Now, you should have got a good understanding of the different types of traders and investors in the stock market. Here, we will be focussing on investors alone. Investors who invest in IPO alone or after IPO in the secondary market as well. RII, QIB, NII are investors who focus mostly on IPO. There are a whole variety of people who invest in the stock market. Investors are people who hold onto their share for more than a day.
Table of contents
Retail Individual Investors: RII
Retail individual investors or RIIs have less than 35 percent of the total shares offered to them during an IPO. These investors are not permitted to buy shares worth more than Rs 2,00,000. This is done to ensure other people have the opportunity to buy shares. Resident Indians and non-resident Indians can apply for this.
Investors purchasing their IPO shares under the RII category may buy shares at the cut-off price. This is the price decided by the company based on demand for the IPO.
Retail investors are someone like you and me. Retail Investors have small purchasing power, they often have to pay higher fees on their trades, as well as marketing, commission, and other related fees. SEBI considers retail investors unsophisticated investors, who are afforded certain protections and barred from making certain risky, complex investments.
CDSL has recently announced that it becomes the first depository to open four crores plus (40 million) active Demat accounts. Ordinary people participating in wealth creation through the stock market is good but unfortunately, most retail investors are indulging in reckless trading and losing money instead of systematically investing and creating wealth.
Market analysts believe the number of retail investors may continue to grow and their growth rate may even accelerate further as the market is towards clocking healthy gains in the long run after the economy picks pace.
Qualified Institutional Buyer: QIB
Public financial institutions, commercial banks, mutual funds, and Foreign Portfolio Investors can apply in the QIB category for IPO. SEBI registration is required for institutions to apply under this category. 50% of the Offer Size is reserved for QIB's.
QIBs are mostly representatives of small investors who invest through mutual funds, ULIP schemes of insurance companies, and pension schemes. They cannot bid at the cut-off price.
High Net worth Investors: HNWI
People who fall into this category generally have at least $1 million (10 crores) in liquid financial assets. HNWIs are in high demand by private wealth managers because it takes more work to maintain and preserve those assets. These individuals generally demand personalized services in investment management, estate planning, tax planning, and so on.
Almost 63% of the world's HNWI population lives in the United States, Japan, Germany, and China, according to the Capgemini World Wealth Report. HNWI are classified into three:
Millionaires, who have $1 million to $5 million in investable wealth
Mid-tier millionaires with $5 million to $30 million
Ultra-HNWIs, with more than $30 million wealth to invest
A very-high-net-worth individual has a net worth of at least 50 crores while an ultra-high-net-worth individual is defined as having at least 300 crores in assets.
An anchor investor in a public issue refers to a qualified institutional buyer (QIB) making an application for a value of Rs 10 crores or more through the book-building process. An anchor investor can attract investors to public offers before they hit the market to boost their confidence.
The minimum application size for each anchor investor should be Rs 10 crores. In offers of size less than Rs 250 crores, there can be a maximum of 15 anchor investors, but in those over Rs 250 crores, SEBI recently removed the cap on the number of anchor investors. Anchor investors are not eligible to bid at a cut-off price.
Non-Institutional Investor: NII
Non-institutional investors or NII's are allotted a maximum of 15 percent of the IPO. Investors in this category may apply for stock worth more than Rs 2,00,000. Resident Indian individuals including HNI, NRIs who qualify, and HUFs may apply in this category as may companies, trusts, scientific institutions, and societies.
The 15 percent allotment is reserved for this category as there is usually quite a bit of demand. NII is not allowed to bid at the cut-off price.
Foreign Institutional Investors: FII
A foreign institutional investor (FII) is an investor or investment fund investing in a country outside of the one in which it is registered. The term foreign institutional investor is commonly used in India, where it refers to outside entities/institutions investing in the nation's financial markets.
FIIs can include hedge funds, insurance companies, pension funds, investment banks, and mutual funds. FII is important for the development of a nation, but some nations such as India have kept a limit to the total value of shares, they can purchase.
Keeping the limit helps to limit the influence of FIIs on individual companies and the nation's financial markets. This can be dangerous if the FIIs fled during a crisis and the potential damage can be catastrophic.
