The problem, if any, with FII investment in Indian stocks isn't whether they are here to stay-that debate got pretty settled once the Sensex touched 5,000 last fortnight, even as punters were perfecting their pronunciations of the word "correction"-but whether there's enough stock floating around for them to deploy their greenbacks. Till date the good old foreign portfolio investors have pumped some $6 billion into the Indian markets, the highest ever in a single year. That may sound like big money, which it of course is in the Indian context. But compare it with the allocation for emerging markets as a whole, estimated in some quarters at $175 billion, and the Indian allocation is still just a few drops in the emerging market ocean. So, with the fundamentals of the economy continuing to look rosy, there's little reason not to expect an increase in India allocation.

To get back to the problem: If FIIs do indeed get even more bullish on India, where would they invest that money? In the Sensex stocks, of course. But how long will it be before they reach the permissible limits in these stocks? Already the FII holding in the outstanding shares of the 30 Sensex stocks is close to 25 per cent, and the value of their holdings in many of the frontline stocks is in excess of the value of the public holding. For instance, as of end-September the value of the FIIs' holding in Infosys was Rs 12,583 crore; the public holding was worth just Rs 3,290 crore. In State Bank of India (SBI), the value of the public holding was Rs 1,960 crore; in contrast the fiis have liberally loosened the pursestrings and invested some Rs 2,964 crore into SBI stock. Further, FII investment in other frontline stocks like Reliance (Rs 10,962 crore), HDFC, ICICI Bank and Hindustan Lever has increased substantially in the past couple of months. In HDFC, for instance, the FII holding has gone up to almost 55 per cent (they can go up to 74 per cent), in ICICI Bank the FII holding is 42 per cent (permitted: 49 per cent), and in Zee it's close to 30 (49 per cent is permitted). How much more money can go into the frontline stocks, and for how long?

Clearly, if the FIIs are going to be here for the really long term, they've got to start looking at stocks other than the 30 that constitute the Sensex. Even if the FIIs have some way to go before reaching the permitted limits in individual companies (they vary from sector to sector, ranging between 24 and 74 per cent), in the interest of a thriving broad-based market, foreign investors buying into mid-cap stocks will surely prove healthy. And, of course, the Sensex stocks may soon get fully valued, if they aren't already.

Now it isn't as if the FIIs aren't interested in such second-line stocks. There are plenty of commodity, pharma and it and auto component plays out there they do find worth buying into. The problem is that these counters just don't generate the kind of liquidity they're used to-deals of 10-15 lakh shares are par for the course. The fear is of getting stuck with a huge volume of shares with no buyers in sight.

So what can these foreign investors do? One option for managements of course is to increase the equity of the company. But then that enthusiasm to attract FII money could be misplaced in the longer run, as a bloated equity base could wreck the company's financial ratios. Apparently, now some FIIs are meeting up with managements and attempting to convince them to strike negotiated deals, whereby they could offload a bit of the promoters' holding in their favour. The advantage of such a deal is that the promoters can rake in a 20-25 per cent premium on the market price. Last fortnight, for instance, one foreign investor met a prominent Mumbai-based pharma company with such an offer. The promoters weren't too keen to oblige, as they felt such a deal had very little value to offer, other than a short-term spurt in the stock price. For, in a few months, these FIIs could well offload that stake, resulting in little or no shareholder value creation in the longer term.

The FIIs may be here to stay, but as they churn portfolios, there will be times when it will be difficult to (literally) fathom whether they're coming or going.