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Sowmya Sundar

ARE foreign institutional investors prodding the bull that is running up the market. For, the ownership pattern of listed companies for the last three quarters reveals that the FIIs are slowly garnering a larger share of India Inc's wealth.

The FIIs are now the third largest investors in Indian companies, after promoters and the Indian public but ahead of domestic mutual funds and other institutional investors.

Business Line analysed the shareholding patterns of 50 companies over the last three quarters, covering the period before and during the bull run, from April to September.

The sample selected for the study covered 50 stocks, including index and mid-cap, that have been highly active over the last few months. An analysis of the share-holding pattern of these 50 companies for the December-June period revealed the following:

Retail shareholders appear to have invested more in the pre-rally period — the January-March 2003 quarter than in the subsequent periods. But they were quick to book profits when the markets started looking up in the latter period.

FII holdings increased significantly in April-June 2003, indicating their rising confidence in the Indian market. They gained one percentage point share in the total outstanding equity between April and June 2003.

Small- and mid-cap stocks such as Arvind Mills, Sesa Goa and LIC Housing Finance too attracted institutional interest over the last two quarters — a phenomenon that has supported a broad based rally this time.

There is a perception that domestic investors have followed in the footsteps of the FIIs as has often happened in the past. But now there appears to have be a role reversal, with domestic investors getting into action first, and the FIIs following.

Corporate investment in equity has risen. This could be an indication that Indian companies are once again looking to shift some of their cash surpluses to the equity market.

Promoters still hold almost half the outstanding equity but have diluted their holdings in favour of foreign and domestic institutions, primarily through private placement and conversion of warrants

Indian public shareholders are is the second largest category of shareholders owning over 15 per cent of the total equity.

FIIs, a bigger part

The effect of FII inflows is evident in most stocks. Not only did index stocks attract FII investments, select mid-cap stocks such as Bharat Electronics, Bharat Forge, i-flex, UTI Bank, Arvind Mills and Bank of Baroda too, saw substantial buying by foreign institutions.

Some of these stocks were neglected for long. . Now, with the FIIs chasing them, their valuation has almost doubled over the last two quarters.

Among the index stocks, BHEL, Ranbaxy, HDFC and Grasim were the FII favourites; in BHEL, for instance, their stake soared from 12.8 per cent in December 2002 to 17.5 per cent June 2003.

Despite the disenchantment of domestic investors with tech stocks, the FIIs appear to sill repose faith in the sector, especially in the April-June 2003 quarter. Stocks of NIIT, i-flex, Satyam Computer and Digital Global received keen attention of foreign investors;

Divergence in stock selection

Unlike earlier times, institutional investors have poured considerable funds into mid- and small-cap stocks, leading to a broad-based market rally.

The broad-basing was also helped by domestic mutual funds and foreign investors adopting divergent stock preferences. For instance, in stocks such as Sundram Fasteners and TNPL, the rally was primarily driven by purchases by mutual funds, while FIIs kept away.

On the other hand, FIIs lapped up many more shares than mutual funds in stocks such as Arvind Mills and LIC Housing Finance. Sesa Goa is a contrast where mutual funds increased their stake from nil to close to 4 per cent in the stock in the January-June period. Institutional interest was almost absent in the stock in the earlier quarters.

Fascination for turnaround stocks

There was a clear preference among institutional investors, both foreign and domestic, for turnaround stocks.

For instance, Thermax, Arvind Mills, Siemens and Crompton Greaves were among the turnaround stocks hounded by institutional investors. Institutional holding in Crompton Greaves rose from 18.5 per cent to 25 per cent in December 2002-June 2003.

pick and choose

Indian retail investors too have been fairly active. Their share in the total outstanding equity is the second highest at 15.3 per cent against the 9 per cent held by the FIIs. But adding on the amount invested by mutual funds (assuming they invest on behalf of the common investors), the public stake would go up to 24 per cent. There is still a large gap between Indian public and foreign institutional holding.

Public holding (excluding mutual funds) increased marginally from 15.7 per cent in December to 15.8 per cent in the March 2003 quarter but declined in the subsequent quarter to 15.3 per cent. Interestingly, retail investors have been more active in select stocks compared to institutional investors. For instance, they have been the primary players in Elgi Equipments.

Being a mid-cap conservative company, institutions hold only 5 per cent of the stock in contrast to over 40 per cent held by the Indian public in December 2002. Public shareholding rose to 45 per cent in January-March. The stock value has more than trebled, driven primarily by retail investments.

Few other stocks such as Thermax, HPCL and Aventis Pharma too were favourites among retail investors. Public holding

rose by about 100 basis points in these stocks. For instance, in HPCL, retail investors held on to the stock when institutions were offloading it. This could mean that retail investors view divestment stocks from a longer-term perspective.

Domestic investors take profits

The study also revealed that retail investors and domestic mutual funds booked profits more actively than the FIIs, taking a cautious approach when the markets started moving up. This indicates a conservative approach to equity investing by the Indian public.

On the other hand, the FIIs became aggressive, investing more, in the April-June quarter when the stock market saw most of the action. During the period, the FII shareholding increased by one percentage point while public holding declined by 50 basis points.

Overseas investors

In addition to FIIs, sizeable NRI/OCB funds have also come into the Indian equity market. Though their share forms a small portion of the total equity, their increasing presence cannot be ignored. Overseas investors have increased their stake to 1.7 per cent in March 2003 from 1.3 per cent in December 2002.

However, they divested most of their incremental holdings in the subsequent quarter when the FIIs entered aggressively, mirroring the investment trend by retail Indian investors. In addition to the attractively valued stock market, the rupee appreciation has also been in favour of overseas investors.

Companies return to equities

Corporates have also been actively pumping money into select stocks. Public corporate bodies held close to 4.5 per cent of the total equity in June 2003 against 4 per cent in December 2002. The low interest rates coupled with the buoyancy in the market could have diverted a portion of the surplus funds into equity.

With India Inc, the fascination was for mid-cap stocks such as SAW Pipes, Ingersoll-Rand, Century Textiles and Burroughs Wellcome as against large cap stocks. The lower institutional interest in these stocks could have made it easier to hike investments in these stocks.

Promoters' stake lower

As stock prices across sectors scaled new highs, promoters appear to have cashed in on the opportunity. Promoter holdings remained largely remained stable with declines in select companies. In companies such as Arvind Mills, UTI Bank, Jindal Steel, there was a transfer of stakes from the promoter group to institutional investors.

Conversion of warrants (Jindal Steel), preferential allotment (UTI Bank) and open market selling by promoters (Arvind Mills) lowered the share of promoters in these companies. This also explains the higher institutional holding in these companies.

Though the FIIs were the dominant theme in the market, they still form a small portion of the total outstanding equity (9 per cent). The Indian public could have a larger influence on the market but for the fragmented nature of their holdings.

The entry of domestic investors at an early stage and signs of regular profit booking is a healthy trend as it limits the scope for huge losses for domestic investors. This is in contrast to the earlier trend of following the foreign investments and being left behind with high cost acquisitions when the FIIs and smart operators book profits when the going is good.

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