Body

A Study On Impact of Foreign Institutional Investors On Indian Stock Market

CHAPTER 1

INTRODUCTION

1.1 FOREIGN INSTITUTIONAL INVESTORS

FII is defined as an institution organized outside of India for the purpose of making

investments into the Indian securities market under the regulations prescribed by SEBI.

‘FII’ include “Overseas pension funds, mutual funds, investment trust, asset management

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

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

incorporated or established outside India proposing to make proprietary investments or

investments on behalf of a broad-based fund. FIIs can invest their own funds as well as invest on

behalf of their overseas clients registered as such with SEBI. These client accounts that the FII

manages are known as ‘sub-accounts’. A domestic portfolio manager can also register itself as an

FII to manage the funds of sub-accounts

Foreign institutional investor means an entity established or incorporated outside India

which proposes to make investment in India. Positive tidings about the Indian economy combined

with a fast-growing market have made India an attractive destination for foreign institutional

investors. FII is defined as an institution organized outside of India for the purpose of making

investments into the Indian securities market under the regulations prescribed by SEBI.

Entry Options for FII

A foreign company planning to set up business operations in India has the following options:

Incorporated Entity

By incorporating a company under the Companies Act,1956 through

• Joint Ventures; or

• Wholly Owned Subsidiaries

CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 1


Foreign equity in such Indian companies can be up to 100% depending on the requirements of the

investor, subject to equity caps in respect of the area of activities under the Foreign Direct

Investment (FDI) policy.

1.1.1 Important terms to know about FIIs:

Sub-account:

Sub-account includes those foreign corporations, foreign individuals, and institutions, funds or

portfolios established or incorporated outside India on whose behalf investments are proposed to

be made in India by a FII.

Designated Bank:

Designated Bank means any bank in India which has been authorized by the Reserve Bank of

India to act as a banker to FII.

Domestic Custodian:

Domestic Custodian means any entity registered with SEBI to carry on the activity of providing

custodial services in respect of securities.

Broad Based Fund:

Broad Based Fund means 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. Provided that if the fund has institutional investor(s) it shall not be necessary for the fund to

have twenty investors.

If the fund has an institutional investor holding more than 10% of shares or units in the fund, then

the institutional investor must itself be broad based fund.

1.1.2 Foreign Institutional Investors Registration

Following entities / funds are eligible to get registered as FII:

• Pension Funds



• Mutual Funds

• Investment Trust

• Insurance or reinsurance companies

• Investment Trusts

• Banks

• Endowments

• University Funds

• Foundations

• Charitable Trusts or Charitable Societies

Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be

registered as FIIs:

• Asset Management Companies

• Institutional Portfolio Managers

• Trustees

• Power of Attorney Holders.

The eligibility criteria for applicant seeking FII registration

As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required to

fulfill the following conditions to qualify for grant of registration:

• Applicant should have track record, professional competence, financial soundness,

experience, general reputation of fairness and integrity.

• The applicant should be regulated by an appropriate foreign regulatory authority in the

same capacity/category where registration is sought from SEBI. Registration with authorities, which

are responsible for incorporation, is not adequate to qualify as Foreign Institutional Investor.



• The applicant is required to have the permission under the provisions of the Foreign

Exchange Management Act, 1999 from the Reserve Bank of India.

• Applicant must be legally permitted to invest in securities outside the country or its in-

corporation / establishment.

• The applicant must be a "fit and proper" person.

• The applicant has to appoint a local custodian and enter into an agreement with the

custodian. Besides it also has to appoint a designated bank to route its transactions.

• Payment of registration fee of US $ 5,000.00

"Form A" as prescribed in SEBI (FII) Regulations, 1995 is to be filled before applying for FII

registration.

Supporting documents required are:

• Application in Form A duly signed by the authorized signatory of the applicant.

• Certified copy of the relevant clauses or articles of the Memorandum and Articles of

Association or the agreement authorizing the applicant to invest on behalf of its clients

• Audited financial statements and annual reports for the last one year , provided that the

period covered shall not be less than twelve months.

• A declaration by the applicant with registration number and other particulars in support of

its registration or regulation by a Securities Commission or Self Regulatory Organisation or any

other appropriate regulatory authority with whom the applicant is registered in its home country.

• A declaration by the applicant that it has entered into a custodian agreement with a

domestic custodian together with particulatrs of the domestic custodian.

• A signed declaration statement that appears at the end of the Form.

• Declaration regarding fit & proper entity.

The fee for registration as FII is US $ 5,000. The mode of payment is Demand Draft in favour of

"Securities and Exchange Board of India" payable at New York”.



SEBI generally takes 7 working days in granting FII registration. However, in cases where the

information furnished by the applicants is incomplete, seven days shall be counted from the days

when all necessary information sought, reaches SEBI.

In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from the

Reserve Bank of India (RBI). In such cases, 7 working days would be counted from the day no

objection is received from RBI.

The FII registration is valid for 5 years. After expiry of 5 years, the registration needs to be

renewed.

Same as initial registration, Along with "Form A" and all the relevant documents, the

applicants are required to fill in additional form (Annexure 1) while applying for renewal. US $ 5,000

needs to be paid for renewal of FII registration.

The application for renewal should be submitted three months before expiry of the FII

registration. 100 % debt FIIs are debt dedicated FIIs which invest in debt securities only. The

procedure for registration of FII/sub-account, under 100% debt route is similar to that of normal

funds besides a clear statement by the applicant that it wishes to be registered as FII/sub-account

under 100% debt route.

The FII registration application should be sent to:

Securities and Exchange Board of India

Division of FII & Custodian

Mittal Court "B" Wing, First Floor

224, Nariman Point

Mumbai 400 021

India.



Chart 1.1- showing FII registration Process:



1.1.3 Sub-Account Registration

a) Institution or funds or portfolios established outside India, whether incorporated or not.

b) Proprietary fund of FII.



c) Foreign Corporates

d) Foreign Individuals.

The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account are

required to sign the Sub-account application form.

"Annexure B" to "Form A" (FII application form) needs to be filled when applying for sub-

account registration. No document is needed to be sent with annexure B. The fee for sub-account

registration is US$ 1,000. The fee is to be submitted at the time of submitting the application. The

mode of payment is Demand Draft in the name of "Securities and Exchange Board of India"

payable at New York. SEBI generally takes three working days in granting FII registration.

However, in cases where the information furnished by the applicants is incomplete, three days

shall be counted from the days when all necessary information sought, reaches SEBI. The validity

of sub-account registration is co-terminus with the FII registration under which it is registered. The

process of renewal of sub-account is same as initial registration. Renewal fee in this case is US $

1,000. OCBs / NRIs are not permitted to get registered as FII/sub-account.

1.1.4 Post-Registration Process

If a registered FII/sub-account undergoes name change, then the FII need to promptly

inform SEBI about the change. It should also mention the reasons for the name change and give

an undertaking that there has been no change in beneficiary ownership.

In case of name change of FII, the request should be accompanied with documents from

home regulator and registrar of the company evidencing approval of name change, and the original

FII registration certificate issued by SEBI should be sent back for necessary amendment.

Procedure for transferring a sub-account from one FII to another:

The FII to whom the Sub-account is proposed to be transferred has to send a request

along with a declaration that it is authorized to invest on behalf of the Sub-account. The transferor

FII should also submit a No-objection certificate.

The FII should send a request, along with no-objection certificate from existing domestic custodian,

for change in domestic custodian.



The FII would be required to send a request for cancellation of its registration or registration of its

Sub-account/s clearly mentioning the name and registration number of the entity. The FII should

ensure that it / Sub-account has nil cash / securities holdings.

Procedure for change of local custodian:

In case of change of the local custodian of the FII / sub-account, the change should be

intimated to SEBI by the FII. On receipt of no objection from the existing custodian and acceptance

from the proposed custodian, the change of custodian would be approved - by SEBI.

Procedure for registration as FII/sub account under 100% debt route:

The procedure for registration of FII/sub account under 100% debt route is similar to that of

normal funds besides a clear statement by the applicant that it wishes to be registered as FII/sub

account under 100% debt route. However, Government of India allocates the overall investment

limit for 100% debt funds annually. The grant of investment limit for individual 100% debt funds is

within this overall limit. The funds have to seek further investment limit in case the limit allotted to

them is exhausted and they wish to invest further.

A Foreign Institutional Investor having an account with one custodian can open accounts

with different custodians for its different sub-accounts. However, one sub-account cannot be

custodial with more than one custodian.

Procedure if an existing sub-account wants to get registered as a Foreign Institutional Investor:

In case if a registered sub-account wishes to get itself registered as a Foreign Institutional Investor,

then it will have to apply in Form A to SEBI for the same and has to satisfy all the eligibility criteria

norms mentioned in SEBI (Foreign Institutional Investor) Regulations, 1995. It should also submit a

letter from the old FII indicating its 'No-objection' to such registration.

Procedure for renewal of FII/Sub-Account registration:

They have to apply before 3 months of the expiry of registration in Form A. Circular No

FITTC/CUST/09/2000 dated September 21, 2000 may be referred.

If the FII does not renew its/sub-account’s registration:

The registration of the FII / Sub-account would get expired at due date and it would not be

allowed to trade in Indian securities markets. If it is not interested in renewal but has certain



residual assets, it can apply for disinvestment in terms of Circular No. FITTC/CUST/12/2001 dated

June 04, 2001 and abides by the guidelines specified in this regard.

