A

SUMMER TRAINING PROJECT REPORT

ON

“IMPACT OF FII’S & FDI’S ON INDIAN STOCK MARKET”

SUBMITTED TO:-

KURUKSHETRA UNIVERSITY, KURUKSHETRA

IN THE PARTIAL FULFILLMENT OF DEGREE OF

“MASTER OF BUSINESS ADMINISTRATION”

2008-2010

UNDER THE GUIDENCE OF: SUBMITTED BY:

MR. SANDEEP SAINI SUNIL KUMAR

BRANCH MANAGER, MBA

RELIANCE MONEY AMBALA ROLLNO……….

MAHARAJA AGRASEN INSTITUTE OF MANAGEMENT AND

TECHNOLOGY

AFFILIATED TO KURUKSHETRA UNIVERSITY KURUKSHETRA

DECLARATION

 

I, SUNIL KUMAR of MBA III Semester, studying at MAHARAJA AGRESAIN

INSTITUTE OF MANAGEMENT &TECHNOLOGY, JAGADHARI, hereby declare

that this project titled “Impact of FII and FDI’s On Indian Stock Market.

” has been prepared by me in partial fulfilment of the requirements of the

KURUKSHETRA UNIVERISITY KURUKSHETRA MBA programme during 2008-

2010.

I further declare that this project has not been submitted earlier in any other university or

institution for the award of any degree or diploma.

SUNIL KUMAR

ACKNOWLEDGEMENT

The satiation and euphonies that accompany the success completion of a task would be

incomplete without a mention of people who made it possible. So, with immense

gratitude, I acknowledge all those, whose guidance and encouragement served as a

beacon light and crowned my effort with success.

I thank Mr. ABHISHEK SIR, Faculty of MAHARAJA AGRESAIN INSTITUTE OF

MANAGEMENT & TECHNOLOGY, JAGADHARI and my project guide for his

valuable guidance and suggestions, and external guide Mr. Sandeep Saini center manager

at reliance money Amballa which were vital inputs towards the completion of the project.

Lastly, I would like to thank all those who have directly or indirectly helped me complete

the project successfully.

SUNIL KUMAR

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 FII’s And FDI’s 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.

CONTENTS

INTRODUCTION

FEATURES OF STOCK MARKET

OPERATIONAL DEFINITIONS

LITERATURE REVIEW

RESERCH METHODOLOGY

OBJECTIVES

RESEARCH DESIGN

DATA COLLECTION

DATA ANALYSIS

SAMPLING PLAN

SAMPLING DESIGN

SCOPE OF STUDY

LIMITATIONS OF THE STUDY

INDUSTRY PROFILE

FOREIGN INSTITUTIONAL INVESTMENT IN INDIA:

MILESTONE

ACTS AND RULE

INVESTMENT OPPORTUNITIES FOR FIIs

BRIEF PROFILE OF IMORTANT INSTITUTIONS

COMPANY PROFILE

FINDINGS AND DATA ANALYSIS

CONCLUSION

SUGGESTIONS & RECOMENDATIONS

BIBLIOGRAPHY

INTRODUCTION

A STOCK EXCHANGE is a platform where buyers and sellers of securities issued by

governments, finance institutions, corporate houses etc., meet and where trading of these

corporate securities take place. This is a market of speculation. If speculation of investors

become wrong than the investors loss. Nobody knows what will happen even after a

second.

A Stock Exchange refers to the segments of the capital market where the securities issued

by corporate are trade. It is open auction market where buyers and sellers meet and

involve competitive prices of the securities. It reflects hopes aspiration fair of people

regarding the performance of the economy. I t provides necessary mobility to capital and

direct flow of the capital into possible and successful enterprise.

Since buying and selling of the different of securities take place on stock exchange. The

prices of particular securities reflect there demand and supply. In fact, stock exchange is

said to be a barometer of economy and financial health.

The stock market in India, Securities and Exchange Board of India (SEBI) is on the issue

of acceptance of hedge funds into Indian financial market. At the some time world wide

trade shows that hedge funds are important force to the reckoned with us. The impact of

hedge funds activity is new to the Indian financial investors (FII) flows volatility of the

stock market. This is so because hedge funds activity in Indian primary through

participatory notes (PN) and the some is reflected under FII inflows. Large stock

operators and investment arms certain large corporate in India in the period consideration

used to use oversees body (OCB) as a mechanism to take exposure to the India n market.

OCB activity in the Indian context is pretty similar to funds trading historically OCB

flows also used to appear under the head of FII flows traditionally a large chunck of the

PN and OCB activity in India use to happen through the Mauritius route due to taxation

benefits. With the latest budget presented by the Indian government .(will become

effective from 1st September 2004 ) reducing long term capital gains to zero and short

term capital gains to 10 % the taxation to Mauritious to exist .

STOCK EXCHANGE

A” STOCK EXCHANGE “is a platform where buyers and sellers of securities issued by

governments, finance institutions, corporate houses etc., meet and where trading of

These corporate securities take place. This is a market of speculation. If speculation of

investors become wrong than the investors loss. Nobody knows what will happen even

after a second.

A Stock Exchange refers to the segments of the capital market where the securities issued

by corporate are trade. It is open auction market where buyers and sellers meet and

involve competitive prices of the securities. It reflects hopes aspiration fair of people

regarding the performance of the economy. I t provides necessary mobility to capital and

direct flow of the capital into possible and successful enterprise.

Since buying and selling of the different of securities take place ion stock exchange. The

prices of particularl securities reflect there demand and supply. In fact, stock exchange is

said to be a barometer of economy and financial health.

The stock exchange is the nerve center of capital market. The stock exchange discharges

three essential functions in the process of capital formation not in raising resources for

the corporate sector.

It provides places for sale and purchase of securities i.e. share, bonds etc. . . .

