Quality, Not Quantity Key To Fii Inflows

The country needs to have only about 50 strong companies having market capitalisation of Rs 1 billion and above to mark itself as hottest investment destination among emerging markets for foreigners, feel fund mangers.

US markets are not all that rosy for investors over there and lately foreign portfolio investors have identified emerging markets as high return giving destinations to divert their funds from the US. At this juncture when FIIs are looking optimistically at emerging markets, and India could be one of the attractive destinations if the current negative developments are phased out, feel fund managers.

"India does not need 6,000-7,000 companies to attract FII investment. A handful of strong companies with a market cap of about Rs 1 billion would be enough to have foreign funds flowing in," S Naganth, chief investment officer, DSP Merrill Lynch Investment Management, said. Until now emerging markets were neglected by the FIIs mainly because of poor corporate governance, transparency and disclosure norms.

 

However, with many companies now adopting the US Gaap accounting procedure, the potential to attract FII funds is huge provided the country has a regular monsoon and the war worries die down, fund managers said.

This will not only infuse liquidity back in the market but will serve as a prop up for the indexes if the stronger companies' market capitalisation increases, fund managers said.

It is worth mentioning that the consistent negative developments in the country during the current calendar year has drastically reduced foreign portfolio investments in the current year.

Foreign portfolio investment flows into India have declined sharply by 85 per cent in May from a year earlier, as foreigners pared exposure to domestic equities out of concern over peace and security issues in the last week of May.

According to Securities and Exchange Board of India (Sebi) data, during the first five months of calendar 2002, foreign inflows dropped 71 percent -- to $645.5 million from $2.2 billion in the same period last year.

Triggering the decline is the threat to domestic stability aroused by the Hindu-Muslim rioting which began in February in Gujarat, India's second-most industrialised state, and fear of war breaking out with nuclear-rival Pakistan.

Though FII inflows have been buoyant since 1995 (with the exception of 1998-99 when net portfolio flows turned negative), the inflows have been primarily in equity and not debt.

After witnessing a relatively better interest in the debt mart in past two years, foreign investors had turned negative. Last year a fall in forward premium had opened the floodgates for foreign debt investments in the new millennium.

Significantly, the trend witnessed in FII debt was in line with what had been happening in gilts. Foreign funds owned a total of $15 billion of Indian assets, both stocks and bonds, as of May 31, according to Sebi. While that is just a fraction of the $1.2 trillion value of the nearly 10,000 stocks listed on the Bombay Stock Exchange (BSE), the influence of foreign investment flows is greatly magnified by a single fact.

Foreign funds are active investors in the 50 most heavily traded stocks. Those 50 stocks accounted for 81 percent of the turnover by value on the BSE in the past year to March, according to the BSE's statistics department.

In May, foreigners remained net investors in Indian securities, but just barely and due entirely to buying of Indian bonds, the Sebi data shows. Foreigner holdings of Indian securities increased by $24.9 million, down steeply from a $166.1 million inflow in May 2001.

Foreigners were net sellers last month of Indian equities, paring their holdings by $35.2 million. They remained net buyers of Indian bonds, acquiring $60.1 million more than they sold.

In the January-May period, foreign holdings of Indian equities increased $530.8 million, down sharply from $2.2 billion in the same five-month period last year.

Day-by-day data shows foreign investors were particularly spooked by indications last week the Indo-Pakistan crisis was escalating into a nuclear showdown.

Foreign funds made their biggest single-day equity sales of 2002 late last week after Pakistan's ambassador to the United Nations said Islamabad was prepared to respond with nuclear weapons if attacked by India, which has significantly more conventional military firepower.

Both countries have subsequently tried to quell concern of a nuclear war breaking out, with the leaders of both countries this past weekend saying such a development was unthinkable.