1.1.5 Scope of Investments under the Portfolio Investment Scheme.

FIIs, under the Portfolio Investment Scheme, are permitted to make both primary and

secondary investments in the India capital markets. Unlike an investor which relies solely on FDI

regulations, a foreign investor which registers as a FII would be allowed to buy and sell securities

over Indian stock exchanges. In addition, FIIs are entitled to effect transactions in a broader

category of securities than an investor relying on FDI regulations alone. FIIs are permitted to

purchase equity securities (both listed and unlisted), units of schemes floated by the Unit Trust of

India and other domestic municipal funds, warrants, debentures, bonds, governmental securities

and derivative instruments which are traded on a recognized stock exchange. There is no limit on

the amount that FIIs may invest in the Indian market, and no lock-up periods apply to investments

made by FIIs.

Exchange Controls

FIIs are required to open up one or more bank accounts with certain designated banks and must

also appoint a domestic custodian for custody of investment made by the FII. Through the

designated accounts, FIIs are authorized to freely transfer funds from foreign currency accounts to

Rupee accounts and vice versa; make Rupee denominated investments in Indian companies;

freely transfer after-tax proceeds from Rupee accounts to foreign currency accounts, and repatriate

capital, capital gain, dividends interest income and other gains, subject to deduction for applicable

withholding taxes. So long as FIIs execute purchases and sales on a recognized Indian stock

exchange, they are not required to obtain transaction specific approval from the Reserve Bank. FIIs

are also entitled to effect transactions using their own proprietary funds, or the funds of their sub

accounts.



Investment Restrictions

Certain limitations apply to investments by FIIs into India. First, FIIs’ and their sub-

accounts’ investment in an Indian company cannot exceed ten percent (10%) of the total issued

share capital of the Indian company (five percent if the subaccount is a foreign corporation or

individual). In addition, the aggregate investment of all FIIs in an Indian company may not exceed

twenty four percent (24%) of its total issued share capital, without the express approval of its board

of directors and shareholders. Even with board of director and shareholder approval, the same

sectoral limits which apply to foreign direct investment would continue to apply. FIIs may register

with SEBI as a debt fund or an equity fund. FIIs which are registered as equity funds are required

to invest at least seventy percent (70%) of their funds in equity and equity-related securities. A FII

registered as a debt fund, on the other hand, must invest one hundred percent (100%) of its funds

in debt instruments. Foreign corporations and individuals are not eligible subaccounts of a FII that

is registered as a debt fund. FIIs are not permitted to engage in short selling, other than in respect

of derivative securities traded over a recognized exchange, and must effect transactions through a

registered stock broker. Sector investment prohibitions and caps which apply to foreign direct

investment also apply to investments by FIIs, and FII investments must also comply with the pricing

requirements applicable to foreign direct investment. In addition, FIIs are not permitted to invest in

print media.



1.2 TREND OF FIIS WITH THE HELP OF ECONOMIC FIGURES

• In 2004, FII investments crossed $9 billion, the highest in the history of Indian capital

markets.

• The total net investment for the year up to December 29 stood at US$9,072 million while

foreign investors pumped in about US$2,113 million in December.

• Korea and Taiwan have always been the biggest recipients of FII money. It was only in

2004 that India managed to receive the second highest FII inflow at over $8.5bn.

• In 2005 FIIs invested more in Indian equities than in Korean or Taiwanese equities.

• On 9th March 2009, India's exceptional growth story and its booming economy have made

the country a favourite destination with foreign institutional investors (FIIs). It has continued to

attract investment despite the Satyam non-governance issue and the global economic contagion

impact on Indian markets.

• According to Mr Gautam Chand, CEO of Instanex, said FIIs are the largest institutional

investors in India with holdings valued at over US$ 751.14 billion as on December 31, 2008.

• They are also the most successful portfolio investors in India with 102 per cent

appreciation since September 30, 2003.



• As per SEBI, number of registered FIIs stood at 1626 and number of registered sub-

accounts stood at 4972 as on March 17, 2009.

Future Prospects of Foreign Institutional Investments:

Sustaining the growth momentum and achieving an annual average growth of 9-10 % in

the next five years.

Simplifying procedures and relaxing entry barriers for business activities and Providing

investor friendly laws and tax system.

Checking the growth of population; India is the second highest populated country in the

world after China. However in terms of density India exceeds China, as India's land area is

almost half of China's total land. Due to a high population growth, GNI per capita remains

very poor. It was only $ 2880 in 2003 (World Bank figures).

Boosting agricultural growth through diversification and development of agro processing.

Expanding industry fast, by at least 10% per year to integrate not only the surplus labour in

agriculture but also the unprecedented number of women and teenagers joining the labour

force every year.

Developing world-class infrastructure for sustaining growth in all the sectors of the

economy

Allowing foreign investment in more areas.

Effecting fiscal consolidation and eliminating the revenue deficit through revenue

enhancement and expenditure management.

Global corporations are responsible for global warming, the depletion of natural resources,

and the production of harmful chemicals and the destruction of organic agriculture.

The government should reduce its budget deficit through proper pricing mechanisms and

better direction of subsidies. It should develop infrastructure with what Finance Minister P

Chidambaram International Research Journal of Finance and Economics - Issue 5 (2006)

171 of India called “ruthless efficiency” and reduce bureaucracy by streamlining

government procedures to make them more transparent and effective.

Empowering the population through universal education and health care, India must

maximize the benefits of its youthful demographics and turn itself into the knowledge hub

of the world through the application of information and communications technology (ICT) in

all aspects of Indian life although, the government is committed to furthering economic

reforms and developing basic infrastructure to improve lives of the rural poor and boost



economic performance. Government had reduced its controls on foreign trade and

investment in some areas and has indicated more liberalization in civil aviation, telecom

and insurance sector in the future.

Chart 1.2- Investment structure of FII



Chart 1.3- FII and THE FINANCIAL SYSTEM



Table 1.1- Number of registered FIIs in India

As of March 2011 there were 1722 FIIs registered with SEBI, as against 1711 in March 2010

SEBI Registered FIIs in India End of March

1992-93 0

1993-94 3

1994-95 156

1995-96 353

1996-97 439

1997-98 496

1998-99 450

1999-00 506

2000-01 527

2001-02 490

2002-03 502

2003-04 540

2004-05 685

2005-06 882

2006-07 997

2007-08 1319

2008-09 1618

2010-11 1711

Till March 2011 1722



Table 1.2- FII share in different sectors of companies listed on NSE

Sectors Percentage of Foreign Institutional Investors

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Sep-11

Banks 18.41 19.15 14.27 16.02 17.62 18.17

Engineering 11.45 10.63 7.34 8.28 9.36 9.30

Finance 18.18 17.44 13.01 16.53 23.35 19.20

FMCG 11.91 14.07 12.72 14.09 16.34 17.00

Information

Technology

14.53 16.00 12.44 11.68 21.16 17.07

Infrastructure 7.15 8.86 7.31 8.90 7.87 7.50

Manufacturing 9.57 9.46 7.28 8.79 9.41 9.60

Media &

Entertainment

15.20 11.71 11.42 7.06 10.97 11.63

Petrochemicals 5.83 4.73 4.77 6.08 6.52 6.49

Pharmaceuticals 11.17 10.69 7.88 8.78 10.19 10.13

Services 13.09 10.70 8.39 8.05 7.41 9.50

Telecommunication 11.17 9.12 6.85 8.64 8.44 8.46

Miscellaneous 8.19 9.30 8.39 8.10 13.65 13.37

Total stake of FIIs

in all sectors

10.78 10.62 8.40 9.58 10.32 10.45

FOREIGN INVESTMENT INFLOWS

YEAR A. Direct Investment B. Portfolio Investment Total(A+B)

Rs. US $ RS. US $ Rs. US $



crore

Million

Crore

Million

Crore Million

Table 1.3- Foreign Investment Inflows

1992-93 965 315 748 244 1713 559

1993-94 1838 586 11188 3567 13026 4153

1994-95 4126 1314 12007 3824 16133 5138

1995-96 7172 2144 9192 2748 16364 4892

1996-97 10015 2821 11758 3312 21773 6133

1997-98 13220 3557 6794 1828 20014 5385

1998-99 10358 2462 -257 -61 10101 2401

1999-00 9338 2155 13112 3026 22450 5181

2000-01 18406 4029 12609 2760 31015 6789

2001-02 29235 6130 9639 2021 38874 8151

2002-03 24367 5035 4738 979 29105 6014

2003-04 19860 4322 52279 11377 72139 15699

2004-05 27188 6051 41854 9315 69042 15366

2005-06 39674 8961 55307 12492 94981 21453

2006-07 103367 22826 31713 7003 135080 29829

2007-08 140180 34835 109741 27271 249921 62106

2008-09 173741 37838 -63618 -13855 110123 23983

2009-10 179059 37763 153516 32376 332575 70139

2010-11 138462 30380 143435 31471 281897 61851

(Sources RBI, Statistics on Indian Economy)

1.3 PORTFOLIO INVESTMENT

With greater openness in the emerging market economies and developing countries,

portfolio investment flows became net outflows in four out of the last years ending 2008. According



to the WEO, private net portfolio flows to these economies, after being overall outflows in the

period 2002-05, recorded modest levels of positive inflows of US $ 2.1 billion and US $ 23.3 billion

in 2005, respectively. The year 2006 witnessed a great reversal with a massive net outflow of us $

111.9 billion. The reversal in emerging Asia was the highest with an outflow of US $ 120.8 billion in

2006. There was no such outflow from India in 2006, Though the level of portfolio inflows was

lower than in 2005.