It [provides linkage between the saving of household sector and investment in corporate

sector of economy.

It provides market quotation for shares debenture and bonds and serves as a role of

barometer, not only of the state of health of individual companies but also of the

economy as a whole.

Therefore, by providing market place quotation of the prices of shares and bonds or sort

of collective judgment. Simultaneously reached by many buyers and sellers in the

market stock exchange serve the role of barometer, not only of the state of health of

individual companies but also of the nation’s economy as a whole.

FEATURES OF STOCK EXCHANGE

It is the place where listed securities are bought and sold.

It is an association of persons known as members.

Trading in securities is allowed under rules and regulations of stock exchange.

Membership is must for transacting business.

Investors and speculators, who want to buy and sell securities, can do so through

members of stock exchange i.e. brokers

OPERATIONAL DEFINITIONS

STOCK MARKET:-

A STOCK EXCHANGE is a platform where buyers and sellers of securities issued by

governments, finance institutions, corporate houses etc., meet and where trading of these

corporate securities take place.

MUTUAL FUNDS: - A Mutual fund is a trust that pools the saving of a number of

investors who share a common financial goal.

FOREIGN DIRECT MARKET (FDI): - This category refers to international investment

in which the investor obtains a lasting interest in an enterprise in another country. Most

concretely, it may take the form of buying or constructing a factory in a foreign country

or adding improvements to such a facility, in the form of property, plants or equipment.

FOREIGN INSTITUTIONAL INVESTOR (FII):- An investor or investment fund that is

from of or registered in a country outside of the one in which it is currently investing.

Foreign institutional investors have made a sizable investment in Indian financial

markets. There are currently about 1324 FIIs registered in India.

FOREIGN PORTFOLIO INVESTMENT (FPI):- FPI is a category of investment

instruments that are more easily traded, may be less permanent, and do not represent a

controlling stake in an enterprise. These include investments via equity instruments

(stocks) or debt (bonds) of a foreign enterprise that does not necessarily represent a long-

term interest.

BULL MARKET: - A Bull market is a market that is consistently going up. It is a market

where there is optimism of further rise batter, business results and other positive factors.

Bull Market can sometimes continue for years, for investors this is the preferred market

trend. However no bull market can continue for very long.

BEAR MARKET: - Bear Market is a market that is showing a persistent downtrend. A

15-20% downward movement of the market generally termed as a bear market.

DIVERSIFICATION: - diversification is the technique of investing in unrelated business

sectors simultaneous so that risk that affects a particular sector does not affect your

overall investment. For example your portfolio of share includes sectors like Information

Technology, Real estate capital Goods, Autos etc.

Exchange rate of a nation's currency- Currency like other commodities rises or falls in

"price" with demand. When investors leave, they sell their holdings in a country's

currency and as demand falls, the "price" of that currency will also fall

ECONOMIES OF SCALE: - Produces are often able to enjoy considerable production

cost savings by buying inputs in bulk, mass-producing or retailing their end product.

These lower costs achieved through expanded production are called Economies of Scale.

DEBT/EQUITY RATIO-The debt/equity ratio measures the extent to which a firm's

capital is provided by lenders (through debt instruments such as fixed-return bonds) or

owners (through variable-return stocks). A greater reliance on financing through debt can

mean greater profitability for shareholders, but also greater risk in the event things go

sour.

INTERNATIONAL MONETARY FUND-The IMF is an international organization of

186 member countries, established in 1947 to promote international monetary

cooperation, exchange stability, and orderly exchange arrangements; to foster economic

growth and high levels of employment; and to provide temporary financial assistance to

countries to help ease balance of payments adjustment.

INSTITUTIONAL INVESTOR An organization whose primary purpose is to invest its

own assets or those held in trust by it for others. Includes pension funds, investment

companies, insurance companies, universities and banks.

INTEREST RATES-Interest rates have a powerful effect on the volume of a nation's

money supply. By raising interest rates, i.e., making the cost of borrowing money more

expensive, governments or banks can decrease the money supply. A decrease in the

money supply tends to be counter-inflationary, which makes a currency more valuable

compared to other currencies.

MOST FAVORED NATION TREATMENT-The phrase "most favored nation" refers to

the obligation of the country receiving the investment to give that investment the same

treatment as it gives to investments from its "most favored" trading partner.

BALANCE OF PAYMENT-The Balance of Payments (BOP) is a statistical statement

that summarizes, for a specific period (typically a year or quarter), the economic

transactions of an economy with the rest of the world. It covers:

All the goods, services, factor income and current transfers an economy receives from or

provides to the rest of the world

Capital transfers and changes in an economy's external financial claims and liabilities

PORTFOLIO INVESTMENT – covers the acquisition and disposal of equity and debt

securities that cannot be classified under direct investment or reserve asset transactions.

These securities are tradable in organized financial markets.

FDI FLOWS AND STOCKS – Through direct investment flows the investors builds up a

direct investment stock (position), making part of the investor’s balance sheet. The FDI

stock (position) normally differs from accumulated flows because of revaluation (changes

in prices or exchange rates) and other adjustments like rescheduling or cancellation of

loans, debt forgiveness or debt-equity swaps with different values.

MULTINATIONAL COMPANIES (MNCs) – are incorporated or unincorporated

enterprises comprising parent enterprises and their foreign affiliates.

FOREIGN DIRECT INVESTOR – A foreign direct investor is an individual, an

incorporated or unincorporated public or private enterprise, a government, a group of

related individuals, or a group of related incorporated and/or unincorporated enterprises

which have a direct investment enterprise that is a subsidiary, associate or branch –

operating in a country other than the country or countries of residence of the direct

investor or investors.

HOST ECONOMY – is the country that receives FDI or FPI from the foreign investor(s).

