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1. Introduction
The Foreign Institutional Investors (FIIs) have emerged as noteworthy players in
the Indian stock market and their growing contribution adds as an important
feature of the development of stock markets in India. To facilitate foreign capital
flows, developing countries have been advised to strengthen their stock markets.
As a result, the Indian tock !arkets have reached new heights and became more
volatile making the researches work in this dimension of establishing the link
between FIIs and tock !arket volatility. "ence, it#s an interesting topic to
ascertain the role of FIIs in Indian $apital !arkets.
%ntil the &'s, there was a general reluctance towards foreign investment or
private commercial flows as India#s development strategy was focused on self*
reliance and import substitution and current account deficits were financed largely
through debt flows and official development assistance. A ma+or development in
our country, post &''& has been liberaliation of the financial sector, especially that
of capital markets. After the launch of the reforms, foreign institutional investors
(FIIs) from eptember &-, &'', with suitable restrictions, were permitted to invest
in all 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 tock /0changes in India and in schemes floated by domestic mutual
funds. A positive contribution of the FIIs has been their role in improving the stock
market infrastructure and the /1I assured its contribution towards its
development.
FII is defined as an institution organied outside of India for the purpose of making
investments into the Indian securities market under the regulations prescribed by
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/1I.2FII# include 34verseas 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 investments on behalf of a broad*
based fund.
FIIs can invest their own funds as well as invest on behalf of their overseas clients
registered as such with /1I. These client accounts that the FII manages are
known as 2sub*accounts#. A domestic portfolio manager can also register itself as
an FII to manage the funds of sub*accountsforeign institutional investor means an
entity established or incorporated outside India which proposes to make investment
in India. 5ositive tidings about the Indian economy combined with a fast*growing
market have made India an attractive destination for foreign institutional investors.
In other words FII is defined as an institution organied outside of India for the
purpose of making investments into the Indian securities market under the
regulations prescribed by /1I.
1.1 Investment by FIIs
There are generally two methods to invest for Foreign Institutional Investors*
• Equity Investment
&6 investments could be in e7uity related instruments or up to 86 could be
invested in debt instruments i.e.9 (/7uity Instruments): 8 (;ebt Instruments)
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• 100% Debt
&6 investment has to be made in debt securities only
/?/T!/>T @4%T/: In case of /7uity route the FIIs can invest in
the following instruments:
A. ecurities in the primary and secondary market including shares which are
unlisted, listed or to be listed on a recognied stock e0change in India.
1. %nits of schemes floated by the %nit Trust of India and other domestic mutual
funds, whether listed or not.$. arrants
&6 ;/1T @4%T/: In case of ;ebt @oute the FIIs can invest in the following
instruments:
a. ;ebentures (>on $onvertible ;ebentures, 5artly $onvertible ;ebentures etc.)
b. 1onds
c. ;ated government securities
d. Treasury 1ills
e. 4ther ;ebt !arket Instruments
It should be noted that foreign companies and individuals are not be eligible to
invest through the& 6 debt route.
1.2 Scope & Trading ec!anism o" Foreign Institutiona# Investors In India.
The scope and the trading mechanism of Foreign Institutional investors in India is
discussed as follow:
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T!e e#igibi#ity criteria "or app#icant see$ing FII registration
As per @egulation B of /1I (FII) @egulations,&''C, Foreign Institutional
Investors are re7uired to fulfill the following conditions to 7ualify for grant of
registration:
• Applicant should have good track record, professional competence, financial
soundness, e0perience, good reputation of fairness and integrity.
• The applicant should be regulated by an appropriate foreign regulatory
authority in the same category where registration is sought from /1I.
@egistration with authorities, which are responsible for incorporation, is not
ade7uate to 7ualify as Foreign Institutional Investor.
• The applicant is re7uired to have the permission under the provisions of the
F/!A, &''' from the @eserve 1ank of India.
• Applicant must be legally permitted to invest in securities outside the
country or its in*corporation D establishment.
• The applicant must be a Efit and properE person not dis7ualified by any
law.• The applicant has to appoint a local custodian and enter into an agreement
with the custodian. Along with the above it also has to appoint a designated
bank to route its transactions.
• 5ayment of registration fee of % G C,.
EForm AE as prescribed in /1I (FII) @egulations, &''C is to be filled before
applying for FII registration.
Supporting documents required are
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• Application in Form A duly signed by the authoried signatory of the
applicant.
• $ertified copy of the relevant clauses or articles of the !emorandum and
Articles of Association or the agreement authoriing the applicant to investon behalf of its clients.
• Audited financial statements and annual reports for the last one year,
provided that the period covered shall not be less than twelve months.
• A declaration by the applicant with registration number and other particulars
in support of its registration or regulation by a ecurities $ommission or
elf*@egulatory 4rganiation or any other appropriate regulatory authority
with whom the applicant is registered in its home country.• A declaration by the applicant that it has entered into a custodian agreement
with a domestic custodian together with particulars of the domestic
custodian.
• A signed declaration statement that appears at the end of the Form.
