FIIs and their impact on Indian Stock market

It is influence of the FIIs which changed the face of the Indian stock markets. Screen based trading and depository are realities today largely because of FIIs. Equity research was something unheard of in the Indian market a decade ago. It was FII which based the pressure on the rupee from the balance of payments position and lowered the cost of capital to Indian business. It is due to the FIIs that a concept like corporate governance is being increasingly adopted by Indian companies; this is benefiting domestic investors also. FIIs are the trendsetters in any market. They were the first ones to identify the potential of Indian technology stocks. When the rest of the investors invested in these scrips, they exited the scrips and booked profits. Before the arrival of FIIs, the activity in stocks used to be evenly attributed with little differences between volumes in specified and cash groups. However since FIIs concentrate on the top 200 companies against the 6,000 listed companies on BSE, the stock trading activity has concentrated to these liquid scrips making them less liquid scrips totally illiquid. Thus, FIIs have become the driving force behind the movements of the stock indices on the Indian stock markets.

Rolling settlement was introduced at the insistence of FIIs as they were uncomfortable with the badla system. The major beneficiaries of the rolling settlement system are FIIs as short settlement cycles offer them quick exit from the market.

With their massive financial muscle FIIs have almost replaced conventional market of the Indian bourse. Today financial institutions and mutual funds including UTI can do little to help the stock markets at a time of crisis. Even UTI, which used to be counter force for FIIs has ceased to play that role in the Indian stock markets.

It is expected that with the adoption of international practices such as rolling settlement and derivatives FII participation will increase and more money will flow into the Indian capital market.


The increase in the volume of activity on stock exchanges with the advent of on screen trading coupled with operational inefficiencies of the former settlement and clearing system led to the emergence of a new system called the depository System. SEBI mandated compulsory adding and settlement of select securities in dematerialized form. All securities are held, traded and settled in demat form. Two depositories have come into existence – NSDL and CSDL. Demat settlements have eliminated bad deliveries and other related problems associated with physical.

Buy Back of shares:

Buy back of shares means that a company purchases or buys back its own shares, which it had issued previously to the shareholders. The company has the option to either cancel them or hold them as treasury – frozen stock. The differences, though technical is significant. For example a company buys back one crore equity shares of the face value of Rs 10 at Rs 100 each. If the shares are cancelled the equity base of the company will be reduced by Rs10 crore, while the reserves will be depleted by Rs 90 crore. If the repurchased shares are held as treasury stock, the shares will not be extinguish, but will be held neither as an investments nor as equity. They can be revived by reissuing them at a later date or for employee option.

A company may be motivated to buy back its own shares for any of the following reasons:

1. A company with surplus cash to invest and buy may consider it to be a worthwhile invest proposition as it carries minimum risk compared with other avenues of investment such as investment in new projects, development of new products, acquisitions and takeovers/
2. For a company facing a threat of hostile takeover share buy back would help its promoters to increase their proportional share holding in the company.
3. A company may think of altering its capital structure if its equity is disproportionately large. Buy back may help the company to achieve a target capital structure.
4. A panic driven fall in share prices can be arrested through buy back of shares.
5. A company intending to improve market quotes of its scrips may choose buy back rather than pay higher dividends as buy back signals management confidence. Moreover, buy back provides an exit route to investors in case of illiquid scrips.