Foreign Institutional Investors (FII) trading activity details with purchase, sales, net and investments.
Who is a Foreign Institutional Investor?
A foreign institutional investor (FII) is an investor or investment fund registered in a country other than the one it is investing in. Primarily, institutional investors include investinng in hedge funds, insurance companies, pension funds and mutual funds investment. The term is very common here in India and hence, refers to outside companies investing in the financial markets of India. In addition to the types of investors above, others include banks, large corporate buyers or representatives of large institutions. All FII activities take a position in a foreign financial market on behalf of the home country in which they are registered.
FII in India
Countries with developing economies have the highest volume of FII activities. Since these economies are dynamically growing, they provide bigger opportunities for investors by offering higher growth potential as compared to mature economies. FII activities are most commonly found in India as our economy is growing. It is mandatory for all the investors to register with the Securities and Exchange Board of India (SEBI) to participate in FII activities.
Take for example, a Japanese Mutual Fund company wanting to invest in a company of Indian origin; what does it have to do? Well, it can purchase the equity on the Indian public exchange and take a long position in a high-growth stock. This transaction is also lucrative to the domestic private investors who may not be able to register with the Securities and Exchange Board of India. Instead, they can invest in the mutual fund and participate in the high growth potential.
So what are the regulations for Investing in Indian Companies?
Only through the country's portfolio investment scheme (PIS) can the FIIs invest in India's primary and secondary capital markets. Through this scheme, FIIs are allowed to purchase shares and debentures of Indian companies on the normal public exchanges in India. These are mandatory if you’re undertaking FII activities.
FII investment today comes with many regulations for fair and transparent working of the transaction. A ceiling is deployed for all FIIs that state the max investment amount can only be 24% of the paid-up capital of the Indian company receiving the investment. Only through a special board approval or the passing of a special resolution can you increase the max investment above 24%. The ceiling is reduced to 20% of the paid-up capital for investments in public sector banks.
The Reserve Bank of India monitors daily compliance with these ceilings for all foreign institutional investments. It checks compliance by implementing cutoff points 2% below the max investment amounts. This gives it a chance to caution the Indian company receiving the investment before allowing the final 2% to be invested.
Foreign institutional investors play a very important role in any economy. These are the big companies such as investment banks, mutual funds etc, who invest considerable amount of money in the Indian markets. With the buying of securities by these big players, markets trend to move upward and vice-versa. They exert strong influence on the total inflows coming into the economy.
Market regulator SEBI has over 1450 foreign institutional investors registered with it. The FIIs are considered as both a trigger and a catalyst for the market performance by encouraging investment from all classes of investors that further leads to growth in financial market trends under a self-organized system.
FII activity in Futures and Options (F&O)
The foreign institutional investors (FIIs) play in the futures & options (F&O) segment is crucial for Indian markets, including in terms of setting the short-term trend. FII statistics has been proved pivotal in predicting the undercurrent of the market; hence, many traders and investors track it keenly.
F&O trades are concentrated on returns month on month. Apart from looking at leverage levels, traders also see when FIIs are long with huge positions, as any small negative news leads to unwinding and vice versa. There has been a rise in FII activity in the F&O segment and one of the key reasons are the higher returns. FIIs, mostly based out at Europe and the US, see lucrative opportunities. These returns are considerably higher when compared to their home market fixed income returns.
The rise in FII activity in F&O segment is also partly due to the depth in the cash segment, which is not big enough to absorb high volumes. Thus, FIIs activity, with strong back up of significant holding in most index heavyweights from banking, software and automobiles sectors, have raised their game in the F&O segment rather than buying heavyweights in the cash market. Had it not been for the higher activity in the F&O segment, Indian markets would have been more volatile.