Stocks in FPI red-flag list jump to five on strong foreign inflows

The number of stocks on the so-called red flag list — a system to monitor foreign shareholding — has increased to five. In September, there was only one stock on the list: Procter & Gamble Hygiene & Health Care. Since then, Novartis India, IndusInd Bank, HDFC Bank, and newly-listed Gland Pharma have been to it.

The increased number of stocks on the list is an indicator of foreign portfolio investors’ (FPIs’) bullishness towards domestic equities. Since October, overseas investors have pumped in more than $17 billion (Rs 1.25 trillion) into the domestic equities.

A red flag is activated whenever foreign shareholding is only less than 3 per cent of the aggregate limit or sectoral cap. All the FPIs on the red-flag list have aggregate FPI shareholding limit of 71 per cent. As of last week, the FPI holding in the five stocks was in the range between 71.1 per cent and 73.3 per cent. The least investment legroom was in Novartis India at Rs 52 crore, while the most was in HDFC Bank at Rs 16,500 crore, the data available with NSDL showed.

Overseas investors tend to take a cautious approach while dealing in stocks on the red-flag list. Once a stock enters this list, further buying by FPIs is permitted on condition they will agree to divest excess holdings within five trading days from the day of breach. If there are more than one shareholders, the holding is sold on a proportionate basis.

The monitoring system was put in place in 2017 after a breach in shareholding in HDFC Bank. Overseas investors had rushed to buy the stock after the Reserve Bank of India (RBI) had lifted the ban on buying HDFC Bank shares after it ownership slipped below 74 per cent of paid-up capital. In 2017, FPIs were bullish towards private banks, particularly HDFC Bank.

The current list is dominated by companies in the pharma space — one of the best-performing sectors this year.

Analysts say more companies could be added to the list, given the relentless buying by FPIs. With effect from April, the government said, the limit in individual companies would be automatically increased to the sectoral limit, unless the company decides otherwise. The move freed up investment legroom in many domestic stocks and prompted global index providers, such as the MSCI and the FTSE, to increase the weighting of domestic stocks in their global indices.