With heightened volatility in Asian and global financial markets in 2006-07, net portfolio

inflows into India amounted to US $ 7.1 billion for 2006-07. Portfolio net inflows after being

negative in the initial months (May-July 2006) picked up momentum in August-November 2006

only to slow down again in March 2008. Euro equities, which were relatively a very small

component of portfolio flows (less than US $ 1 billion in the period 1997-98 to 2004-05), have risen

in 2006-07 and 2007-08 to reach US $ 2.6 billion and US $ 3.* billion, respectively. IN 2007-08,

Euro equities constituted 54.3 percent of the total portfolio net flows. However this composition was

more due to lower net inflows under FII. Portfolio investment inflows in the first six months was

US $ 83.4 billion and outflows was US $ 65 billion leaving a net inflow of US $ 18.3 billion, which

implies a growth of 1,015.2 percent, year on year.

In the scheme of classification based on duration, portfolio investment flows fall under

short term variety. The proportion of net portfolio outflows to total portfolio flows under this head

indicates the nature of such flows. In the seven year period from 2000-01, the proportion of net

flows to total gross flows (inflows plus outflows) were below 13 percent, with the exception of 2003-

04 when it was higher at 25.2 percent. IN 2006-08, the proportion was by abysmally low at 3.3

percent.

Equity Debt

YEAR Gross

Purch.

(Rs. Cr)

Gross

Sales

(Rs. Cr)

Net

Invest.

(Rs.Cr)

Gross

Purch.

(Rs. Cr)

Gross

Sales

(Rs. Cr)

Net

Invest.

(Rs. Cr)

Table 1.4- FII Sale and Purchase activity for the past years on annual basis:



2011 608086.40 611728.80 -3642.40 288365.70 245767.90 42597.80

2010 768402.60 634110.70 140497 213849.20 161749 54442.80

2009 624237.5 540813.69 83423.9 111772.1 107208.91 4563.3

2008 719536.8 772378.7 -52841.9 46296.4 33964 12332.4

2007 811621.8 741276.4 70345.6 31176 21989.7 9186.4

2006 475622.5 439082.8 36539.7 11060.9 7011.7 4049.2

2005 284354.10 237642.20 46711.90 6890.90 12418.00 -5527.10

2004 184608.40 146396.00 38212.40 12478.70 10572.10 1906.70

2003 94122.20 63385.10 30737.10 10956.90 6363.90 4593.00

2002 46854.10 43272.80 3581.30 2970.60 2540.83 429.77

2001 47340.60 34558.30 12752.90 5346.90 4828.30 518.80

2000 74791.50 68421.60 6509.90 2834.80 2735.40 106.00

1999 36395.50 29817.10 6578.10 817.70 698.80 118.60

Source: Securities and Exchange Board of India

According to data released by the market regulator Securities and Exchange Board of

India (SEBI), FIIs transferred a record US $ 17.46 billion in domestic equities during the calendar

year 2009. This FII investment in 2009 proved to be the highest ever inflow in the country in rupee

terms in a single year, breaking the previous high of US $ 14.96 billion parked by foreign fund

houses in domestic equities in 2007. FIIs infused a net US $ 1.05 billion in debt instruments during

the above said period.

CHART 1.4- GROSS PURCHASES & SALES OF EQUITY (RS. CR)



2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 19990

100000

200000

300000

400000

500000

600000

700000

800000

900000

Gross PurchasesGross Sales

Inference:

From the above graph it’s clear that FIIs reached its peak in equity in 2007 period and

because of the recession the investments came down in year 2008. In 2011 also the FII

investments are at good levels. It would depend upon the various government policies which would

support the foreign investors. If the registration and Investment processes become easier then we

could see more investments in the further near future.

CHART 1.5- GROSS PURCHASES & SALES OF DEBT (RS. CR)



2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 19990

50000

100000

150000

200000

250000

300000

350000

Gross PurchaseGross sales

Inference:

From above graph we can say that the trend in the investment in debts suddenly raised

since 2008 as there is a steep ascent in the graph. Due to economical policies of our country and

good market conditions the debt investments has increased.

CHAPTER 2

REVIEW OF LITERATURE & DESIGN OF THE STUDY



2.1 Introduction to the problem

The term Foreign Institutional Investor is defined by SEBI as under:

“Means an institution established or incorporated outside India to make investment in

Indian securities. Provided that a domestic asset management company or domestic portfolio

managers who manages funds raised or collected or brought from outside India for Investment in

India on behalf of a sub-account, shall be deemed to be Foreign Institutional Investor.”

The study attempts understand the behavioral pattern of FII during the period from March-

2007 to February-2012 and examine the volatility of BSE Sense and S&P CNX NIFTY due to FII.

THE data for the study uses the information obtained from the secondary sources like websites of

BSE sensex.We have attempted to explain the impact of foreign institutional investment on stock

market and Indian economy. Also attempts to present the correlation between FII and BSE sensex

and S&P CNX NIFTY by Karl Pearson’s CO-efficient of correlation and Regression analysis.

2.2 Review of Literature

1. Richard W.Sias (1996) has found that a trader-intensified transactions database is

employed to investigate: (1) the relation between order-flow imbalance closed-end funds share

prices and discounts (2) the role of institutional investors in closed-end funds. Empirical results are

consistent with the hypothesis that buyers (sellers) of closed-end funds face upward (downward)

sloping supply (demand) curves. The results also demonstrate that ownership statistics fail to

accurately reflect institutional investors’ importance in closed-end funds market. The results failed

to provide the evidence that institutional investors offset the position of individual investors or that

institutional investors face systematic “noise trader risk”.

2. Ilangovan Prof. D. et al (1997) held that Steps are taken to gain extra mileage as regards

the level of foreign investment receipts is concerned. Foreign direct investment is proven to have

well-known positive effect through technology spillovers and stable investments tied to plant and

equipment, but portfolio capital is associated more closely with volatility and its capacity to be

triggered by both domestic as well as exogenous factors, making it extremely difficult to manage

and control.



3. Arshanapalli Bala et al (1997) has examined the nature and extent of linkage between the

U.S. and the Indian stock markets. The study uses the theory of co-integration to study

interdependence between the BSE, NYSE and NASDAQ. The sample data consisted of daily

closing prices for the three indices from January 1991 to December 1998 with 2338 observations.

The results were in support of the intuitive hypothesis that the Indian stock market was not

interrelated to the US stock markets for the entire sample period. It should be noted that stock

markets of many countries became increasingly interdependent with the US stock markets during

the same time period. India was late in effecting the liberalization policy and when it implanted

these policies it did so in a careful and slow manner. However, as the effect of economic

liberalizations started to take place, the BSE became more integrated with the NASDAQ and the

NYSE, particularly after 1998. It must be noted that though BSE stock market is integrated with US

stock markets, it does not influence the NASDAQ and NYSE markets.

4. Michael Mosebach et al (2000) have examined the long run equilibrium relation between

the net flow of funds into equity MF and the S&P 500 index. Applying the Engel and Granger

correction methodology followed by a state space procedure, we find that the levels of the stock

market are influenced by the net flow of funds into equity MFs. Their findings indicate that the US

equity market appears to be rationally adjusting to a structural change in the behaviour of the US

investing public.

5. Chakrabarti (2001) has examined in his research that following the Asian crisis and the

bust of info-tech bubble internationally in 1998-99 the net FII has declined by US$ 61 million. But

there was not much effect on the equity returns. This negative investment would possibly disturb

the long-term relationship between FII and the other variables like equity returns, inflation, etc. has

marked a regime shift in the determinants of FII after Asian crisis. The study found that in the pre-

Asian crisis period any change in FII found to have a positive impact on the equity returns. But in

the post-Asian crisis period it was found the reverse relation that change in FII is mainly due to

change in equity returns. Hence, any empirical exercise on FII has to take care of this fact.



6. Richard A.Ajayi et al (2001) have studied recent advances in the time-series analysis to

examine the inter-temporal relation between stock indices and exchange rates for a sample of

eight advanced economies. An error correction model (ECM) of two variables employed to

simultaneously estimate short-run and long-run dynamics of variables. The ECM result revealed

significant short-run and long-run relationship between two financial markets. Specifically, the

results show that increase in aggregate stock prices has negative short-run effect on domestic

currency value. In the long-run, however, stock prices have positive effect on domestic currency

value. On the other hand currency depreciation has negative short-run and long-run effects on

stock market.

7. Stanley Morgan (2002) has examined that FIIs have played a very important role in

building up India’s forex reserves, which have enabled a host of economic reforms. Secondly, FIIs

are now important investors in the country’s economic growth despite sluggish domestic sentiment.

The Morgan Stanley report notes that FII strongly influence short-term market movements during

bear markets. However, the correlation between returns and flows reduces during bull markets as

other market participants raise their involvement reducing the influence of FIIs. Research by

Morgan Stanley shows that the correlation between foreign inflows and market returns is high

during bear and weakens with strengthening equity prices due to increased participation by other

players.

8. Sivakumar S (2003) has analysed the net flows of foreign institutional investment over the

years, it also briefly analyses the nature of FII flows based on research, explores some

determinants of FII flows and examines if the overall experience has been stabilising or

destabilising for the Indian capital market.

9. Rai Kulwant et al (2003) heldf that the present study tries to examine the determinants of

Foreign Institutional Investments in India, which have crossed almost US$ 12 billions by the end of

2002. Given the huge volume of these flows and its impact on the other domestic financial markets

understanding the behavior of these flows becomes very important at the time of liberalizing capital

account. In this study, by using monthly data, we found that FII inflow depends on stock market



returns, inflation rate (both domestic and foreign) and ex-ante risk. In terms of magnitude, the

impact of stock market returns and the ex-ante risk turned out to be major determinants of FII

inflow. This study did not find any causation running from FII inflow to stock returns as it was found

by some studies. Stabilizing the stock market volatility and minimizing the ex-ante risk would help

in attracting more FII inflow that has positive impact on the real economy.

