rs 25,987 crore ($5.08 billion) so far this year. ―FIIs have been infusing money into the Indian market due to change in RBI‘s monetary policy that have added liquidity to the system. This liquidity will help in growth of the country,‖ Wellindia Executive Director Hemant Mamtani said. ―Indian market will
continue to witness inflows in the whole year, if the liquidity conditions remain strong,‖ he added. Strong surge in FII inflows in 2012 so far has helped boost the equity markets, as also the rupee.
The stock market barometer Sensex has gained 15 per cent in 2012, despite a fall of about 3.25 percent last month. The index finished at 17,752.68 on February 29. FIIs had mostly stayed away
48 from Indian equities in 2011. They flocked towards the debt market last year with a net
investment of Rs 20,293 crore, while pulling out Rs 2,812 crore from equities.
In the year 2011, FIIs purchased stocks and bonds worth Rs 8 lakh crore, but sold securities worth Rs 7.9 lakh crore, resulting in a net investment of Rs 17,480 crore during the year. Strong surge in FII inflow in 2012 has helped boost the equity markets as well as helped the Indian rupee to strengthen. The foreign fund houses have also infused Rs 17,281 crore in the debt market so far this year. Strong surge in FII inflow in 2012 has helped boost the equity markets as well as helped the Indian rupee to strengthen.
It is not only India which has witnessed an upsurge in investment, equity funds focused on all emerging markets put together have seen an inflow of over $24 billion in 2012. "FIIs
investments in debt market are rising because of higher yields on local bonds," Bandyopadhyay said. In terms of equity investment, foreign funds have poured in maximum money in
infrastructure and pharma stocks, he added. This is the highest net investment by FIIs in stocks and bonds since September 2010.
―In 2012, FIIs infused money into the Indian market mainly on account of easing inflation, a relaxing of foreign investor restrictions and the RBI‘s policy moves,‖ CNI Research Head Kishor Ostwal said. Stock market inflows in the first 17 days of February, at Rs 13,867 crore, were higher than that for the entire month of January 2012, which stood at Rs 10,358 crore.
49
Secret of the Sensex: Biggest FII turn-on since 2000
The Sensex crossed the 18,000 mark and closed at a six-month high. India, which was among the worst performing markets by December 2011, is one of the best performing ones today.
Fundamentally, nothing seems to have changed, either in India or in the world. In fact, after the December quarter corporate numbers, the outlook is even more bleak.
So what is the secret behind this sudden rally? The answer is the largest foreign inflows since the turn of the decade.
The main reason for the sharp 18 percent rise in indices is the Rs 22,000 crore FII money that has entered the country, the highest ever, since Sebi started disclosing the data in 2000. Inflows in the first 15 days of February, at Rs 11,681.7 crore, were higher than that for the entire month of January 2012, which stood at Rs 10,907 crore. This means around $4 billion of money has already flown into the country in the first 45 days of this year. It has resulted in Sensex moving from a low of 15,358 0n 2 January 2012 to 18,231 on 15 February.
While emerging markets trade at a valuation of 12 times their reported profits, developed markets are trading at 14 times their reported profits. Reuters
The MSCI (Morgan Stanley Capital International) Emerging Markets Index has already gained 15 percent in 2012, the best start to a year since 1991. It has outperformed the MSCI World Index by 6 percentage point.
According to a report in Bloomberg, Jonathan Garner, the chief Asia and emerging markets strategist at Morgan Stanley, said the surge in optimism is a contrarian indicator that may signal the rally has gone too far, too fast. Michael Hartnett, chief global equity strategist at Bank of America Investor, says holdings in emerging markets have climbed to a level that historically foreshadowed short-term underperformance.
50 From the chart below, it‘s clear that the banking sector has been the favourite among sector