Final -Role of Financial Instituion in Capital Market in India

8/19/2019 Final -Role of Financial Instituion in Capital Market in India

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A

PROJECT REPORT ON

“ROLE OF FINANCIAL INSTITUTION IN CAPITAL MARKET IN

INDIA”

PREPARED BY

ANKITA TAPARIA

SEAT NO: 1087115

UNDER GUIDANCE OF

PROF. APARNA JAIN

SUBMITTED IN PARTIAL FULLFILMENT OF

REQIREMENT FOR QUALIFYING B.F.M

PART 1 EAMINATION

BAC!ELOR OF FINANCIAL MARKET

UNI"ERSITY OF MUMBAI

S.K. SOMAIYA COLLEGE OF ARTS# SCIENCE# AND COMMERCE#

"ID!YA"I!AR $EAST% MUMBAI&'0077

YEAR (01)&(01'

ACKNO*LEDGEMENT


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It gives me pleasure to present this project on “ROLE OF FINANCIAL

INSTITUTION IN CAPITAL MARKET IN INDIA” to the student of T.Y.B.Com

(Financial Market). The suject made is more compact and logical.

I !ould like to thank PROF. APARNA JAIN" m# project guide for providingme the opportunit# to !ork on this project. M# sincere thanks continue to our college $.%

$omai#a" for providing me the opportunit# to !ork on this project. It !as a great part and a

source of learning for me.

&ast ut not the least" I !ould like to thank all the people !ho helped and

contriuted me kno!ingl# or unkno!ingl# during this project. It ma# not e possile to

mention all the names ut their contriutions have al!a#s enriched me in ever# aspect .

$ignature of the student

EECUTI"E SUMMARY


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The ojective of the project is to find the different role of institutional investors in the

capital market in India and then to find the role of institutional investors in the major

volatile episode in the capital market in India. Finall# to find the relationship et!een the

$ense' variation !ith the variation of the investments made # the institutional investors.

India opened its stock markets to foreign investors in $eptemer * and has" since

+" received considerale amount of portfolio investment from foreigners in the form of

Foreign Institutional Investor,s (FII) investment in e-uities.

hile it is generall# held that portfolio flo!s enefit the economies of recipient countries"

polic# makers !orld!ide have een more than a little uneas# aout such investments.

/ortfolio flo!s often referred as 012T M234Y5 are notoriousl# volatile compared to other

t#pes of capital inflo!s. Investors are kno!n to pull ack portfolio investments at the

slightest hint of troule in the host countr# often leading to disastrous conse-uences to itseconom#.

The# have een lamed for e'acerating small economic prolems in a countr# # making

large and concerted !ithdra!als at the first sign of economic !eakness. The methodolog#

used to is regression anal#sis. The degree of association helps us to -uantif# the relationship

et!een the variations in sense' due to the variation in the net investments made # the

institutional investors. 6fter completing the project I could recommend that 7overnment

should certainl# encourage foreign institutional investment ut should keep a check on the

volatilit# factor. &ong term funds should e given priorit# and encouraged some of the

actions that could e taken to ensure stailit# are $trengthening domestic institutional

investors 2perational fle'iilit# to impart stailit# to the market %no!ledge activities and

research programs.

To conclude !ith I !ould sa# that foreign funds is certainl# one of the most important cause

of volatilit# in the Indian stock market and has had a considerale influence on it. 6lthough it

!ould not e fair enough to come to an# conclusion as there are a lot of other factors e#ond

the scope of the stud# that effect returns and risks.

It is not eas# to predict the nature of the macroeconomic factors and their ehavior ut it has

a great significance on an# econom# and its elements.

ABSTRACT

"The whole is much more than just the sum of the parts"–


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Aristotle

6n econom#" apart from ever#thing else" is a highl# fluid transmission mechanism. Its

eaut# lies in ho! the smallest of changes have the most comple' trickle8do!n effects. 6

paradigmatic e'ample of ho! seemingl# minor polic# changes can jumpstart the econom#

can e illustrated # e'amining the effects lierali9ation on capital market in India.

7loali9ation had led to !idespread lierali9ation and implementation of financial market

reforms in man# countries" mainl# focusing on integrating the financial markets !ith the

gloal markets. Indian Capital Market has also undergone metamorphic reforms in the past

fe! #ears. 4ver# segment of Indian Capital Market via primar# and secondar# markets"

derivatives" institutional investment and market intermediation has e'perienced impact of

these changes !hich has significantl# improved the transparenc#" efficienc# and integration

of Indian market !ith the gloal markets.

This is one of the prime reasons !h# the foreign portfolio investments have een

increasingl# flo!ing into the Indian markets. 6 significant part of these portfolio flo!s to

India comes in the form of Foreign Institutional Investors, (FIIs,) investments" mostl# in

e-uities. 4ver since the opening of the Indian e-uit# markets to foreigners" FII net

investments have steadil# gro!n. Thus" !e can see that there has een a consistent rise in the

FII inflo!s into the countr#.

hile the concerns such as FII pulling ack their investments and the kind of destaili9ing

effect on the capital market in India are all !ell8placed" comparativel# less attention have

een paid so far to anal#9ing the FII flo!s data and understanding their ke# features. 6

proper understanding of the nature and determinants of these flo!s" ho!ever" is essential for

a Meaningful deate aout their effects as !ell as predicting their chances of their sudden

reversals. Thus this project aims at stud#ing the role of these Institutional investors and its

impact on the capital markets in India.

This also aims to find out the various factors and determinants for their investments and

also cite out scenarios !here in these investments !hen pulled ack # these FII could


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reall# affect the capital markets in India.

Institutional investors are a permanent feature of the financial landscape" and their gro!th

!ill continue at a similar and perhaps faster pace. The factors that underpin their development

are far from transitor# and in man# cases have onl# just started having an impact. The

ehavioral characteristics of institutional investors" therefore" !ill e an increasingl#

important determinant of domestic and international financial market conditions" and the

implications for financial market stailit# !arrant serious consideration:

INDE


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SR. NO C!APTER NO CONTENTS PAGE NO

1 C+,-/ ;8+

.

