Participants in the domestic equity market are still wary of overseas stock lending and borrowing operations of foreign institutional investors (FIIs) even while some finance ministry officials have claimed that short-selling through overseas lending is negligible.
FIIs have been lending their participatory notes’ (PNs’) underlying stocks in the overseas market since the beginning of this year, which have been used to short-sell in India. Market players say nearly 50 per cent of the total FII selling of over $12 billion has been through stocks lent overseas. In other words, this short-selling has played a significant role in bringing down the market.
While the finance ministry officials have claimed that overseas lending is a meagre 0.2 per cent of the total free-float market cap of the 224 companies, the stocks of which FIIs have lent overseas, a closer look reveals an entirely different picture.
According to a top mutual fund manager, it would be no exaggeration to say that at any given point of time not more than 10-13 per cent stocks of the entire share capital of the top 200 companies are available in the market. Data for the quarter ended September 2008 show that 87 per cent of the total shares of top 200 Bombay Stock Exchange (BSE) companies have been lying with large institutions, including FIIs, domestic insurance companies, mutual funds and promoters.
“So, stocks sold by FIIs since the beginning of this year is nothing but short-selling. In October, the large-scale selling that the market witnessed was largely short-selling,” said the fund manager.
The data provided by the Securities and Exchange Board of India (Sebi) showed that 34 FIIs had indulged in lending shares of 224 companies, the value of which stood at around Rs 5,000 crore as per the stock prices on November 1. Sebi had released the total outstanding data of FII lending this year at the end of October. However, the short-selling amount could be nearly $6 billion or six times higher than the above figure as share prices have declined by over 60 per cent on an average from their peak. Some of the stocks on the lending list of FIIs have also declined by over 90 per cent.
A top south Mumbai-based stockbroker said this kind of short-selling should not be allowed as it lacked transparency. “It is a complete mockery of know-your-client (KYC) norms floated by Sebi. If the finance ministry is of the view that the overseas lending activity can be allowed, then the regulator should also allow domestic institutions to do the same. As of now, this bias towards FIIs is disturbing market equilibrium,” said the managing director of the a leading brokerage.
Currently, no domestic institution or portfolio manager is allowed to indulge in short-selling in the cash segment of the market.
Sebi had in October warned FIIs against their overseas lending operations after the BSE Sensex crashed by over 35 per cent in the month on thin volumes.
On the finance ministry official’s remarks that the quantity of stocks short-sold was too small compared to their floating stocks, brokers said it was a miscalculation. “For instance, ICICI Bank, which was the highest lent stock by FIIs, had 110 crore floating shares in absolute terms. But roughly, not more than 10 to 15 crore shares are circulating in the market as the rest are cornered by large institutions. So, even if 1 crore shares are short-sold in a concentrated effort, it can severely harm the stock price,” said a broker.
The ICICI stock fell by over 80 per cent this year from a high of Rs 1,465 in January to touch a low of Rs 282 in October. FIIs lent 1.27 crore shares of the bank during the period.
