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INTRODUCTION
1.1 INTRODUCTION
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.
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 can not 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.
1.1.7 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.
• To study the scope and trading mechanism of Foreign Instititutional investors in India.
• To find the relationship between the FIIs equity investment pattern and Indian stock indices.
• To analyze the impact of FIIs equity investment on specific industrial sector (FMCG, Consumer
Durables, Auto, Banking, Real Estate) indices.
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.
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.
Research 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. Sensex and S&P CNX Nifty are selected. These two indices, in a way, represent the picture of
India’s stock markets. Five indices of BSE i.e. BSE Auto, BSE Bankex, BSE Consumer Durables,
BSE FMCG, BSE Realty are also selected so as to further observe the effect of FII in particular
industry . 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 1992when 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 January 2007 to December
2008.
RESEARCH DESIGN
Null Hypothesis (Ho): The various BSE indices and S&P CNX Nifty index does not rise with the
increase in FIIs investment.
Alternate Hypothesis (Ha): The various BSE indices and S&P CNX Nifty index rises with the
increase in FIIs investment.
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.
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.
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.
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.
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.
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).
CHAPTER II
INTRODUCTION TO INDIAN
STOCK MARKET
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)
The depression witnessed after the Independance 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. Bnagalore 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. Bombay
9. Calcutta
10. Madras
11. Ahmedabad
12. Delhi
13. Hyderabad
14. Bangalore
15. 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
2.4 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:
S. 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
Figure 2.1
2.5 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). They are divided into two categories:
Types of Transactions
The flowchart below describes the types of transactions that can be carried out on the Indian stock
exchanges:
Figure 2.2
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.
CHAPTER III
SURVEY OF LITERATURE
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.
CHAPTER IV
ISSUE STUDIED
4.1 To study the scope and trading mechanism of Foreign Instititutional Investors in India.
The scope and the trading mechanism of Foreign Institutional investors in India is discussed as
follow:
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.
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 PROCESSES:
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.
The sample data consists of 24 observations for FII, Sensex and S&P CNX Nifty starting from
January 2007 to December 2008. Average index of all the indices and monthly average of net
investments made by FII is taken into consideration in the study. FII was taken as independent
variable. Stock indices were taken as dependent variable. The data was taken from various
financial sites.
The relationship between the FII’s equity investment pattern and Indian stock indices is studied for
the year 2007 & 2008 with the help of correlation and regression analysis. The results and the
analysis are shown below:
Correlations(2007)
FIIs Sensex
FIIs Pearson Correlation 1 .173
Sig. (2-tailed) .590
N 12 12
Sensex Pearson Correlation .173 1
Sig. (2-tailed) .590
N 12 12
Fig 4.1: Correlation between the FII’s equity investment pattern and Sensex for the year 2007
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .173a .030 -.067 2727.50409
a. Predictors: (Constant), FII
Fig 4.2 Regression between the FII’s equity investment pattern and Sensex for the year 2007
Analysis for the year 2007 on the basis of the above results obtained:
The data includes 12 observations of monthly Sensex and FIIs in year 2007. The correlation and
regression is calculated with the help of SPSS.
Number of Observations = 12
Correlation = 0.173 and regression = 0.590
? There is positive effect of FII on Sensex but the correlation coefficient is low. This means that
Sensex has a relation with FII but the FII is not influencing the Sensex much.
? The regression coefficient is 0.590 which reflects 59.0 % variability in Sensex with the
independent variable i.e FII and how much the FII affects the Sensex in 2007.
? The standard error comes out to be 2727.50409 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.