.*

.+

Introduction

2jective of the project

Methodolog#

( C+,-/ egistered in India

Mutual Funds >egistered in

India

FII >egistered in India


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' C+,-/ *


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in Capital Market in India

8 R/2344/6,3 @*

C329;3 @+

10 R/


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C!APTER 1

INTRODUCTION


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1.1. INTRODUCTION

Financial markets are the catal#sts and engines of gro!th for an# nation. India,s financial

market egan its transformation path in the earl# Ds. The anking sector !itnessed

s!eeping changes" including the elimination of interest rate controls" reductions in reserve

and li-uidit# re-uirements and an overhaul in priorit# sector lending. /ersistent efforts # the

>eserve Bank of India (>BI) to put in place effective supervision and prudential norms since

then have lifted the countr# closer to gloal standards. 6round the same time" India,s capital

markets also egan to stage e'tensive changes. The $ecurities and 4'change Board of India

($4BI) !as estalished in * !ith a mandate to protect investors and usher improvements

into the microstructure of capital markets" !hile the repeal of the Controller of Capital Issues

(CCI) in the same #ear removed the administrative controls over the pricing of ne! e-uit#

issues. India,s financial markets also egan to emrace technolog#. Competition in the

markets increased !ith the estalishment of the 3ational $tock 4'change (3$4) in egulations of + rought aout a restructuring of the mutual fund industr#.

6n arm,s length relationship is re-uired et!een the fund sponsor" trustees" custodian" and

asset Management Compan#. This is in contrast to the previous practice !here all three

functions" namel# trusteeship" custodianship" and asset management# !ere often performed # one od#" usuall# the fund sponsor or its susidiar#. The regulations prescried disclosure

and advertisement norms for mutual funds" and" for the first time" permitted the entr# of

private sector mutual funds. FIIs registered !ith $4BI ma# invest in domestic mutual funds"

!hether listed or unlisted. The + >egulations have een revised on the asis of the

recommendations of the Mutual Funds *DDD >eport prepared # $4BI. The revised

regulations strongl# emphasi9e the governance of mutual funds and increase the

responsiilit# of the trustees in overseeing the functions of the asset management compan#.

Mutual funds are no! re-uired to otain the consent of investors for an# change in the


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0fundamental attriutes5 of a scheme" on the asis of !hich unit holders have invested. The

revised regulations re-uire disclosures in terms of portfolio composition" transactions #

schemes of mutual funds !ith sponsors or affiliates of sponsors" !ith the asset Management

Compan# and trustees" and also !ith respect to personal transactions of ke# personnel of

asset management companies and of trustees.

India opened its stock markets to foreign investors in $eptemer * and has" since +"

received considerale amount of portfolio investment from foreigners in the form of Foreign

Institutional Investor,s (FII) investment in e-uities. This has ecome one of the main

channels of portfolio managers. In order to trade in e-uit# markets" foreign corporations

need to register !ith the $4BI as Foreign Institutional Investor (FII). $4BI,s definition of

FIIs presentl# includes foreign pension funds" mutual funds"

charitaleEendo!mentEuniversit# fund,s etc. as !ell as asset management companies andother mone# managers operating on their ehalf.

The sources of these FII flo!s are varied .The FIIs registered !ith $4BI come from as

man# as *; countries (including mone# management companies operating in India on

ehalf of foreign investors).?$ ased institutions accounted for slightl# over s.*DD crores in + to over >s.*A*@ crores till the end

of Fe *DD;.

hile it is generall# held that portfolio flo!s enefit the economies of recipient countries"

polic# makers !orld!ide have een more than a little uneas# aout such investments.

/ortfolio flo!s8 often referred as 0hot mone#58are notoriousl# volatile compared to other

t#pes of capital inflo!s. Investors are kno!n to pull ack portfolio investments at the

slightest hint of troule in the host countr# often leading to disastrous conse-uences to its

econom#. The# have een lamed for e'acerating small economic prolems in a countr# #

making large and concerted !ithdra!als at the first sign of economic !eakness. The# have


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also een responsile for spreading financial crisis Gcausing contagion in international

financial markets.

International capital flo!s and capital controls have emerged as an important polic# issues in

the Indian conte't as !ell. The danger of 0arupt and sudden outflo!s5 inherent !ith FII

flo!s and their destaili9ing effect on e-uit# and foreign e'change markets have een

stressed.

The financial market in India have e'panded and deepened rapidl# over the last ten #ears.

The Indian capital markets have !itnessed a dramatic increase in institutional activit# and

more specificall# that of FII,s.

This change in market environment has made the market more Innovative and competitiveenaling the issuers of securities and intermediaries to gro!. In India the institutionali9ation

of the capital markets has increased !ith FII,s ecoming the dominant o!ner of the free float

of most lue chip Indian stocks. Institutions often trade large locks of shares and

institutional order,s can have a major impact on market volatilit#. In smaller markets"

institutional trades can potentiall# destaili9e the markets. Moreover" institutions also have to

design and time their trading strategies carefull# so that their trades have ma'imum possile

returns and minimum possile impact cost


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1.( OBJECTI"E OF T!E PROJECT

To $tud# the Impact of Institutional Investors especiall# the FII on the capital

market in India.

To stud# the major 4pisodes of volatilit# in India and anal#9ing the impact of

Institutional investors in these episodes.

To -uantif# the relation et!een FII flo!s and their relationship !ith

economic variales" particularl# !ith 3IFTY.

1.). MET!ODOLOGY


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For covering the Theoretical part I shall e going through a lot of literature including ooks

on FII H Capital Market. Be#ond this I shall e tracking the performance of FII through the

help of internet. To $tud# the major episodes of volatilit# in India" I !ould e reading

through a lot of literature" articles" and maga9ines and visiting various sites for their

comments during that period.

