24748518-17676898-FII-and-FDI-in-India

8/6/2019 24748518-17676898-FII-and-FDI-in-India

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A REPORT

ON

Foreign direct investment (FDI) andforeign institutional

investors (FII) in India

Submitted By:

Nitin Kansal

Enrollment No: 07BS2683

Mobile no. 9861888252, 9238822258

E-mail Id- [email protected]

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mailto:[email protected]:[email protected]


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A REPORT

ON

Foreign direct investment (FDI) and foreign institutional

investors (FII) in India

Submitted By:

Nitin Kansal

Enrollment No: 07BS2683

Mobile no. 9861888252, 9238822258

E-mail Id- [email protected]

A report submitted in partial fulfillment of

the requirements of

MBA program

Distribution list: Dr. Jyotirmayee Kar.

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mailto:[email protected]:[email protected]


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ACKNOWLEDGEMENTSACKNOWLEDGEMENTS

Any accomplishment requires the effort of many people and this work is no

different. I take this opportunity to thank Dr. Jyotirmayee Kar (Faculty

Guide of ICFAI Business School) for providing me valuable product

training and guidance at various stages of my project.

I will also remain highly indebted to Dr. Pradeep Kumar Samanta (MRP

Co-coordinator) for giving me the opportunity to work for this MRP.

Lastly I am thankful to all my colleagues who have given time to help me

during completion of the report.

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Table of contents

Abstract.....06

1. Introduction

......07

1.1 Objective of

project.

08

1.2 Methodology...08

1.3

Limitation

09

2. Main text (FDI)

09

2.1 About foreign direct investment

.10

2.2 FDI Indian

scenario

.10

2.3 FDI in India approval

route11

2.4 Analysis of sector specific policy of

FDI12

2.5 Analysis of share of top ten investing countries in

India.16

2.6 Analysis of sectors attracting highest FDI equity in

flows18

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3. Main text (FII)

..19

3.1 Introduction to FII..

.19

3.2 Market design in India for FIIs..

.23

3.3 Registration process of FIIs.

..23

3.4 Prohibition on

investment.

25

3.5 Trends of FIIs in

India.2

5

3.6 Analysis of trends in FIIs

investment..26

3.7 Details of indices

taken.28

3.8 Framing of

hypothesis

..29

3.9 Recording of

observation.

..29

4. Key

findings.

.31

5. Conclusion ..

.32

6. Appendices 1..

.33

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7. Reference

...38

7.1 Internet

sites

...38

7.2Journal

..38

7.3 Books.

...

38

List of illustrations- list of tables.

Table no. Table name Page no.

1. Sector-specific policy for FDI. 12

2. Share of top investing countries FDI equity inflows. 16

3. Sectors attracting highest FDI equity inflows. 18

4. SEBI Registered FIIs in India. 25

5. Trends in FII Investment. 26

6. Indices period of study and observations. 28

7. Key finding for objective 2. 31

8. Data of monthly closing indices of various Nifty indexes. 33

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ABSTRACTThe report of the project Foreign direct investment (FDI) and foreign institutional investors

(FII) in India mainly focused on the following areas:

A) FOREIGN DIRECT INVESTMENT (FDI)

Net foreign direct investment (FDI) flows into India reached 70630 crore in Indias 200607 fiscal

year, means increase of 187% of the 24613 crore recorded during 200506, with the largest share of

FDI flows from Mauritius, followed by the United States and the United Kingdom. This studyexamines FDI in India, in the context of the Indian economic and regulatory environment. This study

present FDI trends in India, by country and by sectors during the post liberalization period that is

1991 to 2007 year, using official government data from Indian official government internet site like

that of RBI, SEBI. To illustrate the driving forces behind these trends, the study also discusses the

investment climate in India, Indian government incentives to foreign investors, the Indian regulatory

environment as it affects investment, and the effect of Indias global, regional, and bilateral trade

agreements on investment from top 10 FDI investing countries. Finally, the study examines global

FDI in Indias in top 10 sectors of industry.

B) FOREIGN INSTITUTIONAL INVESTORS (FII)

Institutional Investor is any investor or investment fund that is from or registered in a country outside

of the one in which it is currently investing. Institutional investors include hedge funds, insurance

companies, pension funds and mutual funds. The growing Indian market had attracted the foreign

investors, which are called Foreign Institutional Investors (FII) to Indian equity market, and this study

present try to explain the impact and extent of foreign institutional investors in Indian stock market

and examining whether market movement can be explained by these investors. It is often hear that

whenever there is a rise in market, it is explained that it is due to foreign investors' money and a

decline in market is termed as withdrawal of money from FIIs. This study tries to examine theinfluence of FII on movement of Indian stock exchange during the post liberalization period that is

1991 to 2007.

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1. INTRODUCTION

Foreign investment refers to investments made by the residents of a country in the financial assets and

production processes of another country. The effect of foreign investment, however, varies from

country to country. It can affect the factor productivity of the recipient country and can also affect the

balance of payments. Foreign investment provides a channel through which countries can gain access

to foreign capital. It can come in two forms: foreign direct investment (FDI) and foreign institutional

investment (FII). Foreign direct investment involves in direct production activities and is also of amedium- to long-term nature. But foreign institutional investment is a short-term investment, mostly

in the financial markets. FII, given its short-term nature, can have bidirectional causation with the

returns of other domestic financial markets such as money markets, stock markets, and foreign

exchange markets. Hence, understanding the determinants of FII is very important for any emerging

economy as FII exerts a larger impact on the domestic financial markets in the short run and a real

impact in the long run. India, being a capital scarce country, has taken many measures to attract

foreign investment since the beginning of reforms in 1991.

India is the second largest country in the world, with a population of over 1 billion people. As a

developing country, Indias economy is characterized by wage rates that are significantly lower thanthose in most developed countries. These two traits combine to make India a natural destination for

foreign direct investment (FDI) and foreign institutional investment (FII). Until recently, however,

India has attracted only a small share of global foreign direct investment (FDI) and foreign

institutional investment (FII), primarily due to government restrictions on foreign involvement in the

economy. But beginning in 1991 and accelerating rapidly since 2000, India has liberalized its

investment regulations and actively encouraged new foreign investment, a sharp reversal from

decades of discouraging economic integration with the global economy.

The world is increasingly becoming interdependent. Goods and services followed by the financial

transaction are moving across the borders. In fact, the world has become a borderless world. With the

globalization of the various markets, international financial flows have so far been in excess for the

goods and services among the trading countries of the world. Of the different types of financial

inflows, the foreign direct investment (FDI) and foreign institutional investment (FII)) has played an

important role in the process of development of many economies. Further many developing countries

consider foreign direct investment (FDI) and foreign institutional investment (FII) as an important

element in their development strategy among the various forms of foreign assistance.

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The Foreign direct investment (FDI) and foreign institutional investment (FII) flows are usually

preferred over the other form of external finance, because they are not debt creating, nonvolatile in

nature and their returns depend upon the projects financed by the investor. The Foreign direct

investment (FDI) and foreign institutional investment (FII) would also facilitate international trade

and transfer of knowledge, skills and technology.

The Foreign direct investment (FDI) and foreign institutional investment (FII) is the process by

which the resident of one country(the source country) acquire the ownership of assets for the purpose

of controlling the production, distribution and other productive activities of a firm in another

country(the host country).

According to the international monetary fund (IMF), foreign direct investment (FDI) and foreign

institutional investment (FII) is defined as an investment that is made to acquire a lasting interest in

an enterprise operating in an economy other than that of investor.

The government of India(GOI) has also recognized the key role of the foreign direct investment

(FDI) and foreign institutional investment (FII) in its process of economic development, not only asan addition to its own domestic capital but also as an important source of technology and other global

trade practices. In order to attract the required amount of foreign direct investment (FDI) and foreign

institutional investment (FII), it has bought about a number of changes in its economic policies and

has put in its practice a liberal and more transparent foreign direct investment (FDI) and foreign

institutional investment (FII) policy with a view to attract more foreign direct investment (FDI) and

foreign institutional investment (FII) inflows into its economy. These changes have heralded the

liberalization era of the foreign direct investment (FDI) and foreign institutional investment (FII)

policy regime into India and have brought about a structural breakthrough in the volume of foreign

direct investment (FDI) and foreign institutional investment (FII) inflows in the economy. In this

context, this report is going to analyze the trends and patterns of foreign direct investment (FDI) andforeign institutional investment (FII) flows into India during the post liberalization period that is 1991

to 2007 year.

1.1 Objective of the project:

Objective 1 pertaining to FDI: examines the trends and patterns in the foreign direct investment (FDI)across different sectors and from different countries in India during 1991-2007 period means during

post liberalization period.

Objective 2 pertaining to FII: influence of FII on movement of Indian stock exchange during the post

liberalization period that is 1991 to 2007.

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1.2 Methodology

The lifeblood of business and commerce in the modern world is information. The ability to gather,

analyze, evaluate, present and utilize information is therefore is a vital skill for the manager of today.

In order to accomplish this project successfully I will take following steps.

1) Sampling- The study is limited to a sample of top 10 investing countries e.g. Mauritius, USA

etc. and top 10 sectors e.g. electrical instruments, telecommunications etc. which had attracted

larger inflow of FDI and data of NSE stock exchange will be taken to know the impact of FII.