Correlations
FII Sensex
FII Pearson Correlation 1 .130
Sig. (2-tailed) .688
N 12 12
Sensex Pearson Correlation .130 1
Sig. (2-tailed) .688
N 12 12
Fig 4.3 Correlation between the FII’s equity investment pattern and Sensex for the year 2008
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .130a .017 -.082 3262.54183
a. Predictors: (Constant), FII
Fig 4.4 Regression between the FII’s equity investment pattern and Sensex for the year 2008
Analysis for the year 2008 on the basis of the above results obtained:
The data includes 12 observations of monthly Sensex and FIIs in year 2008. The correlation and
regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.130,
Regression = 0.688, Standard Error = 3262.54183
? The effect of FII on Sensex if positive, But the correlation coefficient is very low and it is only
0.130. This means that Sensex has a relation with FII but the FII is not influencing the Sensex
much.
? The standard error comes out to be 3262.54183 which is high. This does not mean that the
relation is false but the error in linear relation is high.
? In 2008, the regression coefficient is 0.688 which means 68.8% variability in BSE Sensex due to
independent variable FII which is much higher than during 2007 in the bullish run.
Correlations
FII nifty
FII Pearson Correlation 1 .036
Sig. (2-tailed) 0.642
N 12 12
nifty Pearson Correlation .036 1
Sig. (2-tailed) 0.642
N 12 12
Fig 4.5 Correlation between the FII’s equity investment pattern and Nifty for the year 2007
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .036a .001 -.099 491.63092
a. Predictors: (Constant), FII
Fig 4.6 Regression between the FII’s equity investment pattern and Nifty for the year 2007
Analysis for the year 2007 on the basis of the above results obtained:
The data includes 12 observations of monthly Nifty and FIIs in year 2007. The correlation and
regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.36,
Regression = 0.642, Standard Error = 491.63092
? The nifty is positively correlated with FIIs. The correlation coefficient is 0.036 which is almost
near to zero and so we can say that FII are almost unrelated to nifty in 2007.
? The coefficient of determination = Explained Variance/Total Variance
Explained Variance = FIIs impact on overall fluctuation in Nifty
Unexplained Variance = impact of other factors
R square is 0.001 which means 1% change in nifty due to explained variance and all other
volatility is due to other factors.
? The standard error is 491.63092 which is high. This does not mean that the relation is false but
the error in linear relation is high.
? The regression coefficient is 0.642 which means 64.2% variability in Nifty due to a single factor
FII.
Correlations
FII nifty
FII Pearson Correlation 1 .348
Sig. (2-tailed) 0.267
N 12 12
nifty Pearson Correlation -.348 1
Sig. (2-tailed) 0.267
N 12 12
Fig 4.7 Correlation between the FII’s equity investment pattern and Nifty for the year 2008
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .348a .121 .033 713.96136
Fig 4.8 Regression between the FII’s equity investment pattern and Nifty for the year 2008
Analysis for the year 2008 on the basis of the above results obtained:
The data includes 12 observations of monthly Nifty and FIIs in year 2008. The correlation and
regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.348,
Regression = 0.267, Standard Error = 713.96136
? The nifty in 2008 is positively correlated to FII. The correlation coefficient is 0.348 which is much
higher than 0.036 of last year. It interprets that Nifty is more correlated to FII in 2008 as
comparable to the 2007.
? The regression coefficient is 0.267 in 2008. By regression it is analyzed how a single dependent
variable is affected by an independent variable. It can be interpreted that with the fall in market in
2008 the FII have started withdrawing from the NSE.
? But the correlation is high due to withdrawing of money by FIIs in 2008 which reflects the
relationship between the two.
? The coefficient of determination is 0.121 which is 12.1% change in Nifty due to explained
variance i.e. FII.
4.3 To analyze the impact of FIIs equity investment on specific industrial sector (FMCG, Consumer
Durables, Auto, Banking, Real Estate) indices.
