In a dramatic shift in strategy, foreign institutional investors (FIIs) have increased their participation in Indian primary markets. This, analysts say, signifies that foreign funds are increasingly adopting a longer-term investment strategy for India.
The top 12 public issues so far this year—both initial public offerings (IPOs) as well as follow-on offers—attracted FII investments of more than $3 billion, according to Prime Database, a Delhi-based primary market tracking firm. This accounts for about 30% of the net FII inflow into India in this period. FIIs have made net investments of $10.17 billion (Rs40,883 crore) in 2007 (till 24 July), according to data available with the capital market regulator Sebi.
Two large public issues—those of ICICI Bank Ltd and DLF Ltd—together saw more than $2.19 billion investments from FIIs. There have been around 59 public issues so far in 2007, and many more are in the pipeline. The Bombay Stock Exchange’s benchmark index Sensex has risen 13.29% since January 2007—from 13,942.24 to 15,794.92 as on Tuesday’s close.
Apart from the public issues, qualified institutional placements (QIPs) also saw strong interest from FII investors. Infrastructure Development Finance Corp. Ltd, for instance, raised about $520 million through a recent QIP. Till June, a clutch of Indian firms had raised $1.3 billion through this route. QIPs are equity placements exclusively with institutional investors. FIIs investment in public issues as well as QIPs are part of the more than $10 billon net investment made till Tuesday.
Besides, Indian firms have raised another $10.65 billion since January through foreign equity issues as well as foreign currency convertible bonds. These bonds are convertible into equity.
Pankaj Vaish, head of liquid markets at Lehman Brothers, says that while investments by FIIs had earlier been focused on the secondary market, “many investors like to enter at the ground floor”.
“This is why one can see an increased participation by FIIs in large public issues in India recently. People want to be in these stocks for a longer duration.”
Lehman Brothers Holdings Inc. and US-based hedge fund DE Shaw & Co. together invested about $600 million in DLF Assets Pvt. Ltd, a unit of Delhi-based realty firm DLF.
Vaish adds that it takes a fair amount of time to pick up large quantities of quality stock in the secondary market. In contrast, he says, in the primary market, hundreds of millions of dollars can be deployed (by investors) at one go: “In the primary market, a stock is usually priced appropriately to conservatively. Investors can accumulate larger quantity of stocks than what is readily available in the secondary market.”
Kaushik Modak, executive director and head of capital markets at Rabo India Finance Ltd, also says that there is a definite increase in participation of FIIs in the Indian primary market, especially in the infrastructure and real estate sectors.
“There is a change in the FII strategy. Previously, they were testing waters, unsure as to whether the Indian story would be sustainable. Today they are long-term players, even in the emerging sectors in India,” Modak adds.
Vijay Gill, chief investment officer of Muscat-based Oman Investment Fund, says FIIs’ appetite for primary markets is large. He adds that such firms are attracted to an IPO because it allows them to tap into the longer-term India growth story. Some of the firms, Gill says, could just be looking to get in at an “attractive” IPO price and exit once they have made their gains, but “in general, I feel that more people are in it for a longer ride.”
According to Ranganath Char, a director at NM Rothschild & Sons (India) Pvt. Ltd, a subsidiary of the global investment banking major, the increased participation by FIIs in the primary markets is also a function of their ability to value firms on the basis of assets. “In India, we have a history of earnings-based valuation,” says Char.
“A classic example is the DLF public issue. Valuation of real estate firms is still evolving in India. Foreign investors who have the expertise in valuing on the basis of assets made a higher pitch for the institutional part of the issue and contributed significantly to the oversubscription of the issue,” adds Char.
It isn’t just foreign portfolio investors that have increased their action outside the secondary markets in India. Foreign private equity funds, whose investments count as foreign direct investment (FDI), are also active. In 2006, foreign private equity firms invested as much as $1.38 billion in Indian companies through pre-IPO deals.
“The valuations (of companies in) some emerging sectors, such as health care, retailing, etc., are not well established and understood in Indian markets. This is one of the primary reasons why such Indian enterprise often bring in foreign investors who have the experience and expertise in funding such concepts in other markets,” says Char on rising PE investments in India.
Richard Ensor, managing director of London-based Euromoney Institutional Investor Plc., says that the increased flow of capital into Indian markets does reflect a buoyant and bullish long-term perspective but adds that there is still a potential threat that some of the FII inflows may turn to be shortterm investments.
“There is still considerable concern about emerging market volatility in general and the Indian equity market in particular. The India story is a good one and is being well told,” he says.