Mumbai: Foreign institutional investors, or FIIs, the driving force behind Indian equity markets, bought into the country’s growth story for the third consecutive quarter. In the three months ended 30 September, FIIs increased their investment in nearly six out of every 10 firms among the 50 that make up the Nifty index.

Collectively, foreign institutions increased their holding by 1.13 percentage points from the preceding quarter, the second fastest sequential growth in at least 15 quarters. Now, FII holdings in Nifty companies totals 14.83%, the highest since the quarter ended March 2007.

Graphics: Paras Jain / Mint

To pull the world financial system out of the toxic debt shock induced by the mid-September 2008 collapse of Lehman Brothers Holding Inc., central banks and governments across the globe unleashed a series of rate cuts and fiscal stimulus measures. As liquidity surged back into the system and risk appetite returned, investors started buying.

In India, foreign investors bought equities worth $7.37 billion (around Rs34,270 crore) during the quarter ended September, higher than the $6.42 billion invested in the preceding quarter, reflecting the richer valuations at which stocks were trading.

The Bombay Stock Exchange’s Sensex, India’s most widely tracked equity index, gained some 18.17% during the three months ended September, after climbing 49% the previous quarter. The Nifty gained 18.48% during the same period.

India’s gross domestic product (GDP) is forecast to grow at a pace next only to China among the world’s major economies. The Reserve Bank of India forecasts that the economy will expand 6% in the year to March.

“The simple factor of GDP growth is driving FII investments," said Sanjay Sachdev, country manager and regional fund manager (South-East Asia) at Tokyo-based Shinsei Bank Ltd. “A lot of liquidity is finding its way into emerging economies."

He expects this trend to continue in the short term on the back of upbeat economic indicators and corporate earnings.

Indeed, industrial output rose to a 22-month high of 10.4% in August and the rate of decline in export growth slowed. GDP grew 6.1% in the April-June quarter, much lower than 7.8% in the year-ago period, but still marginally higher than market expectations of 6%.

Among the 50 stocks on the Nifty, the benchmark of the National Stock Exchange, FIIs increased their holdings in 28 in the September quarter. Only 46 of the firms have reported their September-quarter end shareholding so far.

Under the norms of the capital market regulator, the Securities and Exchange Board of India (Sebi), listed firms are required to file a detailed break-up of their shareholding pattern to stock exchanges for every quarter within three weeks of the end of a quarter.

Realty stocks up again

Just like in the previous quarter, real estate stocks were among the top gainers in FII holdings this quarter too. The maximum rise in FII holding was in real estate developer Unitech Ltd—from 22.79% at the end of June to 36.36% on 30 June. The increase in Unitech is on account of the company selling shares to qualified institutional buyers in the beginning of the quarter to retire part of its debt.

Sobha Developers Ltd and Hindustan Construction Co. Ltd also saw their FII holdings increase substantially because of qualified institutional placements, or QIPs.

QIPs are private placements of equity shares, or securities convertible into equity, by a listed company with qualified institutional buyers, both domestic and foreign, approved by the market regulator. In the September quarter, 24 companies raised Rs17,393 crore through QIPs.

While the FII holding in Sobha rose by 16.14 percentage points, in Hindustan Construction the rise was 15.99 percentage points.

These two companies are not part of the Nifty, and are included in the BSE-500, an index of the top 500 firms that constitute at least 93% of India’s total market capitalization. Indeed, five of the top 10 gainers in FII holdings in this index come from the real estate and construction sector, which is seeing renewed interest on companies restructuring their balance sheets and the government stepping up the pace of infrastructure development.

In this index too, nearly six of every 10 firms saw an increase in holding, but the collective holding was lower at 12.64%, a six-quarter high. This is based on data submitted by 344 firms that have so far reported their shareholdings.

To be sure, when foreign capital returns to a country, blue-chip stocks are the first to benefit. It’s only later that institutional investors target the middle rung.

FIIs, considered the backbone of Indian equity markets, entered the country in 1993. Since then, they have invested some $69.35 billion. In 2007, they pumped in $17.78 billion, the largest ever inflow of foreign portfolio investment in India, but the financial crisis of 2008 saw them withdraw $12.18 billion. Since January this year, they have invested $14.09 billion.