A Study on Changing Role of Foreign Institutional Investors (FIIs) in Indian Capital Market

The commencement of financial sector reform initiated in early 1990’s changed India’s policy on development strategy absolutely. The preliminary approach of financing current account deficit mainly by way of debt flows and official development assistance has altered to harnessing non-debt creating capital flows. Under this approach since September 14, 1992; Foreign Institutional Investors (FIIs) were allowed to invest in financial instruments in India and consequently Indian financial markets have changed greatly in its volume, size, depth and nature. FIIs are important to emerging economies because they bring funds and capital to businesses in developing countries. Foreign institutional investors play a very important role in any economy, since these are the big companies such as investment banks, mutual funds etc, who invest considerable amount of money in the Indian markets. These investors typically include hedge funds, mutual funds, insurance companies and investment banks among others. FIIs generally hold equity positions in foreign financial markets. Due to this, the companies invested in by FIIs generally have improved capital structures due to healthy inflow of funds. Thus, FIIs facilitate financial innovation and growth in capital markets. The entry of an FII can cause a drastic swing in domestic financial markets. It increases demand for local currency and directs inflation. Therefore, there are restrictions put by the managing authority of a country on how much stake FIIs can hold in the domestic company. This ensures that the FII’s influence on the company is limited, so as to avoid exploitation. However, not every FII will make an FDI in the country it is investing in. FIIs directly impact the stock market of the country, its exchange rate and inflation. FIIs can invest in listed, unlisted, and to-be-listed companies on the stock markets, in both the primary and secondary markets. This paper tries to analyse the changing role of FIIs in Indian capital markets because of their increasing share in the market