Foreign Institutional Investment

Every day we come across the term foreign institutional investors. FII portrays the image of any giant hovering over the Indian equity market with the ability to shower bulk cash which in turn can yank up or hammer stock prices easily. These investors control 40 per cent of the freely traded stocks in the Indian market and thus have a different status of their own.

Deconstructing FIIs

Money flowing into the Indian economy from foreign land could be thought as coming from varied sources like pension funds, insurance companies, sovereign wealth funds and many more.

Total assets owned by these investors were $117 trillion as reported by the end of 2010, according to a report released by a major consulting company promoting UK financial sector. Of these:

• Conventional assets stood at $79.3 trillion and comprised of the following:

i) Pension funds with assets worth $29.9 trillion
ii) Mutual funds has $24.7 trillion and
iii) Insurance funds held $24.6 trillion

• Alternative assets such as sovereign wealth funds $4.2 trillion
• Private equity $2.6 trillion
• Hedge funds $1.8 trillion
• ETFs $1.3 trillion and
• Private wealth management funds $42.7 trillion

Where do these funds originate from?

Upon investing we found that about 45 per cent of conventional assets under management, accounting for $36 trillion comes from the US which is more than sufficient a reason to explain why dollar climbs whenever investors turn risk-averse as the investors books the profit and take money back to their safe heaven which is nothing but their own home country. Also it was found that, 8 percent share was accounted by investors from the UK and Japan. Also if we compare the asset concentration we find that it has been declining considerably over the last few years from top five countries accounting for about 90 per cent of global assets in 2006, to 80 per cent level by the end of year 2009.

State of the Indian Economy

If we quickly take a sneak peek in the website of the financial market regulator in India, SEBI we find the list of FIIs from all the above categories and countries. It is needless to say that US being the most developed nation in the world and the super power tops the list with maximum investment in our growing economy. Also FIIs based out of off-shore financial center such as Mauritius, Channel Island, Luxembourg were found in the list. One of the biggest problems with the Indian economy FII are:

• Break-up of the amount invested by each class of FII in the Indian equity market or the bond market is not available.
• Neither the break-up based on source country is available.

Owing to these reasons, debate over the nature of funds routed from Mauritius route is always questioned. It is said that since many of the investment entities which is set up in these countries have opaque structures thus preventing from getting the ultimate owner of such funds at the end. According to a report published by one of the largest financial institute BNP Paribas Securities, it was found that only 1/3rd or 33% of the $10.3 billion of net FII inflows into the Indian stock market in less than 7 months was only explained by the conventional funds. Some of the inflows were reported to be from alternate asset funds. Report clearly stated that such quantum of money coming from ‘non-regular’ sources which according to the conspiracy theory is said to be nothing but the Indian money reported as FII money.” Be it the rating agencies or the head of the state or central bank everybody commented on the policy paralysis and the anaemic growth of the economy. If we look at the corporate India’s growth rate, quarter ended June was the slowest in years and the profitability was reported as the worst despite being the fact that the FIIs investment saw a rise to record at $11.26 billion in the Indian equity market.

For many, such FII inflow is actually the Indian money which is being routed back to the country through Mauritius whereas some recent data suggested about a new breed of investor which is bullish over the Indian economy.

It is a matter of growing concern over the ingenuity of the funds from foreign lands. Such discrepancy in the data will only result to the slowing of the economy in long run. Reporting good numbers by using one’s own fund is doing no good to the economy as the money is just rolling completing the circle and is doing no good for the economy but is just creating irregularities in the market which will result in increased corruption levels from what is already existing in the market. Now the time has arrived when the regulator of the capital market work on policy change, which can help check such security issues, aiming to make the market efficient in any and every manner possible.

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