According to the study, there is an indication that FIIs know they can swing the market by their might and therefore try to take advantage of the fact.

The FIIs usually go on a buying spree in the first and the second quarters of every financial year when the market is down due to their low key activities during the last quarter of the preceding year, the study observes. The decline which starts in the third quarter reaches the maximum in the last quarter.

Speaking to The Financial Express KS Chalpati Rao, associate professor, ISID said that one reason why FIIs can operate in this fashion is the fact that local market players look towardsthem for leads. "The extent of FII influence in the market can be gauged from the fact that brokers had started giving inflated figures of purchases or sales of FIIs to give a false impression of FII activity." To put a check on this, Sebi had recently asked the stock exchanges not to release FII trading details without due confirmation with FII custodians.

Rao said by studying the movement of FII investments into the country over the past few years, it is clear that their operations were being progressively confined to liquid shares. "FII investments have generally been confined to the set of 500 largest companies listed on the bourses, as the market value of these companies taken together increased from 86 per cent to 98 per cent over the last couple of years."

Foreign investments in sectors which form the base of the Indian economy like metals, cement, textile and machinery had also shown a steep decline, said Rao. "Investment is now being concentrated in the software, pharmaceutical and FMCG sectors."

The ISID study on sectoral investments by India-specific funds shows that there was a major shift in the investment exposure within two years.

Computer software group which was not among the top 10 in 1996, reached the topmost position in 1998 with investments increasing from $25.68 million to $133.4 million.

Investment in food and beverages increased from $19.06 million to $47.14 million and in personal care products from $20.61 million to $44.02 million. Pharmaceutical sector also saw an increase in investments from $53.07 million to $ 67.16 million.

In stark contrast, investments in metals declined from $65.72 million to $19.54 million. In the textiles sector too investments declined from $42.38 million to $6.03 million. The cement sector saw a decline in investments from $39.02 million to $10.99 million and investments in electrical machinery declined from $41.56 million to $11.73 million. Rao said that the figures shows that the role of FII investments the over-all economic development of thecountry is declining steadily. The fact that local players are following FII leads is making the matters worse, said Rao. The adverse trend can be highlighted from the fact that the volume of trade in the information technology, fast moving consumer goods (FMCG) and pharmaceutical scrips as a percentage of total trade on the Bombay Stock Exchange too went up substantially between 1996 and 1998.

Rao said it was time for the government to step in and reduce the concentration in trading taking place in the Indian stock market. While the overall turnover has witnessed an impressive increase, the number of companies responsible for the expanded turnover continues to be low. "It is because of heavy concentration in turnover that the Indian stock market responds in a disproportionate manner to any political or economic occurrence", he said.