Surge in Fii Boon or Bane

8/4/2019 Surge in Fii Boon or Bane

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AREPORT

ON

(Surge in FII Boon or Bane)

l investor holding more than 10% shares or units of the fund) , are also eligible to be registered as

FIIs:

1. Asset Management Companies

2. Institutional Portfolio Managers3. Trustees

4. Power of Attorney Holders

INVESTMENT OPPORTUNITIES FOR FIIs


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The following financial instruments are available for FII investments:

a) Securities in 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 mutual funds;

c) Dated Government Securities;

d) Derivatives traded on a recognized stock exchange;

e) Commercial papers.

Investment limits on equity investments

a) FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of an

Indian company.

b) Investment on behalf of each sub-account shall not exceed 10% of total issued capital of an

India company.

c) For the sub-account registered under Foreign Companies/Individual category, the investment

limit is fixed at 5% of issued capital.

These limits are within overall limit of 24% / 49 % / or the sectoral caps a prescribed by

Government of India / Reserve Bank of India.

Investment limits on debt investments

The FII investments in debt securities are governed by the policy if the Government of India.

Currently following limits are in effect:

For corporate debt the investment limit is fixed at US $ 500 million.


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TAXATION

The taxation norms available to a FII is shown in the table below.

Nature of Income Tax Rate

Long-term capital gains 10%

Short-term capital gains 30%

Dividend Income Nil

Interest Income 20%

Long term capital gain: Capital gain on sale of securities held for a period of more than one year.

Short term capital gain: Capital gain on sale of securities held for a period of less than one year.

EXECUTIVE SUMMARY

Management ideas without any action based on them mean nothing. That is why practical

experience is vital for any management studies. Theoretical studies in the class room are not

sufficient to understand the functioning climate and the real problems coming in the way of

management. So, practical exposures are indispensable to such courses. Thus, practical

experience acts as a supplement to the classroom studies. This report deals with Impact of FIIs

And FDIs On Indian Stock Market has been completed. I have learnt a lot of new things which

could never been learnt from theory classes. The next part include whole of research process

used for the project. It contains research methodology, research objective, scope analysis and

interpretation of the data, collected from secondary resources. It also consists limitations of the

study.

In this study I have collected data from secondary source. In this study in used

descriptive research design is used. This part includes observations analysis and discussion on

collected data then suggestions are given these are based are on the usefulness of the study,applicability in the business industry, in decision making, in system development so far.

INDUSTRY PROFILE


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BRIEF PROFILE OF IMPORTANT INSTITUTIONS:

A brief profile of important institutions included in the study is given below.

RESERVE BANK OF INDIA

India's Central Bank - the RBI - was established on 1 April 1935 and was nationalized on 1

January 1949. Some of its main objectives are regulating the issue of bank notes, managing

India's foreign exchange reserves, operating India's currency and credit system with a view to

securing monetary stability and developing India's financial structure in line with national socio-

economic objectives and policies.The RBI acts as a banker to Central/State governments, commercial banks, state cooperative

banks and some financial institutions. It formulates and administers monetary policy with a view

to promoting stability of prices while encouraging higher production through appropriate

deployment of credit. The RBI plays an important role in maintaining the exchange value of the

Rupee and acts as an agent of the government in respect of India's membership of IMF. The RBI

also performs a variety of developmental and promotional functions.

The first concern of a central bank is the maintenance of a soundly based commercial banking

structure. While this concern has grown to comprehend the operations of all financial

institutions, including the several groups of non-bank financial intermediaries, the commercial

banks remain the core of the banking system. A central bank must also cooperate closely with

the national government. Indeed, most governments and central banks have become intimately

associated in the formulation of policy.

They are often responsible for formulating and implementing monetary and credit policies,

usually in cooperation with the government. they have been established specifically to lead or

regulate the banking system.

SECURITUIES AND EXCHANGE BOARD OF INDIA


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In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government

of India through an executive resolution, and was subsequently upgraded as a fully autonomous

body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board

of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and

autonomous regulatory board with defined responsibilities, to cover both development &

regulation of the market, and independent powers has been set up.

The basic objectives of the Board were identified as:

To protect the interests of investors in securities; To promote the development of Securities Market; To regulate the securities market and For matters connected therewith or incidental thereto.

