MUMBAI, July 1: They came in droves in the last three years. They brought in nearly $ nine billion (around Rs 35,000 crore) to the country and was hailed as saviours of an emerging market like India. Foreign institutional investors (FIIs) set the trends and the markets danced to their tunes. Sensex rose to dizzy heights and share prices went beyond the reach of common investors.Come 1998, it is a different story. Operators who sang hosannas for FIIs are aghast and counting their losses. In fact, one reason for the 1,000 point plus fall in Sensex in the current year was the withdrawal of FIIs from the Indian market. There has been no fresh allocation of funds in the last two months and indications are that FIIs will keep away in the next a few months. Result: warning bells have already been raised over the FII operations.The pull-out by FIIs was a major factor which punctured the rally painstakingly built up by big bull Harshad Mehta and his brokers after the budget. FIIs, 508 of them are registered inIndia as per SEBI figures, had already pulled out nearly $ 450 million (around $ 1,800 crore) from India in May and June. ``I expect FIIs to pull out an equal amount in the next couple of months. In 1998 one might see FIIs pulling out $ one billion (around Rs 4,200 crore) from Indian markets. With the conditions not conducive for investment, nobody is talking about bringing fresh investments to India. forget about fresh allocation for Indian market for now,'' said the chief of a leading US-based investment firm who preferred anonymity.If sanctions and downgrading upset the apple cart of FIIs, what has added to their woes is the bad performance of many industry sectors and losses in South-east Asia. ``Our markets are now FII-driven whether it is bullish or bearish phase. If FIIs were in the forefront of the bull rally, now they are in the front of the bear rally (which took the Sensex down from 4,200 to the 3,000 level in two months),'' said a broker who is associated with a leading FII. FIIs had alreadysuffered losses in the Asian region. Many (like Deutche Morgan Grenfell, BZW and Barings) had closed down their equity operations in India last year.Says SEBI chairman D R Mehta, ``I cannot ask them to stop sales. Now a new trend has emerged. Indian brokers look at the movement of other world markets every day before making any commitments. They are also tracking the actions of FIIs who are major players in all the emerging markets of the world.'' Several market experts have now started sounding warning signals against allowing more sops and freedom to FIIs.``But for the effective presence of FIIs in the market, aggressive selling by FIIs would have resulted in further drop of 500 points in Sensex,'' said former BSE president M G Damani. The new FII approach has also raised the spirit of swadeshi supporters in the market. As a former UTI chairman put it, ``We shall have to strengthen the resource base of domestic financial institutions and mutual funds to absorb the deliveries effected by either theFIIs or the big operators.''Critics of FIIs see a pattern in their operations. Citing examples in other emerging markets in the world, they said FIIs target low priced (but fundamentally strong) shares when the indices are at low levels. A buying frenzy is created in such scrips as there are several operators who blindly follow FIIs and take positions in the same shares. When the share price shoot up, FIIs offload it at a good profit. Here again, FIIs have double advantage. They need to pay only 10 per cent long term capital gains tax while Indian investors have to pay 20 per cent.Damani and other experts feel that the FII operations are creating wild swings in share prices and indices. Although the value of FII holdings (Rs 35,000 crore) is only around 7.7 per cent of the total market capitalisation of Rs 4,60,000 crore (the market value of all scrips listed on the Bombay Stock Exchange), FII buy/sell operations always create wild movements in prices. ``Now the government and FIIs are offering moreincentives to FIIs to stop the selling spree,'' complained a fund manager. FIIs were recently given many sops like foreign exchange cover for equity investments and permission for directly responding to takeover open offers instead of going through registered brokers.The market needs FIIs, domestic institutions and retail investors. Now retail investors have left the scene leaving the markets for FIIs and FIs. Experts point out that retail investors should be brought back to increase the liquidity and depth of the market. But for that they should be given a level playing field with same tax concessions and bank finance.