2) Data Collection:

The research will be done with the help Secondary data (from internet site andjournals).

The data is collected mainly from websites, annual reports, World Bank reports,

research reports, already conducted survey analysis, database available etc.

3) Analysis:

Appropriate Statistical tools like correlation and regression will be used to analyze the data

like to analyze the growth and patterns of the FDI and FII flows in India during the post

liberalization period, the liner trend model will be used. Further the percentage analysis will beused to measure the share of each investing countries and the share of each sectors in the

overall flow of FDI and FII into India.

1.3 Limitations of the study:

A) The study has limited itself to a sample of top ten investing countries and top ten level sectors

which have attracted higher inflow of FDI.

B) The data for analysis of impact of FII on stock exchange is limited to National stock exchange

(NSE) only.

1. MAIN TEXT (FDI)

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In this section I am going to discuss or describe the main business of the report i.e. analysis of

secondary data. It includes data in an organized form, discussion on its significance and analyzing the

results. For this I had divided this section in further two subsections i.e. the first subsection fulfill the

requirement of first objective which is pertaining to FDI. The objective for FDI is to examine the

trends and patterns in the foreign direct investment (FDI) across different sectors and from different

countries in India during 1991-2007 period means during post liberalization period. And the second

subsection fulfills the analysis of second objective which is pertaining to FII. The objective for FII is

to examine the influence of FII on movement of Indian stock exchange during the post liberalization

period that is 1991 to 2007.

Subsection I: objective 1: Examine the trends and patterns in the foreign direct

investment (FDI) across different sectors and from different countries in India

during 1991-2007 period means during post liberalization period.

2.1 About foreign direct investment.

Is the process whereby residents of one country (the source country) acquire ownership of assets for

the purpose of controlling the production, distribution, and other activities of a firm in another country

(the host country). The international monetary funds balance of payment manual defines FDI as an

investment that is made to acquire a lasting interest in an enterprise operating in an economy other

than that of the investor. The investors purpose being to have an effective voice in the management

of the enterprise. The united nations 1999 world investment report defines FDI as an investment

involving a long term relationship and reflecting a lasting interest and control of a resident entity in

one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy

other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise or foreign affiliate).

2.2 Foreign direct investment: Indian scenario

Foreign Direct Investment (FDI) is permitted as under the following forms of investments

Through financial collaborations.

Through joint ventures and technical collaborations.

Through capital markets via Euro issues.

Through private placements or preferential allotments.Forbidden Territories

FDI is not permitted in the following industrial sectors:

Arms and ammunition.

Atomic Energy.

Railway Transport.

Coal and lignite.

Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

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Retail Trading (except single brand product retailing).

Lottery Business

Gambling and Betting

Business of chit fund

Nidhi Company

Trading in Transferable Development Rights (TDRs).

Activity/sector not opened to private sector investment.

ForeignInvestment through GDRs (Euro Issues)

Indian companies are allowed to raise equity capital in the international market through the issue ofGlobal Depository Receipt (GDRs). GDR investments are treated as FDI and are designated in dollarsand are not subject to any ceilings on investment. An applicant company seeking Government'sapproval in this regard should have consistent track record for good performance (financial orotherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure

projects such as power generation, telecommunication, petroleum exploration and refining, ports,

airports and roads.1. Clearance from FIPB

There is no restriction on the number of Euro-issue to be floated by a company or a group of

companies in the financial year. A company engaged in the manufacture of items covered under

Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is

likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to

obtain prior FIPB clearance before seeking final approval from Ministry of Finance.

2. Use of GDRs

The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure

including domestic purchase/installation of plant, equipment and building and investment in softwaredevelopment, prepayment or scheduled repayment of earlier external borrowings, and equity

investment in JV/WOSs in India.

3. Restrictions

However, investment in stock markets and real estate will not be permitted. Companies may retain the

proceeds abroad or may remit funds into India in anticipation of the use of funds for approved end

uses. Any investment from a foreign firm into India requires the prior approval of the Government of

India.

2.3 Foreign direct investments in India are approved through two routes

1. Automatic approval by RBI

The Reserve Bank of India accords automatic approval within a period of two weeks (subject to

compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and

100% is allowed depending on the category of industries and the sectoral caps applicable. The lists are

comprehensive and cover most industries of interest to foreign companies. Investments in high-

priority industries or for trading companies primarily engaged in exporting are given almost automatic

approval by the RBI.

2. The FIPB Route Processing of non-automatic approval cases

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FIPB stands for Foreign Investment Promotion Board which approves all other cases where the

parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is

liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign

investors to have a local partner, even when the foreign investor wishes to hold less than the entire

equity of the company. The portion of the equity not proposed to be held by the foreign investor can

be offered to the public.

2.4 Analysis of sector specific policy for FDI

Table no. 1: Sector-specific policy for FDI: (source of following table is

http://dipp.nic.in/fdi_statistics/india_fdi_index.htm )

Sector-specific policy for FDI:

Sr.No.

Sector/Activity FDI Cap /Equity Entry/Route

A) AGRICULTURE

1. Floriculture, Horticulture, Developmentof Seeds, Animal Husbandry,Pisciculture, Aqua-culture andCultivation of Vegetables & Mushroomsunder controlled conditions and servicesrelated to agro and allied sectors.

100% Automatic

2. Tea Sector, including tea plantation 100% FIPB

B) INDUSTRYB) 1 MINING3. Mining covering exploration and mining

of diamonds & precious stones; gold,silver and minerals.

100% Automatic

4. Coal & Lignite mining for captiveconsumption by power projects, andiron & steel, cement production andother eligible activities permitted underthe Coal Mines (Nationalization)

100% Automatic

5. Mining and mineral separation oftitanium bearing minerals and ores, itsvalue addition and integratedactivities

100% FIPB

B) 2. MANUFACTURING6. Alcohol- Distillation & Brewing 100% Automatic

7. Cigars & Cigarettes- Manufacture 100% FIPB

8. Coffee& Rubber processing & 100% Automatic

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warehousing

9. Defense production 26% FIPB

10. Hazardous chemicals, viz.,hydrocyanic acid and its derivatives;

phosgene and its

derivatives; and isocyanates and

diisocyantes of hydrocarbon.

100% Automatic

11. Industrial explosives - Manufacture 100% Automatic

12. Drugs & Pharmaceuticals includingthose involving use of recombinantDNA technology

100% Automatic

B) 3. POWER

13. Power including generation(Except Atomic energy); transmission,

distribution and Power Trading.

100% Automatic

C) SERVICES

14. CIVIL AVIATION SECTOR

i. Airports-

a. Greenfield projects 100% Automatic

b. Existing projects 100% FIPB

Beyond 74%ii. Air Transport Services including Domestic Scheduled Passenger Airlines; Non-

Schedules Airlines; Chartered Airlines; Cargo Airlines; Helicopter and SeaplaneServices

c. Scheduled Air Transport Services/Domestic Scheduled Passenger Airline

49%- FDI; 100%- for NRI investment

Automatic

d. Non-Scheduled Air Transport Service/Non-Scheduled airlines, Charteredairlines, and Cargo airlines

74%- FDI 100%- forNRIs investment

Automatic

e. Helicopter Services/Seaplane servicesrequiring DGCA approval 100% Automatic

iii. Other services under Civil Aviation Sector

f. Ground Handling Services 74%- FDI, 100%- forNRIs investment

Automatic

g. Maintenance and Repairorganizations; flying traininginstitutes; and technical traininginstitutions

100% Automatic

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24. Investing companies ininfrastructure / services sector (excepttelecom sector)

100% FIPB

25. Non Banking Finance Companies

i) Merchant Bankingii)Underwriting Portfolio ManagementServicesiii)Investment Advisory Servicesiv) Financial Consultancyv) Stock Brokingvi) Asset Managementvii) Venture Capitalviii) Custodial Servicesix) Factoringx) Credit Rating Agenciesxi) Leasing & Financexii) Financexiii) Housing Finance

xiv) Forex Brokingxv) Credit card Businessxvi) Money changing businessxvii) Micro credit

xviii) Rural credit

100% Automatic

26. Petroleum & Natural Gas sector

a. Refining 49% in case of PSUs100% in case of Private

companies

Automatic (in case ofprivate companies)

FIPB (in case ofPSUs

b. Other than Refining and includingmarketstudy and formulation; investment/financing; setting up infrastructurefor marketing in Petroleum & NaturalGas

sector.

100% Automatic

27. Print Media

a. Publishing ofnewspaper andperiodicals dealing with news andcurrent affairs

26% FIPB

b. Publishing of scientific magazines/specialty journals/ periodicals

100% FIPB

28. Telecommunications

a. Basic and cellular, Unified AccessServices, National/ International LongDistance, V-Sat, Public Mobile Radio

Trunked Services (PMRTS), GlobalMobile Personal CommunicationsServices (GMPCS) and other value

74% (Including FDI,FII, NRI, FCCBs,ADRs, GDRs,convertible preference

shares, and proportio-

nate foreign equity in

Automatic up to 49%.

FIPB beyond 49%.

