Seeing this US fund selling shares, other foreign investors also followed suit. The Finance Ministry was forced to step in and it issued a stern warning to foreign funds against compounding the woes of the market. This is not the first time that FIIs are on a `quit India movement'. It has been happening quite frequently in the last one year.

Indian stock markets are once again dancing to the tune of foreign institutional investors (FIIs). The fall in share prices started even before the US-64 fiasco and was all along led by FIIs. In fact Sensex -- 30-share sensitive index of the Bombay Stock Exchange -- had fallen by over 1406 points in the last six months, i.e. from April to October. Unfortunately, Indian financial institutions were not successful in counteringthe onslaught of FIIs in the last nine months. Punters watched with great amusement the way Indian institutions struggled to absorb the sales effected by FIIs last week.

The massive fall in market capitalisation -- the total market value of all shares listed on the stock exchanges -- has dampened the spirit of the entire investing class. The 224-point crash in Sensex on last Monday triggered by the Unit Trust of India's revelation on negative balances in its book has further exacerbated the problems. The major casualty is likely to be the disinvestment in public sector units.

Simultaneously, the fund-raising plans of several companies, including both public and private sector companies from both international and domestic capital markets have gone haywire. As a result, there is an overall increase in the cost of the capital -- debt and equity -- thereby hurting the genuine promoters and affecting industrial growth.

As per the figures compiled by the Securities and Exchange Board of India (SEBI), theFIIs have sold stocks worth $ 540 million (around Rs 2,280 crore) since April this year. As a matter of fact, in the the last six months Indian markets witnessed net FII inflows only in June when a small amount of $ 19.7 million was brought in by FIIs. ``I cannot ask FIIs to invest or sell out from the markets,'' SEBI chairman D R Mehta told The Indian Express when FIIs resorted to massive sales after the nuclear tests and sanctions.

Said the country head of a US-based investment firm, ``when the US imposed sanctions against India FIIs got panicky. FII sales increased after global credit rating agencies downgraded India in June/July.'' Sensex was at the peak of 4322 on April 22 this year but fell to 2916 by October 9. After the nuclear tests, FIIs sold stocks worth $ 416 million ($218 million in May and $ 198 million in June). The price rigging exercise on the stock exchanges was another reason which prompted retail investors and FIIs to go slow in Indian markets.

But FII and SEBI officials feel India isstill comparatively better than other Asian markets. Excluding Japan, India's ranking in market capitalisation has gone up from six to three. India with a market cap of $ 90 billion is third behind Taiwan (market cap of $ 274 billion) and Hong Kong ($ 242 billion). Notwithstanding this, many FIIs have started downgrading earnings mainly due to the deterioration in the world economy and consequent reduction in commodity prices. Merrill Lynch of US revised downwards earnings growth for Sensex companies from 11.2 per cent to 5.2 per cent for the year ending March 1999.

``India was treated as safe haven last year in the midst of the Asian crisis. However, political uncertainty, lack of progress on economic reforms, nuclear tests and subsequent sanctions, downgrading by rating agencies and a budget perceived by investors as being too protectionist ha led to negative sentiment amongst investors,'' Merrill Lynch said in a review on India. ``While India is bound to feel the effects of slowing world economy, byspeeding up various reform measures like the Insurance Bill, Companies Bill, buyback of shares and clear policies on aviation and telecom, India can still woo more investment,'' said another FII official operating in India.

The selling exercise by FIIs is expected to intensify in the next two months. By December FIIs will have to redeem some of their portfolios and sell stocks to fund these redemptions. This means FII outflows will increase and stocks will continue under pressure. In fact, share prices of banks and financial institutions have already started feeling the heat. While the IDBI scrip has fallen from Rs 117 to Rs 40 in six months, ICICI has dipped to Rs 40 from Rs 122.60 and SBI from Rs 305 to Rs 165.

One reason attributed for the fall in their stocks was the rising level of non-performing assets (NPAs) -- or defaulted loans. According to a study by Credit Lyonnais, 200 companies operating in India have a potential to default on Rs 10,800 crore of bank loans and Rs 27,300 crore of loans fromfinancial institutions. Indian banks and institutions have so far remained immune to the NPA problem plaguing the the rest of the Asian banks. However, the continued slowdown in economic and industrial growth raises the possibility of a decline in the health of Indian banks, this study says.A study conducted by a financial daily has revealed that 1907 scrips are at their 52-week low level. Of the 120 scrips in the prestegious A group of BSE, 67 plunged to their 52 week lows after touching 52-week high level in the last one year. On top of this, over 50 per cent of 6800 plus scrips listed on the BSE are quoting below the face value of Rs 10. Except some pharma and software shares, all other sectors have taken heavy beating on markets.

The depression in the markets has come at a time when the government was preparing the ground for PSU disinvestment. The fall is not restricted to the domestic market, even global depository receipts (GDRs) of Indian companies listed on overseas stock exchanges are at theirall-time low levels. With many GDRs quoting at hefty discounts ranging from 70-90 per cent to their offer prices, the Skindia GDR index has lost 33.42 per cent in the first half of the current financial year. The loss in GDRs is greater than the domestic shares as Sensex lost only 21.85 per cent during the period.

Is there a way out? FIIs and local punters unanimously say by lifting of sanctions by the US and permission for buyback of shares would be key catalysts to improve the market sentiment. Simultaneously, all pending reforms need to be taken up on a priority basis. Will this happen?