FIIs Impact on the Indian Stock Market
Stock markets of developing economies are generally prized possessions for Foreign Institutional Investors. It won’t be an understatement if you call FIIs the drivers and catalysts for the Indian stock markets too. FIIs’ entry into the Indian markets can be traced back to 1992, and since then, FIIs have been supplementing domestic savings and augmenting investments. FIIs infuse the majority of volumes we witness in the broad market indices. Some of you must have heard market reports accrediting huge market volatility to FIIs’ selling and buying. FIIs are single-handedly capable of driving individual stocks and our benchmark indices– Nifty 50, Sensex, and BankNifty. Who are FIIs? Foreign Institutional investors, or FIIs, are firms that invest in the assets of countries other than the ones they are registered at. FIIs can be overseas pension funds, mutual funds, investment trusts, asset management companies, banks, institutional portfolio managers, charitable trusts, charitable societies, etc. FIIs are generally given preferential tax treatment in most countries, including India. However, they are bound to comply with the regulations laid down by SEBI and the ceiling limits fixed by RBI.
According to the prescribed rules, FIIs are not allowed to hold more than 24% of the paid-up equity share capital of any Indian company. However, the same can be given effect if the board of the company receiving such investment passes a special resolution allowing the same. This ceiling is further dropped to 20% in the case of public sector banks in India. RBI foresees the compliance of this ceiling limit and sets a cut-off point of 2% below the maximum limit. It gives a warning to the Indian company if it receives the final 2% investment. Why do FIIs prefer India? FIIs are mostly based in countries with mature economies like the USA; there are no real growth opportunities in matured economies that can be translated into quick returns. Thus FIIs are always looking for growing economies with tremendous growth potential. Given the long-term growth prospects, India is arguably the most attractive spot for foreign institutional money. Investors continue to be optimistic about India, and our Government is constantly trying to lure fresh foreign investors. The rate cuts brought into effect by the central bank favour FIIs as it infuses more liquidity into the markets. Moreover, India has well-regulated primary and secondary markets, making the investors confident about the security of their investment. To get into the details of the two kinds of markets, read our article on the difference between the primary and secondary markets on the Teji Mandi. FIIs positively impact the financial markets and tend to drive the major trends in the Indian stock market. Of the three market players, i.e. the FIIs, the DIIs and the retailers, FIIs are clearly in a position to lead the rally in the direction they decide, given their quantum of investment. As retail investors, though we cannot predict the next move of FIIs, it’s best to keep track of what FIIs are doing. Because the broad market indices will ultimately follow the FIIs as they have all the money to drive markets, you can refer to daily updates SEBI releases on FII and DII activity during the trading session. To get all the latest updates from the market right on your phone, you can download the Teji Mandi app. To get active investing advice, reach out to our experts through our website.