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How did the Indian stock market respond when FIIs declined? Read the blog to know understand possible connection.
The stock market attracts investments from ‘retail investors’, who are individuals, and ‘institutional investors’, who invest on behalf of others.
Institutional investors in India can be domestic (DIIs) or foreign (FIIs). So, India’s investment landscape includes both.
Simple logic suggests the more FIIs, the better for the country’s stock market. But why? Let’s understand why Dalal Street needs FIIs to stay in the green zone.
What is FII?
The full form of FII is foreign institutional investors. A foreign institutional investor (FII) is an entity that invests in economies beyond its home country. They seek investment opportunities both domestically and abroad.
Recent data from the RBI indicates that India, set to be a 3.7 trillion economy in 2023, is an attractive investment prospect for FIIs.
India’s growing economy needs FII capital to support its businesses. In return, FIIs gain stakes in these firms and profit when they succeed.
Indian Companies with high % of FII holdings 2023
Understanding FIIs involves knowing their stake in companies. For instance, HDFC has the highest FII stake at 70%, according to recent figures.
The following table enlists the top 10 companies with the highest holdings percentage of FII in India:
| Rank | Company Name (data as of 2021) | FII Stake (in %) |
| 1 | Housing Development Finance Corporation (HDFC) | 70 |
| 2 | Zee Entertainment Enterprises | 66 |
| 3 | Shriram Transport Finance Corporations | 61 |
| 4 | IndusInd Bank | 52 |
| 5 | Axis Bank Ltd | 49 |
| 6 | Apollo Hospitals Enterprise | 48 |
| 7 | ICICI Bank | 46 |
| 8 | Kotak Mahindra Bank | 42 |
| 9 | Fortis Healthcare | 41 |
| 10 | Indus Towers | 41 |
Nature of FII investment
Indian citizens can trade local stocks with a demat account. To invest in US markets like the Dow Jones or S&P 500, a more complex process is required.
Investing in US exchanges via an institution classifies your money as US FII. Similarly, investing in Dalal Street makes you an Indian FII. FDIs, however, invest in Indian firms with overseas branches, like HDFC Bank’s New York branch.
FDI vs. FII – Key differences
| Foreign Direct Investments (FDIs) | Foreign Institutional Investor/ investments (FIIS) |
| Investment lasts for long-term | Tends to last for a short-term or limited period |
| Not easy to enter or exit an investment position | Easy to enter or exit investment position, especially if made through the market |
| Benefits include money inflow, technical knowledge, strategic know-how about the firm | Benefits are limited to dividends and funds |
| Tends to target a specific company | May target a specific sector but usually, FIIs hold a diverse portfolio |
| Particularly crucial for the GDP of the country | Particularly important for a company looking to raise capital for business expansion |
| Provides transfer of control to the investor or higher influence | Does not provide any transfer of ownership or higher influence |
Role of FII in the stock market
Institutional investors have significant capital, which increases with international investments, especially from large economies like the US, due to their extensive clientele and monetary differences.
When inflation strikes, people withdraw institutional investments for cash. Institutions must sell assets to repay, which can decrease asset value.
Several assets devalue, lowering the index and rendering the market red. This happens when FIIs must plan a sell-off due to inflation.
FII example for the impact of withdrawals on retail investors
For instance, in 2021, ‘X’ invested in ‘ABC’. In 2022, inflation led to FII sell-offs. X, noting FII reduction and rising inflation, moved to low-risk accounts. A drop in ABC’s FII increased X’s scepticism, leading to a similar action. This scepticism among retail investors triggered a massive sell-off, deepening Dalal Street’s losses.
FII’s impact on Nifty and Sensex
This happened in 2022 when inflation peaked and Russia and Ukraine went to war. DII kept the Indian stock market afloat.
Let’s examine 2022’s equities flow and market reaction for FII investment in India:
| Month | Net Sales or Purchases by FIIs (in crores) | Sensex Performance | Nifty performance |
| January 2022 | Net sale = Rs. 34,097.13 | 0.41% | 0.08% |
| February 2022 | Net sale = Rs.33,838.36 | 3.05% | 3.15% |
| March 2022 | Net sale = Rs.37,945.04 | 4.13% | 3.99% |
| April 2022 | Net sale = Rs.8,725.87 | 2.57% | 2.07% |
| May 2022 | Net sale = Rs.37,663.39 | 2.62% | 3.03% |
| June 2022 | Net sale = Rs.49,468.93 | 4.58% | 4.85% |
| July 2022 | Net purchase = Rs.6,719.75 | 8.58% | 8.73% |
| August 2022 | Net purchase = Rs. 49,109.41 | 3.42% | 3.50% |
| September 2022 | Net sale = Rs.9,532.33 | 3.54% | 3.74% |
| October 2022 | Net sale = Rs.8,430.60 | 5.78% | 5.37% |
| November 2022 | Net purchase = Rs.38,234.90 | 3.87% | 4.14% |
| December 2022 | Net sale = Rs. 1,353.71 | 3.58% | 3.48% |
Here, Net sale: Gross Sale > Gross Purchase (FIIs decrease)
Net purchase: Gross Sale < Gross Purchase (FIIs increase)
Fii purchases overtook sales for the first time in July 2022. People invested more as inflation declined. For Indian investments, FIIs always had more capital. The BSE Sensex rose 8.58% and the NSE Nifty50 8.73%.
FIIs significantly impact stock market performance, but investors often overlook this. It’s a reminder to check a stock’s FIIs before investing.
FAQs
Foreign Institutional Investors (FIIs) in India are regulated by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). The RBI manages foreign exchange controls and sets regulations impacting FII investments. SEBI grants registration to FIIs, sets investment limits, and monitors their activities. The Ministry of Finance also plays a role in making policy decisions about FII investments.
Foreign Portfolio Investment (FPI) and Foreign Institutional Investment (FII) are both types of foreign investments. FPI refers to investment by non-residents in Indian securities. FII, a subset of FPI, involves large institutions like pension funds and mutual funds investing in financial assets. While FPI includes all investor categories, FII represents the big entities, hence their investment value is usually higher.
Foreign Institutional Investment (FII) is often more liquid than Foreign Direct Investment (FDI), allowing for easier entry and exit. FII primarily provides financial benefits and is a tool for quick financial gains. It can also diversify portfolios as FIIs can invest in a wider range of asset classes. However, both FDI and FII are essential for economic growth, providing capital, technology, and integration.
Foreign Portfolio Investment (FPI) in India is regulated by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). SEBI oversees the entry and operation of FPIs in Indian securities markets. RBI manages the inflow and outflow of foreign exchange related to FPIs. SEBI has issued the SEBI (Foreign Portfolio Investors) Regulations, 2019, and operational guidelines governing FPIs.
Yes, Foreign Portfolio Investors (FPIs) can invest in debt securities. They can invest in government securities and corporate bonds through three channels: the Medium-Term Framework (MTF), the Voluntary Retention Route (VRR), and the Fully Accessible Route (FAR). FPIs can also invest in debt securities issued by Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs). These investments contribute to the diversification and growth of the Indian financial market.