Explained: Why FPIs are buying via IPO route and selling in stock market

Foreign portfolio investors (FPIs), who are considered ‘smart’ investors as they know when to buy and sell stocks, have been behaving quite differently this year. A perplexing feature of the recent FPI activity is their highly erratic nature as they have been offloading stocks in the stock market but at the same time investing through the initial public offering (IPO) route.

As per the data available on the NSDL, FPIs have invested ₹1.03 lakh crore in the Indian primary market through IPOs and Qualified Institutional Buyers (QIBs), while they pumped out ₹1.18 lakh crore through secondary market.

“The reason for this dichotomy is the high valuations in the secondary market and the reasonable valuations in the primary market. It appears that FIIs are likely to turn out consistent buyers only when the market corrects further and valuations become attractive," says V.K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Manish Bhandari, Founder, CEO & Portfolio Manager at Vallum Capital Advisors, believes that FPIs are realigning their portfolios towards new businesses as a result they are selling old economy stocks and buying new age shares. "FPI is divesting in the secondary market and putting money in QIP and new IPO. They have put roughly around $2.5bn in QIP and New IPO. In my view, they are selling old economy stocks and buying new economy/new age stocks/businesses.  This is called portfolio realigning towards new businesses which reflect new India," he says.

JM Financial in a recent report said that foreign investors may be heading back to the United States amid growing optimism about the growth of the world’s largest economy with Donald Trump coming back to power. The report highlighted that the sell-off in the Indian market started as a “Sell India, Buy China” trade post the Chinese government announcing stimulus measures for the economy in Sep’24. FIIs preferred moving to China (trading at less than half of India’s valuations. India’s 1-year forward profit-to-earnings (P/E) through Jul’24 to Sep’24 was > 1 standard deviation above mean). Consequently, China saw FII inflows of $96 billion in Sep’24.

However, recent trend shows that there FPIs continue to sell equities in stock market but at a much slower pace compared with the previous month, which can be partly attributed to the reduced valuations caused by the correction in the market. At the current level, Sensex and Nifty50 are down nearly 10% from their recent peak in September 2024.

After a record sell-off of ₹1.1 lakh crore in the secondary market in October, FPIs withdrew equities worth ₹39,315.8 crore in November, which is much less as compared to the previous month. In the calendar year 2024, they have sold equities worth ₹1,18,620.6 crore in the first 11 months of this year, against an inflow of ₹1.27 lakh crore in 2023.

Meanwhile, FPIs showed a lot of interest in the Indian IPO market, investing ₹17,704 crore in November after injecting ₹19,842 crore in the previous month. It is notable that they made these investments in the primary market despite turbulence in the secondary market amid weak corporate earnings, valuation concerns, and escalated geo-political tensions.

“Before October, valuations were a significant concern in the Indian market, and the last quarter's earnings season brought clear disappointments. Amid signs of an economic slowdown in India, the U.S. markets found themselves in a "goldilocks" scenario prompting FIIs (Foreign Institutional Investors) to reallocate capital from Indian and other emerging markets to the U.S. markets. This shift was primarily driven by ETF-based selling,” says Santosh Meena, Head of Research, Swastika Investmart Ltd.

“However, long-term India-specific funds continue to invest in the Indian market, particularly through the primary market. The surge in IPO activity this year, featuring many promising companies, has offered FIIs an attractive avenue for diversification despite broader market challenges,” he adds.

(DISCLAIMER: The views and opinions expressed by investment experts on fortuneindia.com are either their own or of their organisations, but not necessarily that of fortuneindia.com and its editorial team. Readers are advised to consult certified experts before taking investment decisions.)