Understanding FII and DII meaning in Indian Share Market: Over the last few months of the COVID19 pandemic and stock market crash crisis, there have been many news sources headlining the FII sellout. Basically, FII stands for Foreign Institutional Investors and DII stands for Domestic Institutional Investors.
But what do terms such as FII and DII exactly mean? And why are they important enough in the share market to make the front page? In this article, we are going to cover that. Here, we will explain what are FII and DII and why they matter. Let’s get started.
Different Types of Investors in the Market
Individual investors like you and me who invest in our personal capacities are known as Retail Investors. But retail investors form a very small portion of the stock market. The major activity is dominated by institutional investors.
Institutional investors include hedge funds, insurance companies, pension funds, investment banks, and mutual funds. They invest in various markets using their pooled funds received from insurances bought, SIP investments, etc. from customers. These institutional investors are also known as elephants of the market because of the money power they hold in order to influence markets. In addition to this, it is also observed that when institutional investors buy the stock markets show a bullish trend and a bearish trend when they start selling.
These institutional investors are further divided into Foreign Institutional Investors [FII] and Domestic Institutional Investors[DII] depending on whether the investments are from domestic or foreign institutions in the Indian financial markets.
Why Institutions invest in Foreign Markets?
FII generally invests in emerging markets like India because investing in developing countries provides their investment a greater scope for growth which otherwise is limited in developed nations. This is done through a global mutual fund, hedge fund, etc. present in their home country.
But the economic conditions of emerging markets are not the only thing FII’s consider when it comes to making investments. They also consider the legal aspects and political climate of the country too. This is done in order to ensure the safety of the investments as they already face the risks of investing in emerging markets.
Countries with lenient laws when it comes to foreign investments and a stable political environment top the list of attractive investment destinations for the FII’s. On the other hand, protectionist local laws and politically unstable countries are ill-favored by the FII’s. One good example would be the Rs.82,575 crore Foreign Portfolio Investment ( highest in the Modi era) that followed PM Modi’s landslide victory. The opposite was noticed when WHO declared corona a pandemic.
FII however also helps the domestic economy they invest in. This is because they bring with them huge capital, boosting economic growth in capital deficient countries. FII also helps improve the Current Account Deficit situation of a country. This is why FII interest or net positive inflows are a good sign. FII outflows, on the other hand, depict a country where investments have become too risky or are a sign of an unstable government.
FII interests change immediately in response to the economic and political climate. This is particularly the reason why FII investments are known as ‘hot money’.
Investment from DII or FII regardless provides fodder. Then, why is this distinction necessary?
We have already established the volatility of FII. This volatility coupled with huge capital backing can have a detrimental impact on the economy in times of crisis.
FIIs have become one of the major drivers in the Indian Markets. But Investments from FII can be pulled out at any time, and they have been historically blamed for large withdrawals of capital leading to significant negative bearing on the domestic markets. In order to avoid such a scenario where 100% of investments in a company are from FII’s, an FII sellout would lead to a drastic reduction in the price. This has led to laws passed restricting the ownership in order to control the influence of the FII’s.
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What are the regulations that FIIs are subject to?
As per the SEBI (Foreign Institutional Investors) Regulations -1995, FIIs are generally limited to a maximum investment of 24% of the paid-up capital of the Indian company receiving the investment. However, FIIs can invest up to 30% if shareholder approval is received.
DII’s and the importance of a favorable environment
DII’s refer to institutions that invest in countries they are set up in. It is very important to note that a country’s political and legal environment plays a crucial role. A government that offers financial incentives which include corporate tax reduction, tax holidays, subsidies, and other financial incentives. These create a favorable investment environment. In such a scenario not only are FII’s interested but also the DII’s are encouraged to keep investing within India instead of looking for opportunities in other countries.
In 2015 Dividends and Long Term Capital Gains (LTCG) on shares traded in stock exchanges are totally exempted from Income tax even though it is not the poor who earn them. Such moves encourage Institutional investors to add to the capital in India. But the opposite happened when in 2018 when the then Finance Minister Mr.ArunJaitely declared a 10% Long Term Capital Gain in the budget disturbing the sentiments of the market. This move led to relentless selling off of shares held by the FII’s and DII’s in February 2018.
These investments were diverted towards Brasil and Gabon where they get suitable conditions of earning i.e. 100% exemption in Income Tax and Long term capital gain were present. Hence it is also very important for the government to create a favorable investment environment to keep the capital within India
How to find out FII and DII Holdings in Stocks?
To find the FII and DII holdings in any particular stock, you can go to the shareholding pattern segment on Trade Brains Portal. Simply, go the https://portal.tradebrains.in/ and search the Company Name in the search bar. This will take you to the Stock Details page. On this page, navigate to the Shareholding pattern section.
For example, here is the latest shareholding pattern of RELIANCE INDUSTRIES (Quarter-wise). You can find the FII and DII holdings in Reliance Industries for different quarters using this detailed table.
(Image: Reliance Industries Shareholding – Trade Brains Portal)
Similarly, you can find the FII and DII holdings in any publically listed companies in India by looking into its shareholding pattern available on Trade Brains Portal.
Closing Thoughts
In this article, we discussed what are FII and DII in the share market, the difference between them, and how to find their holding details.
Basically, FII stands for Foreign Institutional Investors and DII stands for Domestic Institutional Investors. By looking into the FII and DII holdings in different stocks, you can find how confident are big investors for investing in particular stocks, industry segment, and the market overall.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.
