Foreign funds take shelter under 'warehousing' deals

Park Their Shares With Other Market
Participants As Further Fall Seen
Mar 21, 2008
Gaurav Pai & Ashish Rukhaiyar
MUMBAI

HUGE blocks of shares continue to change hands amid volatile market conditions. Nothing unusual about that. Except that quite a few of those “block deals” could be “friendly transactions”, as foreign fund managers try to minimise the haemorrhaging of their portfolios.

A section of the market players alleges that these are warehousing deals which will be reversed at a later date. But some others feel the deals are a result of creation of new sub-accounts after the Sebi diktat on participatory notes (P-notes). Experts also add that after the Bear Stearns episode, such transactions have been on the rise.

Dealers say that foreign funds have taken to temporarily parking their shares with other market participants due to the prospect of further fall in share prices and investors abroad asking for their money to be returned. There is always a prior understanding of the price of sale and the subsequent price of buyback, they add.

The entity ‘warehousing’ shares is usually another foreign fund or an institution holding a participatory note. Brokers also suggest that certain promoters are also a part of this operation.

For instance, if fund A is holding shares of company B in its portfolio, then A will park those shares in some investment company indirectly controlled by B. At times, the promoters agree to such deals, else the erosion in market capitalisation would be severe if fund A decides to sell those shares in the market.

“If they (funds) stick to their shares, there is a chance that prices will fall further,” says Biranchi Sahu, head of institutional equity at. “Naturally, some of the FIIs are shifting their shares to other FIIs or P-note entities with an understanding that these will be brought back later,” he adds.

In some instances, the fund is not able to sell the shares in the market because that stock is hitting the lower end of the circuit filter. At the same time, because of the steady slide in the stock price, the fund’s net asset value gets eroded. To prevent this, the fund enters into an agreement with another institution to buy those shares temporarily. The transaction will be reversed when market conditions improve. They would compensate the entity (who is buying the shares) through some means, mostly monetary.

However, Centrum Stock Broking managing director Devesh Kumar feels, “This could be because of conversion of P-note holdings into sub-accounts.” He says that when investors get a sub-account with a new entity, they tend to “transfer their earlier holdings to the new account”.

FIIs have invested over Rs 3,000 crore in the period between January 15 and March 17, but have also sold shares to the tune Rs 16,000 crore. During the period, the Sensex tanked 5,400 points to end at 14,809 on Wednesday.