JOIN USIt is a question that begs for an answer: what drives non-resident Indians (NRIs) and foreign institutional investors (FIIs) to continue investing in Indian stocks, while the retail investors in the country have not been able to do so?
Resident Indians continue sitting on the fence, even as the the government attempts to promote equity investment from the household sector by launching seemingly friendly schemes like the Rajiv Gandhi Equity Savings Scheme (RGESS).
As retail investors sit on the fence for whatever the reasons might be, NRIs seem to be actively buying up Indian stocks going by the surge in number of NRIs who have opened demat accounts in recent years. The number of demat accounts held by NRIs with the National Securities Depository has risen 40 per cent in the last five years. Currently, it stands at 1.35 lakh accounts compared from 97,000 accounts in 2008. And the total number of demat accounts (domestic and overseas investors put together) rose by a little over 29 per cent in this period.
What’s more? As much as 80 per cent of the 1,800 entities on the National Stock Exchange (NSE) now comprise NRIs compared with 69 per cent five years ago. Not specific to equities alone, domestic mutual funds also have witnessed a rising NRI interest. So much so, that NRIs account for over 6 per cent of total assets under management (AUMs) by these institutions.
In the above context, Rajesh Dedhia, Director, Vantage Institute of Financial Markets, a subsidiary of BSE-listed Vantage Corporate Services, offers an explanation saying, “Many NRIs from Saudi Arabia and Oman, who make enquiries, are optimistic about India. Even at 5-6 per cent growth, they consider India a safer and more lucrative market to invest in. They are a conservative bunch and look for bluechip stocks to invest.”
NRIs have turned to India also because of the recent deregulation of deposit interest rates, points out Kotak Securities Vice-President B Gopakumar, saying, “The RBI’s move on liberalising interest rates on NRE deposits encouraged many non-resident Indians to remit money to India. A percentage of this is flowing into the equity market.”
In terms of market-cap, analysts point out that Infosys, Reliance Industries and ITC figure on top of the NRI portfolio. Some NRIs have increased their exposure to defensive sectors such as consumer durables, FMCG and pharmaceuticals, while they have trimmed holdings in cement, capital goods and infrastructure companies. Mukesh Ambani’s flagship company Reliance Industries (RIL) figures among top-10 picks by NRIs.
However, current rules stipulate that no individual NRI can hold more than 5 per cent of the paid-up value of shares of a company. Also, total holding by all NRIs put together in an Indian company cannot exceed 10 per cent of the paid-up capital (this ceiling can be raised to 24 per cent under certain conditions.
FIIs more dominant
Alongside NRIs, FIIs have been more dominant players in domestic bourses showing renewed interest in Indian stocks, a trend that drove the bellwether index of the country’s premier bourse BSE past the 20,000-mark in closing last fortnight.
That apart, Finance Minister Palaniyappan Chidambaram, at a recent function in Mumbai to mark Sebi’s completion of 25 years in regulating Indian stock markets, also pointed out that the offshore investments during this period grew exponentially, and specifically cited that FIIs during the calendar year (CY) 2012 infused about $31 billion in the India market, of which $24.4 billion were in equities (see FII data chart). And in the current CY, Chidambaram noted that till May 13, 2013, FIIs pumped in $17.73 billion, in which equities accounted for $12.81 billion.
Analysts feel that the market will show an upward bias with continuing foreign fund inflows but still rule out a bull run till macroeconomic issues are resolved to instill enough buyer confidence that can sustain the momentum. Citigroup in its latest note to clients said FII ownership in the top 500 companies has hit an all-time high of 21.2 per cent, climbing 128 basis points in the March quarter and, counting the foreign promoters’ 7.6 per cent stake implying the foreigners are now the most dominant shareholders. A basis point is one-hundredth of a percentage point. “We see upsides, but not a bull market,” analysts Aditya Narain and Jitender Tokas at Citigroup said in the note.
While foreign flows have been very strong, FII portfolio stance seems to have turned more conservative, with higher allocations (relative to benchmarks) to energy, telecom and healthcare, and lower allocations to the stronger performing/larger financials and IT. According to Sebi data, FIIs were net buyers to the tune of Rs 1,40,847 crore in 2012-13, whereas DIIs were net sellers of Rs 69,069 crore. In months when FIIs were net sellers, DIIs were net buyers and vice versa. Yet, the markets have not received a steady direction this year.
Retail investors
In the current situation, where big institutions are themselves confused, what would retail (small) investors do? The popular Sensex at BSE has plummeted 5 per cent in the first three months of 2013. And the reasons are fears over early elections, global uncertainty and currency crisis — the currency falls due to market speculation which the government may not be able to back. The triggers for such fear are usually depleting foreign exchange reserves and high fiscal deficit. India’s current account deficit (CAD) reached a new high of $32.5 billion, or 6.7 per cent of gross domestic product, in the third quarter of 2012-13, which means that the probability of the rupee falling is pretty high.
What is preventing retail investors to comeback to bourses? Chidambaram voiced the concern last week in Mumbai that the volatility in the stock markets is keeping small investors away even as the government and Sebi have taken various steps to win over the confidence of retail investors. Angel Broking Vice-President (Research) Vaibhav Agrawal has a clearer perspective on this when he says that retail investors have not made any money in the markets, as new highs have not been made in the last six long years. “Markets need to cross new highs before retail investors return to the markets,” he says. Concurs Sunil Singhania of Reliance Mutual Fund, saying, “There is a psychological aspect to it. In the last four-five years, retail investors have not seen any gains coming out of the equity markets.”
At the same time, he points out that there have been significant gains in the alternate asset classes, be it real estate or gold. “It is not about the markets going up or down, I think it is the market being more stable. That is the time when we will start to see some fresh money coming in.”
Chidambaram too voiced concerns that the volatility in the stock markets has kept small investors away even as the government and Sebi have taken various steps to win the confidence of retail investors.
And, for this (stability) to happen, what is needed? Agrawal says, “Agreed that Sebi cannot obviously endorse equities and tell investors outright to buy equities, rather it should take up the task of enlightening retail investors about the core characteristics of equities as an asset class.” Even now, he points out that many retail investors get into stocks for quick short-term gains based on hearsay rather than professional advice and end up losing money in the process. “They need to understand that buying a stock means getting part ownership in the underlying business. So, they need to hold stocks from a longer-term point-of-view and understand that the return on the stocks they have purchased would eventually reflect the growth and prospects of the concerned company,” he says.
As far as endorsing equities, it is the job of the market participants on the domestic sell side and buy side institutions to advise investors that the right time has come to invest in equities as an asset class. They need to urge investors into equities as a growing and compounding asset class, unlike, say gold. With inflation coming down and global commodity prices declining, India is looking well-positioned to do very well in the coming months and years.
Investors need to be made aware that this is a great time to allocate a portion of their portfolios in equities to maximise their risk-reward. In short, the challenge for both the government and market participants now is to ensure that the India stock remains attractive for resident Indians also.