• ;eclaration regarding fit proper entity.
The application fee for registration as FII is % G C,. The mode of payment is
;emand ;raft in favor of Eecurities and /0change 1oard of IndiaE payable at
>ew =orkH.
/1I generally takes 9 working days in granting FII registration. "owever, in
cases where the information furnished by the applicants is incomplete or missing,
seven days shall be counted from the days when all necessary information sought,
reaches /1I.
In cases where the applicant is bank and subsidiary of a bank, /1I seeks
comments from the @eserve 1ank of India (@1I). In such cases, 9 working days
would be counted from the day no ob+ection is received from @1I.
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The FII registration is valid for C years. After e0piry of C years, the registration
needs to be renewed.
ame as initial registration, Along with EForm AE and all the relevant documents,
the applicants are re7uired to fill in additional form (Anne0ure &) while applying
for renewal. % G C, needs to be paid for renewal of FII registration.
The application for renewal should be submitted three months before e0piry of the
FII registration. & 6 debt FIIs are debt dedicated FIIs which invest in debt
securities only. The procedure for registration of FIIDsub*account, under &6 debt
route is similar to that of normal funds besides a clear statement by the applicant
that it wishes to be registered as FIIDsub*account under &6 debt route.
. iterature 'evie(
Foreign institutiona# investment)a !istory in India
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The remarkable economic growth during the past two decades in most of the
emerging countries had been stimulated by foreign capital inflows from developed
countries. The post &''s period witnessed sharp augment inflows of foreign
private capital and official development finance lost its predominance in net capital
inflows. !ost of the developing countries opened their capital markets to foreign
investors either because of inflationary pressures, widening current account
deficits, e0change depreciation, increase in foreign debt or as a result of economic
policy. There was a surge in capital inflows into India too since &'' as in India,
the purchase of domestic securities by FIIs was first allowed in eptember &'' as
part of the liberaliation process that followed the balance of payment crisis in
&''*'& (ordon and upta, 8).
>ow days, a significant portion of Indian corporate sector#s securities are held by
Foreign Institutional Investors, such as pension funds, mutual funds and insurance
companies. These investors are often viewed as sophisticated investors as these
institutional investors are better informed and better e7uipped to process
information than individual investors ("an and ang, -). As the share of
foreign investors in emerging markets has risen, they have influenced the assets
prices considerably. $onse7uently, policymakers have become increasingly
concerned about the factors determining international investment, the performance
of foreign capital investments, and the impact of foreign investment on local
turnover and on the volatility of stock prices (Tesar and erner, &''C).
The impact study of FIIs flows on domestic stock market is important from
government as well as investor point of view, for e0ample, does the opening up of
the market for FII increase speculation in the market and thus make the market
more volatile and more vulnerable to foreign shocks (Ji, ). The immediate
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impact of market opening to FIIs is the surge in trading volume and capital inflows
to domestic stock markets, result of which the boom in stock prices. The stock
market boom, typically, does not last for the entire period is of capital inflows. It
usually starts with the initial surge in capital inflows and ends before the episode of
capital inflows completely subsides ($alvo and !endoa, ).
"enry () reports the two possible conse7uences of market liberaliation in the
light of international asset pricing models. First outcome of market liberaliation
(because of its impact on the cost of capital) is an increase in a country#s e7uity
prices because market learns that domestic markets will liberalie more in near
future. The second impact of market liberaliation is on physical investment that
will increase because of fall in cost of capital as new entrepreneurs will initiate
more investment pro+ects. The second effect of market liberaliation will definitely
increase the rate of economic growth.
imilarly ompers et al. (&) prove that institutional investors invested in li7uid
and large stocks having low returns during the previous year. o an increase in the
institutional demand in share market will affect stock market prices and returns if
supply and demand curves for that particular share are not perfectly elastic.
"an et al. (-) also analye the impact of institutional investors on stock prices
from a different perspective. They studied the impact on stock prices because of
the investment constraints on institutional investors by their unit holders.
Institutional constraints some time refrain from selling or purchasing of stock
about which they have even some goodDbad news. o they conclude that higher
institutional investment constraints have strong price momentum on the shares.
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imilarly Jin et al. (B) conclude that the investment performance of FIIs high
holding stocks is significantly better than that of FIIs low holding stocks. They
presented the evidence that FIIs trading behavior has generated better returns and
portfolio performance since the stock market#s full liberaliation. Ji () studies
the impact of market opening to foreign investors on Taiwan stock market behavior
and found no significant changes in stock market return after market opening. 1ut
author agreed that the impact on return should be there because large international
investors tend to study companies more thoroughly. The involvement of foreign
investors disseminates information better hence leads to more efficient market.
@ichards (-) analye data of si0 Asian emerging e7uity markets and found two
interesting findings. The trading behavior of foreign investors was largely
influenced by the return in global market that is positive feedback trading. The
price impact associated with foreign investors trading was much large than
estimated earlier.
