Importent - Redemption pressure forces FIIs to cut holdings

The turmoil in the global financial markets and growing aversion to risk is prompting foreign institutional investors (FIIs) to cut their exposure in the Indian equity markets. The decrease in risk appetite is evident in the latest shareholding pattern of FIIs that tracks a decline in their holding in Nifty companies.

Market analysts attribute this largely to redemption pressures, triggered in part by uncertainty in the global markets coupled with the expected slowdown in economy. As per data furnished by companies, of the 21 Nifty companies that have disclosed their shareholding details as on March 2008, there has been a decline in the FII holding in 18 companies.

“Investors have a tendency to see events through a magnifying glass and FIIs are no exception to this. Though there are negatives in the macro-economic scenario, India is comparatively a safe market with sustained growth over long term,” says Vikram Bhatt, director, Ajmera Associates. The three companies that have witnessed an increase in FII shareholding — Nalco, Bharat Petroleum and ICICI Bank — have seen their holding go up by 0.04%, 0.27% and 0.33% respectively.

In contrast, many companies from the capital goods sector (ABB, Siemens and L&T) have seen a decline in their FII holding by over 1%. Other companies to see such an erosion in holding include Power Grid, Dr Reddy’s Lab, Reliance Energy, ACC and HDFC.

The erosion, however, is much more in companies like ACC, Reliance Energy and Larsen and Toubro, where FII holding has decreased by 3.28%, 2.33% and 1.95% respectively. Foreign investors were net sellers for over $3 billion during the January-March quarter this year, in part due to unwinding of P-note positions.

According to Mr. Ajmera, FIIs total allocation to India is at about 5% of their total investment corpus. “However, they have to sell their profitable positions to offset the losses in their books. Also, many investors start redeeming their investments on fears of further fall,” says Mr Bhatt.

Market analysts also say that even though data ending March 31 reflects erosion, the last couple of days have seen renewed buying by major funds. This could result in an increase in their shareholding in the frontline companies, for it is these companies where the funds enter or exit first.

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