10. Agarwal, Chakrabarti et al (2003) have found in their research that the equity return has a

significant and positive impact on the FII. But given the huge volume of investments, foreign

investors could play a role of market makers and book their profits, i.e., they can buy financial

assets when the prices are declining thereby jacking-up the asset prices and sell when the asset

prices are increasing. Hence, there is a possibility of bi-directional relationship between FII and the

equity returns.

11. Raju M.T, Ghosh Anirban (2004) held that volatility estimation is important for several

reasons and for different people in the market. Pricing of securities is supposed to be dependent

on volatility of each asset. In this paper we not only extend the study period of the earlier paper but

also expand coverage in terms of number of countries and statistical techniques. Mature markets /

Developed markets continue to provide over long period of time high return with low volatility.

Amongst emerging markets except India and China, all other countries exhibited low returns

(sometimes negative returns with high volatility). India with long history and China with short

history, both provide as high a return as the US and the UK market could provide but the volatility

in both countries is higher. The third and fourth order moments exhibit large asymmetry in some of

the developed markets. Comparatively, Indian market show less of skewness and Kurtosis. Indian

markets have started becoming informationaly more efficient. Contrary to the popular perception in

the recent past, volatility has not gone up. Intra day volatility is also very much under control and

has came down compared to past years.

12. Sandhya Ananthanarayanan (2004) held that as part of its initiative to liberalize its financial

markets, India opened her doors to foreign institutional investors in September, 1992. This event

represents a landmark event since it resulted in effectively globalizing its financial services



industry. We study the impact of trading of Foreign Institutional Investors on the major stock indices

of India. Our major findings are as follows. First, we find that unexpected flows have a greater

impact than expected flows on stock indices. Second, we find strong evidence consistent with the

base broadening hypothesis. Third, we do not detect any evidence regarding momentum or

contrarian strategies being employed by foreign institutional investors. Fourth, our findings support

the price pressure hypothesis. Finally, we do not find any substantiation to the claim that

foreigners’ destabilize the market.

13. Kwangsoo Ko et al (2004) have examined the characteristics of institutional and foreign

investor stock ownership, and the stock price performance according to their ownership for two

major Asian markets, Japan and Korea. The differences in abnormal returns are more evident for

foreign ownership portfolios than for institutional ownership portfolios, especially in Korea. If we

consider either institutional or foreign investors, the differences in abnormal returns remain still

significant in Korea, but not in Japan. Both institutional investors’ incentive for stock holding and

the extent of stock market efficiency would be the possible explanations for the different results

between Japan and Korea.

14. David A. Carpenter et al (2005) has examined that the Indian government has established

a regulatory framework for three separate investment avenues: foreign direct investment;

investment by foreign institutional investors; and investment by foreign venture capital investors.

While these investment alternatives have created clear avenues for foreign investment in India,

they remain subject to many conditions and restrictions which continue to hamper foreign

investment in India.

15. Bose Suchismita et al (2005) has examined the impact of reforms of the foreign

institutional investors' (FIIs) investment policy, on FII portfolio flows to the Indian stock markets, an

aspect, studies on determinants of FII flows to India so far have not taken into consideration. FIIs

have been allowed to invest in the domestic financial market since 1992; the decision to open up

the Indian financial market to FII portfolio flows was influenced by several factors such as the

disarray in India's external finances in 1991 and a disorder in the country's capital market. Aimed



primarily at ensuring non-debt creating capital inflows at a time of an extreme balance of payment

crisis and at developing and disciplining the nascent capital market, foreign investment funds were

welcomed to the country. Analysis also helps to evaluate the impact of liberalization policies as well

as measures for strengthening of policy framework for FII flows, in the post-Asian crisis period

16. Samy Dr. P. Chella et al (2006) held that Investors can pick up stocks at these levels for a

growth story for long term i.e. for equities a 5 years holding period is reasonable to give a very

above average return. Caution may be exercised to buy only good, well established market movers

and never, to buy on margins or play intraday or dabble in derivatives market, which is high risk.

17. Sikdar Soumyen (2006) held that the surge in inflows has not been matched by a

corresponding growth in the absorptive capacity of the Indian economy. The major reason is the

persistent slowdown of industrial activity since 1997. At the same time, the Reserve Bank of India

(RBI) has been reluctant to let the rupee find its market-clearing level under the circumstances.

This has resulted in steady accretion to our foreign exchange reserves (FER) over the last few

years. Problems of Foreign Capital are widening of current account deficit, monetization,

appreciation of real exchange, etc.

18. Andy Lin Chih-Yuan Chen (2006) has explored the relationship between qualified foreign

institutional investors (QFIIs) and Taiwan’s stock market and evaluates the effect of QFIIs’

investment transactions on Taiwan’s stock market. By taking the date of easing regulatory

restrictions on foreigners’ stock investment holdings as a cutoff point, the research uses the

highest and lowest 10 stocks of QFII holdings in three industry sectors as sample portfolios to

study the prior- and post-event returns.

19. Dhamija Nidhi (2007) held that the increase in the volume of foreign institutional

investment (FII) inflows in recent years has led to concerns regarding the volatility of these flows,

threat of capital flight, its impact on the stock markets and influence of changes in regulatory

regimes. The determinants and destinations of these flows and how are they influencing economic



development in the country have also been debated. This paper examines the role of various

factors relating to individual firm-level characteristics and macroeconomic-level conditions

influencing FII investment. The regulatory environment of the host country has an important impact

on FII inflows. As the pace of foreign investment began to accelerate, regulatory policies have

changed to keep up with changed domestic scenarios. The paper also provides a review of these

changes.

20. P. Krishna Prasanna (2008) has examined the contribution of foreign institutional

investment particularly among companies included in sensitivity index (Sensex) of Bombay Stock

Exchange. Also examined is the relationship between foreign institutional investment and firm

specific characteristics in terms of ownership structure, financial performance and stock

performance. It is observed that foreign investors invested more in companies with a higher volume

of shares owned by the general public. The promoters’ holdings and the foreign investments are

inversely related. Foreign investors choose the companies where family shareholding of promoters

is not substantial. Among the financial performance variables the share returns and earnings per

share are significant factors influencing their investment decision

2.3 Statement of the problem

An adage says “a problem well defined is half solved”. The project deals with the “Impact

of Foreign Institutional Investors on Indian Stock Market”. This research project studies the

relationship between FIIs investment and stock indices. For this purpose India’s two major indices

i.e. BSE Sensex and S&P CNX Nifty are selected. These two indices, in a way, represent the

picture of India’s stock markets. So this project reveals the impact of FII on the Indian capital

market.

There may be many other factors on which a stock index may depend i.e. Government

policies, budgets, bullion market, inflation, economic and political condition of the country, FDI,

Re./Dollar exchange rate etc. But for this study I have selected only one independent variable i.e.

FII. This study uses the concept of correlation and regression to study the relationship between FII

and stock index. The FII started investing in Indian capital market from September 1992 when the

Indian economy was opened up in the same year. Their investments include equity only. The

sample data of FIIs investments consists of monthly average from March 2007 to February 2012.



2.4 Scope of the study

Scope of the study is very broader and covers both the stock indices and its comparison

with foreign institutional investments. But, study is only going to cover foreign investments in form

of equity. The time period is limited from March 2007 to February 2012 as it will give good idea

about FII trend.

The study will provide a very clear picture of the impact of foreign institutional investors on

Indian stock indices. It will also describe the market trends due to FIIs inflow and outflow.

The study would be helpful for further descriptive studies on the ideas that will be explored.

Moreover, it would be beneficial to gain knowledge regarding foreign institutional investments, their

process of registration and their impact on Indian stock market.

2.5 Objectives of the study

Following are the objectives of the study:

• To study the scope and trading mechanism of Foreign Instititutional investors in India.

• To find the impact of net investments made by foreign institutional investors on S&P CNX

NIFTY.

• To find the impact of net investments made by foreign institutional investors on BSE

Sensex.

• To find the trend of foreign institutional investment



2.6 Hypothesis

A hypothesis describes the relationship between or among variables. A good hypothesis is one that

can explain what it claims to explain, is testable and has greater range, probability and simplicity

than its rivals

Null Hypothesis (Ho): The BSE Sensex and S&P CNX Nifty indices do not vary with the variation in

Foreign Institutional Investments

Alternate Hypothesis (Ha): The BSE Sensex and S&P CNX Nifty indices vary with the variation in

Foreign Institutional Investments.

2.7. Research Methodology

Research methodology is the arrangement of conditions for collection and analysis of data

in a manner that aims to combine relevance to the research purpose with economy in procedure.

Research methodology is the conceptual structure within which research is conducted. It

constitutes the blueprint for the collection measurement and analysis of the data.

The research methodology here includes:

• Research design

• Sampling design

• Sampling technique

• Data collection method



2.7.1 Research Design

Exploratory Research

As an exploratory study is conducted with an objective to gain familiarity with the

phenomenon or to achieve new insight into it, this study aims to find the new insights in terms of

finding the relationship between FII’S and Indian Stock Indices.

2.7.2 Sampling Design

• Universe

In this study the universe is finite and will take into the consideration related news and

events that have happened in last few year.

• Sampling Unit: -

As this study revolves around the foreign institutional investment and Indian stock market.

So for the sampling unit is confined to only the Indian stock market.

2.7.3 Sampling Technique

Convenient Sampling: Study conducted on the basis of availability of the Data and

requirement of the project. Study requires the events that have impact on the Indian stock market.

Data collection Method:

Secondary data: For the secondary data various literatures, books, journals, magazines,

web links are used. As there are not possibilities of collecting data personally so no questionnaire

is made.

