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Home-market Bias: Foreign Investment in Indian Equities

Foreigners own a significant 23% or US$218 billion of India’s listed market capitalization of US$936 billion. Their influence on Indian markets is heightened further since less than half the shares of Indian companies are available for trading, with the remaining in the hands of promoters or insiders.

Around 15% of foreigner holdings are in instruments that are listed and traded on foreign stock exchanges in the form of ADRs ($14 billion; 15 listings), GDRs ($13 billion; 155 listings) and ETFs ($4 billion; 5 listings). However, in terms of value traded, over 30% of daily trading by foreigners takes place in these instruments outside India, indicating a strong home-market bias. In our opinion, this trend is set to grow, with less sophisticated investors coming into the investment sphere and advisors being encouraged to recommend global exposure products in an era of declining developed market yields.

In terms of product preference, investors seem to have a strong preference for ADRs, with eight of the top ten overseas products being US-listed ADRs, and seven of these listed on the New York Stock Exchange, and just Infosys on Nasdaq. Banks account for 45% of trading and IT for 33%. ICICI Bank is easily the most liquid product accounting for a third of total ADR value traded.

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