2.1 Determinants o" FII Investment
2.1.1 Impact cost
4ne of the pre*re7uisites for an investor to be able to comfortably trade fre7uently
in the market (to reconstitute the investment portfolio) is the ability to do so
comfortably in a market without having to suffer a great transaction cost. In other words, it re7uires the market to be li7uid. Financial Kforeign shareholders have
financial focus and lay emphasis on li7uidity, argue $offee (&''&) and Aguilera
and Lackson (8). Ji7uidity, in this conte0t, means the ability of the market to
absorb large 7uantities of trade without a heavy transaction cost. The transaction
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cost, here, would mean not the fi0ed costs like brokerage, depository chares etc.
but the cost that is attributable to lack of market li7uidity. ince these costs are
different in different countries and also vary across the stocks listed in the same
country#s bourses, it could be one of the important considerations for the Foreign
5ortfolio Investors.
2.1.2 ar$et 'eturn
The basic rationale for the international capital flows is the rate of return which is
higher in a foreign market compared to the domestic market. $apital flows across
the geographical boundaries of the countries is mainly to enhance the productivity
and efficiency of capital at the global level. "ence the rate of return should
certainly e0plain the choice of a particular stock for investment by the FIIs.
!ohanty (&'') has found that the institutional investors as a group have invested
in companies with good financial performance. $lark and 1erko (&''B) show a
positive contemporaneous relation between e7uity flows and stock returns using
monthly data for !e0ico. The study has used the market return of the >ifty
companies# stock as the average of the market return for the 8 months Lune*August
-, as it is reported by >/.
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2.1.* +on),romoter S!are!o#ding
The shares that are available for trading in the normal course are those that are with
the investors other than the promoters and other interested and special categories of
investors. This is an important variable to be considered in investing in a stock
because the available free*float in most American companies is above ' per cent
whereas in India promoters have more than C per cent stakes in ma+ority of large
companies.(1iswal, 8) As early as in &'B, ;emset (&'B) has found that one
of the important determinants of secondary market li7uidity is the number of
shareholders. As the number of persons currently holding a particular share
increases, the number of market participants interested in trading the asset
increases in direct proportion. Therefore, the number of transactions per unit of
time also increases. 4ne of the findings of his study is that the increase in the
number of shareholders reduces the bid*ask spread. 1enston and "agerman (&'9-)
also have observed a direct relation between a pro0y for insider holdings and bid*
ask spread. These studies show that the number of shareholders and the ratio of
non*promoter shareholders to total shareholders have a bearing on the interest of
the investors in wanting to include that security in their portfolio and also the bid*
ask spread. The ratio of shares held by >on*promoter category to 5romoters
category as of eptember - is used in the model. This is a measure of li7uidity
of a stock in the bourses. This is the 7uantum of shares that an investor can actually
buy and sell. The FIIs investment cap has not been included as one of the
e0planatory variables because only &9 out of the C >ifty companies studied haveFIIs investment cap different from the generic cap. The balance 88 companies have
stayed with the generic cap only. "ence, FIIs investment cap is not considered for
the model.
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2.2 'ecent FII trends in India
1ansal And 5asricha ('), studied the impact of market opening to FIIs, on
Indian stock market behavior. India announced its policy regarding the opening
of stock market to FIIs for investment in e7uity and related instruments on &-th
eptember &''. %sing stock market data related to 1ombay tock /0change,
for both before and after the FIIs policy announcement day, they conducted an
empirical e0amination to assess the impact of the market opening on the returns
and volatility of stock return. they found that while there is no significant
changes in the Indian stock market average returns, volatility is significantly
reduced after India unlocked its stock market to foreign investors.
5. Mrishna 5rasanna () has e0amined the contribution of foreign
institutional investment particularly among companies included in sensitivity
inde0 (ense0) of 1ombay tock /0change. Also e0amined is the relationship
between foreign institutional investment and firm specific characteristics in
terms of ownership structure, financial performance and stock performance. It
is observed that foreign investors invested more in companies with a higher
volume of shares owned by the general public. The promoters# holdings and the
foreign investments are inversely related. Foreign investors choose the
companies where family shareholding of promoters is not substantial. Among
the financial performance variables the share returns and earnings per share are
significant factors influencing their investment decision
5rasanna () e0amined FIIs investment preferences in India. The study has
observed that apart from economic development of the country, firm specific
factors to a large e0tent determine FIIs investment in a firm. FIIs invested more
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in companies with higher volume of shares owned by general public. The
promoters# holdings and foreign investment were inversely related and also
foreign investors tend to choose companies where family holding of promoters
is not substantial. @eturns and earnings per share were significant factors
influencing the investment decisions by FIIs.
@ai Mulwant et al (8) held that the present study tries to e0amine the
determinants of Foreign Institutional Investments in India, which have crossed
almost %G & billion by the end of . iven the huge volume of these
flows and its impact on the other domestic financial markets understanding the
behavior of these flows becomes very important at the time of liberaliing
capital account. In this study, by using monthly data, we found that FII inflow
depends on stock market returns, inflation rate (both domestic and foreign) and
e0*ante risk. In terms of magnitude, the impact of stock market returns and the
e0*ante risk turned out to be ma+or determinants of FII inflow. This study did
not find any causation running from FII inflow to stock returns as it was found
by some studies. tabiliing the stock market volatility and minimiing the e0*
ante risk would help in attracting more FII inflow that has positive impact on
the real economy.
