worsened with some of the companies had to file for bankruptcy and some had to take financial aids from government to continue its business operation. It led the FIIs also to direct its trading activities in the same way by offloading its holdings in equities. This resulted in Sensex down to 9000 from Top of 21000. FIIs sold equities of Rs. 44660 crores so far in 2008 which come to around 15% of net investment of Rs. 284,942 crores as on 1st January 2008 of last eight years. The current investments of FIIs is Rs. 2,40,272 Crores. This is almost 16.7% of BSE 500 total market capitialisation. If we explain the things in simple terms, market
pundits often attribute the rally of stock market and fall of stock market to the flow of funds by FIIs. We often hear the terms "FIIs Fuel the Market Run". If we analyze the impacts, then the major impacts are: -
They increased depth and breadth of the market.
They played major role in expanding securities business.
Their policy on focusing on fundamentals of the shares had caused efficient pricing of shares. These impacts made the Indian stock market more attractive to FIIs and also domestic investors, which involves the other major player MF (Mutual Funds). The impact of FIIs is so high that whenever FIIs tend to withdraw the money from market, the domestic investors become fearful and they also withdraw from market.
1999 35468 492
2000 41979 556
2001 55272 482
2002 58848 480
2003 89307 510
2004 128127 637
2005 178449 823
2006 211082 993
2007 284942 1123
2008 (19/11/2008) 240272 1407
Day (Points Lossin Sensex) Gross Purchases (Rs.Crores)GrossSales (Rs.Crores) NetInvestments(Rs. Crores)
21/01/2008 (1408) 3062.00 1060.30 2001.80
22/01/2008 (875) 2813.30 1618.20 1195.10
18/05/2006 (856) 761.80 527.40 234.40
17/12/2007 (826) 670.00 869.00 -199.00
18/10/2007 (717) 1107.00 1372.50 -265.50
18/01/2008 (687) 1077.20 1348.40 -271.20
21/11/2007 (678) 640.70 791.80 -151.10
16/08/2007 (643) 989.50 750.30 239.20
02/08/2007 (617) 534.50 542.00 -7.50
01/08/2007 (615) 809.40 956.90 -147.50
From this table, we can see that the major falls are accompanied by the Withdrawal of investments by FIIs. Take the case on January 18, 2008, the Sensex lost almost 687 points. Here, the net sales by FIIs was Rs. 1348.40 Crores. This is a major contributor to the fall on that day. But contrary to that day, take the case on January 21, 2008, the Sensex lost 1408 points and the gross sales was Rs. 1060.30 Crores and the purchases were Rs. 3062.00 Crores. So this can be concluded that after the fall of market, FIIs had invested again into the market. From this, we can see the effect of FIIs.
Net Investments of FII from 1999-08
Rs. In Crore
Year Net Investments
1999 6697
2000 6511
2001 13293
2002 3577
2003 30458
2004 38831
2005 47181
2006 36540
2007 72060
2008 (19/11/2008) -44,670.40
Now we analyze the net investments' graph from 1999 to 2008. From this, we can see that there is an increase in net investments till 2005 and there was small decrease in investments in the year 2006. But there was a steep increase in the year 2007-08. This was the best period in Indian stock market where stock prices were increased and the market was in good mood. When we take the investments in 2008, the net investments is negative. And we know the market is volatile in this year. So we find that there is direct relation between net investments and movement of stock market.
From the graphs drawn in the above parts, we can see that the major falls in stock
market is accompanied by the withdrawal of money by FIIs. So there is a direct
relation between the FII's money flow and the movement of sensex. The biggest fall in stock markets occurred in 2007 and 2008. This means the volatility of market is more because during this period there was an increase in registration of FIIs and the investments reached almost Rs. 283468.40 Crores by the end of 2007. The present condition is that the investments had reduced to 240,272 Crores as on Nov 19. So this reduction is one cause of volatailty. From all this, we can analyze prime facia that the FIIs influence market.
FII Holdings
Considering the FIIs investment activities in Indian Market it is important to look at the stock to stock level. There are companies which have holding of FIIs more than 30%. In these companies even minor increase or decrease by FIIs can lead to higher volatility in the price of the stock. Hence, looking at current market scenario one has to take in to consideration the FIIs holding of those companies before investing. Here we have given the table of top 20 companies in which FIIs have significant stake. The FIIs have decreased its stake in United Phosphorous, ICICI Bank and in IDFC by 3 to 4% during last quarter. However they have Increased stake in Educomp, United Spirits and India Cements for the same period. ( SEE PICTURE TOP )
Future Outlook
The last eight years data of the FIIs trading activities in Indian Equity market suggests that FIIs have been the major Movers and Shakers of Market. From the Sensex level of 3000 in the year 2003 to 21000 in January 2008 and again down to 10000 in October 2008. The last five year Bull Run was led by strong Indian fundamental and FII inflow in market. But now due to global financial crisis, FIIs are facing great liquidity crunch. Now they are withdrawing their money from the Indian equity market. There is no problem in Indian long term growth story but the global hedge funds and FII have incurred huge losses in their countries and are facing redemption pressure so they are selling equity at any level. As mentioned earlier during the past 9 months FIIs have sold 15% of net investment of last eight years. So there is great possibility that they may continue their selling in coming days. One can imagine if they sell another 5%, then how much more down fall can happen in the market?
