Friday, September 15, 2006

FIIs account for a lot more than what meets the eye!

Foreign institutional investors have played a significant role in the bull run of the past 3 years. Since January 2002 they have pumped in over Rs.1.3 lakh crore in Indian markets. During this period, the benchmark indices -Sensex and the Nifty - yielded returns of over 200%. It can be argued that FIIs do not matter a great deal given that they have a small share (between 18-20%) in the daily trading volumes of the cash market. In the F&O market, their share is even smaller (less than 10%, ie.). Check the monthly derivatives update available here. But, do these numbers really indicate that FIIs do not matter a great deal? I think NOT. Here's why:

FIIs own close to 20% of all the Nifty companies. The shareholding pattern of companies available at the end of every quarter indicates that this is indeed the case. However, if adjusted for the free-float, their stake increases to around 40%, which is quite substantial! And, which is why I think they matter a lot more than what is believed. While this was only a small analysis of the Nifty 50 companies, which account for something like 50-60 per cent of the total mcap of Corporate India, one can do a more broad-based analysis by studying the S&P CNX 500 numbers.

A few examples (numbers as of 31-Aug-06 from here):

>> Mcap: Rs.1.4 lac crores,
>> Free-float factor - 0.2,
>> Free-float mcap - Rs.28,000 crore
>> FIIs stake (over total mcap and not FF mcap) - 9.4%
>> FIIs share as a % of free-float mcap - (0.0943 * 1.4 lac crore) / (28,000 crore) = 19.2%

Reliance Industries
>> Mcap: Rs.1.39 lac crores,
>> Free-float factor - 0.55,
>> Free-float mcap - Rs.76,000 crore
>> FIIs stake (over total mcap and not FF mcap) - 19.8%
>> FIIs share as a % of free-float mcap - (0.198 * 1.39 lac crore) / (76,000 crore) = 36%

FIIs share goes up substantially in case of companies such as ICICI Bank, Infosys Technologies, HDFC, HDFC Bank, Bharti Airtel, etc. where a). FIIs have significantly higher stakes and b). the free-float in these companies is also pretty high.

All in all, the numbers indicate that FIIs own and can therefore influence more than what meets the naked eye.

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