Agarwal, $hakrabarti et al (8) have found in their research that the e7uity
return has a significant and positive impact on the FII. 1ut given the huge
volume of investments, foreign investors could play a role of market makers
and book their profits, i.e., they can buy financial assets when the prices are
declining thereby +acking*up the asset prices and sell when the asset prices are
increasing. "ence, there is a possibility of bi*directional relationship between
FII and the e7uity returns.
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ordon and upta (8) analyed the factors affecting portfolio e7uity flows
into India. The analysis has shown that, the magnitude of flows was smaller in
India compared to other emerging markets and also less volatile than other
emerging markets. 5ortfolio flows were determined by both domestic and
e0ternal factors. Among e0ternal factors Jibor was prominent and in domestic
factors credit ratings and lagged returns were important determinants of
portfolio flows. In 7uantitative terms both domestic and e0ternal factors were
found to be e7ually important in determining portfolio flows.
1atra (8) e0amined FII trading behavior and returns in Indian e7uity market
based on daily and monthly data. The study has found trend chasing and
positive feedback trading by FIIs on daily basis at an aggregate level. 1ut no
such evidence was found in monthly basis. 1ased on the impact of trading
imbalance, study concluded that bias of FIIs do not have destabiliing impact
on the e7uity market.
$hakrabarti (&) e0amined the nature and causes of FII flows to India. The
study has found FII inflows were highly correlated with e7uity returns in India
and argued that FII flows are effects of returns rather than the cause of it. The
study also argued that, FIIs do not seem to have informational disadvantage
compared to local investors. It was found that Asian crisis resulted in a regime
shift and since then domestic e7uity returns became the single most important
determinant of FII flows to India.
!ukher+ee et al. () e0amined the daily flows of FIIs investment in Indian
stock market. The study has found that domestic e7uity returns was the most
important factor in influencing the FIIs investment flows into the country and
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FIIs investment flows do not have significant impact on returns. FIIs sale and
net flows were significantly affected by the performance of the e7uity market
whereas FIIs purchase was not responsible for such a performance. The study
has also found that, FIIs investment flows were highly auto correlated.
tanley !organ () has e0amined that FIIs have played a very important
role in building up India#s fore0 reserves, which have enabled a host of
economic reforms. econdly, FIIs are now important investors in the country#s
economic growth despite sluggish domestic sentiment. The !organ tanley
report notes that FII strongly influence short*term market movements during
bear markets. "owever, the correlation between returns and flows reduces
during bull markets as other market participants raise their involvement
reducing the influence of FIIs. @esearch by !organ tanley shows that the
correlation between foreign inflows and market returns is high during bear and
weakens with strengthening e7uity prices due to increased participation by
other players.
uresh 1abu and 5rabheesh () e0amined the causal relationship between
foreign institutional investment and stock returns. The study has found bi
directional causality between FIIs investment and stock returns. FIIs investment
flows were more stock return driven.
Thenmohi and Mumar (') e0amined the dynamic interaction between
mutual fund flows and security returns and between mutual fund flows and
volatility. They found a positive contemporaneous relationship between stock
market returns and mutual fund flows measured as stock purchases and sales.
The study has found that mutual funds flows are significantly influenced by
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returns but returns were not influenced by mutual fund flows. The study has
also identified a strong positive relationship between stock market volatility and
mutual fund flows.
ome of the studies reviewed in this section belong to early part of . They
are the initial periods in the development of institutional investment. It gives
enough +ustification to have revisit the pattern of institutional investment. The
studies of uresh 1abu and 5rabheesh (), and Thenmohi and Mumar
(') do belong to the latest period and have addressed the primary ob+ective
of the present study individually i.e. e0amining the relationship between returns
and institutional investment as represented by FIIs and !Fs. 1ut, both studies
have considered only one estimation window. In the present study an attempt is
made to analye the relationship between institutional investments and market
return over a period of time by dividing the study to cover different phases in
the market.
2.* -vervie( o" Indian Stoc$ ar$et
tock markets refer to a market place where investors can buy and sell stocks. The
price at which each buying and selling transaction takes is determined by the
market forces (i.e. demand and supply for a particular stock. A stock e0change
includes an association of persons or firms to regulate and supervise all
transactions, rules, regulations and standard practices to govern all marketdealings, authoried stock brokers and an e0change floor where stock brokers or
their approved agents meet during fi0ed business hours to buy and sell securities.
The ecurities and /0change 1oard of India (/1I) is the regulatory body of the
stock market. It gives rules and regulation to control the stock e0changes. These
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rules and regulation are called the stock market reforms. To study the stock market
reforms in detail, we have to study the concepts of capital market in detail firstly.