For the stud# purpose" I !ill take onl# 3IFTY that is the 3ational $tock 4'change (3$4)

enchmark Inde' is considered. This is ecause the larger chunk of FII activit# in India

happens on the 3$4. 3$4 is the dominant e'change in India !ith close to A@ of cash

market turnover and !ell over D of derivatives turnover in India happening on the 3$4.

The dail# inde' volatilit# and volatilit# in dail# FII cash flo!s !ere studied and dail# FII

volatilit# on the 3ift# volatilit#. 2n the information so gathered I !ill e running $/$$

anal#sis H reaching onto the conclusion. Thus throughout the project I shall e making use of

secondar# data.


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C!APTER (

TYPES OF INSTITUTIONAL IN"ESTORS

(.1 INSTITUTIONAL IN"ESTOR

6n institutional investor is an investor" such as a ank" insurance compan#" retirement fund"


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hedge fund" or mutual fund that is financiall# sophisticated and makes large investments" often

held in ver# large portfolios of investments. Because of their sophistication" institutional

investors ma# often participate in private placements of securities" in !hich certain aspects of

the securities la!s ma# e inapplicale.

I;3,9 =/;3; are organi9ations !hich pool large sums of mone# and invest those sums

in securities" real propert# and other investment assets. The# can also include operating

companies !hich decide to invest their profits to some degree in these t#pes of assets.

6n institutional investor can have some influence in the management of corporations ecause it

!ill e entitled to e'ercise the voting rights in a compan#. Thus" it can activel# engage

in corporate governance. Furthermore" ecause institutional investors have the freedom to u#

and sell shares" the# can pla# a large part in !hich companies sta# solvent" and !hich go under.

Influencing the conduct of listed companies" and providing them !ith capital are all part of the

jo of investment management.

(.(. DOMESTIC INSTITUTIONAL IN"ESTOR

It is used to denote an investor 8 mostl# of the form of an institution or entit#" !hich invests

mone# in the financial markets of its o!n countr# !here the institution or entit# !as originall#

http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Real_propertyhttp://en.wikipedia.org/wiki/Real_propertyhttp://en.wikipedia.org/wiki/Real_propertyhttp://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/Investment_managementhttp://en.wikipedia.org/wiki/Real_propertyhttp://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/Investment_managementhttp://en.wikipedia.org/wiki/Security_(finance)


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incorporated. In India" there are roadl# four t#pes of institutional investors.

(.(.1 DE"ELOPMENTAL FINANCIAL INSTITUTIONS: It is like Industrial Finance

Corporation of India (IFCI)" Industrial Credit and Investment Corporation of India (ICICI)"

Industrial =evelopment Bank of India (I=BI)" the $tate Financial Corporations" etc. The role

pla#ed # these financial institutions (FIs) is to e'tend funds to the companies for oth long

terms financing and (more recentl#) !orking capital financing. The financial institutions e'tend

oth det and e-uit# financing to their nominee directors in the companies.

(.(.( INSURANCE COMPANIES: It is like the &ife Insurance Corporation (&IC)"

7eneral Insurance Corporation (7IC)" and their susidiaries.

(.(.) BANKS: 4arlier anks used to finance onl# the !orking capital of the companies. But

no! the# are also e'tending long8term finance to the companies.

(.(.' ASSET MANAGEMENT COMPANIES: 6ll the mutual funds including ?nit Trust of

India (?TI). The mutual funds collect funds from oth individuals and corporate to invest in the

financial assets of other companies. In India" the mutual funds participate largel# in the e-uit#

capital of the companies. The mutual fund industr# !hich is the major institutional investors inIndia started in + !ith the formation of ?nit Trust of India" at the initiative of the


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7overnment of India and >eserve Bank.

T+/ +;3> 3< 4,9 6=6/6 3


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entit# !as originall# incorporated.FII investment is fre-uentl# referred to as hot mone# for the

reason that it can leave the countr# at the same speed at !hich it comes in. In countries like

India" statutor# agencies like $4BI have prescried norms to register FIIs and also to regulate

such investments flo!ing in through FIIs.

(.).1 SOURCES OF FII IN INDIA:

The sources of these FII flo!s are varied. The FIIs registered !ith $4BI come from as man# as

*; countries (including mone# management companies operating in India on ehalf of foreign

investors). ?$8ased institutions accounted for slightl# over


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C!APTER )

CAPITAL MARKET IN INDIA

).1 CAPITAL MARKET IN INDIA

The Boma# $tock 4'change (B$4)" !hich egan formal trading in ;A@" is one of the oldest in

6sia. 2ver the last decade" there has een a rapid change in the Indian securities market" oth in


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primar# as !ell as the secondar# market. 6dvanced technolog# and online8ased transactions

have moderni9ed the stock e'changes.

In terms of the numer of companies listed and total market capitali9ation" the Indian e-uit#

market is considered large relative to the countr#,s stage of economic development. Currentl#"

there are


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These pricing errors limited order flo! to these markets. 4'plicit nation!ide connectivit# and

implicit movement to!ard one national market has changed this situation. 3$4 has estalished

satellite communications !hich give all trading memers of 3$4 e-ual access to the market.

$imilarl#" B$4 and the =elhi $tock 4'change are oth e'panding the numer of trading

terminals located all over the countr#. The aritrages are eliminating pricing discrepancies

et!een markets.

The Indian capital market still faces man# challenges if it is to promote more efficient

allocation and moili9ation of capital in the econom#.

• First" market infrastructure has to e improved as it hinders the efficient flo! of

information and effective corporate governance.

• $econd" the trading s#stem has to e made more transparent.

• Third" India ma# need further integration of the national capital market through

consolidation of stock e'changes.

• Fourth" the pa#ment s#stem has to e improved to etter link the anking and securities

industries.

The capital market cannot thrive aloneJ it has to e integrated !ith the other segments of thefinancial s#stem. The gloal trend is for the elimination of the traditional !all et!een anks and

the securities market. $ecurities market development has to e supported # overall

macroeconomic and financial sector environments. Further lierali9ation of interest rates"

reduced fiscal deficits" full# market8ased issuance of 7overnment securities and a more

competitive anking sector !ill help in the development of a sounder and a more efficient capital

market in India.