Since its inception SEBI has been working targeting the securities and is attending to the

fulfillment of its objectives with commendable zeal and dexterity. The improvements in the

securities markets like capitalization requirements, margining, establishment of clearing

corporations etc. reduced the risk of credit and also reduced the market.

SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, theeligibility criteria, the code of obligations and the code of conduct for different intermediaries

like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers,

credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and

risk management systems for Clearing houses of stock exchanges, surveillance system etc. which

has made dealing in securities both safe and transparent to the end investor.

Another significant event is the approval of trading in stock indices (like S&P CNX Nifty &

Sensex) in 2000. A market Index is a convenient and effective product because of the following

reasons:

It acts as a barometer for market behavior;

It is used to benchmark portfolio performance;

It is used in derivative instruments like index futures and index options;


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It can be used for passive fund management as in case of Index Funds.

Two broad approaches of SEBI is to integrate the securities market at the national level, and also

to diversify the trading products, so that there is an increase in number of traders including

banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact

through the Exchanges. In this context the introduction of derivatives trading through Indian

Stock Exchanges permitted by SEBI in 2000 AD is a real landmark.

BOMBAY STOCK EXCHANGE:

Of the 22 stock exchanges in the country, Mumbai's (earlier known as Bombay), Bombay Stock

Exchange is the largest, with over 6,000 stocks listed. The BSE accounts for over two thirds of

the total trading volume in the country. Established in 1875, the exchange is also the oldest in

Asia. Among the twenty-two Stock Exchanges recognized by the Government of India under the

Securities Contracts (Regulation) Act, 1956, it was the first one to be recognized and it is the

only one that had the privilege of getting permanent recognition ab-initio.

Approximately 70,000 deals are executed on a daily basis, giving it one of the highest per hour

rates of trading in the world. There are around 3,500 companies in the country which are listed

and have a serious trading volume. The market capitalization of the BSE is Rs.5 trillion. The

BSE `Sensex' is a widely used market index for the BSE.

The main aims and objectives of the BSE are to provide a market place for the purchase and sale

of security evidencing the ownership of business property or of a public or business debt. It aims

to promote, develop and maintain a well-regulated market for dealing in securities and to

safeguard the interest of members and the investing public having dealings on the Exchange. It

helps industrial development of the country through efficient resource mobilization. To establish

and promote honorable and just practices in securities transactions

BSE Sensex

The BSE Sensex is a value-weighted index composed of 30 companies with the base April 1979

= 100. It has grown by more than four times from January 1990 till date. The set of companies in

the index is essentially fixed. These companies account for around one-fifth of the market

capitalization of the BSE.


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NATIONAL STOCK EXCHANGE OF INDIA

The National Stock Exchange of India Limited has genesis in the report of the High Powered

Study Group on Establishment of New Stock Exchanges, which recommended promotion of a

National Stock Exchange by financial institutions (FIs) to provide access to investors from all

across the country on an equal footing. Based on the recommendations, NSE was promoted by

leading Financial Institutions at the behest of the Government of India and was incorporated in

November 1992 as a tax-paying company unlike other stock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in

April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June

1994. The Capital Market (Equities) segment commenced operations in November 1994 and

operations in Derivatives segment commenced in June 2000.

S&P CNX Nifty

S&P CNX Nifty is a well-diversified 50 stock index accounting for 23 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 owned and managed by India Index Services and Products Ltd. (IISL), which

is a joint venture between NSE and CRISIL. IISL is India's first specialized company focused

upon the index as a core product. IISL have a consulting and licensing agreement with Standard

& Poor's (S&P), who are world leaders in index services.

The average total traded value for the last six months of all Nifty stocks is approximately 58% of

the traded value of all stocks on the NSE

Nifty stocks represent about 60% of the total market capitalization as on March 31, 2005.

Impact cost of the S&P CNX Nifty for a portfolio size of Rs.5 million is 0.07%

S&P CNX Nifty is professionally maintained and is ideal for derivatives trading.

OBJECTIVE, SCOPE AND PURPOSE

Objectives:


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Influence of FII on movement of Indian stock exchange. To understand the FII & FDI policy in India. To know the performance of Indian stock market. To know the impact of FIIs on Indian stock market.

SCOPE:

The report examines The Impact of Foreign Institutional Investments and Foreign Direct

Investment on Equity Stock Market in India. The scope of the research comprises of information

derived from secondary data from various websites. The various information and statistics were

derived from the websites of BSE, NSE, Money Control, RBI and SEBI. Sensex and Nifty was a

natural choice for inclusion in the study, as it is the most popular market indices and widely used

by market participants for benchmarking.

