Domestic Institutional Investor (DII) ownership of listed Indian firms has reached 19.5%, its highest point since 2001. Bolstered by strong inflows from Domestic Mutual Funds (DMFs), DIIs are filling in the vacuum in the stock market left by the sustained selling by foreign investors. This can give domestic institutions greater influence over how Indian companies are valued, and potentially over the incentives those companies face when deciding where to deploy capital.
Recent research suggests that DIIs and especially DMFs have a short-term investment horizon. This makes it difficult for the firms they invest in to focus on long-term activities, such as innovation. The question is whether that investment behaviour can change as domestic institutions become more important shareholders.