HOME ECONOMY – is the country of origin/residence of the company that invests in

the foreign economy/host economy.

SUBSIDIARY– is an incorporated enterprise in the host country in which the foreign

investor owns more than 50 per cent of the shareholder’s voting power or has the right to

appoint or remove a majority of the members of this enterprise’s administrative,

management or supervisory body.

EQUITY CAPITAL – comprises of equity in branches and ordinary shares in subsidiaries

and associates.

Reinvested earnings – consist of the direct investor’s share of earnings not distributed as

dividends by subsidiaries or associates and earnings of branches not remitted to the direct

investor.

OTHER CAPITAL – covers inter-company debt (including short-term loans such as

trade credits) between direct investors and subsidiaries, branches and associates.

WTO – World Trade Organization.

LITERATURE REVIEW

Bruce A. Blonigen

This paper surveys the recent burgeoning literature that empirically examines the foreign

direct investment (FDI) decisions of multinational enterprises (MNEs) and the resulting

aggregate location of FDI across the world. The contribution of the paper is to evaluate

what we can say with relative confidence about FDI as a profession, given the evidence,

and what we cannot have much confidence in at this point. Suggestions are made for

future research directions.

Hugo Rojas-Romagosa

Foreign Direct Investment (FDI) flows have increased substantially in the past two

decades. These developments have motivated the appearance of a large number of

empirical papers that test the expected benefits that FDI inflows are assumed to bring to

the host countries. We survey the recent theoretical and empirical literature, but restrict

our attention to the productivity changes that are induced by increased FDI inflows. We

review both the aggregate productivity effects, as well as the spillover effects of FDI on

local firms.

Giorgio De Saints

This paper study the dynamics of expected stock return and volatility in emerging

financial market. We find clustering predict ability and persistence in conditional

volatility and others have documented for mature market. However, emerging market

exhibit higher volatility and conditional probability of large price changes then mature

market exposure to high country specific risk does not appear to be rewarded with higher

expected return. We deduct a risk reward relation in Latin America but not in Asia.

Karimullah:

The article examines the impact of foreign institutional investor s FII equity investment

behavior in the Indian stock market. It attempts to find out the two-way causality between

foreign institutional investors (FIIs) behavior and performance of Indian stock market for

the period of January 1997 to June 2007.this article seeks to examine the idea that

financial liberalization induces increased efficiency in the financial market as permission

of FIIs equity investment is an important example of financial liberalization. Return in

the stock market is used as proxy for the efficiency of the stock market in India .granger

causality test has been applied to test the bidirectional causality. Apart from net

investment of FIIs, the purchase and sales behavior of FIIs are analyzed separately. The

results indicate that stock market performance is a major determinant of both the FIIs

purchase and sales behavior. But we did not find strong evidence that the variations in the

stock market indices are determined by FIIs investment behavior.

Blockholder, Market efficiency and managerial myopia:

This paper shows holders can add value even if they cannot interview in a firm’s

operations. Blockholders have strong incentive to monitor the firm’s fundamental value,

since they can sell their stakes upon bad news. By trading on their private information

(following the “Wall Street rule”) they cause prices to reflect fundamental value rather

than current earnings. This in turn encourages managers to invest for long term growth

rather than short term profits. Contrary to the view that the U.S.’s liquid markets and

transient shareholders exacerbate myopia, this paper shows that they can encourage

investment.

Robert Lensink and Oliver Morrissey

This paper contributes to the literature on FDI and economic growth. We deviate from

previous studies by introducing measures of the volatility of FDI Inflows. As introduced

into the model, these are predicted to have a negative effect on growth. We estimate the

standard model using cross-section, panel data and instrumental variable techniques.

Whilst all results are not entirely robust, there is a consistent finding that FDI has a

positive effect on growth whereas volatility of FDI has a negative impact. The evidence

for a positive effect of FDI is not sensitive to which other explanatory variables are

included. In particular, it is not conditional on the level of human capital (as found in

some previous studies). There is a suggestion that it is not the volatility of FDI per se that

retards growth but that such volatility captures the growth-retarding effects of unobserved

variables.

Foreign direct investment in Bangladesh; an analysis of perception of prospective

investors:

Bangladesh had gone through several major policy changes regarding the ownership and

control of industries with a view of promoting economic growth . one of the strategies the

government of Bangladesh (GOB) followed to accelerate economic growth was to attract

foreign direct investment (FDI) into country

OBJECTIVES OF THE STUDY

To know the performance of Indian stock market.

To know the impact of FIIs on Indian stock market.

To know the impact of FDIs on Indian stock market.

RESEARCH METHODOLOGY

Research Methodology has many dimensions, it include not only research methods but

also considers the logic behind the methods used in the context of the study and explains

why only a particular method of technique had been used so that research lend

themselves to proper evaluations. Thus in a way it is a written game plan for concluding

research therefore in order to solve research problem it is necessary to design a research

methodology for the problem as the same differ from problem to problem.

Research Design:

The research design is a pattern or an outline of a research project . It is a statement only

the essential of a study those provide the basic guidelines for the detail of the project. The

present study being conducted follows a descriptive research design has the data would

be responses from a simple containing g a large numbers of sources .It is a cross section

of the situation design of the descriptive studies including the nature and the analytical

method.

Data Collection

After the research problem has been defied and the research design has been chalked out,

the task of date collection begins. Data can be collected from other primary or secondary

sources.

The main source of obtaining necessary data for the study was Secondary Data. This

study is empirical in nature and hence secondary data is used to conduct the research. The

data was collected from the Internet by exploring the Secondary sources available on

websites. Secondary Data: The secondary data constitutes of daily FII flows data which

was collected from Money Control and Equity Master, the daily returns of SENSEX and

NIFTY from BSE and NSE websites respectively. The trends in FII flow from the RBI

website and information on FII from SEBI.

