Decoding FII flows

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Who are the FIIs and where do they come from? We hit the FII trail.

The term foreign institutional investor conjures up the image of a giant hovering over the Indian equity market with the ability to yank up or hammer stock prices at will.

Since these investors control 40 per cent of the freely traded stocks in the Indian market, the clout they wield is not surprising. But they are far from a cohesive bunch.

Deconstructing FIIs

Money flowing into our country could come from various global investing institutions, such as pension funds, insurance companies, sovereign wealth funds and so on.

Total assets owned by these investors was $117 trillion towards the end of 2010, according to CityUK, a consulting company that promotes the UK’s financial sector.

Of these, conventional assets stood at $79.3 trillion. This group was made up of pension funds with assets worth $29.9 trillion, mutual funds with $24.7 trillion and $24.6 trillion held by insurance funds.

Alternative assets such as sovereign wealth funds ($4.2 trillion), private equity ($2.6 trillion, hedge funds ($1.8 trillion), ETFs ($1.3 trillion) and private wealth management funds ($42.7 trillion) made up the rest of this global asset pool.

Conventional assets have almost doubled in the period between 2000 and 2010, from $39.6 to $79.3 trillion.

These funds declined 14 per cent in the 2008 crash but recovered in no time and stood at a new high towards the end of 2010.

Alternate assets such as sovereign wealth funds, hedge funds and ETFs have grown at a much faster clip, recording manifold increase in the last decade. That many of the alternate assets are a fairly new phenomenon could account for this faster growth.

Where do these funds originate from? Investors from the US are the source of about 45 per cent of conventional assets under management, accounting for $36 trillion. This would explain why the dollar climbs whenever investors turn risk-averse; they take money back to the safe haven of their home country.

Investors from the UK and Japan account for an 8 per cent share. But the asset concentration is declining over the last few years.

While the top five countries accounted for about 90 per cent of global assets in 2006, this share had declined to 80 per cent by 2009.

India is different

A quick scan of the list of FIIs put up on the SEBI web site shows that India too has registered foreign investors from all the above categories and countries.

Investors from the US dominate the list. There are also many FIIs based in offshore financial centres such as Mauritius, Channel Island, Luxembourg and so on.

But the market regulator does not provide a break-up of the amount invested by each class of FII in Indian equity or bonds. Neither is a break-up based on source country available.

There is a long-standing debate regarding the nature of a large chunk of FII money flowing through the Mauritius route.

Since many of the investment entities set up in these countries have opaque structures, the ultimate owners of the funds remain hidden.

Attempts to reconcile FII inflow/outflow with corresponding flows from global investment funds also show large gaps.

According to a report published by BNP Paribas Securities (Asia), only one-third of the $10.3 billion of net FII inflows into the Indian stock market in the first seven months of this calendar is explained by investments by conventional funds.

While some of the inflows could be from alternate asset funds, the report says, “such a large quantum of money coming from ‘non-regular’ sources lends credence to the oft-repeated conspiracy theory that a lot of FII flows into India are, in reality, Indian money disguised as FII money.”

(This article was published on August 18, 2012)
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