Domestic investors hold more than FPIs in top companies

By now, the story of how FPIs have been selling consistently in the last 9 months and domestic funds have been buying is well documented. Between October 2021 and June 2022, FPIs took out nearly $35 billion from Indian equities. During the same period, the domestic investors like mutual funds and LIC have aggressively invested in Indian equities and more than offset the selling by the FPIs. Now there is an interesting finding about the holding patterns that has been highlighted by Morgan Stanley.

According to a recent note by Morgan Stanley, the combined holdings in equities of domestic investors (mutual funds and households) increased by a full 720 bps or 7.20% in the year 2022. This has taken the domestic ownership level to 25.6%. Clearly, this growth in domestic ownership has come at the cost of foreign ownership and that is also evident if you just look at the way the FPI ownership in most of the major stocks in the Indian market has fallen during the same period.

This kind of a trend is visible in India for the first time since 2010. Today, the total equity ownership of domestic investors has exceeded the holdings of foreign funds in 75 major companies during the June 2022 quarter. Just look at these numbers. The combined holdings of domestic investors in equities increased 720 bps to 25.6% as of June 2022. During the same period the total equity ownership of Foreign Portfolio Investors or FPIs fell sharply by 230 basis points to 24.8%. Clearly, the Indian markets are turning domestic.

If you just look at the June 2022 quarter, the trends were quite stark. For instance, there was a 90 bps increase in the domestic ownership of Indian equities. At the same time, this June quarter also saw FPI ownership fall by 84 bps in these 75 companies which can be classified as the bluest of blue chips. To get a perspective. FPI ownership in these 75 companies has fallen by 232 bps since December 2014 but by 263 bps year-on-year. In short, most of the FPI ownership damage happened in the last one year only.

One more signal, that may not be too encouraging is that even the holdings of promoters has fallen by 20 bps in the last one year. However, if you look at from a long term perspective since the year 2014,the fall has been actually 326 bps. Clearly, either promoters have been selling out or they have been losing control, possibly due to reasons like pledging of equity stakes, change in control etc. On the other hand, the holdings of financial institutions are up during the current year.

Let us talk about the financial institutions in greater detail. Their holdings in these 75 companies rose 39 bps on a yoy basis. However, the spike is quite small if you see from 2014 onwards. Domestic mutual funds saw their share rising by 49 bps on a yoy basis but by a whopping 580 bps over 2014. Clearly, during this period, the mutual fund AUM has grown exponentially and mutual funds have made the best of it. The worry is that now promoters of these 75 companies own 44.9%; down from 45.4% last year.

To sum it up, as of June 2022, FPIs own 24.8% of equity of these top companies. In comparison, domestic mutual funds hold 9.5%, the general public holds 9%, financial institutions hold 7.2% while NRIs and others own 4.7%. The combination of public, domestic mutual funds and domestic financial institutions combined gives you domestic holdings, which is what has crossed the FPI holdings in June 2022. Whether the greater domestication of markets is a good sign or not, only time will tell!