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Hints from the US Federal Reserve Chairman Ben Bernanke that he may end the easy money policy have sent Indian stock markets into a tizzy, with Foreign Institutional Investors (FIIs) already making net sales of shares in June.
But what will be the impact on markets if FIIs reduce their positions in Indian stocks?
A good starting point to gauge this, is to see how much of the outstanding shares are in FII hands today.
Ever since the financial crisis of 2008 gave way to quantitative easing, FIIs have been net buyers in our markets. Cumulatively, they have invested close to Rs 4.2 lakh crore in Indian equity markets between 2009 and now. This is double the amount they invested from 1992 till 2008.
This amounts to 65 per cent of the value of equity investments held by FIIs today. Calculations based on the shareholding patterns for companies in the CNX 500 (representing 95 per cent of the market), show that FII holdings in Indian stocks are at a high.
They held only about 16 per cent of the overall market value of shares in 2007, but this has climbed to 19 per cent by end-March 2013.
Therefore, there is no doubt that if they decide to withdraw all that money or even a significant portion of it, Indian stocks will be in shambles. But given that large pullouts by FIIs impact the value of their own residual holdings, not to talk of the value of the rupee, such an exodus is highly unlikely.
Sectors and stocks
Having said this, FIIs could choose to take profits in select sectors where their ownership is high. So which sectors are most vulnerable?
Data from the end-March 2013 shareholding patterns of companies in the CNX 500 show that banking and finance is the space with the highest FII ownership.
FIIs currently hold 31 per cent of the outstanding market cap in banks and finance companies. The top stock within this space is HDFC where FIIs hold 73.6 per cent stake. This is also the largest held stock within the listed universe in terms of value.
The other stocks with high FII stakes (45 per cent or more) are IDFC, Shriram Transport, Yes Bank and Federal Bank. Yes Bank and IDFC have fallen 12 per cent and 17 per cent, respectively, over the last one month.
The other sectors where FIIs own more than 20 per cent of the outstanding value are automobiles, entertainment, IT and pharma.
Within auto, Mahindra & Mahindra, Hero Motocorp and Tata Motors are FII favourites with 28-35 per cent stakes.
These stocks have fallen close to 5 per cent in the last one month. In the entertainment space, Zee Entertainment has 42 per cent FII stake while the other top stocks are Hathway Cable and Den Networks. These stocks have fallen 6-8 per cent in the last month.
In the IT space, Infosys, Hexaware Technology, Redington India, KPIT and Mindtree have found favour with foreign investors.
Barring Redington that has fallen 11 per cent in the last month, other stocks have managed to hold up.
In the pharma space, Strides Arcolab, Glenmark Pharma, Dr Reddy’s, and Lupin are the most owned.
It is also possible that FIIs, should they choose to lighten their holdings, may go for the stocks that represent their biggest India exposures. HDFC, Infosys, ITC, HDFC Bank, Reliance Industries and ICICI Bank are the top FII-held stocks by value.
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