The Hindu Business Line : Market decline is steep while fall in FII holdings is not

BL Research Bureau For much of 2008, FIIs have been cast as the villains of the piece in the Indian stock market meltdown. Net sales of Rs 52,842 crore executed this year by FIIs also seem like a mammoth sum.

But did you know that FIIs have relinquished only a minuscule portion of their stakes in Indian stocks, at least as per the available shareholding data?

Despite the huge FII sell-off, the shareholding patterns for CNX-500 companies show just a 1 percentage point reduction in FII holdings over 2008. FIIs, who held 15.4 per cent of the outstanding equity of these companies in December 2007, now hold 14.2 per cent (as of September 2008, the latest available shareholding pattern), a mere 1.2 percentage point decline.

While that may seem like good news, it needs to be noted that a mere 1 percentage point reduction in FII stake has contributed to a near halving of bellwether indices.

High impact cost

Impact cost, which captures the cost of executing a transaction on the stock exchanges, has always been on the higher side in the Indian markets.

That may be one explanation for the extended impact of FII sales on prices.

While mutual funds bought stocks even as FIIs sold, their quantum of purchases was small in relation to FII sales. In 2008, while FIIs net sold equities worth Rs 52,842 crore, mutual funds’ saw net inflows (showing buying interest) of just about Rs 13,753 crore.

With very few interested buyers, FIIs would have been forced to find buyers at lower and lower prices, explaining the steep erosion in some stocks.

Another explanation for the steep fall could be influence that FIIs wield on the investment decisions of retail investors.

The much-touted ‘blind following’ that FIIs have may also have accelerated declines in stocks that FIIs exited.

Moves significant

Even though overall FII ownership in stocks didn’t fall much, FII moves were significant at the level of individual stocks. In 2008, the number of companies that registered a fall in FII stakes far outnumbered the ones that saw an increase.

Sixty per cent of the stocks in the CNX-500 companies saw a fall in FII shareholding, while only 30 per cent saw an increase.

That said, the overall picture may get clearer once the shareholding patterns for December-08 quarter are out early next month.

That will help capture the changes in FII stakes in October, the month which saw the highest monthly pullout by FIIs (net sold equities worth Rs 15,347 crore).

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Market decline is steep while fall in FII holdings is not