2.7.4 RESEARCH ANALYSIS TOOLS

Correlation and Regression Analysis:



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

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

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

use the Correlation tool to determine whether two ranges of data move together — that is, whether

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

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

whether values in both sets are unrelated (correlation near zero).

Regression Analysis: We can analyze how a single dependent variable is affected by the values of

one or more independent variables — for example, how an athlete's performance is affected by

such factors as age, height, and weight. We can apportion shares in the performance measure to

each of these three factors, based on a set of performance data, and then use the results to predict

the performance of a new, untested athlete.

2.8 Limitations of the study

1. The project has been prepared in two months, so due to time limitations depth analysis of such a

wide concept may contain some lacuna. IN this report impact of FII on the stock market has been

analyzed considering BSE Sensex ans S&P CNX NIFTY. But only these two may not depict exact

picture of the entire stock market.

2. The data for calculation is taken on monthly basis. The data on daily basis can give more

positive results.

3. The secondary data that I have used in this study may not give true picture of the concern.

4. For calculation purpose I have used only Correlation and Regression methods. Only these two

methods may not give accurate information about the impact of FII on stock market

2.9 Chapter Scheme

CHAPTER 1 - INTRODUCTION

1.1 Foreign Institutional Investors

1.2 Trend of FIIs with the help of economic figures

1.3 Portfolio Investment



CHAPTER 2 - REVIEW OF LITERATURE AND RESEARCH DESIGN

2.1 Introduction to the Problem

2.2 Review of Literature

2.3 Statement of the Problem

2.4 Scope of the Study

2.5 Objectives of the Study

2.6 Hypothesis

2.7 Research Methodology

2.8 Limitations of the Study

2.9 Chapter Scheme

CHAPTER 3 - PROFILE OF THE INDUSTRY

3.1 Overview of Indian Stock Market

3.2 Trading Pattern of Indian Stock Market

3.3 S&P CNX NIFTY

3.4 Issues Studied

CHAPTER 4 - RESULTS, ANALYSIS AND DISCUSSIONS

4.1 FII Flows and Volatility of BSE Sensex and S&P CNX NIFTY

4.2 Correlation and Regression Analysis

4.3 Correlation and Regression with determinants of FII and Indian Stock Market

CHAPTER 5 – SUMMARY OF FINDINGS, CONCLUSIONS & SUGGESTIONS

5.1 Summary of Findings



5.2 Conclusion

5.3 Suggestions

CHAPTER 3

PROFILE OF THE INDUSTRY

3.1 OVERVIEW OF INDIAN STOCK MARKET

The working of stock exchanges in India started in 1875. BSE is the oldest stock market in

India. The history of Indian stock trading starts with 318 persons taking membership in Native

Share and Stock Brokers Association, which we now know by the name Bombay Stock Exchange

or BSE in short. In 1965, BSE got permanent recognition from the Government of India. National

Stock Exchange comes second to BSE in terms of popularity. BSE and NSE represent themselves



as synonyms of Indian stock market. The history of Indian stock market is almost the same as the

history of BSE.

The 30 stock sensitive index or Sensex was first compiled in 1986. The Sensex is

compiled based on the performance of the stocks of 30 financially sound benchmark companies. In

1990 the BSE crossed the 1000 mark for the first time. It crossed 2000, 3000 and 4000 figures in

1992. The reason for such huge surge in the stock market was the liberal financial policies

announced by the then financial minister Dr. Man Mohan Singh.

The up-beat mood of the market was suddenly lost with Harshad Mehta scam. It came to

public knowledge that Mr. Mehta, also known as the big-bull of Indian stock market diverted huge

funds from banks through fraudulent means. He played with 270 million shares of about 90

companies. Millions of small-scale investors became victims to the fraud as the Sensex fell flat

shedding 570 points.

To prevent such frauds, the Government formed The Securities and Exchange Board of

India, through an Act in 1992. SEBI is the statutory body that controls and regulates the functioning

of stock exchanges, brokers, sub-brokers, portfolio managers, investment advisors etc. SEBI

oblige several rigid measures to protect the interest of investors. Now with the inception of online

trading and daily settlements the chances for a fraud is nil, says top officials of SEBI.

Sensex crossed the 5000 mark in 1999 and the 6000 mark in 2000. The 7000 mark was

crossed in June and the 8000 mark on September 8 in 2005. Many foreign institutional investors

(FII) are investing in Indian stock markets on a very large scale. The liberal economic policies

pursued by successive Governments attracted foreign institutional investors to a large scale.

Experts now believe the sensex can soar past 14000 mark before 2010.

The unpredictable behavior of the market gave it a tag – ‘a volatile market.’ The factors

that affected the market in the past were good monsoon, Bharatiya Janatha Party’s rise to power

etc. The result of a cricket match between India and Pakistan also affected the movements in

Indian stock market. The National Democratic Alliance led by BJP, during 2004 public elections

unsuccessfully tried to ride on the market sentiments to power. NDA was voted out of power and

the sensex recorded the biggest fall in a day amidst fears that the Congress-Communist coalition

would stall economic reforms. Later prime minister Man Mohan Singh’s assurance of ‘reforms with

a human face’ cast off the fears and market reacted sharply to touch the highest ever mark of

8500.



India, after United States hosts the largest number of listed companies. Global investors

now ardently seek India as their preferred location for investment. Once viewed with skepticism,

stock market now appeals to middle class Indians also. Many Indians working in foreign countries

now divert their savings to stocks. This recent phenomenon is the result of opening up of online

trading and diminished interest rates from banks. The stockbrokers based in India are opening

offices in different countries mainly to cater the needs of Non Resident Indians. The time factor

also works for the NRIs. They can buy or sell stock online after returning from their work places.

The recent incidents that led to growing interest among Indian middle class are the initial

public offers announced by Tata Consultancy Services, Maruti Udyog Limited, ONGC and big

names like that. Good monsoons always raise the market sentiments. A good monsoon means

improved agricultural produce and more spending capacity among rural folk.

The bullish run of the stock market can be associated with a steady growth of around 6%

in GDP, the growth of Indian companies to MNCs, large potential of growth in the fields of

telecommunication, mass media, education, tourism and IT sectors backed by economic reforms

ensure that Indian stock market continues its bull run.

3.1.1 History of the Indian Stock Market - The Origin

Stock markets refer to a market place where investors can buy and sell stocks. The price

at which each buying and selling transaction takes is determined by the market forces (i.e. demand

and supply for a particular stock.

Let us take an example for a better understanding of how market forces determine stock

prices. ABC Co. Ltd. enjoys high investor confidence and there is an anticipation of an upward

movement in its stock price. More and more people would want to buy this stock (i.e. high demand)

and very few people will want to sell this stock at current market price (i.e. less supply). Therefore,

buyers will have to bid a higher price for this stock to match the ask price from the seller which will

increase the stock price of ABC Co. Ltd. On the contrary, if there are more sellers than buyers (i.e.

high supply and low demand) for the stock of ABC Co. Ltd. in the market, its price will fall down.

In earlier times, buyers and sellers used to assemble at stock exchanges to make a

transaction but now with the dawn of IT, most of the operations are done electronically and the



stock markets have become almost paperless. Now investors don’t have to gather at the

Exchanges, and can trade freely from their home or office over the phone or through Internet.

One of the oldest stock markets in Asia, the Indian Stock Markets has a 200 years old history.

18th Century East India Company was the dominant institution and by end of the century,

busuness in its loan securities gained full momentum

1830's Business on corporate stocks and shares in Bank and Cotton presses started in Bombay.

Trading list by the end of 1839 got broader

1840's Recognition from banks and merchants to about half a dozen brokers

1850's Rapid development of commercial enterprise saw brokerage business attracting more

people into the business

1860's The number of brokers increased to 60

1860-61 The American Civil War broke out which caused a stoppage of cotton supply from United

States of America; marking the beginning of the "Share Mania" in India

1862-63 The number of brokers increased to about 200 to 250

1865 A disastrous slump began at the end of the American Civil War (as an example, Bank of

Bombay Share which had touched Rs. 2850 could only be sold at Rs. 87)

3.1.2 Achievements and Milestones

Pre-Independence Scenario - Establishment of Different Stock Exchanges

1874 With the rapidly developing share trading business, brokers used to gather at a street (now

well known as "Dalal Street") for the purpose of transacting business.

1875 "The Native Share and Stock Brokers' Association" (also known as "The Bombay Stock

Exchange") was established in Bombay

1880's Development of cotton mills industry and set up of many others

1894 Establishment of "The Ahmedabad Share and Stock Brokers' Association"



1880 - 90's Sharp increase in share prices of jute industries in 1870's was followed by a boom

in tea stocks and coal

1908 "The Calcutta Stock Exchange Association" was formed

1920 Madras witnessed boom and business at "The Madras Stock Exchange" was transacted

with 100 brokers.

