FIIs pull out funds in December

First December outflow since 2006; scams prompt a re-rating of Indian stocks.

The end-of-year sell-off by foreign institutional investors (FIIs) is common. But this year, the sales have surpassed the recent years’ figures by a substantial margin.

For the first time since 2006, FIIs are set to end the last month of a calendar year on a negative note. This is also the first time since May this year that foreign investors have net-sold Indian shares.

According to data with the Securities and Exchange Board of India (Sebi), FIIs have been net sellers at Rs 2,514.7 crore in the current month (till December 24). While it is common for FIIs to square off positions in December to book the profit or loss in their balance sheets, they have ended the past few years as net buyers in December. In December 2009, FIIs were net buyers of Rs 10,367 crore. In 2008 and 2007, they net-bought shares worth Rs 1,319 crore and Rs 4,897 crore, respectively. In 2006, however, there was a net outflow of Rs 3,594 crore in December.

Market participants, attributing the outflows to year-end selling by FIIs, say the sell-off has been higher due to the frequent reports related to scams and corruption that are leading to a re-rating of Indian stocks.

“Some recent reports have damaged India’s image and even long-only funds started playing with their P&L (profit & loss statement),” says the vice-president of a leading domestic brokerage, on conditions of anonymity. “This aggravated the sell-off, as hedge funds and proprietary desks of foreign investors were in any case selling Indian shares. Some global financial majors have recently re-rated Indian stocks due to corporate governance issues,” he said.

Incidentally, the second week of December saw FIIs selling Indian shares worth nearly Rs 3,000 crore, the highest weekly sell-off in nearly six months. In the same period, South Korea reported a net inflow of $593 million, while Taiwan ($468 mn) and Indonesia ($394 mn) also attracted substantial foreign inflows.

“Factors like relative attractiveness and the general risk perception play an important role in attracting inflows,” says U R Bhat, managing director, Dalton Capital Advisors (India). “Currently, what we are experiencing is a prolonged period of uncertainty and a lot depends on how India emerges from some of the recent negative news flows. Many investors are waiting on the sidelines.”

December, as mentioned earlier, would be the first month since May when FIIs would end a month on a negative note. In May, FIIs were net sellers at Rs 9,174 crore and since then have invested a little more than $24 billion, or Rs 1.08 lakh crore. On a cumulative note, this year’s FII inflows of nearly $29 bn, or Rs 1.29 lakh crore, were the highest ever in any one calendar year. Last year, the net inflows were a little less than $18 billion.