Global turmoil, not stock-lending, led to market fall: Finmin

The Finance Ministry on Friday said the sharp decline in the stock market during October was a fallout from the global financial turmoil rather than stock-lending by foreign institutional investors (FIIs). This view is contrary to what some market experts have said was the case.

A senior official of the ministry on Friday told reporters that the total shares lent overseas by FIIs were too insignificant to influence their prices. “Of the nearly 100 billion shares in 224 companies, only 192 million shares were lent overseas”, he said. Since the total amount of stock lent overseas constitutes only a “small proportion” of the floating stock, it would be improper to claim that the stock market fall was due to lending by these FIIs, the official added.

“There is zero correlation between offshore stock-lending by FIIs and the 10 biggest price losers in India between December 31, 2007 and October 8 this year,” he said.

The official hinted that the overseas stock-lending mechanism for FIIs should not be restricted. However, any decision in this regard could only be taken by market regulator Securities and Exchange Board of India (Sebi),” he said.

However, experts said market operators had hammered the prices of some stocks through a concerted effort. “Given the bearish sentiment, some leading firms were borrowing shares from FIIs and selling through a combination of cash and futures to hammer the price and cover at the lower end. This is possible in a highly-volatile market, which has poor liquidity,” said a broker.

While disclosing lending by FIIs, Sebi had recently asked them to wind up their stock-lending position.

In October, the market regulator had disclosed the quantity of shares lent by FIIs to entities other than in the Indian securities market.