Mumbai: The numbers are staggering by any yardstick. In one of the most aggressive buying sprees since liberalisation, foreign investors pumped in nearly Rs 3,71,342 crore into Indian stocks in the four years ended December 2013. This is more than the combined investment in the nine years beginning 2001, and dwarfs all that was invested in the boom years of 2005-08.
That the investment was made in the backdrop of sliding economic growth and falling corporate profits is surprising and can be attributed to global factors such as Fed Reserve's easing programme and prospects of a change at the Centre after the May 2014 general elections. The stock indices, bereft of any other trigger, rose to life highs in a dramatic Uturn in November just months after growth slipped to a decade low and the rupee had followed suit, sinking to a life low. This dollar tsunami didn't just lift indices.
It has also resulted in the highest ever ownership by foreign institutional investors (FIIs) in Indian stocks. The aggregate holding of offshore funds in benchmark Nifty companies was 18.12 per cent in the September quarter versus 17.86 per cent in June, and 18.08 per cent in the March quarter.
FII stakes in companies such as Axis Bank, M&M, HCL Technologies, Tata Power Company, NTPC, Wipro and Sun Pharma hit a record high in the September quarter. Some marketmen worry that a fast-rising FII ownership may not be that good for Indian markets as the funds could soon run out of stocks to buy. In the past four years (with the exception of 2011), foreign institutional investors have invested about $20 billion every year.
If FIIs maintain their pace of investments, they would pump in about $100 billion in five years and buy out large chunks of the stocks that they own today. "If foreigners want to buy each and every stock that they own today, out of what is remaining in their foreign investment quota, they can only pump in another $100 billion. (Then) There will be no stock available for them in the markets," says Sunil Singhania, head (equities), Reliance Capital Asset Management. This is not an implausible scenario.
Foreign investors pump in nearly Rs 4 lakh crores into Indian stocks in four years ended December 2013
FIIs own substantial stakes in some of the country's biggest blue chips, such as Infosys (about 55 per cent), HDFC (73 per cent) and ICICI Bank (67 per cent). The headroom for further investments has already shrunk and may become zero in the coming weeks and months if they buy more.
In TCS and ITC, the FII ownership is close to the ceiling and further purchases may not be possible. Tempting though it may be for those who resent FII domination of the market, the scenario is unlikely to come to pass. In the next year or so, companies and the markets are going to adjust themselves to this rising trend of FII ownership.
The objective will be to facilitate further FII purchases, not restrict them. Here are four things that are likely to happen, and what it means for the markets and investors: First, wherever possible, companies are likely to increase the ceiling for FII purchases. This especially applies to cases where there is a divergence between the government policy of higher foreign direct investment and an FII ceiling that has remained unchanged for several years. Companies may have let status quo remain for a number of reasons. One could be that they are waiting for the right opportunity and time. Now that FII holding is approaching the danger mark, and demand for stocks is increasing, expect managements to be more proactive. Second, promoters of some of India's leading companies will use this opportunity to sell some of their stake.
This will broaden ownership and allow foreign and domestic funds to buy more shares of the companies. In both TCS and Wipro, promoter holding is more than 70 per cent. The absence of free float means lack of buying opportunities for both FIIs and domestic funds.
If Tata Sons and the holding companies owned by Azim Premji sell some of their stakes, investors and the stock prices of both the companies will reap the benefits. Don't forget that much of the rally in IT and consumer goods stocks in the past one year has been driven by heavy FII buying. "Currently, FIIs can directly invest up to 24 per cent in Indian companies. But in many sectors the ceiling is much higher. I am sure when there will be demand for paper, companies will seek shareholders' approval and raise FII limits," said UR Bhat, MD, Dalton Capital Advisors. Third, a number of quality stocks beyond the top 100 on the BSE and NSE are likely to come into play even if FII limits are increased. Experts believe that many good stocks can be found in the broader market and this can be an opportunity to test FIIs' stock-picking skills.
"There are many good-quality midcap companies worth investing in. Currently, liquidity may be an issue. But that will improve once FIIs start investing. Till about 2000, FIIs used to invest in less than top 50 companies, now they are investing in over 100 companies. As the economy grows, institutional participation also gets wider," said Saurabh Mukherjea, CEO (institutional equities) at Ambit Capital.Fourth, scarcity of good-quality stocks will provide an opportunity for highquality, unlisted companies to go for IPOs. Insurance companies have been allowed by the regulator to float their shares, but market conditions and the financials of many companies may be deterring them from taking this step.
"I think Indian markets are poised for rerating by foreign investors. What is required is confidence in the markets, which is only possible by strong government reforms, and then we might see even PSU stocks getting FII attention. Some of the expected IPOs from insurance companies, asset management companies, exchanges, etc, may also find FII attention," said Deven Choksey, MD and CEO, KR Choksey Shares and Securities. A number of private, unlisted companies are doing very well, but ownership in them is restricted.
If and when the economy improves, the appetite among FIIs is likely to force promoters, and in some cases private equity investors, to look to the market for raising money or securing an exit. Some of the big Indian IPOs are probably just waiting in the wings for things to turn around.
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