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added telecom services Indian promoters/

Investing Company)

b. ISP with gateways, radio- paging, end-to-

end bandwidth.

74% Automatic up to 49%.FIPB beyond 49%.

c. a) ISP without gateway,(b) infrastructure provider providing

darkfibre, right of way,duct space,tower(Category I);

(c) electronic mail and voice mail

100% Automatic up to 49%.FIPB beyond 49%.

d. Manufacture of telecom equipments 100% Automatic

29. Trading

i) Wholesale/cash & carry tradingii) Trading for exports

iii) Trading of items sourced from smallscale sector

iv) Test marketing of such items forwhich a company has approval formanufacturev)Single Brand product retailing

100% Automatic

30. Satellites - Establishment andoperation

74% FIPB

31. Special Economic Zones and FreeTrade Warehousing Zones covering

setting up of these Zones and setting upunits in the Zones

100% Automatic

2.5 Analysis of share of top ten investing countries FDI equity in flows

Table no. 2: Share of top investing countries FDI equity inflows. (Source:http://dipp.nic.in/fdi_statistics/india_fdi_index.htm )

Cumulative amount of FDI inflows (From Aug. 1991 to march 2007): Rs. 2,32,041 crore andUS$ 54,628 million.

Ranks Country Cumulative inflows(from Aug. 1991 to march2007)Amount Rupees in crore.

%age with totalinflows (in terms ofrupees)

1. Mauritius 79162 34.11

2. U.S.A. 24536 10.57

3. U.K 16660 7.174. Netherlands 11402 4.915. Japan 9313 4.016. Germany 7060 3.04

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7. Singapore 7050 3.038. France 3803 1.639. South Korea 3234 1.3910. Switzerland 2879 1.24

TOTAL FDI INFLOWS232041

Foreign investors have begun to take a more active role in the Indian economy in recent years. By

country, the largest direct investor in India is Mauritius; largely because of the India-Mauritius

double-taxation treaty. Firms based in Mauritius invested 79162 crores in India between Aug. 1991

and March 2007, equal to 34.11 percent of total FDI inflows. The second largest investor in India is

the United States, with total capital flows of 24536 crore during the 19912007 periods, followed by

the United Kingdom, the Netherlands, and Japan.

Mauritius

According to Indian government statistics, Mauritius accounts for the largest share of cumulative FDI

inflows to India from 1991 to 2007, nearly 34.11 percent. Many companies based outside of Indiautilize Mauritian holding companies to take advantage of the India- Mauritius Double Taxation

Avoidance Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains taxes,

and may allow some India-based firms to avoid paying certain taxes through a process known as

round tripping.

The extent of round tripping by Indian companies through Mauritius is unknown. However, the Indian

government is concerned enough about this problem to have asked the government of Mauritius to set

up a joint monitoring mechanism to study these investment flows. The potential loss of tax revenue is

of particular concern to the Indian government. The existence of the treaty makes it difficult to clearly

understand the pattern of FDI flows, and likely leads to reduced tax revenues collected by the Indian

government.

United States

The United States is the second largest source of FDI in India (10.57 % of the total), valued at 24536

crore in cumulative inflows between August 1991 and March 2007. According to the Indian

government, the top sectors attracting FDI from the United States to India during 19912007 (latest

available) are fuel (36 percent), telecommunications (11 percent), electrical equipment (10 percent),

food processing (9 percent), and services (8 percent). According to the available M&A data, the two

top sectors attracting FDI inflows from the United States are computer systems design and

programming and manufacturing.

Since 2002, many of the major U.S. software and computer brands, such as Microsoft, Honeywell,

Cisco Systems, Adobe Systems, McAfee, and Intel have established R&D operations in India,

primarily in Hyderabad or Bangalore. The majority of U.S. electronics companies that have

announced greenfield projects in India are concentrated in the semiconductor sector. By far the largest

such project is AMDs chip manufacturing facility in Hyderabad, Andhra Pradesh. The largest share

(36 percent) was found in the manufacturing sector, most prominently in the machinery, chemicals,

and transportation equipment manufacturing segments. Other important categories of employment are

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professional, scientific, and technical services; and wholesale trade, with 29 percent and 18 percent of

U.S. affiliate employment, respectively.

European Union

Within the European Union, the largest country investors were the United Kingdom and the

Netherlands, with 16660 crore and 11402 crore, respectively, of cumulative FDI inflows between

Aug. 1991 and March 2007. The United Kingdom, the Netherlands, and Germany together accounted

for almost 75 percent of all FDI flows from the EU to India. All EU countries together accounted for

approximately 25 percent of all FDI inflows to India between August 1991 and March 2007. FDI

from the EU to India is primarily concentrated in the power/energy, telecommunications, and

transportation sectors. The top sectors attracting FDI from the European Union are similar to FDI

from the United States. Manufacturing; information services; and professional, scientific, and

technical services have attracted the largest shares of FDI inflows from the EU to India since 2000.

Unilever, Reuters Group, P&O Ports Ltd, Vodafone, and Barclays are examples of EU companies

investing in India by means of mergers and acquisitions. European companies accounted for 31

percent of the total number and 43 percent of the total value for all reported Greenfield FDI projects.The number of EU Greenfield projects was distributed among four major clusters: ICT (17 percent),

heavy industry (16 percent), business and financial services (15 percent), and transport (11 percent).

However, the heavy industry cluster accounted for the majority (68 percent) of the total value of these

projects.

Japan

Japan was the Fifth largest source of cumulative FDI inflows in India between August 1991 and

March 2007, i.e. the cumulative flow is 9313 crore and it is 4.01% of total inflow. FDI inflows to

India from most other principal source countries have steadily increased since 2000, but inflows fromJapan to India have decreased during this time period. There does not appear to be a single factor that

explains the recent decline in FDI inflows from Japan to India. India is, however, one of the largest

recipients of Japanese Official Development Assistance (ODA), through which Japan has assisted

India in building infrastructure, including electricity generation, transportation, and water supply. It is

possible that this Japanese government assistance may crowd out some private sector Japanese

investment. The top sectors attracting FDI inflows from Japan to India are transportation (54 percent),

electrical equipment (7 percent), telecommunications, and services (3 percent). The available M&A

data corresponds with the overall FDI trends in sectors attracting inflows from Japan to India.

Companies dealing in the transportation industry, specifically automobiles, and the auto

component/peripheral industries dominate M&A activity from Japan to India, including YamahaMotors, Toyota, Kirloskar Auto Parts Ltd., and Mitsubishi Heavy Industries Ltd. Japanese companies

have also invested in an estimated 148 Greenfield FDI projects valued at least at $3.7 billion between

2002 and 2006. In April 2007, Japanese and Indian officials announced a major new collaboration

between the two countries to build a new Delhi-Mumbai industrial corridor, to be funded through a

public-private partnership and private-sector FDI, primarily from Japanese companies. The project

was begun in January 2008 with initial investment of $2 billion from the two countries. The corridor

will cross 6 states and extend for 1,483 km, in an area inhabited by 180 million people. At completion

in 2015, the corridor is expected to include total FDI of $4550 billion. A large share of that total is

destined for infrastructure, including a 4,000 MW power plant, 3 ports, and 6 airports, along with

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additional connections to existing ports. Private investment is expected to fund 10-12 new industrial

zones, upgrade 56 existing airports, and set up 10 logistics parks. The Indian government expects

that by 2020, the industrial corridor will contribute to employment growth of 15 percent in the region,

28 percent growth in industrial output, and 38 percent growth in exports.

2.6 Analysis of sectors attracting highest FDI equity inflows

Table no. 3: Sectors attracting highest FDI equity inflows :( source:http://dipp.nic.in/fdi_statistics/india_fdi_index.htm )

Ranks Sector

Cumulative Inflows(from August 1991to March 2007)Amount in rupees incrore

%age with totalinflows

1.

Electrical Equipments

(including computer software & electronics) 36,034 18.77

2.Services Sector(financial & non-financial) 34,238 17.84

3.Telecommunications(radio paging, cellular mobile, basic telephone services) 16,691 8.7

4 Transportation Industry 15,427 8.04

5.Fuels(power + oil refinery) 12,105 6.31

6.Chemicals(other than fertilizers) 9,510 4.95

7.Construction activities(including roads & highways) 6,396 3.33

8. Drugs & Pharmaceuticals 5,281 2.75

9. Food Processing Industries 5,143 2.68

10. Cement and Gypsum Products 4,329 2.26

TOTAL FDI INFLOWS 2,32,041

The sectors receiving the largest shares of total FDI inflows between August 1991 and March 2007

were the electrical equipment sector and the services sector, each accounting for 18.77 and 17.84

percent respectively. These were followed by the telecommunications, transportation, fuels, and

chemicals sectors. The top sectors attracting FDI into India via M&A activity were manufacturing;

information; and professional, scientific, and technical services. These sectors correspond closely withthe sectors identified by the Indian government as attracting the largest shares of FDI inflows overall.

