Domestic institutional investors, consisting of banks, insurers, mutual funds, NBFCs and other financial institutions, are often blamed for being unable to counter-balance the direction of foreign institutional investor funds flows.
There is also a widespread perception that the Indian stock markets are shallow and largely dependent on FII flows.
Nirmal Rungta, Director and Head-Private Client Group CIMB Securities, said: “FIIs have always been concentrated in their buying/selling in India. They usually buy/sell for two to three months at a stretch while DIIs have neither matched them in the period of buy/sell nor the quantum. There can never be a balance as FII flows are in turn dependent on their investors, which is determined by their perception of India.”
There have also been situations when both FIIs and DIIs do not want to buy. In addition, if one takes out the contribution of India’s largest DII — LIC — from the equation, the investible amount becomes very small, he said.
Arun Kejriwal, Founder, KRIS Research, feels that whatever little counter-balancing takes place, happens under compulsion because State-run financial institutions are expected to subscribe to the Government’s divestment programme and hence necessarily have liquid cash at their disposal.
Independent If the Centre does not pressurise its State-run financial institutions to subscribe to its divestment programme, in most cases, the direction of DIIs and FIIs will be the same. There is no question of DIIs counter-balancing the FIIs. This is how the markets used to experience sharp movements - upward or downward.
In fact, State-run DIIs can do a better job and become a larger part of the market, if left alone, he felt.
On the issue of curbs on certain DIIs, such as banks and insurers by their sectoral regulators (RBI and IRDA) to participate in equity derivatives, Kejriwal said the aim is to protect the retail investor, whereas FII flows are welcome as the country doesn’t have a choice.
Those in the trade say it is the situation on the ground at any point in time that decides whether DIIs act as a counter-balance to FII flows or not.
Rajesh Agarwal, Head-Research, of Kolkata-based Eastern Financiers, said: “Whenever FIIs sell a stock due to worsening fundamentals, DIIs never buy that scrip. However, DIIs would always pick up a scrip when FIIs exit a stock on account of redemption pressure from their investors or a decision to exit emerging markets.”
The market regulator SEBI has been an active proponent of a strong DII to act as a counter-balance to FII flows.
SEBI has been of the view that higher active retail participation can be achieved only if savings are channelised into the markets through the DII route, which, in turn, would make DII participation robust to counter-balance FII flows.