The relationship between the FII’s equity investment pattern and specific industrial stock indices is
studied for the year 2007 & 2008 with the help of correlation and regression analysis. The results
and the analysis is shown below:
Correlations
FII auto
FII Pearson Correlation 1 .084
Sig. (2-tailed) .807
N 12 11
auto Pearson Correlation .084 1
Sig. (2-tailed) .807
N 11 11
Fig 4.9 Correlation between the FII’s equity investment pattern and Auto sector for the year 2007
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .053a .003 -.097 326.82145
a. Predictors: (Constant), FII
Fig 4.10 Regression between the FII’s equity investment pattern and Auto sector for the year 2007
Analysis for the year 2007 on the basis of the above results obtained:
The data includes 12 observations of monthly Auto sector indices and FIIs in year 2007. The
correlation and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.084,
Regression = 0.807, Standard Error = 326.82145
? FII has no significant relation with BSE Automobiles, as the value of correlation is 0.084. This
does not mean that there is no relation at all between them. It shows the absence of linear
relation between the two variables but not a lack of relationship altogether.
? The regression coefficient is 0.807 which means 80.7 % impact of FII on BSE automobiles. It
reflects how the market is going up with the increase in FIIs.
? The standard error comes out to be 326.82145 which is high. This does not mean that the
relation is false but the error in linear relation is high.
Correlations
FII auto
FII Pearson Correlation 1 .116
Sig. (2-tailed) .719
N 12 12
auto Pearson Correlation .116 1
Sig. (2-tailed) .719
N 12 12
Fig 4.11 Correlation between the FII’s equity investment pattern and Auto sector for the year
2008.
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .116a .013 -.085 957.46389
a. Predictors: (Constant), FII
Fig 4.12 Regression between the FII’s equity investment pattern and Auto sector for the year 2008
Analysis for the year 2008 on the basis of the above results obtained:
The data includes 12 observations of monthly Automobiles sector indices and FIIs in year 2008.
The correlation and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.116,
Regression = 0.807, Standard Error = 326.82145
? The correlation coefficient is 0.116 which means there is no significant correlation between
Automobiles sector and FIIs in 2008. It shows the absence of linear relation between the two
variables but not a lack of relationship altogether. But as comparable to 2007 there is more
positive relation between the above two variables.
? The coefficient of determination which is 13% also reflects more clear picture that how explained
variance i.e. FII are affecting BSE Auto index.
? The regression coefficient is 0.719 which means that in 2008 with the withdrawal of money by
FIIs in 2008 the Auto Sector index has also fallen. This can easily be seen as the reduction in
regression coefficient from 0.807 to 0.719.
? The standard error comes out to be 2727.50409 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.
Correlations
FII bankex
FII Pearson Correlation 1 .166
Sig. (2-tailed) .606
N 12 12
bankex Pearson Correlation .166 1
Sig. (2-tailed) .606
N 12 12
Fig 4.13 Correlation between the FII’s equity investment pattern and banking sector for the year
2007
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .053a .003 -.097 326.82145
a. Predictors: (Constant), FII
Fig 4.14 Regression between the FII’s equity investment pattern and banking sector for the year
2007
Analysis for the year 2007 on the basis of the above results obtained:
The data includes 12 observations of monthly Banking sector indices and FIIs in year 2007. The
correlation and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.166,
Regression = 0.870, Standard Error = 326.82145
? There is positive effect of FII on BSE Banking sector index but the correlation coefficient is 0.166
which is low. This means that BSE Banking sector index has a relation with FII but the FII is not
influencing the the index much.
? The R square is 0.03 which means FII has a 3% influence on all fluctuations in the Banking
index.
? The standard error comes out to be 326.82145 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.
? The regression is 0.870 from which it can be analysed that how BSE banking is affected by the
values of independent variable FII. It can be seen that BSE banking is affected a lot by FII and
with more FIIs index is also going up.
