FIIs change tack as valuations zoom

Preferential allotment and IPOs top investment avenues.

Foreign institutional investors (FIIs) are increasingly taking the preferential allotment route besides branching out to primary markets as valuations are fast getting stretched in the secondary mart.

This month, for example, FIIs have taken out nearly Rs 5,000 crore from the secondary market.

However, their overall exposure to listed companies has gone down only by nearly half of that as they invested about Rs 2500 crore through preferential allotments and IPOs.

Since April 4, the earliest for which figures available till yesterday, FIIs have withdrawn nearly Rs 4,892 crore from listed stocks, while they invested half the amount through the back-door, without going through the exchanges, according to the figures submitted by custodians to the Securities and Exchange Board of India. (Sebi)

While profit-booking motive for the selloff in the secondary market is well-known, Andrew Holland, executive vice-president at DSP Merrill Lynch Securities, says higher prices in the secondary market are prompting investors to look at other options.

Since promoters are often willing to place substantial chunks at a discount to prevailing market price, its is easier and more cost effective for institutions to pick up large stakes in promising companies.

"Some companies are much smaller in size but offer much better growth prospects," he says, "besides, this helps institutional investors gain a substantial stake in the company, instead of picking stocks in small quantities from secondary markets."

"That foreign investors are now placing faith in smaller companies is also a reflection of the growth of investor confidence in the economy. He said foreign investors are willing to go the extra-mile to stay invested. "The new breed of foreign investor is not afraid of looking outside the secondary market for opportunities," he added.

With more and more foreign funds getting excited about the India story at a time when most of the frontline stocks are already trading at relatively high valuations, alternate routes, including investing in private companies, now seems to be getting explored.