Foreign institutional investors, or FIIs, the main drivers of Indian equities, have seen the value of their India portfolio drop three-fourths, or about $190 billion, this year, a tumultuous one for markets worldwide. FII holdings dropped to below $60 billion this week, from around $244 billion in January.
More than their sale of stocks, the erosion in the value of FII investments has contributed to the decline, worsened by a 20% drop in the value of the rupee against the dollar this year.
The mark-to-market value of FII investments in the Bombay Stock Exchange’s top 500 companies by market capitalization, in the BSE-500 index, had slumped to around $138 billion by end-June and further down to about $82 billion around end-September.
Mark-to-market is the accounting practice of valuing one’s portfolio in accordance with the current market value and not the cost at which the stocks are bought. FII investment in Indian stocks outside the BSE-500 is negligible.
The BSE-500 accounts for roughly 93% of the total market capitalization of India’s equity markets.
A Mint analysis of FII holdings in domestic equity markets indicates that these investors have suffered a value erosion of at least 30% in their India portfolio during October, as the BSE-500 index slumped more than 25% and the rupee lost 5.75% during this month.
While net selling by FIIs amounted to just about $12 billion worth of Indian equities, or some 7% of their total holding, in the BSE-500 between January and September, the 57% drop in the BSE-500 index and more than 20% loss in the exchange value of the local currency saw their portfolio shrink by more than 75% on a mark-to-market basis.
FIIs had pumped about $67 billion net into Indian equities between 1993 and 2007.
Boosted by the strong inflows, the Sensex, which was at the 2,500 levels around end-1993, multiplied more than eight times to 20,200 levels by end-2007.
The benchmark index, however, dropped about 50% since January, as portfolio flows reversed against the backdrop of a global credit crisis.
The local currency, which was widely expected early this year to appreciate against the US dollar, riding on continued portfolio inflows and a favourable economic climate, also made a U-turn, dropping to an all-time low on Thursday.
Most large FIIs restrict their investments to large and mid-cap stocks. Investment in small-cap stocks or those outside the BSE-500 stock basket is almost negligible, as they account for only about 7% of the market capitalization of India’s stock universe.
To woo FII inflows and to contain capital outflows from Indian stocks, the Securities and Exchange Board of India, or Sebi, lifted year-old curbs on participatory notes, or PNs, which are contracts issued by FIIs to offshore clients.
PN contracts entitle the holder to reap returns proportional to that of the stock or index it is pinned to, in the local market. Sebi’s move, however, has not curbed portfolio outflows and most client brokers in India say FIIs will continue to cash out of local equities at least till this year-end.
According to a 22 October research report by Edelweiss Capital, the single most valuable chunk collectively owned by FIIs in India is Reliance Industries Ltd, India’s largest firm by market capital. On the other hand, FIIs hold the highest percentage of free-float, or shares available for trading in the bourses, in Educomp Solutions Ltd—about 80%.