Largely, companies with high market capitalisation have benefited from the best years of foreign investor inflows into Indian equity markets. Through the past five years, about three of every four dollars invested by foreign investors in the Indian stock market were in a small number of companies that account for a major chunk of India’s market capitalisation. In terms of numbers, these companies account for less than four per cent of the listed universe. This means about 96 per cent of listed companies have had limited access to foreign capital to fund growth.
ALSO READ: On MAT, FPIs cut India play, take out Rs 12k cr in May A total of 5,665 companies are listed on the BSE. Of these, only 3.53 per cent (200 companies) account for the bulk of foreign flows. As much as 77 per cent of foreign flows through the past five years have been into the BSE-200, according to Motilal Oswal Securities’ May 2015 ‘Flowmeter: India Holdings & Flows’ report. It said non-banking financial companies, utilities and technology companies absorbed most of the capital. The concentration might be even higher, if one goes by a Kotak Securities strategy report, authored by analysts Sanjeev Prasad, Sunita Baldawa and Akhilesh Tilotia. The report said 40 companies accounted for 74 per cent of equity portfolios in India.
“Largely, smaller companies will have to fund their growth through internal accruals and domestic money. There is a bit of a size advantage, when it comes to attracting foreign capital, though this is not unique to India. Bigger companies find it easier to be funded through equity, while smaller companies are at a disadvantage,” said Deepak Jasani, head of retail research at HDFC Securities. Various studies have pointed to the role equity capital plays in helping fund corporate growth, especially in emerging markets such as India.
A University of Cambridge study on how emerging market companies funded growth cited the importance of equity capital. Citing data, it said most corporations in developed countries relied on external financing. It was found such funding accounted for 70 per cent of the growth in corporate net assets in Korea, Thailand, Mexico, Turkey and Malaysia; the sample size was 10 countries. In Brazil and India, external funding accounted for about half the growth. Equity financed about a quarter of the corporate growth in two of the 10 countries, and about 40 per cent in five other countries, showed the 1998 study, ‘Emerging Stock Markets, Portfolio Capital Flows and Long-term Economic Growth: Micro and Macroeconomic Perspectives,’ authored by Ajit Singh and Bruce A Weisse. “There are liquidity issues. Most foreign investors do not invest in companies with market capitalisation of less than Rs 1,000 crore,” said Vikas Khemani, president and chief executive, Edelweiss Securities. The top 200 BSE companies account for 82.94 per cent of the exchange’s overall market capitalisation. Also, these account for 60 per cent of the overall volumes, show exchange data. The relatively lower liquidity in smaller companies makes it more expensive for foreign investors to buy into such companies or exit them. Through the past five years, foreign institutional investors have been net buyers by Rs 4.84 lakh crore, according to depository data. Since liberalisation, four of these five years were among the best, in terms of foreign inflows. The highest flows were recorded in 2012-13, when foreign investors invested Rs 1.4 lakh crore in Indian markets. Together, the past five years accounted for 59.17 per cent of the overall inflows since foreign investors were allowed to buy Indian stocks.