1923 When recession followed, number of brokers came down to 3 and the Exchange was

closed down

1934 Establishment of the Lahore Stock Exchange

1936 Merger of the Lahoe Stock Exchange with the Punjab Stock Exchange

1937 Re-organisation and set up of the Madras Stock Exchange Limited (Pvt.) Limited led by

improvement in stock market activities in South India with establishment of new textile mills and

plantation companies

1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was

established

1944 Establishment of "The Hyderabad Stock Exchange Limited"

1947 "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks and Shares

Exchange Limited" were established and later on merged into "The Delhi Stock Exchange

Association Limited"

Post Independence Scenario

The depression witnessed after the Independence led to closure of a lot of exchanges in the

country. Lahore Estock Exchange was closed down after the partition of India, and later on merged

with the Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and got

recognition only by 1963. Most of the other Exchanges were in a miserable state till 1957 when

they applied for recognition under Securities Contracts (Regulations) Act, 1956. The Exchanges

that were recognized under the Act were:

1. Bombay



2. Calcutta

3. Madras

4. Ahmedabad

5. Delhi

6. Hyderabad

7. Bangalore

8. Indore

Many more stock exchanges were established during 1980's, namely:

• Cochin Stock Exchange (1980)

• Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982)

• Pune Stock Exchange Limited (1982)

• Ludhiana Stock Exchange Association Limited (1983)

• Gauhati Stock Exchange Limited (1984)

• Kanara Stock Exchange Limited (at Mangalore, 1985)

• Magadh Stock Exchange Association (at Patna, 1986)

• Jaipur Stock Exchange Limited (1989)

• Bhubaneswar Stock Exchange Association Limited (1989)

• Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989)

• Vadodara Stock Exchange Limited (at Baroda, 1990)

• Coimbatore Stock Exchange

• Meerut Stock Exchange



3.1.3 Performance of Indian Stock Market Over Few Years

At present, there are twenty one recognized stock exchanges in India which does not include the

Over The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India

Limited (NSEIL).

Government policies during 1980's also played a vital role in the development of the Indian Stock

Markets. There was a sharp increase in number of Exchanges, listed companies as well as their

capital, which is visible from the table:

TABLE 3.1-NO. OF STOCK EXCHANGES YEAR WISE



Sl.

No.

As on 31st

December

1946 1961 1971 1981 1991 1995 2001 2005

1 No. of Stock

Exchanges

7 7 8 8 9 14 20 23

2 No. of Listed

Cos.

1125 1203 1599 1552 2265 4344 6229 8593

3 No. of Stock

issues of

Listed Cos.

1506 2111 2838 3230 3697 6174 8967 11784

4 Capital of

Listed Cos.

(Cr. Rs.)

270 753 1812 2614 3973 9723 32041 59583

5 Market Value

of Capital of

Listed Cos.

(Cr. Rs.)

971 1292 2675 3273 6750 25302 110279 478121

6 Capital per

Listed Cos.

(4/2) (Lakh

Rs)

24 63 113 168 175 224 514 693

7 Market Value

of capital per

Listed Cos.

(Lakh Rs.)

(5/2)

86 107 167 211 298 582 1770 5564

3.2 TRADING PATTERN OF THE INDIAN STOCK MARKET

Indian Stock Exchanges allow trading of securities of only those public limited companies that are

listed on the Exchange(s).



Indian stock exchange allows a member broker to perform following activities:

• Act as an agent,

• Buy and sell securities for his clients and charge commission for the same,

• Act as a trader or dealer as a principal, Buy and sell securities on his own account and

risk.

Over The Counter Exchange of India (OTCEI)

Traditionally, trading in Stock Exchanges in India followed a conventional style where

people used to gather at the Exchange and bids and offers were made by open outcry.

This age-old trading mechanism in the Indian stock markets used to create many

functional inefficiencies. Lack of liquidity and transparency, long settlement periods and benami

transactions are a few examples that adversely affected investors. In order to overcome these

inefficiencies, OTCEI was incorporated in 1990 under the Companies Act 1956. OTCEI is the first

screen based nationwide stock exchange in India created by Unit Trust of India, Industrial Credit

and Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets,

Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries and

CanBank Financial Services.

Advantages of OTCEI

• Greater liquidity and lesser risk of intermediary charges due to widely spread trading

mechanism across India

• The screen-based scripless trading ensures transparency and accuracy of prices

• Faster settlement and transfer process as compared to other exchanges

• Shorter allotment procedure (in case of a new issue) than other exchanges

NATIONAL STOCK EXCHANGE

In order to lift the Indian stock market trading system on par with the international standards. On

the basis of the recommendations of high powered Pherwani Committee, the National Stock



Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and

Investment Corporation of India, Industrial Finance Corporation of India, all Insurance

Corporations, selected commercial banks and others.

NSE provides exposure to investors in two types of markets, namely:

1. Wholesale debt market

2. Capital market

Wholesale Debt Market - Similar to money market operations, debt market operations involve

institutional investors and corporate bodies entering into transactions of high value in financial

instrumets like treasury bills, government securities, etc.

Trading at NSE

• Fully automated screen-based trading mechanism

• Strictly follows the principle of an order-driven market

• Trading members are linked through a communication network

• This network allows them to execute trade from their offices

• The prices at which the buyer and seller are willing to transact will appear on the screen.

• When the prices match the transaction will be completed , a confirmation slip will be

printed at the office of the trading member.

Advantages of trading at NSE

• Integrated network for trading in stock market of India

• Fully automated screen based system that provides higher degree of transparency

• Investors can transact from any part of the country at uniform prices

• Greater functional efficiency supported by totally computerized network



3.3 S&P CNX Nifty:

Nifty Fifty was an informal term used to refer to 50 popular large cap stocks on the New York Stock

Exchange in the 1960s and 1970s that were widely regarded as solid buy and hold growth stocks.

The fifty are credited with propelling the bull market of the early 1970s. Most are still solid

performers, although a few are now defunct or otherwise worthless.

The long bear market of the 1970s that lasted until 1982 caused valuations of the nifty fifty to fall to

low levels along with the rest of the market, with most of these stocks under-performing the

broader market averages. A notable exception was Wal-Mart, the best performing stock on the list,

with a 29.65% compounded annualized return over a 29 year period.



Because of the under-performance of most of the nifty fifty list, it is often cited as an example of

unrealistic investor expectations for growth stocks. However, those who held on until the late 1990s

bull market saw many of the stocks return to market valuations.[2]

Characteristics

The stocks were often described as "one-decision", as they were viewed as extremely stable, even

over long periods of time.

The most common characteristic by the constituents were solid earnings growth for which these

stocks were assigned extraordinary high price-earnings ratios. Fifty times earnings was not

uncommon.

NIFTY means National Index for Fifty

S&P CNX Nifty is a well diversified 50 stock index accounting for 21 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 specialised company focused upon the

index as a core product. IISL has a marketing and licensing agreement with Standard & Poor's

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

The traded value for the last six months of all Nifty stocks is approximately 44.89% of the

traded value of all stocks on the NSE

Nifty stocks represent about 58.64% of the total market capitalization as on March 31,

2008.

Impact cost of the S&P CNX Nifty for a portfolio size of Rs.2 crore is 0.15%

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



3.4 ISSUE STUDIED

To study the scope and trading mechanisms of Foreign Institutional Investors in India.

The scope and the trading mechanism of Foreign Institutional investors in India is discussed as

follows:

The eligibility criteria for applicant seeking FII registration

As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required to

fulfill the following conditions to qualify for grant of registration:

• Applicant should have track record, professional competence, financial soundness,

experience, general reputation of fairness and integrity.

• The applicant should be regulated by an appropriate foreign regulatory authority in the

same capacity/category where registration is sought from SEBI. Registration with authorities, which

are responsible for incorporation, is not adequate to qualify as Foreign Institutional Investor.

• The applicant is required to have the permission under the provisions of the Foreign

Exchange Management Act, 1999 from the Reserve Bank of India.



• Applicant must be legally permitted to invest in securities outside the country or its in-

corporation / establishment.

• The applicant must be a "fit and proper" person.

• The applicant has to appoint a local custodian and enter into an agreement with the

custodian. Besides it also has to appoint a designated bank to route its transactions.

• Payment of registration fee of US $ 5,000.00

"Form A" as prescribed in SEBI (FII) Regulations, 1995 is to be filled before applying for FII

registration.

Supporting documents required are:

• Application in Form A duly signed by the authorized signatory of the applicant.

• Certified copy of the relevant clauses or articles of the Memorandum and Articles of

Association or the agreement authorizing the applicant to invest on behalf of its clients

• Audited financial statements and annual reports for the last one year, provided that the

period covered shall not be less than twelve months.

• A declaration by the applicant with registration number and other particulars in support of

its registration or regulation by a Securities Commission or Self Regulatory Organisation or any

other appropriate regulatory authority with whom the applicant is registered in its home country.

• A declaration by the applicant that it has entered into a custodian agreement with a

domestic custodian together with particulars of the domestic custodian.

• A signed declaration statement that appears at the end of the Form.

• Declaration regarding fit & proper entity.

The fee for registration as FII is US $ 5,000. The mode of payment is Demand Draft in favour of

"Securities and Exchange Board of India" payable at New York”.



SEBI generally takes 7 working days in granting FII registration. However, in cases where the

information furnished by the applicants is incomplete, seven days shall be counted from the days

when all necessary information sought, reaches SEBI.

In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from the

Reserve Bank of India (RBI). In such cases, 7 working days would be counted from the day no

objection is received from RBI.

The FII registration is valid for 5 years. After expiry of 5 years, the registration needs to be

renewed.

Same as initial registration, Along with "Form A" and all the relevant documents, the applicants are

required to fill in additional form (Annexure 1) while applying for renewal. US $ 5,000 needs to be

paid for renewal of FII registration.

The application for renewal should be submitted three months before expiry of the FII registration.

100 % debt FIIs are debt dedicated FIIs which invest in debt securities only. The procedure for

registration of FII/sub-account, under 100% debt route is similar to that of normal funds besides a

clear statement by the applicant that it wishes to be registered as FII/sub-account under 100% debt

route.

Sub-Account Registration

e) Institution or funds or portfolios established outside India, whether incorporated or not.

f) Proprietary fund of FII.

g) Foreign Corporates

h) Foreign Individuals.

The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account are

required to sign the Sub-account application form.

