Who are these faceless FIIs  

October 20, 2003

If the present bull run really worries the regulator, then they would do well to find out more about the Foreign Institutional Investors (FIIs) pumping money into Indian stocks. This article was published in Divvya Bhaskar in Gujarati.

Who are these faceless FIIs?

By Sucheta Dalal

The last two major bull runs in the Indian stock market were led by two individuals, each earning the partly derisive sobriquet of Big Bull.  In 1992, the Harshad Mehta-led rally ended in a crash; and in 1999-2000, Ketan Parekh created a bubble through stock ramping that he probably learnt from Harshad and his luck in catching the Information Technology mania early enough.

We are now in the midst of another phenomenal rally. This time, it is based on fairly strong economic fundamentals leading to GDP estimates being revised by economic think tanks. Surprisingly however, one set of investors are more gung-ho about India than all others – these are Foreign Institutional Investors (FIIs).  They have been pumping money into Indian stocks as there were a scarcity.

The benchmark BSE Sensex soared from a six-month low of  2924.02 on April 25 to 4855 on 15th October powered entirely by FII buying. They have pumped in a phenomenal Rs 18,000 crore into India until mid-October; and their investment in the first nine days of October was higher than their total investment in 2003.

Who are these faceless FIIs? Why are they so bullish about India? And why is their frenzied buying causing more worry than jubilation in the Finance Ministry?

One reason is their very facelessness. Although the Securities and Exchange Board of India (SEBI) registers FIIs and releases their total net sale and purchase figures, they are just bland numbers. We know nothing about their motivation, their advisors, their investment horizon or how they plan to eventually book profits (which they will have to start doing at the end of the Christmas holiday for calculation of returns and traders’ bonuses).

We do know that SEBI has asked FIIs to reveal beneficial ownership of Participatory Notes (PNs) subscribed by foreign investors. SEBI tells us that all FIIs have been regularly reporting such beneficial ownership. But that still leaves the public without any information. Does SEBI have the machinery to check out these beneficial owners and find out if hot money is flowing into the Indian market?

Can we trust the regulator to have the market intelligence to detect mischief before it erupts into a problem? Past experience says no.

Readers would recall that the 1999-2000 scam saw a host of Overseas Corporate Bodies (OCBs), pump money into Indian stocks. For a long time, their buying was seen as an endorsement of the K-10 shares.  It was only after the crash led to investigations that OCBs were revealed as completely unregulated, $10 capital companies that were fronts from Ketan Parekh, his industrialist cronies and other shady operators. It was also clear that the Reserve Bank, which registered OCBs and allowed them into India and SEBI had forgotten about the need to supervise them.

Will it be different with the FIIs, who are rumoured to be investment vehicles for large hedge fund investment in India? Internationally, hedge funds have been known to swoop down on poorly regulated markets when they spot big profit opportunities. They invest ferociously and exit just as rapidly, often destabilising markets when they leave.

Will hedge funds, investing through FIIs rock the market when they decide to book profits? So far, they have been buying far more than they have sold.

What is mystifying about this rally is that Indian mutual funds have remained on the sidelines, even after they have plenty of fresh investment in their growth and equity schemes. For instance, in the first 10 days of October, net FIIs purchases were Rs 3622 crore, while Indian mutual funds bought a net Rs 21 crore. For all of 2003, Indian mutual funds are net sellers to the tune of Rs 275 crore.

What we clearly need is some transparency and clarity about FII investment. The regulator must start by putting some faces on the FIIs and disclose which specific institutions are most  bullish on India by temporarily publishing the net sale and purchase positions of individual FIIs.  Of course, this would lead to allegations of unfairness; but it is better for the regulator to be safe than sorry. 

Alternatively, SEBI must order a detailed investigation to track the movement of shares and money, to-and-from all investors purchasing over 10,000 shares in at least a dozen top companies. This investigation, will need collaboration between stock exchanges,  banks and custodians through whom FIIs make their investments as well as share depositories.

Only if such an investigation reveals that there is nothing untoward in FII trading activities, can the regulators afford to relax and enjoy the bull run.

Until then, developments in the U.S.A point to the need for extreme vigilance. Investigations over the last year by U.S.regulators, including the Securities Exchange Commission, the New York State Attorney General and the Justice Department reveal that the best American companies, financial institutions and brokerage firms are not averse to bending regulations to make  a fast buck –usually at the cost of small investors.