RESEARCH METHODOLOGY

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. whichhad attracted larger inflow of FDI and data of NSE stock exchange will be taken to know

the impact of FII.

2) Data Collection:


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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 be used to measure the share of each investing countries and the share of

each sectors in the overall flow of FDI and FII into India.

Correlation: We have used the Correlation tool to determine whether two ranges of datamove together that is, how the Sensex, Bankex, IT, Power and Capital Goods are

related to the FII which may be positive relation, negative relation or no relation.

We will use this model for understanding the relationship between FII and stock indices

returns. FII is taken as independent variable. Stock indices are taken as dependent

variable

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 purchasesgross 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 has been separately run between FII and six indices taking one index

at a time with help of Microsoft excel.


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Results of this study show that not only the FIIs are the major players in the domestic stock

market in India, but their influence on the domestic markets is also growing. Data on trading

activity of FIIs and domestic stock market turnover suggest that FIIs are becoming more

important at the margin as an increasingly higher share of stock market turnover is accounted for

by FII trading. Moreover, the findings of this study also indicate that Foreign Institutional

Investors have emerged as the most dominant investor group in the domestic stock market in

India. Particularly, in the companies that constitute the Bombay Stock Market Sensitivity Index

(Sensex) and NSE Nifty, their level of control is very high. Dominant position of FIIs in the

Sensex companies, it is not surprising that FIIs are in a position to influence the movement of

Sensex and Nifty in a significant way.

Since FIIs are dominating the Indian Market, individual investors are forced to accept the

dictates of major FIIs and hence join the group by entering the Mutual Fund group. Many Mutual

Funds floated specific funds for the sectors favoured by the FIIs. An implication of MFs gaining

strength in the Indian stock market could be that unlike individual investors, whose monies they

manage, MFs can create market trends whereas the small individual investors can only follow

the trends. The situation becomes quite difficult if the funds gain a vested interest in certain

sectors by floating sector specific funds. One can even venture to say that the behavior of MFs in

India has turned the very logic that mutual funds invest wisely on the basis of well-researched

strategies and individual investors do not have the time and resources to study and monitor

corporate performance, upside down. Thus, the entry of FIIs has not resulted in greater depth in

Indian stock market; instead it led to focussing on only a few sectors. Ultimately to provide a

level playing field, even the domestic investors had to be offered lower rates of capital gains tax.

While it can be expected that foreign affiliated mutual funds would follow the investment pattern

of FIIs, it is important to note that many domestic ones also followed FIIs. The sectors favoured

by FIIs account for a substantial portion of the net assets under control of many Mutual Funds.

The Mutual funds are gaining prominence in the Indian Stock market and that the share of

foreign affiliated MFs is growing, a number of Indian funds are following the investment

strategies of the foreign ones.


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On the other hand if FII investments constitute a large share of the equity capital of a financial

entity, an FII pullout, even if driven by development outside the country can have significant

implications for the financial health of what is an important institution in the financial sector of

this country.

Similarly, if any set of developments encourages an unusually high outflow of FII capital from

the market, it can impact adversely on the value of the rupee and set of speculation in the

currency that can in special circumstances result in a currency crisis. There are now too many

instances of such effects worldwide for it be dismissed on the ground that India's reserves are

adequate to manage the situation.

FII investments, seem to have influenced the Indian stock market to a considerable extent. FIIs

are interested in the Indian stock market increases its vulnerability to fluctuations. Analysis

suggested a strong influence of FII investment on the Sensex and Nifty index. This finding takes

quite further the general understanding that net FII investments influences stock prices in India

as it traces the relationship.

KEY FINDING:

correlation and regression matrix

Correlation with FII Multiple R R2 Standard Error observation

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 12896.703 135

CNX 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.


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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.

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.

Analysis of trends in FII investment

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 131993-94 5593 466 5127 39338.46154

1994-95 7631 2835 4796 -6.456017164

1995-96 9694 2752 6942 44.74562135

1996-97 15554 6979 8575 23.52348027

1997-98 18695 12737 5958 -30.51895044

1998-99 16115 17699 -1584 -126.5861027


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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 -9.622719644

2006-07 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 of overheating; 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


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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 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 globaluncertainties 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 a slack in FII investments.