Correlations
FII bankex
FII Pearson Correlation 1 .149
Sig. (2-tailed) .662
N 12 11
bankex Pearson Correlation .149 1
Sig. (2-tailed) .662
N 11 11
Fig 4.15 Correlation between the FII’s equity investment pattern and banking sector for the year
2008
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .064a .004 -.096 2021.30305
a. Predictors: (Constant), FII
Fig 4.16 Regression between the FII’s equity investment pattern and banking sector for the year
2008
Analysis for the year 2008 on the basis of the above results obtained:
The data includes 12 observations of monthly Banking sector indices and FIIs in year 2008. The
correlation and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.149,
Regression = 0.662, Standard Error = 2021.30305
? The correlation coefficient is 0.149 which means there is no significant correlation between
banking sector and FIIs in 2008. It shows the absence of linear relation between the two variables
but not a lack of relationship altogether. But as comparable to 2007 there is less positive relation
between the above two variables.
? The coefficient of determination = Explained Variance/Total Variance
Explained Variance = FIIs impact on overall fluctuation in BSE Banking
Unexplained Variance = impact of other factors
R square is 0.004 which means 4% change in nifty due to explained variance and all other
volatility is due to other factors.
? The regression coefficient is 0.662 which means that with the change in FII there is less change
in the banking sector index and fewer amounts is withdrawn from this.
Correlations
FII consumerdurables
FII Pearson Correlation 1 .173
Sig. (2-tailed) .610
N 12 11
consumerdurables Pearson Correlation .173 1
Sig. (2-tailed) .610
N 11 11
Fig 4.17 Correlation between the FII’s equity investment pattern and consumer durables sector for
the year 2007
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .077a .006 -.093 1035.50370
a. Predictors: (Constant), FII
Fig 4.18 Regression between the FII’s equity investment pattern and consumer durables sector for
the year 2007
Analysis for the year 2007 on the basis of the above results obtained:
The data includes 12 observations of monthly Consumer durables sector indices and FIIs in year
2007. The correlation and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.173,
Regression = 0.610, Standard Error = 1035.5070
? There is positive effect of FII on BSE CD sector index but the correlation coefficient is 0.166
which is low. This means that BSE CD sector index has a relation with FII but the FII is not
influencing the the index much.
Correlations
FII consumerdurables
FII
Pearson Correlation 1 .192
Sig. (2-tailed) .572
N 12 11
consumerdurables Pearson Correlation .192 1
Sig. (2-tailed) .572
Fig 4.19 Correlation between the FII’s equity investment pattern and consumer durables sector for
the year 2008
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .045a .002 -.098 1175.87269
a. Predictors: (Constant), FII
Fig 4.20 Regression between the FII’s equity investment pattern and consumer durables sector for
the year 2008
Analysis for the year 2008 on the basis of the above results obtained:
The data includes 12 observations of monthly Consumer durables sector indices and FIIs in year
2008. The correlation and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.192
Regression = 0.572, Standard Error = 1175.87269
? The correlation coefficient is 0.192 which means there is no significant correlation between BSE
CD sector and FIIs in 2008. It shows the absence of linear relation between the two variables but
not a lack of relationship altogether. But as comparable to 2007 there is more positive relation
between the above two variables.
? The coefficient of determination = Explained Variance/Total Variance
Explained Variance = FIIs impact on overall fluctuation in Nifty
Unexplained Variance = impact of other factors
R square is 0.004 which means 2% change in nifty due to explained variance and all other
volatility is due to other factors.
? The regression coefficient is 0.572 which means that in 2008 with the withdrawal of money by
FIIs in 2008 the Auto Sector index has also fallen. This can easily be seen as the reduction in
regression coefficient from 0.610 to 0.572.