ICT and electronics have been the largest industry recipients of Greenfield FDI into India in recent

years, but have seen the number of new Greenfield projects plateau since 2004. Rather, the size of the

projects in these industries has increased substantially. For example, global semiconductor

manufacturers Advanced Micro Devices (AMD - United States) and Flextronics (Singapore) have

entered into separate joint ventures with SemIndia to build semiconductor manufacturing facilities in

Hyderabad. The $3 billion AMD-SemIndia joint venture will produce semiconductor chips which can

then be used to manufacture electronic products in the Flextronics-SemIndia $3 billion joint venture.

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The chip fabrication facility will manufacture chips for cell phones, set-top boxes, personal

computers, and similar products.

The heavy industry and transport equipment sectors together attracted over FDI of 15427 crore in

Greenfield FDI projects during 1991 to 2007. The cluster with the highest reported value during

200206 is heavy industry. Projects in this sector tend to be highly capital intensive, with single

projects frequently requiring upwards of $6 billion in startup investment costs. The largest recent

examples include the POSCO and Arcelor-Mittal Steel projects, and Vedanta Resources (United

Kingdom) aluminum smelter project, all planned for the state of Orissa.

3. MAIN TEXT (FIIS)

Subsection II: objective 2: Pertaining to FII: influence of FII on

movement of Indian stock exchange during the post liberalization period

that is 1991 to 2007.

3.1 Introduction to FII

Since 1990-91, the Government of India embarked on liberalization and economic reforms with a

view of bringing about rapid and substantial economic growth and move towards globalization of the

economy. As a part of the reforms process, the Government under its New Industrial Policy revamped

its foreign investment policy recognizing the growing importance of foreign direct investment as an

instrument of technology transfer, augmentation of foreign exchange reserves and globalization of the

Indian economy. Simultaneously, the Government, for the first time, permitted portfolio investments

from abroad by foreign institutional investors in the Indian capital market. The entry of FIIs seems to

be a follow up of the recommendation of the Narsimhan Committee Report on Financial System.

While recommending their entry, the Committee, however did not elaborate on the objectives of the

suggested policy. The committee only suggested that the capital market should be gradually opened

up to foreign portfolio investments.

From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all the securities

traded on the primary and secondary markets, including shares, debentures and warrants issued by

companies which were listed or were to be listed on the Stock Exchanges in India. While presenting

the Budget for 1992-93, the then Finance Minister Dr. Manmohan Singh had announced a proposal toallow reputed foreign investors, such as Pension Funds etc., to invest in Indian capital market. To

operationalise this policy announcement, it had become necessary to evolve guidelines for such

investments by Foreign Institutional Investors (FIIs).

The policy framework for permitting FII investment was provided under the Government of

India guidelines vide Press Note date September 14, 1992. The guidelines formulated in this

regard were as follows:

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1) Foreign Institutional Investors (FIIs) including institutions such as Pension Funds, Mutual

Funds, Investment Trusts, Asset Management Companies, Nominee Companies and

Incorporated/Institutional Portfolio Managers or their power of attorney holders (providing

discretionary and non-discretionary portfolio management services) would be welcome to

make investments under these guidelines.

2) FIIs would be welcome to invest in all the securities traded on the Primary and Secondary

markets, including the equity and other securities/instruments of companies which are listed/to

be listed on the Stock Exchanges in India including the OTC Exchange of India. These would

include shares, debentures, warrants, and the schemes floated by domestic Mutual Funds.

Government would even like to add further categories of securities later from time to time.

3) FIIs would be required to obtain an initial registration with Securities and Exchange Board of

India (SEBI), the nodal regulatory agency for securities markets, before any investment is

made by them in the Securities of companies listed on the Stock Exchanges in India, in

accordance with these guidelines. Nominee companies, affiliates and subsidiary companies of

a FII would be treated as separate FIIs for registration, and may seek separate registration withSEBI.

4) Since there were foreign exchange controls in force, for various permissions under exchange

control, along with their application for initial registration, FIIs were also supposed to file with

SEBI another application addressed to RBI for seeking various permissions under FERA, in a

format that would be specified by RBI for the purpose. RBI's general permission would be

obtained by SEBI before granting initial registration and RBI's FERA permission together by

SEBI, under a single window approach.

5) For granting registration to the FII, SEBI should take into account the track record of the FII,its professional competence, financial soundness, experience and such other criteria that may

be considered by SEBI to be relevant. Besides, FII seeking initial registration with SEBI were

be required to hold a registration from the Securities Commission, or the regulatory

organization for the stock market in the country of domicile/incorporation of the FII.

6) SEBI's initial registration would be valid for five years. RBI's general permission under FERA

to the FII would also hold good for five years. Both would be renewable for similar five year

periods later on.

7) RBI's general permission under FERA would enable the registered FII to buy, sell and realizecapital gains on investments made through initial corpus remitted to India, subscribe/renounce

rights offerings of shares, invest on all recognized stock exchanges through a designated bank

branch, and to appoint a domestic Custodian for custody of investments held.

8) This General Permission from RBI would also enable the FII to:

a. Open foreign currency denominated accounts in a designated bank. (There could even be

more than one account in the same bank branch each designated in different foreign

currencies, if it is so required by FII for its operational purposes);

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b. Open a special non-resident rupee account to which could be credited all receipts from the

capital inflows, sale proceeds of shares, dividends and interests;

c. Transfer sums from the foreign currency accounts to the rupee account and vice versa, at the

market rate of exchange;

d. Make investments in the securities in India out of the balances in the rupee account;

e. Transfer repairable (after tax) proceeds from the rupee account to the foreign currency

account(s);

f. Repatriate the capital, capital gains, dividends, incomes received by way of interest, etc. and

any compensation received towards sale/renouncement of rights offerings of shares subject to

the designated branch of a bank/the custodian being authorized to deduct withholding tax on

capital gains and arranging to pay such tax and remitting the net proceeds at market rates of

exchange;

g. Register FII's holdings without any further clearance under FERA.

9) There would be no restriction on the volume of investment minimum or maximum-for the

purpose of entry of FIIs, in the primary/secondary market. Also, there would be no lock-in

period prescribed for the purposes of such investments made by FIIs. It was expected that thedifferential in the rates of taxation of the long term capital gains and short term capital gains

would automatically induce the FIIs to retain their investments as long term investments.

10) Portfolio investments in primary or secondary markets were subject to a ceiling of 30% of

issued share capital for the total holdings of all registered FIIs, in any one company. The

ceiling was made applicable to all holdings taking into account the conversions out of the fully

and partly convertible debentures issued by the company. The holding of a single FII in any

company would also be subject to a ceiling of 10% of total issued capital. For this purpose, the

holdings of an FII group would be counted as holdings of a single FII.

11) The maximum holdings of 24% for all non-resident portfolio investments, including those of

the registered FIIs, were to include NRI corporate and non-corporate investments, but did not

include the following:

a. Foreign investments under financial collaborations (direct foreign investments),

which are permitted up to 51% in all priority areas.

b. Investments by FIIs through the following alternative routes:

i. Offshore single/regional funds;

ii. Global Depository Receipts;

iii. Euro convertibles.

12) Disinvestment would be allowed only through stock exchange in India, including the OTC

Exchange. In exceptional cases, SEBI may permit sales other than through stock exchanges,

provided the sale price is not significantly different from the stock market quotations, where

available.

13) All secondary market operations would be only through the recognized intermediaries on the

Indian Stock Exchange, including OTC Exchange of India. A registered FII would be expected

not to engage in any short selling in securities and to take delivery of purchased and give

delivery of sold securities.

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14) A registered FII can appoint as Custodian an agency approved by SEBI to act as custodian of

Securities and for confirmation of transactions in Securities, settlement of purchase and sale,

and for information reporting. Such custodian should establish separate accounts for detailing

on a daily basis the investment capital utilization and securities held by each FII for which it is

acting as custodian. The custodian was supposing to report to the RBI and SEBI semi-annually

as part of its disclosure and reporting guidelines.

15) The RBI should make available to the designated bank branches a list of companies where no

investment will be allowed on the basis of the upper prescribed ceiling of 30% having been

reached under the portfolio investment scheme.

16)Reserve Bank of India may at any time request by an order a registered FII to submit

information regarding the records of utilization of the inward remittances of investment capital

and the statement of securities transactions. Reserve Bank of India and/or SEBI may also at

any time conduct a direct inspection of the records and accounting books of a registered FII.

17) FIIs investing under this scheme will benefit from a concessional tax regime of a flat rate tax

of 20% on dividend and interest income and a tax rate of 10% on long term (one year or more)

capital gains.

These guidelines were suitably incorporated under the SEBI (FIIs) Regulations, 1995. These

regulations continue to maintain the link with the government guidelines through an inserted clause

that the investment by FIIs should also be subject to Government guidelines. This linkage has allowed

the Government to indicate various investment limits including in specific sectors.

3.2 Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside India which

proposes to make investment in India in securities. A Working Group for Streamlining of the

Procedures relating to FIIs, constituted in April, 2003, inter alia, recommended streamlining of SEBI

registration procedure, and suggested that dual approval process of SEBI and RBI be changed to a

single approval process of SEBI. This recommendation was implemented in December 2003.

Currently, entities eligible to invest under the FII route are as follows:

i) As FII: Overseas pension funds, mutual funds, investment trust, asset management

company, nominee company, bank, institutional portfolio manager, university funds, endowments,

foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated

or established outside India proposing to make proprietary investments or with no single investor

holding more than 10 per cent of the shares or units of the fund).

