When Foreign Institutional Investors (FIIs) are consistent net sellers in the Indian stock market, and Indian entities (such as DIIs, retail investors, or HNIs) absorb the supply in the secondary market, it primarily results in a change of ownership. However, this can have certain indirect economic and financial impacts on the company.
1. Direct Impact on Company’s Cash Flow: No Impact
Since these transactions occur in the secondary market, they do not involve the company directly receiving or paying cash.
The company’s cash flow remains unaffected unless it is conducting a buyback, FPO (Follow-on Public Offer), or fresh equity issuance in response to falling stock prices.
2. Indirect Impacts on the Company
Even though cash flow is not directly impacted, there are indirect effects:
a) Valuation Decline and Cost of Capital
If heavy FII selling leads to a sharp fall in stock price, it can increase the company's cost of equity capital.
If the company plans to raise funds via fresh equity issuance, it may need to offer shares at a lower price, leading to higher equity dilution.
A lower stock price can also impact employee ESOPs, affecting retention and compensation costs.
b) Dollar Outflows and Currency Impact
When FIIs sell, they repatriate funds in USD, increasing demand for dollars and causing INR depreciation.
If the company has foreign currency borrowings, a weaker INR can increase interest costs and repayment burden.
Conversely, export-driven companies may benefit from a weaker rupee due to better forex realization.
c) Perception and Credit Ratings
If FII selling is linked to concerns over governance, performance, or policy risks, it can trigger credit rating downgrades, increasing borrowing costs for the company.
A lower market capitalization can also reduce the company’s weight in key indices, affecting future institutional investment inflows.
Conclusion
While secondary market selling does not impact a company’s operational cash flow, it can affect the company’s valuation, cost of capital, and forex exposure, leading to potential long-term economic consequences. However, the actual impact depends on the company's balance sheet, leverage, and business model.
Anish J Parashar
Securities Analyst
Disclaimer Content is for educational purposes only For investment purposes consult your financial.