Mumbai: A soaring Sensex on Friday has raised fresh hopes for the markets.
All of last week, India’s benchmark Bombay Stock Exchange index was supported by domestic institutional investors (DIIs) who pumped in Rs4,125 crore in equities, while foreign institutional investors (FIIs), long considered the market’s main driver, withdrew Rs3,316 crore.
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Indeed, all of 2008, DIIs have bought stocks worth Rs55,215 crore, net of selling, as the FII sell-off so far this year is the largest in India’s stock market history.
Since the capital market regulator opened up in 1993, FIIs have invested $57.4 billion in India, but so far this year they have taken out $8.9 billion (about Rs41,000 crore). Meanwhile, and as a result, the Sensex has fallen 30.7% in 2008. In 2007, $17.3 billion worth of FII funds flowed into Indian equities and the Sensex gained 45%.
While the US government’s plan to invest nearly $1 trillion to rescue distressed financial institutions played a role in global as well as Indian sentiment in shoring up markets and might yet fuel more rebounds, the significant role played by DIIs—banks, insurance companies and mutual funds—in shoring up the Sensex raises critical questions that point to how the Sensex might behave in coming days and weeks.
Also see Vital Statistics (Graphic)
Even as they agree DIIs can help balance the market, many analysts are openly worrying whether domestic investors can keep ensuring money flows into the Indian equity market if the FII pull-out continues. And there is the larger question as to whether a sharply slowing Indian economy will sustain the kind of profits that, in turn, help fuel Indian stock valuations and justify DIIs putting more money into Indian equities.
Indian domestic financial institutions simply “don’t have the muscle power” to bail out the markets, declares Nilesh Shah, deputy managing director of ICICI Prudential Asset Management Co. Ltd, India’s third largest fund house with assets under management worth Rs53,000 crore.
FIIs have been selling because their lenders have asked them to bring back the money, says Shah noting, along with other Indian fund managers, that such a pull-out is, therefore, not really indicative of a lack of confidence in India.
Indeed, FII sales have accelerated in wake of the collapse of US investment bank Lehman Brothers Holdings Inc., the sale of Merrill Lynch and Co. to Bank of America Corp., and the US government’s takeover of insurer American International Group Inc., barely a week after it took over Freddie Mac and Fannie Mae, two of the US’ largest mortgage houses.
But not everyone has such a sanguine view on Indian equities. Several foreign funds have a “sell” on India, including, as late as Tuesday, Clive McDonnell, the Hong Kong-based regional strategist at BNP Paribas Securities Asia.
On paper, according to a Mint analysis, DIIs can potentially invest up to about Rs1.04 trillion in 2008 alone, purely based on their total cash reserves. But, this is only an investable amount on paper and very little of it actually finds its way into the stock market.
For example, the limit on total capital market exposure for Indian banks is 40% of their net worth, or equity and reserves, and half of that can be directly invested in equities. Collectively, Indian banks have a net worth of Rs2.54 trillion.
However, about half a dozen treasury heads of banks Mint interviewed said they have not invested more than 2% of this amount and don’t normally go beyond that. This means, domestic banks’ investment in market can, in theory, go up by Rs45,767 crore but it may not happen anytime soon, given the uncertainties surrounding this asset class and banks’ traditional conservative investment practices.
“Normally, banks are not very active players in the equity market,” notes Mohan Shenoy, head of treasury at Mumbai-based Kotak Mahindra Bank Ltd, which has assets of around Rs28,300 crore.
“I would say that they follow very prudent investment norms,” said Deven Choksey, managing director and chief executive officer of Mumbai-based KR Choksey Securities Pvt. Ltd. “Most of the banks, barring a few, do not have the machinery (systems and processes) to invest in the equity markets, and in the absence of such machinery, they are not comfortable risking depositors’ money in equity.”
Insurance companies, though, could play a critical role in the market as they had funds of Rs8.67 trillion at the end of last fiscal, according to S.B. Mathur, secretary general of the Life Insurance Council, an industry association. This consists of total assets under unit-linked plans and endowment plans. While under the former, most assets are invested in equities, according to investor appetite, insurance regulator’s norms allow only about 20% of assets under other type of plans to be invested in stocks. However, they too do not seem to be very excited about equities.
In fiscal 2008, they had invested only Rs55,000 crore and in the first four months of the current fiscal, only Rs25,000 crore, says Mathur.
“Business growth is pretty strong, with insurance premia growing at about 50% per annum,” said U.S. Roy, managing director of SBI Life Insurance Co. Ltd, but adds he hasn’t committed any big equity investments. “We are long-term players, not traders, and once global markets stabilize, the fundamental strength of the Indian economy will start playing out.”
Based on what has already been deployed this year by the life insurance industry—and the preference of those holding SBI Life’s unit-linked insurance plans to put a large chunk of their premiums into equity (investors can choose the proportion they want in equity and debt)—Roy estimated investment by life insurance firms this year will exceed last year’s Rs55,000 crore.
Among the insurance firms, Life Insurance Co. of India, or LIC, invests the most in equities, given it accounts for more than three-quarters of total assets under management by insurance firms. “At every point of time, we are fully invested and don’t sit on any cash,” said a senior official from LIC, on condition of anonymity. “The market will continue to be volatile, and we will invest in whatever asset class that looks good, equity included.”
LIC has so far invested around $50 billion in the markets.
The third set of large domestic investors, mutual funds, are sitting on Rs28,315 crore cash in their equity funds or those with a mandate to be invested in stocks, according to data provided by ICRA Online Ltd, a group company of rating agency ICRA Ltd. This is roughly 15% of the Rs1.9 trillion assets under management it has in its equity funds.
Overall, the assets under management, or AUM, of Indian mutual funds in August were Rs5.4 trillion. However, this is not a correct indication for mutual funds’ appetite for equities, as AUM can go down or up, depending on the direction of the market, and does not necessarily point to any inflow or outflow of funds.
According to ICICI Prudential’s Shah, his firm has kept 5-10% of its portfolio in cash. “Nothing has changed,” he says.
Local investors have shored up the markets in situations like this before in 2001 and 2003, reminds Sunil Singhania, a fund manager at Reliance Capital Asset Management Co. Ltd, India’s largest mutual fund in terms of AUM. His belief is that the current uncertainty is a short-term phenomenon. “Near term will be dictated by what happens in the global markets,” said Singhania. “But indications are that they (governments and central banks) will go to any extent to support the financial system.”
Some local fund mangers interviewed by Mint say they alone cannot support the market if foreign investors continue to sell. At the same time, they say they believe FIIs will not entirely desert the Indian market, given its long-term potential. Since 1993, some 1,500 FIIs have set up shop in India and out of this, some 280 funds have entered the country just in 2008—despite the steep fall in the Sensex.
Teena Jain and Nesil Staney of Mint, and PTI contributed to this story.