Do FIIs Stoke Share Prices?

FIIs have long been believed to be the backbone of the Indian stock market. Does their interest or otherwise really matter to share price movements? Evidence suggests, they actually don’t , says Saikat Mitra.

Anybody who has followed the Indian stock market would certainly agree to the fact that much of its growth over the past one decade or so has been fuelled by money from abroad. Foreign Institutional Investors with their deep pockets have pumped money into emerging markets like India in search of superior returns. And why not, after all it is the depth of markets like India that offer them a wider choice in terms of the investible arenas. Such a depth not only fetches them good returns but also give them adequate opportunity to hedge against downturns in some sectors by offering growth in certain others.

As they say, numbers do speak for themselves. Here are some to substantiate our position as sated above. Since 1992 FIIs have pumped in close to Rs 4.97 Lakh crore in the Indian markets. This has put to birth a strong notion that it is only FIIs who can create momentum for stocks in which they get interested in, thereby pushing them up. Is this notion really correct? Do FIIs really stoke share prices? Here is some evidence to probe the reality.

Do They Really Matter?

In the calendar year (CY) 2012, till date, FII’s have pumped in Rs 43173 crore in Indian equities. The benchmark index during the same period has witnessed a gain of 10 per cent. In CY 2011 FIIs were net sellers to the tune of  Rs 2714 crore in the equity market and during the same period the Sensex declined by 24 per cent. This hints at the fact that FII’s are indeed responsible for the broader movement of the markets. But wait until you read the entire piece to find out if this really holds true.

Where They Stand Today

Till 27th April, 2012, around 780 companies have released their shareholding patterns for Q4FY12. On a QoQ basis FII’s have increased their stake in 288 if these companies while in case of 257 companies their stake has gone down. There are 235 companies where their holding has neither gone up nor down. We narrowed down our analysis to stick to the companies forming part of the BSE 500 Index for a better understanding of the matter. In case of the BSE 500 Index there are 271 stocks that have witnessed an increase in FII stake on a QoQ basis, while 180 companies have seen a decrease in the stake of FII’s.

A deeper analysis of the numbers shows that out of the top 20 sectors (see Table 1), Metals have been in demand emerging as the favourites of FIIs. 68 per cent of the total 25 companies that comprise this sector (in the BSE 500) have witnessed a hike in the stake of FIIs on a QoQ basis. But what comes as a real surprise is that the company (Prakash Industries) that has seen a decrease of 5.48 per cent in the stake held by FIIs in the March quarter of 2012 as compared to the December quarter of 2011 has witnessed a price appreciation of more than 91 per cent in Q4FY12.

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If you thought this would have been an isolated case, take a look at another example from a different sector. Out of the total 63 companies from the Banking and NBFC space that form part of the BSE 500 Index, 38 companies have seen a hike in the stake held by FII’s. On the price front, South Indian Bank has seen a price appreciation of 15.40 per cent during Q4FY12 and the stake held by FIIs too has increased by 3.90 per cent which is the highest in this sector. However there is a flip side here too in case of LIC Housing Finance there is a 5.88 per cent decrease in the stake held by FII’s whereas the price if this stock has gone up by 16.07 per cent.

In the auto sector too, the story is the same. Out of the total 20 companies 12 companies have seen a hike in the stake held by FII’s. On the price front, Tata Motors appreciated by 69 per cent and the stake held by FII’s in its stock increased by 3.48 per cent. However, in case of Escorts there is a 3.82 per cent decrease in the stake held by FII’s but the stock price has gone up by 8.93 per cent. Out of the the seven stocks in this sector which witnessed a decrease in the stake held by FIIs, six have actually witnessed a price appreciation.

UP or Down
FII Stake Movement in Major Sectors during the March quarter of 2012 against the December quarter of 2011

These examples do prove one thing that there is no conclusive evidence to prove that FIIs are indeed responsible for pushing up share prices. Stocks do catch the fancy of the market if FIIs get interested in them, but this often happens with a lag effect. There is no clear co-relation with the FII’s increasing or decreasing their stakes and with the stock prices. So the next time you see foreigners getting interested in a stock or two, take your time to actually find out if this interest is likely to translate into higher share prices based on other factors as well.