Stocks

Are FPIs exiting Indian markets?

NARAYANAN V | | | Updated on: Nov 26, 2021

FPIs are not just major investors but also a key constituent in determining the market direction

 

 

Who are FPIs?

Foreign portfolio investment (FPI) simply refers to financial assets held by investors in another country. Individuals or entities who invest in foreign portfolios are known as foreign portfolio investors (FPIs). In the Indian context, FPIs refers to registered overseas investor groups which include foreign institutional investors (FIIs) and qualified foreign investors (QFIs). Governed by the market regulator SEBI, FPIs are allowed to invest in various categories of financial assets including listed equities, corporate debt, government securities, units of domestic mutual funds and other assets. FPIs are typically Central Banks, Sovereign Wealth funds, mutual funds, insurance and reinsurance companies, pension funds, corporate bodies, Trusts and high net worth individuals.

What is their presence in the Indian Stock market?

The policy regime for foreign portfolio investments in India commenced in 1992 when FIIs (FPIs since January 2014) were allowed to invest in domestic equities. It was followed by access to the corporate debt market (1995) and G-secs (1997). Over the years, FPIs have made substantial investments in all these categories, enough to create a flutter as and when they pull out money from the market. As of October 30, 2021, FPIs total assets in the equity segment alone stood at ₹49.37-lakh crore, much higher than the assets of the entire Indian mutual fund industry which stood at ₹37.33-lakh crore during that period.

How strong is their influence in the market?

FPIs are not just major investors but also a key constituent in determining the market direction. Hence, FPI investments and sell-offs are keenly watched not just by the market participants but also by the government and policy makers. For instance, on July 5, 2019, Finance Minister Nirmala Sitharaman introduced a tax surcharge on individuals who earn over ₹2 crore as part of the Union Budget. Since many FPIs operate under a trust structure, they also became subject to the tax. This led to an intense wave of selling by FPIs, who dumped Indian equities worth over ₹30,000 crore in just two months (July and August) leaving the stock market gasping. The government was forced to roll back the tax surcharge on FPIs in September.

Are they net sellers in the secondary market today? Why?

FPI investment in Indian equities touched a historic high of ₹2.74-lakh crore in FY21. However, foreign investors have been on a selling spree, especially in the secondary market (stock exchange), since the beginning of the current fiscal. FPIs have pulled out close to ₹59,000 crore from the secondary market so far this fiscal which is the highest in more than a decade. In recent times, several global brokerages including Morgan Stanley, CLSA and Nomura have downgraded Indian equities due to rich valuations which is not commensurate with their earnings or growth potential in the near term.

Are they exiting India?

Not entirely. While FPIs have been net sellers in the secondary market, they are pumping in huge sums of money in the primary market, joining the Initial Public Offering (IPO) frenzy in India. As on date, FPIs have invested close to ₹56,000 crore in the primary market during the current fiscal, which is the highest in the last several years.

Published on November 26, 2021
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