FIIs vs DIIs: Reversing roles after 25 years

In 1992, foreign institutional investors (FIIs), or foreign portfolio investors, were allowed to participate in the Indian equity market, marking a major step in opening the Indian capital market to foreign investment.

- JANAK RAJ

FIIs began their operations with a modest investment of ₹13 crore in 1992-93. At that time, domestic institutional investors (DIIs), comprising the erstwhile Unit Trust of India (UTI), six bank-sponsored mutual funds, and four financial institution-sponsored mutual funds, were well-established. In 1993, private-sector mutual funds were also allowed, which, along with the mutual funds already in operation, were expected to act as a counterweight to FIIs. The combined equity investments (outstanding) of DIIs were approximately ₹45,000 crore at end-March 1993. However, the next few years proved turbulent for DIIs, reducing their relative significance markedly.

UTI, which was by far the largest mutual fund at the time, faced serious problems in its assured-return schemes in 1998. This shook investor confidence in mutual funds, slowing down their resource mobilisation over the following years. Consequently, outstanding equity investments of DIIs rose only marginally, from ₹65,300 crore at end-March 1998 to ₹65,800 crore by end-March 2000. During the same period, FII investments more than doubled, reaching ₹70,300 crore, thereby surpassing DII investments for the first time. DII equity investments declined to ₹59,000 crore by end-March 2005, partly due to the bifurcation of the erstwhile UTI into two components in 2003.