Impact of FII on Stock Market in India

An important feature of the development of stock market

in India in the last 15 years has been the growing
participation of Institutional Investors. Institutional
investors comprise both foreign institutional investors and
the domestic institutions like (mutual funds, insurance
companies etc). In India, these institutional investors
manage large amount of funds which constitutes a
significant share of the entire market capitalization. The
role of these investors especially FIIs (also known as foreign
portfolio investors) in Indian stock market has been a
matter of debate. FII investments seem to have influenced
the Indian stock market to a considerable extent. Looking at
the direction of the funds flow from these investors, we can
explain the market movement.
 Why are FIIs important?
Attracting foreign capital appears to be the
main reason for opening up of the stock
markets for FIIs. In order to attract portfolio
investments, it has been advocated to develop
stock markets. The general perception about
the foreign portfolio investments is that, not
only do they expand the demand base of the
stock market, but they can also stabilise the
market through investor diversification.
 Impact on Share price:
Price discovery of stocks are results of the interaction between supply-demand forces.
Buying equities in huge chunks leads to a steep rise in the prices and heavy selling leads to a
massive fall in the prices. Heavy buy and selling of stocks create a demand-supply gap situation for
that particular stock and which ultimately result in the fall or rise in the price. This is what
happened when FIIs come into play.
General perception about FIIs that they bring good money and also their entry symbolizes a mature
market. Though, it is true that FIIs do help in formation of an efficient market, their sudden
movements of funds have been responsible for some of the biggest stock market crash in the
history.
Investment by FIIs is heavily dependent on the expected return. Whenever there is a change in the
expected return scenario (due to political situation, restrictions etc) or availability of a better
investment opportunity, a movement of funds can be seen by these FIIs. This comes through heavy
selling of the stock holdings in their portfolio. And due to this heavy selling massive falls in stock
prices take place.
Individual investors who jumped into the fray when market was rising feel the pinch most when
these FIIs sell off their holdings. These investors incur heavy losses due to the sudden fall. The
stocks also take severe beatings as these stocks takes a long time to recover due to loss of
confidence, despite the companies good financial performance.
Here, we will see the effect of FIIs fund movement on stock prices through the analysis of historical
price and shareholding pattern of Vakrangee Software, a domestic mid-cap IT Company.
 The Company: Vakrangee Software
Vakrangee Softwares Ltd is a domestic IT company. The
companys businesses include Document Management
Services (DMS), Printing Management Services (PMS) and
IT & IT Enabled Services (ITes). The company has a good
business model and expected to grow with a rapid growth
rate in future.
The stock of the company is currently trading at Rs.32. The
companys stock price has fallen from all time high of
Rs.291 to Rs. 19 due to heavy sell off by FIIs. The fall of
stock price started from September,2008 onwards due to
heavy selling by FIIs. Their stake in company has come
down to zero in Dec, 2008. The sudden fall in stock price
can be seen in historical price chart (between 31/07/09 to
28/11/09).
 These two Pi-Charts explain the change in the
share holding pattern of the company in last two
quarters. Before September quarter, FIIs had a
major share (18%) in the company. Their share
was almost equals to the promoters share. Now,
in December quarter, FIIs share came down to
zero due to their sudden exit which led to a
massive fall in stock price. Currently, the company
is available at a deep discount and with almost no
risk. Here no risk implies zero FIIs stake in the
company.
 Conclusion
By the analysis of Vakrangee Software, we can
conclude that the companies in which FIIs have very
large stake are more prone to have stock price crash
than the companies in which FIIs has no or very low
stake. Before investing in such companies, investors
should always do some research and try to find out
whether FIIs are dumping the stocks.
Here the result of this analysis also applies to the
whole market. A very large amount of fund under FIIs
management without any restrictions on their
movements can destabilize the market.