FIIs Are Buying Mutual Funds Units

FII top Net sales of Rs 7,352.20 crore in May

Read this article carefully. It could provide you with a perspective you never imagined before.

The purpose of this hypothesis is not to define how markets will move tomorrow or the day after, but to highlight a possibility that belies the current state of the market: Things are not quite as menacing as they seem.

Perhaps Chidambaram is right; the Indian economy is on track, nothing has changed in the fundamentals, but somehow I suspect that the Finance Minister is not disclosing everything. Behind the obvious calm face is a machiavellian mind devising a scheme whose goal is as yet not known. One would suspect aggrandizement for the party with a view to elections in 2 years.

Why are FIIs selling so heavily?

According to Sebi, FIIs sold Rs 7,354.20 crore in May, roughly $1.6 billon. Looking at past behavior and also the quantum of investments made in 2005 in to the Indian markst, about $1 billion is normal and expected to move out.

However, the discrepancy between NSE and Sebi figures belies the muted optimism that exists under this whole panic situation.

NSE figures for FIIs, derived mainly out of orders punched in by brokers on NSE and BSE terminals, show that on May 29, 2006, FII clocked net sales of Rs 116.42 crore, while Sebi figures indicate Rs 81 crore. For May 30, 2006, NSE shows net sales of Rs 262 crore, while Sebi shows net sales of Rs 8 crore.

My view is that FIIs have turned to some other equity investments in India, not necessarily in the purview of the stock markets. Just read what Sebi means by FII figures:

“Data pertains to all the activities undertaken by FIIs in Indian Securities Market, including trades done in secondary market, primary market and activities involved in right/bonus issues, private placement, merger & acquisition etc.”

The etcetera is not defined or stated. Sebi needs to clarify this to all investors.

The difference between the Sebi and NSE figures, means FIIs pumped Rs 772 crore in the last two days in to primary markets–how about the DLF IPO?–or did private placements or M&As.

So, where did this money go? Could the FIIs have considered the FM’s penchant for mutual funds, and poured money in there? I would not know if this is a wise move for FIIs, but the FII FAQs on Sebi.com clearly state that FIIs can in fact invest in units of Mutual funds.

Finally, the sell-off could also be the precedent to the opening up of FDI in retail and real estate. Money has gone out back to the original backers of these FIIs, and could re-enter as FDI in the country. A lot of FIIs would want to give profits back to their investors, and then encourage them to invest in another fund that does FDI investments. While this possibility does not work in favor of the bourses, it certainly does in favor of the Indian economy.