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First time in 11 years, FIIs turn net sellers; pull out $13 billion

Mumbai: Foreign institutional investors, or FIIs, the key drivers of the Indian stock market in the past few years, pulled out at least $13 billion (about Rs62,880 crore) in 2008, the most in 15 years, after an unprecedented global credit crunch led to a flight of capital from emerging markets.
This is also the first time in 11 years that there has been a net outflow of FII money from India, according to a Mint analysis of data from capital markets regulator Securities and Exchange Board of India, or Sebi.
Analysts do not see huge FII inflows in 2009 either, as they expect foreign investors to continue to be averse to risk, though some might see India as a major pick among emerging economies.
Also Read Losing Money (Graphic)
FIIs have invested a net $50.59 billion in Indian equities since Sebi opened up the stock markets to them in 1993. At the height of the bull run at the beginning of 2008, FII inflows had increased to about $140 billion, according to some estimates, pushing the Sensex, India’s most tracked index, to a record 21,206.77 points on 10 January.
But FIIs started withdrawing heavily from India in the wake of the global credit crunch and economic slowdown, dragging down the stock markets as well. As a result, the portfolio of FIIs has shrunk to about $70-80 billion, according to estimates provided by fund managers.
FII sales of Indian stocks accelerated, especially after a series of financial failures in the US—investment bank Lehman Brothers Holdings Inc. declared bankruptcy in mid-September, Merrill Lynchand Co. was sold to Bank of America Corp., and the US government had to take over insurer American International Group Inc. a week after it took over the country’s largest mortgage lenders Freddie Mac and Fannie Mae.
FIIs have been selling mainly because their lenders, facing a cash crunch in home markets, asked the investors to bring back the money, analysts said.
“The general environment is not conducive and institutional investors wanted to pare down risk due to the global meltdown,” said Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership Llp., a global fund registered as an FII in India. “You can’t expect them to return in a very big way. It will probably take at least a year for confidence to come back.”
Domestic institutional investors such as mutual funds, banks and insurance companies more than made up for most of the FII outflows, in absolute terms at least, pumping in more than $16 billion this year. But they haven’t been able to boost the markets.
The Sensex has fallen 52% so far in 2008. In 2007, FIIs put in $17.3 billion worth of funds into Indian equities and the Sensex gained 47%.
Still, local brokerages expect that while foreign investors might not come back in a big way, there might be some inflows.
“I think flows next year will be marginally positive,” said Vikas Khemani, co-head of institutional equities at Edelweiss Capital Ltd, which says it has 600 FII clients. “There may not be any immediate inflows. The dust has to settle and the post-election scenario has also to become clear before FIIs start allocating money to India.”
Regional equity analysts such as Clive McDonnell, head of equity strategy at BNP Paribas Securities (Asia) Ltd, have raised their ratings for India, citing low exposure to the global economic slowdown because of lower dependence on exports to the US and Europe.
“Looking ahead, we see greater risk being ‘underweight’ as opposed to ‘overweight’ Asia,” McDonnell wrote in his latest report.
While India faces “fiscal constraints, it is less exposed to the global economic slowdown, having a below Asian average weighting towards cyclical sectors. Lower oil prices, leading to a narrowing of the current account deficit and lower inflation pressures compared to 2008, drive our recommendation,” McDonnell wrote.
“On a relative basis, India might be better than other emerging markets since it is less dependent on trade with the US and EU (European Union),” Bhat of Dalton Strategic said. “But I don’t expect anybody to consider the basket (of emerging markets) itself.”
Satyam barred from doing business with World Bank

WASHINGTON/NEW DELHI: The World Bank has barred India's Satyam Computer from doing business with it for eight years on the charges of data theft, a Bank official said on Tuesday.

"The information is true... quotes about the World Bank on Fox News channel are correct," the Bank's spokesperson in India said when asked about the US media reports on the debarment.

The development comes at a time when the company is facing a probe back home over an abortive acquisition deal involving two firms promoted by Satyam Chairman Ramalinga Raju's family.

The World Bank debarment -- the harshest sanction the world's largest anti-poverty agency has imposed on any company since 2004 -- was meted out for "improper benefits to bank staff" and "lack of documentation on invoices," said a Fox News report, quoting Robert Van Pulley, the top World Bank information security official.

Satyam had announced a USD 1.6 billion deal to acquire two firms -- Maytas Infra and Maytas Properties -- promoted by Raju's family and withdrew it within hours after shareholders' dissent.

This was followed by market regulator Securities and Exchange Board of India and the government saying that it would look into the matter. Months after "stonewalling and denying" reports that Satyam has been barred from doing any business with the bank
for eight years, a top World Bank official has admitted that Satyam -- one of its technology vendors -- was barred in February and the ban has already started in September, the Fox News report said.

The report added that Van Pulley made the comments about Satyam debarment in a meeting and two telephone conversations with officials of the Government Accountability Project (GAP), a 30-year-old whistle-blowing organisation based in
Washington.

In a conversation with GAP, Van Pulley also admitted that the Satyam case had been turned over to the US justice department in 2006 as well as to the US treasury dept, the
report added.

"It is not known if a case against Satyam or World Bank officials is being pursued by either government agency," it said, adding that Van Pulley is also in charge of the bank's
procurement department, where he oversaw the Satyam contract.

"From 2003 through 2008... the World Bank paid Satyam hundreds of millions of dollars to write and maintain all the software used by the bank throughout its global information network, including its back-office operations. That involved overseeing data that ranges from accounting and personnel records to trust funds administered for many of the world's richest nations.

"But at the same time, Satyam was straying badly across the bank's ethical warning lines. In 2005, the bank's chief information officer, Mohamed Muhsin, was ousted after being accused of improperly buying preferential stock options from Satyam, even as he awarded the firm major contracts.

A top-secret investigation led to Muhsin being banned permanently from the bank in January 2007. But for reasons that remain unclear, Satyam was allowed to remain in control of the bank's information network until early October 2008," the report added.

Fox News further quoted securities lawyers as saying that "the debarment by the World Bank, one of Satyam's largest and most important customers, should have been announced by the company to its shareholders immediately and also filed with the US Securities and Exchange Commission."

Quoting sources, the report said that one of the worst breaches apparently occurred last April in the network of the bank's super-sensitive treasury unit, which manages 70 billion dollars in assets for 25 clients including the central banks of some countries.

"...bank investigators had discovered that spy software had been covertly installed on workstations inside the bank's Washington headquarters allegedly by one or more contractors from Satyam," Fox News said.

According to the report, Zoellick reportedly told his deputies, "I want them off the premises now". But at the urging of the bank's then-chief information officer, Satyam employees remained at the bank through early October while it engaged in a "knowledge transfer" with two new contractors, it noted.

The report pointed out that in discussions with GAP's officials Thursday, Van Pulley denied that Satyam was behind any of the bank's security breaches.

"I am not in a position to tell you," adding that "we're confident" it wasn't Satyam, the report said quoting Van Pulley.

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