D-St favourites queue up at RBI for higher FII investment limit

Titan Industries, a hot favourite among investors for a couple of years, has dropped six per cent over the past few days.

The trigger for the sudden sell-off was not the usual result disappointment or an earning downgrade. It was sparked by a Reserve Bank of India (RBI) notification late last week that the company had exhausted its limit for investment by foreign institutional investors (FIIs).

Traders dumped the stock as they feared the move might cap upside for the stock.

Analysts said the drop in Titan shares was a reflection of FIIs’ growing influence over Indian stocks.

Prompted by FIIs' appetite for domestic stocks, several leading companies have approached the central bank seeking increase in FII investment limits. This is partly meant to prevent a sell-off in their stocks when they near or touch the current limit.

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In the past three months, five firms — Tech Mahindra, Tata Motors (for its differential voting rights, or DVR, shares), HCL Tech, Lupin and Strides Arcolab — have applied to RBI for raising FII investment limits.

“Foreign institutions are becoming important for the Indian markets. In the past three-four years, Indian markets have increasingly become FII-dominated. So, we are seeing many companies asking for higher FII limits; that is where the money is coming from,” said Ambit Capital CEO (institutional equities) Saurabh Mukherjea.

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According to the RBI guidelines, 24 per cent is the default limit for FII investment in a company.

In the case of public-sector banks, it is 20 per cent. The 24 per cent ceiling can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and after the firm’s general body has passed a special resolution to that effect.

FII interest in the stocks here, however, has not been broad-based. The companies that have recently applied for increase in FII investments are mostly from the IT (Tech Mahindra and HCL Tech) and pharma (Lupin and Strides Arcolab) sectors.

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While HCL Tech and Tech Mahindra have received approvals, Lupin and Strides Arcolab are waiting.

“Given the current economic environment, there are only a few stocks for FIIs to invest in; it is difficult to rely on the mid-caps. FIIs are restricting investments to select stocks and will incrementally invest only in these stocks,” said Sandeep Singal, co-head of institutional equity, Emkay Global Financial Services.

FIIs have put close to Rs 91,000 crore into Indian equities so far this calendar year.

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Bankers warn, many quality companies risk the possibility of reaching a stage where they would not be able to absorb more FII inflows.

“The problem is not whether FIIs will invest or not. The problem is whether or not companies will be able to absorb the liquidity. Unless we create excellent companies, where are we going to get the capacity to absorb the money required,” asked Axis Capital Deputy CEO Nilesh Shah.

As of September-end, FIIs’ shareholding in Tech Mahindra stood at 32 per cent, double that in September last year.

FII holding in HCL technologies rose six per cent to 26 per cent during the same period.

Strides Arcolab has seen a 13 per cent rise in FII shareholding to 53.4 per cent, while in the case of Lupin, FII holding rose three per cent to 31.4 per cent.