The financial securities deal with the capital market, which include primary market
and secondary market. The primary market is that part of capital market that deals
with the issuance of new securities. 5rimary market issue can be classified in to
initial public offer, right issue and preferential issue. The secondary market is the
financial market for trading of securities that have already been issued in initial
private or public offering. ecurities initially issued in the primary market by
companies are traded on the secondary market.
2.*.1. istory o" Indian Stoc$ ar$et
The earliest records of security dealings in India are somewhat obscure. The /ast
India $ompany was the dominant institution in the country#s economy and it is
presumed that transactions in its loan securities first began in the eighteenth
century. 1y the &8Ns, shares of banks and cotton companies were actively traded
in 1ombay. Though the list of tradable securities kept increasing there were only
half a doen brokers recognied by banks and merchants during the &-s and
&Cs. The number of brokers increased to about C shortly thereafter, when a
true Nshare maniaN took place in India. The stock boom was the result of a
disruption in the cotton supply from the %nited tates to 1ritain due to the
American $ivil ar. Jater, in &9C, the tock /0change of !umbai (1/) was
established as EThe >ative hare and tockbrokers AssociationE. The 1/ is the
oldest e0change in Asia. The 1/ has evolved over the years and is currently thelargest stock e0change in the country accounting for one third of trading volume
and the largest share of listings and market capitaliation. In the &'s, the number
of e0changes grew dramatically and today there are 8 recognied stock e0changes
in the country. In addition to the 1/, the >ational tock /0change of India Jtd.
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(>/) and the Inter*connected tock /0change of India (I/) are significant in
terms of market capitaliation and trading value. The >/ was incorporated in
&'' and in &''- began operations in the holesale ;ebt !arket (;!) and the
e7uities segment. Trading of derivative instruments was introduced on the
e0change in . I/ is a national*level e0change providing trading, clearing,
settlement, risk management and surveillance support to the inter*connected
market system. Fifteen regional stock e0changes are currently linked through I/
linkage and connectivity to all the participating e0changes to widen their market.
2.*.2+ationa# Stoc$ E/c!ange
4n the basis of the recommendations of high powered 5herwani $ommittee, the
>ational tock /0change was incorporated in &'' by Industrial ;evelopment
1ank of India, Industrial $redit and Investment $orporation of India, Industrial
Finance $orporation of India, all Insurance $orporations, selected commercial
banks and others. >/ provides e0posure to investors in two types of markets,
namely: holesale debt market and $apital market .holesale ;ebt !arket is
similar to money market operations, debt market operations involve institutional
investors and corporate bodies entering into transactions of high value in financial
instruments like treasury bills, government securities, etc. >/ has some positive
points such as fully automated screen*based trading mechanism, trictly follows
the principle of an order*driven market, trading members are linked through a
communication network, this network allows them to e0ecute trade from their
offices, the prices at which the buyer and seller are willing to transact will appear
on the screen, when the prices match the transaction will be completed and a
confirmation slip will be printed at the office.
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.8.8ombay stoc$ e/c!ange
1ombay stock e0change is the oldest stock e0change in Asia with a rich heritage,
new spanning three centuries in its &88 years of e0istence. hat is now popularly
known as 1/ was established as 3The >ative share stock 1rokers‟
AssociationH in &9C. 1/ is the first stock e0change in the country which
obtained permanent recognition (in&'CB) from the ovt. of India under the
ecurities $ontracts (@egulation) Act &'CB. 1/ pivotal and preeminent role in the
development of the Indian $apital !arkets is widely recognied. It changed from
the open outcry system to an outline screen based order driven trading system in
&''C. 1/ is now a corporatied under the provisions of the $ompanies Act &''C.
2.*.Stoc$ ar$et 'e"orms about FII I+ I+DI
FII have been allowed to invest in the Indian securities market since eptember
&'' when the uidelines for Foreign Institutional Investment were issued by the
overnment. The /1I (Foreign Institutional Investors) @egulations were
enforced in >ovember &''C, largely based on these uidelines. The regulations
need FIIs to register with /1I and to obtain approval from the @eserve 1ank of
India (@1I) under the Foreign /0change @egulation Act to buy and sell securities,
release foreign currency and rupee bank accounts, and to forward and repatriate
funds. 4nce /1I registration has been obtained, an FII does not re7uire any
further consent to buy or sell securities or to move funds in and out of the country,
sub+ect to compensation of applicable ta0. Foreign investors, whether registered as
FIIs or not, may also invest in Indian securities outside the FIIs process. Foreign
financial service institutions have also been allowed to set up +oint ventures in
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stock broking, asset management companies, merchant banking, and other
financial services firms along with Indian partners. Foreign portfolio investments
in Indian companies are limited to individual foreign ownership at & percent of
the total issued capital of any one company and to aggregate foreign ownership at
8 percent of the total issued capital of any one company. hen India opened
investment into listed e7uities through the FIIs framework not all foreign investors
were eligible to register with the Indian securities regulator (/1I). >o FII was
permitted to own more than C6 of a firm and there were restrictions on ownership
by all FIIs taken together. Foreign investors faced many difficulties in
accomplishing transactions in the Indian e7uity market. For e0ample in &''8, the
settlement system which was based on physical paper share certificates found it
difficult to handle the settlement volume of foreign investors. imilarly, foreign
investors who sent orders to open outcry trading floor of the 1ombay stock
e0change found an array of problems including high transactions costs and low
probability of order e0ecution. Thus from &''8 to 8, the !inistry of Finance
and /1I led a strong reforms aiming at a fundamental transformation of the
e7uity market. 5resently the ceiling for overall investment for FIIs is -6 of the
paid up capital of the Indian company. The limit is 6 of the paid up capital in
the case of public sector banks, including the tate 1ank of India. The ceiling can
be raised up to sectoral capDstatutory ceiling, sub+ect to the approval of the board
and the general body of the company passing a special resolution to that effect.
