FIIs shun large-caps to quietly accumulate PSUs, smaller stocks in Q4

FIIs raised their holdings in 51 percent of the 186 companies from the Nifty Microcap 250 Index that have reported the latest shareholding information

While foreign investors have been actively offloading large-cap stocks in Indian markets, the real story lies beneath the surface. They are strategically exiting blue-chip counters while accumulating public sector and small-cap stocks -- a strategy that retail investors have executed with notable success until now.

For the quarter ended March 31, 2025, 79 listed PSU companies have disclosed their shareholding data so far, with foreign institutional investors (FIIs) increasing their stakes in 52 percent of the companies. Additionally, FIIs raised their holdings in 51 percent of the 186 companies from the Nifty Microcap 250 Index that have reported the latest shareholding information.

Beyond these segments, FIIs have also shown interest in the broader market -- raising their stakes in 43 percent of the 107 BSE MidCap stocks and 42 percent of the 730 BSE SmallCap stocks that have reported their latest shareholding data so far.

According to analysts, recent corrections have significantly lowered valuations in PSU and smaller stocks. This has made them attractive investment opportunities. Historically, when valuations become compelling, institutional investors tend to increase their exposure, which could explain renewed buying interest.

Mid and small-cap stocks are often favoured by risk-taking FIIs due to their potential to generate alpha in Indian markets. Despite concerns around revenue and margin visibility, these stocks are generally less affected by global developments, given their domestic focus, analysts added.

In the case of PSU stocks, FIIs might be averaging down their earlier positions. Many of these stocks have corrected sharply—some by over 50 percent from their 52-week highs—making valuations even more attractive, analysts said.

So far, 36 companies in the Nifty50 index have reported their March quarter shareholding data, with FIIs increasing stakes in only five, while reducing holdings in the rest. Similarly, among the 73 Nifty100 constituents that have disclosed data, nearly 73 percent witnessed a decline in FII ownership.

Deepak Jasani, an independent research analyst, said large-cap stocks are witnessing reduced FII interest due to concerns around over-ownership and global uncertainties, such as ongoing trade tensions. These factors are impacting revenue and profit visibility, prompting foreign investors to trim their stakes.

During the March quarter, FIIs offloaded over Rs1.16 lakh crore worth of Indian equities. The Nifty index dipped 0.5 percent, while the Nifty100 fell 1.8 percent. In contrast, the broader BSE MidCap and SmallCap indices saw sharper corrections, declining over 11 percent and 15 percent, respectively.

Independent analyst Ajay Bagga said that we are seeing a twin strategy of domestic defence play and alpha opportunities exploration via going down the market cap chain to more undiscovered and potential multi bagger stocks. Whether this works out is a question, but it is a truth of the Indian market for now. It is a rare alignment of domestic retail flows going into the SMIDs and FPIs also raising stake in nearly half of these, Bagga added.

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