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(ii) As Sub-accounts: The sub account is generally the underlying fund on whose behalf the

FII invests. The following entities are eligible to be registered as sub-accounts, viz. partnership firms,

private company, public company, pension fund, investment trust, and individuals.

FIIs registered with SEBI fall under the following categories:

a) Regular FIIs- those who are required to invest not less than 70 % of their investment in

equity-related instruments and 30 % in non-equity instruments.

b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset management

companies, nominee companies and incorporated/institutional portfolio managers or their power of

attorney holders (providing discretionary and non-discretionary portfolio management services) to be

registered as FIIs. While the guidelines did not have a specific provision regarding clients, in the

application form the details of clients on whose behalf investments were being made were sought.

While granting registration to the FII, permission was also granted for making investments in the

names of such clients. Asset management companies/portfolio managers are basically in the business

of managing funds and investing them on behalf of their funds/clients. Hence, the intention of theguidelines was to allow these categories of investors to invest funds in India on behalf of their

'clients'. These 'clients' later came to be known as sub-accounts. The broad strategy consisted of

having a wide variety of clients, including individuals, intermediated through institutional investors,

who would be registered as FIIs in India. FIIs are eligible to purchase shares and convertible

debentures issued by Indian companies under the Portfolio Investment Scheme.

3.3 Registration Process of FIIs

A FII is required to obtain a certificate by SEBI for dealing in securities. SEBI grants the certificate

SEBI by taking into account the following criteria:

i) The applicant's track record, professional competence, financial soundness, experience,

general reputation of fairness and integrity.

ii) Whether the applicant is regulated by an appropriate foreign regulatory authority.

iii) Whether the applicant has been granted permission under the provisions of the Foreign

Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for making

investments in India as a Foreign Institutional Investor.

iv) Whether the applicant is a) an institution established or incorporated outside India as a

pension fund, mutual fund, investment trust, insurance company or reinsurance

company. b) an International or Multilateral Organization or an agency thereof or a

Foreign Governmental Agency or a Foreign Central Bank. c) an asset management

company, investment manager or advisor, nominee company, bank or institutional

portfolio manager, established or incorporated outside India and proposing to make

investments in India on behalf of broad based funds and its proprietary funds in if any

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or d) university fund, endowments, foundations or charitable trusts or charitable

societies.

v) Whether the grant of certificate to the applicant is in the interest of the development of

the securities market.

vi) Whether the applicant is a fit and proper person.

The SEBIs initial registration is valid for a period of three years from the date of its grant of renewal.

Investment Conditions and Restrictions for FIIs:

A Foreign Institutional Investor may invest only in the following:-

(a) Securities in the primary and secondary markets including shares, debentures and warrants of

companies, unlisted, listed or to be listed on a recognized stock exchange in India.

(b) units of schemes floated by domestic mutual funds including Unit Trust of India, whether

listed or not listed on a recognised stock exchange.(c) Dated Government securities.

(d) Derivatives traded on a recognised stock exchange.

(e) Commercial paper.

(f) Security receipts.

The total investments in equity and equity related instruments (including fully convertible debentures,

convertible portion of partially convertible debentures and tradable warrants) made by a Foreign

Institutional Investor in India, whether on his own account or on account of his sub- accounts, should

not be less than seventy per cent of the aggregate of all the investments of the Foreign Institutional

Investor in India, made on his own account and on account of his sub-accounts. However, this is notapplicable to any investment of the foreign institutional investor either on its own account or on

behalf of its sub-accounts in debt securities which are unlisted or listed or to be listed on any stock

exchange if the prior approval of the SEBI has been obtained for such investments. Further, SEBI

while granting approval for the investments may impose conditions as are necessary with respect to

the maximum amount which can be invested in the debt securities by the foreign institutional investor

on its own account or through its sub-accounts. A foreign corporate or individual is not eligible to

invest through the hundred percent debt route.

Even investments made by FIIs in security receipts issued by securitization companies or asset

reconstruction companies under the Securitization and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002 are not eligible for the investment limits mentioned above.

No foreign institutional should invest in security receipts on behalf of its sub-account.

3.4 Prohibitions on Investments:

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FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also

not allowed to invest in any company which is engaged or proposes to engage in the following

activities:

1) Business of chit fund

2) Nidhi Company

3) Agricultural or plantation activities

4) Real estate business or construction of farm houses (real estate business does not include

development of townships, construction of residential/commercial premises, roads or

bridges.

5) Trading in Transferable Development Rights (TDRs).

3.5 Trends of Foreign Institutional Investments in India.

Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global

Depository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds.Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to

undertake portfolio investments in India. Thereafter, the Indian stock markets were opened up for

direct participation by FIIs. They were allowed to invest in all the securities traded on the primary and

the secondary market including the equity and other securities/instruments of companies listed/to be

listed on stock exchanges in India. It can be observed from the table below that India is one of the

preferred investment destinations for FIIs over the years. As of March 2007, there were 996 FIIs

registered with SEBI.

Table no. 4: SEBI RegisteredFIIs in India

Year End of March

1992-93 0

1993-94 3

1994-95 156

1995-96 353

1996-97 439

1997-98 496

1998-99 450

1999-00 506

2000-01 527

2001-02 490

2002-03 502

2003-04 540

2004-05 685

2005-06 882

2006-07 996

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3.6 Analysis of trends in FII investment

Table no. 5: Trends in FII Investment

Year

Gross Purchases

(a) (Rs.crore)

Gross Sales (b)

(Rs.crore)

Net Investment (a-b)

(Rs.crore) % increase

1992-93 17 4 13

1993-94 5593 466 5127 39338.46154

1994-95 7631 2835 4796 -6.456017164

1995-96 9694 2752 6942 44.745621351996-97 15554 6979 8575 23.52348027

1997-98 18695 12737 5958 -30.51895044

1998-99 16115 17699 -1584 -126.5861027

1999-00 56856 46734 10122 739.0151515

2000-01 74051 64116 9935 -1.847460976

2001-02 49920 41165 8755 -11.87720181

2002-03 47061 44373 2688 -69.29754426

2003-04 144858 99094 45764 1602.529762

2004-05 216953 171072 45881 0.25565947

2005-06 346978 305512 41466 -9.6227196442006-07 520508 489667 30841 -25.62340231

During the initial year 1992-93, the FII flows started in September, 1992 which amounted to Rs. 13

crore because at this moment government was framing policy guidelines for FIIs. However, within a

year, the FIIs rose 39338.46% of 1992-93 during 1993-94 because government had opened door for

investment in India. Thereafter, the FII inflows witnessed a dip of 6.45%. The year 1995-1996

witnessed a turnaround, gliding up the contribution of FII to a massive of Rs. 6942 crore. Investment

by FIIs during 1996-1997 rose a little i.e. 23.52% of the preceding year. This period was ripe enough

for FII Investments because at that time where international capital markets were in the phase ofoverheating; the Indian economy posted strong fundamentals, stable exchange rate expectations and

offered investment incentives and congenial climate for investment of these funds in India. During

1997-98, FII inflows posted a fall of 30.51%. This slack in investments by FIIs was primarily due to

the South-East Asian Crisis and the period of volatility experienced between November 1997 and

February 1998. The net investment flows by FIIs have always been positive from the year of their

entry. Only in the year 1998-99, an outflow to the tune of Rs. 17699 crore was witnessed for the first

time. This was primarily because of the economic sanctions imposed on India by the US, Japan and

other industrialized economies. These economic sanctions were the result of the testing of series of

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nuclear bombs by India in May 1998. Thereafter, the FII portfolios investments quickly recovered and

showed positive net investments for all the subsequent years.

FIIs investments declined from Rs. 10122 crore during 1999-2000 to Rs. 9935 crore during 2000-01.

FII investment posted a year-on-year decline of 1.8 % in 2000-01, 11.87 % in 2001-02 and 69.29 % in

2002-03. Investments by FII posted a fall of 80 % in 2002-03 as compared with investments in the

period of 1999-00. Investments by FIIs rebounded from depressed levels from the year 2003-04 and

witnessed an unprecedented surge. FIIs flows were recycled to India following readjustment of global

portfolios of institutional investors, triggered by robust growth in Indian economy and attractive

valuations in the Indian equity market as compared with other emerging market economies in Asia.

The slowdown in 2004-05 was on account of global uncertainties caused by hardening of crude oil

prices and the upturn in the interest rate cycle. The resumption in the net FII inflows to India from

August 2004 continued till end 2004-05. The inflows of FIIs during the year 2004-05 was Rs. 45881

crore. During 2006-07 the foreign institutional investors continued to invest large funds in Indian

securities market. However, due to global developments like meltdown in global commodities

markets and equity market during the three month period between May 2006 to July 2006, fall in

Asian Equity markets, tightening of capital controls in Thailand and its spillover effects, there was aslack in FII investments.

As I had discussed FIIs environment in India like what is FII in India, policy framework for

FIIs, market design in India for foreign institutional investors, registration process in India,

Trends of Foreign Institutional Investments in India. Now to fulfill the objective of this project

i.e. influence of FII on movement of Indian stock exchange (national stock exchange of India)

during the post liberalization period that is 1991 to 2007, the following research methodology is

designed.