PERFORMANCE OF INDIAN STOCK MARKET

Indices : sensex For the period : from year 1991 To year 2008

year Open High low close Price/earnings Price/bookvalue

Dividendyield

1991 1027.38 19554.81.29 947.14 1908.85 22.30 3.58 1.24

1992 1957.33 4546.58 1945.48 2615.37 36.19 6.35 .80

1993 2617.78 3459.07 1980.6 3346.06 31.78 4.81 .98

1994 3436.87 4643.31 3405.88 3926.90 45.45 6.07 .68

1995 3910.16 3943.66 2891.45 3110.49 23.63 3.81 1.13

1996 3114.08 4131.22 2713.12 3085.20 16.07 3.02 1.50

1997 3096.65 4605.41 3096.65 3658.98 14.45 2.80 1.52

1998 3658.34 4322.00 2741.22 3055.41 13.00 2.25 1.80

1999 3064.95 5150.99 3042.25 5005.82 17.35 3.07 1.38


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2000 9209.54 6150.69 3491.55 3972.12 24.48 3.81 1.14

2001 3990.65 4462.11 2594.87 3262.33 17.60 2.51 1.83

2002 3262.01 3758.27 2828.48 3377.28 15.22 2.30 2.14

2003 3383.85 5920.76 2904.44 5838.96 15.02 2.49 2.14

2004 5872.48 6617.15 4227.50 6602.69 17.26 3.28 2.01

2005 6626.8 9442.98 6069.33 9397.93 16.21 3.94 1.582006 9422.49 14035.30 8799.01 13786.91 20.18 4.75 1.35

2007 83827.77 20498.11 12316.10 20286.99 22.25 5.32 1.10

2008 20325.27 21206.77 14677.24 16481.20 22.44 5.71 .98

FOREIGN INVESTMENT FLOWS IN INDIA:

One of the most important distinctions between Portfolio and Direct investment to have emerged

from this young era of globalisation is that portfolio investment can be much more volatile.

Foreign Investment Flows in India

YearA. DirectInvestment

B. PortfolioInvestment Total (A + B)

(US $ million) (US $ million) (US $ million)

1990-91 97 6 1031991-92 129 4 1331992-93 315 244 5591993-94 586 3567 41531994-95 1314 3824 51381995-96 2144 2748 48921996-97 2821 3312 61331997-98 3557 1828 53851998-99 2462 61 25231999-00 2155 3026 51812000-01 4029 2760 67892001-02 6131 2021 81522002-03 4660 979 56392003-04 4675 11377 16052

From a net foreign investment inflow of US $ 5.3 billion in 1997-98, such inflows declined toUS $ 2.4 billion in 1998-99. This is because of the lower portfolio inflows, as a result of whichthe net investment has dropped. The changes in the investment conditions in a country or regioncan lead to dramatic swings in portfolio investment. For a country on the rise, in other words for


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developing countries, FPI can bring about rapid development, helping an emerging economymove quickly to take advantage of economic opportunity, creating many new jobs andsignificant wealth. However, when a country's economic situation takes a downturn, sometimesjust by failing to meet the expectations of international investors, the large flow of money into acountry can turn into a stampede away from it.

CHART: FOREIGN INVESTMENT FLOWS

FOREIGN PORTFOLIO FLOWS TO INDIA

Foreign portfolio investments have been allowed in India on the basis of the recommendations ofthe Narasimham committee which stated:The committee would also suggest that the capital markets should be gradually opened up toforeign portfolio investments and simultaneously efforts should be initiated to improve the depth


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of the market by facilitating the issue of new types of equities and innovative debt instruments.(Narasimham committee report)Prior to 1992, only non-resident Indians (NRIs) and Overseas corporate bodies (OCBs) wereallowed to undertake portfolio investment in India. Only on September 14, 1992 the Governmentof India issued guidelines on FII investments in India which was followed by a notification by

Securities and Exchange Board of India (SEBI) three years later in November 1995.