Magazines and Bulletins: - NSE News Bulletins etc.

INTERNET: -

www.sebi.gov.in

wwwnse.co.in

www.moneycontrol.com

etc.

SAMPLING PLANNING

Sampling is an effective step in collection of primary and secondary data and has a great

influence on the quality of the results. The sampling plan includes population, sample

size and sample design.

DATA ANALYSIS:-

PLAN OF ANALYSIS

The data gathered from various sources were primarily studied and necessary data was

sorted out sequentially keeping in mind the procedure of the study. The analysis has been

made by, correlating the FII purchases, sales and net investment with equity market

returns to identify whether a relation exists between them. Findings are included which

transmits the important points, which were gathered from the study.

The data has been analyzed with the help of various graphs like bar graph etc.

SCOPE OF THE STUDY

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.

LIMITATIONS OF THE STUDY

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 year’s performance;

There is no particular format for the study;

Sufficient time is not available to conduct an in-depth study;

INDUSTRY PROFILE

INVESTMENT IN INDIAN MARKET

India is believed to be a good investment despite political uncertainty, bureaucratic

hassles, shortages of power and infrastructure deficiencies. India presents a vast potential

for overseas investment and is actively encouraging the entrance of foreign players into

the market. No company, of any size, aspiring to be a global player can, for long ignore

this country, which is expected to become one of the top three emerging economies.

Success in India

Success in India will depend on the correct estimation of the country's potential;

underestimation of its complexity or overestimation of its possibilities can lead to failure.

While calculating, due consideration should be given to the factor of the inherent

difficulties and uncertainties of functioning in the Indian system. Entering India's

marketplace requires a well-designed plan backed by serious thought and careful

research. For those who take the time and look to India as an opportunity for long-term

growth, not short-term profit- the trip will be well worth the effort.

Market potential

India is the fifth largest economy in the world (ranking above France, Italy, the United

Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It is

also the second largest among emerging nations. (These indicators are based on

purchasing power parity). India is also one of the few markets in the world, which offers

high prospects for growth and earning potential in practically all areas of business.

Despite the practically unlimited possibilities in India for overseas businesses, the world's

most populous democracy has, until fairly recently, failed to get the kind of enthusiastic

attention generated by other emerging economies such as China.

Lack of enthusiasm among investors

The reason being, after independence from Britain 50 years ago, India developed a highly

protected, semi-socialist autarkic economy. Structural and bureaucratic impediments

were vigorously fostered, along with a distrust of foreign business. Even as today the

climate in India has seen a sea change, smashing barriers and actively seeking foreign

investment, many companies still see it as a difficult market. India is rightfully quoted to

be an incomparable country and is both frustrating and challenging at the same time.

Foreign investors should be prepared to take India as it is with all of its difficulties,

contradictions and challenges.

Developing a basic understanding or potential of the Indian market

Envisaging and developing a Market Entry Strategy and implementing these strategies

when actually entering the market are three basic steps to make a successful entry into

India. The Indian middle class is large and growing; wages are low; many workers are

well educated and speak English; investors are optimistic and local stocks are up; despite

political turmoil, the country presses on with economic reforms. But there is still cause

for worries- Infrastructure hassles.

The rapid economic growth of the last few years has put heavy stress on India's

infrastructure facilities. The projections of further expansion in key areas could snap the

already strained lines of transportation unless massive programs of expansion and

modernization are put in place. Problems include power demand shortfall, port traffic

capacity mismatch, poor road conditions (only half of the country's roads are surfaced)

and low telephone penetration.

Indian Bureaucracy

Although the Indian government is well aware of the need for reform and is pushing

ahead in this area, business still has to deal with an inefficient and sometimes still slow-

moving bureaucracy.

Diverse Market

The Indian market is widely diverse. The country has 17 official languages, 6 major

religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ

greatly among sections of consumers. Therefore, it is advisable to develop a good

understanding of the Indian market and overall economy before taking the plunge.

INTERNATIONAL PORTFOLIO FLOWS:

International portfolio flows, as opposed to foreign direct investment (FDI) flows, refer to

capital flows made by individuals or investors seeking to create an internationally

diversified portfolio rather than to acquire management control over foreign companies.

Diversifying internationally has long been known as a way to reduce the overall portfolio

risk and even earn higher returns. Investors in developed countries can effectively

enhance their portfolio performance by adding foreign stocks particularly those from

emerging market countries where stock markets have relatively low correlations with

those in developed countries.

International portfolio flows are largely determined by the performance of the stock

markets of the host countries relative to world markets. With the opening of stock

markets in various emerging economies to foreign investors, investors in industrial

countries have increasingly sought to realize the potential for portfolio diversification that

these markets present.

It is likely that for quite a few years to come, FII flows would increase with global

integration. The main question is whether capital flew in to these countries primarily as a

result of changes in global (largely US) factors or in response to events and indicators in

the recipient countries like its credit rating and domestic stock market return. The answer

is mixed – both global and country-specific factors seem to matter, with the latter being

particularly important in the case of Asian countries and for debt flows rather than equity

flows.

FOREIGN INSTITUTIONAL INVESTMENT IN INDIA:

MILESTONES

India embarked on a programme of economic reforms in the early 1990s to tie

over its balance of payment crisis and also as a step towards globalisation.

An important milestone in the history of Indian economic reforms happened on

September 14, 1992, when the FIIs (Foreign Institutional Investors) were allowed

to invest in all the securities traded on the primary and secondary markets,

including shares, debentures and warrants issued by companies which were listed

or were to be listed the stock exchanges in India and in the schemes floated by

domestic mutual funds.

Initially, the holding of a single FII and of all FIIs, NRIs (Non-Resident Indians)

and OCBs (Overseas Corporate Bodies) in any company were subject to a limit of

5% and 24% of the company's total issued capital respectively.

