The month of June saw a record-breaking influx of Foreign Portfolio Investments (FPIs) in the equity market, solidly surpassing any other month of the current calendar year, 2020. This significant uptick indicates a shift in investor confidence and market dynamics, which spells a potential alteration in the economic landscape.
Unprecedented Increase in June Trading Sessions
Foreign portfolio investors demonstrated this renewed confidence through the purchase of shares totaling around Rs. 21,000 crore over the course of merely five trading sessions within the first week of June 2020. The magnitude of this growth undermines the previous high recorded in May where a total of Rs. 14,569 crore worth of shares were traded. Major sectors targeted by the FPIs were automobiles, private banks, and pharmaceutical companies.
Factors Driving the Surge in FPIs
Several key developments are linked to the sharp surge of FPIs. These include the Rights Issue of Reliance Industries Limited (RIL), Kotak Mahindra Bank’s stake sale, and an overall increase in optimism regarding the Indian market.
RIL’s Rights Issue, which tallied up to Rs. 53,124.20 crore, marks India’s largest rights issue. Moreover, Uday Kotak’s divestment of Rs. 6,800 crore worth of shares from the Kotak Mahindra Bank, which were subsequently acquired by FPIs, also contributed to this trend.
Negative Cumulative Foreign Flows in Equities for 2020
In spite of the recent surge, the cumulative foreign flows in equities for 2020 remain in the negative. Specifically, it records at a shortfall of Rs. 19,531 crore. This is largely attributed to massive outflows experienced in March and April, with March alone witnessing a record outflow of Rs. 61,973 crore, which was followed by April’s sizeable selling of Rs. 6,884 crore worth shares.
Understanding Rights Issue, Stake Sale, and Foreign Portfolio Investment
A rights issue is a financial mechanism where a company offers its existing shareholders the opportunity to buy additional shares at a reduced price. This enables companies to raise capital to clear debts, acquire assets, or facilitate expansion without resorting to loans.
In contrast, a stake sale refers to a company selling its equity holding in a certain company to another company. It entails a disinvestment process of a company’s shares.
Foreign Portfolio Investment (FPI), on the other hand, implies securities and other financial assets passively held by foreign investors. It doesn’t endow the investor with direct ownership of financial assets and is relatively liquid depending upon the market volatility. FPI forms a part of a country’s capital account and gets documented in its Balance of Payments (BOP), which measures the amount of money flowing from one country to others over a fiscal year.
Implications of FPI and FDI
Both FPI and Foreign Direct Investment (FDI) are vital sources of funding for most economies, including India. Foreign capital can help develop infrastructure, set up manufacturing facilities, and service hubs, investing in productive assets like machinery and equipment, thereby aiding economic growth and stimulating employment.
In 2019, The Securities and Exchange Board of India (SEBI) introduced new FPI Regulations, replacing the previous ones from 2014.
(Source: TH)