Apart from these, there is a category of investors called Foreign Institutional Investors (FIIs).
Who are these FIIs?
These FIIs bring in money from abroad to invest in Indian equities. When FIIs actually bring in money from abroad, it is termed as foreign fund flows. There are some very large FIIs investing in the Indian markets including the likes of Morgan Stanley, Goldman Sachs, Government of Singapore, CLSA etc.
By the end of June, there were as many as 1710 registered FIIs with the Securities and Exchange Board of India (SEBI). In the four years ended December 2013, FIIs had invested a staggering sum of Rs 371,342 crore in the Indian equities.
Most of these FIIs raise money from individuals abroad and than tend to invest in equities here.
Where do they invest?
These funds tend to invest in both segments of the capital markets, that is debt and equity. In the last few years FIIs have been very active and foreign fund flows into the Indian markets have risen sharply. The debt segment is also a favorite area where foreign funds invest. This is because foreign funds get a huge interest rate differential between the Indian and foreign debt market. While they get an interest rate of a maximum of 2.7 per cent in US treasuries, they can get as much as 9-10 per cent interest here. This gives them a huge opportunity to invest in Indian debt at higher interest rates.
Apart from this they also invest in Indian equities.
Problems with FII investment in India?
The one problem that we find with FII investment is their inflows tend to be volatile, which can upset the Indian stock markets. When they sell, it can bring down the markets enormously, because Indian markets cannot absorb such huge selling pressure.
One cannot forget the mayhem they caused in 2008, when the Lehmann Brothers crisis unfolded. the Indian markets crashed from 21,000 points to below 8,000 points, largely on the back of some heavy selling by foreign institutional investors.
Similarly, when they invest the markets go berserk. The one reason why the Sensex has rallied from 18,000 points seen last year to the current levels is on account of a huge surge in FII flows.
It's necessary to attract this category of investors as it brings in more dollar inflows into the India and also helps our domestic stock markets. FIIsfirst began investing in Indian market since 1993, when Manmohan Singh permitted their entry during a number of steps that he took towards liberalization. Since then, they have become regular investors in the Indian markets and today hold a substantial number of shares in select stocks in India.