TRENDS IN FII INVESTMENT IN INDIA

TABLE: Trends in FII investment

Year FII PURCHASE FII SALES FII NET FII NET CUM FII NET

in crores in crores in crores US$ million US$ million

1993-94 5593 466 5126 1634 1638

1994-95 7631 2835 4796 1528 3167

1995-96 9694 2752 6942 2036 5202

1996-97 15554 6979 8575 2432 7634

1997-98 18695 12737 5958 1649 92841998-99 16115 17699 -1584 -386 8898

1999-00 56856 46734 10122 2339 11237

2000-01 74051 64116 9934 2160 13396

2001-02 49920 41165 8755 1846 15242

2002-03 47060 44371 2689 562 15804

2003-04 144858 99094 45765 9949 25754

Source: Reserve Bank of India Annual Report 2004

INFERENCE: The investments by FIIs have been registering a steady growth since the opening

of the Indian capital markets in September 1992. Their investments have always been net

positive, but for 1998-99, when their sales were more than their purchases.

It can be observed from the above table that the portfolio investment inflows have always been

on the increase. But the years 2001-02 and 2002-03 saw some reversal in the trend. From a net


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inflow of US $ 2.1 billion in 2000-01, such inflows declined to US $ 1.8 billion in 2001-02, and

further dropped to US $ 0.562 billion in 2002-03. The decline is because of the lower portfolio

inflows, as a result of which the net investment has dropped in these years. However, this decline

witnessed a sharp reversal in the year 2003-04. FIIs have made a net investment of Rs. 45,764

crores during this year registering a growth of 1602% over the previous year, creating a record in

the history of FII investment in India. Gross purchases in this year amounted to Rs.144,857

crores, a growth rate of 208% compared to the year before. This trend continued in April 2004,

only to suffer reversal again during May and June 2004, when the net investment became

negative. Fortunately, the year from July 2004 has been seeing a net positive portfolio flows by

FIIs. As of September 2004, the net FII portfolio investment stands at US $ 27,637 million. If it

is so, then increasing the FII investment cap per se will not be helpful. The country has to work

on specific measures to encourage more FII investments. The analysis of data indicates that there

has been substantial divestment by the FIIs during the year 1998-99. The maximum outflow was

during the months of May and June 1998 (almost US$430 millions).

TABLE: Monthly Trends of FIIs for the Year 1998-99

Month Purchases Sales Net Net

(Rs mn) (Rs mn) (Rs mn) (US$ mn)

Apr-98 11422 11756 -335 -8.4

May-98 8253 13284 -5031 -124.3

Jun-98 8023 16072 -8049 -190.5

Jul-98 13098 12154 944 22.2

Aug-98 7932 11783 -3851 -90.1

Sep-98 14381 12458 1923 45.2Oct-98 10737 16470 -5733 -135.4

Nov-98 10391 9845 546 12.9

Dec-98 11089 8789 2300 104.8

Jan-99 16355 11894 4462 104.8

Feb-99 16477 13084 3393 79.8

Mar-99 25207 23973 1233 29

A major factor which led to continuous outflow of funds during the middle and end of the year1998 was the worsening outlook on the emerging markets. Credit worthiness of almost all the

South-east Asian nations was severely damaged by the crises which started in July 1997. As aresult, the FIIs were facing heavy redemption pressures from the Emerging Markets Funds. Thestock markets in all these countries fell continuously from March 1998 till about September1998. The integration of the Indian capital markets with the international markets thus spilledover to Indian markets as well. However, the net outflow from the Indian markets was muchlower than the other Asian countries. A further indication of the integration of the Indian marketscan be seen from the upsurge in the valuations and funds inflows during the first quarter of 1999,when all the other Asian countries have also seen rising trend in stocks indices.


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The sluggishness in investment in the emerging markets was exacerbated by the fact thathroughout 1998-99, US and European markets showed historically high valuations, and theexpectations of further rise because of the strong economic indicators there which led to reducedallocations elsewhere.

CHART : GROWTH OF FII INVESTMENTS IN INDIA

INFERENCE: The trickle of FII flows to India that began in January 1993 has gradually

expanded to an average monthly inflow of close to Rs. 1900 crores during the first six months of

2001. By June 2001, over 500 FIIs were registered with SEBI. The total amount of FII

investment in India had accumulated to a formidable sum of over Rs.50,000 crores during this

time. In terms of market capitalization too, the share of FIIs has steadily climbed to about 9% of

the total market capitalization of BSE (which, in turn, accounts for over 90% of the total market

capitalization in India).

