Foreign institutional investors have sold equities worth Rs 79,526 crore in the Indian markets since October as a series of regulations, including curbs on investments through participatory notes (P-notes) and turmoil in the domestic financial markets have made investments in India less attractive.
While the circular on P-notes is just one among several reasons for this heavy selling, at least some of the entities, which have unwound their positions in the Indian markets, have taken positions in the Singapore Exchange CNX Nifty futures, say experts.
Interestingly, the volume of trading in the Nifty futures shifting to the Singapore Exchange has gone up in the same period. The share of SGX Nifty, as a percentage of the total Nifty futures OI, rose from 5.6 per cent to 8 per cent immediately after the P-note curb and stood at a robust 31.5 per cent till April, a recent report by Edelweiss said.
"P-note holders, who have unwound their positions in the Indian markets, have taken fresh positions in the SGX CNX Nifty futures till the time they get registered as FIIs with Sebi. The transaction cost is also high especially for FIIs who run a long-short P-note book. These FIIs can roll over their Nifty positions at SGX or Nifty but they prefer SGX because of lower costs," said Yogesh Radke, research analyst at Edelweiss Capital. SGX Nifty transaction cost is as low as 2-3 basis points in the absence of the securities transaction tax.
FIIs trimmed their holding in the BSE 500 companies by nearly two percentage points to 17.8 per cent, bringing it back to June 2005 levels, according to a recent Citigroup report.
Domestic institutional investors (DIIs) have been buyers of equities worth Rs 56,448 crore in the same period. The data compiled by exchanges includes buying and selling transactions in the secondary markets as also block deals.
According to Sebi data, FIIs have sold equities worth Rs 25,054 crore in the cash market. The Sebi data considers all investments, which include FCCB conversions, investments in ADR/GDR and secondary market transactions.
In October last year, Sebi had restricted P-notes investments in the derivatives market, asking the investors to unwind their positions within 18 months. At the same time, the regulator permitted P-notes investment in the cash market up to 40 per cent of the FIIs' assets under custody. Experts said that part of it may be attributed to the Sebi's clampdown on P-notes.
"Nearly eight months have gone by since the P-note circular was brought out by Sebi. The markets are yet to see a lot of unwinding of positions which will happen in the next 10 months. This will definitely not help the markets," said the research head of a domestic broking house, who did not wish to be named.
However, there are differing views on this with some market participants feeling that the fundamental picture has changed for the Indian economy, thanks to soaring crude oil prices and a growing fiscal deficit, which have bothered FIIs.
