FIIs are cold money!

Alright, once upon a time, there was a stock market marred by scams, insider trading and low depth. The government arrested bad guys, infused transparency and it coincided with a growth story. Lo and behold! Investors swarm like bees, the market never seems to cool off and aren’t we happy!

We would have, but for the government that is more tense and skeptical than ever, thinks that a lot of money is chasing a few papers, and even thinks about putting a cap on FII investment. And what’s the purported reason? FIIs are hot! err…. hot money.

Nothing is farther from the truth. True, every investor wants a good avenue for investment and will book profits when opportunity arises. But they aren’t hot money. One, they have invested mostly in blue chips and fundamentally sound mid caps, which don’t give return in the short term. Second, most of the newer FIIs are pension funds and Japanese investors, who have a longer perspective than even our own mutual funds. Third, they control so much stake (30-40% of the free float) that if they happen to pull out at once, the biggest losers will be they themselves.

Contrast this with our retail investors. Even when the sensex was rising, the market breadth remained largely negative. Why? Our retail investors try to ride the tide called penny caps which rise in a boom and end up losing a fortune. The government expends a lot of energy trying to track money and insider trading and even putting a cap on FII flows, to protect the investors from the fallout. But should the government try to protect the investors from the stupidity they themselves are responsible?

The only panacea for the market from overheating is to divest the PSUs to infuse quality paper in the market, and give the foreign investors to participate more in the debt market. Give them a chance to stay when the Feds hike rates.

Discouraging FII from participating in the growth story called India, while exhorting them for 150 billion dollars investment is one step forward, two backwards.