Foreign Institutional Investors -
October 6th, 2010
A Grave Balance of Payments situation forced the policymakers to take a relook at allowing foreign capital Into the country and the year of 1991 marked the announcement of some fiscal disciplinary measures along with reforms on the external sector made, it possible for the foreign capital to reach the shores of the country.
As on 31st March 2005 there were 685 (ISMR 2004-05 NSE, Mumbai) registered foreign institutional investors in the Indian stock market.
As on that date the net cumulative investments made by FIIs are around USD 35.9 billion representing around 6.55% of India's market capitalization.
Ever since they were permitted to invest in India the investments made by them showed a gradual increase except in the 1998-99. The net inflows averaged around 1.1 bn. per year and large net outflows are rare barring the year of 1998-99 where most South Asian countries were out of favor for a while.
Foreign portfolio investment carries a sense of notoriety of its own because at the first sign of trouble this flows in reverse direction.
The notoriety emanates from the very nature of FII investment - portfolio managers tend to restructure and rebalance their portfolios dynamically across the countries, their primary concern being their portfolio.
Owing to their magnitude of flows, the direction of FII investment flows tends to make or break the fortunes of a market. FII flows to India are less.
Since, it is not statutorily binding on FIIs to make public, the companies in which they are investing in, there is no publicly available information on this aspect.
However, the overall investment that can be made by all FIIs in any company's equity is monitored by Reserve Bank of India; it gives a caution notice, when the overall FII investment level reaches 22 percent in a company.
Subsequently, all purchases have to be done by prior approval of Reserve Bank of India.
From such monitoring reports it can be gauged that the FIIs are market or not.
Here, one has to note that most stocks that figure in institutional investors' portfolios are more or less those securities that comprise the Nifty or Sensex indices. Hence, co-movements between index and the institutional investments are likely.
But, when we use Advances and Declines ratio (ADR hereafter) it captures the direction of entire market in unambiguous terms. Generally advances to declines ratio indicate the breadth of the market.
Hence, we use ADR instead of Nifty or Sensex returns.
In reality, it is not possible to isolate the actions of mutual funds and FIIs on the stock market, since both the category of investors are acting simultaneously hence, the institutional activity is captured by taking the ratio of combined purchases of mutual funds and Fl Is to combined sales of mutual funds and FIIs so if the ratio is >1 means institutions have pumped in money i.e., the market witnessed a net inflow of money while a ratio of <1 indicates there is an outflow of money from the market.