).(. INSTITUTIONAL IN"ESTORS REGISTERED IN INDIA

).(.1. MUTUAL FUNDS REGISTERED IN INDIA:


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From the ar chart aove it is clearl# evident that the mutual fund industr# is still at a nascent

stage as compared to the FII,s. $ince its inception in < !hen the first mutual fund i.e. ?TI had

the monopol# for *@ #ears. It !as thus in the #ear after ; that pulic sector anks and

financial institution started their 6MC .Finall# in the third phase !hen private pla#ers entered the

arena" it lead to a fierce attle to hold the top slot in the Indian mutual fund industr# .The

gro!ing numer of mutual fund companies corroorates the fact that Indian pulic are no!

looking for different avenues to invest their earnings and are confident on the !orking of capital

market in India. This sho!s that $4BI has in a !a# restored the faith of these investors in spite of

the different scams that rocked the capital market in India.

).(.( FII REGISTERED IN INDIA:

&et,s look at some of the data to get an idea aout the trend of FIIs

In India" and also to see the future direction of their movement. India had @*; FIIs !ere

registered !ith $4BI # end of *DD and # end of Fe8*DD; the numer increased to+D+.

The trend in the numer of registered FIIs has een consistentl# on the rise as can e seen


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from the taleJ sho!ing the significant amount of confidence that Indian Capital market has

developed in the last fe! #ears.

3ot onl# has een the numer increasing on a consistent asis" ut the amount of inflo! into

Indian market has also seen a manifold increased. The gross purchase" sales and net

investment figure on an annual asis gives a fair idea aout the consistenc# of their

investments in our countr#.

6s !e can see in the investment trends tale" e'cept for ;" the net investment # the FIIs in

the Indian market has al!a#s een positive since lierali9ation !hich to a large e'tent tells aout

the consistenc# of their presence in Indian market. This is also evident from the fact that the

numer of FII registering in India is increasing in spite of the fact that $4BI has declined to issue

an# further /3 notes and also asked them to get registered. This sho!s that India still remains the

hot spot for the foreign investors in the coming #ear.


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C!APTER '

MAJOR INSTITUTIONAL IN"ESTORS IN INDIA

'.1 MAJOR INSTITUTIONAL IN"ESTORS IN INDIA

The total numer of =omestic institutional investors speciall# the mutual funds is


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'.(. DOMESTIC INSTITUTIONAL IN"ESTORS

'.(.1. LIFE INSURANCE CORPORATION OF INDIA:


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&ife Insurance in its modern form came to India from 4ngland in the #ear ;;. The first t!o

decades of the t!entieth centur# sa! lot of gro!th in insurance usiness. From s.**.


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Management (66?M) of >s. D"+; Crores (66?M for Mar D; ) and an investor ase of over

.;A &aths. >eliance Mutual Fund" a part of the >eliance 8 6nil =hiruhai 6mani 7roup" is

one of the fastest gro!ing mutual funds in the countr#. >eliance Capital &td. is one of India,s

leading and fastest gro!ing private sector financial services companies" and ranks among the top

+ private sector financial services and anking companies" in terms of net !orth. >eliance Capital

&td. has interests in asset management" life and general insurance" private e-uit# and proprietar#

investments" stock roking and other financial services.

'.(.). ICICI PRUDENTIAL FUNDS

ICICI /rudential 6sset Management Compan# enjo#s the strong parentage of prudential

plc" one of ?%Ls largest pla#ers in the insurance H fund management sectors and ICICI

Bank" a !ell8kno!n and trusted name in financial services in India. ICICI /rudential

6sset Management Compan#" in a span of just over eight #ears" has forged a position of

pre8eminence in the I6, M,9 F6 industr# as one of the largest asset

management companies in the countr# !ith assets under management of >s. +A"D.*<

crore (as of March +" *DDA). The Compan# manages a comprehensive range of schemes

to meet the var#ing =/;4/ needs of its investors spread across ; cities in the

countr#. ?pon its inception in Ma# ; it manages * funds of >s D Cr and has gro!n

to manage +@ Funds !orth >s *"DD;.@ Cr.

'.(.'. UTI MUTUAL FUNDS:


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?TI Mutual Fund came into e'istence on st Feruar# *DD+. Bank of Baroda (B2B)" /unja

3ational Bank (/3B) and $tate Bank of India ($BI) and &ife Insurance Corporation of India

(&IC) are the sponsors of the ?TI Mutual Fund. ?TI Mutual Fund is managed # ?TI 6sset

Management Compan# /rivate &imited (6MC). ?TI 6MC is a registered portfolio manager

under the $4BI (/ortfolio Managers) >egulations" + for undertaking portfolio management

services and also acts as the manager and marketer to offshore funds. ?TI Mutual Fund has a

nation!ide net!ork consisting AD ?TI Financial Centers (?FCs) and ?TI International offices

in &ondon" =uai and Bahrain. The fund has a track record of managing a variet# of schemes

catering to the needs of ever# class of citi9enr#.

'.(.5. !DFC MUTUAL FUND:


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1=FC (1ousing =evelopment Finance Corporation &imited) is one of the dominant pla#ers in

the Indian mutual fund space. 1=FC !as incorporated in AA as the first speciali9ed Mortgage

Compan# in India. 1=FC Mutual Funds are handled # 1=FC 6sset Management Compan#

&imited. 1=FC 6sset Management Compan# !as incorporated under the Companies 6ct" @"

on =ecemer D" " and !as approved to act as an 6sset Management Compan# for the

Mutual Fund # $4BI on ul# +" *DDD. The compan# also provides portfolio management E

advisor# services.

