FIIs in Indian Capital Market - How Predictable Are They?

I just presented a paper on "Impact of FIIs and DIIs in Dynamism of Indian Capital Market" - co-authored with one of my senior colleague Dr. Rekha - at the 5th National Conference on "Indian Capital Markets - Retrospect and Prospects" held at GJIMT, Mohali.

Dr. Prem Kumar, Director, Ludhiana Stock Exchange and an eminent industry practitioner had asked me "what is my thinking about FIIs' investment flow in Indian capital market in future". While answering his query one thing that kept coming to my mind is that the FIIs, though being a major source of liquidity in the Indian capital market, are basically speculators. Otherwise why would they repatriate their money from an economy which is fundamentally sound - a $1 trillion economy with a steady-state growth of 6.5% (when others were striving hard to show a positive figure).

It is understood that there was a severe liquidity crunch at their home, the Indian stocks were highly over-valued, and we also cannot eliminate the possibility of a subtle pressure from their governments to bring back the money home. But, the investment behaviour of the FIIs in the Indian capital market - especially the equity segment - is crazy. The bull-run in the market post elections results in May 2009 seemed to me a handi-work of the foreigners. Out of the 14 trading days, during which the Sensex shot from12000 pt to 15000 pt, they were net buyers on 10 occasions. But, they immediately offloaded some investments in the months of June and July. What is the justification for this behaviour? Isn't it queer?

Also, the Sensex is too narrow an index to reflect the actual impact. Dr. Prem Kumar suggested broadbasing of the Sensex which is highly solicited. Also, the regulatory framework should ensure that the FIIs stay invested for long-term. The FIIs comprise only about 20% of the total combined turnover of NSE and BSE, yet they are powerful enough to influence the retail investors and dance them to their tunes.

Another Sign of Recovery

The direct tax collection figures can indicate whether an economy is doing well or not. If the economy is passing through a slowdown and there is a contraction in industrial production and corporate earnings then the direct tax collected thereof would also be low. Also, in the event of a economic slowdown (if not recession) even if the direct tax collections, at least, matches with that of the figures prevailing in the good times then it is indeed a sign of recovery.

There were concerns among the policy makers of a lower mop up of direct taxes due to reduced corporate earnings. But, the all India figures for direct tax collection till September 5, totalling Rs. 90,039.7 crore, is actually higher than what it was for the corresponding period last year.

The finance ministry's projection for direct tax collection in the current fiscal year is about Rs. 400,000 crore. The last year's collection was targeted at Rs. 345,000 crore while the actual collection was lower by Rs. 6,000 crore. (Source: ET)

The Saga of Illiquid Stocks in BSE

Ideally a stock is termed as illiquid if its is not actively traded in the market or has been lying dormant for a long time. In the current scenario in Indian stock market, on one hand when we see a marked improvement in investor interest in shares, on the other hand there is a spike in the number of illiquid stocks in the BSE.

The number of listed stocks on BSE is around 7750 while its counterpart NSE has close to 1200 listed stocks. The number of illiquid stocks have risen from 1600 in September 2008 to 1800 in August 2009. On NSE, this number has gone down to 235 from 327 in the same period.

This sudden spurt in the number of illiquid stocks vis-a-vis listed shares does not send a good message about the exchange's business health. It also points out that the difference in listing requirements across exchanges. Is SEBI doing something in this direction to improve turnover and volume? After all a stock if not actively traded for a long time is as good as a privately held company.