September rush of FIIs worries analysts

'Source of over $5 bn flows this year unexplained'

Huge foreign inflows in September that has been pushing the stock indices and the currency to new highs have alarmed some analysts who are worried about the nature of these flows.

Reflecting the concerns of the market over huge amount of inflows received in September, Kotak Institutional Equities analysts Sanjeev Prasad and Saifullah Rais said. “We have no credible explanation for the September ‘rush’ ($3.3 bn and counting) yet, but highlight that P-notes were a big driver of inflows in July and August 2012. We suspect the same may be true for September also."

In August, French Brokerage BNP Paribas had also expressed concerns about the nature of foreign flows. According to the BNP Paribas report titled “Solving the FII riddle”, “More than 50 per cent of the funds have come from Asia ex-Japan (AEJ) funds and Global Emerging (GEM) market funds.  India-dedicated FII funds have been sellers ETFs have contributed only three per cent to the inflows Almost half the funds have come from ‘other’ or unexplained sources – comprising of sovereign wealth funds, sector funds, hedge funds. This classification has lent credence to the oft repeated conspiracy theory that a lot of FII flows are Indian money disguised as FII money. Such a large quantum of money coming into the country from a non-regular source of money is adding fuel to the fire.”

India’s share of FII into Asia has been 62 per cent which is much higher than the historical norm of 25 per cent, reflecting their preference for India, BNP Paribas analysts had said.

Analysing the investment by FIIs between January and August, Prasad and Rais said that Market participants have been pondering about the magnitude and nature of FII inflows in the Indian market in CY2012 and they could explain only about 60 per cent of the flows.: “We can account for around $7 bn of the FII inflows out of the reported $12 bn of FII cash inflows”
 
They broke down $7 billion as follows: “(1) FDI-to-FII block deals in several stocks ($2.5 bn or so), (2) ETF flows of around $1.2 bn, (3) sovereign funds ($2 bn or so) and (4) cash-futures arbitrage.”

As per SEBI data, the assets under custody under P-notes increased Rs 11,900  crore between June 2012 and August 2012 versus an increase of Rs23,500 crore for all FIIs.