How local investors pumped up their weight against FIIs on Indian bourses

Indian stock markets have historically danced to the tunes of what foreign institutional investors did on the trading floor. This was largely because of the huge proportion of promoter holding in Indian companies. As offshore portfolio investors were the key driver of free float shares of most companies, or the shares that were traded in effect, they also dictated the direction of the market.

As traders shifted to the screen over the last decade, a slow transformation has been afoot not just in how they trade but also in who has become the real market makers.

Essentially, the dynamics of how the local markets move have changed. This is because of the huge pull of domestic capital sourcing from retail investors, in particular, who lapped on to the mutual funds as also made direct bets on the stock market given the lure of big gains. This is also because of high-net-worth investors (HNIs), who shuffled their asset holding away from real estate, especially after demonetisation in 2016.

To be sure, global factors still affect local sentiments, be it the US Federal Reserve’s decisions and its impact on how foreign investors shuffle asset allocation, or a war in Europe, for instance. But more than ever before, the impact on Indian bourses is now linked to what the local investors do.

If we scan through the latest statistics of the stock holdings of different categories of investors, it buttresses the trend.

For starters: the share of retail, HNIs and domestic institutional investors (DIIs) as a whole reached an all-time high of 23.34% as on March 31, 2022, well above the FII share of 20.15%.

To put this in perspective, as on March 31, 2015, the FII share was 23.32% while the combined share of retail, HNI and DII was just 18.47%, according to data compiled by Prime Database.

Drilling deeper, the data show the share of retail investors (individuals with up to Rs 2 lakh worth of shareholding) in companies listed on the National Stock Exchange reached an all-time high of 7.42% as on March 31, 2022, from 7.33% as on December 31, 2021. In value terms, too, retail holding in companies listed on the NSE reached an all-time high of Rs 19.16 lakh crore (or about $250 billion) from Rs 19.05 lakh crore on December 31, 2021.

Meanwhile, the ownership of HNIs (individuals with more than Rs 2 lakh shareholding) in companies listed on the NSE declined marginally to 2.21% from 2.28% on December 31, 2021. But the combined retail and HNI share reached an all-time high of 9.64%.

The share of DIIs, which include domestic mutual funds, insurance companies, banks, financial institutions and pension funds, increased to 13.7% as a whole from 13.21% as on December 31, 2021. In value terms, DII holding went up to an all-time high of Rs 35.35 lakh crore ($460 billion) as on March 31, 2022.

At the same time, net outflows from FIIs of a huge Rs 1,10,019 crore during the quarter resulted in their share declining to a nine-year low. Most notably, FIIs pulled out Rs 69,370 crore from financial services and software sector during the quarter while investing Rs 13,450 crore in metals and mining, and food, beverages and tobacco companies. The holding of FIIs in value terms in companies listed on the NSE stood at Rs 51.99 lakh crore ($680 billion) as on March 31, 2022.

To be sure, the FIIs remain the largest non-promoter shareholders in the Indian market and their investment decisions still have a huge bearing on the stock prices.

Institutional muscle, PSU divestments, promoters’ unease

The total institutional share, that is FII and DII holding, declined to a four-year low of 33.85% last quarter. The gap between FII and DII holding also decreased with DII holding now 32% lower than FII holding. The widest gap between FII and DII holding was in the quarter ended March 31, 2015, when DII holding was 55.46% lower than FII holding.

If we spread out the data points to look over a longer 12-year period, the FII share has increased from 16.03% to 20.15% while the DII share has increased from 11.39% to 13.70%. This is largely to do with shrinking stakeholding of the government in PSUs.

The share of the government (as promoter) in companies listed on the NSE has declined to 5.48% as on March 31, 2022, from 22.48% as on June 30, 2009.

Meanwhile, the share of private promoters in companies listed on the NSE has increased to 45.13% from 33.59% on June 30, 2009. Within this, ‘Indian’ private promoters’ share has gone up from 26.43% to 36.88% over the last 12 years while ‘foreign’ promoters’ share has gone up from 7.17% to 8.25%.

While hostile takeovers are still rare, promoters have seen how the shrinking holding of their peers has brought them face to face over board decisions from activist investors in the recent past. They have also used the window of creeping acquisition to hike their holding over time.

Notably, there were a dozen companies in which the trinity of promoters, FIIs and DIIs all increased their stake during the quarter. These include Jindal Steel & Power, Alembic Pharmaceuticals, Angel One, Raymond, MTAR Technologies, Maharashtra Seamless, Somany Ceramics, Greenply Industries, Mold-Tek Packaging, Eveready Industries, Arihant Superstructures and Aksharchem.

The wisest of them all

If we consider the broad set of investor categories and track their activity, we see FIIs, private promoters and to some extent HNIs who have been more successful in placing their bets.

Based on a set of around 1,800 companies listed on the NSE, the companies where promoters hiked their stake, the average share price moved up over 6% last quarter. As against this, the benchmark Nifty 50 index rose just 0.6% last quarter.

This could be a case of prior information and bullish stance of the promoters. On the flip side, they also sold shares in a set of firms that saw the share price move up.

The Indian government and even Life Insurance Corporation, the single-biggest asset manager in the country and which is currently in the market itself to go public, weren’t so lucky.

As far as retail investors go, they were caught up with adverse selection. They hiked stake in close to a thousand companies last quarter or over half of the sample set. The share price of these companies on an average slumped 7%. At the same time, of the remaining 700-odd firms where they sold stake last quarter saw their share price move up nearly 9% on average!

LIC was caught on the wrong foot here, too. The companies in which it sold shares saw a 4% rise in their share price. To be fair, this could also be due to bulk shares offloaded by the life insurer, putting pressure on the stocks.