FIIs - NOT ALL LOVE IS LOST, YET

By Ruma Dubey

Grapevine has it that FIIs are beating a hasty exit from India. Their love for India is all lost in the quagmire of politics, policy paralysis, inflation, falling growth rate and general apathy from all ends. Someone said that the “I” in BRIC has fallen off. Now isn’t that being too dramatic? But this could have stemmed from the data put out by SEBI on 31st Dec 2011. According to SEBI, FIIs purchased stocks worth more than Rs 6 lakh crore during 2011, but sold shares worth a higher amount -- resulting into a net outflow of over Rs 2,700 crore for 2011. And in 2010, the year had ended with a net FII inflow of over Rs 1.3 lakh crore.

But the big difference between then and now, which could have been the sole reason for the pullout is the rupee vis-à-vis the US dollar. FIIs took a hit of 36% on their investments during 2011, as measured by the movement in the BSE's Dollex Index and they are estimated to have lost a jaw dropping Rs.2 lakh crore. They are stated to have accounted for about 10% of total losses of Rs 19.45 lakh crore for the entire stock market.

Yet, there is a silver lining. The FIIs have not moved out lock, stock and barrel out of India. Given the overall turbulence and the overtly bearish overhang, FIIs have decided to mitigate their risk by increasing their investment in debt instruments. During 2011, the FIIs infused Rs 42,067 crore into the dent market, resulting in a net FII inflow of Rs 39,353 crore for the year, while taking into account both stocks and debt securities.

So the FIIs have not exited, it is just that they are investing wisely. After all they are here in India to make money and not because they love India thus they will put money where the returns are better. And the Finance Ministry, with an ear to the ground whenever it concerns FIIs, did the right thing by allowing foreign individuals direct access to Indian equities through the qualified foreign investor or better recognized as the QFI route. QFIs include individuals, groups or associations, resident in a foreign country which is compliant with necessary international norms. The circular from the Finance Ministry did not propose any registration or eligibility requirements for QFIs, reiterating that SEBI and RBI will issue relevant circulars to operationalise the scheme by January 15.

And the news on the street is that SEBI too is going to follow up with an equally good move to retain and bring in more FIIs. It is widely rumoured that liberalisation of norms for FIIs coming in through sub-account is on the agenda. Currently the rules for foreign investor investment through sub accounts is pretty stiff - FIIs and sub-accounts have to register themselves with SEBI, a fund must have a minimum of 20 investors, minimum net worth criteria of $50 million amongst many other.

Another pointer to the “foreigners” not scooting off is the FDI inflow. Now that is the real measure, more than FIIs pumping “hot money” into the stock market. But FDI inflow increase indicates that they still find attractive enough to make some long term and much bigger commitments. As per the data released by ministry of commerce and industry, India registered a 36% increase in FDI inflow at $ 23.68 billion during the January-October 2011 v/s FDI worth $ 17.36 billion during the same period in 2010. It is only after August that FDI has picked up, or else, it was very much in the red. Thus the overall FDI number for the year was at $ 19.42 billion, down from $ 25.83 billion in 2009-10.

As we keep on reiterating, the entire market runs on sentiments. If the moods turnaround, all this gloom will overnight turn into boom. And to change those sentiments, we need some stimulus, some policy announcement which will buoy the sentiments. In all likelihood, if RBI reduces rates in its policy of 24th Jan 2012, moods will turnaround. Or if not in Jan, surely in the next one!