Correlations
FII fmcg
FII Pearson Correlation 1 .252
Sig. (2-tailed) .454
N 12 11
fmcg Pearson Correlation .252 1
Sig. (2-tailed) .454
N 11 11
Fig 4.21 Correlation between the FII’s equity investment pattern and fmcg sector for the year
2007
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .178a .032 -.065 187.05383
a. Predictors: (Constant), FII
Fig 4.22 Regression between the FII’s equity investment pattern and fmcg sector for the year 2007
Analysis for the year 2007 on the basis of the above results obtained:
The data includes 12 observations of monthly FMCG sector indices and FIIs in year 2007. The
correlation and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.252
Regression = 0.454, Standard Error = 187.05383
? There is a positive correlation between FMCG and FIIs and the correlation coefficient is 0.252. It
reflects FMCG and FII inflow/Outflow moving in same direction.
? The R square is .032 which means that FII has a big impact on the FMCG sector index.
? The regression is 0.454 from which it can be analyzed that how BSE FMCG is affected by the
values of independent variable FII. It can be seen that BSE banking is affected a lot by FII and
with more FIIs index is also going up.
Correlations
FII fmcg
FII Pearson Correlation 1 .403
Sig. (2-tailed) .194
N 12 12
fmcg Pearson Correlation .403 1
Sig. (2-tailed) .194
N 12 12
Fig 4.23 Correlation between the FII’s equity investment pattern and fmcg sector for the year
2008
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .403a .162 .078 185.75990
a. Predictors: (Constant), FII
Fig 4.24 Regression between the FII’s equity investment pattern and fmcg sector for the year 2008
Analysis for the year 2008 on the basis of the above results obtained:
The data includes 12 observations of monthly FMCG sector indices and FIIs in year 2008. The
correlation and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.403
Regression = 0.194, Standard Error = 185.75990
? The correlation coefficient is 0.192 which means there is no significant correlation between BSE
FMCG sector and FIIs in 2008. It shows the absence of linear relation between the two variables
but not a lack of relationship altogether. But as comparable to 2007 there is more positive relation
between the above two variables.
? The regression coefficient is 0.194 which means that in 2008 with the withdrawal of money by
FIIs in 2008 the FMCG Sector index has also fallen. The less investment in FMCG sector index is
the reason for this. This can easily be seen as the reduction in regression coefficient from 0.494 to
0.194.
Correlations
FII realty
FII Pearson Correlation 1 .228
Sig. (2-tailed) .501
N 12 11
realty Pearson Correlation .228 1
Sig. (2-tailed) .501
N 11 11
Fig 4.25 Correlation between the FII’s equity investment pattern and realty sector for the year
2007
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .146a .021 -.077 2294.77791
Fig 4.26 Regression between the FII’s equity investment pattern and realty sector for the year
2007
Analysis for the year 2007 on the basis of the above results obtained:
The data includes 12 observations of monthly Realty sector indices and FIIs in year 2007. The
correlation and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.228
Regression = 0.501, Standard Error = 2294.77791
? There is a positive correlation between Realty and FIIs and the correlation coefficient is 0.252. It
reflects Realty and FII inflow/Outflow moving in same direction.
? The coefficient of determination = Explained Variance/Total Variance
Explained Variance = FIIs impact on overall fluctuation in Nifty
Unexplained Variance = impact of other factors
R square is 0.021 which means 21% change in realty sectoral indices due to explained variance
and all other volatility is due to other factors.
? The regression is 0.501 from which it can be analyzed that how BSE realty is affected by the
values of independent variable FII. It can be seen that BSE realty is affected a lot by FIIs inflow
and with more FIIs inflow, index is also going up.
Correlations
FII realty
FII Pearson Correlation 1 .129
Sig. (2-tailed) .690
N 12 12
realty Pearson Correlation .129 1
Sig. (2-tailed) .690
N 12 12
Fig 4.27 Correlation between the FII’s equity investment pattern and realty sector for the year
2008
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .348a .121 .033 713.96136
a. Predictors: (Constant), FII
Fig 4.28 Regression between the FII’s equity investment pattern and realty sector for the year
2008
Analysis for the year 2008 on the basis of the above results obtained:
The data includes 12 observations of monthly Realty sector indices and FIIs in year 2007. The
correlation and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.129
Regression = 0.690, Standard Error = 713.96136
? The correlation coefficient is 0.129 which means there is no significant correlation between BSE
realty sector and FIIs in 2008. It shows the absence of linear relation between the two variables
but not a lack of relationship altogether. But as comparable to 2007 there is less positive relation
between the above two variables.
