Net FII flows in October 2010 stood at $28.6 billion, according to the RBI figures, probably an all-time high. FII flows during all of FY 2009-10 only added up to $32 billion.

With the RBI doing nothing (net purchases in October were less than half a billion dollars), the rupee climbed almost 4 per cent in a single month.

But as it turned out, there was no need for the RBI to do anything, because FII outflows in November (by themselves, even without bringing the current account deficit into the picture) took care of 70 per cent of the October inflows.

Incredibly, this development was precisely anticipated by the CMIE in a January 2011 report, published before data on FII flows during November 2010 became available.

CMIE's logic? Simply that since the October inflows were intended to fund over-subscriptions to the Coal India IPO, the bulk of the money would quickly go back after there was no longer any need for it.

As it happens, the issue attracted bids worth about Rs 235,000 crore.

According to Coal India figures, 209.455 million shares were allotted to FIIs at Rs 245/share. Since the qualified institutional buyers segment (which includes other QIBs as well) was oversubscribed 24.6 times, FII application money could have run as high as Rs 126,000 crore; which is almost exactly equal to $28 billion.

It is worth noting here that bank deposits shot up by Rs 256,000 crore between September and October 2010, and then dropped by Rs 179,000 crore in November.

Interestingly, the reason for this in and out running by FIIs was that about six months before the Coal India IPO, SEBI made it mandatory for QIBs to bring in 100 per cent of the money while applying for securities by way of ASBAs ( that is applications supported by blocked amount).

Level field

The idea was to level the field for all players, and to ‘avoid the inflated demand for public issues' resulting from the excessive leverage enjoyed by QIBs, who were earlier allowed to back their applications with only 10 per cent of the bid amount.

But the thing about over-subscriptions is that if you know an issue is going to be heavily over-subscribed, the rational thing is to inflate your bids. No matter how heavily you are obliged to do so, to ensure that you end up with the number of shares you want, your money will not get blocked for long, and costs will therefore be relatively small.

So, the odd thing about the Coal India IPO is not that FIIs over-subscribed, but that they did not over-subscribe enough, because they under-estimated the extent to which the issue would be over-subscribed, and therefore failed to sufficiently inflate their demand.

At any rate, though they were allotted only 209 million shares in October, by the end of December they had picked up another 140 million shares at the much higher prices prevailing on the open market. Issued for Rs 245, the stock closed above Rs 340 on the day of listing, and at Rs 312 on January 17.

Finally, so far as the levelling of the field is concerned, FIIs do have access to cheaper sources of money, and it is hard to see what anyone can do about that.

But others with access to cheap money, including some long-term players, behaved differently. Insurance companies, for example, encashed all the 36 million shares they were allotted in less than two months.

Related Topics
comment COMMENT NOW