"Annexure B" to "Form A" (FII application form) needs to be filled when applying for sub-account

registration. No document is needed to be sent with annexure B. The fee for sub-account

registration is US$ 1,000. The fee is to be submitted at the time of submitting the application. The

mode of payment is Demand Draft in the name of "Securities and Exchange Board of India"

payable at New York. SEBI generally takes three working days in granting FII registration.



However, in cases where the information furnished by the applicants is incomplete, three days

shall be counted from the days when all necessary information sought, reaches SEBI. The validity

of sub-account registration is co-terminus with the FII registration under which it is registered. The

process of renewal of sub-account is same as initial registration. Renewal fee in this case is US $

1,000. OCBs / NRIs are not permitted to get registered as FII/sub-account.

Post-Registration Process

If a registered FII/sub-account undergoes name change, then the FII need to promptly inform SEBI

about the change. It should also mention the reasons for the name change and give an

undertaking that there has been no change in beneficiary ownership.

In case of name change of FII, the request should be accompanied with documents from home

regulator and registrar of the company evidencing approval of name change, and the original FII

registration certificate issued by SEBI should be sent back for necessary amendment.

Procedure for transferring a sub-account from one FII to another:

The FII to whom the Sub-account is proposed to be transferred has to send a request along with a

declaration that it is authorized to invest on behalf of the Sub-account. The transferor FII should

also submit a No-objection certificate.

The FII should send a request, along with no-objection certificate from existing domestic custodian,

for change in domestic custodian.

The FII would be required to send a request for cancellation of its registration or registration of its

Sub-account/s clearly mentioning the name and registration number of the entity. The FII should

ensure that it / Sub-account has nil cash / securities holdings.

Procedure for change of local custodian:

In case of change of the local custodian of the FII / sub-account, the change should be intimated to

SEBI by the FII. On receipt of no objection from the existing custodian and acceptance from the

proposed custodian, the change of custodian would be approved - by SEBI.



Procedure for registration as FII/sub account under 100% debt route:

The procedure for registration of FII/sub account under 100% debt route is similar to that of normal

funds besides a clear statement by the applicant that it wishes to be registered as FII/sub account

under 100% debt route. However, Government of India allocates the overall investment limit for

100% debt funds annually. The grant of investment limit for individual 100% debt funds is within

this overall limit. The funds have to seek further investment limit in case the limit allotted to them is

exhausted and they wish to invest further.

A Foreign Institutional Investor having an account with one custodian can open accounts with

different custodians for its different sub-accounts. However, one sub-account cannot be custodial

with more than one custodian.

Procedure if an existing sub-account wants to get registered as a Foreign Institutional Investor:

In case if a registered sub-account wishes to get itself registered as a Foreign Institutional Investor,

then it will have to apply in Form A to SEBI for the same and has to satisfy all the eligibility criteria

norms mentioned in SEBI (Foreign Institutional Investor) Regulations, 1995. It should also submit a

letter from the old FII indicating its 'No-objection' to such registration.

Procedure for renewal of FII/Sub-Account registration:

They have to apply before 3 months of the expiry of registration in Form A. Circular No

FITTC/CUST/09/2000 dated September 21, 2000 may be referred.

If the FII does not renew its/sub-account’s registration:

The registration of the FII / Sub-account would get expired at due date and it would not be allowed

to trade in Indian securities markets. If it is not interested in renewal but has certain residual

assets, it can apply for disinvestment in terms of Circular No. FITTC/CUST/12/2001 dated June 04,

2001 and abide by the guidelines specified in this regard.

INVESTMENT OPPORTUNITIES

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 by FII/sub-account:

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 prescribed by Government

of India / Reserve Bank of India.

Investment limits on debt investments by FII/sub-account:

The FII investments in debt securities are governed by the policy if the Government for FII

investments in Government debt, currently of India. Currently following limits are in effect:

100 % Debt Route US $ 1.55 billion

70 : 30 Route US $ 200 million

Total Limit US $ 1.75 billion

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

Other investment limits:

Normal FII (70:30 Route) 100% Debt FII



Total investment in equity and equity related instruments shall not be less than 70% of aggregate

of all investments. 100% investment shall be made in debt security only.

Securities to be registered in name of:

a. In the name of FII when making investments on its own behalf

b. In the name of sub-account when making investments on behalf of Sub-account

DERIVATIVES POSITION LIMITS

a. The FII position limits in a derivative contracts (Individual Stocks)

The FII position limits in a derivative contract on a particular underlying stock i.e. stock option

contracts and single stock futures contracts are:

i. For stocks in which the market wide position limit is less than or equal to Rs. 250 Cr, the

FII position limit in such stock shall be 20% of the market wide limit.

ii. For stocks in which the market wide position limit is greater than Rs. 250 Cr, the FII

position limit in such stock shall be Rs. 50 Cr.

b. FII Position limits in Index options contracts

FII position limit in all index options contracts on a particular underlying index shall be Rs. 250

Crores or 15 % of the total open interest of the market in index options, whichever is higher, per

exchange.

This limit would be applicable on open positions in all option contracts on a particular underlying

index.

c. FII Position limits in Index futures contracts:

FII position limit in all index futures contracts on a particular underlying index shall be Rs. 250

Crore or 15 % of the total open interest of the market in index futures, whichever is higher, per

exchange.

This limit would be applicable on open positions in all futures contracts on a particular underlying

index.



In addition to the above, FIIs shall take exposure in equity index derivatives subject to the following

limits:

i. Short positions in index derivatives (short futures, short calls and long puts) not exceeding

(in notional value) the FII’s holding of stocks.

ii. Long positions in index derivatives (long futures, long calls and short puts) not exceeding

(in notional value) the FII’s holding of cash, government securities, T-Bills and similar instruments.

d. FII Position Limits in Interest rate derivative contracts

At the level of the FII

The notional value of gross open position of a FII in exchange traded interest rate derivative

contracts shall be:

i. US $ 100 million.

ii. In addition to the above, the FII may take exposure in exchange traded in interest rate

derivative contracts to the extent of the book value of their cash market exposure in Government

Securities.

At the level of the sub-account

The position limits for a Sub-account in near month exchange traded interest rate derivative

contracts shall be higher of:

i. Rs. 100 Cr or

ii. 15% of total open interest in the market in exchange traded interest rate derivative

contracts.

CHAPTER 4

RESULTS, ANALYSIS & DISCUSSIONS

4.1 FII FLOWS AND VOLATILITY OF BSE SENSEX AND S&P CNX NIFTY

Chart 4.1-FII Flows and BSE Sensex



01-Mar-

07

01-Jul-0

7

01-Nov-0

7

01-Mar-

08

01-Jul-0

8

01-Nov-0

8

01-Mar-

09

01-Jul-0

9

01-Nov-0

9

01-Mar-

10

01-Jul-1

0

01-Nov-1

0

01-Mar-

11

01-Jul-1

1

01-Nov-1

1

-20,000.00

-10,000.00

0.00

10,000.00

20,000.00

30,000.00

40,000.00

FII InvestmentsBSE

Inference:

The above graph shows that how BSE index has changed with respect to FII flows from

01-Mar-07 to 01-Dec-11. Form the above graph we can say that there is a change in the

movement of BSE due to FII inflows but the change is not very drastic as the FII investment line

has so much curves in it but BSE is lightly showing few curves. So finally we can say that FII

inflows have a moderate impact on BSE Sensex.

Very few studies have been carried out in India empirically to see the impact of FIIs on Indian

Stock Market. According to Dornbusch and Park(1995), foreign investors pursue positive feedback

strategies which makes stocks to overreact to change in fundamentals.

Chart 4.2: FII Flows and S&P CNX Nifty:



01-Mar-

07

01-Jun-07

01-Sep-07

01-Dec-

07

01-Mar-

08

01-Jun-08

01-Sep-08

01-Dec-

08

01-Mar-

09

01-Jun-09

01-Sep-09

01-Dec-

09

01-Mar-

10

01-Jun-10

01-Sep-10

01-Dec-

10

01-Mar-

11

01-Jun-11

01-Sep-11

01-Dec-

11

-20,000.00

-10,000.00

0.00

10,000.00

20,000.00

30,000.00

40,000.00

FII Investments NIFTY

Inference:

The above graph shows that how S&P CNX Nifty index has changed with respect to FII

flows from 01-Mar-07 to 01-Dec-11. Form the above graph we can say that there is a change in the

movement of Nifty due to FII inflows but the change is not very drastic as the FII investment line

has so much curves in it but Nifty is lightly showing few curves. So finally we can say that FII

inflows have a moderate impact on Nifty.

Nifty has top 50 companies on the basis of their market capitalization. So these would be

the top performers of the market. That would be the reason that Nifty is also not showing very

strong change with FII inflows

4.2 CORRELATION & REGRESSION ANALYSIS

4.2.1 Correlation

The Karl Pearson’s Co-efficient of Correlation has been computed between the Foreign

Institutional Investments prices on the one hand and BSE and NIFTY. The correlation coefficient is

significant at 0.01 level.



A positive correlation coefficient indicates the co-movement of FII and the concerned factor in

the same direction. A negative coefficient of correlation denotes that the movement of the FII and

the factor take place in the opposite direction. The strength of correlation coefficient is categorized

as below:

A correlation coefficient of more than +/- 0.9 will indicate a very strong relationship.

A correlation coefficient of between +/- 0.75 and +/- 0.9 will indicate a strong relationship.

A correlation coefficient of between +/- 0.25 and +/- 0.75 will indicate a moderate

relationship.

A correlation coefficient of between +/- 0.1 and +/- 0.25 will indicate a weak relationship.

A correlation coefficient of less than +/- 0.1 will indicate a very weak relationship.

