FII tide ebbs, price premia tapering off

Premiums on SBI and ICICI Bank are down by a third from levels of 12% and 9%.

The foreign investment tide on Indian bourses is ebbing. Tell-tale signs of this are visible on the Bombay Stock Exchange's exclusive window for trades between foreign institutional investors (FIIs), where activity and price premiums are tapering off.

Brokers say that premiums on the State Bank of India and ICICI Bank, two of the most actively traded scrips on this window, are down by a third from levels of 12 per cent and 9 per cent above the regular market price in the first half of March.

Apart from these two, Punjab National Bank, Grasim, Bhel, Hindalco and Bharti Tele-Ventures were also traded heavily on this window till recently. Premiums on these counters have dropped to a range of 1-3 per cent from higher levels earlier.

Trades on the special window, dubbed the Six Lakh Series after their six-digit stock codes beginning with the number six, are often done at a premium to the normal market price because FII investment in these companies may be at, or close to, permitted ceilings.

The premiums shot up when FIIs that entered the market in recent months tried to play catch-up with the early birds.

While FII inflows were robust in the first half of March (Rs 8,245.20 crore), they have tapered off in the second (March 16-29) to a negative Rs 1,100 crore owing to outflows on some days.

More than the data on FII inflows, dealers said the more disturbing news was that many hedge funds, which have an India exposure through the participatory notes route, had started pulling the rug.

Hedge fund activity does not show up separately in FII data, but domestic brokers who have written participatory notes have to clear off the underlying trades whenever the pull-out happens.

Dealers said overseas hedge funds now believed that the rewards of staying invested in emerging markets were not commensurate with the uncertainties, more so when some currencies are yielding much higher returns.

This growing reticence of foreign investors is reflected both in the regular FII data and the Six Lakh Series window. Said the institutional head of a broking house, "FII activity and premiums have come down in the FII-to-FII trades window in line with their open-market activity."

FIIs have been net buyers of Indian shares worth Rs 16,214 crore in 2005, according to figures on the Securities and Exchange Board of India (Sebi) website.

Of this, Rs 1,245.60 crore came in January, Rs 7,823.40 crore in February and Rs 7,145.20 crore in March. Brokers said that February and March figures are higher because of FII buying in public offerings and also because of the Bharti Tele-Ventures block deal worth about Rs 2,440 crore.

While FII inflows were robust in the first half of March (Rs 8,245.20 crore), they have tapered off in the second, with some days also recording outflows.

Tell-tale signs

Premiums on SBI and ICICI Bank are down by a third from levels of 12 per cent and 9 per cent

The premiums shot up when FIIs that entered the market in recent months tried to play catch-up with the early birds

Dealers say hedge funds having an exposure through the participatory notes route have started pulling the rug