Mumbai: The government’s big-ticket divestment of Central undertakings has taken a toll on the flow of money from domestic institutional investors, or DIIs, into the secondary market.
Domestic institutions have turned net sellers in equities in March for the first time since 2004—the year from which data on DII investments is available on exchange website—as big primary market issues of public sector units have left them with little money for secondary market play.
If the trend continues, it may affect the movement of stocks and the benchmark index, analysts with brokerages said, as a sudden drop in the supply of money can pull stock prices down.
The government has raised around Rs25,000 crore from the market in the financial year ending 31 March, and plans to raise Rs40,000 crore in the next fiscal.
In March, domestic institutions have sold stocks worth Rs4,395 crore, net of buying after pumping in Rs12,222 crore in January and Rs1,344 crore in February.
Traditionally, the three months ending March form the best investment phase for domestic institutions such as banks, mutual funds and insurance firms as they are flush with inflows from tax saving investments beginning January.
India’s tax assesment year ends in March and people rush to buy tax savings instruments before the year-end.
Eight small firms sold shares through initial public offers, or IPOs, worth Rs2,461 crore in January. The government entered the market in a big way in February with a Rs8,480 crore follow-on offer of NTPC Ltd and followed this up by public issues of Rural Electrification Corp. Ltd (REC) in mid-February and NMDC Ltd in March.
These three big issues raised some Rs22,000 crore. Domestic financial institutions led by state-owned insurer Life Insurance Corp. of India were the major subscribers to all three issues.
“LIC and many other investors sold some of their holdings in secondary market and pumped in money into government’s primary market issuances that were floated in quick succession since February. This is one of the main reasons of negative net investments in the secondary market by DIIs,” said Nirakar Pradhan, chief investment officer, Future Generali India Life Insurance Co. Ltd.
LIC, the largest institutional investor, alone subscribed for shares worth at least Rs15,000 crore in public offers of NTPC, REC and NMDC.
Girish Dev, executive director and chief executive of Networth Stock Broking Ltd, a Mumbai-based retail brokerage, said: “The market is going nowhere as the domestic institutions, which used to invest big money during this period, have turned sellers. Many of them have subscribed to the recent public issues.”
According to Dev, this has brought down the daily traded turnover in the market to half of what was seen in January.
The Bombay Stock Exchange’s bellwether equity index Sensex hit a 52-week high of 17,790.33 on 6 January, but by the end of the month, it dropped to 16,357.96. Since 1 February, the index gained 1,221 points or 7.46% to end at 17,578.23 on 19 March, riding on the money from foreign institutional investors, or FIIs, who bought shares worth Rs10.810 crore net of selling.
“At least 60% of the money that flows into tax-saving unit-linked insurance products or similar tax-saving mutual funds are invested in equity during the March quarter. This, coupled with profit-booking opportunities in secondary markets, have positioned the domestic institutions to move their investments to big-ticket government public issues,” Pradhan of Future Generali added.
According to data from stock exchanges, DIIs have been big buyers of stocks in the past five years.
In February-March 2009, DIIs invested Rs6,725 crore, despite a slump in equity markets following the collapse of US investment bank Lehman Brothers Holding Inc. in September 2008. The previous year, they had bought shares worth Rs6,955 crore during this period.
This year, between 1 February and 19 March, they are net sellers to the tune of Rs3,051 crore.
Navneet Munot, chief investment officer, SBI Funds Management Pvt. Ltd, said public issues by state-owned firms had absorbed a part of the cash that mutual funds accumulated by booking profit in secondary markets this quarter.
“The net inflows in the mutual fund industry is not much this March quarter to spare much cash for secondary market stocks. The sales numbers have just started improving after continued negative sales during the third quarter,” Munot said.
Besides NMDC, NTPC and REC, NHPC Ltd and Oil india Ltd are two other government companies that raised money this fiscal.
In the next fiscal, the process will be kickstarted with the initial public offer of Satluj Jal Vidyut Nigam Ltd in April, followed by Engineers India Ltd. Other state-owned companies such as Steel Authority of India Ltd, Bharat Sanchar Nigam Ltd and MMTC Ltd are expected to hit the markets later.