Why FIIs avoid mid-caps

Foreign institutional investors (FIIs) are gung-ho over the Indian equity markets, and even prefer it to China as an investment destination, but market illiquidity is a major constraint.

Equally, they would like to invest in India's mid-cap stocks, but the quality of management in those companies acts as a dampener as, by and large, they are family-owned. These were some of the points that emerged at a Ficci seminar on global capital markets in Mumbai on Tuesday.

Arun Mehra, head, Fidelity Investment in India said, "We need to have more government companies coming into the capital markets to increase the float of the large caps, but even in the mid-cap and small-cap segments, we have to generate liquidity." He said one of the ways to do it was to have market makers.

Hazel McNeilage, managing director, Asia Principal Global Investor (Singapore), said, "We would like to invest in mid-cap stocks, but there has to be an improvement in the quality of management." She pointed out that long-term performance of mid-caps have been "not so good."

In all, the participants on the panel discussion on global markets said mid-cap stocks had significant family ownership and the promoters should be asked to disinvest their stakes further. "Maybe the broking firms could extend more coverage to the mid-caps," Hazel said.

Robin Osmond, global head of investment banking, HSBC plc, said, "The last six to eight months have generated the most optimism in India in terms of the number of issuances and institutional investments."

While extolling the regulatory regime, he said the main negatives were the small size of the market, lack of liquidity and the fact that though there was a lot of demand from the foreign investors there as no commensurate demand from the domestic institutions. There were also a lot of discussions on hedge funds operating India.

Priya Mathu, a member on the CalPERS board, said, "Hedge funds investments trigger enhanced information about securities, which is one of the positive outcomes of having a hedge fund base here."

Mehra pointed out that it was extremely important to allow hedge funds to operate and allow them sufficient flexibility.