FIIs LIMIT - OPPORTUNITIES REMAIN UNLIMITED

By Ruma Dubey

Over the past few months, while everyone has been concentrating on major macro issues, QE tapering, RBI and Sensex gyrations, there have been many companies which have reached FII limits. There have been stock specific movements every time a company has announced that it has reached its limit or is awaiting approval for hike in FII limit. And this hike in limit has been on the surge for a couple of months.

Take a look at some of the companies which recently announced hike in FII limit. Today Federal Bank is in the limelight as its FII limit has been hiked from 49% to 74%. Axis Bank, Karur Vysya Bank, NHC Foods, Powergrid India and many more. Remember Titan Industries in Nov’13? It had exhausted its FII limit after which the share price tanked. We saw Tech Mahindra, Tata Motors, HCL Tech, Lupin, Strides Arcolab; all hiking FII limit.

So what does this indicate? The most obvious – FIIs preference for particular stocks and more importantly, irrespective of the QE tapering, their infatuation with India has not disappeared as feared by many.

As per a report put out by Business Standard, of the 453 mid-cap and small-cap companies, FII holding at end of Q3FY14  rose to 42% or 190 companies while in 101 companies, their holding remained status quo and in 162 companies, they reduced their stake. Recently, HDFC became the listed Indian company to have 74% shareholding by FIIs, wherein at end of they held 74.25% v/s 73.09% at end of Q2FY14. ICICI Bank was the second favourite with 67.55% holding followed by Infosys with 56.34% FII holding at end of Q3FY14.

This ceiling on FII limit in monitored not by SEBI but by RBI, on a daily basis. As per RBI, The ceiling for overall investment for FIIs is 24% of the paid up capital of the Indian company. The limit is 20% of the paid up capital in the case of public sector banks, including the State Bank of India. The ceiling of 24% can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. 

The trigger point for FIIs is 2% below the limit and once FII holding gets here, RBI issues a cautionary note to the designated bank branches, letting them know about the limit and no more equity shares for the FIIs can be purchased without RBI’s approval. RBI gives clearance on a first come, first served basis, till the limit is breached, after which no further buying for FIIs is allowed.

Thus what happens to you and me when FIIs reach their limit? First and foremost, the ceiling will go up, meaning more momentum and higher stock price. And if the entire limit is exhausted, we could see some churning but no exodus. Well, there are many who fear that quality stocks are running out-of-stock with FIIs cornering all good stocks. Also others confer that valuations go way above its intrinsic value, like in Jubilant Food.

FII limit or not, if the company is good, the bottomline is that investors, be it FIIs, DIIs or retail investors; all will queue up. A company’s stock price moves in direct tandem with the earnings and fundamentals. FIIs will also follow this same basic rule.