Even as foreign portfolio investors (FPIs) rushed to sell out their holdings in Indian companies during the quarter ended March 2020 following the risk aversion after concerns rose over global economic growth following the spread of the coronavirus pandemic, domestic institutional investors (DIIs) raised their holding in NSE-listed entities, hitting an all time high of 14.4 per cent.
According to the shareholding filed by 1,575 of the total 1,631 companies listed on the National Stock Exchange (NSE) for the quarter ending March 31, 2020 and data sourced from nseinfobase.com, a joint initiative of NSE and PRIME Database, while FPIs reduced their holding in NSE-listed companies from a four year high of 20.24 per cent in December 2019 to 19.13 per cent as on March 31, 2020, DIIs led by mutual funds (MFs) increased their holdings to all-time high level of 14.4 per cent from 14.06 per cent in December 2019.
Holding of domestic MFs in companies listed on NSE reached an all-time high of 7.97 per cent by value as on March 31, 2020. It stood at 7.79 per cent as of December 2019.
In absolute value terms, however, all categories lost significantly following a sharp correction in markets in March due to COVID-19. The Sensex fell 23 per cent in March, and between January and March it lost 28.6 per cent.
While the total value of FPI holdings fell down by 32 per cent from Rs 30.72 lakh crore in December 2019 to Rs 20.92 lakh crore in March 2020, the total value of DII holdings declined by 26.2 per cent from Rs 21.34 lakh crore to Rs 15.74 lakh crore.
The reduction in FPI holding and increase in holdings by DIIs amidst the pandemic has resulted in narrowing of the gap between FPI and DII holding.
Counterbalance to FPI outflows
The sharp rise in DII holding over last six years has provided a counterbalance to the FPIs in Indian markets. Even in March 2020, when FPIs pulled out a net of Rs 61,900 crore from Indian equities, DIIs invested a net of Rs 55,595 crore.
The gap between FPI and DII holding in NSE-listed companies, which stood at 6.18 percentage points in December 2019, narrowed to 4.73 percentage points at the end of March 2020. Over the last six years, the gap has been steadily narrowing.
Data shows that while FPI holding has come down from 19.54 per cent March 2014 to 19.13 per cent in March 2020, DII holding has gone up significantly from 10.63 per cent to 14.4 per cent in the same period.
This also indicates the growing influence of domestic investors and the deepening of Indian markets through the MF route. In fact, the MF holding in NSE-listed companies in the same period has risen significantly from 2.8 per cent to 7.97 per cent.
“I see the quarter ended December 2016 as an inflection point as the government announced demonetisation in November. The incremental effect was higher since then as formalisation of economy happened and money started getting channelised into mutual funds,” said Pranav Haldea, MD, PRIME Database. He added that increase in MF holding has created a strong counterbalance to FPIs.
“Ten years back, when FPIs pulled out, there was no counterbalance other than LIC. However, now MFs keep the market relatively stable. In March also, when FPIs pulled out, domestic MFs saw it is an investment option and they invested,” Haldea added.
Insurance companies, however, have not been able to increase their holding in the same period, and in the six year period their holding has come down marginally from 5.49 per cent in 2014 to 5.11 per cent in March 2020. Even in the quarter ended March 2020, while MFs increased their shareholding in NSE-listed companies over that in the previous quarter, insurance companies saw a decline in their holding from 5.16 per cent to 5.11 per cent.
FPIs, however, continue to remain the biggest non-promoter shareholders in the Indian market and their investment decisions have a huge bearing on the stock prices and overall direction of markets.
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