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For foreign institutions, the India dream is turning into a nightmare

Nikhil Faleiro in Bombay

Foreign institutional investors have little to cheer during the present Season of Joy? The bubble has apparently burst for the FIIs, and the stockings of the FII employees, once the envy of corporate India for their high salaries and even more fabulous year-end bonuses, are likely to remain empty this Christmas. Four years after they set up office in the country, amidst great fanfare and proclamation, FIIs are packing their bags to make the long journey home, leaving behind their employees to face an uncertain future. The investment trends listed below speak for themselves:

Trends in FII investment

Month	Gross purchase (Rs bn)	Gross sales (Rs bn)	Net investment (Rs bn)
July	14.2	8.2	6.0
August	13.6	3.6	5.0
September	14.1	7.8	6.3
October	20	10.1	9.9
November	11	16.5	-5.5
December 15, 1997	3.7	6.8	-3.1

Entering the country in 1993, when the stock market was at its peak, the FIIs slowly but surely began to tighten their grip on the stock markets, easing out the local brokers in the bargain. The FIIs with their dollars and vast financial resources soon began to play a crucial role in determining the daily market activity -- moving the Sensex in the direction of their choice. The FIIs wielded so much power that on any given day, local brokers would wait for them to make the first move before entering the market.

But things are different today. With the secondary market witnessing a fall from August 1997 onwards, peaking in November, the secondary market has seen a 10 per cent decrease in returns, to the utter dismay of many FIIs who have invested heavily in the secondary market. From August to November 1997, 200 additional BSE scrips turned illiquid, having not been traded even once over 30 of the preceding 60 working days.

Similarly, the number of stocks traded in the secondary market in November 1997 were only 1,300 as compared to the 2,264 scrips traded in November 1996. The listless markets had a domino effect, because corporates have cut down on public issues, which in turn means less business for the FIIs. Public issues declined from an all-time high of 1,445 in 1995 to an abysmal 128 this year, making for a depressing Christmas and giving a bad start to the New Year.

The illiquid market conditions, the lack of good public issues, and the market volatility is causing many FIIs to rethink their strategies and options in India. The Bombay Stock Exchange has turned from being the favourite hunting ground of most FII's to their graveyard. Fearing little improvement in the months and years to come, given the political instability in India and the economic crises in Asia, the headcount of FIIs leaving the country is expected to rise. Says an FII analyst, "Conditions are so bad that we expect only 100 FIIs to remain by the end of the next two years from the current level of 471."

The Indian markets attracted FIIs by the droves because of the excellent quality scrips, and the FII's cumulative investments in the country crossed the $8 billion mark in November 1997. Moreover, the presence of the FIIs in the markets had grown so omnipotent that their absence today has turned the market listless. Even the local players are following suit, worsening the situation.

Foreign institutional investors flocked to the country in 1992 after the Indian government liberalised the economy. With the country then facing an acute foreign currency crisis and embracing reforms overzealously, the entry of FIIs with their large dollar reserves was welcomed by most. Over the past five years, FII's have purchased large stakes in leading Indian companies. The injection of foreign savings into India also gave a much needed shot in the arm to the fledgling capital market and dramatically improved the Indian foreign exchange coffers. With the Indian market looking extremely attractive, FII investment continued to rise. With the increase in investment, the number of registered FIIs also increased substantially from a measly 131 at the end of 1992 to 475 by the end of November 1997.

Yet, things have not been looking rosy for the FIIs during the past few months. The depreciation of the rupee combined with the liquidity crunch (for most of 1997) has kept the small investor away, resulting in depressed market conditions. This caused net FII investment to plummet, sending the stock markets into a tailspin. And for he first time in five years, FII investment showed a net outflow of Rs 5.5 billion in November 1997. As per the figures released by the Securities and Exchange Board of India, the total foreign institutional investment in the equity market now stands at $9.05 billion, down from $9.10 billion in October. The decline continues for December, though figures are yet to be released.

The bad run, triggered by the economic crisis both in South East Asia markets and in the Indian markets, has hit FIIs hard. Peregrine Capital started the process by retrenching 16 of its staffers. According to Shankar Dey, managing director, Peregrine Capital, "The upheaval in the southeast Asian markets has left many brokeraging housing high and dry, and to reduce our huge costs we have no option than to retrench our staff." To reduce costs, the broking house has already retrenched 11 of the 12 personnel in the debt market operations and the broking firm's long-term plans is to reduce the 1,750 staff by 30 per cent (525 employees) within the next three months.

Similarly the local arm of Barclays Banks and its investment arm BZW India are facing an extremely uncertain future. On October 16, when Chief Executive Martin Taylor announced that select business of BZW such as the equity and advisory business would be hived off, the shock waves travelling through the FII community were palpable. The parent Barclays firm is determined to carry out its plans to propel BZW into the ranks of the big league alongside Merrill Lynch and Morgan Stanley, and to achieve this goal, Barclays is selling off some of its unprofitable divisions worldwide to raise the necessary finance to fund its plans.

Barclays Bank is not the only one that is going through a period of uncertainty. National Westminster Bank, based in the United Kingdom, is also going through a period of turmoil. Its investment arm, Natwest Markets, incurred a loss of 77 million pounds sterling due to mispricing of options, rumours abounded that the bank is planning to hive off certain divisions. On November 24, 1997 Natwest Securities finally threw in the towel and admitted defeat. It started cutting down its employees, and those left untouched remain fearful of retrenchment and have already begun seeking new jobs and headhunters. Admits Alok Sethi, managing director Natwest Securities, "We are looking for buyers for our businesses in Asia and Australia." Deutsche Bank too has started shedding its staff. The broking house has already closed down its Bombay office due the unfavourable market conditions.

Foreign institutional investors are not the only ones that are at the receiving end. Among the Indian broking houses, the firm of S S Kantilal Ishwarlal is currently finalising a severance package for over 20 employees and similarly, Lloyd Securities dismissed 11 employees with a three-month severance package after the company went through a bad patch. Says Sanjay Aggarwal, chief executive Lloyd Securities, "The heydays when the Sensex used to jump higher every day is over. Now the financial world is going through a period of change and if you are not profitable, then you have to close down."

The FIIs, seeing their dreams turn into a nightmare, are learning to cope by downsizing their operations or simply quitting India. But for their Indian employees, used to permanent jobs where sacking was virtually unheard of and now facing an uncertain future, there seems to be little to cheer about.

Year	No of public issues	Amount collected (Rs bn)
1992	405	5.5
1993	667	11.2
1994	1130	9.2
1995	1445	14.6
1996	1183	12.4
1997	128	5.0

EARLIER REPORT:
Negative November saw outflows exceed inflows