TABLE: CORRELATION OF FII WITH NIFTY

MONTH GROSS PURCHASES GROSS SALES NET INVESTMENT

APRIL -0.308891015 -0.486299015 -0.122510317MAY -0.203839618 -0.226174846 0.127555673


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JUNE 0.40719847 0.013881057 0.556762421JULY 0.231397721 -0.008199745 0.352195939AUGUST -0.296292834 -0.009987101 -0.288696993SEPTEMBER 0.631541276 0.478957403 0.377141924OCTOBER -0.107835133 -0.303940405 0.118451125

NOVEMBER 0.103856902 0.232269601 -0.020576251DECEMBER -0.689594568 -0.692805116 -0.496878284JANUARY -0.02034654 -0.57330261 0.64885866FEBRUARY 0.124176605 -0.056354197 0.233709555MARCH 0.419911809 -0.255570154 0.483718703

FII flows and contemporaneous stock returns are strongly correlated in India. The correlation

coefficients between different measures of FII flows and market returns on the Bombay Stock

Exchange during different sample periods are shown in Table above. While the correlations arequite high throughout the sample period, they exhibit a significant rise since the beginning of the

1999-00. The calculations show that there exists a relationship between FIIs and Nifty since 6

out of 12 months show positive correlation in the case of Gross Purchass and 8 out of 12 months

indicate a positive correlation in the case of Net FII Investment and Nifty.

TABLE : CORRELATION OF FII WITH SENSEX


APRIL -0.267580403 -0.509025858 -0.076211493MAY -0.184653959 -0.224809346 0.1484205JUNE 0.405635894 -0.004710378 0.575995013JULY 0.291205286 0.045396684 0.353391901AUGUST -0.315900375 -0.033391574 -0.301709231SEPTEMBER 0.661834837 0.506184274 0.389776394OCTOBER -0.067640059 -0.311421901 0.18995454NOVEMBER 0.083505749 0.244942636 -0.057919794

DECEMBER -0.666663184 -0.688620778 -0.46494095JANUARY 0.02201209 -0.551509386 0.679227006FEBRUARY 0.00689661 -0.170243004 0.149373722MARCH 0.417854257 -0.250893125 0.479619465


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The behaviour of the foreign portfolio investors matched the behaviour of Sensex during this

period. Net FII investment in the Indian capital markets started fluctuating sharply during April

and it turned negative. Net FII investment in the Indian stock market was positive from May to

July. During this period, the Sensex and net FII investment showed very high degree of

correlation. For the month of June showed a correlation as high as 0.60. The months of

September, October, November and December shows a declining trend, the FII investment

reversed from that day. On the whole, there exists a relationship between FIIs and Sensex since 7

out of 12 months show positive correlation in the case of Gross Purchases and 8 out of 12

months indicate a positive correlation in the case of Net FII Investment and Sensex.

TABLE: COEFFECIENT OF DETERMINATION OF FII WITH NIFTY

MONTH GROSS PURCHASES GROSS SALES NET INVESTMENTAPRIL 0.095413659 0.236486732 0.015009MAY 0.04155059 0.051155061 0.01627JUNE 0.165810594 0.000192684 0.309984JULY 0.053544905 6.72358E-05 0.124042

AUGUST 0.087789444 9.97422E-05 0.083346SEPTEMBER 0.398844383 0.229400194 0.142236

OCTOBER 0.011628416 0.09237977 0.014031NOVEMBER 0.010786256 0.053949168 0.000423DECEMBER 0.475540669 0.479978929 0.246888JANUARY 0.000413982 0.328675883 0.421018

FEBRUARY 0.015419829 0.003175796 0.05462MARCH 0.176325927 0.065316104 0.233984

Coefficient of Determination (R2), ranges from 0 - 1, is always part of the standard regression

output, the important measure of goodness of fit. R2 = correlation coefficient (r) squared, since

the range of r is from -1 to +1, squaring r forces R2 to fall between 0 and 1. R2 in the above table

gives the percentage (%) of the total variation in Nifty that is explained by the regression

equation, or explained by FIIs. During the month of January the total variation in Nifty explained

by FII amounted to 42% and the remaining 58% is explained by other factors which influence

Nifty.

