About FIIs & DIIs

Are you familiar with the terms FIIs and DIIs? Most of us are retail investors in the Indian stock market. You might have come across these terms. Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) are the key movers along with the Retail Investors in the Indian financial markets.

FIIs are from outside the country and invest in India’s financial markets. They are entities participating in the country’s markets from overseas.

On the other hand, DIIs are investors based in India who invest in the country’s financial instruments and securities. These two groups are big players in the market, and various factors influence their investment decisions. Further, they impact the flow of investments into the economy.

Data from the first half (H1) of the fiscal year 2024-25 shows that overseas institutional investors (FIIs) accounted for 65% of India’s investments totaling USD 3.1 billion. In 2023 domestic investors represented 37% of the investment pie compared to an average of 19% over the past five years. This trend continues into H1 FY 2024-25 where domestic investors make up 35% of the overall share.

FIIs (Foreign Institutional Investors)

FIIs, or foreign institutional investors, significantly impact the financial markets of foreign countries. Foreign institutional investors (FIIs) invest in India but are not nationals of the country.

To operate in India, foreign institutional investors must register with SEBI and abide by its regulations. Due to fluctuations in currency values, foreign institutional investments (FIIs) have the opportunity to gain or lose substantial amounts of money.

For example, if a non-retail investor from the US decides to invest in the Indian market, they are classified as an FII. These investors bring money from abroad and invest it in the stock market, targeting areas with growth potential. FIIs are also referred to as Foreign Portfolio Investors (FPI). These entities are not individual investors

DIIs (Domestic Institutional Investors)

Indian investors who are interested in profiting from the Indian stock market are known as Domestic Institutional Investors (DIIs). DIIs operations in the stock market play a significant role when foreign institutional investors are net sellers in the country’s stock market.

DIIs can invest in various avenues, such as insurance companies, mutual funds, and liquid funds, and their investment decisions are influenced by political and economic factors. DIIs have the potential to impact the economy’s net investment flows, similar to foreign institutional investors (FIIs).

In India, the stock market’s performance is significantly influenced by domestic institutional investors, especially when foreign institutional investors are selling more than buying.

The total investment made by domestic institutional investors (DIIs) in the Indian stock market exceeded ₹2 trillion rupees in 2022. For instance, the Life Insurance Corporation is India’s most prominent domestic institutional investor (DII).

Different Categories of FIIs and DIIs in India

In India, not all types of Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) are permitted. There are specific institutions that have the approval to operate within the country. Here are the classifications of FIIs and DIIs in India.

Types of DIIs (Domestic Institutional Investors) in India

1. Indian Insurance Companies:  In recent years the role of companies in India has seen growth. They offer financial security in cases of severe illness or accidental demise. Notable examples include Bajaj Allianz Life Insurance and Max Life Insurance.
2. Indian Banks and Other Financial Institutions: These organizations provide a range of services, including loans, locker facilities and, various insurance products. The returns generated from these investments are channelled into stock markets, contributing to the nation’s economic framework. Examples of such institutions include HDFC Bank, State Bank of India (SBI) and, Kotak Mahindra Bank.
3. Indian Mutual Fund Firms: These firms are among the popular investment options that can be customized based on the risk appetite of individual investors. They gather funds to invest in assets providing reassurance to investors. Notable examples include ICICI Prudential Mutual Fund and Tata Mutual Fund.

Types of FIIs (Foreign Institutional Investors) in India

Now let’s explore the various categories of FIIs.

Foreign Mutual Funds These investment vehicles combine money from investors to create a diverse portfolio of stocks.

Foreign Pension Funds These funds are responsible for managing pensions for beneficiaries and invest in instruments to ensure future pension payouts.

1. Foreign Insurance Companies: Entities offering financial coverage to individuals or organizations typically invest across asset classes to enhance their portfolios.
2. Foreign Central Banks: Central banks like the US Federal Reserve or other nations central banks have the ability to invest in the Indian stock market as FIIs.
3. Examples of portfolio investments (FPIs) or FIIs encompass stocks, bonds, mutual funds, exchange traded funds, American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs).

Difference Between FIIs & DIIs

1) Origin of Investors: FIIs have Foreign entities and DIIs have Domestic entities of a country, as the origin of investors.

2) Effect on Market: FIIs have impact over the market ranging from days to months. On the other hand, DIIs have effect on the market which last from months to years.

3) Focus on Sector: FIIs focus mainly on financial markets and assets. Whereas, DIIs focus on diverse sectors including non-financial sectors along with financial sectors.

4) Impact on Management: Generally, FIIs are passive investors and don’t have much on management. DIIs may actively participate in management decisions and corporate governance.

5) Investment tenure: For FIIs, the investment tenure is short to medium term (days to months). For DIIs, the investment tenure is short to long term (days to years).

6) Limit of Investment: In India, the maximum Foreign Institutional Investment (FII) can be 24% of the entire paid-up capital. For DIIs there’s no such restriction in India.

7) Objective: The purpose of investments in FIIs is to seek financial returns and portfolio diversification. On the other hand, investment is DIIs is for wealth creation, meeting long term goals, retirement benefits, etc.

8) Ownership and Control: FIIs have no ownership right or control over Indian companies. DIIs investing in Indian companies may have an impact over a company’s decision making.

9) Regulatory monitoring: FIIs are regulated by the host country’s authorities. DIIs are regulated by domestic market authorities and financial regulators.

10) Tax regulation: Section 115AD applies to foreign institutional investors’ earnings, including income from securities and short-term or long-term capital gains obtained from the sale of such securities in India. On the other hand, for DIIs, corporate tax of flat 30% is implemented, which is same as for the Indian companies.

11) Volume of Investment: In the first quarter of FY 2024-25, approximately 24.5% of the companies in the Nifty 500 have investments from FIIs or FPIs in India. For DIIs, they are directed towards 16.9% of all Nifty 500 during the first quarter of FY 2024-25.

Frequently Asked Questions (FAQs)

At how much percentage Section 115AD applied to FIIs for Income for Securities in India?

Interest on securities is taxed at 20% for foreign institutional investors in India.

What is the taxable percentage of FIIs in India arising from short-term capital gain?

If there is a short-term capital gain arising from the transfer of:

– selling a listed company’s equity share,

– selling an equity-oriented fund unit, or

– Selling a business trust unit, as mentioned in section 111A

Income from such short-term securities are taxed at 15%.

How much FIIs in India taxed from the sale of other securities?

The FIIs in India are taxed from selling other securities at 30%.

What are the restrictions for FIIs to invest in India?

According to SEBI guidelines, every FII or sub-account of an FII has authorisation to allocate a maximum of 10% of a single company’s equity within the overall 24% investment limit for all FIIs, NRIs, and OCBs combined.

In which markets of India could the FIIs invest in India?

FIIs are allowed to invest in companies that are listed, unlisted, or will be listed on the stock markets, and they can do so in both the primary and secondary markets.

Who regulates and supervises the FIIs and DIIs in India?

Securities and Exchange Board of India (SEBI) regulates and supervises FIIs and DIIs in the Indian financial markets.

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