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Role of FIIs in Indian Stock Market

How did the Indian stock market respond when FIIs declined? Read the blog to know understand possible connection.

foreign institutional investors

Let’s start with a simple question – who ‘invests’ in the stock market?
a. Common people putting their own money in the market or ‘retail investors’ and
b. Entities investing on behalf of the common people or ‘institutional investors’. 

Another question – do these institutional investors always belong to the country of origin (in this case, India)? Or do foreign institutions invest too? Well, the answer is “both”.. India enjoys a mix of domestic (DIIs) and foreign institutional investors (FIIs). 

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 are FIIs? 

Reiterating the previous point, a foreign institutional investor (FII) is an institution, individual or even a group that looks to invest in the economy of another country. They, of course, invest in their country of origin. But also look for investment prospects abroad. 

Recent data released by the Reserve Bank of India (RBI) suggests India is likely to become a 3.7 trillion economy in 2023, maintaining its no.5 position. Clearly, India is a potential investment prospect for FIIs. 

Conversely, an emerging and rapidly-growing economy like India requires the capital of FIIs. Why? Primarily to support its businesses. And in-return, FIIs hold stakes in these firms and reap profits if and when the companies prosper. 

And boy, do FIIs hold huge stakes in Indian firms!

Indian Companies with high % of FII holdings 2023 

To understand how FIIs work, you need to know what is the stake held by FIIs – or rather, how much stake. Recent figures released by indiancompanies.in suggest HDFC has the highest percentage of FIIs i.e., a whopping 70 percent. 

The following table enlists the top 10 companies with the highest FII holdings percentage in India:

Rank Company Name
(data as of 2021)
FII Stake (in %)
1Housing Development Finance Corporation (HDFC)70
2Zee Entertainment Enterprises 66
3Shriram Transport Finance Corporations 61
4IndusInd Bank52
5Axis Bank Ltd 49
6Apollo Hospitals Enterprise 48
7ICICI Bank 46
8Kotak Mahindra Bank42
9Fortis Healthcare 41
10Indus Towers41

Nature of FII investment 

Before getting into the connection between FII and the Indian stock market, one aspect requires some clarification – difference between foreign direct investment (FDI) and FII. 

As an Indian citizen, you can access all stocks listed in a public exchange if you have created a demat account. And other criteria like age, residence…you get the gist. But what if you want to get a taste of Dow Jones or S&P 500, a.k.a the US stock market? There’s a whole elaborate process for it. 

Read Also: How to Invest in US Stocks from India?

The point is when you invest in US exchanges through an institution, your money becomes an FII for the United States. Similarly, those wishing to invest in stocks on Dalal Street become FIIs for India. 

FDIs, however, are an entirely different entity. To begin with, they tend to invest in an Indian company having an arm or centre located overseas. For instance, the overseas branch of HDFC Bank located in New York. 

FDI vs. FII – Key differences 

Foreign Direct Investments (FDIs)Foreign Institutional Investor/ investments (FIIS)
Investment lasts for long-term Tends to last for short-term or limited period 
Not easy to enter or exit investment position Easy to enter or exit investment position, especially if made through market
Benefits include money inflow, technical knowledge, strategic know-how about firm Benefits are limited to dividends and funds
Tends to target 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 the 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 

Now that this difference has been clarified, time to dive into the influence of FIIs on the stock market. For a better understanding, let’s consider our beloved Indian stock market for further discussion. 

Role of FIIs in Indian stock market 

Institutional investors, in general, have abundant access to capital. And with foreign investors belonging to powerful economies like the US, this access becomes multifold. Why? Primarily because of a large clientele and, of course, the currency difference. (Currently, US dollar to INR stands at $1 = Rs.81.78). 

Now imagine when inflation kicks in, people want free cash to spend. They decide to withdraw their investments from institutions. To return the money to their clients, institutions sell their investments. 

If withdrawals increase rapidly, institutions have no choice but to plan a sell-off. This devalues the price of an asset. 

When several assets get devalued, the index falls, thus, turning the market red. This situation is replicated when FIIs are compelled to plan a sell-off amid inflation. 

You may also like: Why Tata Steel’s decline in net profit is a sign of recovery

Impact of FII withdrawals on retail investors

For instance, in 2021, a domestic retail investor ‘X’ invested in the shares of a publicly listed company ‘ABC’. In 2022 unfortunately, inflation kicks in. This leads to massive sell-offs by FIIs. How would X come to know? 

In terms of the overall market, purchase and sales data for FIIs is made public on a daily, monthly and yearly basis. However, for a specific company, the FII inflows and outflows are evident in their quarterly results. 

Investor X notices the sudden drop in FIIs and becomes sceptical about letting his money remain stagnant in the market. With inflation and commodity-prices going up, he decides to withdraw his money from the market and instead, invests in extremely low-risk instruments like deposits. 

X further notices that FIIs in company ABC have dropped during the ongoing quarter. This again, adds to his scepticism, leading to the same output. 

If retail investors on a large scale become sceptical, a massive sell-off occurs. Dalal Street becomes a deeper red!

FII’s impact on Nifty and Sensex

This is precisely what happened in 2022 when inflation reached new heights, and the war began between neighbours Russia and Ukraine. However, domestic institutional investors (DII) helped the Indian stock market remain above water. 

Now, let’s look at the flow of FIIs in terms of equity along with market reaction in 2022: 

MonthNet Sale or Purchase by FIIs (in crores)Sensex Performance Nifty performance 
January 2022Net sale = Rs. 34,097.130.41%0.08% 
February 2022Net sale = Rs.33,838.363.05%3.15%
March 2022Net sale = Rs.37,945.044.13%3.99%
April 2022Net sale = Rs.8,725.872.57%2.07% 
May 2022Net sale = Rs.37,663.392.62%3.03%
June 2022Net sale = Rs.49,468.934.58%4.85%
July 2022Net purchase = Rs.6,719.75  8.58%8.73%
August 2022Net purchase = Rs. 49,109.413.42%3.50%
September 2022Net sale = Rs.9,532.333.54%3.74%
October 2022Net sale = Rs.8,430.605.78%5.37%
November 2022Net purchase = Rs.38,234.903.87%4.14%
December 2022Net sale = Rs. 1,353.713.58% 3.48%
Here, Net sale: Gross Sale > Gross Purchase (FIIs decrease) 
Net purchase: Gross Sale < Gross Purchase (FIIs increase)

If you closely look at July 2022, it was the first time that total FII purchases surpassed FII sales. This shows that with inflation gradually receding, people had more money to invest. Invariably, FIIs had more access to capital, which they invested in Indian markets. 

Thus, BSE Sensex rallied 8.58 percent while NSE Nifty50 gained 8.73 percent. 

In a nutshell, FIIs play a crucial role in the stock market’s performance. More often than not, investors disregard this important metric. 

Yes, this is a subtle nudge for you to look at the FIIs of a stock before investing your hard-earned money!

What do the figures say? 

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