( In order to broad base the FII investment and to ensure that such an investment

would not become a camouflage for individual investment in the nature of FDI

(Foreign Direct Investment), a condition was laid down that the funds invested by

FIIs had to have at least 50 participants with no one holding more than 5%. Ever

since this day, the regulations on FII investment have gone through enormous

changes and have become more liberal over time.

( From November 1996, FIIs were allowed to make 100% investment in debt

securities subject to specific approval from SEBI as a separate category of FIIs or

sub-accounts as 100% debt funds. Such investments were, of course, subjected to

the fund-specific ceiling prescribed by SEBI and had to be within an overall

ceiling of US $ 1.5 billion. The investments were, however, restricted to the debt

instruments of companies listed or to be listed on the stock exchanges.

In 1997, the aggregate limit on investment by all FIIs was allowed to be raised

from 24% to 30% by the Board of Directors of individual companies by passing a

resolution in their meeting and by a special resolution to that effect in the

company's General Body meeting.

( From the year 1998, the FII investments were also allowed in the dated

government securities, treasury bills and money market instruments.

( In 2000, the foreign corporates and high net worth individuals were also allowed

to invest as sub-accounts of SEBI-registered FIIs. FIIs were also permitted to seek

SEBI registration in respect of sub-accounts. This was made more liberal to

include the domestic portfolio managers or domestic asset management

companies.

( 40% became the ceiling on aggregate FII portfolio investment in March 2000.

( This was subsequently raised to 49% on March 8, 2001 and to the specific

sectoral cap in September 2001.

( As a move towards further liberalization a committee was set up on March 13,

2002 to identify the sectors in which FIIs portfolio investments will not be subject

to the sectoral limits for FDI.

( Later, on December 27, 2002 the committee was reconstituted and came out

with recommendations in June 2004. The committee had proposed that, 'In

general, FII investment ceilings, if any, may be reckoned over and above

prescribed FDI sectoral caps. The 24 per cent limit on FII investment imposed in

1992 when allowing FII inflows was exclusive of the FDI limit. The suggested

measure will be in conformity with this original stipulation.' The committee also

has recommended that the special procedure for raising FII investments beyond

24 per cent up to the FDI limit in a company may be dispensed with by amending

the relevant regulations.

( Meanwhile, the increase in investment ceiling for FIIs in debt funds from US $ 1

billion to US $ 1.75 billion has been notified in 2004. The SEBI also has reduced

the turnaround time for processing of FII applications for registrations from 13

working days to 7 working days except in the case of banks and subsidiaries.

All these are indications for the country's continuous efforts to mobilize more

foreign investment through portfolio investment by FIIs. The FII portfolio flows

have also been on the rise since September 1992. Their investments have always

been net positive, but for 1998-99, when their sales were more than their purchase

ACTS AND RULES

FII registration and investment are mainly governed by SEBI (FII) Regulations, 1995.

ELIGIBILITY FOR REGISTRATION AS FII: Following entities / funds are eligible to

get registered as FII:

1. Pension Funds

2. Mutual Funds

3. Insurance Companies

4. Investment Trusts

5. Banks

6. University Fund s

7. Endowments

8. Foundations

9. Charitable Trusts / Charitable Societies

Further, following entities proposing to invest on behalf of broad based funds(a fund

established or incorporated outside India, which has at least twenty investors with no

single individual 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 Managers

3. Trustees

4. Power of Attorney Holders

INVESTMENT OPPORTUNITIES FOR FIIs

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 FII investments in Government debt, currently following limits are applicable:

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

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.

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

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, the eligibility 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;

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.

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.

INTRODUCTION TO THE COMPANY

The Reliance – Anil Dhirubhai Ambani Group is among India’s top three private sector business houses on all major financial parameters, with a market capitalisation of Rs 100,000 crore (US$ 22 billion), net assets in excess of Rs 31,500 crore (US$ 7 billion), and net worth to the tune of Rs 27,500 crore (US$ 6 billion).

Reliance Money Limited has been promoted by Reliance Capital Limited a part of Anil Dhirubhai Ambani Group with the Net-worth – Rs. 4500 cr., amongst the top 3 banking & financial services companies in the private sector.

BOARD OF DIRECTORS

Anil DhiruBhai Ambani, Chairman

Amitabh Jhunjhunwala, Vice-Chairman 

Rajendra Chitale, Independent Director 

Shri C. P. Jain 

Reliance ADA Group Structure

Reliance money is a part of the reliance Anil Dhirubai Ambani Group and is promoted by

Reliance capital, the fastest growing private sector financial services company in India,

ranked amongst the top 3 private sector financial companies in terms of net worth.

Reliance money is a comprehensive financial solution provider that enables you to carry

out trading and investment activities in a secure, cost-effective and convenient manner.

Through reliance money, you can invest in a wide range of asset classes from Equity,

Equity and commodity Derivatives, Mutual Funds, insurance products, IPO’s to availing

services of Money Transfer & Money changing.

Reliance Capital

Reliance Life Insurance

Reliance General Insurance

Reliance Money

Reliance Consumer

Finance

Reliance Mutual fundMutual Fund

Reliance Money offers the convenience of on-line and offline transactions through a

variety of means, including its Portal, Call & Transact, Transaction Kiosks and at it’s

network of affiliates.

Some key steps of the company that are as…..

“Success is a journey, not a destination.” If we look for examples to prove this quote

then we can find many but there is none like that of Reliance Money. The company

which is today known as the largest financial service provider of India.

Success sutras of Reliance Money:

The success story of the company is driven by 8 success sutras adopted by it namely

trust, integrity, dedication, commitment, enterprise, hard work and team play, learning

and innovation, empathy and humility. These are the values that bind success with

Reliance Money.