This project, in a way, reveals the influence of FIIs investment on movement of Indian stockexchange (national stock exchange of India) during the post liberalization period that is 1991 to 2007.

I have applied a simple linear model to estimate the effect of FII on the stock index. The data analysis

tools used in the research is correlation and regression.

I have taken six indices to study the impact of FII on Indian bourses. One of these indices is Nifty

while other five are some specific index of NSE. These six indices give the close picture of Indian

stock exchanges. I have taken average monthly data of FIIs and monthly closing index of all the

indices.

There may be many other factors on which a stock index may depend i.e. Government policies,budgets, bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar

exchange rate etc. But for my study I have selected only one independent variable i.e. FII and

dependent variable is indices of nifty. This study uses the concept of correlation and regression to

study the relationship between FII and stock index. The FII started investing in Indian capital market

from September 1992 when the Indian economy was opened up in the same year. Their investments

include equity only. The sample data of FIIs investments consists of monthly average from April 1992

to March 2007 and indices value consist monthly closing value with period of study and various

observations which is given below in table.

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Table no. 6: indices period of study and observations.

Indices Period of study Observation

S&P CNX NIFTY 30/Apr/91- 30/Mar/07 180

BANK NIFTY 31/Jan/00- 30/Mar/07 87

CNX 100 31/Jan/03- 30/Mar/07 51

CNX IT 31/Jan/96- 30/Mar/07 135

CNX NIFTY JUNIOR 31/Oct/95- 30/Mar/07 138

S&P CNX 500 30/Jun/99- 30/Mar/07 94

3.7 Details of indices taken:

The CNX 100 tracks the behavior of combined portfolio of two indices viz. S&P CNX Nifty and

CNX Nifty Junior. It includes 100 of the 935 companies currently listed on the NSE. CNX 100 is

computed using market capitalisation weighted method, wherein the level of the index reflects thetotal market value of all the stocks in the index relative to a particular base period. The method also

takes into account constituent changes in the index and importantly corporate actions such as stock

splits, rights, etc without affecting the index value. The CNX 100 Index has a base date of Jan 1, 2003

and a base value of 1000.

The S&P CNX 500 is India's first broad-based benchmark of the Indian capital market for comparing

portfolio returns vis--vis market returns. The S&P CNX 500 represents about 92.66% of total market

capitalization and about 86.44% of the total turnover on the NSE. The S&P CNX 500 Equity Index is

desegregated into 72 Industry sectors, which are separately maintained by IISL. These industry

indices are derived out of the S&P CNX 500 and care is taken to see that the industry representationin the entire universe of securities is reflected in the S&P CNX 500. e.g., if in the entire universe of

securities, banking sector has a 5% weightage then the Banking sector (as determined by the Banking

stocks in S&P CNX 500) would have a 5% weightage in the S&P CNX 500. The Banking sector

index would be derived out of the Banking stocks in the S&P CNX 500. The changes to the weightage

of various sectors in the S&P CNX 500 would dynamically reflect the changes in the entire universe

of securities. The calendar year 1994 has been selected as the base year for S&PCNX 500. The base

value of the index is set at 1000.

The CNX BankIndex is an index comprised of the most liquid and large capitalized Indian Banking

stocks. It provides investors and market intermediaries with a benchmark that captures the capital

market performance of Indian Banks. The Index has 12 stocks from the banking sector, which trade

on the National Stock Exchange. The CNX Bank Index has a base date of Jan 1, 2000 and base value

of 1000.

The CNX IT Companies in this index are those that have more than 50% of their turnover from IT

related activities like software development, hardware manufacture, vending, support and

maintenance. The CNX IT Index constituents represent about 12.80% of the total market

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capitalization as on September 1, 2006. The CNX IT Index has a base date of Jan 1, 1996 and a base

value of 1000.

The Base Value of the index was revised from 1000 to 100 w.e.f. May 28, 2004.

The CNX Nifty Junior Index comprises of the next rung of liquid securities after those forming part

of S&P CNX Nifty. It may be useful to think of the S&P CNX Nifty and the CNX Nifty Junior as

making up the 100 most liquid stocks in India. CNX Nifty Junior represents about 8.98% of the total

market capitalization as on September 1, 2006. The average traded value for the last six months of all

Junior Nifty stocks is approximately 9.17% of the traded value of all stocks on the NSE. Impact cost

for CNX Nifty Junior for a portfolio size of RS.2.50 million is 0.15%. The CNX Nifty Junior was

introduced on January 1, 1997, with base date and base value being November 03, 1996 and 1000

respectively and a base capital of Rs.0.43 trillion.

The S&P CNX Nifty is a well-diversified 50 stock index accounting for 22 sectors of the economy. It

is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and

index funds. S&P CNX Nifty is based upon solid economic research and is well respected

internationally as a pioneering effort in better understanding how to make a stock market index. Theaverage total traded value for the last six months of all S&P CNX Nifty stocks is approximately 56.31

% of the traded value of all stocks on the NSE. S&P CNX Nifty stocks represent about 59.91 % of the

total market capitalization as on September 1, 2006. The base period selected for S&P CNX Nifty

index is the close of prices on November 3, 1995, which marks the completion of one year of

operations of NSE's Capital Market Segment. The base value of the index has been set at 1000 and a

base capital of RS.2.06 trillion.

3.8 Framing of hypothesis:

Null Hypothesis (Ho): The various NSE indices do not rise with the increase in FIIs investment meansFIIs have no influence on Indian stock exchange.

Alternate Hypothesis (H1): The various NSE indices rise with the increase in FIIs investment means

FIIs have influence on Indian stock exchange.

The data regarding indices of NSE was taken from the site of NSE (the data for monthly closing value

is given in appendice 1). I got the data on FIIs investment from HANDBOOK OF STATISTICS ON

THE INDIAN SECURITIES MARKET 2008.

3.9 Recording of observation:

I have taken the monthly closing index of all the indices. For FIIs I have recorded monthly average of

the net investments made by them in the Indian capital market.

Net Investments = gross purchases gross sales (fig. is in Rs crore)

Use of Model: A simple linear relationship has been shown between two variables using correlation

and regression as the data analysis tools. One variable is dependent and the other is independent. I

have taken FII as the independent variable while the stock index has been taken as dependent variable.

The impact of FII has been separately analyzed with each of the index. So, correlation and regression

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has been separately run between FII and six indices taking one index at a time with help of Microsoft

excel.

Inference: If the hypothesis holds good then we can infer that FIIs have significant impact on the

Indian capital market. This will help the investors to decide on their investments in stocks and shares.

If the hypothesis is rejected, or in other words if the null hypothesis is accepted, then FIIs will have no

significant impact on the Indian bourses.

Regression Analysis: This analysis tool performs linear regression analysis by using the "least

squares" method to fit a line through a set of observations. I can analyze how a single dependent

variable is affected by the values of one or more independent variables for example, how an

athlete's performance is affected by such factors as age, height, and weight.

Correlation: This analysis tool and its formulas measure the relationship between two data sets

that are scaled to be independent of the unit of measurement. The population correlation calculation

returns the covariance of two data sets divided by the product of their standard deviations. I can use

the Correlation tool to determine whether two ranges of data move together that is, whether largevalues of one set are associated with large values of the other (positive correlation), whether small

values of one set are associated with large values of the other (negative correlation), or whether values

in both sets are unrelated (correlation near zero).

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4. KEY FINDING:

For objective 1

a) Net FDI in India was valued at $4.7 billion in the 200506 Indian fiscal year, and more thantripled, to $15.7 billion, in the 200607 fiscal year. Almost one-half of all FDI is invested inthe Mumbai and New Delhi regions.

b) By country, the largest investors in India are Mauritius, the United States, and the UnitedKingdom. Investors based in many countries have taken advantage of the India-Mauritius

bilateral tax treaty to set up holding companies in Mauritius which subsequently invest inIndia, thus reducing their tax obligations.

c) By industry, the largest destinations for FDI are electrical equipment (including computersoftware and electronics), services, telecommunications, and transportation.

For objective 2

Table no. 7: correlation and regression matrix

Correlation with FII Multiple R R2 Standard Errorobservation

S&P CNX NIFTY 0.651 0.651 0.423 575.658 180

BANK NIFTY 0.634 0.634 0.402 1229.644 87

CNX 100 -0.159 0.159 0.025 898.820 51

CNX IT -0.191 0.191 0.036 12896.703 135CNX NIFTY JUNIOR 0.656 0.656 0.431 1319.629 138

S&P CNX 500 0.540 0.540 0.292 670.583 94

1. Impact of FII on S&P CNX Nifty: The effect of FII on Nifty is positive and the co-efficient of

correlation is high so the effect is also high. The standard error comes out to be 575.658 which are

high. This does not mean the relation is false but we can say that the error in linear relation is high.

2. Impact of FII on Bank Nifty: The effect of FII on Bank Nifty is positive. So, FII is directly

related to Bank Nifty. But the co-efficient of correlation is high so the effect is also high. The standard

error comes out to be 1229.644 which are very high. This means that the deviation from the mean

value is high. This does not mean the relation is false but we can say that the error in linear relation is

high. The value of multiple-R is also high. We can say that FII have significant impact on Bank Nifty

during the period of 31-January-2000- 30-March-07.

