Share Market: FII News

NEW DELHI: After being in the driver's seat of Indian bourses for the past 4-5 years, the foreign institutional investors may lose their dominance to the domestic counterparts this year in terms of capital inflows into the market.

FIIs made a net investment of about $17 billion in Indian stocks in 2007, which was nearly 10 times of domestic mutual funds' net investment at about $1.7 billion.

However with insurance companies emerging as a major investor in stocks, the total kitty of domestic institutions are set to overtake the overseas inventors by a wide margin.

The FII flows have been the cornerstone of the phenomenal rise of the Indian stock markets, but domestic institutions are likely to surpass them in 2008, brokerage firm Sharekhan said in a latest report.

Analysts at Sharekhan anticipate a huge corpus of $15-20 billion to be invested by the insurance companies in the next two years, while the mutual funds are also likely to put in $5-8 billion.

Taking into account both MFs and insurance companies, the domestic institutions would easily surpass the FII inflows going forward, Sharekhan report said.

With huge FII inflows being a key factor behind the rally in the past few years, even a short-term flight of overseas funds have caused jitters on the bourses, given their significant holding in the free-float market capitalisation.

Since 2000, FII ownership in Indian market has risen over three-fold to 20 per cent and is now nearly three times of the total holdings of domestic MFs and insurance companies, according to global financial services major Citigroup.

However, with insurers upping the ante and MFs sitting on a large pool of cash waiting to find its way to the market, analysts expect FIIs' dominance to come down soon.

The slowdown in the US is also likely to adversely impact the foreign capital flow into Indian stocks. "While economic implications for India from US slowdown may be relatively less severe, one cannot say the same about implications on flows," Citigroup's India research head Ratnesh Kumar said.

The trend over the past 2-3 years show that any change in the global risk appetite has affected FII inflows into India.

"If any slowdown in the US pans out in such a way as to dislocate risk appetite of global flows, it can have a significant negative impact on the Indian market," Kumar said.

Recent curbs on overseas inflows through participatory- note route may also moderate the FII inflows, thus making way for domestic institutions to shore up their holdings.

"The banning of P-Notes will have a major impact on the FII inflows and the foreign investments are likely to slowdown in 2008," PricewaterhouseCoopers' Financial Services Practice (tax and regulations) Head Punit Shah said.

The flows through P-notes could be substituted only partly through direct registrations and new FIIs and there could certainly be a slowdown in inflows, Shah added.

However, the analysts expect any negative impact of the reversal in trend of FII inflows to be offset by the large investments by domestic institutions.

According to Enam Securities, insurance companies have an investment pipeline of USD 56 billion with public and private sector shares of 70 and 30 per cent respectively.

While private sector insurers could invest about $8 billion dollar (50 per cent of their planned investment) in equities, the public sector could divert close to $10 billion (25 per cent of their total) pipeline into the market.

The net inflow into stocks could be worth $14 billion, after excluding 20 per cent in commissions from total $18 billion planned for equities.

-PTI