Foreign Institutional Investors commonly known as FIIs are the companies and some big proprietor investing in the financial market through online trading. International institutional investors must register with the Securities and Exchange Board of India (SEBI) to participate in the stock market. Also, we can say FIIs are those institutions that invest in the assets of different countries other than investing in the countries, where they are situated.
FIIs play an important role in the development of any economy. Basically FIIs are big companies such as investment banks, mutual funds, etc. who invest a considerable amount of money in overseas markets. Due to buying and selling of securities by these big players, stock markets tend to move upward or downward accordingly.
Foreign Institutional Investor in Share Market
FIIs have invested around Rs. 7.08 trillion in shares since 1992, the year they were allowed into the Indian stock market. During Fiscal year 2014, the total number of FIIs registered in the country was 1,710.
Source : NSE
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Where do they invest?
Foreign Institutional Investors invests in the following:-
- Securities in the primary and secondary markets including online share trading, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India.
- Units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed or not listed on a recognized stock exchange.
- Dated Government securities.
- Derivatives traded on a recognized stock exchange.
- Commercial paper.
- Security receipts.
FIIs primarily invest in equities as is evident from the graph below:
Source : Open Governance India
FIIs investors are more open to investing in Equity market than the debt as they see a greater opportunity of returns from Equity. The FIIs investment is lowest in the year 2008 as because of the recession in the stock market, but investment in debt market remain the same. In the recovery phase, FIIs looked upon equity and grabbed every opportunity to maximize profits.
Benefits of FIIs to economy and eventually investors:
- FIIs bring increased amount of equity capital and manages uncertainty with a risk control.
- FIIs prefer equity over debt, and opening up economy for such institutions hedges the risk of foreign debt by introducing non-debt creating foreign inflows.
- FII brings financial innovation and creation of hedging instrument and also better competition, developing greater correlation between asset prices and fundamental.
- Along with better corporate governance and increased dividend payouts develops equity market, which indirectly aids economic development.
- Improves the efficiency of the market and increase the availability of riskier long-term capital for projects.
Also Read: Does country’s growth rate or foreign investment impact stock market?
Correlation between FIIs activity and Nifty
Source : Traders Cockpit
In the chart above, the bar lines above the level-zero represent total buying of equities by FIIs, whereas bars below the level-zero represent the selling of equities by FIIs. The blue line represents the nifty movement, corresponding to the FIIs buying and selling. We can see that FIIs activities are very much in favor to the Indian stock market since 2010. In the beginning of the year 2010, Nifty reported a very good movement. Year 2011 reported a decline in FIIs activities then nifty again declined to around 4500. In the beginning of 2012, market bagged some good amount of FIIs investment. Nifty gained maximum from FIIs in the year 2014, which took it to record level. This sudden gain in FIIs investment was due to the election scenario as government is very much in favor of FIIs investment.
For instance, FIIs invested in HDFC and ICICI bank with a holding of around 60% and 40% respectively. In between 2008-2011, FIIs raised their investment in the following banks, which moved the stock to new heights.
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Should you follow FIIs?
According to investors, retail investors should not withdraw their positions or change their mind from daily stock movement either caused by FIIs inflows or outflows. FIIs are giant investors, who do not wait for the right price they just invest when they want. They do not look at stock prices while buying or selling. In addition FIIs impact is more in Indian stock market than other as Indian market has thin liquidity and limited retail participation.
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Great article on foreign institutional investor in the Indian share market. The RBI has also allowed a number of foreign investors to invest, on repatriation basis, in non-convertible/redeemable preference shares or debentures issued by Indian companies listed on established stock exchanges in India. The investment should be within the overall limit of US$ 51 billion allocated for corporate debt. Long-term investors registered with SEBI will also be deemed as eligible investors. Thanks for sharing. Keep posting.
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