Vision of Reliance Money

To achieve & sustain market leadership, Reliance Money shall aim for complete

customer satisfaction, by combining its human and technological resources, to provide

world class quality services. In the process Reliance Money shall strive to meet and

exceed customer's satisfaction and set industry standards.

Mission statement:

“Our mission is to be a leading and preferred service provider to our customers, and we

aim to achieve this leadership position by building an innovative, enterprising , and

technology driven organization which will set the highest standards of service and

business ethics.”

Reliance Capital has interests in asset management and mutual funds, life and general

insurance, private equity and proprietary investments, stock broking, depository services,

distribution of financial products, consumer finance and other activities in financial

services.

Reliance Mutual Fund is India's no.1 Mutual Fund. Reliance Life Insurance is India's

fastest growing life insurance company and among the top 4 private sector insurers.

Reliance General Insurance is India's fastest growing general insurance company and the

top 3 private sector insurers. Reliance Money is the largest brokerage and distributor of

financial products in India with more than 2.5 million customers and the largest

distribution network. Reliance Consumer finance has a loan book of over Rs. 8,000

crores at the end of June 2008.

Reliance Capital has a net worth of Rs.6,862 crores (US$ 1.6 billion) and total assets of

Rs. 19,940 crores (US$ 4.6 billion) as of June 30, 2008 and over 26,000 employees.

Money has increased its market share among private financial companies to nearly

Convenient & effective – Anytime & anywhere financial transaction capability.

Launched in April 2007. It provides the Flat fees system. It has 2.2 million customers in 1

year of official launch. It has over 5,000 outlets across 700 towns/cities. Average daily

turnover – in excess of Rs 2,000 crores.

Considering the entire life market, including the Rs. 12,890 crores booked by life

insurance Corporation, Reliance life insurance market share works out to around 6.25% .

The life insurance market continuous to be dominated by LIC which has about 67% share

this only a marginal dip from its 73% share in end-July. These comparisons are only for

first year or new business premium.

The gap between Reliance life insurance and the second-in-line private insurer is vast. In

fact, this scenario has led some analysts to wonder if the company is not a trifle too

aggressive. But others say this has more to do with the companies’ customer-centric

focus, its pan-India presence and superior risk management and investment strategies.

Reliance Money is not, however, resting on its laurels.

Company’s customer centric approach will be studied during the training period and the

finding of the research work will definitely focus on the present condition & future

requirement (if any) relating to products of company.

Thus, Reliance Money provides a comprehensive platform, offering an investment

avenue for a wide range of asset classes. Its endeavor is to change the way India transacts

in financial market and avails financial services. Reliance Money offers a single window

facility, enabling you to access amongst others, Equities, Equity and Commodity

derivatives, Offshore Investments, IPO’s, Mutual Funds, Life Insurance and General

Insurance products.

Advantages offered by Reliance money over other companies:

Cost Effective

Convenience

Security

Single Window for Multiple Products

3 in 1 Integrated Access

Demat Account with Reliance Capital

PRODUCT OFFERING

Trading Portal (with almost negligible brokerage )

Equity Broking

Commodity Broking

Derivatives ( Futures & Options )

Offshore Investments (Contract For Differences)

D-Mat Account.

Financial Products

Mutual Funds

Life Insurance

ULIP plan

Money Back Plan

General Insurance

Vehicle/Motor Insurance

Health Insurance

House insurance

IPO’s

Value-Added Services

ORGANIZATIONAL STRUCTURE

National Level : National Head

Zonal Level : Zonal Head

Regional Level : Regional head

Divisional level : Cluster Head

Branch Level : Center Manager

Area Level : Business Development Executives & Freelancers

SALES METHODOLOGY

PERFORMANCE OF INDIAN STOCK MARKET

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

year Open High low close Price/earnings Price/book value

Dividend yield

1991 1027.38 19554.81.29 947.14 1908.85 22.30 3.58 1.241992 1957.33 4546.58 1945.48 2615.37 36.19 6.35 .801993 2617.78 3459.07 1980.6 3346.06 31.78 4.81 .981994 3436.87 4643.31 3405.88 3926.90 45.45 6.07 .681995 3910.16 3943.66 2891.45 3110.49 23.63 3.81 1.131996 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 1.521998 3658.34 4322.00 2741.22 3055.41 13.00 2.25 1.801999 3064.95 5150.99 3042.25 5005.82 17.35 3.07 1.382000 9209.54 6150.69 3491.55 3972.12 24.48 3.81 1.142001 3990.65 4462.11 2594.87 3262.33 17.60 2.51 1.832002 3262.01 3758.27 2828.48 3377.28 15.22 2.30 2.142003 3383.85 5920.76 2904.44 5838.96 15.02 2.49 2.142004 5872.48 6617.15 4227.50 6602.69 17.26 3.28 2.012005 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 1.352007 83827.77 20498.11 12316.10 20286.99 22.25 5.32 1.102008 20325.27 21206.77 14677.24 16481.20 22.44 5.71 .98

PERFORMANCE OF AUTO SECTOR

Indices: AUTO For the period :From year 2000 to 2008

year Open High Low close2000 0.00 0.00 0.00 21.122001 0.00 0.00 0.00 755.552002 0.00 0.00 0.00 1015.622003 0.00 0.00 0.00 2533.792004 -- 2871.63 0.00 2836.392005 2852.05 4299.07 2525.72 4256.452006 4251.97 5843.51 3959.66 5518.502007 5604.44 5881.83 4435.21 5667.452008 5671.41 5796.87 4063.38 4548.08

PERFORMANCE OF POWER SECTOR

Indices: POWER For the period :From year 2005 to 2008

Year Open High low close Price/earnings Price/book value

Dividend yield

2005 -- 0.00 0.00 1457.91 0.00 0.00 0.002006 -- 0.00 0.00 2048.43 0.00 0.00 0.002007 4395.76 4729.00 4023.09 4548.85 6.35 1.08 .102008 4584.38 4929.34 2896.47 3281.29 34.40 5.90 .73

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.

