FIIs not seen as market movers

Study says FIIs own over 5% of equity in just 332 of 1,162 firms.

Contrary to popular belief, foreign institutional investors (FIIs) may not be driving the Indian equity market. FIIs owns just 11.1 per cent of equity market and constituted just 9.79 per cent of the total market turnover in 2005, argues Ajay Shah, former consultant to the finance ministry, in a study.

Analysing market data from January 2003 till September 2005, the study says an incremental net equity inflow of Rs 1,000 crore from FIIs appears to be associated with higher Nifty returns of 0.4 per cent.

Arguing that FII investments were in fact 'sticky' Shah says, "Firms with FII investment had 82 per cent chance of retaining it and firms not having FII investment had 86 per cent chance of not getting it." Shah presented the paper at an ICRIER - World Bank workshop last week.

At a firm level, the study showed FIIs own over 5 per cent of equity in just 332 of the 1,162 listed companies having a market capitalisation of over $10 million.

Instead of taking the daily data on net FII inflows and outflows in equity shares of listed company, Shah has computed the ownership based on the actual shareholding in each of the company and its market value.

Outside of promoters, who own 52.38 per cent of the Indian equity market, it is retail investors who have a dominant share of 28.75 per cent.

Foreign investors, in fact as a class, own roughly as much equity in 2005 as Indian retail investors did in 20041. FIIs share at 11.1 per cent though is higher than the 7.85 per cent owned by the domestic institutional investors, stated the study.

Taking on the argument that FII flows cause fluctuations even though they engage in small transactions, Shah says that would imply that FIIs have superior skills at stock market speculation and, thus, they were contributing to market efficiency and needed to be encouraged.