Also the rigid criteria of re7uiring FIIs and sub*account to register as a 9:8 FIID
sub*account or &6 debt FIIDsub*account has recently been done away with.
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2.*.3 T!ere are some ot!er re"orms and t!eir e""ects on FIIs a#so mentioned
be#o(
&. Jimit of investment by FIIs increased from -'6 to the limit of sectoral cap for
F;I with the approval of the board of directors the shareholders. FIIs
investments in sectors like hotels and tourism, petroleum, air, roads, highways, port
etc. can be up to &6. These reforms increase the profit of FIIs.
. After the year 9, FIIs are permitted to entering to the short selling
transactions only in accordance with the specified by /1I. This would prohibit
the market manipulation.
8. >ow no transaction could be carried forward and the transaction in securities
would be only through stock broker is granted a certificate by /1I.
-. After the year 9 FIIs are permitted to invest % G 8. billion in ovt.
ecurities.
C. Internet trading promotes competition and improves investor service.
B. @olling settlement has a positive impact on the FIIs. This would increase the
fle0ibility in transacting of the institutional investors. 1ecause of it the speculative
volumes reduce which was very high in India.
9. FIIs are permitted up to 86 in infrastructure companies in the security market
vi. stock e0changes, deposits
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8. 'esearc! -b4ective and ypot!esis
-b4ectives o" t!e Study
Following are the ob+ectives of the study:
• To study the scope and trading mechanism of Foreign Institutional
investors in India.
•
To find the relationship between the FIIs e7uity investment pattern andIndian stock indices.
ypot!esis
>ull "ypothesis ("o): The 1/ Inde0 does not rise with the increase in FIIs
investment.
Alternate "ypothesis ("a): The various 1/ ense0 rises with the increase in
FIIs investment.
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-. Scope nd +eed -" Study
cope of the study is very broader and covers both the values of 1/ ense0 andits comparison with foreign institutional investments. 1ut, study is only going to
cover foreign investments in form of e7uity. The time period is limited from
Lanuary to ;ecember && as it will give e0act impact in both the bullish and
bearish trend.
The study will provide a very clear picture of the impact of foreign institutional
investors on 1/ ense0. It will also describe the market trends due to FIIs inflow
and outflow.
The study would be helpful for further descriptive studies on the ideas that will be
e0plored. !oreover, it would be beneficial to gain knowledge regarding foreign
institutional investments, their process of registration and their impact on 1/
sense0.
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3. 'esearc! et!odo#ogy
@esearch methodology is the arrangement of conditions for collection and analysis
of data in a manner that aims to combine relevance to the research purpose with
economy in procedure. @esearch methodology is the conceptual structure within
which research is conducted. It constitutes the blueprint for the collection
measurement and analysis of the data.
The research methodology here includes:
O @esearch problem
O @esearch design
O ampling design
O ampling techni7ue
O ;ata collection method
3.1 'esearc! ,rob#em
There is a saying 3a problem well defined is half solvedH. The pro+ect deals with
the 3Impact of Foreign Institutional Investors on 1/ ense0 H. This research
pro+ect studies the relationship between FIIs investment and 1/ sense0. This
indice, in a way, represent the picture of India#s stock markets. o this pro+ectreveals the impact of FII on the Indian capital market.
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There may be many other factors on which a stock inde0 may depend i.e.
overnment policies, budgets, bullion market, inflation, economic and political
condition of the country, F;I, @e.D;ollar e0change rate etc. 1ut for this study I
have selected only one independent variable i.e. FII. This study uses the concept of
correlation and regression to study the relationship between FII and stock inde0.
The FII started investing in Indian capital market from eptember &''when the
Indian economy was opened up in the same year. Their investments include e7uity
only. The sample data of FIIs investments consists of monthly average from
Lanuary to ;ecember &&.
3.2 'esearc! Design
/0ploratory @esearch
As an e0ploratory study is conducted with an ob+ective to gain familiarity with the
phenomenon or to achieve new insight into it, this study aims to find the new
insights in terms of finding the relationship between FII# and Indian tock
Indices.
3.* Samp#ing Design
• %niverse
In this study the universe is finite and will take into the consideration related
news and events that have happened in last few years.
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• ampling %nit
As this study revolves around the foreign institutional investment and 1/
ense0.o for the sampling unit is confined to only the Indian stock market.