'.) FOREIGN INSTITUTIONAL IN"ESTORS

'.).1 DEUTSC!E GROUP:


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=$ Investments part of =eutsche 6sset Management" !as founded in @ in FrankfurtEMain.

ith fund assets under management of euro *A n" the compan# is one of the Top D

companies !orld!ide. In 4urope" =$ is one of the leading mutual fund companies andcurrentl# manages euro A+ n. In e'cess of more than euro


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The formation of Citigroup in ; created a ne! model of financial services organi9ation to

serve its clients, financial needs. 6s the compan# continues to gro! and evolve" it,s increasingl#

evident that such a large" comple' grouping of usinesses can indeed succeed. ith *A@"DDD

emplo#ees !orking in more than DD countries and territories" Citigroup,s gloalit# and

diversit# contriute to its continued success

'.).) !SBC GLOBAL IN"ESTMENTS:

1$BC Investments is one of the !orldLs premier Fund management organi9ations. It hasestalished a strong reputation !ith institutional investors including corporations" governments"

insurance companies and charities the !orld over for delivering consistentl# superior returns. In

India !e offer fund management services for institutional as !ell as retail investors. 2ur arra# of

products includes 4-uit# Funds Income E=et Funds.

'.).' MORGAN STANLEY @CO INTERNATIONAL LTD:


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Morgan $tanle# is a gloal financial services firm and a market leader in securities" investment

management and credit services. It has more than DD offices in *A countries and manages


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=$/ Merrill nch Mutual Funds are managed # =$/ Merrill nch Fund Managers. =$/

Merrill nch &td. (=$/M&) is a premier financial services provider and Merrill nch (M&)

holds D stake in =$/M&. =$/M& !as originall# called =$/ Financial Consultants &td. The

firm traces its origins to =. $. /urhoodas H Co." a securities and rokerage firm !ith over


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C!APTER 5

IN"ESTMENT TRENDS OF INSTITUTIONAL IN"ESTORS

5.1. IN"ESTMENT TRENDS OF INDIAN MUTUAL FUND INDUSTRY:


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The 6ssets under Management of ?TI !as >s.s. s. +*AA Cr in March

+.

The net asset value (36N) of mutual funds in India declined !hen stock prices started falling

in the #ear *. Those da#s" the market regulations did not allo! portfolio shifts into

alternative investments. There !as rather no choice apart from holding the cash or to further

continue investing in shares.

6 lone ?TI !ith just one scheme in < no! competes !ith as man# as e!arding honest and transparent management !ith higher valuations has created a

s#stem of risk8 re!ard created !here the corporate sector is more transparent then efore. Funds

collection has een increasing in last @ #ears !hich can e attriuted to the fact of sound

economic gro!th and the confidence of the retail investors on the capital market of India.

5.(. FOREIGN INSTITUTIONAL IN"ESTMENT:


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$FII% is one of the main channels of foreign investment in India. Foreign institutional investors

(FIIs) !ere permitted to invest in Indian securities market in +. $ince then" their investments

into Indian e-uit# market have gro!n # leaps and ounds. In fact" FIIs" as a class of institutional

investors" have assumed a major role in mature and emerging market economies" in recent #ears.

The FII in the Indian e-uit# markets has risen steadil# since *DD+8Ds. @"*D"@D; crore in *DD8DA from

>s. +"s. +D";s.


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5.). REASONS FOR GRO*T! OF FII

IN"ESTMENTS

7loal li-uidit# is" of course" the primar# cause of the recent surge in 6sian markets including

India. 6lso lo! interest rate regime has led foreign investors to look for fresh avenues to

invest. This has resulted in most emerging markets seeing heav# inflo!s. FII,s see India as a

good destination to invest in and make mone#. The# are happ# !ith the Indian governmentLs

commitment to economic reforms. The# are also looking closel# at sectors (and companies

!ithin these sectors) !hich the# think have potential. Infact" the gro!ing competitiveness of

Indian companies is an enticing factor.

L3&T/4 C,-,9 G,; T, !hich is the ta' an investor pa#s !hen he sells his shares

after more than a #ear 88 has een aolishedJ thus one can sell his shares !ithout having to pa#

the government an# kind of ta'.

R-// A--/2,3: T+/ dollar has een falling in value vis8P8vis other currencies. 6s a

result" FIIs don,t find the thought of investing in the ?$ market all that attractive. The# kno!

the# !ill make more mone# if the# invest else!here. E23342 G3+: 6s mentionedearlier !e !itnessed a 7=/ gro!th rate of aout ;.@ last #ear. 2ur industries like Telecom"

Banking etc are doing relativel# !ell. 6ll these make our countr# ver# attractive to invest in.

The sheer si9e of India and the relative stailit# the countr# offers are other ovious plus

points. hatever the case ma# e" a perception is gaining momentum that foreign investors

are here to sta# at least in the short8term.


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C!APTER

. FOREIGN INSTITUTIONAL IN"ESTMENT: A

COST BENEFIT ANALYSIS


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.1 FOREIGN INSTITUTIONAL IN"ESTORS:

I3623:

e have heard people sa#ing that the !orld is going gloal and India is also moving to!ards

prosperit# ut !hat does it actual means and !ho are the persons ehind this scenario" !hich

should e kno!n. 6mong them the persons !ho are responsile or !e can sa# !ho have

contriuted to!ards this scenario are the Foreign Institutional Investors.

The !orld is increasingl# ecoming interdependent. Toda# the needs of the customer have

increased and the# !ant goods from all over the !orld. e can see

variet# of products

moving

across the !orld and the !orld trade increased # 1(0.

The developing countries are looking for!ard to stead# flo! of capital and are undergoing the

learning process of ho! to asor them.

6s regard the attendant risks" the central ank of the countries have to tackle them. There are

man# !a#s the inflo! can come into the countr#. =et is a form of capital forms !hich are

raised from anks or from the markets. The non8det creating flo!s includes

Foreign =irect

Investment or /ortfolio Investment

.( POLICY MEASURE TO ATTRACT FII:


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The 7overnment of India has introduced man# polic# measures to attract FII

1.A34,2 ,--3=,9:

6utomatic approval up to a specified limit is allo!ed in +< specified high priorit#" capital8intensive and high technolog# industries. Foreign investment has een allo!ed in e'ploration"

production and refining of oil and marketing of gases.

