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Even as foreign investors are cutting back their exposure to the Indian market, the equity ownership of domestic investors, including retail, mutual funds, and insurance companies, reached a record high at the end of the June quarter (data available from March 2005, see chart).
Domestic investors now own 20.2 per cent of the BSE 500 companies, surpassing the previous high of 20 per cent at the end of the March 2010 quarter. Domestic ownership of the country’s top listed companies was up 134 basis points (a basis point is one hundredth of a percentage point) in the last quarter, witnessing the sharpest incremental rise in domestic participation since the September 2008 quarter.
In contrast, foreign investors seem to have turned bearish. The effective foreign institutional investor (FII) ownership in BSE 500 companies declined to 20.4 per cent at the end of the June quarter from 20.8 per cent in the previous quarter. This is the first major sell-off by FIIs in the last three years. FIIs had last cut their exposure in the September 2011 quarter, when their holding had declined by 10 basis points over a six-month period.
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The analysis is based on the quarter-ending market capitalisation and shareholding pattern of the current set of BSE 500 companies for the period beginning January-March 2005 at an interval of six months except for the June 2015 quarter.
Domestic investors’ equity ownership worth Rs 19.21 lakh crore ($300 billion) at the end of June is up from Rs 17.96 lakh crore ($280 billion) at the end of March. In comparison, FII equity holding (of BSE 500 companies) during the period declined to Rs 19.4 lakh crore ($303 billion) from Rs 19.78 lakh crore ($309 billion). The exchange rate is assumed at Rs 64 to a dollar.
Retail ownership increased to an eight-year high of 9.2 per cent worth Rs 8.73 lakh crore ($136 billion), up by around Rs 52,000 crore during the quarter. Domestic institutions now own 11.1 per cent of BSE 500 companies worth Rs 10.5 lakh crore ($164 billion), up by around Rs 73,000 crore during the quarter. In comparison, the BSE 500’s combined market capitalisation was down marginally during the period.
At this rate, domestic investors will overtake FIIs to become the largest group of non-promoter investors on Dalal Street, a position they ceded in the September 2013 quarter. FIIs have been net buyers of equity worth Rs 1,411 crore in July-August.
Many experts believe FII shareholding is likely to come down further as an increase in interest rates in the US could lead to capital outflow. Most are pinning their hopes on domestic institutional investors to offset any reduction in inflows.
“The multi-year transition of household savings from physical assets to financial assets is firmly under way, which should be supportive for continuing inflows into equity mutual funds,” says Abhay Laijawala, head of research at Deutsche Bank.
“With a decline in inflation, household savings will increase and quite a large portion of it may flow into equity, given that Indians remain underweight. It also helps that competing asset classes are not doing too well right now,” says Swati Kulkarni, executive vice-president and fund manager – equities at UTI AMC.
Devang Mehta of Anand Rathi Financial Services says, “There are few options for investors right now and they have seen in the past that equity offers the best inflation-adjusted returns over four to five years. I remain bullish on incremental domestic flows to the market,” he says.
The risk is that domestic investors have increased allocation when market valuation on the trailing price-to-earnings multiple is at five-year high and smart money — FIIs and promoters — are steadily cutting back their exposure.
