Foreign institutional investors presence at all-time high

The number of foreign institutional investors (FIIs) registered with the Securities and Exchange Board of India (SEBI) has hit an all-time high despite a downturn in the market.

Increased regulatory scrutiny on indirect investment routes and keenness of foreign investors to build at least a token presence before the current downcycle reverses have contributed to the rise, say experts.

Twenty one institutions registered as FIIs with the market regulator in the current financial year, taking the number of such entities to 1,743, according to the latest SEBI data.

Also, the number of sub-accounts, or entities using already registered FIIs to make their investments, swelled by 342 to 6,028 during the period. Both figures are all-time highs.

Institutional investors based outside of India have to register with the stock market regulator as FIIs in order to invest directly in Indian markets.

A fall in the use of participatory notes, an instrument which allows indirect investment in the market, has caused the rise in FII numbers, say experts.

“SEBI has been discouraging the use of P-notes in favour of direct access with emphasis on more transparency and disclosures,” said Vikas Khemani, president and head — institutional equities at Edelweiss Securities.

“Post the regulatory intervention in recent years, the use of P-notes has been coming down and it is easier for them to take a direct route,” said Saurabh Mukherjea, head, institutional equities at Ambit Capital.

The SEBI data show that the percentage of FII investments through the P-note route has fallen to 15.4% in August from a high of 19.5% in May.    

Some institutions are also building for a time when they could play a more active time in the markets, says Sandeep Singhal, co-head, institutional equity derivatives at Emkay Global Financial Services.

“All the large hedge funds in the world want to come into India. It has become clear that India is a market to be in with a 5-20 year perspective. They may take a licence though they may not be immediately active,” he said.

Buying activity by FIIs has dropped over 93% in the current financial year as Indian markets have lost 16.77%.

FIIs have been net buyers in Indian markets by Rs4,065.30 crore as compared to Rs61,009.08 crore in the same period last year.

FIIs, which have been coming into India attracted by growth, may wait for the current slowdown to end before activity picks up, said Singhal of Emkay.

“We expect that there will be a reversal in the current interest rate cycle within 6-9 months and growth should pick up as well. FIIs could become more active when this happens,” he said.

Sentiment is fragile right now on account of weak global macro economic environment, said Mukherjea of Ambit.

“FIIs are not bullish on India at the moment as they still find the Indian markets overvalued on relative basis with poor political governance and weakening corporate earnings growth. The markets may head further downwards to 14,500 levels by end of this year as the global situation remains worrisome,” he said.