(. T+/ F3/ I=/;4/ P3433 B3,6 $FIPB%:

FIB/ has een set up to process applications in cases not covered # automatic approval.

). A F3/ I=/;4/ I4-9/4/,3 A+3> $FIIA%:

FII6 !as estalished in august !ithin the Ministr# of Industr# in order to ensure the

approvals for Foreign Investment (including 3>I investment) are -uickl# translated into actual

investment inflo!s and that proposals fructif# into projects. In particular" in case !here FIB/

clearance is needed" approval time has een reduced to +D da#s. Foreign companies have een

allo!ed to use their trade marks on domestic sales from


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The role of foreign investment over the #ears can,t e ignored. It certainl# has had an impact

on the Indian stock market !ith a lot of enefits ut along !ith these enefits there are a fe!

costs attached !ith it. Therefore it is useful to summari9e the enefits and costs for India of

having foreign inflo!s.

BENEFITS

A% R/62/6 23; 3< />

FII inflo!s augment the sources of funds in the Indian capital markets. FII investment

reduces the re-uired rate of return for e-uit#" enhances stock prices" and fosters investment # Indian firms in the countr#. The impact of FIIs upon the cost of e-uit# capital ma# e

visuali9ed # asking !hat stock prices !ould e if there !ere no FIIs operating in India.

?% S,?9> +/ ?,9,2/ 3< -,>4/

For promoting gro!th in a developing countr# such as India" there is need to augment

domestic investment" over and e#ond domestic saving" through capital flo!s. The e'cess of

domestic investment over domestic savings result in a current account deficit and this deficit is

financed # capital flo!s in the alance of pa#ments. /rior to " det flo!s and official

development assistance dominated these capital flo!s. This mechanism of funding the current

account deficit is !idel# elieved to have pla#ed a role in the emergence of alance of

pa#ments difficulties in ; and . /ortfolio flo!s in the e-uit# markets" and F=I" as

opposed to det8creating flo!s" are important as safer and more sustainale mechanisms for

funding the current account deficit.

2% K39/6/


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The activities of international institutional investors help strengthen Indian finance. FIIs

advocate modern ideas in market design" promote innovation" development of sophisticated

products such as financial derivatives" enhance competition in financial intermediation" and

lead to spillovers of human capital # e'posing Indian participants to modern financial

techni-ues" and international est practices and s#stems.

6% S/+/ 23-3,/ 3=/,2/

=omestic institutional and individual investors" used as the# are to the ongoing practices of

Indian corporate" often accept such practices" even !hen these do not measure up to the

international enchmarks of est practices. FIIs" !ith their vast e'perience !ith modern

corporate governance practices" are less tolerant of malpractice # corporate managers and

o!ners (dominant shareholder). FII participation in domestic capital markets often lead to

vigorous advocac# of sound corporate governance practices" improved efficienc# and etter

shareholder value.

/% I4-3= 4,/ /


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,% !/6 ,6 -3;=/


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C!APTER 7

DETERMINANTS OF FOREIGN INSTITUTIONALIN"ESTMENT

DETERMINANTS OF FOREIGN INSTITUTIONAL IN"ESTMENT

6fter the initiation of economic reforms in the earl# Ds" the movement of foreign


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capital flo! increased ver# sustantiall#. There are a lot of factors that determine the nature

and cause of foreign institutional investment in a countr# a fe! of them eing inflation

e'change rate e-uit# returns" government policies" price earring ratio and risk. 3o! if !e

tr# to anal#9e the relation of each of these factors !ith the level of foreign inflo! in the

countr#" !e might have a etter understanding. &et us roadl# classif# the factors into

inflation" risk and stock market returns and understand the asic principle ehind the

inflo!s.

,% E> /;8 6n increase in the return in the foreign market !ill induce investors to

!ithdra! from the Indian (domestic) stock market to invest in the foreign market.

Investors are elieved to follo! a higher return" hence !hen the return in the domestic

market increases" FII flo!s to the domestic market. hile the flo!s are highl# correlated

!ith e-uit# returns in India" the# are more likel# to e the effect than the cause of these

returns. . It is assumed that the e-uit# returns have a positive impact on the FII inflo! ut

foreign investors can also get involved in profit ooking. The# can u# financial assets

!hen the prices are declining" there# jacking8up the asset prices and sell !hen the asset

prices are increasing and hence e the cause of such returns so making it more of a i8

directional relationship.

?% R; 8 Investors are considered to e risk averse" hence !hen risk in the domestic

market increases the# !ill !ithdra! from the domestic market" !hen risk in the foreign

market increases" investors !ill !ithdra! from the foreign market and invest in the Indian

(domestic) market. Investments" either domestic or foreign" depend heavil# on risk factors.

1ence" !hile stud#ing the ehavior of FII" it is important to consider the risk variale.

>isk can e divided into e'8ante and une'pected risk. hile the e'8ante risk certainl# has

an inverse relation !ith the foreign investment nothing can e clearl# said aout the

une'pected risk.

2% I


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hen inflation in the domestic countr# increases" the purchasing po!er of the funds invested

declines" hence investors !ill !ithdra! from the domestic Market. $imilarl#" !hen inflation

in the foreign countr# increases" the purchasing po!er of funds invested in the foreign countr#

declines" causing institutional investors to !ithdra! from the foreign market and make

investment in the domestic (Indian) market.

D% E2+,/ ,/ H hen the value of the home currenc# is stronger the FII investments

!ill also increase as the percentage of returns the FII get automaticall# increases and vice

versa.

$o it can e said that the inflation and risk in the domestic countr# and return in the foreign

countr# adversel# affect the FII flo!ing to the domestic countr#" !hereas inflation and risk

in the foreign countr# and return in the domestic countr# have a favorale effect on the

flo! of FII.

