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Suresh Krishnamurthy

FOREIGN investors continue to fancy large-cap Indian stocks with the flood of dollars going into these stocks remaining unabated.

During the period June 2004 to June 2005, they have pumped in about Rs 28,000 crore or just more than $6 billion. This means that their holdings in the blue chip stocks of the Indian stock market have more than doubled. Their holdings, as of June 2005, would now be worth Rs 2,25,000 crore at current prices.

Foreign institutional investors' (FIIs) holdings in Nifty stocks, as of June 2004, stood at Rs 1,10,000 crore.

It is not just the FIIs, but the foreign investment community as a whole comprising additionally, non-resident Indians and overseas investors who have looked favourably on India Inc, having invested in the GDR/ADRs of listed stocks. Their holdings are now worth Rs 3,30,000 crore up from Rs 1,65,000 crore as of June 2004. And with good reason too. S&P CNX Nifty index has gained about 70 per cent during this period.

Stocks that attracted the attention of FIIs during this period include VSNL, Bharti Tele-Ventures, Dabur India, SAIL and Tata Power. FII stake in these companies quadrupled in value terms. In the case of VSNL, value of FII stake has vaulted from Rs 37 crore, at the end of June 2004, to Rs 740 crore, now.

Foreign holdings now account for about 27.9 per cent of Nifty's market capitalisation. Technically, there is still headroom for some more. Foreign holdings can rise up to 49 per cent, in stocks of most private sector companies, and 24 per cent, in stocks of public sector companies. If FII stake were to rise to this level, then Nifty stocks themselves can accommodate fresh investment of close to Rs 1,50,000 crore or nearly $35 billion.

Some analysts, however, have a different opinion. A leading foreign investment house had stated in a report a few months ago that foreigners now own 74 per cent of market's free float leaving marginal scope for further demand from that source. The report also said that valuations were running ahead of fundamentals.

Since that report, however, both stock prices and FII inflows have only raced ahead. Since March 2003, overseas investors had invested $18 billion in India, which is comparable to the investments of $26 billion in Taiwan, and $24 billion in South Korea.

According to the RBI data in the period between June 2004 and June 2005, about $8 billion (about Rs 35,000 crore) has come into the country. Much of the fresh inflows appear to be seeking large-cap stocks. Out of the total FII investments, about 85 per cent was invested in stocks with market capitalisation in excess of Rs 5,000 crore.

This is almost equal to the proportion invested in such stocks in June 2004. This is not to say they have totally ignored the small and medium-sized companies. They have investments in 900 companies, as of June 2005, compared to roughly 600 a year earlier.

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