TABLE: Foreign Investment Flows in India

YearA. Direct Investment

B. Portfolio Investment 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 5639

2003-04 4675 11377 16052

From a net foreign investment inflow of US $ 5.3 billion in 1997-98, such inflows declined to US $ 2.4 billion in 1998-99. This is because of the lower portfolio inflows, as a result of which the net investment has dropped. The changes in the investment conditions in a country or region can lead to dramatic swings in portfolio investment. For a country on the rise, in other words for developing countries, FPI can bring about rapid development, helping an emerging economy move quickly to take advantage of economic opportunity, creating many new jobs and significant wealth. However, when a country's economic situation takes a downturn, sometimes just by failing to meet the expectations of international investors, the large flow of money into a country 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 of the Narasimham committee which stated:The committee would also suggest that the capital markets should be gradually opened up to foreign portfolio investments and simultaneously efforts should be initiated to improve the depth 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) were allowed to undertake portfolio investment in India. Only on September 14, 1992 the Government of 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 PURCHASEFII SALES FII NET FII NET CUM FII NET  in crores in crores in crores US$ million US$ million1993-94 5593 466 5126 1634 16381994-95 7631 2835 4796 1528 31671995-96 9694 2752 6942 2036 52021996-97 15554 6979 8575 2432 76341997-98 18695 12737 5958 1649 92841998-99 16115 17699 -1584 -386 88981999-00 56856 46734 10122 2339 112372000-01 74051 64116 9934 2160 133962001-02 49920 41165 8755 1846 152422002-03 47060 44371 2689 562 158042003-04 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 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 -8.4May-98 8253 13284 -5031 -124.3Jun-98 8023 16072 -8049 -190.5Jul-98 13098 12154 944 22.2Aug-98 7932 11783 -3851 -90.1Sep-98 14381 12458 1923 45.2Oct-98 10737 16470 -5733 -135.4Nov-98 10391 9845 546 12.9Dec-98 11089 8789 2300 104.8Jan-99 16355 11894 4462 104.8Feb-99 16477 13084 3393 79.8Mar-99 25207 23973 1233 29

A major factor which led to continuous outflow of funds during the middle and end of the year 1998 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 a result, the FIIs were facing heavy redemption pressures from the Emerging Markets Funds. The stock markets in all these countries fell continuously from March 1998 till about September 1998. The integration of the Indian capital markets with the international markets thus spilled over to Indian markets as well. However, the net outflow from the Indian markets was much lower than the other Asian countries. A further indication of the integration of the Indian markets can 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.

The sluggishness in investment in the emerging markets was exacerbated by the fact that hroughout 1998-99, US and European markets showed historically high valuations, and the expectations of further rise because of the strong economic indicators there which led to reduced allocations 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 INVESTMENTAPRIL -0.308891015 -0.486299015 -0.122510317MAY -0.203839618 -0.226174846 0.127555673JUNE 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 0.118451125NOVEMBER 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 are quite 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

MONTH GROSS PURCHASES GROSS SALES NET INVESTMENTAPRIL -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 -0.057919794DECEMBER -0.666663184 -0.688620778 -0.46494095JANUARY 0.02201209 -0.551509386 0.679227006FEBRUARY 0.00689661 -0.170243004 0.149373722MARCH 0.417854257 -0.250893125 0.479619465

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 0.124042AUGUST 0.087789444 9.97422E-05 0.083346SEPTEMBER 0.398844383 0.229400194 0.142236OCTOBER 0.011628416 0.09237977 0.014031NOVEMBER 0.010786256 0.053949168 0.000423DECEMBER 0.475540669 0.479978929 0.246888JANUARY 0.000413982 0.328675883 0.421018FEBRUARY 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

MONTH GROSS PURCHASES GROSS SALES NET INVESTMENTAPRIL 0.071599272 0.259107325 0.005808MAY 0.034097085 0.050539242 0.022029JUNE 0.164540479 2.21877E-05 0.33177JULY 0.084800519 0.002060859 0.124886AUGUST 0.099793047 0.001114997 0.091028SEPTEMBER 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 0.461349FEBRUARY 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.

Share of top investing countries in FDI Approvals

Rank Country Aug.1991 to march2002

%of total approvals

2002-03

2003-04

2004-05

2005-06(April Jan.)

Cumulative approvals aug 1991 to Jan 2006

% of total approvals till Jan 2006

1 U.S.A. 56,631 24.71 818 881 779 260 59394 22.922 Mauritius 32,919 14.37 1432 1572 2838 3565 42340 16.343 U.K. 21,396 9.34 1819 590 1178 1019 26011 10.044 Japan 10794 4.71 566 345 172 73 11955 4.615 SouthKore

a9,798 4.28 29 65 15 64 9975 3.85

6 Germany 8,976 3.92 292 172 177 222 9843 3.807 Netherlan

ds8618 3.76 315 628 76 117 9758 3.77

8 Australia 6,768 2.95 47 34 39 40 6931 2.679 France 6,28 2.72 323 37 71 94 6756 2.6110 Singapore 7,943 3.47 330 369 578 164 9387 3.62FDI approvals

229,150 7,904

6,224 8,728 7112 259,118

Share of top investing countries in FDI inflow in India

Rank Country Aug.1991 to march2002

%of total approvals

2002-03

2003-04

2004-05

2005-06(April Jan.)