7.(. COMPARISON BET*EEN FIIS AND MUTUAL FUNDS

IN"ESTMENTS

The comparison et!een the FII purchases and net investment !ith Mutual funds for the


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period reveals some interesting information. 6s can e seen from the figure" the amount of

mutual fund investment in our countr# is ver# meager as compared to that of FIIs. It means

that Indian pulic is still not putting its et on mutual funds and.

FIIs are much more aggressive in nature than mutual funds" !hich seem to have een

ver# constant in their approach to the Indian e-uit# market. $ince Ma#,D


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there has een an increasing trend of their participating in the capital market. ith their

increasing participation there has een a lot of effect on man# parameters of the Indian capital

market. The major effect of the increasing participation of the institutional investors has een

oserved in the follo!ing areas.

L6> Market li-uidit# is a usiness" economics or investment term that refers to an

assetLs ailit# to e easil# converted through an act of u#ing or selling !ithout causing a

significant movement in the price and !ith minimum loss of value. 6n act of e'change of a

less li-uid asset !ith a more li-uid asset is called li-uidation. &i-uidit# also refers oth to

that -ualit# of a usiness !hich enales it to meet its pa#ment oligations" in terms of

possessing sufficient li-uid assetsJ and to such assets themselves.

6 li-uid asset has some or more of the follo!ing features. It can e sold () rapidl#" (*) !ith

minimal loss of value" (+) an#time !ithin market hours. The essential characteristic of a

li-uid market is that there are read# and !illing u#ers and sellers at all times. 6n elegant

definition of li-uidit# is also the proailit# that the ne't trade is e'ecuted at a price e-ual to

the last one. 6 market ma# e considered deepl# li-uid if there are read# and !illing u#ers

and sellers in large -uantities. This is related to a market depth" !here sometimes orders

cannot strongl# influence prices. The li-uidit# of a product can e measured as ho! often it is

ought and soldJ this is kno!n as volume. 2ften investments in li-uid markets such as the

stock e'change or futures markets are considered to e more li-uid than investments such as

real estate" ased on their ailit# to e converted -uickl#. $ome assets !ith li-uid secondar#

markets ma# e more advantageous to o!n" are !illing to pa# a higher price for the asset

than for comparale assets !ithout a li-uid secondar# market.

P2/ ?96 4/2+,;4 ith the increasing participation of the institutional investors in

the capital market" it has also helped the different companies to raise funds for their use

through the capital market in india.earlier the companies use to go for det financing !hich

has a cost attached to it and also in those da#s the cost of issuing an I/2 !as higher as


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compared to the funds that !ere eing generated # the companies. ith the help of FII the

market has ecome more competitive fair value of their.

R39/ 3< ;-/29,3 7enerall# people transact for three reasons hedging speculating and

aritraging 1edgers are those to intend to hedge their risk. $peculation ma# e defined as the

purchase or sale of a good !ith a vie! to resale or repurchase at a later date" !here the

motive ehind such action is the e'pectation of changes in the prices.

$peculation is one of the most !atched activit# in an# capital market its importance varies in

different countries in countries like in ?$ it forms an integral part of the market !hereas in

developing countries like India it,s taken as a threat. It is often elieve that speculators even

out the price fluctuation # due to change in demand and suppl# condition ut the concerns

aout the adverse effects of speculation come from t!o sources. First" the possiilit# that

speculation" instead of evening out price fluctuations" ma# end up e'acerating such

fluctuations. $econd" is the prolem of speculation destaili9ing rather than staili9ing prices

and hence affecting resource allocationQ Through speculation" future e'pected price not onl#

depends on" ut also has an impact on the spot price.

The market for shares is suject to much larger fluctuations than the market for onds or

even commodities. $hares represent a share in the e'pected future profits of a compan#.

hen fortunes of companies G oth in the short run as !ell as in the medium to long run G

fluctuate" so do share prices. ?ncertaint# regarding the future leads to heav# discounting of

future profits" and to focus on short8period e'pectations aout capital value rather than long8

period prospects of the compan#.

First" the potential of market manipulation is acute in small emerging markets and li-uidit# is

often poor. 6lthough there are man# polic# initiatives that could increase li-uidit# and reduce

the degree of collusion among large traders" there ma# not e a sufficient mass of domestic

speculators to ensure market li-uidit# and efficienc#. $econd" opening the market to foreign

speculators ma# increase the valuation of local companies" there# reducing the cost of e-uit#

capital.

"39,9> Nolatilit# most fre-uentl# refers to the standard deviation of the change in value of

a financial instrument !ith a specific time hori9on. It is often used to -uantif# the risk of the

instrument over that time period. Nolatilit# is t#picall# e'pressed in annuali9ed terms" and it

ma# either e an asolute numer (@) or a fraction of the mean (@). Nolatilit# is often


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vie!ed as a negative in that it represents uncertaint# and risk . 1o!ever" volatilit# can e good

in that if one shorts on the peaks" and u#s on the lo!s one can make mone#" !ith greater

mone# coming !ith greater volatilit#. The possiilit# for mone# to e made via volatile

markets is ho! short term market pla#ers like da# traders hope to make mone#" and is in

contrast to the long term investment vie! of u# and hold. In toda#Ls markets" it is also

possile to trade volatilit# directl#" through the use of derivative securities such as options and

variance s!aps. Foreign institutional investment is certainl# volatile in nature and its volatilit#

has certainl# posed some threats to the Indian stock market considering its influence on the

market. 7iven the presence of foreign institutional investors in $ense' companies and their

active trading ehavior" small and periodic shifts in their ehavior lead to market volatilit#.

$uch volatilit# is an inevitale result of the structure of India,s financial markets as !ell.

Markets in developing countries like India are thin or shallo! in at least three senses. First"

onl# stocks of a fe! companies are activel# traded in the market. Thus" although there are

more than ;"DDD companies listed on the stock e'change" the B$4 $ense' incorporates just +D

companies" trading in !hose shares is seen as indicative of market activit#. $econd" of these

stocks there is onl# a small proportion that is routinel# availale for trading" !ith the rest

eing held # promoters" the financial institutions and others interested in corporate control or

influence. 6nd" third the numer of pla#ers trading these stocks is also small.