3. Impact of FII on CNX 100: CNX 100 is inversely related to FII for the period of 31-January-

03- 30-March-2007. But the extent of impact is low as co-efficient of correlation is -0.159.

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4. Impact of FII on CNX IT: FII has inversely little significant relation with CNX IT, as the value of

correlation is -0.191. This does not mean that there is no relation at all between them. It shows the

absence of linear relation between the two variables but not a lack of relationship altogether.

5. Impact of FII on CNX NIFTY JUNIOR: CNX NIFTY JUNIOR directly related to FII for the

period of 31-Oct-1995- 30-March-2007. But the value of R is high so the degree of relation is also

high low. Standard error in this case is 1319.6 which is high compared to other standard errors

between FII and other stock indices.

6. Impact of FII on S&P CNX 500: S&P CNX 500 is also highly correlated with FII. In this case

again the degree of relation is high.

5. CONCLUSION:

For objective 1:

The process of economic reforms which was initiated in July 1991 to liberalize and globalize the

economy had gradually opened up many sectors of its economy for the foreign investors. A large

number of changes that were introduced in the countrys regulatory economic policies heralded the

liberalization era of the FDI policy regime in India and brought about a structural breakthrough in the

volume of the FDI inflows into the economy maintained a fluctuating and unsteady trend during the

study period. It might be of interest to note that more than 50% of the total FDI inflows received by

India during the period from 1991-2007 came from Mauritius and the USA. The main reason for

higher levels of investment from Mauritius was that the fact that India entered into a double taxation

avoidance agreement (DTAA) with Mauritius were protected from taxation in India. Among thedifferent sectors, the electrical and equipment had received the larger proportion followed by service

sector and telecommunication sector.

For objective 2:

According to findings and results, I concluded that FII did have high significant impact on the Indian

capital market. Therefore, the alternate hypothesis is accepted. S&P CNX NIFTY, BANK NIFTY,

CNX NIFTY JUNIOR, S&P CNX 500 showed positive correlation but CNX 100, CNX IT showed

negative correlation with FII. Also the degree of relation was high in all the case. It shows high degree

of linear relation between FII and stock index. This shows that there is relationship between them.

One of the reasons for high degree of any linear relation can also be due to the sample data. The data

was taken on monthly basis. The data on daily basis can give more positive results (may be). Also FII

is not the only factor affecting the stock indices. There are other major factors that influence the

bourses in the stock market. I also analyzed that FII had significant impact on the stock index for the

period starting from January 1991 to March 2007. The sample data available for other indices like

BANK NIFTY, CNX 100, S&P CNX 500 was low with just 51, 87 and 94 respectively observations

that have also hampered the results.

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6 APPENDICES 1

Table no. 8: DATA OF MONTHLY CLOSING INDICES OF VARIOUS NIFTY INDEX.

S&P CNXNIFTYMAIN

BANKNIFTY

CNX 100 CNX IT CNX NIFTYJUNIOR

S&P CNX500

Date Monthlyclosing

Monthlyclosing

Monthlyclosing

Monthlyclosing

Monthlyclosing

Monthlyclosing

30-Apr-91 389.01 _ _ _ _ _

31-May-91 403.18 _ _ _ _ _

28-Jun-91 391.96 _ _ _ _ _

31-Jul-91 498.71 _ _ _ _ _

30-Aug-91 531.97 _ _ _ _ _

30-Sep-91 553.79 _ _ _ _ _

31-Oct-91 554.4 _ _ _ _ _

29-Nov-91 563.17 _ _ _ _ _

24-Dec-91 558.63 _ _ _ _ _

31-Jan-92 684.93 _ _ _ _ _

29-Feb-92 889.3 _ _ _ _ _

31-Mar-92 1261.65 _ _ _ _ _ 30-Apr-92 1105.55 _ _ _ _ _

29-May-92 826.16 _ _ _ _ _

26-Jun-92 855.84 _ _ _ _ _

31-Jul-92 767.94 _ _ _ _ _

28-Aug-92 850.86 _ _ _ _ _

30-Sep-92 938.14 _ _ _ _ _

30-Oct-92 809.87 _ _ _ _ _

30-Nov-92 726.38 _ _ _ _ _

24-Dec-92 761.31 _ _ _ _ _

29-Jan-93 785.28 _ _ _ _ _ 27-Feb-93 774.18 _ _ _ _ _

31-Mar-93 660.51 _ _ _ _ _

30-Apr-93 622.42 _ _ _ _ _

31-May-93 656.16 _ _ _ _ _

30-Jun-93 667.5 _ _ _ _ _

30-Jul-93 706.83 _ _ _ _ _

30-Aug-93 799.65 _ _ _ _ _

30-Sep-93 827.13 _ _ _ _ _

29-Oct-93 817.18 _ _ _ _ _

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26-Nov-93 988.88 _ _ _ _ _

24-Dec-93 1042.59 _ _ _ _ _

31-Jan-94 1246.59 _ _ _ _ _

28-Feb-94 1349.49 _ _ _ _ _

31-Mar-94 1177.11 _ _ _ _ _

29-Apr-94 1150.66 _ _ _ _ _

31-May-94 1187.19 _ _ _ _ _

30-Jun-94 1249.44 _ _ _ _ _

29-Jul-94 1278.54 _ _ _ _ _

31-Aug-94 1373.29 _ _ _ _ _

30-Sep-94 1290.53 _ _ _ _ _

31-Oct-94 1267.21 _ _ _ _ _

30-Nov-94 1245.75 _ _ _ _ _

23-Dec-94 1182.28 _ _ _ _ _

31-Jan-95 1071.23 _ _ _ _ _

28-Feb-95 1014.72 _ _ _ _ _

31-Mar-95 990.24 _ _ _ _ _

28-Apr-95 941.83 _ _ _ _ _

31-May-95 997.4 _ _ _ _ _

30-Jun-95 961.23 _ _ _ _ _

31-Jul-95 994.25 _ _ _ _ _

31-Aug-95 971.74 _ _ _ _ _

29-Sep-95 1011.97 _ _ _ _ _

31-Oct-95 988.26 _ _ _ 1167.18 _

30-Nov-95 862.1 _ _ _ 991.7 _

29-Dec-95 908.53 _ _ _ 1057.86 _

31-Jan-96 848.42 _ _ 922.44 989 _

29-Feb-96 992.51 _ _ 1023.85 1152.08 _

29-Mar-96 985.3 _ _ 1012.78 1151.15 _

30-Apr-96 1114.36 _ _ 1144.16 1273.72 _

31-May-96 1089.92 _ _ 1068.8 1238.8 _

28-Jun-96 1122 _ _ 1122.31 1297.27 _

31-Jul-96 1042.81 _ _ 980.02 1198.72 _

30-Aug-96 1029 _ _ 973.15 1155.67 _

30-Sep-96 943.96 _ _ 878.9 1041.61 _

31-Oct-96 909.29 _ _ 849.73 1018.7 _

29-Nov-96 830.32 _ _ 811.14 960.45 _ 31-Dec-96 899.1 _ _ 835.01 1035.07 _

31-Jan-97 972.65 _ _ 922.71 1067.8 _

28-Feb-97 998.65 _ _ 1046.02 1053.11 _

31-Mar-97 968.3 _ _ 1049.07 1032.95 _

30-Apr-97 1079.85 _ _ 1324.93 1104.65 _

30-May-97 1050.9 _ _ 1330.07 1116.15 _

30-Jun-97 1192.4 _ _ 1574.84 1163.9 _

31-Jul-97 1221.5 _ _ 2017.48 1322 _

29-Aug-97 1105 _ _ 2171.41 1255.15 _

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30-Sep-97 1123.8 _ _ 2680.7 1261.55 _