3. Samp#ing Tec!nique)
$onvenient ampling: tudy conducted on the basis of availability of the ;ata and
re7uirement of the pro+ect. tudy re7uires the events that have impact on the Indian
stock market.
3.3 Data co##ection et!od
econdary data: For the secondary data various literatures, books, +ournals,
magaines, web links are used. As there are not possibilities of collecting data
personally so no 7uestionnaire is made.
3.5 'esearc! na#ysis Too#s
3.5.1 'egression ana#ysis and 6orre#ation ana#ysis
@egression Analysis: e can analye how a single dependent variable is affected
by the values of one or more independent variables P for e0ample, how an
athleteNs performance is affected by such factors as age, height, and weight. e can
apportion shares in the performance measure to each of these three factors, based
on a set of performance data, and then use the results to predict the performance of
a new, untested athlete.
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$orrelation: 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. e can use the $orrelation tool to
determine whether two ranges of data move together P that is, whether large
values of one set are associated with large values of the other (positive correlation),
whether small values of one set are associated with large values of the other
(negative correlation), or whether values in both sets are unrelated (correlation near
ero).
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B. na#ysis
5.1 6orre#ations
Correlations
SensexVal FII
SensexVal
Pearson Correlation 1 .403**
Sig. (2-tailed) .005
N 4 4
FII
Pearson Correlation .403** 1
Sig. (2-tailed) .005
N 4 4
**. Correlation is signi!i"ant at t#e 0.01 le$el (2-tailed).
Inferences:*
&. As the 5earson correlation coefficient between FII and ense0 ?alue is
good and positive (.-8) and the p value is .C, this implies that null
hypothesis is re+ected.
. o we can infer that Foreign Institutional Investments have significant
correlation with ense0.
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'egression
Model Summaryb
%odel & & S'are dsted &
S'are
Std. +rror o! t#e
+sti,ate
1 .403a .12 .144 24.33/
a. Predi"tors (Constant) FII
. eendent Variale SensexVal
Coefficientsa
%odel nstandardi6ed
Coe!!i"ients
Standardi6ed
Coe!!i"ients
t Sig. 5.07 Con!iden"e
Inter$al !or 8
Correlations
8 Std.
+rror
8eta 9o:er
8ond
er
8ond
;ero-
order
Partial Part
1(Constant) 15412.41
45.
333.11/ .000
144/5.
1/
134.21
FII .100 .033 .403 2.5 .005 .033 .1/ .403 .403 .403
a. eendent Variale SensexVal
@egression /7uation is ense0 Q&C-&.&9R .& FII
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6!arts
The histogram shows the residuals of the ense0 variable. @esidual is what remains after
independent co*efficient have been determined. This curve is not a normal curve which
implies that some part of histogram is outside the normal curve. This implies that residual
is more after carrying out the regression analysis.
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The normal p*p plot of regression standardied residual shows the residual values
all hugging the line of least s7uares or the line of greatest fit. These values must be
close to the line of least s7uares which is an idealied plot. o in this plot there is
some deviation.
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The scatter plot shows the distribution of data which must be randomly distributed.
If the data is not randomly distributed then we have heteroscedasticity present in
our data which implies that we don#t have confidence in standard error associated
with our database.
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Frequencies
Sense/ 7a#ues Statistics
NValid 4
%issing 0
%ean 1024./1
Std. +rror o! %ean 451.553
%edian 1/25.50
Std. e$iation 312.453
Varian"e //215.232
S
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Foreign Institutiona# Investment Statistics
NValid 4
%issing 0
%ean 135.2353
Std. +rror o! %ean 122.31/
%edian 2/5.300000
Std. e$iation 122.0312
Varian"e 154/1/4.50
S
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39448
39479
39508
39539
39569
39600
39630
39661
39692
39722
39753
39783
-20000
-15000
-10000
-5000
0
5000
10000
15000
20000
25000
FY - 2008
SensexVal
FII
Interpretation• After plotting the values of 1/ ense0 of the year and the values of
respective FII#s, we find that the values of FII#s and ense0 are interrelated
in some manner.
• hen there is a downfall in FII#s the value of ense0 also comes down and
vice*versa.
• 1ut there is some deviations or e0ceptions to this were found. For e0 from
Lan to Feb the value of FII#s has been increased and ense0 value have
been decreased, which indicates that there has been some other factors
which effects ense0 values.
• The period of has been a period of tremor for the Indian !arkets, the
Indian !arkets plunged after making high of &- in Lan. to as low as
''8 in ;ec. almost decrease of around C6.
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39814 39845 39873 39904 39934 39965 39995 40026 40057 40087 40118 40148
-10000
0
10000
20000
30000
40000
50000
60000
FY - 2009
#REF! #REF!
Interpretation
• After plotting the values of 1/ ense0 of the year ' and the values of
respective FII#s, we find that the values of FII#s and ense0 are not
following a particularly related to each other.
• ense0 in this year has been continuously increasedS on the contrary FII#s
values undergo some variations. This indicates that there have been some
other factors which affect ense0 values.
