No lure for the FII hike bite

Mumbai: While there is much talk about allowing Indian companies to hike the FII investment limit to 74 per cent from the current 49 per cent, the crucial question is whether they will bite the bait?

Lets discuss this issue at a later stage in this article, and lets now talk about the benefits, if at all the hike is made. If the hike comes about, India will stand to gain substantially as its weightage in the all-important Morgan Stanley Capital International Index (MSCI) index will go up. While this may not sound important to skeptics, higher weightage in the MSCI index means higher allocation and, therefore, higher flow of funds into the Indian capital markets.

Many FIIs use the MSCI index as a benchmark to allocate funds for investing in a country. Funds following the MSCI index usually constitute about 20 per cent to 22 per cent of the total FII investment. Higher MSCI weightage generally means higher fund allocation. FII investments result in greater inflow of foreign exchange into the economy, which strengthens the foreign exchange reserve and provides comfort to the balance of payment position of a country.

FII investment and foreign direct investment (FDI) are the two important sources through which India receives and refurbishes its foreign exchange reserves, which currently stand at about $43 billion, far lower in comparison to that of China which is said to be in the order of around $130 billion.

While the country has been unable to attract any significant amount of FDI, which at the last count was placed at a miniscule $3 billion, FII inflows have been largely on the back of heated stock markets in the last few years.

While the impact may not be immediate, it will definitely be felt once the adjustments to the MSCI index are done with. The adjustments to the MSCI index are to be affected in November 2001 and May 2002.

At the time of the last adjustment, Indias weightage in the MSCI provisional index series came rolling down to 3.5 from 6.5 per cent, which adversely affected the FII inflow. Two reasons were cited for reduction in weightage. One, restrictive foreign ownership, because of low FII investment limit and two, low floating stock or low non-promoter holdings.

So far, eight companies have been allowed to raise FII investment limit in their equities to 49 per cent. These are Crisil, Global Tele Systems, HDFC, Infosys Technologies, NIIT, Reliance Industries, Reliance Petroleum and Satyam Computer Services.

The new constituents of the new index are Reliance Petroleum, VSNL, HDFC Bank, Britannia and Dabur. From the existing constituents Wipro, Satyam, ICICI, Dr Reddys and Infosys Technologies have gained in terms of weightage. On the other hand, Reliance, ITC, HLL and SBI have lost ground.

The big question is: Will the Indian companies bite the bait of increasing the FII limit to 74 per cent? If they dont, then the entire advantage of higher weightage coming through the MSCI index will just not happen. The problem really is that of losing control of ownership of the company concerned, which the Indian promoters will just not like to happen.

One can reasonably expect that only those companies, which do not have significant shareholding by individuals or promoters, would like to hike the investment limit to 79 per cent as they would have nothing to lose, individually speaking.