Investors need not worry even if FIIs have no headroom

With Foreign Portfolio Investors (FPIs) on a buying spree, some market players have been warning of bellwether stocks reaching the maximum permissible limit for FPI holding. This leaves little headroom for further buying in these stocks. So, given that it is FPIs who play piper to the Indian stock market, should investors in such stocks worry?

Not really, found an analysis by BusinessLine . When the foreign portfolio cap in a stock is hit, the market’s immediate reaction is usually negative. But over a month or so, most stocks recoup lost ground as fundamental factors come into play.

Take the case of Maruti Suzuki. As the FPI ownership in the company hit the 22 per cent mark in March, the stock immediately recoiled by 1.7 per cent on the same day. But it raced up by 13.8 per cent in the week following the development and was up 22.6 per cent a month later. In a similar fashion, shares of Axis Bank which dipped by 0.13 per cent on the day FPI limits were hit, were up 3.6 per cent one week later and were trading 15 per cent higher after a month. Other stocks such as IndusInd Bank, Zen Technologies and IDFC have also shown similar trends.

“When FPIs hit the limit, effectively, they can’t buy more and foreign fund flows dry up in that counter. In the short term, a stock underperforms. But if the fundamentals are strong, you get buying interest from other parties,” explains Ashish Shankar, Motilal Oswal Private Wealth Management Head — Investment Advisory.

Foreign portfolio investors are permitted an aggregate investment of up to 24 per cent in a company, according to the RBI rules, though this limit can be raised by a company up to the applicable sector cap with the board and shareholder approval.

A report published by Kotak Institutional Equities in July indicated that the headroom for FPIs to invest in top-tier companies is limited now, particularly in cyclical sectors. “FIIs have already used 75-80 per cent of the permissible FPI limit in cyclical sectors. Cyclical sectors such as consumer discretionary (80 per cent), financials (77 per cent) and industrials (74 per cent) have used up most of their available FPI limit. This implies foreign investors can incrementally buy only approximately $2.2 billion in the industrials sector within the CNX Nifty 50. In contrast, energy has available foreign headroom worth $35 billion,” said the report.

Foreign investors are not free to invest in all the outstanding shares of a company, because each sector has separate foreign ownership limits. So, when a stock hits the FPI limit, be sure to watch out for fresh approvals by the board of directors, shareholders, and the RBI for an increase in the cap, which is usually a positive.

“Given the importance of FPIs in India — they own 22 per cent of market cap and about 40-45 per cent of floating stock, in the shorter run, these flows have a price impact. Most FPIs have gone full up on their limit because they like a company,” says Shankar.

“Traders give a lot of weightage to this (announcements on FPI limits) to make a short-term buck. If an FPI cannot trade, it is a concern, because they are one of the biggest participants in the market,” says Shankar of Motilal Oswal.

For example, following the recent hike in the FPI limit for Zee Entertainment to 100 per cent, shares of the company climbed 3.8 per cent and a month later, they were trading 9.3 per cent higher. But you have to act on tangible announcements, not mere proposals and rumours. For example, when Kotak Mahindra Bank approached the RBI to hike the maximum level of FPI in the company on June 18, investors were unimpressed, with the stock tumbling 8 per cent a week after the proposal was raised. It was still down 2.5 per cent a month later, but when the RBI approval finally came on July 19, the stock rebounded by 5.7 per cent over a month.