UNLIMITED OPPORTUNITIES IN FIIs 'LIMIT'

By Ruma Dubey

Over the past few months, while everyone has been concentrating on major macro issues, interest rates in India and USA, Europe, Brexit, oil and Sensex gyrations, there have been many companies which have reached FII limits. There have been stock specific movements every time a company has announced that it has reached its limit or is awaiting approval for hike in FII limit. And this hike in limit has been on the surge for a couple of months.

Recently, South Indian Bank reached the trigger limit of FIIs holding; Trent reached the FII limit of 24%.  Remember Titan Industries in Nov’13? It had exhausted its FII limit after which the share price tanked. We saw Tech Mahindra, Axis Bank, Federal Bank, BPCL, Ultra Tech, Crompton Consumer, Yes Bank, all hiking FII limit.

So what does this indicate? The most obvious – FIIs preference for particular stocks and more importantly, irrespective of the macro factors, geopolitical issues, their infatuation with India has not disappeared as feared by many.

As per a report in Economic Times, FIIs held in excess of 1% stake in 454 domestic stocks as of June 30, with the top 10 among them holding shares worth over Rs 2 lakh crore. HDFC and HDFC Bank are the hot favorite, held by almost all the big funds.

This ceiling on FII limit in monitored not by SEBI but by RBI, on a daily basis. As per RBI, The ceiling for overall investment for FIIs is 24% of the paid up capital of the Indian company. The limit is 20% of the paid up capital in the case of public sector banks, including the State Bank of India. The ceiling of 24% can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. The ceiling for FIIs is independent of the ceiling of 10/24 per cent for NRIs/PIOs.

The trigger point for FIIs is 2% below the limit. The cut-off limit for companies with 24% ceiling is 22% and for companies with 30% ceiling, is 28% and so on. Similarly, the cut-off limit for public sector banks (including State Bank of India) is 18%. Thus once FII holding gets here, RBI issues a cautionary note to the designated bank branches, letting them know about the limit and no more equity shares for the FIIs can be purchased without RBI’s approval. RBI gives clearance on a first come, first served basis, till the limit is breached, after which no further buying for FIIs is allowed.

Thus what happens to you and me when FIIs reach their limit? First and foremost, the ceiling will go up, meaning more momentum and higher stock price. And if the entire limit is exhausted, we could see some churning but no exodus. Well, there are many who fear that quality stocks are running out-of-stock with FIIs cornering all good stocks. Also others confer that valuations go way above its intrinsic value, like in Jubilant Food.

FII limit or not, if the company is good, the bottomline is that investors, be it FIIs, DIIs or retail investors; all will queue up. A company’s stock price moves in direct tandem with the earnings and fundamentals. FIIs will also follow this same basic rule.