• ense0 has shown some recovery from the past recessionary period of .
S
F
FII
Sens
FII
Sens
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40179 40210 40238 40269 40299 40330 40360 40391 40422 40452 40483 40513
-10000
-5000
0
5000
10000
15000
20000
25000
30000
35000
FY - 2010
#REF! #REF!
Interpretation
• The period of & has showed continuity in uptrend in the markets.
• The 1/ ense0 has surged to CB& as on 8& st ;ec. & from &B8CB in
Lan. & gaining -&'C points and the inflows from the FIINs have been
robust during this period.
• The total FII inflow during this period has been to the tune of @s. &9'B9-
crs.
FII
Sens
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Nov-10 Jan-11 Feb-11 A-11 J"n-11 J"l-11 Se-11 Nov-11 e$-11
-10000
-5000
0
5000
10000
15000
20000
25000
FY-2011
#REF! #REF!
Axis Title
Axis Title
Interpretation
• The period of && has shown a mi0 trend in sense0 values.
• From Lan to !arch && !arch it has been decreased and then follow a
continuous downtrend and reached &C-C-,and the inflows from the FIINs
have also been not so good during this period.
• The total FII inflow during this period has been to the tune of @s. 9& crs.
• There had been months in this period where FII#s inflow is ma0imum
i.e.&BC &9 in the months of Luly and ;ecember.
Sens
FII
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0
5000
10000
15000
20000
25000
SensexVal
SensexVal
Interpretation
• Above line chart shows the ense0 values from Lan# to ;ec &&.
• There has been strong downfall in the value of ense0 during the year ,
because of the global recession.
• In the ne0t year the ense0 has been recovered much from the recessionary
pressures of , in the month of ;ec & it has reached the value of
CB which was its life time high.
• Again in the year of && it starts declining and reached the level of &C-C-
in ;ec &&.
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-30000
-20000
-10000
0
10000
20000
30000
40000
50000
60000
FII
FII
Interpretaion
• Above line chart shows different inflows and outflows of Foreign
Institutional Investments in India.
• Foreign investors have been continuously investing in India because only in
the year of outflow of investments were there otherwise there were
inflows in the country.
• The highest inflow of foreign capital was in the month of ;ec ' which was
around -B crores.
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-30000
-20000
-10000
0
10000
20000
30000
40000
50000
60000
FY 2008-2011
SensexVal
FII
Interpretation
• The above chart shows the relative effect of Foreign Institutional
Investments on 1/ ense0 from Lan 9 to ;ec && we can see that
how the FII investments have affected the movement in the Indian !arkets.
Also the study supports this fact as the correlation between the two is
positive (.-8) Thus, FII investments play an important role in our Indian
!arkets.
• This being an important factor should always be tracked upon. the period of
was a period of pain due to economic crisis in the global economy, this
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recessionary period had severe impact on the Indian !arkets too as the
global investors sell*off was seen.
• The period of ' saw simultaneous recovery due to reassurance by the
overnment in the form of relief packages and the recovery in the economy
itself.
• The period of & has been the continuity of the recovery for the Indian
!arkets as we are a growing economy with lots of potential.
• The ;5 of India is on constant rise, the business prospects and political
stability all are attracting the foreign investors to be a part of the Indian
!arkets.
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FI+DI+8S
After the analysis following are the findings of the study:
&) There is a positive and significant correlation (.-8) between Foreign
Institutional Investments and the value of sense0, which states that FII#s inflows
and outflows, has significant impact on 1/ ense0.
) ;eterminants of the FII#s are Impact cost, >on promoter holding, !arket
return.
8) In bearish trend of the volatility in Indian tock indices due to FIIs is more
than in bullish trend of '. >o doubt FII inflow is more in '. The domestic
investors were also playing an important role in ' but in FIIs is
influencing market more as domestic investors are not in the market.
'ecommendations
After the analysis of the pro+ect study, following recommendations can be made:
&) implifying procedures and rela0ing entry barriers for business activities and
providing investor friendly laws and ta0 system for foreign investors.
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) Allowing foreign investment in more areas. In different industries indices the
FIIs should be encouraged through different patterns like futures, options, etc.
8) omewhere, a restriction related to the track record of ub* Accounts is also to
be made on the investors who withdraw money out of the Indian stock market who
have invested with the help of participatory notes.
-) e have to modernie and also have to save our culture. imilarly the laws
should be such that it protects domestic investors and also promote trade in country
through FIIs.
C) /ncourage industries to grow to make FIIs an attractive +unction to invest.
imitation
There are certain limitations in the study which is to be conducted. ome of theselimitations are discussed below:*
&. There can be some other determinants which may affect the stock market
volatility, but not taken into account in this study.
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. The data to be analyed will be collected for a period of four years only which is
a short interval when analying the impact of FII#s on Indian tock /0change.
8. As the data is to be analyed on monthly basis so it may lead to some error if it
is analyed on weekly or daily analysis as this analysis provides more data and
hence better analysis can be done.