The diminishing free float in the equity of large and mid-cap stocks has reached alarming levels. This can become a problem in the near future for foreign institutional investors.
Ironically, as FIIs pump more and more money into such stocks, free float equity decreases further. In the top 10 companies in which FIIs have the largest stakes, portfolio investors have almost exhausted the available free float, with little room for stepping up investments.
FIIs have a significant shareholding in 38 most-traded and large cap companies. Their concentration in the top 15 companies amounts to as much as 83 per cent of their total holdings in 38 companies. Last year, this concentration was 80 per cent.
While the FIIs have started scouting for other investment opportunities, the poor availability of good stocks with sufficient market capitalisation may limit the consistently high flows into the equity market during the last few months, analysts point out.
On average, FIIs own 69 per cent of the 53 per cent free float available in the top 10 stocks.
If you were to exclude Hindustan Lever and Reliance Industries from this list, the ownership level has reached 81 per cent of the 66 per cent free float available for FIIs.
According to data on the "foreign inclusion factor availability" under the Morgan Stanley Capital International index, FIIs own 59.9 per cent of the 60 per cent free float available in Dr Reddy's Lab, 72.5 per cent of the 74 per cent free float in HDFC, 60.7 per cent of the 50 per cent free float available in HDFC Bank, 26.1 per cent of the 35 per cent free float in Hindustan Lever, 87.5 per cent of the 70 per cent free float in ICICI Bank and 43.3 per cent of the 60 per cent free float in Infosys Technologies.
In some cases, FIIs cannot go beyond their current holding despite the room available because the total foreign investment in the company has reached the overall foreign ownership limit.
Significantly, FIIs have raised their stakes in the top 38 companies in the last two years by 21.5 per cent. Despite the recent increase in investments outside the top 38 companies, FII investments remain highly concentrated.
The FII holdings in the top 15 companies are currently valued at $13.8 billion, according to JM Morgan Stanley estimates.
The valuation support for the aggregate mid-cap basket has started waning after the recent surge in prices because mid-caps carry higher risk and, thus, higher return expectations.
Thus, FIIs cannot expand their investments in mid-caps beyond a certain point.
For the quarter ended June 2003, the share of flows into stocks outside the list of the 38 companies has risen. The top 38 stocks have received 59 per cent of total FII flows during 2003 as compared with 82 per cent during 2002.
Though the top 10 stocks account for the bulk of FII investments, recent data suggest that FIIs have started moving down the cap curve in search of newer pastures.
The share of flows into large cap names has started to decline recently and the mid caps are the beneficiaries.
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