Developing countries will be having the highest number of FII’s as to bring up and develop their economy. This provides a higher growth potential to the investors. All FII’s must register with SEBI in order to participate in the financial market in India.
FIIs are allowed to invest in India's primary and secondary capital markets only through the country's portfolio investment scheme. This scheme allows FIIs to purchase shares and debentures of Indian companies on the nation's public exchanges.
FIIs are generally limited to a maximum investment of 24% of the paid-up capital of the Indian company receiving the investment. Paid-up capital is the money a company receives when they sell the shares through the primary market, usually through an IPO offering. If a mutual fund in the United States sees a high potential in an Indian listed company, they usually go ahead and take a long position by buying the company’s shares in India.
The Reserve Bank of India monitors compliance with these limits daily by implementing cut-off points 2% below the maximum investment. Cut-off points will be a caution alert to the investor where he decides to go ahead buying the security or not. This also cautions the Indian company to receive the investment before allowing the final 2% to be purchased.
China is also a popular destination for foreign institutions seeking to invest in high-growth capital markets. In 2019, China removed the limits on the amount FII’s can purchase stock in the nation-listed companies. This move was made to increase the number of FII participation in the country.
Major multinational companies involved in foreign institutional investors include Citigroup, HSBC, and Merrill Lynch.
Domestic Institutional Investors: DII
Domestic institutional investors are those institutional investors who undertake investment in securities and other financial assets of the country they are based in. DII’s institutions are organizations such as banks, insurance companies, mutual fund houses, etc in the financial or real assets of a country. Like FII, DII can also impact the economy’s growth.
In India, domestic institutional investors have quite a decisive role when it comes to the performance of the Indian stock market, especially when foreign institutional investors become the county’s net sellers.
In India, there are 4 types of Domestic Institutional Investors in India:
Indian Mutual Funds
A mutual fund is a type of financial fund made by collecting a pool of money from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. These funds are operated by professionals or money managers who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors.
In India, mutual funds are a popular investment option for beginners, intermediate and expert investors due to their flexibility and versatility. As of March 2020, Indian mutual funds held a total of ₹11,722 crores in equity holdings.
Indian Insurance companies
This is a type of domestic institutional investor solely based in India or Indian-owned insurance companies. Insurance companies offer a range of insurance options from life insurance, term insurance, health insurance, retirement options, and more. The insurance policies you take, the health insurance, all this money is pooled in together to have a massive cash contribution.
They then invest this money in the stock market to gain returns on this capital. Remember, they will not only give your capital back, but they will also give the capital with interest earned. Where do you think they are getting the additional amount? Yes, from the stock market. These companies are a large contributor to the overall DII equity and contribute in the range of 20,000 crores each quarter.
Local pension funds
The purpose of pension plan schemes is for individuals to lead a hassle-free retirement by creating a retirement corpus through their pension plan. The Indian government has National Pension Scheme, Provident Public Fund, and Employees’ Provident Fund Organisation that contribute to the country’s DII.
As of the March 2020 quarter, pension schemes were the biggest domestic institutional investors bringing a total of over ₹33,706 crores in equity holdings. Now you can imagine, how you’re small contribution every month is getting into a big corpus after retirement.
Banking and Financial institutions
Indian banks and financial institutions come under this category. Although they are not the key driver in the stock market or a major contributor in the DII, their asset under management is continuously growing. Asset under management is the money they are putting into the stock market.
The money which you put as a Fixed deposit into the bank and the money which you pay as interest for the loans, all contribute to a pool of large cash in hand with the bank and they invest this amount in the stock market. The interest earned from the stock market is used to give back the interest to the fixed deposit participants and for the growth of the bank.
Whoever the investor is, no big institution can now fully drive the stock market with its capital potential. SEBI has strict rules and regulations set into the limit a participant can contribute to the stock market. Remember the Harshad Mehta Scam in1992, that is almost impossible to happen now. Even if you are the LIC of India.
Now, you should have got a better understanding of what types of investors are there in the market and who all are the participant. Now, let's take a deep dive into how you can calculate your returns. Once you start investing, you need whether your investment growth is good or bad, right? Hearing CAGR and absolute returns in news might seem confusing now, but we’ll cover all this in the next article.