FIIs change tack, buy more in primary mart

In a change in their investment strategy in India, foreign institutional investors (FIIs) have been buying in the primary markets and booking profits in the secondary markets.

The secondary markets data provided by the Bombay Stock Exchange and National Stock Exchange between April 1, 2006 and February 22, 2008, show that FIIs have been net sellers to the tune of Rs 38,554 crore based on trading done through client code.

The consolidated data provided by the Securities and Exchange Board of India (Sebi) show that FIIs have been net purchaser of shares to the tune of Rs 78,260 crore.

This is on the basis of their buy/sell on the secondary markets, conversion of foreign currency convertible bonds (FCCBs), strategic preferential allotments by promoters, equity issues to qualified institutional participants and investments in the primary market through public issues.

This means FIIs have made purchases of Rs 116.814 crore in the primary markets in the same period and have been selling in the secondary market.

The FIIs preferred the primary route for equity investment largely on account of the attractive valuation in the primary issues says Sudip Bandyopadhyay, director and CEO of Reliance Money.

Deven Choksey, director,m Kisan Ratilal Choksey Shares and Securities, said FIIs have been net sellers in the Indian markets of late to make up the losses in the other markets.

Market sources said that it is true that the FIIs were net sellers in the secondary markets and net buyers in the primary markets.

This is because investments in FCCBs, QIP and IPOs have given 63 per cent returns as compared to 39 per cent return given by the Sensex in the current year.

One common perception (particularly by domestic Indian investors) is that foreign investors set the tone for the Indian equity market.

According to Goldman Sachs Asia Pacific Investment analysis, recent evidence contradicts this. Foreigners have been net sellers of Indian equities since September 2007 and the market has risen meaningfully, till the fall in January and February 2008.

This implies that domestic investors have been more influential in setting share price levels. The study shows that foreign ownership levels for both large- and mid-cap stocks have moderated during the past year, which also shows the rising influence of domestic investors.

Looking ahead, as more foreign investors receive FII (foreign institutional investor) status, those foreigners who have been holding stock through participatory notes (which were significantly restricted by the Sebi last October) may now be more willing to trade more actively.

Given widespread recognition that India's valuation is stretched, this could result in more foreign selling.