The Hindu Business Line : Fund flows into stocks: Disclosures need a boost

THERE is a clear need to improve the quality and quantum of disclosures regarding fund flows into the stock market. Speculation relating to institutional fund flows and their direction has often been cited as reasons for price trends in many stocks.

Hedge funds' angle: In the past fortnight, there have been indications that hedge funds may be testing the Indian waters yet again. In 2000-01, their presence was seen as a factor influencing price trends significantly. Hedge funds typically adopt a highly aggressive style of investing. They leverage their assets to invest more and trade more in an effort to spike returns to above-normal rates.

Their style is slightly different from that of traditional foreign institutional investors. The latter's mandate usually does not permit them to adopt the kind of aggressive styles that hedge funds resort to. But the FIIs too have resorted to large-scale trading since the last quarter of 1996.

As a result, the overall effect of hedge funds in the Indian context may not be as sharp. This may be the reality. But the perception is that hedge funds play a role that can have volatile effects. This may also suit the interests of traders and speculators in the ongoing bullish market phase. This probably is why there are deliberate information leaks that hedge funds are here in a big way. The truth in such information is difficult to establish. In the last two months, FII flows have been about $ 875 million. This has created ample room for rumours on the interest shown by hedge funds.

Improving quality of disclosures about fund flows into the market is the only way to tackle efforts at using such pegs to manipulate stock prices.

Obscure OCBs too: If hedge funds are the one dimension to fund flows that has been left untouched, flows from overseas corporate bodies is yet another black hole.

This is despite the overwhelming role played by the OCBs in the Ketan Parekh-centred 1999-2000 bull run. The OCBs provide a respectable front to channel funds of promoters/market operators. Three years have lapsed. But there have been no signs of any concrete effort to make public the inflows through the OCB route.

Canvas of disclosures: The system for capturing fund flows and trading actions (buying and selling) is in place. The depository, the banking system and the custodians provide a neat framework to capture fund flows from significant sources. This is the route used to bring FII and mutual fund flows to the public domain. SEBI needs to extend this to cover the OCBs and hedge funds, among others. Disclosures could cover the following aspects:

Flows from hedge funds, their purchases, sales and net positions should be disclosed separately. They are now clubbed with FII flows. As there is a difference in the style of operations, investment objectives and potential impact on price trends, the case for separate disclosures is strong.

At times, hedge fund inflows and outflows can be compressed in a short time-frame. By separate disclosures, SEBI will also remove the scope for mischief — of using possible hedge fund flows as a trigger to boost stock prices — that exists now.

Similar information for the OCBs will also be of importance. It can help investors and other market participants keep track of the liquidity flows from this vital source into the market. If there are sharp spikes — as would have been the case in 1999-2000 — the sources of such liquidity can be looked into. Any abuse of the banking system can also be checked out.

SEBI should also provide on a monthly basis, the flows relating to the top ten of the 15 FIIs. It is common for stocks to go up on the speculation that FII A or B is pouring funds into the market. In 2001 first quarter, one single FII brought in close to $1 billion.

Speculation was rife that much of these inflows had been invested in a single stock. If there is a monthly snapshot of major FII stakes in the Indian market, it could reduce the scope for rumours and manipulation.

Information of investments by select individual FIIS are available from sources such as Lipper Analytical Services, US. If private sector outfits can collate such information, there is no reason why SEBI should not use its regulatory clout to formalise an information dissemination arrangement.

The insider angle: Now, the magnitude and direction of flows from big-ticket investors is an important piece of inside information. A small set of market players is privy to such information. The room to profit from such information is obviously immense, irrespective of whether there are inflows or outflows.

The present opaque system of disclosures has been around too long for anybody's comfort and should not be allowed to perpetuate.

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