>INDIA EQUITY STRATEGY: Owning India Inc.: FIIs - Investing More, Owning Less

■ A lot of foreign flow, but less and less to show — A fair amount of foreign money flowed into India in the March–June quarter ($2.5b) while domestic MF flows were negative; but foreigners owned less of India Inc. at the end of the quarter (-40bps, 16.4%). This appears an extreme outcome - probably a combination of flow timing, underperformance (buying high selling low?), paper supply and insurance company buying. But a longer-term trend of foreign flows/market performance suggests that more and more foreign money is still moving the market, but by less
and less.

■ Staying bullish – foreigners more so than domestics — The market is up <5%>
and 21% yoy, but portfolio appearance suggests more bullishness than market performance so far. FII portfolios appear most bullish (financials, discretionary and industrials key over-weights), the domestic MFs a little less so but hugely overweight capital goods, and the insurers probably the only ones playing a little safe – but building up on their OW financials call. Energy, IT and Utilities are the consensus UWs. No big positioning/sectoral shifts within the quarter – with some marginal shifts toward the benchmark, across investors.

■ Ownership mix; settling down, or are domestic flows destined to dip? — CY10 has witnessed little change in key owner classes: Promoters at about 50%, FIIs 16- 18%, Domestics (MFs and insurers) sub 10%, and individuals about 8%. Is this here to stay or is it the lull before a massive (domestic) regulatory storm? With MFs already hurting due to new distribution regulations (-$2b YTD), insurers anxiously preparing for a sea change in distribution/product changes (effective Sep 1, 2010 – key risk to incremental growth/flows) and retail investors preparing for possible long-term capital gains tax from April 2011 (zero currently), will it be only foreign money hereon? Time will tell, but if that does happen, FIIs would probably need to invest less to own more – unlike the last quarter.

To read the full report: INDIA STRATEGY