TABLE : COEFFECIENT OF DETERMINATION OF FII WITH SENSEX



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APRIL 0.071599272 0.259107325 0.005808MAY 0.034097085 0.050539242 0.022029JUNE 0.164540479 2.21877E-05 0.33177JULY 0.084800519 0.002060859 0.124886

AUGUST 0.099793047 0.001114997 0.091028

SEPTEMBER 0.438025352 0.256222519 0.151926OCTOBER 0.004575178 0.0969836 0.036083NOVEMBER 0.00697321 0.059996895 0.003355DECEMBER 0.444439801 0.474198576 0.21617JANUARY 0.000484532 0.304162603 0.461349

FEBRUARY 4.75632E-05 0.028982681 0.022313MARCH 0.17460218 0.06294736 0.230035

Similarly, in the case of FII and Sensex we have R2 = .46, indicating that variation in FII

explains about 46% of the variation in Sensex. 54% of the variation in Sensex is unexplained by

FII, explainable by other factors, omitted variables, random variation, etc. We shouldn't put too

much emphasis on R2, t-stat are more important. However, R2, or some other measure of

goodness of fit is expected in reported empirical results.

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 stock

exchange (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 isNifty 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,


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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.

indices period of study and observations.

Indices Period of study ObservationS&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

the total 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 representation in 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


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

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 allstocks 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. The average 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.


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CONCLUSION

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

In this study I tried to find out the impact of and FIIs on Indian Stock Market .the important

result of this study is that the foreign investment is determined by stock market return. But

foreign investment is not a major factor for the stock market boom in India the FII are

increasingly dominant in the stock market. The domestic investors and domestic companiesremain not so dominant. There is therefore the fear of sudden outflows of the foreign capital and

this may be a trigger a third stock market scam as most regulatory changes re being made only as

a follow up of an adverse event.

RECOMMENDATIONS

Some of the steps that can be taken to help influence the choices made by foreign institutional

investors include:

The Government should cut its fiscal deficits, which would result in strengthening the

economy as a whole.


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Creating infrastructure and other facilities to attract foreign investment. As described earlier,

an array of services can help promote foreign institutional investment in India, ranging from

basic services such as the provision of electricity and clean water, to fair and effective dispute

resolution systems.

The ability of governments to prevent or reduce financial crises also has a great impact on the

growth of capital flows. Steps to address these crises include strengthening banking supervision,

requiring more transparency in international financial transactions and ensuring adequate

supervision and regulation of financial markets.

An attempt should be made to bring down the inflation level to attract more foreign

institutional investments into India.

The Banking system needs to be strengthened which could be achieved by reducing the

number of Non Performing Assets.

The FIIs investments, though shown an increasing trend over time, are still far below the

permissible limits. One such measure in this line could be the newly announced INDONEXT, the

platform for trading the small and mid-cap companies, which might bring some focus on these

companies and hopefully add some liquidity and volume to their trading, which may attract some

further investments in them by FIIs.

The fact is that developing country like India has its own compulsions arising out of the very

state of their social, political and economic development. To attract portfolio investments and

retain their confidence, the host countries have to follow stable macro-economic policies,

The provision for clear procedures must be followed in the event of disputes between

investors and host governments, to ensure that rules are adhered to and that arbitration may be

established by mutual consent.

Countries may impose these kinds of measures like expropriation, domestic content

requirements, restrictions on capital outflows of short term investments, etc with the intention of

protecting domestic industries from international competition and promoting their economic

development, but this usually leads to misallocation of resources away from the natural

economic capabilities of nations.

There has been a significant shift in the character of global capital flows to the developing

countries in recent years in that the predominance of private account capital transfer and


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especially portfolio investments (FPI) increased considerably. In order to attract portfolio

investments which prefer liquidity, it has been advocated to develop stock markets.

LIMITATIONS

The data for analysis of impact of FII on stock exchange is limited to National stockexchange (NSE) only.

As the time available is limited and the subject is very vast. The study is general. It is mainly based on the data available in various websites &other secondary sources . The inferences made is purely from the past years performance There is no particular format for the study. Sufficient time is not available to conduct an in-depth study.

BIBLIOGRAPHY

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.

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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Internet sites:

www.nse.india.com

www.sebi.co.in www.centrum.co.in www.bse.co.in www.indianinfoline.com
http://www.nse.india.com/http://www.sebi.co.in/http://www.centrum.co.in/http://www.bse.co.in/http://www.indianinfoline.com/http://www.indianinfoline.com/http://www.bse.co.in/http://www.centrum.co.in/http://www.sebi.co.in/http://www.nse.india.com/

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