We often hear market experts giving credit to/blaming FIIs (Foreign Institutional Investors) for significant market movements. Have you ever wondered who these people are and what really calls for their importance?
Well, FIIs are foreign companies investing in Indian stock markets; these may be banks, mutual funds, endowments, pension funds etc. This form of investment must not be confused with foreign direct investment which entails long term commitments and creation of physical assets, institutional investors are simply market players but given their deep pockets their actions often become crucial hence, their role is keenly monitored by market watchdogs, not only do they require prior registration with SEBI but are also required to follow specified guidelines, one of the major ones being placing limits on their ownership in domestic companies. Currently there are about 1300+ FIIs registered with SEBI.
FIIs fall into the group of ’smart money’ investors since they are known for their well planned moves and have a signalling effect on other investor classes. Even though the volume of trades executed by them is not very high in comparison with other market participants, they often drive market sentiments. Given their expertise at choosing good bets within a market, many domestic market participants follow their footsteps. They are found to invest across market segments (including units of mutual funds), with an increasingly active role in equity based derivatives and often change their sectoral preferences, current favourites being IT and FMCG. It is also interesting to note that the percentage of equity held by FIIs in many companies is often comparable to the percentage of retail investor holdings (typically 10-20%).
Given India’s impressive growth record in recent times FII activity has also picked up tremendously, in 2007 alone they made investments worth $17.2 billion (source IBEF) and since the market turnaround this January have been blamed for causing stock prices to soar previously due to the excessive demand created by them.
It must be noted that FII investments are not determined by the state of the Indian economy alone since such investors have massive holdings in their home and other markets too and in the case of losses in these, their Indian holdings are often sold to cover the same. Net FII outflows in two months in 2007 are attributed to the subprime crisis; the current recessionary trend in western economies has also had its effect, which is evident from the net inflows in the last six months:
The extent to which FIIs influence the overall health of the market is often debated and the extent of this dependency is yet to be ascertained, however their role has been artificially curbed to some extent by market regulators. But whatever the case might be, next time you think of investing in a company, it might be worthwhile to understand how FIIs are viewing it.
