FPI bets on Indian stocks have become more concentrated over time

Top 10% of stocks account for most of their holdings

Foreign portfolio investors have increasingly put more of their eggs in a smaller basket of Indian stocks.

The recent sell-off and the advent of technology companies listing on the stock exchanges could be factors that might favour a rejig resulting in increased diversification, according to experts.

The top 10 per cent of stocks account for 93 per cent of investments, shows exchange data. It was 85 per cent in 2006. It has now been edging close to the 2001 level of 98 per cent.

“The rise in concentration in the last three years or so is merely a market feature notice the commensurate (actually more acute) rise in the market-cap share of the top....(10 per cent)...of listed stocks during this period,” said data from the National Stock Exchange’s monthly market pulse report.  The analysis looked at quarterly numbers till December 2020 for Nifty 500 companies.

“These are all the compulsions of size,” said UR Bhat, director at Dalton Capital Advisors (India). Foreign portfolio investors often have to invest billions of dollars. They tend to buy more of large, liquid stocks since entry and exit becomes a problem otherwise, he said. This would also mean that concentration would come down during a sell-off as it is easier to exit the more liquid names, he pointed out.  

Foreign investors have been net sellers by Rs 15,595 crore so far in April and May.

The listing of start-up companies could help create more diversification too, suggested Pankaj Pandey, head of research at brokerage firm ICICI Direct. These companies typically have very low promoter holding. They have to raise money multiple times as they grow. This tends to dilute the original promoter’s holdings as new partners pump in more money. This also means that more shares of the company are available for investors to buy and sell when such companies list on the stock exchange. This higher free float could provide an avenue for FPIs looking for liquid investments.

A look at the sectoral figures also shows some signs of concentration. Almost a third of the assets under custody are in financial services companies. Software and services, oil and gas and automobile related stocks are among the other favourite sectors. Pharmaceuticals and biotechnology stocks also are part of the top five (see chart). The top three sectors alone account for the majority of holdings.

 There is a similar trend in terms of number of stocks in which they invest, according to the NSE analysis.

“....overall number of stocks in the portfolio has hovered around 1200 for the past 10 years. During this period (2010-), FIIs have poured in US$145bn+ on a net basis into the Indian equity markets. In the absence of new companies, the deployment of this capital has led to a gradual rise in their ownership of the incumbent portfolio,” it said.

They hold at least five per cent stake in 70 per cent of the Nifty 500 companies, it said.

Mutual funds are exploring more stocks though their concentration too has been on the rise, it added.