Cumulative FDI inflows to Jan 2006 aug 1991 to Jan 2006

% of total approvals till Jan 2006

1 Mauritius 27446 29.64 3766 2609 5141 9120 48112 36.90

2 U.S.A. 12248 13.23 1504 1658 3055 1705 20183 15.48

3 U.K. 4263 4.60 1617 769 458 1645 8757 6.724 Japan 5099 5.51 1971 360 575 669 8680 6.665 Netherlan

ds3856 4.61 836 2247 1217 329 8489 6.51

6 Germany 3455 3.73 684 373 663 1302 6481 4.977 Singapore 1997 2.16 180 172 822 1013 4186 3.218 France 1947 2.10 534 176 537 63 3259 2.509 South

korea2189 2.36 188 110 157 257 2903 2.23

10 Switzerland

1299 1.30 437 207 353 332 2530 1.94

Total FDI inflow

92611 14932 12117 17138 19356 156154

Sources of FDI inflows in India

Top 10 countries have accounted for more than a half of India’s FDI approvals during 1991-95, while is share increased to about 70% over 2004-05. this able shows ranking of cumulative investment approved during the period 1991 to January 2006 reveals that USA was the largest investor in India with an investment of Rs. 59394crores Netherlands , France and Singapore follows in that order . but the share of USA has been declining , whereas the shares of Mauritius has been increasing from past few years . it has b increased by more than 80% in2004-05 compared to 2003-04 , mainly due to FDI being routed through Mauritius , as it has a double Taxation avoidance treaty with India . in terms of FDI inflow into the country , Mauritius topped the list with90% share of total FDI inflows , whereas USA holds the 2nd position with 15.48% of total FDI inflows in India . thus in terms of FDI inflows Mauritius is way ahead from UK ,Japan Netherlands Germany , Singapore ,France South Korea and Switzerland follows in that order .South Korea who holds2.23%share Australia who holds 8th positioning FDI approvals with 2.65% share ,does not figure in top 10 countries in FDI inflows . O the other hand , Switzerland , which does not come in FDI approvals holds holds 10th position in FDI inflows with 1.94% share .Above table shows that FDI inflows from all countries have been increased in 2004-05

Total FDI and FDI in ICT Sector

Year FDI inflow Amount in Rs. Cr.

Growth in FDIAmount in Rs. Cr.

FDI in ICT sector

Growth in FDI in ICT

1991-92 409 3511992-93 1094 167.48 675 92.311993-94 2018 84.46 2380 252.591994-95 4312 113.68 4132 73.611995-96 6916 60.39 6750 63.361996-97 9654 39.59 9211 36.461997-98 13548 40.34 11817 28.291998-99 12343 -8.89 8644 -26.851999-00 10311 -16.46 7271 -15.882000-01 12645 22.64 10323 41.972001-02 19361 53.11 14419 39.682002-03 14932 -22.88 8423 -41.582003-04 121117 -18.85 6703 -20.422004-05 17138 41.44 3869 -42.28

Under consideration , it has been observed that there are some fluctuations in the growth rate both in positive rates. From 1991-92 to 1997-98 , there has been a steady growth in FDI inflow but it drastically fall is again noticed in 2002-03 and 2003-04.The most probable reasons behind these alarming downfalls is the result of various asian crise and sanctions amposed on India as a cosequence of nuclear explosion test by government of India that cast a shadow on FDI inflows to India during the period 1998-2000. further there seems a declining trend in FDI in the period 2001-4 . This trend was felt across the world ( 108 countries according to world investment report 2003 ) as the world was experiencing an economic slowdown . Reduction in M&As( merger and acquisitions ) was the major reason and also the war in Iraq and SARS had a negative impact on global capital flows in 2003. In 2004 , global FDI inflows began to recover after the stock of previous year .

The statistical description in terms of mean, standard deviation , minimum , maximum and coefficient of variance shows:

FDI inflows FDI in ICT Mean 9771 6783Std. dev. 6005 4133Min 409 351Max 19361 14419CV% 61.45 60.93AAGR 42.77 37.02

The CV% is almost equal as seen in above tables ,which represents that the variability in the FDI inflows and FDI in ICT sector is approximately similar . This depicts that whenever there is a change in the FDI inflows , the FDI in ICT as also affected.

Year Wise FDI inflows into Infrastructure sector during April 2000 to December

2007

(In US$ million)

Year amt.

2000-01 292.37

2001-02 1902.26

2002-03 347.33

2003-04 388.37

2004-05 456.00

2005-06 914.04

2006-07 2179.39

Total 10575.56

FINDINGS:

It is an accepted fact now that FIIs have significant influence on the movements of the

stock market indexes in India. If one looks at the total FII trade in equity in India and its

relationship with the stock market major indexes like Sensex and Nifty, it shows a

steadily growing influence of FIIs in the domestic stock market.

FIIs and the movements of Sensex are quite closely correlated in India and FIIs wield

significant influence on the movement of Sensex. NSE also observes that in the Indian

stock markets FIIs have a disproportionately high level of influence on the market

sentiments and price trends. This is so because other market participants perceive the FIIs

to be infallible in their assessment of the market and tend to follow the decisions taken by

FIIs. This ‘herd instinct’ displayed by other market participants amplifies the importance

of FIIs in the domestic stock market in India.

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 FII’s 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.

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

CONCLUSION

In this study I tried to find out the impact of FDIs 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 companies remain 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.

SUGGESTIONS AND RECOMENDATIONS

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.

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

attract portfolio investments which prefer liquidity, it has been advocated to develop

stock markets.

BIBLIOGRAPHY

BOOKS:-

Business environment (Suresh Bedi)

The Journal of Amity Management Analyst (Jan. June 2007)

The Journal of Business ,vol.59,no.3, 383-403.

The Journal of Finance India

Apeejay journal of management and technology.(Jan 2009)

JIMS 8M April June 2007

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