"Being a smaller market with limits on foreign holding of stocks, the flow is bound to be lesser than in other markets" Brian Brown, CEO, Salomon Smith Barney

For Mumbai's beleaguered hoteliers, labouring under the strain of 9-11 and a domestic economy that regularly flatters to deceive, this is the unkindest cut. Execs in Foreign Institutional Investors (FIIs), peripatetic travellers who sometimes log enough frequent flyer miles to go to the moon and back gratis, and who play a part in keeping hotel-occupancy rates above the Plimsoll, are becoming scarcer by the minute in India's commercial capital. In the nineties, this correspondent could open the window in her fifth floor corner office in Mumbai's Nariman Point, throw a pebble-not that one is in the habit of cluttering up the workspace with pebbles-and hope to hit someone who worked for a FII. Not today, you can't: one of India's choleric neighbours could actually launch an ICBM targeting Nariman Point, and chances are, not one of the casualties would have anything to do with a FII.

Check with Samir Arora. The 30-something, who serves as Alliance Capital's head of emerging markets out of Singapore is an India-bull. Yet, in the past three months, he has been to Korea (if you need to know which Korea, you probably shouldn't be reading a business magazine) twice to sniff out Korean success stories. In the same period, he has been to India only once. Says Arora, who has just returned from Korea: ''On an average, each Korean company meets three-to-four foreign investors every day.''

If room-nights and frequent flier miles are too touchy-feely for you, head for the numbers. In the first four months of 2002 (up to April 18), FIIs invested around Rs 3,534 crore ($736 million) in India, 63 per cent lower than the Rs 9,605 crore they did in the first four months of 2001. That means, each of the 491 FIIs registered with the Securities and Exchange Board of India (SEBI) has invested Rs 7.9 crore in India thus far in 2002.

"Other emerging markets, say Korea and Taiwan, give larger returns than the Indian stockmarkets" Mark Mobius, President, Templeton Emerging Mkt Fund

Averages are probably as misleading as comparisons with 2001. Last year was a great year in terms of FII investments. India attracted $2.84 billion (Rs 13,292 crore) of that, lower only than the $3.05 billion (Rs 10,803 crore) it did in 1996. Most fund managers have a ready explanation for their seeming disenchantment with India: it's nothing personal; just look at the numbers. "The Indian markets have underperformed the average emerging market by 10 per cent since September 21, 2001, the day the new bull markets began, and by 15 per cent over the past two years," explains Ruchir Sharma, Executive Director, Morgan Stanley Investment Management India. Numbers bear him out: thus far in 2002, emerging Asian markets have risen 14.5 per cent (in dollar terms), Indonesia, 66 per cent, Thailand, 28 per cent, and Korea, 25 per cent. The Indian stockmarket, in contrast, has gone up just 7.8 per cent. Predictably, FII inflows peaked in January 2001 ($865 million, or Rs 4,045 crore) when the Sensex thought it was Icarus. To carry the numbers game to its logical denouement, net FII investments in Korea and Taiwan in the first three months of 2002 were $6 billion (Rs 28,800 crore) and $11 billion (Rs 52,800 crore), respectively. The curry, it would appear, is no longer hot.

Greener Pastures Beckon

There is a school of thought, one subscribed to by analysts like Brian Brown, the CEO of brokerage Salomon Smith Barney, that suggests India is getting its due. "India is probably getting its share (of FII investments); but being a smaller market with limits on foreign holding of stocks, the flow is bound to be lesser than in other markets." Korea's market capitalisation, points out Brown, is three times India's. The man is probably right: India gets as much FII investments as its returns warrant. At least since 2000, the Indian stockmarket has trailed most Asian markets. Then, there's the issue of liquidity (or how easy it is to buy and sell a particular scrip). "Other emerging markets, say Korea and Taiwan, give larger returns. Perhaps, the liquidity these markets offer is an equally important factor," sums up Mark Mobius, President, Templeton Emerging Market Fund. Of the 5,000-odd companies listed on Bombay Stock Exchange, there could be just about a 100 that satisfy the 'liquid' definition.

The better performance of other markets is reflected in the weightages assigned to them in the Morgan Stanley Capital International Emerging Market (MSCI EM) index, the gold-standard of emerging market indices. India's weightage has consistently followed a downward spiral, from a peak of 10.9 in February 2000, to 5.5 per cent in November 2001, and further down to 3.93 in May 2002. According to market players, India's weightage is likely to rise marginally to 4.5 per cent due to the increase in the FII investment limits in Infosys and Hindustan Lever Limited. India's weightage has never been lower in the index since its inclusion in it eight years ago. Now compare that to Korea's climb: from a weightage of 11.7 per cent in February 2000 to 19.1 per cent in November 2001, to 21 per cent in May 2002. Or Malaysia's progress from not even being in the index in February 2000, to 6.4 per cent in November 2001, and then slightly down to 5 per cent. Or China's progress, from 0.3 per cent in February 2000 to 5.4 in November 2001. Give us satay, anyday.

"The only factor that determines a foreign investor's behaviour is the opportunity for profit" Marc Faber, Investment Strategist

Revenge Of The Lemmings

Korea's emergence as a favourite is surprising. After all, didn't its economy collapse in 1997 under the weight of all those underperforming chaebols? If it has managed to woo back foreign investors, it is on the strength of its economic reforms. The less said about that subject in India, the better. The fundamentals of most Southeast Asian economies are stronger than India's, driven as they are by a strong domestic market. ''Asian economies are leaner today and there are a number of compelling corporate stories," says Vasudev Joshi, a strategist at HSBC Securities. In addition, domestic investors in these markets are fairly bullish. That could explain why some funds have reduced their exposure to India. There are-as there always will be-a few funds following a contrarian strategy that invest in excess of 10 per cent of their corpus in Indian companies. LG Antenna Fun and Loomis Sayles Emerging Markets Fund, are two such funds (there are 15 in all).

One reason for the continued interest in India, believes Sharma of Morgan Stanley, is a few companies that continue to do well. "From a macro (economic) perspective, FIIs would have sold out long ago given the slow pace of reforms; the reason they have stayed on is because of company-specific success stories." And when there is even a minor sign of things changing, the floodgates open up. For instance, on February 6, 2002, when the government announced more reforms in one go than it had in all 2001, FII investments shot up to Rs 1,966 crore. And if FIIs are not very excited by the government's privatisation drive, adds Mobius of Templeton, it is because they don't have access to all the information they need to make an investment-decision. Shareholder agreements, for instance, are rarely made public and "these could have clauses affecting the functioning of companies".

Political risk isn't all that critical as it is made out to be, although FII investments did turn a negative Rs 81 crore on April 15 and Rs 57 crore on April 16, the days the Gujarat riots rocked Parliament. Political instability could truncate the reforms process and that, in turn, could hit FII inflows. Still, FIIs, says Marc Faber, a Hong Kong-based investment strategist who is known as Dr Doom in investment circles, are opportunistic animals. "The only factor that determines a foreign investor's behaviour is the opportunity for profit. If they feel a market has the potential to climb 30 per cent or 50 per cent in a few months, they will go for it, no matter what."

If India wants to recapture its place in the FII-worldview it had better do something about reforms and quick. Signals like the clutch of reforms announced on February 6, 2002, would help. "Foreign investors, like most investors, are lemmings," laughs Dr Doom. Only, the lemmings are headed out of the country now and while everyone knows what needs to be done to stem the tide, the government doesn't seem in any position to do it.