Soaring FII inflows begin to raise eyebrows

A whopping $1.2 billion (over Rs 5,220 crore) came to the Indian stock market in the last two weeks. This record FII inflow to Dalal Street ...

A whopping $1.2 billion (over Rs 5,220 crore) came to the Indian stock market in the last two weeks. This record FII inflow to Dalal Street in a short period was the main factor that kept the benchmark Sensex above the 7,200 level last week.

The FII interest in India in the month of June is surprising as the economic fundamentals of the country have not changed. On the contrary, economic think-tanks like CMIE have forecast a lower GDP growth and a negative growth in the farm sector. ‘‘The sharp rise in FII investments since the middle of June is surprising. Some of these FIIs are buying stocks at high levels,’’ said BSE dealer Pawan Dharnidharka.

According to Sebi data, after a net outflow of $261 million in May, FIIs have invested $1.225 billion in June. FII inflows picked up after the Ambanis announced the settlement. The market has started dancing to the tune of foreign funds once again.

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The market is agog with speculation that most FII purchases were from Japanese and Taiwanese funds. True, a number of international fund houses have launched India-dedicated funds in Japan and Taiwan. But the identity of investors who put money in these FIIs is not known. There’s very little Sebi can do if the FII money is routed through unregulated participatory notes of FIIs.

‘‘The government needs to find out whether the FII money coming to India belongs to the Indians or genuine foreign investors. If there’s a problem, Sebi should review the systems and rules to plug the loopholes,’’ said the partner of a top broking firm. FIIs were also involved in many of the block deals-which are executed at predetermined prices in synchronised deals-on the street.

In 2000, Indian promoters and brokers invested in stocks misusing the OCB (overseas corporate body) route through Mauritius. Share prices were then rigged with the OCB money that came from abroad.

When the scam came to light, regulators were forced to ban the OCB route. But bullish market pundits claim that inflows to Indian markets has been a part of the surge in FII inflow across emerging markets. They maintain that foreign investors and hedge funds are moving out of the US markets to emerging ones as interest rates in the US are unlikely to gather pace.

The FII story so far

• FII inflows in 2005: $4.71 billion

• Total FII investments: $35.11 billion

• Number of FIIs registered with Sebi: 33

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