30-Oct-97 1085.25 _ _ 2646.56 1246 _

28-Nov-97 1023.95 _ _ 2447.39 1159.2 _

31-Dec-97 1079.4 _ _ 2399.71 1189 _

30-Jan-98 963.45 _ _ 2324.85 1106.3 _

27-Feb-98 1060.75 _ _ 2755.26 1213.15 _

31-Mar-98 1116.9 _ _ 3422.16 1339.4 _

30-Apr-98 1159.35 _ _ 5383.9 1588.9 _

29-May-98 1063.15 _ _ 6919.05 1620.2 _

30-Jun-98 941.65 _ _ 5989.93 1342.2 _

31-Jul-98 931.4 _ _ 6513.97 1450.45 _

31-Aug-98 852.8 _ _ 6589.55 1483.65 _

30-Sep-98 904.95 _ _ 6581.99 1538.5 _

31-Oct-98 824 _ _ 6404.64 1419.75 _

30-Nov-98 817.75 _ _ 5894.12 1379.5 _

31-Dec-98 884.25 _ _ 7051.82 1519 _

29-Jan-99 966.2 _ _ 11244.07 1692.5 _

27-Feb-99 981.3 _ _ 12545.26 1773.45 _

31-Mar-99 1078.05 _ _ 14081.01 2069.2 _

30-Apr-99 978.2 _ _ 11357.5 1809 _

31-May-99 1132.3 _ _ 13318.37 1968.45 _

30-Jun-99 1187.7 _ _ 13575.23 1955.6 806.1

30-Jul-99 1310.15 _ _ 16489.64 2227.65 905.05

31-Aug-99 1412 _ _ 17911.89 2524.4 999.65

30-Sep-99 1413.1 _ _ 22528.22 2763.6 1025.1

29-Oct-99 1325.45 _ _ 20330.09 2588.55 972.6

30-Nov-99 1376.15 _ _ 25468.88 3057.45 1039.1

30-Dec-99 1480.45 _ _ 41742.03 3983.8 1205

31-Jan-00 1546.2 1148.89 _ 50705.62 4351.9 1316.25

29-Feb-00 1654.8 1075.15 _ 74537.88 4447.25 1486.65

31-Mar-00 1528.45 1106.83 _ 65240.55 3695.75 1322.9

28-Apr-00 1406.55 1056.2 _ 45085.8 2788.65 1067.6

31-May-00 1380.45 1001.24 _ 32394.06 2448.7 967.6

30-Jun-00 1471.45 1087.18 _ 42411.04 2672.45 1073.7

31-Jul-00 1332.85 993.58 _ 34587.23 2464.95 959.7

31-Aug-00 1394.1 1003.07 _ 42979.41 2548.25 1026.45

29-Sep-00 1271.65 907.53 _ 36285.95 2369.3 925.431-Oct-00 1172.75 861.27 _ 32309.49 2234.3 851.05

30-Nov-00 1268.15 941.08 _ 33382.18 2477.25 920.9

29-Dec-00 1263.55 971.73 _ 29383.46 2426.05 912.85

31-Jan-01 1371.7 1094.09 _ 33896.98 2407.7 981.2

28-Feb-01 1351.4 1171.65 _ 30116.65 2141.45 950.53

30-Mar-01 1148.2 991.51 _ 17468.25 1601.8 754.2

30-Apr-01 1125.25 992.76 _ 17267.4 1525.2 746.2

31-May-01 1167.9 1034.54 _ 18982.64 1627.15 791

29-Jun-01 1107.9 986.95 _ 16302.17 1415.4 725.85

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31-Jul-01 1072.85 960.83 _ 15972.81 1342.55 697.05

31-Aug-01 1053.75 939.57 _ 15724.37 1277.35 684.2

28-Sep-01 913.85 797.97 _ 10902.19 1084.4 583.55

31-Oct-01 971.9 875.15 _ 12139.67 1174.2 622.2

29-Nov-01 1067.15 928.1 _ 16778.78 1334.15 703.2

31-Dec-01 1059.05 868.61 _ 18282.17 1298.3 700.6

31-Jan-02 1075.4 917.79 _ 18362.8 1348.55 714.5

28-Feb-02 1142.05 1028.48 _ 17554.44 1495.55 767.6

28-Mar-02 1129.55 1033.58 _ 18557.8 1566.95 775.5

30-Apr-02 1084.5 1044.13 _ 17936.8 1607.75 771.3

31-May-02 1028.8 1039.46 _ 16828.27 1497.1 739.55

28-Jun-02 1057.8 1094.7 _ 16561.81 1617.4 772.85

31-Jul-02 958.9 1055.87 _ 13652.87 1455.85 706.65

30-Aug-02 1010.6 1073.63 _ 15543.52 1452.6 737.15

30-Sep-02 963.15 1045.23 _ 15273 1257.85 691

31-Oct-02 951.4 1011.86 _ 15702.7 1255.3 691.95

29-Nov-02 1050.15 1094.95 _ 18909.9 1337.1 741.55

31-Dec-02 1093.5 1226.5 _ 19073.4 1413.05 772.85

31-Jan-03 1041.85 1273.62 963.55 16624.71 1376.85 749.1

28-Feb-03 1063.4 1306.02 982.26 17109.16 1387.1 762

31-Mar-03 978.2 1265.19 902.42 14966.88 1259.55 701.35

30-Apr-03 934.05 1314.71 872.71 11351.13 1339.75 697.2

30-May-03 1006.8 1630.94 959.99 10993.4 1664.15 807.2

30-Jun-03 1134.15 1657.56 1073.41 13002.4 1783.7 894.5

31-Jul-03 1185.85 1807.94 1135.3 13675.94 2012.3 938.55

29-Aug-03 1356.55 1940.75 1296.31 15056.3 2275.25 1100.45

30-Sep-03 1417.1 2029.28 1361.52 17315.55 2456.95 1138.55

31-Oct-03 1555.9 2294.55 1491.08 18550.6 2656.15 1218.3

28-Nov-03 1615.25 2202.46 1551.99 20644.8 2801.2 1285.4

31-Dec-03 1879.75 2588.78 1819.59 23542.25 3405.7 1531.35

30-Jan-04 1809.75 2639.88 1760.02 21370.45 3367.65 1459.8

27-Feb-04 1800.3 2603.97 1749.02 20599.2 3330.6 1442.8

31-Mar-04 1771.9 2813.7 1731.29 19372.9 3392.05 1457.5

30-Apr-04 1796.1 3059.79 1770.36 20687 3639.8 1507.55

31-May-04 1483.6 2243.9 1450.66 2042.15 2846.9 1226.55

30-Jun-04 1505.6 2256.12 1473.22 2115.2 2903.35 1248

30-Jul-04 1632.3 2332.29 1592.43 2269.2 3082.1 1351.4531-Aug-04 1631.75 2345.16 1600.42 2340.15 3199 1377.2

30-Sep-04 1745.5 2505.7 1717.99 2496.2 3504.25 1478.75

29-Oct-04 1786.9 2466.96 1751.04 2667.15 3481.55 1502.05

30-Nov-04 1958.8 2997.66 1924.45 2996.5 3884.55 1653.2

31-Dec-04 2080.5 3497.36 2067.62 2936.9 4453.3 1804.9

31-Jan-05 2057.6 3429.6 2033.62 2849.4 4247.8 1768.25

28-Feb-05 2103.25 3676.5 2082.2 2919.05 4388.2 1827.4

31-Mar-05 2035.65 3536.64 2017.21 2923.15 4275.15 1772.85

29-Apr-05 1902.5 3162.21 1887.3 2539.75 4024.4 1688.65

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31-May-05 2087.55 3467.72 2067.26 2933 4364.55 1834.85

30-Jun-05 2220.6 3638.4 2181.42 3072.1 4393.25 1906.2

29-Jul-05 2312.3 4361.15 2295.81 2985.95 4919.1 2027.4

31-Aug-05 2384.65 4062.6 2366.23 3177.15 5053 2126.35

30-Sep-05 2601.4 4622.1 2566.58 3296.5 5303.5 2274

31-Oct-05 2370.95 4003.85 2330.81 3211.95 4714.45 2067.8

30-Nov-05 2652.25 4298.2 2647.93 3533.95 5242 2306.15

30-Dec-05 2836.55 4534.2 2781.55 3906.9 5541.45 2459.2

31-Jan-06 3001.1 4617.6 2944.15 4010.3 5882.9 2585.95

28-Feb-06 3074.7 4579.05 3011.8 3972.9 5966.65 2658.95

31-Mar-06 3402.55 4661.5 3318.45 4352.9 6412.1 2910.35

29-Apr-06 3557.6 4549.8 3481.3 4341.85 6856 3064.7

31-May-06 3071.05 4123.55 2998.25 3869.65 5827.4 2635.25

30-Jun-06 3128.2 3708.9 3003.15 3957.55 5264.3 2562.5

31-Jul-06 3143.2 4078.8 3020.85 4113.55 5335.1 2562.55

31-Aug-06 3413.9 4594.85 3291.7 4445.6 5940.5 2807.95

29-Sep-06 3588.4 5276.25 3479.75 4540.5 6510.4 2988.25

31-Oct-06 3744.1 5588.7 3633.1 4888.95 6823.15 3114.55

30-Nov-06 3954.5 6198.3 3818.55 5267.85 6967.25 3280.45

29-Dec-06 3966.4 6008.75 3839.3 5432.25 7106.35 3295.05

31-Jan-07 4082.7 5953.95 3948.25 5535 7268.05 3393.1

28-Feb-07 3745.3 5240.3 3626.2 5129.6 6722.1 3107.75

30-Mar-07 3821.55 5308.5 3701.55 5180.7 6878.05 3145.35

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7 REFERENCES

A number of websites, newspaper article annual reports of RBI, magazines etc.

7.1 Internet sites :a) www.rbi.org.in/home.aspx

b) www.google.com

c) www.fdimagazine.com

d) www.members.aol.com/RTMadaan1/sectors

e) http://dipp.nic.in/fdi_statistics/india_fdi_index.htm

f) www.nseindia.com

g) www.sebi.gov.in

7.2 Journals :

a) ICFAI Journal: E.g. the ICFAI journal of public finance, issue- February, vol. VI.b) Handbook of statistics on the Indian securities market 2008.

7.3 Books:

a) Foreign direct investment in India by Lata Chakravarthy.

b) FDI (issues in emerging economies) by K. Seethe Pathi.c) Foreign institutional investors by G Gopal Krishna Murthy.

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