FIIs get glitz but small players rule the roost

RBI Governor Y V Reddy may be concerned enough about the quality and volatility of overseas portfolio investments to mull fresh taxes on FII inflows but the Economic Survey has given them a clean chit.

The Survey has documented the sharp rise in the number of registered FIIs, and recorded that this growth is desirable as it indicates a more diverse, and hence more stable, pool of foreign investors.

The entry of FIIs has increased the diversity of participants and helped fuel market liquidity, it says. FIIs have been in the spotlight due to their net purchases which have jumped manifold. Going a step further, the Survey has highlighted the emphatic return of retail investors to make the point that FIIs are not the dominant players on Dalal Street. Ergo, foreign investments should not be feared.

It mentions that a finmin committee is formulating policies to encourage FII inflows through curbs on speculative tendencies. Overall, the Survey gives a positive outlook saying considerable domestic and foreign investments appear to be in the pipeline.

There are, in fact, signs of mass equity culture making a head-turning come back. On an average 5,400 new households gained access to Dalal St every single weekday of 2004.

The roaring 72% returns from the Sensex in the previous year were obviously hard to resist for equity-averse Indian investors who opened an unprecedented number of new demat accounts with the depository, NSDL, to be able to trade in shares.

Only 2% of Indian households have invested their savings in equities over the past few years. The Economic Survey fell short of updating this statistic but it is widely expected that a larger section of the population currently has increased exposure to stocks.

Also, investors didn’t just open new demat accounts, they used them actively to remain the most dominant segment on the bourses. Institutional investors both — foreign and local — accounted for only 10.8% of the equities market. The Economic Survey estimates the average per equity trade size for 2004 at Rs 27,715 on the NSE and Rs 23,984 on the BSE.

Institutional investors transact in large number of shares costing lakhs of rupees.

A small average trade size at a time when the total turnover has soared to Rs 43,14, 322 crore — more than one and a half times of India’s GDP — means there are a large number of traders on the bourses.