FII game plan: Sell stocks for profit, bet on IPOs, discounted QIPs, block deals

FIIs sold equities worth  ₹6,823.19 crore amid weak global and domestic cues in 2024.
FIIs sold equities worth ₹6,823.19 crore amid weak global and domestic cues in 2024.

Summary

  • Even as FIIs consider valuations in the secondary market high, they remain upbeat on India's market narrative, compelling them to seize every opportunity, say experts. 

MUMBAI : Foreign institutional investors (FIIs) didn't entirely flee India in 2024, after all.

They adopted a two-pronged approach: booking profit in the secondary market while placing bets in the equity capital market (ECM) by way of initial public offerings (IPOs), follow-on offerings (FPOs), and qualified institutional placements (QIPs).

Though FIIs were net sellers in the secondary market, they contributed to approximately 47% of anchor allocations in IPOs in the calendar year 2024, said Mahesh Natarajan, head-equity capital markets, Nomura.

Natarajan added that even during October-November, when FIIs sold shares worth $13 billion in the secondary market, their share of the anchor book for the 14 IPOs executed in the period remained at approximately 47%, demonstrating their resilience in supporting India ECM deals.

Rebalancing bets

FIIs sold equities worth ₹6,823.19 crore amid weak global and domestic cues in 2024. However, record local investor buying compensated for the sell-offs. Domestic institutional investors (DIIs) made net purchases worth ₹5,24,541.81 crore, showed data from National Securities Depository Ltd.

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Meanwhile, 91 main-board companies collectively raised ₹159,784.16 crore in 2024, over a threefold increase from 2023's ₹49,436 crore, showed data from Capital Market.

“Overall, India saw ECM activity worth $65 billion in 2024, with IPOs worth about $20 billion. That is keeping in mind, the average IPO listing return has been around 20+% while the large cap indices have returned approximately 9% in the year," said Natarajan.

He explained that as the average size of IPOs increased (doubled between 2023 and 2024), FIIs looked at IPOs and FPOs as opportunities to pick up chunkier exposure to growth stocks at reasonable valuations without major price impact (if they were to buy in the secondary markets).

This effectively means that FIIs are churning their portfolios, said Kaushal Shah, managing director and head-ECM, Kotak Investment Banking. “Even as FIIs consider valuations in the secondary market high, they remain upbeat on India's market narrative, compelling them to seize every opportunity and not miss out."

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Besides, impressive day-one listing gains, as seen with Vibhor Steel Tubes Ltd (181.5%), BLS E-Services Ltd (126%), Unicommerce Esolutions Ltd (118%), and Bajaj Housing Finance Ltd (114%), prompted FIIs to switch ships.

Bargain deals

At the same time, the lower risk involved in investing in already-listed companies enhanced their confidence in QIPs and sell-downs, elaborated Shah.

As of 28 December, Indian companies had raised ₹1,37,560 crore across 95 QIPs in 2024, as compared to ₹54,350 crore from 45 issues a year earlier, Mint reported quoting data from Prime Database.

The Indian market's robust outperformance over the past four years has resulted in a valuation premium compared to peers, said Milind Muchhala, executive director at Julius Baer India. This has prompted FIIs to book profits in existing holdings while waiting for better entry points for fresh purchases.

Consequently, FIIs' ownership of Indian equities has dropped to below 17% from 24% before the covid-19 outbreak, he said.

“With opportunities to participate in emerging businesses, better liquidity/size of participation (without influencing price), perceived valuation gap and experience of healthy listing gains, the IPO/unlisted market has seen increasing investments by the FIIs," Muchhala said.

This, coupled with the opportunity to participate in discounted QIPs/offers for sale (OFS) has led to ECM deals becoming an attractive avenue for FIIs to secure substantial stakes at competitive rates, signalling a strategic pivot in their approach.

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To put it simply, when there is an ECM deal, there is always interest in such event-driven trades, as this gives investors an opportunity to buy stock in size. In some cases, the stock also corrects once the overhang of the selling pressure is lifted, explained Ganeshan Murugaiyan, head of corporate coverage and advisory, BNP Paribas India.

He also noted that large companies' IPOs allow investors to diversify their holdings within the large-cap space.

The last calendar year also saw numerous block deals that came in at a range of discounts to the current market price. Such discounted trades also induce appetite from investors, said Murugaiyan.

The year saw FIIs acquiring stakes in Indian companies such as Zomato Ltd, HDFC Bank Ltd,  IndusInd Bank Ltd, and JSW Steel Ltd through block trades.

The expectations from 2025

A large pipeline of IPOs and FPOs has been building up during the second half of 2024. “We therefore expect the momentum to continue with the composition biased towards IPOs and QIPs from the block trends we witnessed in 2024," predicted Murugaiyan.

Even Natarajan believed that, based on their ECM pipeline, the trend of larger deals will continue in 2025. He added that FIIs continue to show interest across multiple roadshows that he has seen in January. This will continue to be boosted by participation from India-dedicated foreign portfolio investors who have seen strong inflows in their funds.

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“We do see risks from geo-political events and flow rebalancing across markets. That said, these are temporary in nature, and long-term FIIs would continue to invest in India ECM offerings with a view to generating alpha returns at scale," added Natarajan.

The strong macroeconomic policies, driven by decreasing global inflation and easing interest rates and the growth of new-age companies, are major drivers for this growing appetite of foreign investors in the IPO market, said Khushboo Chopra, head of business development, IQ-EQ India, a financial services provider to FIIs and private equity firms.

She explained that the correction in secondary markets could be attributed to the recent change in futures and options trading rules as well as higher valuations resulting in less favourable entry points. “But overall Indian capital markets will continue to grow and attract foreign capital."

 

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