FIIs' pre-results stock buying spree under Sebi scanner

Companies generally begin announcing their financial results after about a week of the end of every quarter and it is common for investors to base their investment decisions on these figures.

However, in a strange pattern noticed for the past few quarters, the Foreign Institutional Investors (FIIs) are embarking on an above-normal stock buying spree during days before the start of the corporate earnings season.

This buying spree generally begins about 10 days before the earnings season and stops 2-3 days before the results start coming out.

The average quantum of stock-purchase activities in these days has been much more than the daily average for other parts of a quarter, leading to a case for suspicion by market regulator Sebi, sources said.

While the investigation is in initial stage, it is being probed that whether this upsurge in FII buying activities was due to any insider information about the corporate results, they added.

There have been only 4-5 days during such periods in past one-and-a-half year when FIIs have been net sellers of stocks.

This strange trend has been noticed for past few quarters, when corporate results have not been very good due to factors like soaring inflation, economic slowdown and rising interest costs.

In this backdrop, Sebi is investigating whether FIIs are getting any prior information about the companies not being able to post a strong set of results. It is being probed that whether the shares are being purchased with an intention to sell in a pre-earnings rally, which generally builds up a day or two before the quarterly results.

A senior official said that the daily average for net purchase by FIIs so far in 2011 stands below Rs 100 crore, but they have been purchasing shares worth an average of more than Rs 1,000 crore during the 5-10 days before the beginning of quarterly results.
A similar pattern was noticed also for the figures for 2010, when the average daily FII inflow into stocks stood at about Rs 500 crore but the last 5-10 days before the earnings season was an average net inflow of close to Rs 1,000 crore.

Besides, the daily stock purchase by FIIs during these days has also been generally higher than the average figures for the respective months since 2010, with only exception being the days before the earnings season for the July- September 2010 quarter, sources said.

In many cases, the FIIs have turned net sellers soon after the beginning of the earnings season, after purchasing heavily during the days before the result announcements.
A recent brokerage report from Kotak Institutional Equities also said that it has noticed "a peculiar phenomenon of large FII inflows into the Indian market in the last 5-6 trading sessions of quarter-ending months."

It said that these flows were always positive and disproportionately large compared to the rest of the month, and were also significantly higher than those during similar periods in other months.

"We do not have an answer to this phenomenon but would be curious to understand the reasons for the disproportionate flows," the report said.

Kotak said that "over the past six quarters, the Indian market has seen average inflows of USD 1.1 billion in the last five trading sessions of the quarter-ending months (June, September, December and March)."

"This compares with about USD 400 million of average monthly inflows over the past 18 months and only USD 58 million of net inflows excluding the quarter-ending months," the report said.

"It would be too much to expect that our observation is just mere coincidence. However, we do not have an explanation for this currently," it added, while ruling out factors like low valuation for this strange trend.