In a massive meltdown, market capitalisation on the Bombay Stock Exchange has dropped by a whopping Rs 100,000 crore between July 31 and November 14, prompting BSE president Madan Gopal Damani to call for major curbs on foreign institutional investor holdings in Indian corporates. The BSE president has called for a reduction in the FII equity cap to 20 per cent in all corporates.
In an exclusive interview with Business Standard in Calcutta, Damani said the government needed to act swiftly to curb rampant FII activity in Indian markets to avoid a repeat of the South Asian debacle. What has been raised to 30 per cent can be brought down to 20 per cent again if this rampant pressure is to be controlled, he said. The BSE is also expected to articulate this point to the government.
Damani said the increase in the individual FII limit from 5 per cent to 10 per cent was also fraught with danger as holdings could get concentrated. Reducing the limit to 20 per cent would ensure that more companies do not come under the FII stranglehold, he said.
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Citing the latest statistics to buttress his point, the BSE president said total market capitalisation had dropped Rs 99,622 crore between July 31 and November 14, while that of B1 and B2 stocks had dropped from Rs 3,08,096 crore in July to Rs 2,82,700 crore now. Besides, turnover of B1 and B2 stocks had also dropped from Rs 50 crore a day to Rs 41 crore a day, indicating a stranglehold of big FIIson the specified group stocks.
The rampant FII control is not just reflected by the sensex. The BSE-100 and BSE-200 and even the National Stock Exchange-50 are showing the same trends, said Damani. For Gods sake, the time is not ripe for introduction of futures and options in India, he warned.
Damani, who recently retur-ned from a tour of South Asian countries, said foreign investors are not allowed to invest in all categories of stocks in China. Besides, Shenzen had not introduced futures and options, he said. But still, foreigners do invest in that country, he pointed out.
Citing the case of Malaysia, Damani said the meltdown there began as a result of foreign investors hammering the local currency and also through the derivatives mechanism.
Very often, a hedging tool becomes a risky tool itself. It is very difficult to pinpoint where hedging ends and speculation begins, the BSE chief pointed out.
Damani, who in mid-June 1996 had warned finance minister P Chidambaram that the Indian markets were becoming dangerously FII-driven, asserted that Now is the time to act. FIIs traditionally book profits across the world in the last quarter of the year, he pointed out.
Damani also called for allowing major Indian financial institutions, to invest in stocks in a big way to create a strong counter to combined FII selling pressure. He added that good companies should be allowed to buy back their own shares immediately and bank funds should also be available for corporates to buy shares of listed companies in the same group. There is no need to wait for the Act to be amended. It can be done through an Ordinance, he said.
Calling for the bringing back of incentives like 80M and 80CC, the BSE president said Indian FIs could also pick up several good stocks from the B1 and B2 groups which are now quoting at price-earnings ratios of under 4 in many cases.