In such a scenario investment # the foreign institutional investors leads to a sharp price

increase this provides incentives to FII investment and enhances investment and !hen the

correction in the stock prices egins it !ould have to e a pull out # the FII and can result in

sharp decline in the prices. The other reason for volatilit# is that the foreign institutional

investors are attracted to a market # the e'pectation of price increase that tend to e

automaticall# reali9ed" the inflo! of foreign capital can result in an appreciation of the rupee

vis8P8vis the dollar .This increases the return earned in foreign e'change" !hen rupee assets

are sold and the revenue converted into dollars.

6s a result" the investments turn even more attractive triggering an investment spiral that

!ould impl# a sharper fall !hen an# correction egins. 6part from that the gro!ing reali9ation

# the FIIs of the po!er the# !ield in !hat are shallo! markets" encourages speculative

investment aimed at pushing the market up and choosing an appropriate moment to e'it. This


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manipulation of the market !ould certainl# enhance the volatilit# and in volatile markets even

the domestic investors tr# to manipulate the market !hen the prices are reall# high. . Foreign

institutional investment is certainl# volatile in nature and its volatilit# has certainl# posed

some threats to the Indian stock market considering its influence on the market. 7iven the

presence of foreign institutional investors in $ense' companies and their active trading

ehavior" small and periodic shifts in their ehavior lead to market volatilit#. $uch volatilit# is

an inevitale result of the structure of India,s financial markets as !ell. Markets in developing

countries like India are thin or shallo! in at least three senses. First" onl# stocks of a fe!

companies are activel# traded in the market. Thus" although there are more than ;"DDD

companies listed on the stock e'change" the B$4 $ense' incorporates just +D companies"

trading in !hose shares is seen as indicative of market activit#. $econd" of these stocks there is

onl# a small proportion that is routinel# availale for trading" !ith the rest eing held #

promoters" the financial institutions and others interested in corporate control or influence.

6nd" third the numer of pla#ers trading these stocks is also small

2verall the foreign institutional investors have een ullish on the Indian stocks ut the

prolem is that this ullish nature might e a result of the activities outside the Indian market it

might e due to the performance of their e-uit# market or their non e-uit# returns. Therefore

the# seek out forest returns and diversified geographical portfolio in order to hedge their risk

and !hen the# make some adjustments in their portfolio and make shifts in favor or against a

countr# it orings aout sharp changes.

7.' EAST ASIAN CRISIS


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6fter ten #ears (;GA) of pegging of the Thai aht to the ?.$. dollar" on ul# *" A" the

peg had to e aandoned" and this created pressure on other 6sian currencies" and eventuall#

rought do!n the Mala#sian ringgit" the Indonesian rupiah" the /hilippine peso" and the

%orean !on. B# end8A" these currencies had lost et!een


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!hich e'acerates the fall in the senses. =uring the Black Monda# episode the FII !ere also

on a heav# selling spree !hich ultimatel# leads to some major fall in the sense' value. FII

investment ehavior during these four specific events indicates that these events did affect the

ehavior of the foreign portfolio investors.

RECOMMENDATIONS

6fter anal#9ing the nature and ehavior of the foreign institutional investment in the past


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and its influence on the Indian stock market it !ould e safe enough to sa# that foreign

funds are one of the most volatile instruments floating in the market and needs to e

handled cautiousl#.

7overnment should certainl# encourage foreign institutional investment ut should keep a

check on the volatilit# factor. &ong term funds should e given priorit# and encouraged

some of the actions that could e taken to ensure stailit# are

S/+/ 634/;2 ;3,9 =/;3;

The participation of domestic pension funds in the e-uit# market !ould augment the

diversit# of vie!s on the market and hence the domestic pension funds must e

encouraged.

B3,6 ?,; 3< /9?9/ //;

In order to address the market integrit# concerns arising out of allo!ing some entities"

!hich do not have reputational risk or are unregulated" there" is merit in prohiiting

such entities from getting registered.

O-/,3,9 3 4-, ;,?9> 3 +/ 4,/

The stailit# of foreign investment in India !ill e enhanced if FIIs are ale to s!itch

et!een e-uit# and det investments in India" depending on their vie! aout future e-uit#

returns. $4BI can make such policies.

K39/6/ ,2=/; ,6 /;/,2+ -3,4;

There must e a lot of research programs and studies conducted # the economic affairs

regulators in India

CONCLUSION

6fter anal#9ing the nature of FII in the past it !ould e safe enough to sa# that the foreign


56/59

funds is certainl# one of the most important cause of volatilit# in the Indian stock market and

has had a considerale influence on it. 6lthough it !ould not e fair enough to come to an#

conclusion as there are a lot of other factors e#ond the scope of the stud# that effect returns

and risks .it is not eas# to predict the nature of the macroeconomic factors and their ehavior

ut it has a great significance on an# econom# and its elements. 6lthough generall# a positive

relation has een seen et!een the stock market returns and the FII inflo!s it is not eas# to

sa# !hich the cause n !hich is the effect is and strange ehavior has also een noticed in the

past.

Foreign investment certainl# are influencing the Indian stock market ut the e'tent of this

influence cannot e determined or rather the e'tent of India,s dependence on the FIIs is a

sujective issue as on no clear grounds can !e see a permanent relationship et!een the

stock market returns and the Foreign inflo!s. But to generali9e the# have sho!n a positive

relation most of the time apart from a fe! occasions !here the ehavior of their relation

!as difficult to e'plain.

REFERENCES

4/$IT4


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!!!.nseindia.com

!!!.seindia.com

!!!.investopedia.com

!!!.livemint.com

!!!.sei.gov.in

!!!.capitaline.com


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Documents

Final -Role of Financial Instituion in Capital Market in India