FIIs prefer blue chips over small & mid-caps

The domestic stock market may be emerging as one of the most attractive destination for overseas investments, but when it comes to foreign institutional investors (FIIs), large blue chips score over their smaller counterparts by a huge margin.

Out of the total FII inflow into the country last year, the top 100 companies accounted for 80.34 per cent of their investment, while their exposure in top 150 companies was even more than 88 per cent, economic think-tank National Council of Applied Economic Research says.

However, the exposure of FIIs, who control over 11.5 per cent of the country's total market capitalisation, in the blue chip stocks has seen a modest decline over the past four years, NCAER said in its latest monthly report.

The highly skewed distribution of FII flows implies that not all enterprises have been able to attract inflows, it said, adding, investments are going mostly into companies with strong fundamentals. This indicates that FIIs have a strong influence on the stock markets and influence decisions of the domestic investors as well.

More than 60 per cent of the above 150 companies are among the BSE 100 index, it said.Investments in strong companies mean that the threat of capital flight and volatility of flows are smaller than what would have been the case if the investments were in weaker opportunities, it said.

Highlighting the advantages, the report said the benefits of FII inflows are not limited to improving the availability of funds and supplementing domestic savings.

The gains include education in modern managerial practices and greater scrutiny of corporate governance. These effects are difficult to measure, but highly relevant for the growth of enterprises, it said.

Annual FII inflows have always been on the rise. By February, FII inflows touched 52 billion dollars (Rs 2,24,900 crore) in terms of net investments in equity and debt markets.

A large proportion (over 90 per cent) of FII flows in India is made up of equity flows. At the end of 2005-06, 1,159 Indian companies received FII flows.