? The regression coefficient is 0.690 in 2008 which means that with the fall in FIIs in this year
there is a big variability in realty sector as well. But there are many other factors which are
affecting realty sector other than FII in 2008.
CHAPTER V
FINDINGS, CONCLUSIONS,
LIMITATIONS
&
RECOMMENDATIONS
5.1 FINDINGS
1) Impact of FIIs on Sensex: In 2007, the correlation coefficient is more than in 2008 which
interprets that the relationship between these two variables is more in the period when there is
bearish trend. But in both the years FIIs were not much positively correlated, so a less significant
impact of FIIs is seen. The error is very high in both the years which doesn’t mean that relation is
false but we can say that the error in linear relation is high.
2) Impact of FIIs on Nifty: The correlation coefficient of FIIs and Nifty is unrelated in 2007 and
2008. The regression coefficient predicts the value from an independent variable i.e. FII for the
dependent variable Nifty. Regression coefficient is 0.267 in 2008 and 0.911 in 2007 which
replicates that how Nifty index has gone down by withdrawal of FIIs.
3) Impact of FIIs on Industrial Sectoral Indices: In different Industrial sectoral indices of BSE
( BSE Auto, BSE Banking, BSE CD, BSE FMCG, BSE Realty) the correlation is always less. And also
the coefficient of determination reveals that the explained variance ( FII ) doesn’t has much
impact on the sectoral indices. And in 2008 the regression coefficient is giving a clear picture that
the withdrawal by FIIs is resulting a fall in indices and so FIIs are playing good role during this
time.
4) FIIs have less impact on Indian stock indices and other unexplained variables are also
influencing the Indices.
5) In bearish trend of 2008 the volatility in Indian Stock indices due to FIIs is more than in bullish
trend of 2007. No doubt FII inflow is more in 2007. The domestic investors were also playing an
important role in 2007 but in 2008 FIIs are influencing market more as domestic investors are not
in the market.
5.2 CONCLUSION
In developing countries like India foreign capital helps in increasing the productivity of
labour 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.
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 any significant impact on Indian Stock Market. The null hypothesis is rejected. BSE CD and
Nifty showed some positive correlation with FII in 2007 and 2008 but rest of the indices showed
very less positive correlation with FII. 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.
5.3 LIMITATIONS
Besides following scientific methodologies the study has come across some limitations. These are:
? The study is based on Sensex sample. The Sensex companies have an external image that they
are the best performers in the country. If the sample companies consist of probably a
heterogeneous group then the results may give better insight in to relationship of the specific
variables.
? The data is taken on monthly basis. The data on daily basis can give more positive results.
? Secondary data that I have used in this study may not give true picture of the concern.
5.4 RECOMMENDATIONS
After the analysis of the project study, following recommendations 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 protect domestic investors and also promote trade in country through FIIs.