The Formula is as follows:

Where,

r = Coefficient of correlation

N= number of observations

4.2.2 Regression Analysis

We can analyze how a single dependent variable is affected by the values of one or more

independent variables — for example, how an athlete's performance is affected by such factors as



age, height, and weight. We can apportion shares in the performance measure to each of these

three factors, based on a set of performance data, and then use the results to predict the

performance of a new, untested athlete.

Usage of Regression analysis, benefits:

Regression analysis can predict the outcome of a given key business indicator (dependent

variable) based on the transactions of other related business drivers (exploratory variables). For

example it allows you to predict sales volume, using the amount spent on advertising and the

number of sales people that you employ.

Data modeling can be used without there being any knowledge about the underlying

processes that have generated the data, in this case the model is an empirical model. Morever in

modeling knowledge of the probability distribution of the errors is not required. Regression analysis

requires assumptions to be made regarding probability distribution of the errors. Statistical tests are

made on the basis of these assumptions. In regression analysis the term “model” embraces both

the function used to model the data and the assumptions concerning probability distributions.

Regression can be used for predicting (including forecasting of time series data), inference,

hypothesis testing, and modeling of casual relationships. These uses of regression rely heavily on

the underlying assumptions being satisfied.

Regression analysis has been criticized s being misused for these purposes in many

cases where the appropriate assumptions cannot be verified to hold. One factor contributing to the

misuse of regression is that it can take considerably more skill to critique a model than to fit a

model.

Underlying assumptions

Classical assumptions for regression analysis can include:

The sample must be representative of the population for the prediction.

The error is assumed to be a random variable with a mean of zero conditional on the

explanatory variable.

The independent variables are error free. If this is not so, modeling may be done using

errors in variables model techniques.



The predictors must be linearly independent, i.e. it must not be possible to express any

predictor as a linear combination of the others.

The errors are uncorrelated, that is, the variance-covariance matrix of the errors is

diagonal and each non-zero element is the variance of the error.

The variance of the error is constant across observations. If not, weighted least squares or

other methods might be used.

There are sufficient (but all not necessary) conditions for the least squares estimator to

possess desirable properties; these assumptions imply that the parameter estimates will be

unbiased, consistent, and efficient in the class of linear unbiased estimators. Many of these

assumptions may be relaxed in more advanced treatments.

Formula for regression is as follows:



4.3 CORRELATION AND REGRESSION WITH DETERMINANTS OF FII AND INDIAN STOCK

MARKET

Table 4.1- Correlation between FII and BSE:

Correlations

FII BSE

FII

Pearson Correlation 1 .390**

Sig. (2-tailed) .002

N 60 60

BSE

Pearson Correlation .390** 1


N 60 60

**. Correlation is significant at the 0.01 level (2-tailed).

The data includes 60 observations of monthly FIIs and BSE from March 2007 to February 2012. The correlation and regression is calculated with the help of SPSS.



The above table suggests that the correlation coefficient between the FIIs and BSE is .390 which denotes moderate relationship between call option price and strike price.

In operational terms, 0.390 indicates that a 1% change in FII leads to 0.39% in the BSE in the same direction. An increase in FII investment leads to increase in BSE and a decrease in FII Investment leads to decrease in BSE.

Thus it can be said that FII is a moderate influencer and plays a normal role in predicting the BSE .

Table 4.2- Regression between FII and BSE

Variables Entered/Removeda

Model Variables

Entered

Variables

Removed

Method

1 FIIb . Enter

a. Dependent Variable: BSE

b. All requested variables entered.

Model Summary

Model R R Square Adjusted R

Square

Std. Error of the

Estimate

1 .390a .152 .138 2759.5938665

a. Predictors: (Constant), FII


ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression 79423354.802 1 79423354.802 10.429 .002b

Residual 441690781.874 58 7615358.308

Total 521114136.676 59


b. Predictors: (Constant), FII


Coefficientsa

Model Unstandardized Coefficients Standardized

Coefficients

t Sig.

B Std. Error Beta

1(Constant) 15599.711 387.587 40.248 .000

FII .114 .035 .390 3.229 .002


Interpretation:

The regression coefficient is 0.002 which reflects 0.2 % variability in BSE with the independent

variable i.e FII and how much the FII affects the BSE from Mar-2007 to Feb 2012.

The standard error comes out to be 2759.59 which is very high and so it means that the

deviation from the mean value is very high. This does not mean the relation is false but we can say

that the error in linear relation is high.



Table 4.3- Correlation between FII and

NIFTY

The data includes 60 observations of monthly FIIs and NIFTY in year from March 2007 to February 2012. The correlation and regression is calculated with the help of SPSS.

The above table suggests that the correlation coefficient between the FIIs and NIFTY is 0 .396 which denotes moderate relationship between call option price and strike price.

In operational terms, 0.396 indicates that a 1% change in FII leads to 0.396% in the NIFTY in the same direction. An increase in FII investment leads to increase in NIFTY and a decrease in FII Investment leads to decrease in NIFTY.

Thus it can be said that FII is a moderate influencer and plays a normal role in predicting the NIFTY .


Correlations

FII NIFTY

FII

Pearson Correlation 1 .396**


N 60 60

NIFTY

Pearson Correlation .396** 1


N 60 60

**. Correlation is significant at the 0.01 level (2-tailed).


Table 4.4- Regression between FII and NIFTY:

Variables Entered/Removeda

Model Variables

Entered

Variables

Removed

Method

1 FIIb . Enter

a. Dependent Variable: NIFTY

b. All requested variables entered.

Model Summary

Model R R Square Adjusted R

Square

Std. Error of the

Estimate

1 .396a .157 .142 816.2034597

a. Predictors: (Constant), FII

ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression 7177514.977 1 7177514.977 10.774 .002b

Residual 38638909.079 58 666188.088

Total 45816424.056 59


b. Predictors: (Constant), FII

Coefficientsa

Model Unstandardized Coefficients Standardized

Coefficients

t Sig.



B Std. Error Beta

1(Constant) 4666.736 114.636 40.709 .000

FII .034 .010 .396 3.282 .002


Interpretation:

The regression coefficient is 0.002 which reflects 0.2 % variability in NIFTY with the independent

variable i.e FII and how much the FII affects the NIFTY from Mar-2007 to Feb 2012.

The standard error comes out to be 816.20 which is very high and so it means that the

deviation from the mean value is very high. This does not mean the relation is false but we can say

that the error in linear relation is high.



CHAPTER 5

SUMMARY OF FINDINGS, CONCLUSIONS & SUGGESTIONS

5.1 FINDINGS

After the analysis following are the findings of the study:

1. There is a positive correlation between FII inflows and Indian Stock Market.

2. From the data interpretation and analysis we can come to the conclusion that the correlation

between the net investment made by foreign institutional investors and the values of the BSE

Sensex is 39% and hence the inflow made by FII affects the BSE Sensex. The data collected is

from March 2007 to February 2012.

3. From the data interpretation and analysis we can come to the conclusion that the correlation

between the net investment made by foreign institutional investors and the values of the S&P CNX

NIFTY is 39.6% and hence the inflow made by FII affects the S&P CNX NIFTY in a moderate way.

The data collected is from March 2007 to February 2012.

4. The R-square statistics shows that the value of BSE Sensex is dependent on FII to the extent of

15.2% and for the remaining 84.8% depends on other factors such as inflation, exchange rates,

etc.

5. The R-square statistics shows that the value of S&P CNX NIFTY is dependent on FII to the

extent of 15.7% and for the remaining 84.3% depends on other factors.

6. FIIs have less impact on Indian stock indices. Other unexplained variables are also influencing

the Indices. There may be many other factors on which a stock index may depend i.e. Government

policies, budgets, bullion market, inflation, economic and political condition of the country, FDI,

Re./Dollar exchange rate etc.

Thus there exists a significant relationship between the inflows of FII and the Indian Stock

Market.



5.2 CONCLUSION

The main objective of this study was to determine impact of Foreign Institutional

Investments on Indian stock market. To test this we have employed methodology of Karl Pearson’s

Co-efficient of Correlation and regression analysis. Correlation was used to know there was

positive effect or negative effect. Regression was used to find the extent of impact of FII over the

stock market.

According to Data analysis and findings, it can be concluded that FII do have any

significant impact on the Indian Stock Market but there are other factors like government policies,

budgets, bullion market, inflation, economical and political condition, etc. do also have an impact

on the Indian stock market. There is a positive correlation between stock indices and FIIs but FIIs

didn’t have high significant impact on Indian Stock Market. The null hypothesis is rejected. BSE

Sensex and S&P CNX NIFTY showed positive correlation with FII from 2007 and 2012. Also the

coefficient of determination is less in all the case. It shows the absence of linear relation between

FII and stock index. This does not mean that there is no relation between them.

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

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

be). Also FII is not the only factor affecting the stock indices. There are other major factors that

influence the bourses in the stock market.

But Foreign Institutional Investment in developing countries like India would help in

increasing the productivity of labor and to build up foreign exchange reserves to meet the current

account deficit. Foreign Investment provides a channel through which country can have access to

foreign capital.

5.3 SUGGESTIONS

After the analysis of the project study, following suggestions can be made:



1) Simplifying procedures and relaxing entry barriers for business activities and providing

investor friendly laws and tax system for foreign investors.

2) Allowing foreign investment in more areas. In different industries indices the FIIs should be

encouraged through different patterns like futures, options, etc.

3) Somewhere, a restriction related to the track record of Sub- Accounts is also to be made

on the investors who withdraw money out of the Indian stock market who have invested with the

help of participatory notes.

4) We have to modernize and also have to save our culture. Similarly the laws should be

such that it would protect domestic investors and also promote trade in country through FIIs.

5) Encourage industries to grow to make FIIs an attractive junction to invest.


Economy & Finance

Body