Almost half of FII inflows unexplained

A BNP Paribas report lends credence to the theory that a lot of foreign inflows are Indian money disguised as FII money

Despite the policy paralysis and slowdown in the economy, FIIs have invested their highest ever amount on a year-to-date basis in 2012. According to a report by BNP Paribas titled ‘Solving the FII riddle’ authored by Manish Raychaudhuri and Gautam Mehta net FII investments till early August 2012 in the country stood at $10.7 billion. This figure is higher even in bull run of 2007 and liquidity driven rally of 2010.

At a time when conspiracy theory of the source of FII investments in the country are flying thick and thin, BNP Paribas report throws light on the origin of these funds.

Following are the salient points of the report

• More than 50 per cent of the funds have come from Asia ex-Japan (AEJ) funds and Global Emerging (GEM) market funds
• India-dedicated FII funds have been sellers
• ETFs have contributed only three per cent to the inflows
• Almost half the funds have come from ‘other’ or unexplained sources – comprising of sovereign wealth funds, sector funds, hedge funds. This classification has lent credence to the oft repeated conspiracy theory that a lot of FII flows are Indian money disguised as FII money. Such a large quantum of money coming into the country from a non-regular source of money is adding fuel to the fire.
• India’s share of FII into Asia has been 62 per cent which is much higher than the historical norm of 25 per cent, reflecting their preference for India.
• Both AEJ and GEM funds are investing significantly over their benchmark weights.
• While GEM funds have received considerable inflows ($15.3 billion) in 2012, AEJ funds have lost money and despite such a loss of funds they are the largest investors in India among FIIs
• FII buying has been in relative defensive stocks. Top 15 stocks account for 65 per cent of their buying.