Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

FIIs are not the source of all problems


A recent economic times article berates “the games FIIs play” as a reason for the massive volatility in today’s markets.

Here’s my take on individual points.

Short Selling
The author says that FIIs short sell even though SEBI has not allowed them to. They do this by borrowing shares from PN accounts, directly from their custody accounts without the lenders permission. I must say that “without the lenders permission” seems to be an assumption – I believe most people who own p-notes have signed up to earn some interest on lending their shares for the short term (callable in a few days).

Short selling through borrowing is happening in the Indian market all the time, not just by FIIs. Have you got a letter from your online broker recently saying that your stocks are going to be placed by default into the “margin” account? Meaning the stocks you buy will be directly placed into the brokers proprietary account which they can use to short sell (or lend to FIs to short sell).

This is a huge problem – I had to call up my broker and say I want the stocks to be moved to my DP account and I don’t want to have margin account at all. They have said ok, and I get a DP statement for all stocks I buy. Many brokerages simply tell you what you have bought but don’t credit the shares to your DP. (they keep it in their account for trading, and will give it to you whenever you want of course) If you want the shares – say to sell them – then they will ensure the shares are provided back to you.

Short selling like this is happening with Indian brokerages too, small and large. The FIIs are no different.

For the period that you have the shares in the “margin” account, you can use a certain part of their value as your margin for trading. Now I don’t trade (i.e. buy/sell daily) so I don’t need a margin account. But I’m sure my broker will love to borrow my shares! So I remove shares from the margin account.

In more developed markets, I could put the shares up for borrowing and people would pay me money to borrow the shares for a short while. They must give me back my shares whenever I want of course.

In any case, this point is moot: The Finance Minister has allowed short selling by institutions legally.

Long term derivative contracts
The author complains that FIIs are internally providing long term contracts like six months and one year contracts to each other without SEBI’s knowledge. To that I say: Big deal. The buyer and seller are aware of the risk, and SEBI is not guaranteeing the contract, so why should SEBI be involved?

And this is a darn good thing. We need long term contracts (six months to one year) because it provides a very good stable base for the market. SEBi doesn’t allow it because the exchanges don’t have the infrastructure to manage them (plus even the +2 month contracts are ultra illiquid) That is no reason to disallow a long term contract!

What are FCCBs? They are long term call options for the investors. What is the Mukesh Ambani increasing his stake in Reliance? It is an 18 month future on Reliance. If that is legal, why is long term derivatives not legal? I think it is completely legal to offer a long term derivative if you are willign to take the risk. In fact I can write a six month call option to you, anytime, and SEBI cannot interfere. Why? Because this is not guaranteed by SEBI or an exchange.

Long term derivatives are great stabilizers, if you look at the markets abroad.

FIIs are bad boys
the article says traders have not made money and hedge funds are the main mischief makers. Hello? Hedge funds is hot money. Trading is a risky game. For time immemorial, most traders have lost money. In every market. Only a few people make money in the stock markets.

For a couple of years, it was too easy to make money. You could either do an overnight position in a high volume stock and sell on open. Or you could short after 15 minutes of opening and make 2%. It was a simple pattern.

Today it is a lot more difficult to make money on trading. Not because of hedge funds. Because the market is more mature, and the patterns have been broken comprehensively. Now to blame FIIs for this and say that because of them traders have lost the ability to make easy money is being a cry-baby. Adapt, evolve or leave.

Btw, hedge funds lost the most money in december with the simple patterns and trying to manipulate the market by overselling and then hopeing market will drop. It did not drop and they suffered.

At this point nobody has the power to manipulate the market, not even FIIs. You can see how much of the market the FIIs trade; the market is equally shared between FIIs, Indian FIs, and retail investors.

FIIs are not united firstly, so each one is a small entity that barely has the power to move hte market much. Secondly, the only way to manipulate the market is by doing synchro trading, which SEBI is really harsh on.

Thirdly we should be for open markets only – what’s the point of a controlled market, it is like going back in time. One day the argument will be that no one should make losses, like we do for farmers’ agriculture loans.

FIIs very large orders get filled in only gradually, and the weighted average price of large orders is at the higher end of buys and lower end of sells. Meaning there is not much scope for manipulation.

If we are excited about FIIs buying a stock, we are the ones that are stupid. If they are buying a stock like crazy, why should we follow suit? If there’s a good reason, yes, but if we buy just because they buy, we are nothign but sheep.

What we have to do is learn and adapt. Don’t blindly buy a stock that is FII pushed – remember that many FIIs are funded by Indian black money, so there is scope for insider manipulation – and if you own a stock that is being favoured like hell by FIIs, consider booking out your profits.


Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial