1

A

COMPREHENSIVE PROJECT REPORT

ON

“IMPACT OF FOREIGN INSTITUTIONAL INVESTORS ON INDIAN STOCK

MARKET:”

Submitted to

MARWADI EDUCATION FOUNDATION GROUP OF INSTITUTE

IN PARTIAL FULFILLMENT OF THE

REQUIREMENT OF THE AWARD FOR THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

Under

Gujarat Technological University

UNDER THE GUIDENCE OF

Faculty guide

Dr.Monica Varma

Submitted by

Kalariya Jaykumar A.

Enrollment N o . 147340592042

M.B.A - SEMESTER IV

MARWADI EDUCATION FOUNDATION GROUP OF INSTITUTE

M.B.A PROGRAMME

Affiliated to Gujarat Technological University

Ahmadabad

DECEMBER-2015

2

PREFACE

Comprehensive Project is an integral part of the MBA program at MARWADI

EDUCATION FOUNDATION GROUP OF INSTITUTE . An exercise like this helps us

to have a firsthand experience as to what an academic ‗Research project‘ entails. It

exposes us to the process of identifying, systematizing and exploring specific

problems or issues. This process fosters creation of new knowledge and expansion

of existing framework of knowledge. To get acquainted with the theoretical aspects of

management and the practical implications of theory is greatly valuable for us. An

analysis of the direction of causality to understand the possible devastating effect of

volatility of FII flows on the Indian Stock Market is important. The present empirical

study has been undertaken to throw some light on the cause and effect relationship

between FII flows and Indian stock market returns. We felt that the utility of the report

could further enhance by widening its coverage and updating its contents wherever

necessary. We hope this report will provide necessary information. Comprehensive

project is the golden opportunities for the every student of the management

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ACKNOWLEDGEMENT

―No one who achieves success does so without acknowledging the help of

others Here it‘s an immense opportunity for us to articulate our ―Vote of

Thanks‖ towards all those persons who not only helped but inspire us making

research project with great learning.

First of all, we would like to Thank Dr.Monical verma for providing us initial

guidance regarding the framework of project.

We would like to express our thanks to Dr. Monica Varma who has not just

continuously guided us but taught us new concepts and made our journey of

preparing for project more interesting. His invaluable and significant guidelines

improved our outlook in making our project a real learning experience. He also

encouraged us to put in our best efforts and bring out the best of our abilities.

We are also thankful to the whole staff of MEFGI and other faculties to whom we

approach during our project. At last but not the least, we take an opportunity to

appeal our profound gratitude to our adorable and beloved parents for their

everlasting love, strong moral support, encouragement without which we were

unable to reach the present status of education.

4

DECLARATION

I, Kalariya Jaykumar A. hereby declare that the report for ―Comprehensive

project‖ entitled ――“IMPACT OF FOREIGN INSTITUTIONAL INVESTORS

ON INDIAN STOCK MARKET:” is a result of our own work and our

indebtedness to other work publications, if any, has been duly

acknowledged.

Place: Rajkot (signature)

Date: Kalariya Jaykumar

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Executive Summary

“Foreign Institutional Investor” means an institution established or

incorporated outside India, which proposes to make investment in India in

securities. (Regulation 2(f) of the FII regulation)

The issue of whether FII flow affects stock market returns or the other way round

is a matter of some controversy. It has been perceived in some quarters that FII

flows are the major drivers of stock markets in India and hence a sudden reversal

of such flows may harm the stability of its markets. Contrary to this belief, it is

viewed by others that FII flows react to the existing crisis in the stock market,

possibly exacerbating it rather than causing it.

In light of these events, Grand Project taken up dealt with three objectives.

One objective is to find out the cause and effect relationship between the FII and

BSE, NSE .Second, objective is to know how much FII and BSE,NSE affect each

other through Regression . Third objective is to assess the growth and development

of the Indian stock Market. Fourth, objective is to develop an understanding about the

concept and role of Foreign Institutional Investors (FII‘s) in India. Correlations

between the two estimated variables' series are determined to have a preliminary

understanding of the nature of relationship between stock market returns and FII

flows.

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Table of content

Chapter Particulars Page no.

1 1.1 About the Industry 9

1.2 Overview of World Market 16

1.3 Overview of Indian market 19

1.4 Growth of the industry 24

2 2.1 FII rules invest in India 33

3 introduction on Indian market 41

3.1market index 42

3.2 who can invest in India 44

3.3 Investment Opportunities for Retail Foreign Investors

46

4 Introduction of study 48

4.1 Literature review 48

4.2 Background of the study 52

4.3 Problem statement of the study 53

4.4 Objective 54

5

Research Methodology 56

5.1 Research Design 56

5.2 Sources of Data 56

5.3 Data Collection Method 56

5.4 Population 56

5.5 Sampling size 56

6 Data analysis and interpitation 57

7 Result and finding 63

8 Limitation of the study 65

9 Conclusion and suggestion 66

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LIST OF TABLE

LIST OF GRAPH

Graph no. Particular Page no.

1.1 growth of FII 25

1.2 Net investment by last 7 year 31

1.3 FII equity and debt data (April 2006 to december 2015) 32

3.1 BSE sensex index 43

table no. name of table page no.

1.1 BRIC Ranking for 6 pillars 16

1.2 Global Competitive Index 2014-2015 for BRICS Global rank 17

1.4 growth of FII 24

1.5 net invest by FII 2007 to 2006 30

2.1 Companies in which FII Investment is allowed up to 30% of their paid up capital 36

2.2 Companies in which FII Investment is allowed upto 40% of their paid up capital 37

2.3 Companies in which FII Investment is allowed upto 49% of their paid up capital 37

2.4 Companies in which FII Investment is allowed up to 49% of their paid up capital 38

2.5 Companies in which FII Investment is allowed upto sectoral cap/statutory ceiling of their paid up capital 38

2.6 Companies where 22% FII investment limit has been reached and further purchases are allowed with prior approval of RBI 39

2.7 top 10 FII in india as per 2005 39

6.1 FII and CNX NIFTY Regression 57

6.2 FII and CNX 500 Regression 59

6.3 FII and BSE sensex Regression 61

Anexture 68

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CHAPTER-1 ABOUT THE INDUSTRY

FIIs were allowed to trade in the Indian stock market from 14th

September 1992 but they made first investment in the month of January

1993. FII is defined as an institution organized outside of India for the

purpose of making investments into the Indian securities market under the

system prescribed by SEBI. „FIIs‟ 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‟. Foreign

institutional investor means an entity established or incorporated outside

India which proposes to make investment in India. Positive word about the

Indian economy combined with a fast-growing market has 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.

MEANING : Foreign institutional investors play a very important role in any

economy. These are the big companies such as investment banks, mutual

funds etc, who invest considerable amount of money in the Indian markets.

9

With the buying of securities by these big players, markets trend to move

upward and vice-versa. They exert strong influence on the total inflows

coming into the economy. The FIIs are considered as both a trigger and a

catalyst for the market performance by encouraging investment from all

classes of investors which further leads to growth in financial market trends

under a self-organized system.

FIIs are those institutional investors which invest in the assets belonging to

a different country other than that where these organizations are based.

Foreign investments in the country can take the form of investments in

listed companies (i.e. FII investments); investments in listed/unlisted

companies other than through stock exchanges (i.e. Foreign Direct

Investment, Private Equity / Foreign Venture Capital Investment route);

investments through American Depository Receipts / Global Depository

Receipts (ADR/GDR) or investments by Non Resident Indians (NRIs) and

Persons of Indian Origin (PIO) in various forms.

1.1 ABOUT FOREIGN INSTITUTIONAL INVESTOR

“Foreign Institutional Investor” means an institution established or

incorporated outside India, which proposes to make investment in India in

securities (Regulation 2(f) of the FII regulation).

An investor or investment fund that is from or registered in a country

outside of the one in which it is currently investing. Institutional

investors include hedge funds, insurance companies, pension

funds and mutual funds.- Economic times

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Foreign institutional investors (FIIs) are those institutional investors which

invest in the assets belonging to a different country other than that where

these organizations are based.

‗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.

A) Foreign Institutional Investors Registration

Currently, entities eligible to invest under FII route are as follows

(A.1) As FII

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 (i.e., fund having more than

20 investors with no single investor holding more than 10 per cent of the

shares or units of the fund).

(A.2) As Sub-accounts

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The sub account is generally the underlying fund on whose behalf the FII

invests. The following entities are eligible to be registered as sub-accounts,

viz. partnership firms, private company, public company, pension fund,

investment trust, and individuals.

(A.3) Domestic entity

A domestic portfolio manager or a domestic asset management company

shall also be Eligible to be registered as FII to manage the funds of sub-

accounts.

(B) FIIS REGISTERED WITH SEBI FALL UNDER THE FOLLOWING

CATEGORIES

(B.1) Regular FIIs – those who are required to invest not less than 70 Per

cent of their investment in equity -related instruments and up to 30 per cent

in non-equity instruments.

(B.2) 100 per cent debt-fund FIIs – those who are permitted to invest only

in debt instruments.

(C) MECHANISM OF FOREIGN INSTITUTIONAL INVESTORS

FII flows help supplement the domestic savings and augment

domestic investments without increasing the foreign debt of the

recipient countries, correct current account deficits in the external

balance of payments' position, reduce the required rate of return for

equity, and enhance stock prices of the host countries, yet there are

worries about the vulnerability of recipient countries' capital markets

to such flows.

12

FII flows, often referred to as 'hot money' (i.e., short-term and overly

speculative), are extremely volatile in character compared to other

forms of capital flows. Foreign portfolio investors are regarded as 'fair

weather friends' who come in when there is money to be made and

leave at the first sign of impending trouble in the host country thereby

destabilizing the domestic economy of the recipient country.

Often, they have been blamed for exacerbating small economic

problems in the host nation by making large and concerted

withdrawals at the slightest hint of economic weakness.

It is also alleged that as they make frequent marginal adjustments to

their portfolios on the basis of a change in their perceptions of a

country's solvency rather than variations in underlying asset value,

they tend to spread crisis even to countries with strong fundamentals

thereby causing 'contagion' in international financial markets.

Further, it is feared that too much of FII inflows may build up sizeable

surpluses on a country's balance of payments, create excess liquidity

and hence exert upward pressure on the exchange rate of the

domestic currency or on domestic prices.

The fear of foreigners capturing a large part of the securities' market

is also associated with FII flows. Accordingly, it is viewed that as

securities markets in developing countries like India are narrow and

shallow and as the foreign investors have command over

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considerable funds and occupy a dominant position in the capital

market, FII flows have the potential for major capital flight out of India

driving the prices down sharply and hence inducing considerable

instability in the Indian stock market.

(D) SEVERAL REASONS ON FIIs SELLING

It is always good to keep an eye on what the big movers are doing and

plan individual strategy accordingly. There are several reasons on FIIs

selling, but there are three predominant factors that are cited as being

largely responsible.

The swings in the market forced several FIIs to withdraw from India and

invest their dollars in other emerging markets. Some of the other

markets include Uruguay, Russia, the Ukraine, and several other

former Soviet countries. Though there have been swing‘s in the past

too but FII response this time was different because of margin

pressures back home as even they have to provide regular returns to

their investors.

The Indian markets are not seen as a good short-term bet any more.

India is seen as a good investment for the medium to long term. FIIs

seem to fear the pace of growth and the fundamentals of the markets.

Most FIIs are looking at corporate governance and execution abilities,

which could be significant drivers in creating a strong portfolio of Indian

stocks. Recent action taken by the market regulator indicates that the

Indian government would like to moderate the inflow of FII money.

(E) BENEFITS OF ENCOURAGING FIIS

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(E.1) Reduced cost of equity capital

FII inflows augment the sources of funds in the Indian capital markets. In a

common sense way, the impact of FIIs upon the cost of equity capital may

be visualized by asking what stock prices would be if there were no FIIs

operating in India. FII investment reduces the required rate of return for

equity, enhances stock prices, and fosters investment by Indian firms in the

country.

(E.2) Imparting stability to India's Balance of Payments

For promoting growth in a developing country such as India, there is need

to augment domestic investment, over and beyond domestic saving,

through capital flows. The excess of domestic investment over domestic

savings result in a current account deficit and this deficit is financed by

capital flows in the balance of payments.

(E.3) Knowledge flows

The activities of international institutional investors help strengthen Indian

finance. FIIs advocate modern ideas in market design, promote innovation,

development of sophisticated products such as financial derivatives,

enhance competition in financial intermediation, and lead to pullovers of

human capital by exposing Indian participants to modern financial

techniques, and international best practices and systems

(E.4) Strengthening corporate governance

Domestic institutional and individual investors, used as they are to the

ongoing practices of Indian corporate, often accept such practices, even

when these do not measure up to the international benchmarks of best

practices. FIIs, with their invest experience with modern corporate

15

governance practices, are less tolerant of malpractice by corporate

managers and owners (dominant shareholder). FII participation in domestic

capital markets often lead to vigorous advocacy of sound corporate

governance practices, improved efficiency and better shareholder value.

(E.5) Improvements to market efficiency

A significant presence of FIIs in India can improve market efficiency

through two channels. First, when adverse macroeconomic news, such as

a bad monsoon, unsettles many domestic investors, it may be easier for a

globally diversified portfolio manager to be more dispassionate about

India's prospects, and engage in stabilizing trades. Second, at the level of

individual stocks and industries, FIIs may act as a channel through which

knowledge and ideas about valuation of a firm or an industry can more

rapidly propagate into India.

For example, foreign investors were rapidly able to assess the potential of

firms like Infosys, which are primarily export-oriented, applying valuation

principles that prevailed outside India for software services companies.

(F) Rationale for encouraging FII flows

Foreign investment – both portfolio and direct varieties – can supplement

domestic savings and augment domestic investment without increasing the

foreign debt of the country. Such investment constitutes non-debt creating

financing instruments for the current account deficits in the external

balance of payments. Capital inflows into the equity market give higher

stock prices, lower cost of equity capital, and encourage investment by

Indian firms. Foreign investors often help spur domestic reforms aimed at

16

improving the market design of the securities markets, and help strengthen

corporate governance. These benefits do require concomitant policy effort

in terms of improving financial regulation and corporate governance.

1.2 OVERVIEW OF WORLD MARKET

World Economic Forum came out with The Global Competitiveness

Report 2014- 2015 as per which Switzerland continues to top the

overall ranking in Global Competitive Index (GCI), characterized by

an excellent capacity for innovation and a very sophisticated business

culture. Sweden has moved ahead of Singapore and United States to

claim 2nd position this year. Singapore, United States ,Netherland

and Germany round out the top five. continue to prevail in the top 10

with Japan, Finland, Sweden, Hong Kong and united kingdom

following suit. After having fallen four positions over the past two

years, the United Kingdom moves up one spot to 10th place this year,

with a stable performance.

Table1.1 BRIC Ranking for 6 pillars

NO PILLARS BRAZIL RUSSIA INDIA CHINA

1 Recivedforegin investment

13 16 20 4

2 Exports 6 8 12 1

3 Imports 21 17 8 2

4 foreignexchange reserve

8 7 9 1

5 GDP(nominal) 8 15 7 2

6 GDP(PPP) 7 6 3 1

(source:-2014-15world economy report )

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Here we show in table 1 BRIC ranking here we see the china economy

during 2014-15 very strong and high import export and foreign exchange

reserve and GDP rate also high and also see that world highest economy.

India is GDP are high and good to Brazil and Russia but compares to

china, Brazil and Russia we less received foreign investment. China export

are more compare to import in 2nd and export in 1st number so its show

china’s economy condition are very good and attractive to investor but in

India exports are more and rank are 12 and import is 8 so our economy are

in deficit and low of our import and export rate because that our economy

is slow down that’s less foreign investor to invest our country compare to

china.

Table 1.2 Global Competitive Index 2014-2015 for BRICS Global rank

The Global competitiveness report 2014-15 and the Global

Competitiveness Index 12 pillars through process GCI gives above

rank that pillars Quality of institute, Energy and transfer infrastructure,

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Macroeconomic stability, health and primary education efficiency

enhance, Higher education and training, Goods and market

efficiency, Labor market efficiency, financial market sophistication,

Technology readiness, Market size innovation- driven, business

sophistication and innovation are that pillars give table-2 GCI rank.

China are high 12 pillars and that china is high rank(28) in

BRICS, After that Russia came 53rd GCI rank and second in

BRICS,South Africa is 56th GCI rank and 3rd country in BRICS, Brazil

57th rank and 4th country in BRICS country and India is 71st country in

GCI index through 12 pillars of GCI and it show that China is

Developed country in BRICS country and India is developing country.

All of the BRIC country rankings either improve slightly or stay the

same. China is to 28th place. Brazil 57th , India 71st , and Russia stays

53rd.

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1.3 OVERVIEW OF INDIAN MARKET

Introduction

Economies like India, which offer relatively higher growth than the

developed economies, have gain favour among investors as attractive

investment destinations for foreign institutional investors (FIIs). Investors

are optimistic on India and sentiments are favourable following

government’s announcement of a series of reform measures in recent

months.

According to a poll conducted by Bank of America Merrill Lynch (BofA-ML)

recently, in which 50 investors participated, India was the most favourite

equity market for the global investors for the year 2015 at 43 per cent,

followed by China at 26 per cent. The global investment bank is of the view

that India remains to be in a structural bull market.

India is poised to become the second biggest ecosystem option after the

US in the next two years on account of the ongoing high growth rates.

Several technology based start-ups have received over US$ 2.3 billion in

funding since 2010, while over 70 private equity (PE) and venture capital

(VC) funds remain active in the segment.

Market Size

FII’s net investments in Indian equities and debt have touched record highs

in the past financial year, backed by expectations of an economic recovery,

falling interest rates and improving earnings outlook. FIIs have invested a

net of US$ 89.5 billion in 2014-15— expected to be their highest

investment in any fiscal year. Of this, a huge amount—US$ 57.2 billion—

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was invested in debt and it is their record investment in the asset class,

while equities absorbed US$ 32.3 billion.

India continues to be a preferred market for foreign investors. India-

focused offshore equity funds contributed US$ 0.5 billion, whereas India-

focused ETFs added a much higher US$ 1.2 billion of the total net inflows

of about US$ 1.7 billion into the India-focused offshore funds and ETFs

during the quarter ended June 2015.

The total Mergers and Acquisitions (M&A) transaction value for the month

of July 2015 was US$ 4.57 billion involving a total of 46 transactions. In the

M&A space, energy and natural resources was the dominant sector

amounting to 56 per cent of the total transaction value.

In Private Equity, a total of 110 deals worth disclosed value of US$ 2.15

billion were reported in July 2015.

Government Initiatives

Government of India has accepted the recommendation of A.P. Shah

Committee to not impose minimum alternate tax (MAT) on overseas

portfolio investors retrospectively for the years prior to April 01, 2015,

thereby providing significant relief to foreign portfolio investors (FPIs).

The RBI has also allowed a number of foreign investors to invest, on

repatriation basis, in non-convertible/redeemable preference shares or

debentures issued by Indian companies listed on established stock

exchanges in India. The investment should be within the overall limit of

US$ 51 billion allocated for corporate debt. Long-term investors registered

with SEBI will also be deemed as eligible investors

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After the launch of the reforms in the early 1990s, there was a gradual

shift towards capital account convertibility. From September 14, 1992, with

suitable restrictions, FIIs and Overseas Corporate Bodies (OCBs) were

permitted to invest in financial instruments.

The policy framework for permitting FII investment was provided under the

Government of India guidelines, which enjoined upon FIIs to obtain an

initial registration with SEBI and also RBI’s general permission under

FERA. The Government guidelines of 1992 also provided for eligibility

conditions for registration, such as track record, professional competence,

financial soundness and other relevant criteria, including registration with a

regulatory organisation in the home country. The guidelines were suitably

incorporated under the SEBI (FIIs) Regulations, 1995.With coming into

force of the Foreign Exchange Management Act, (FEMA), 1999 foreign

exchange related transactions of FIIs were permitted by RBI. Right from

1992, FIIs have been allowed to invest in all securities traded on the

primary and secondary markets, including shares, debentures and

warrants issued by companies which were listed or were to be listed on the

Stock Exchanges in India and in schemes floated by domestic mutual

funds.

The holding of a single FII, and of all FIIs, NRIs and OCBs together in any

company were initially subject to the limit of 5 per cent and 24 per cent of

the company’s total issued capital, respectively. Furthermore, to ensure a

broad base and prevent such investment acting as a camouflage for

individual investment in the nature of FDI and requiring Government

approval, funds invested by FIIs have to have at least 50 participants

22

(changed to 20 investors in August, 1999) with no single participant holding

more than 5 per cent (revised to 10 per cent in February, 2000).

However, this was allowed to be increased subject to passing of resolution

by the Board of Directors of the company followed by passing of a special

resolution by the General Body of the company. The ceiling limit under

special procedure was enhanced in stages as follows:

to 30 per cent from April 4, 1997

to 40 per cent from March 1, 2000,

to 49 per cent from March 8, 2001,and

to sectoral cap/statutory ceiling from September 20,2001.

The Government guidelines for FII of 1992 allowed, inter-alia, entities such

as asset management companies, nominee companies and

incorporated/institutional portfolio managers or their power of attorney

holders (providing discretionary and non discretionary portfolio

management services) to be registered as FIIs. While the guidelines did

not have a specific provision regarding clients, in the application form the

details of clients on whose behalf investments were being made were

sought. While granting registration to the FII, permission was also granted

for making investments in the names of such clients. Asset management

companies/portfolio managers are basically in the business of managing

funds and investing them on behalf of their funds/clients. Hence, the

intention of the guidelines was to allow these categories of investors to

invest funds in India on behalf of their ‘clients’. These ‘clients' later came to

be known as sub-accounts. The broad strategy consisted of having a wide

variety of clients, including individuals, intermediated through institutional

23

investors, who would be registered as FIIs in India. A Working Group for

Streamlining of the Procedures relating to FIIs, constituted in April, 2003,

inter alia, recommended streamlining of SEBI registration procedure, and

suggested that dual approval process of SEBI and RBI be changed to a

single approval process of SEBI. This recommendation was implemented

in December 2003.

Under eligibility conditions, the definition of broad based funds was relaxed

in August, 1999 and in February, 2000 and newer entities, such as foreign

firms were allowed to invest as sub-accounts. In order to have a level

playing field in intermediation, domestic portfolio managers were allowed in

February, 2000 to manage the funds of sub-accounts, so as to give end-

customers a greater choice about the identity of their fund manager in

India. FIIs were initially allowed to only invest in listed securities of

companies. Gradually, they were allowed to invest in unlisted securities,

rated government securities, commercial paper and derivatives traded on a

recognised stock exchange. From November 1996, any registered FII

willing to make 100 per cent investment in debt securities were permitted

to do so subject to specific approval from SEBI as a separate category of

FIIs or sub-accounts as 100 per cent debt funds In order to increase

transparency, SEBI issued a circular on October 31, 2001 to all FIIs and

their custodians advising the FIIs to report as and when any derivative

instruments with Indian underlying securities are

issued/renewed/redeemed by them, either on their own account or on

behalf of sub-accounts registered under them. In 2003 this circular was

further revised to include disclosure of more details about terms, nature

and contracting parties.

24

The overall cap on investments in Government securities, both through the

normal route and the 100 per cent debt fund route, was revised from US$1

billion to US$1.75 billion in November, 2004. Moreover, investments were

allowed only in debt securities of companies listed or to be listed in stock

exchanges. Investments were free from maturity limitations. From April

1998, FII investments were also allowed in dated Government securities.

Treasury bills, being money market instruments, were originally outside the

ambit of such investments, but were included subsequently from May,

1998.In April 2006 there was a rise in the cumulative debt investment limits

from US $1.75 billion to US $2 billion and US $0.5 billion to US $1.5 billion

for FII/Sub Account investments in Government securities and Corporate

Debt, respectively.

1.4 GROWTH OF FII

Table-3 growth of FII

Year Equity (iNR crores) Debt (iNR crores) Total (iNR crores)

2000-01 10,207 -273 9,933

2001-02 8,072 690 8,763

2002-03 2,527 162 2,689

2003-04 39,960 5,805 45,765

2004-05 44,123 1,759 45,881

2005-06 48,801 -7,334 41,467

2006-07 25,236 5,605 30,840

2007-08 53,404 12,775 66,179

2008-09 -47,706 1,895 -45,811

2009-10 1,10,221 32,438 1,42,658

2010-11 1,10,121 36,317 1,46,438

2011-12 43,738 49,988 93,726

25

2012-13 1,40,033 28,334 1,68,367

Sources:SEBI)

Figure-1 growth of FII

Positive impact: It has been emphasized upon the fact that the capital

market reforms like improved market transparency, automation,

dematerialization and regulations on reporting and disclosure standards

were initiated because of the presence of the FIIs. But FII flows can be

considered both as the cause and the effect of the capital market reforms.

The market reforms were initiated because of the presence of them and

this in turn has led to increased flows.

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Total (iNR crores)

Debt (iNR crores)

Equity (iNR crores)

26

A. Enhanced flows of equity capital: FIIs are well known for a greater

appetite for equity than debt in their asset structure. For example, pension

funds in the United Kingdom and United States had 68 per cent and 64 per

cent, respectively, of their portfolios in equity in 1998. Not only it can help

in supplementing the domestic savings for the purpose of development

projects like building economic and social infrastructure but can also help

in growth of rate of investment, it boosts the production, employment and

income of the host country.

B. Managing uncertainty and controlling risks: FIIs promote financial

innovation and development of hedging instruments. These because of

their interest in hedging risks, are known to have contributed to the

development of zero-coupon bonds and index futures. FIIs not only

enhance competition in financial markets, but also improve the alignment

of asset prices to fundamentals. FIIs in particular are known to have good

information and low transaction costs. By aligning asset prices closer to

fundamentals, they stabilize markets. In addition, a variety of FIIs with a

variety of risk-return preferences also help in dampening volatility.

C. Improving capital markets: FIIs as professional bodies of asset

managers and financial analysts enhance competition and efficiency of

financial markets. By increasing the availability of riskier long term capital

for projects, and increasing firms’ incentives to supply more information

about them, the FIIs can help in the process of economic development.

D. Improved corporate governance: Good corporate governance is

essential to overcome the principal-agent problem between share-holders

27

and management. Information asymmetries and incomplete contracts

between share-holders and management are at the root of the agency

costs. Bad corporate governance makes equity finance a costly option.

With boards often captured by managers or passive, ensuring the rights of

shareholders is a problem that needs to be addressed efficiently in any

economy. Incentives for shareholders to monitor firms and enforce their

legal rights are limited and individuals with small share-holdings often do

not address the issue since others can free-ride on their endeavor. FIIs

constitute professional bodies of asset managers and financial analysts,

who, by contributing to better understanding of firms’ operations, improve

corporate governance. Among the four models of corporate control -

takeover or market control via equity, leveraged control or market control

via debt, direct control via equity, and direct control via debt or relationship

banking-the third model, which is known as corporate governance

movement, has institutional investors at its core. In this third model, board

representation is supplemented by direct contacts by institutional investors.

Negative impact: If we see the market trends of past few recent years it is

quite evident that Indian equity markets have become slaves of FIIs inflow

and are dancing to their tune. And this dependence has to a great extent

caused a lot of trouble for the Indian economy. Some of the factors are:

A. Potential capital outflows: “Hot money” refers to funds that are

controlled by investors who actively seek short-term returns. These

investors scan the market for short-term, high interest rate investment

opportunities. “Hot money” can have economic and financial repercussions

on countries and banks. When money is injected into a country, the

28

exchange rate for the country gaining the money strengthens, while the

exchange rate for the country losing the money weakens. If money is

withdrawn on short notice, the banking institution will experience a

shortage of funds.

B. Inflation: Huge amounts of FII fund inflow into the country creates a lot

of demand for rupee, and the RBI pumps the amount of Rupee in the

market as a result of demand created. This situation leads to excess

liquidity thereby leading to inflation where too much money chases too few

goods.

C. Problem to small investors: The FIIs profit from investing in emerging

financial stock markets. If the cap on FII is high then they can bring in huge

amounts of funds in the country’s stock markets and thus have great

influence on the way the stock markets behaves, going up or down. The FII

buying pushes the stocks up and their selling shows the stock market the

downward path. This creates problems for the small retail investor, whose

fortunes get driven by the actions of the large FIIs.

D. Adverse impact on Exports: FII flows leading to appreciation of the

currency may lead to the exports industry becoming uncompetitive due to

the appreciation of the rupee.

E. Issue related to participatory notes: When Indian-based brokerages

buy India-based securities and then issue participatory notes to foreign

investors. Any dividends or capital gains collected from the underlying

securities go back to the investors. Any entity investing in participatory

notes is not required to register with SEBI (Securities and Exchange Board

29

of India), whereas all FIIs have to compulsorily get registered. Trading

through participatory notes is easy because participatory notes are like

contract notes transferable by endorsement and delivery. Secondly, some

of the entities route their investment through participatory notes to take

advantage of the tax laws of certain preferred countries. Thirdly,

participatory notes are popular because they provide a high degree of

anonymity, which enables large hedge funds to carry out their operations

without disclosing their identity. The hedge funds borrow money cheaply

from western markets and invest these funds into stocks in emerging

economies. It is also feared that the hedge funds, acting through

participatory notes, will cause economic volatility in Indian exchange and

generally these are blamed for the sudden fall in indices. These unlike FIIs

are not directly registered under SEBI, but they operate through sub

accounts with FIIs and according to a number of studies it has been found

that more than 50% of the funds are flowing through this anonymous route,

which can lead to a great loss to the Indian economy.

Further, FIIs have contributed a lot in making Indian economy one of the

fastest growing economy in the world today. Foreign institutional

investment can play a useful role in development by adding to the savings

of low and middle income developing countries. And India among the world

inventors is believed to be a good investment destination inspite of all the

political uncertainty and infrastructural inefficiencies. After the liberalization

of financial policies India has been able to attract a lot of FII from rest of

the world and which in turn has played its part very well by helping in

development of Indian economy from what it was in early 1990s to a would

30

be super power that it is today. But still the harsh consequences of FIIs

should not be ignored by the government and further reforms should be

introduced in the economic sector to counter the tendency of the FIIs to

destabilize the emerging equity market. And also attempts should be made

to encourage small domestic investors to participate in the equity market.

Table-1.5 Net investment by FII last 10 year

Year net investment

2007 -1581.6

2008 -101802.6

2009 24132.1

2010 62713.4

2011 -26873

2012 105317.5

2013 87893.5

2014 66522.3

2015 -16331.3

2016 -13448.3

31

Figure1.2 Net investment last 7 year

In above figure 2 we show 2007 to 2016 year net data that show that 2007

and 2008 negative investment means in two years FII are sale their

investment that two years are recession. In 2009 and 2010 are positive

investment 24132.1 and 62713.4 respectively. In 2011 are again FII reduce

their investment and gone up to -26873.In 2012 FII investment are

105317.5 and that highest last 10 year. In year 2013 FII investment is

87893.5 its decreases previous year 2012. In 2014 FII investment are

66522.3 and its decrease to 2012 and 2013 FII investment. In 2015

-16331.3.

32

Figure-1.3 FII NET EQUITY & DEBT APRIL 2006 TO

DECEMBER 2015

Above figure show that FII net equity and debt data April 2006 to

December 2015. In June 2013 to November 2013 is show negative

investment in debt. Financial year 2006 is equity and debt investment

show positively. In 2007-08 due to world recession FII has sale there

investment and that show more sale in Indian market.

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

Ap

r/0

6

De

c/0

6

Au

g/0

7

Ap

r/0

8

De

c/0

8

Au

g/0

9

Ap

r/1

0

De

c/1

0

Au

g/1

1

Ap

r/1

2

De

c/1

2

Au

g/1

3

Ap

r/1

4

De

c/1

4

Au

g/1

5

net equity

net debt

33

Chapter-2 FII RULES IN INVEST IN INDIA AND

REGULATION

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 enter into an agreement with the custodian.

Besides it also has to appoint a designated bank to route its

34

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

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 Organization 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.

35

• Declaration regarding fit & proper entity.

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

Demand Draft in favor of "Securities and Exchange Board of India"

payable at New York‖. SEBI generally takes 7 working days

in granting FII registration

Limits on FII to invest in India

The Reserve Bank of India monitors the ceilings on FII/NRI/PIO

investments in Indian companies on a daily basis. For effective monitoring

of foreign investment ceiling limits, the Reserve Bank has fixed cut-off

points that are two percentage points lower than the actual ceilings. The

cut-off limit for companies with 24 per cent ceiling is 22 per cent and for

companies with 30 per cent ceiling, is 28 per cent and so on. Similarly, the

cut-off limit for public sector banks (including State Bank of India) is 18 per

cent.

Once the aggregate net purchases of equity shares of the company by FIIs

reach the cut-off point, which is 2% below the overall limit, the Reserve

Bank cautions all designated bank branches so as not to purchase any

more equity shares of the respective company on behalf of FIIs without

prior approval of the Reserve Bank. The link offices are then required to

intimate the Reserve Bank about the total number and value of equity

shares/convertible debentures of the company they propose to buy on

behalf of FIIs On receipt of such proposals, the Reserve Bank gives

clearances on a first-come-first served basis till such investments in

36

companies reach 22/30/49 per cent limit or the sectoral caps/statutory

ceilings as applicable. On reaching the aggregate ceiling limit, the Reserve

Bank advises all designated bank branches to stop purchases on behalf of

their FIIs clients. The Reserve Bank also informs the general public about

the `caution’ and the `stop purchase’ in these companies through a press

release.

Table no.2.1- Companies in which FII Investment is allowed up to

30% of their paid up capital

1. Aptech Ltd

2. Asian Paints (India) Ltd

3. Capital Trust Ltd

4. Container Corporation of India

5. Ferro Alloys Corporation Ltd

6. Garware Polyester Ltd

7. GIVO Ltd (formerly KB&T Ltd)

8. Gujarat Ambuja Cements Ltd

9. InfoTech Enterprises Ltd.

10. Mastek Ltd

11. Orchid Chemicals and Pharmaceuticals Ltd

12. Pentasoft Technologies Ltd (Pentafour Communications Ltd)

13. Polyplex Corporation Ltd

14. Ranbaxy Laboratories Ltd

15. Software Solutions Integrated Ltd

37

16. Sonata Software Ltd

17. The Credit Rating Information Services of India Ltd.

18. The Paper Products Ltd

19. Vikas WSP Ltd

Table no.2.2-Companies in which FII Investment is allowed upto 40%

of their paid up capital

1. Balaji Telefilms Ltd.

2. M/s. Burr Brown (India) Ltd.

3. M/s. Elbee Services Ltd.

4. Hero Honda Motors Ltd.

5. Jyoti Structures Ltd

6. Maars Software International Ltd.

7. Padmini Technologies Ltd

8. Pent media Graphics Ltd.

9. Thiru Arooran Sugars Ltd.

10. UTV Software Ltd.

11. Visual Soft Technologies Ltd

12. M/s. Silver line Technologies Ltd.

13. Ways India Ltd

14. SSI Ltd

Table no.2.3-Companies in which FII Investment is allowed upto 49%

of their paid up capital

1. Blue Dart Express Ltd

38

2. CRISIL

3. HDFC Bank Ltd

4. Hindustan Lever Ltd

5. Himachal Futuristic Communications Ltd

6. Infosys Technologies Ltd.

7. NIIT Ltd.

8. Dr. Reddy's Laboratories

9. Panacea Biotec Ltd

10. Reliance Industries Ltd.

11. Reliance Petroleum Ltd.

12. Sofia Software Ltd

13. Sun Pharmaceutical Industries Ltd

14. United Breweries Ltd.

15. United Breweries (Holdings) Ltd.

16. Zee Tele films Ltd.

Table no.2.4-Companies in which FII Investment is allowed up to 49%

of their paid up capital

1. ICICI Bank Ltd.

Table no.2.5-Companies in which FII Investment is allowed upto

sectoral cap/statutory ceiling of their paid up capital

1. GTL Ltd. - (74%)

2. Housing Development Finance Corporation Ltd. - (74%)

3. Infosys Technologies Ltd. - (100%)

39

4. Pent media Graphics Ltd. - (100%)

5. Pentasoft Technologies Ltd. - (100%)

6. Mascon Global Ltd. - (100%)

7. Punjab Tractors Ltd. - (64%)

8. Satyam Computer Services Ltd - (60%)

Table no.2.6-Companies where 22% FII investment limit has been

reached and further purchases are allowed with prior approval of RBI

1. ACC Ltd.

2. Digital Global Soft Ltd.

In india approximately 4159 FII. As per December 2005 top 10 fii are

following table

Table no. 2.7- top 10 FII in india as per 2005

Top 10 Flls In India Based On M-Cap

HSBC

Morgan Stanley

Merrill Lynch

Goldman Sachs

CLSA

Aberdeen

Copthall

Citi

40

Genesis

Capital

41

CHAPTER-3 INTRODUCTION TO INDIAN STOCK MARKRT

Most of the trading in the Indian stock market takes place on its two stock

exchanges: the Bombay Stock Exchange (BSE) and the National Stock

Exchange (NSE). The BSE has been in existence since 1875. The NSE,

on the other hand, was founded in 1992 and started trading in 1994.

However, both exchanges follow the same trading mechanism, trading

hours, settlement process, etc. At the last count, the BSE had about 4,700

listed firms, whereas the rival NSE had about 1,200. Out of all the listed

firms on the BSE, only about 500 firms constitute more than 90% of its

market capitalization; the rest of the crowd consists of highly illiquid shares.

Almost all the significant firms of India are listed on both the exchanges.

NSE enjoys a dominant share in spot trading, with about 70% of the

market share, as of 2009, and almost a complete monopoly

in derivatives trading, with about a 98% share in this market, also as of

2009. Both exchanges compete for the order flow that leads to reduced

costs, market efficiency and innovation. The presence

of arbitrageurs keeps the prices on the two stock exchanges within a very

tight range.

Trading Mechanism

Trading at both the exchanges takes place through an open electronic limit

order book, in which order matching is done by the trading computer.

There are no market makers or specialists and the entire process is order-

driven, which means that market orders placed by investors are

42

automatically matched with the best limit orders. As a result, buyers and

sellers remain anonymous. The advantage of an order driven market is

that it brings more transparency, by displaying all buy and sell orders in the

trading system. However, in the absence of market makers, there is no

guarantee that orders will be executed.

All orders in the trading system need to be placed through brokers, many

of which provide online trading facility to retail customers. Institutional

investors can also take advantage of the direct market access (DMA)

option, in which they use trading terminals provided by brokers for placing

orders directly into the stock market trading system.

Settlement Cycle and Trading Hours

Equity spot markets follow a T+2 rolling settlement. This means that any

trade taking place on Monday, gets settled by Wednesday. All trading on

stock exchanges takes place between 9:55 am and 3:30 pm, Indian

Standard Time (+ 5.5 hours GMT), Monday through Friday. Delivery of

shares must be made in dematerialized form, and each exchange has its

own clearing house, which assumes all settlement risk, by serving as a

central counterparty.

3.1 Market Indexes

The two prominent Indian market indexes are Sensex and Nifty. Sensex is

the oldest market index for equities; it includes shares of 30 firms listed on

the BSE, which represent about 45% of the index's free-float market

capitalization. It was created in 1986 and provides time series data from

April 1979, onward. The main Index of BSE is SENSEX. The other indices

43

at BSE are: BSE 500, BSE 100, BSE 200, BSE PSU, BSE MIDCAP, BSE

SMLCAP, BSE BANKEX, BSE Teck, BSE Auto, BSE Pharma, BSE Fast

Moving Consumer Goods (FMCG), BSE Consumer Durable (SYMBOL:

Cons Dura), BSE Metal.

Figure-3.1 BSE sensex index

Another index is the S&P CNX Nifty; it includes 50 shares listed on the

NSE, which represent about 62% of its free-float market capitalization. It

was created in 1996 and provides time series data from July 1990, onward.

NSE main index is CNX Nifty. NSE also set up as index services firm

known as India Index Services & Products Limited (IISL) and has

launched several stock indices, including: S&P CNX Nifty, CNX

Nifty Junior, CNX 100 (= S&P CNX Nifty + CNX Nifty Junior), S&P

CNX 500 (= CNX 100 + 400 major players across 72 industries), CNX

44

Midcap (introduced on 18 July 2005 replacing CNX Midcap 200), Nifty

midcap 50.

Market Regulation

The overall responsibility of development, regulation and supervision of the

stock market rests with the Securities & Exchange Board of India (SEBI),

which was formed in 1992 as an independent authority. Since then, SEBI

has consistently tried to lay down market rules in line with the best market

practices. It enjoys vast powers of imposing penalties on market

participants, in case of a breach.

3.2 Who Can Invest in India?

India started permitting outside investments only in the 1990s. Foreign

investments are classified into two categories: foreign direct

investment (FDI) and foreign portfolio investment (FPI). All investments, in

which an investor takes part in the day-to-day management and operations

of the company, are treated as FDI, whereas investments in shares without

any control over management and operations are treated as FPI.

For making portfolio investment in India, one should be registered either as

a foreign institutional investor (FII) or as one of the sub-accounts of one of

the registered FIIs. Both registrations are granted by the market regulator,

SEBI. Foreign institutional investors mainly consist of mutual funds,

pension funds, endowments, sovereign wealth funds, insurance

companies, banks, asset management companies etc. At present, India

does not allow foreign individuals to invest directly into its stock market.

45

However, high-net-worth individuals (those with a net worth of at least

$US50 million) can be registered as sub-accounts of an FII.

Foreign institutional investors and their sub accounts can invest directly

into any of the stocks listed on any of the stock exchanges. Most portfolio

investments consist of investment in securities in the primary

and secondary markets, including shares, debentures and warrants of

companies listed or to be listed on a recognized stock exchange in India.

FIIs can also invest in unlisted securities outside stock exchanges, subject

to approval of the price by the Reserve Bank of India. Finally, they can

invest in units of mutual funds and derivatives traded on any stock

exchange.

An FII registered as a debt-only FII can invest 100% of its investment into

debt instruments. Other FIIs must invest a minimum of 70% of their

investments in equity. The balance of 30% can be invested in debt. FIIs

must use special non-resident rupeebank accounts, in order to move

money in and out of India. The balances held in such an account can be

fully repatriated. (For related reading, see Re-evaluating Emerging

Markets. )

Restrictions/Investment Ceilings

the government of India prescribes the FDI limit and different ceilings have

been prescribed for different sectors. Over a period of time, the

government has been progressively increasing the ceilings. FDI ceilings

mostly fall in the range of 26-100%.

46

By default, the maximum limit for portfolio investment in a particular listed

firm is decided by the FDI limit prescribed for the sector to which the firm

belongs. However, there are two additional restrictions on portfolio

investment. First, the aggregate limit of investment by all FIIs, inclusive of

their sub-accounts in any particular firm, has been fixed at 24% of the paid-

up capital. However, the same can be raised up to the sector cap, with the

approval of the company's boards and shareholders.

Secondly, investment by any single FII in any particular firm should not

exceed 10% of the paid-up capital of the company. Regulations permit a

separate 10% ceiling on investment for each of the sub-accounts of an FII,

in any particular firm. However, in case of foreign corporations or

individuals investing as a sub-account, the same ceiling is only 5%.

Regulations also impose limits for investment in equity-based derivatives

trading on stock exchanges.

3.3 Investment Opportunities for Retail Foreign Investors

Foreign entities and individuals can gain exposure to Indian stocks through

institutional investors. Many India-focused mutual funds are becoming

popular among retail investors. Investments could also be made through

some of the offshore instruments, like participatory notes (PNs) and

depositary receipts, such as American depositary receipts (ADRs), global

depositary receipts (GDRs), and exchange traded funds (ETFs)

and exchange-traded notes (ETNs).

As per Indian regulations, participatory notes representing underlying

Indian stocks can be issued offshore by FIIs, only to regulated

47

entities. However, even small investors can invest in American depositary

receipts representing the underlying stocks of some of the well-known

Indian firms, listed on the New York Stock Exchange and Nasdaq. ADRs

are denominated in dollars and subject to the regulations of the

U.S. Securities and Exchange Commission (SEC). Likewise, global

depositary receipts are listed on European stock exchanges. However,

many promising Indian firms are not yet using ADRs or GDRs to access

offshore investors.

Retail investors also have the option of investing in ETFs and ETNs, based

on Indian stocks. India ETFs mostly make investments in indexes made up

of Indian stocks. Most of the stocks included in the index are the ones

already listed on NYSE and Nasdaq. As of 2009, the two most prominent

ETFs based on Indian stocks are the Wisdom-Tree India Earnings Fund

(NYSE: EPI) and the Power Shares India Portfolio Fund (NYSE:PIN). The

most prominent ETN is the MSCI India Index Exchange Traded Note

(NYSE:INP). Both ETFs and ETNs provide good investment opportunity for

outside investors.

48

Chapter-4 INTRODUCTION OF STUDY

4.1 Literature Review

1 Dr. Kajal Gandhi (May 2015) held that Foreign Institutional Inflows and

Indian Stock Market Volatility. In this context these paper examine the

dynamic linkage between foreign institutional investments and Indian stock

market was examined by applying Grangers causality test. The empirical

study shows a causal relation of foreign institutional investments on Indian

stock market. During recent times since FIIs are playing a dominant role in

driving Indian stock market, they have almost one-third of all the assets

under the custody of custodians in any period of time. But they have a

thirst for short term profitability for which they often mobilize funds. The

results are however, are tentative and there is a need to undertake an in-

depth research to address the issue.

2 Krishna Prasanna & Bharat Bansal (May 25, 2014) held that Foreign

Institutional Investments and Liquidity of Stock Markets: Evidence from

India. In these context these paper examine empirical assessment of this

claim using alternative liquidity measures. FIIs and the portfolio flows have

certainly contributed to the growth of stock market activity in India. Market

capitalization, volume and value traded grew significantly along with FII

flows. The results indicate that the foreign institutional trading significantly

influences the market liquidity in a negative direction. An increase in the

Gross Sales leads to an increase in the spread and the Illiquidity as

measured by the Amihud illiquidity ratio and hence a decrease in future

market liquidity. Similarly, an increase in Gross Purchases significantly

reduces the future market liquidity.

49

3 Bikramaditya Ghosh, Dr. Padma Srinivasan (august 2014) held that

An Analytical Study to Identify the Dependence of BSE 100 on FII & DII

Activity. In these context these paper examine Conventional wisdom

confirms that FIIs & DIIs are the principal movers & shakers in the Indian

equity market. They are seen as the cardinal constituents of the entire

investment domain in the union of India. This study is carried out to

measure their impact in a mathematical way, and to figure out whether

they are the true market movers or not.BSE 100 is a large Cap broad-

based Index & FII, DII data is from Sept 2007 to October 2013 for the said

Index. This study is intended to measure the impact of FII, DII trading

activity from September 2007 to October 2013 on BSE 100.Adjusted R

Square is most important in such a multivariate analysis, here it is found to

be quite feeble (0.02838). A relative high value of R Square increases the

predictability of the model, such a low value doesn’t help the cause at

all.74 observation points are in consideration over a little more than 6

years. Degree of Freedom (DF) suggests the number of variables, here

there are two (namely FII Activity/DII Activity. It is tested that BSE 100

does depend upon the DIIs (period Sept 2007 to Oct 2013). Now the next

question is, what the impact of DIIs in BSE 100 is; is it strong or feeble.

The difference between the observed value of the dependent variable (y)

and the predicted value (ŷ) is called the residual (e). So, each data point

has one residual.

4 Dr. Rakesh Kumar Miss Sarita Gautam (Octomber-2014) held that An

Empirical Study on impact of FII and other stock exchanges volatility on

BSE stock exchange volatility . In these context these paper examine the

50

impact of various factors through Multivariate Regression Analysis. This

analysis defined the degree as well as relationships among the factors.

Volatility of Stock market changed very rapidly, so except these others

factors should also consider for research work. FII and Nikkei have an

inverse relation whereas NASDAQ and FTSE have positive relations with

the BSE SENSEX. When investors are trading in secondary capital market

in this case they should consider these studied factors for the minimization

of risk and increase the return.

5 Anubha Shrivastav (2013) held that A Study of Influence of FII Flows on

Indian Stock Market. In these context these paper examine that

investments by FIIs and the movements of Sensex are quite closely

correlated in India and FIIs wield significant influence on the movement of

sensex. There is little doubt that FII inflows have significantly grown in

importance over the last few years According to findings and results, I

concluded that FII did have high significant impact on the Indian capital

market. Therefore, the alternate hypothesis is accepted. FII’S have positive

impact on BSE Sensex and Nifty. However there are other major factors

that influence the bourses in the stock market, but FII is definitely one of

the factors. This signifies that market rise with increase in FII’s and

collapse when FII’s are withdrawn from the market. Also BSE CG, BSE

CD, and BSE IT showed positive correlation but BSE FMCG showed

negative correlation with FII. The degree of relation was low in all the case.

It shows low degree of linear relation between FII and other stock index.

This implies that their impact on the stock prices varies from sector to

sector which is further influenced by the industry to which it belongs to and

the sectoral performance.

51

6Sanjana Juneja (December-2013) Understanding the Relation between

FII and Stock Market. In these context these paper examine Compared to

security markets in developed economies, Indian markets being narrower

and shallower, allows foreign investors with access to significant funds, to

become the dominant player in determining the course of markets.

Because of their over sensitive investment behavior and herding nature,

FIIs are capable of causing severe capital out flight abruptly, tumbling

share prices in no time and making stock markets unstable and

unpredictable. In the process, more often than not, the domestic individual

investors are on the receiving end, losing their precious savings in such

outrageous speculative trading. India as an emerging economic power

cannot afford to be intimidated down by the FIIs every now and then. We

need formidable Domestic Investors which can pump in liquidity even

during cash crunch circumstances thereby fuelling the development. With

savings to the tune of roughly 35% of GDP, India can use this to its

strength by formulating policies which ensure that domestic funds like

Pension Funds, Provident Funds & other Large Corpus Funds have a

greater exposure to the equity market. The foreign investment in India

should be encouraged, but only from a strategic long term perspective.

52

4.2Background of Study

FII inflows and control have emerged as important policy issue in India.

Among the Indian policymakers, FIIs flows are believed to have a positive

impact on the country‘s development. FII flows supplement and augment

domestic savings and domestic investment without increasing the foreign

debt of country. Added to this, FII inflows to the equity market increase

stock prices, lower cost of equity capital and encourage the investment by

Indian firms and lead to improvements in securities market design and

corporate governance. The foreign institutional investment inflows have the

potential of influencing the process of economic development of India

through the positive impacts on macro-economic fundamentals of the

country. Therefore, the outlook is that the policy makers of India should

provide the FIIs with more opportunities and reasons to invest in Indian

markets by suggesting and implementing prudential norms. The FII

manipulate the situation of boom in such a manner that they wait till the

index rises up to a certain height and exit at an appropriate time. This

tendency increases the volatility further. But, volatility is too good for the

market as it helps in keeping the economy cycle moving and it will again

help the values of the stocks at a fair price for investments to again keep

flowing and so will the FIIs too.

Unexpected flows (FII) have a greater impact than expected flows and

further some researchers claim that foreigners‘ do not destabilize the

market Thus, there are many different opinions related to the impact of FII

flows on Indian capital market and that is why for the same reason we

have done a research.

53

4.3 PROBLEM STATEMENT AND IMPORTANCE OF THE STUDY

The issue of whether FII flows affects stock market returns or the other

way round is a matter of some controversy. It has been perceived in some

quarters that FII flows are the major drivers of stock markets in India and

hence a sudden reversal of such flows may harm the stability of its

markets. Contrary to this belief, it is viewed by others that FII flows react to

the existing crisis in the stock market, possibly exacerbating it rather than

causing it. An analysis of the direction of causality to understand the

possible devastating Impact of FII flows on the Indian economy is

important from the viewpoint of Indian policy makers especially when such

flows have recorded a sharp rise over the last decade. But, as very few

studies have been done so far in this regard, the present empirical study

has been undertaken to throw some light on the cause and effect

relationship between FII flows and Indian stock market returns.

54

4.4 Objectives

The objective of this study is to identify whether there exist a

causal relationship between net investment made by FIIs and the

stock market indices in the Indian Stock Market.

We analyze the relationship between foreign institutional investment

and stock indices in India (CNX NIFTY ,CNX 500 AND S&P BSE

SENSEX)

The aid of yearly data from April 2006 to December 2015 through

correlation coefficient, Regression.

Null Hypotheses

H01:- there is no significant impact of FII on CNX NIFTY.

H02:- there is no significant impact of FII on CNX 500.

H03:- there is no significant impact of FII on BSE SENSEX.

The CNX Nifty is a well diversified 50 stock index accounting for 13

sectors of the economy. It is used for a variety of purposes such as

benchmarking fund portfolios, index based derivatives and index

funds.CNX Nifty is owned and managed by India Index Services and

Products Ltd. (IISL).

The CNX 500 is India’s first broad-based stock market index of the Indian

stock market. The CNX 500 represents about 96% of total market

capitalization and about 93% of the total turnover on the National Stock

Exchange of India (NSE).

55

The S&P CNX 500 companies are disaggregated into 72 industry indices,

the S&P CNX Industry Indices. Industry weights in the index reflect the

industry weights in the market. The CNX 500 Index represents about

95.77% of the free float market capitalization of the stocks listed on NSE

as on March 31, 2015.

The S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive

Index), also-called the BSE 30 or simply the SENSEX, is a free-float

market-weighted stock market index of 30 well-established and

financially sound companies listed on Bombay Stock Exchange. The 30

component companies which are some of the largest and most actively

traded stocks, are representative of various industrial sectors of the

Indian economy.

56

Chapter-5 RESEARCH METHODOLOGY

5.1 Research Design

It is a descriptive research between FII and Indian stock market.

5.2 Sources of Data

NSE, SEBI, MONEY CONTROL

5.3 Data Collection Method

Secondary

5.4 Population

NSE, BSE (April 2006 to December 2015)

5.5 Sampling size

CNX NIFTY, CNX 500, S&P BSE SENSEX

57

Chapter-6 DATA ANALYSIS AND INTERPRETATION

Null Hypotheses

H01:- there is no significant impact of FII on CNX NIFTY.

H02:- there is no significant impact of FII on CNX 500.

H03:- there is no significant impact of FII on BSE SENSEX.

FII AND CNX 500

Table no. 6.1

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.16618754

R Square 0.027618298

Adjusted R Square 0.019162805

Standard Error 1244.098578

Observations 117

ANOVA

Df SS MS F Significance F

Regression 1 5055540.206 5055540.206 3.266314367 0.073330613

Residual 115 177994846.3 1547781.272

Total 116 183050386.5

REGRESSION RESULT

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept 4330.043378 130.8152107 33.10045793 1.28436E-60 4070.923631 4589.163125 4070.923631 4589.163125

NET EQUITY FII X 0.021679912 0.011995781 1.807294765 0.073330613 -0.00208142 0.045441244 -0.00208142 0.045441244

From the above table 6.1of Regression analysis of FII and CNX 500 ratio

shows that multiple correlation coefficient are 0.16618754. This

indicates that the correlation among independent and depended variable is

58

positive. The coefficient of destermination is 2.76%.This means that

close to 3% of the variation in the dependent variable is explained by the

independent variable. Since p-value of F-static is 0.073330613 which is

greater than 0.05 at 5% level of significance, so we accept the null

hypotheses and conclude that there is no significant relationship between

FII and CNX 500.

59

FII AND CNX NIFTY

Table no.6.2.

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.182709439

R Square 0.033382739

Adjusted R Square 0.024977371

Standard Error 1501.7941

Observations 117

ANOVA

df SS MS F Significance F

Regression 1 8957484.142 8957484.142 3.971597789 0.048642002

Residual 115 259369334.7 2255385.519

Total 116 268326818.9

REGRESSION RESULT

Coefficients Standard

Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept 5342.030388 157.9115314 33.82926086 1.32253E-61 5029.238046 5654.82273 5029.238046 5654.82273

NET FII X 0.028858035 0.014480519 1.992886798 0.048642002 0.000174915 0.057541155 0.000174915 0.057541155

From the above table 6.2of Regression analysis of FII and CNX NIFTY

ratio shows that multiple correlation coefficient are0.182709439. This

indicates that the correlation among independent and depended variable is

positive. The coefficient of determination is 3.338%.This means that

close to 3% of the variation in the dependent variable is explained by the

independent variable. Since p-value of F-static is 0.048642002 which is

less than 0.05 at 5% level of significance, so we reject the null

60

hypotheses and conclude that there is significant relationship between FII

and CNX NIFTY.

61

FII AND BSE SENSEX

Table no. 6.3

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.182489207

R Square 0.033302311

Adjusted R Square 0.024896244

Standard Error 4926.736573

Observations 117

ANOVA

Df SS MS F Significance F

Regression 1 96161274.66 96161274.66 3.961699477 0.048918778

Residual 115 2791364325 24272733.26

Total 116 2887525599

REGRESSION RESULT

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept 17839.27153 518.0394015 34.43612876 2.05355E-62 16813.13521 18865.40785 16813.13521 18865.40785

FII X 0.094552678 0.047504316 1.990401838 0.048918778 0.000455774 0.188649582 0.000455774 0.188649582

From the above table 6.3of Regression analysis of FII and SENSEX ratio

shows that multiple correlation coefficient are0.182489207. This

indicates that the correlation among independent and depended variable is

positive. The coefficient of determination is 3.33%.This means that close

to 3% of the variation in the dependent variable is explained by the

independent variable. Since p-value of F-static is 0.048918778 which is

less than 0.05 at 5% level of significance, so we reject the null

62

hypotheses and conclude that there is significant relationship between FII

and SENSEX.

63

Chapter-7 RESULTS AND FINDING

Correlation of coefficient is0.182709439 that indicate positive

correlation of FII and CNX NIFTY.

P-value of F-static is 0.048642002 which is less than 0.05 at 5%

level of significance, so we reject the null hypotheses and conclude

that there is significant relationship between FII and CNX NIFTY.

Correlation of coefficient is 0.16618754 so that indicate positive

correlation of FII and CNX 500.

P-value of F-static is 0.073330613 which is greater than 0.05 at 5%

level of significance, so we accept the null hypotheses and

conclude that there is no significant relationship between FII and

CNX 500.

Coefficient of correlation is 0.182489207 so that indicate positive

correlation of FII and SENSEX.

P-value of F-static is 0.048918778 which is less than 0.05 at 5%

level of significance, so we reject the null hypotheses and conclude

that there is significant relationship between FII and SENSEX.

64

FINDINGS

Financial Year 2000-01 to 2007-08 FII increase their investment

Financial year 2008-09 FII is withdraw their investment because of

world market recession.

Financial Year 2008-09 to 2012-13 FII increase their investment in

debt market.

65

Chapter-8 LIMITATION OF THE STUDY

Here data size are not huge so it’s not show proper impact of FII and

Indian stock market

Here we take just three indices in Indian stock market so we not take

a whole Indian market

Here we apply regression and correlation not apply any other test so

its limitation of study.

66

Chapter-9 CONCLUSION AND SUGESSION

There is a positive impact of FII and Indian stock market

Its Positive impact of FII on CNX NIFTY AND SENSEX

There is no impact on FII and CNX 500.

67

BIMLIOGRAPHY

http://www.craytheon.com/charts/fii_dii_nse_bse_trading_chart

_graph.php

http://www.moneycontrol.com/stocks/hist_index_result.php?ind

ian_indices=7

http://www.moneycontrol.com/india/stockmarket/foreigninstituti

onalinvestors/15/42/activity/FII/200604201512

Works Cited Bansal, K. P. (2014). Foreign Institutional Investments and Liquidity of Stock Markets:. 16.

Bikramaditya Ghosh, D. P. (2014). An Analytical Study to Identify the Dependence of BSE 100 on FII & DII

Activity. 5.

Dr. Rakesh Kumar, M. S. (2015). AN EMPIRICAL STUDY ON IMPACT OF FII AND OTHER STOCK

EXCHANGES VOLATILITY ON BSE STOCK. 10.

Gandhi, D. K. (2015). A Study of Foreign Institutional Inflows andndian Stock Market Volatility. 4.

Juneja, S. (2013). Understanding The Relation Between FII and Stock Market. 7.

Shrivastav, A. (2013). Influence of FII Flows on Indian Stock Market. 31.

68

ANEXTURE

Months FII EQUITY

CNX500 CNXNIFTY BSE SENSEX

Apr-06 589.2 3064.7 3557.6 12042.56

May-06 -8,247.20 2635.25 3071.05 10398.61

Jun-06 1,418.20 2562.5 3128.2 10609.25

Jul-06 1,447.90 2562.55 3143.2 10743.88

Aug-06 4,774.00 2807.95 3413.9 11699.05

Sep-06 6,231.70 2988.25 3588.4 12454.42

Oct-06 4,578.54 3114.55 3744.1 12961.9

Nov-06 6,574.74 3280.45 3954.5 13696.31

Dec-06 -3,410.90 3295.05 3966.4 13786.91

Jan-07 94.45 3393.1 4082.7 14090.92

Feb-07 6,065.00 3107.75 3745.3 12938.09

Mar-07 1,403.30 3145.35 3821.55 13072.1

Apr-07 5,431.80 3379.1 4087.9 13872.37

May-07 4,574.50 3563.65 4295.8 14544.46

Jun-07 7,939.60 3625.75 4318.3 14650.51

Jul-07 18,132.80 3783.85 4528.85 15550.99

Aug-07 -7,526.80 3711.55 4464 15318.6

Sep-07 18,948.50 4188.55 5021.35 17291.1

Oct-07 15,577.60 4806.85 5900.65 19837.99

Nov-07 -4,597.40 4869.55 5762.75 19363.19

Dec-07 4,896.70 5354.7 6138.6 20286.99

Jan-08 -17,326.30 4349 5137.45 17648.71

Feb-08 5,419.90 4360.7 5223.5 17578.72

Mar-08 124.4 3825.85 4734.5 15644.44

Apr-08 979 4222.1 5165.9 17287.31

May-08 -4,917.30 3959.65 4870.1 16415.57

Jun-08 -10,577.70 3203.35 4040.55 13461.6

Jul-08 -1,012.90 3456.7 4332.95 14355.75

Aug-08 -2,065.80 3489.05 4360 14564.53

Sep-08 -7,937.00 3058.6 3921.2 12860.43

Oct-08 -14,248.60 2225.7 2885.6 9788.06

Nov-08 -2,820.30 2093.1 2755.1 9092.72

Dec-08 1,330.90 2295.75 2959.15 9647.31

69

Jan-09 -3,009.50 2209.05 2874.8 9424.24

Feb-09 -2,690.50 2112.85 2763.65 8891.61

Mar-09 269 2294.85 3020.95 9708.5

Apr-09 7,384.20 2662.95 3473.95 11403.25

May-09 20,606.90 3579.9 4448.95 14625.25

Jun-09 3,224.90 3469.7 4291.1 14493.84

Jul-09 11,625.30 3764.1 4636.45 15670.31

Aug-09 4,028.70 3840.25 4662.1 15666.64

Sep-09 19,939.50 4118.65 5083.95 17126.84

Oct-09 8,304.10 3853.15 4711.7 15896.28

Nov-09 5,317.80 4145.45 5032.7 16926.22

Dec-09 10,367.20 4329.1 5201.05 17464.81

Jan-10 5,902.40 4156.05 4882.05 16357.96

Feb-10 2,113.50 4127.55 4922.3 16429.55

Mar-10 18,833.60 4313.25 5249.1 17527.77

Apr-10 9,764.50 4368.1 5278 17558.71

May-10 -8,629.90 4226.6 5086.3 16944.63

Jun-10 10,244.60 4420.7 5312.5 17700.9

Jul-10 17,120.60 4475.15 5367.6 17868.29

Aug-10 11,185.30 4537.25 5402.4 17971.12

Sep-10 29,195.80 4925.15 6029.95 20069.12

Oct-10 24,770.80 4972.95 6017.7 20032.34

Nov-10 18,519.90 4781.4 5862.7 19521.25

Dec-10 1,476.10 4940.95 6134.5 20509.09

Jan-11 -6,330.20 4424.6 5505.9 18327.76

Feb-11 -3,754.50 4247.15 5333.25 17823.4

Mar-11 6,966.70 4626.45 5833.75 19445.22

Apr-11 7,018.50 4615.3 5749.5 19135.96

May-11 -5,158.20 4492.9 5560.15 18503.28

Jun-11 3,172.10 4522.95 5647.4 18845.87

Jul-11 7,411.10 4424.05 5482 18197.2

Aug-11 -10,214.60 4038.35 5001 16676.75

Sep-11 -1,147.00 3978.35 4943.25 16453.76

Oct-11 2,468.80 4215.9 5326.6 17705.01

Nov-11 -3,946.60 3811.25 4832.05 16123.46

Dec-11 -128.5 3597.75 4624.3 15454.92

Jan-12 12,967.20 4082.85 5199.25 17193.55

Feb-12 25,217.40 4275.55 5385.2 17752.68

Mar-12 8,832.90 4221.8 5295.55 17404.2

Apr-12 -1,865.60 4178.35 5248.15 17318.81

70

May-12 -1,522.80 3913.05 4924.25 16218.53

Jun-12 133.5 4170.65 5278.9 17429.98

Jul-12 10,346.40 4126.45 5229 17236.18

Aug-12 9,729.60 4129.9 5258.5 17429.56

Sep-12 20,769.00 4504.35 5703.3 18762.74

Oct-12 10,272.90 4448.85 5619.7 18505.38

Nov-12 10,967.10 4675.25 5879.85 19339.9

Dec-12 24,299.20 4743.45 5905.1 19426.71

Jan-13 22,673.90 4795.3 6034.75 19894.98

Feb-13 21,122.40 4477.5 5693.05 18861.54

Mar-13 11,660.50 4438.35 5682.55 18835.77

Apr-13 5,145.30 4641.75 5930.2 19504.18

May-13 21,267.70 4681.45 5985.95 19760.3

Jun-13 -9,318.70 4510.9 5842.2 19395.81

Jul-13 -7,120.20 4379.65 5742 19345.7

Aug-13 -6,200.00 4175.85 5471.8 18619.72

Sep-13 12,632.90 4392.05 5735.3 19379.77

Oct-13 18,012.80 4804.85 6299.15 21164.52

Nov-13 7,079.40 4770.1 6176.1 20791.93

Dec-13 15,425.60 4914.85 6304 21170.68

Jan-14 -141.3 4709.15 6089.5 20513.85

Feb-14 2,593.70 4849.5 6276.95 21120.12

Mar-14 22,351.70 5224.85 6704.2 22386.27

Apr-14 7,299.50 5255.65 6696.4 22417.8

May-14 16,512.00 5802.85 7229.95 24217.34

Jun-14 13,990.85 6174.2 7611.35 25413.78

Jul-14 9,355.77 6194.45 7721.3 25894.97

Aug-14 6,436.65 6360.75 7954.35 26638.11

Sep-14 5,448.79 6415.7 7964.8 26630.51

Oct-14 892.35 6685.75 8322.2 27865.83

Nov-14 14,302.23 6918.05 8588.25 28693.99

Dec-14 -864.34 6773.65 8282.7 27499.42

Jan-15 17,689.09 7166.7 8808.9 29182.95

Feb-15 8,892.86 7239.45 8901.85 29361.5

Mar-15 8,717.04 6978.15 8491 27957.49

Apr-15 8,702.56 6749.65 8181.5 27011.31

May-15 -1,895.03 6959.85 8433.65 27828.44

Jun-15 -5,480.24 6897.2 8368.5 27780.83

Jul-15 2,592.68 7106.2 8532.85 28114.56

Aug-15 -17,248.65 6669.35 7971.3 26283.09

71

Sep-15 -5,695.70 6646.1 7948.9 26154.83

Oct-15 4,204.28 6750.95 8065.8 26656.83

Nov-15 -7,628.81 6686.1 7935.25 26145.67

Dec-15 205.49 6724.75 7946.35 26117.54