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In 2023 (Till Aug), Foreign Institutional Investors (FIIs) invested a significant INR 1.32 lakh crore (USD 16 billion) in the Indian equity market. Despite global economic challenges, India’s stable government policies and robust macro fundamentals have attracted sustained growth and the investment outlook continues to be bullish.

In the dynamic world of finance and investment, Initial Public Offerings (IPOs) mark a significant moment for companies seeking to raise capital and boost growth. The involvement of Foreign Institutional Investors (FIIs) in these IPOs holds substantial importance, bringing a global perspective and a myriad of benefits for the issuing company. Let’s understand why FII investment is a cornerstone for IPO success.

1. Market validation and Confidence Boost:

Reliance Industries’ Jio Platform’s IPO saw substantial FII participation, bringing in liquidity that sustained the stock’s demand. This ensured a successful IPO, and also contributed to Jio Platforms’ subsequent fundraising rounds.

One of the primary advantages of having FIIs participate in an IPO is the significant capital they bring to the table. This infusion of foreign funds can be a game-changer for companies, providing the financial muscle needed for expansion, research and development, and other strategic initiatives.

2. Global Credibility and Investor Confidence:

When Alibaba, the Chinese e-commerce giant, went public in the US in 2014, it attracted significant FII interest. This not only validated Alibaba’s global appeal but also instilled confidence among US investors, making it one of the largest IPOs.

The participation of FIIs lends global credibility to a company’s IPO. It acts as an endorsement of the company’s growth potential and financial health, instilling confidence in other institutional investors and retail investors who might be inclined to participate when reputable foreign entities get involved.

3. Transparency brings Diversification:

With FII investment becoming a norm, the levels of transparency and corporate governance standards have vastly undergone a change for the better in the corporate sector. This in addition to SEBI’s disclosure regulations, have seen companies becoming more transparent. This has resulted in huge benefits to the shareholders and ensuring a diverse shareholder base. Diversity in the shareholder base is crucial for the stability of a company’s stock. FIIs contribute significantly to this diversification, reducing the risk associated with a concentrated shareholder base. This helps in stable stock performance, even in the face of market fluctuations.

4. Broader Visibility and Market Recognition:

Sun Pharma’s IPO witnessed strong FII backing, showcasing global confidence in India’s pharmaceutical capabilities. FII interest played a crucial role in establishing Sun Pharma as a key player in the global pharmaceutical landscape.

The participation of FIIs brings global visibility to the IPO. This international attention can attract a broader spectrum of investors, fostering a more dynamic and robust market for the company’s shares. Moreover, global recognition can enhance the company’s reputation on the international stage.

5. Knowledge Transfer and Expertise:

Beyond the capital injection, FIIs often bring valuable knowledge, experience, and expertise. Their participation signifies a thorough due diligence process, and their insights can prove invaluable for the company’s management in refining strategies and governance practices.

6. Enhanced Liquidity and Trading Activity:

Post-IPO liquidity is crucial for the stock’s performance in the secondary market. FIIs contribute to higher liquidity and increased trading activity, making the stock more attractive to a wider array of investors. This liquidity is essential for maintaining an active and efficient secondary market.

Conclusion:

In conclusion, the involvement of FIIs in company IPOs is a multifaceted advantage that goes beyond the immediate capital injection. It brings credibility, diversity, global visibility, and expertise, all of which contribute to the long-term success of the company in the public market. As companies navigate the intricacies of going public, considering the role of FIIs can be a strategic move that pays dividends in terms of financial stability and market recognition.