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Journals:
ICFAI Journals
Economic times
CHAPTER VII
ANNEXURE
Month Close
Jan-07 5,515.36
Feb-07 5,109.38
Mar-07 4,869.13
Apr-07 4,998.71
May-07 5,012.28
Jun-07 4,739.57
Jul-07 4,933.83
Aug-07 4,878.05
Sep-07 5,332.26
Oct-07 5,507.17
Nov-07 5,469.50
Dec-07 5,667.45
Jan-08 4,832.48
Feb-08 4,887.17
Mar-08 4,524.77
Apr-08 4,726.00
May-08 4,355.76
Jun-08 3,585.62
Jul-08 3,679.51
Aug-08 4,001.23
Sep-08 3,674.98
Oct-08 2,685.62
Nov-08 2,330.56
Dec-08 2,444.71
Month Close
Jan-07 7,260.09
Feb-07 6,408.01
Mar-07 6,542.01
Apr-07 6,882.89
May-07 7,607.35
Jun-07 8,009.94
Jul-07 8,148.68
Aug-07 7,858.79
Sep-07 9,469.26
Oct-07 10,655.33
Nov-07 10,870.88
Dec-07 11,418.00
Jan-08 10,713.91
Feb-08 10,113.73
Mar-08 7,717.61
Apr-08 8,819.68
May-08 7,714.59
Jun-08 5,915.98
Jul-08 6,516.41
Aug-08 7,009.69
Sep-08 6,478.85
Oct-08 5,011.24
Nov-08 4,645.40
Dec-08 5,454.54
BSE Sensex Index from January 2007 to December 2008
Month Close
7-Jan 14,090.92
7-Feb 12,938.09
7-Mar 13,072.10
7-Apr 13,872.37
7-May 14,544.46
7-Jun 14,650.51
7-Jul 15,550.99
7-Aug 15,318.60
7-Sep 17,291.10
7-Oct 19,837.99
7-Nov 19,363.19
7-Dec 20,286.99
8-Jan 17,648.71
8-Feb 17,578.72
8-Mar 15,644.44
8-Apr 17,287.31
8-May 16,415.57
8-Jun 13,461.60
8-Jul 14,355.75
8-Aug 14,564.53
8-Sep 12,860.43
8-Oct 9,788.06
8-Nov 9,092.72
8-Dec 9,647.31
Month Close
Jan-07 3,800.93
Feb-07 3,509.38
Mar-07 3,570.33
Apr-07 3,685.86
May-07 4,195.08
Jun-07 4,250.65
Jul-07 4,172.07
Aug-07 4,299.00
Sep-07 4,804.24
Oct-07 5,283.38
Nov-07 5,365.83
Dec-07 6,956.79
Jan-08 5,103.86
Feb-08 4,699.34
Mar-08 3,883.29
Apr-08 4,543.11
May-08 4,320.82
Jun-08 3,477.60
Jul-08 3,685.84
Aug-08 3,840.79
Sep-08 2,929.18
Oct-08 2,072.98
Nov-08 1,793.57
Dec-08 1,913.74
BSE FMCG Index from January 2007 to December 2008
Month Close
Jan-07 1,906.21
Feb-07 1,785.88
Mar-07 1,739.10
Apr-07 1,800.55
May-07 1,907.38
Jun-07 1,829.33
Jul-07 1,973.16
Aug-07 1,973.93
Sep-07 2,161.35
Oct-07 2,126.59
Nov-07 2,154.81
Dec-07 2,319.92
Jan-08 2,167.34
Feb-08 2,274.39
Mar-08 2,290.07
Apr-08 2,461.38
May-08 2,427.76
Jun-08 2,080.33
Jul-08 2,139.18
Aug-08 2,215.60
Sep-08 2,160.76
Oct-08 1,799.83
Nov-08 1,936.60
Dec-08 1,987.38
Month Close
Jan-07 7,276.60
Feb-07 5,649.84
Mar-07 5,646.06
Apr-07 6,182.62
May-07 7,368.82
Jun-07 6,933.91
Jul-07 7,854.05
Aug-07 7,241.65
Sep-07 9,178.53
Oct-07 10,502.77
Nov-07 10,626.31
Dec-07 12,727.42
Jan-08 9,871.06
Feb-08 9,565.67
Mar-08 7,554.80
Apr-08 8,505.49
May-08 7,008.66
Jun-08 4,543.47
Jul-08 5,079.01
Aug-08 4,995.25
Sep-08 3,508.77
Oct-08 1,978.24
Nov-08 1,561.01
Dec-08 2,274.13
FII Net Purchase/ Sales for the Year 2007 and 2008.