Five-day FII mystery, every three months

There seems to be a method to foreign institutional investors’ purchase of Indian equities. FIIs have a particular bias for the last five trading sessions in the quarter-ending months of March, June, September and December. The flows are always positive inflows and disproportionately large, compared to the rest of the month.

These inflows are significantly higher when compared to similar periods in other ‘normal’ months. Inflows at the end of any other month are substantially lower than the one when the quarter ends.

Over the past six quarters, the Indian market has seen average inflows of $1.1 billion in the last five trading sessions of the four quarter-ending months. This compares with about $400 million of average monthly inflows over the past 18 months and only $58 mn of net inflows, excluding the quarter-ending months. Sanjeev Prasad, co-head of Kotak Institutional Equities, in a strategy note has said: “It would be too much to expect that our observation is mere coincidence. However, we do not have an explanation for this.”
 

LAST-MINUTE DASH
Quarter  ended	FIIs net investment equity ($ million)	Sensex  (% chg)
Mar ‘10	1,000.38	0.44
Jun ‘10	439.43	-0.31
Sep ‘10	1,968.99	1.05
Dec ‘10	887.76	2.17
Mar ‘11	1,093.67	5.96
Jun ’11	1,129.40	6.31
Note: Both FIIs & Sensex data are only for the last five trading days of the quarter Source: Sebi Compiled by BS Research Bureau

Rajesh Jain, executive vice-president and head of retail research at Religare Securities, says: “The international markets tend to influence inflows into domestic markets. The changing global sentiment could have an impact.”

While this explanation may hold true for this year, the quarterly pattern is not recent but goes back six quarters. It’s apparent the trend has nothing to do with the F&O (futures and options) expiry period towards the end of the month, since the expiry takes place every month and not every quarter. Prasad also rules out valuations as a reason for the sudden large inflows during the last five days of any quarter-ending month. Valuations seem to be quite similar around that period for the 18-month period, except for this June, when valuations had dipped below ‘normal’ levels, sufficiently enough for the market to attract some inflows.

Also, the flows are largely back-ended in the quarter-ending months, compared to other months. In effect, even if the average daily inflows have not been substantial, the last five days sees most of the inflows. For instance, net inflows in June were $734 mn, but the last five trading sessions in the month saw inflows $1,129 mn.

However, Tarun Bhatia, director of capital markets at Crisil Research, says: “Fund managers would like to reflect higher deployment and are likely to invest large amounts in the last five days.” Undoubtedly, given the erratic global situation this year, portfolio flows have been rather volatile. This trend, too, has affected the benchmark indices. The last five trading sessions of March saw inflows of $1,093.7 mn and the same period in June saw $1,129 mn. During this period, the benchmark index rose 5.96 per cent in the last five days of March and by 6.3 per cent in the same period in June.

There is a buzz in the markets that foreign funds, benchmarked on a quarterly basis, could be doing it to push up their Net Asset Value. However, Jigar Shah, head of research at Kim Eng Securities India, believes the Indian market is huge and for some people to take concerted action is not easy.