The Hindu Business Line : Market tied to FII apron strings

EVER since the FIIs first made their appearance on the Indian shores in 1993, they have been playing an increasingly important role in terms of guiding the markets.

Any event or a policy, either actual or perceived that affects the FII inflows will, hence, have a direct effect on the market sentiment. This has been dramatically demonstrated during the course of the last week.

The PN Spanner

A news item about a possible SEBI ban on participatory notes (PNs) that first appeared in the Press on Friday, January 16, took the winds out of market- the BSE Sensex promptly fell by 117 points. This was only the trailer as the Sensex went on to register a fall of 467 points from the close of 6,063 seen on January 15. The impact of the news can be gauged from the fact that the bourses registered their first three-day back-to-back fall of more than 100 points, a phenomenon seen only once earlier during May 2000.

The SEBI press release on January 23 clarifies that the ban on issue of PNs will only apply to the entities that are unregulated in their country of origin. The markets will take this as very positive development. The PNs can continue to be freely used as long as the FIIs know their clients and entities are regulated. This will mean money can continue to flow in at the same pace. The second concession given by the SEBI addresses the market concerns even better. Markets were apprehensive that the ban on PNs may come with a retrospective effect. That would have meant a mass exodus from the market of all the money that came under this route. The money that has already come through the PN route can now remain parked till their date of the maturity or five years whichever is earlier. This will make the the markets heave a sigh of relief.

By quarantining the existing PNs and controlling the inflow of further funds, SEBI has shown that rare combination of regulatory concerns that are alive to market sensitivity also. By this move SEBI has also put its regulatory toe in the FII accounting door. The release will leave a few questions unanswered.

What is the definition of a regulated entity? Can the underlying portfolio of banned PNs be changed? I am sure these can be sorted out.

Importantly, there was always a question mark in the mind of the investor as to the colour of money that was coming in through the PN route. That perception will now change and SEBI figures will now be looked at with added respect and conviction.

FII inflows de-accelerate

January inflows suggest that the FII foot is not on the gas. The inflows in January are just 48 per cent of inflows in December. That apart, the FIIs have been net sellers in stock futures and index futures in January.

Does that mean that FIIs are losing interest in India? I don't think so. The truth is India story remains very much intact. The issue is not that January inflows are less, the fact is that December inflows were abnormally high. Year-end considerations may have tempted those FIIs which did not have India in their portfolios to go out and buy whatever they could lay their hands on. It would have been very embarrassing not to have a pie of the country that gave one of the best returns in the world in 2003.

A section of the market feels that while FIIs ruled the bourses in 2003, the retail investor will drive the markets in 2004. The hypothesis that moving one per cent of money from debt to equity will result in X per cent rise in the markets works very well on excel sheets and teak-wooded conference rooms. It does not act in real market place. The retail Indian investor is a follower and not a leader. He will need an infantry of either the FIIs or proprietary investors to clear the way for him. For the moment there is no questioning, who is the king on Dalal Street.

(The author is V-P & Head of Research, Anagram Stockbroking Ltd)

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