FII holdings change

What Is FII Holdings?

Foreign Institutional Investors (FII) holding refers to that portion of a company’s shareholding that is held by the FIIs. These foreign institutional investors identify growing companies in foreign boundaries and invest in their securities through primary and secondary markets. However, to safeguard companies from the excessive influence of FIIs, the regulatory authorities of the host countries enact certain restrictions or capping on FII holdings.

As in the case of India, the Reserve Bank of India has set a maximum limit of 24% of the paid-up capital of a company for FII investment. This limit can be raised if the company’s board of directors agrees to this and a special resolution is passed. Similarly, the FII limit for investing in public sector banks is set at a maximum cap of 20%.

• FII holding refers to that portion of the company’s paid-up capital held by FIIs.
• RBI has capped the total investment by an FII at 24%, which can be increased after approval from BOD.

What Is FII Holding Change?

FII holding change refers to the amount of change that took place in a company's FII holding over a period of time. The FII change can be both positive and negative, and consequently, as per the momentum of FII holding change, a company or a financial market experiences a decrease or increase in the prices of securities.

The large capital inflow from FIIs influences the behaviour of financial markets drastically. Therefore, investors and market participants in the host country track these changes extensively to align their investments with the market momentum.

• FII holding change is the change in the shareholdings of FIIs over a period of time.
• FII holding change can influence the market momentum both positively and negatively.

Who Are Foreign Institutional Investors (FIIs)?

Foreign institutional investors, commonly known as FIIs, are foreign entities or investment companies that invest in companies that are headquartered in other countries. To put this in perspective, let us say there is a company in the USA that is investing in an Indian company. Such a transaction can be considered an investment by a foreign institutional investor. In this case, from the perspective of the Indian company, the investing company of the USA is a foreign Institutional investor.

FIIs can be of various types, such as hedge fund managers, insurance companies, mutual funds, or banks. All these institutions execute cross-border investment transactions in companies with the primary purpose of diversification and increased returns generation.

In emerging markets like the Indian stock markets, the role of Foreign Institutional Investors (FIIs) has become increasingly important. Investment from FIIs assists Indian companies in raising large amounts of capital for further expansion, and these foreign investors also bring their technical know-how to the table.

• FIIs are foreign institutions that invest in the securities of foreign companies.
• FII inflows are significant in emerging markets like India for raising capital and expansion.

Types Of FIIs

1. Hedge Funds - Hedge Funds are an organisation or fund constituted after pooling money from private investors. These funds are managed by highly skilled fund managers who invest and create funds using complex and risky strategies. Typically, the objective of hedge funds is to maximise returns and outperform the market using hedging strategies, which include investing a part of the fund’s asset in securities that move in the opposite direction to the primary fund holdings. These funds perform transactions in various kinds of financial instruments spread across companies, sectors, and even nations. They participate in foreign investing to diversify their portfolio and reduce risk for their funds. The participants of a hedge fund are wealthy investors who possess huge amounts of investable capital and have high risk-taking capabilities.
2. Insurance companies - Insurance companies are organisations that are involved in the business of selling insurance policies to customers in return for a policy premium. These companies allow the customers to secure their insured items from possible damages in future, and in return for such a service, they receive a policy premium from them. These policy premiums are invested in distinct financial instruments that have good liquidity so that future claims of customers can be settled with ease while maintaining financial stability for the organisations. Further, the investments also help insurance companies to earn returns to fund their day-to-day expenses.
3. Mutual Funds - Mutua Funds are investment vehicles that pool their investor’s capital and distribute it in various financial instruments based on a focused investment strategy. The amount invested in these MFs is managed by skilled fund managers, providing a secure and strategic way of investing.
   These funds are invested in different financial assets such as stocks, bonds, real estate, and foreign securities. Investors can access mutual funds to diversify their portfolios over domestic and foreign financial securities.
4. Sovereign Wealth Funds -  Sovereign Wealth Funds or SWFs are state-owned investment funds that invest financial assets to generate substantial returns to fulfil their objectives. These funds source their investible capital from government revenue, such as income from privatisation, reserve surplus, or trade surplus. Depending on their investment objective, risk tolerance, and other factors, SWFs invest their funds in different asset classes in domestic and international regions.
5. Foreign Central Banks - Foreign Central Banks are the central banking institutions of nations that act as regulators of the banking sector of their respective countries. Along with the regulation and management of the banking sector, these institutions are also responsible for managing the country's foreign currency rates and circulation.

Features Of FIIs

1. Regulated Operations - Foreign Institutional Investors (FIIs) possess the ability to influence the financial markets of the host countries because of the significant investments they make. Thus, FIIs are subject to financial regulations by both domestic and host countries to maintain transparency and fair competition in the markets.
2. Large Institutions -  FIIs are different from retail or individual investors because they are large institutions that invest through pooled funds of other investors and shareholders.
3. Deal In Foreign Securities - Foreign Institutional Investors (FIIs) invest in financial securities or assets listed in the host countries. It means that they perform investment transactions in stock, bonds or other securities of companies based in a foreign country.
4. Portfolio Investing - FIIs typically invest and hold positions in the company’s financial instruments, such as equities or debt, rather than acquiring direct interest in the company's management and operations.
5. Diversification objective - Diversifying their fund's portfolios is one of the primary reasons FIIs invest in securities of foreign companies. By performing cross-border investments, FIIs are able to mitigate a portion of their risks in emerging markets, which allows them to earn better returns with limited risk.

Top Foreign Institutional Investors (FII) In India

1. Government of Singapore - The Government of Singapore has strengthened its position as the top FII investor in India. With a stocks portfolio of 63 Indian stocks aggregating to a total net worth of Rs 2,38,099.4 crores.
2. Europacific Growth Fund - The Europacific Growth Fund is another critical FII that invests in India. It currently holds a portfolio of 7 Indian companies with a total net worth of 35,148 crores.
3. Government Pension Global Fund - The Government Pension Global Fund is a Sovereign Global Fund set up in 1990 by the Norwegian Government. The portfolio of this fund includes 96 stocks totalling to a net worth of 1,37,484 crores.
   Besides the above-mentioned FIIs, Oppenheimer Developing Markets Funds, Vanguard Fund, Nalanda India Fund Limited, and other various FIIs are major foreign investors in the Indian stock market.

Why FIIs Invest in the Indian Stock Market?

1. Emerging Economy - Economies like India offer substantial room for long-term economic growth, which creates a space for FIIs to earn significant returns on their investments.
2. Diversification - FIIs prefer investing in India because it provides a distinct set of investment opportunities to them, resulting in diversification of risk.
3. Global Partnerships - Currently, India is a preferred hub for manufacturing and export-import activities for global companies. Thus, to benefit from this global exposure, FIIs invest extensively in India.

Key Takeaways On FIIs

• Foreign Institutional Investors (FIIs) are institutions that invest in securities of companies and government organisations that are not based in their home country.
• These institutions source their capital from shareholders and other investors which is then pooled and invested for maximising returns.
• FIIs can be of different types, such as hedge funds, foreign central banks, insurance companies and others.
• FIIs tend to influence the prices of securities through their selling and buying activities.