FIIs aren’t responsible for the havoc in the stock markets, nor are they causing upheavals in the companies whose stock they hold.
NEW DELHI: Junk the foreign devil theory. Foreign institutional investors (FIIs) aren’t responsible for the havoc in the stock markets, nor are they causing upheavals in the companies whose stock they hold.
“Foreign ownership tends to be sticky, it’s not as if they are evil hedge funds jumping around,” economist Ajay Shah said at the World Bank- Indian Council for Research on International Economic Relations (Icrier) workshop on ‘Increased integration of China and India’ in the global financial system.
FIIs actually account for a lesser share of outside shareholding than retail investors, and portfolio investments also tend to be sticky, Ajay Shah and Ila Patnaik argued in a paper presented at the seminar.
They based their conclusions on a study of the holding patterns of 1,162 firms, with market value of above $10 million (Rs 45 crore).
Also, Shah said, the size of transactions of FIIs was only 5% of market operations. Sure, FII ownership of Indian equity has soared 75% in just four years (see table). But only 332 of the 1,162 firms had high FII ownership — that is, over 5% of their outsider shareholdings is with FIIs.
More importantly, during these past four years, holdings by retail investors (non-institutional/non-promoter) had always accounted for a larger share of outside shareholding of companies.
And at 150%, the growth of the holdings of retail investors was almost double that of the growth of FII holdings.
So what are the kind of firms that attract high FII interest? Size, for one, matters. Bigger firms and more liquid stocks, argues Shah, get more FII interest. There’s been no study, though, of the sectoral composition of FII holdings.
Nor does hot money always flee, the paper argues. The chances of firms with high levels of FII investment retaining that holding was as high as 80%. The lower the level of investment, the lower the chance of this being stepped up, Shah argues.
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