• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Sowmya Sundar

THE rush of foreign funds into the country last year and the subsequent rally in the bourses have created the impression that increased foreign investment could be the propelling force behind an active stock market. But a factor that went largely unnoticed was that by end-2003, foreigners had cornered close to 30 per cent of the equity in India's top 50 companies — the Nifty 50.

In contrast, foreigners collectively owned just 18 per cent in these companies at the end of 2001 and 32 per cent in December 2002.

Effectively, foreigners hold enough shares in Indian companies to influence the way business is done. These shareholders may have a say in the decision-making and running of the company's day-to-day business.

The staggered profile of foreign investors within this universe of stocks, however, limits the possibility of any such influence. The number of FIIs that now operate in the Indian market is over 500, against just a handful a year ago.

Very few companies, barring MNCs and companies such as HDFC and ICICI, have a single foreign entity holding more than one per cent. For instance, the Government of Singapore holds more than five per cent in ICICI Bank.

A handful of FIIs, such as Emerging Market Fund and Janus Worldwide, have acquired over one cent stake in a number of companies over the past two years. Though these investments can influence the stock prices, they are not strategic investments and, hence, may not have an impact on strategic business decisions.

Foreigners own a third of the wealth

An analysis of the shareholding of the 50 companies represented by the Nifty index reveals that close to one-third of the corporate wealth represented by the market capitalisation of these companies is in foreign hands.

The Nifty accounts for close to 70 per cent of the total market capitalisation of the National Stock Exchange. Thus, a substantial part of the Indian corporate wealth is being controlled by foreign hands.

Obviously, a large chunk of the increase in foreign holding is due to FII inflows and not due to any strategic investment. When the recently listed companies Maruti Udyog and Bharti Tele — both with substantial foreign strategic holdings — are included, the picture improves.

The FII holdings in these stocks have increased by 3.7 percentage points to 13.7 per cent and the total foreign shareholding has risen by 6.7 percentage points.

Is the high foreign presence due to the presence of MNCs operating out of India? Ironically, of the 26 companies where foreign holding is more than 25 per cent, 20 are promoted by Indians.

The list includes some of the prominent family-run companies such as Reliance Industries, Hindalco and Grasim. Technology companies such as Satyam and Infosy, where FIIs hold a substantial stake too have a higher shareholding. Only six MNCs, on the other hand, have a foreign holding of more than 25 per cent.

Sector-wise trends

An interesting aspect is that the foreign shareholding has increased across all sectors barring FMCG.

Understandably, FMCG companies under-performed the market in 2003, when most other sectors had their share of the rally.

Few sectors, such as energy (petrochemicals, oil and gas), automobiles and pharma, received the highest fund inflows.

A number of factors, such as re-rating of the PSU oil stocks, the passage of the Electricity Bill leading to re-rating of stocks in the power and power equipment sector such as Tata Power and BHEL, and Reliance taking over BSES in the privatisation process attracted institutional funds into these stocks and led to a substantial rise in FII holdings. The listing of Maruti, where Suzuki holds a substantial stake, also increased the proportion of foreign holding in the Nifty companies.

Spill-over effect on mid-cap stocks

The foreign fund flows were not restricted to the top companies alone. A number of mid-cap companies too attracted FII flows. Here, again, the flow was across the board, though banking sector and pharma stocks were most sought after.

Textiles, another emerging area with potential for scaling up, also attracted investments. Arvind Mills, Century Textiles and Bombay Dyeing are some instances.

Assuming that the FIIs bought into Nifty 50 companies at a 20 per cent discount to their 2003 year high, only 68 per cent of the total calendar year FII flows of Rs 35,100 crore for 2003 have gone into Nifty stocks. This means a substantial part of the flows have found their way into mid- or small-cap stocks.

If we assume that the FIIs bought into Nifty stocks at 10 per cent below the year high, close to 25 per cent of the funds would have been channelled into mid- and small-cap stocks.

Though this might not be an accurate calculation, it gives an idea of the quantum of funds that have been invested in mid-cap stocks.

An analysis of the FII holding in the stocks constituting the Nifty MidCap 200 too reinforces that institutional funds have gone into mid-cap stocks. Of the 200 stocks in the index, at least 40 per cent witnessed a hike in FII holding.

A number of stocks, such as LIC Housing Finance, Titan Industries and Hexaware Technologies, attracted substantial FII flows in the September-December 2003 quarter.

The flow of funds into small- and mid-cap companies could mean that:

Stories in this Section
On stock option and employee stock ownership plans

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line