Body

491 views
399 views

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
491
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
20
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Body

  1. 1. A Study On Impact of Foreign Institutional Investors On Indian Stock Market CHAPTER 1 INTRODUCTION1.1 FOREIGN INSTITUTIONAL INVESTORS FII is defined as an institution organized outside of India for the purpose of makinginvestments into the Indian securities market under the regulations prescribed by SEBI. ‗FII‘ include ―Overseas pension funds, mutual funds, investment trust, asset managementcompany, nominee company, bank, institutional portfolio manager, university funds, endowments,foundations, charitable trusts, charitable societies, a trustee or power of attorney holderincorporated or established outside India proposing to make proprietary investments orinvestments on behalf of a broad-based fund. FIIs can invest their own funds as well as invest onbehalf of their overseas clients registered as such with SEBI. These client accounts that the FIImanages are known as ‗sub-accounts‘. A domestic portfolio manager can also register itself as anFII to manage the funds of sub-accounts Foreign institutional investor means an entity established or incorporated outside Indiawhich proposes to make investment in India. Positive tidings about the Indian economy combinedwith a fast-growing market have made India an attractive destination for foreign institutionalinvestors. FII is defined as an institution organized outside of India for the purpose of makinginvestments into the Indian securities market under the regulations prescribed by SEBI.Entry Options for FIIA foreign company planning to set up business operations in India has the following options:Incorporated EntityBy incorporating a company under the Companies Act,1956 through• Joint Ventures; orCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 1
  2. 2. A Study On Impact of Foreign Institutional Investors On Indian Stock Market• Wholly Owned SubsidiariesForeign equity in such Indian companies can be up to 100% depending on the requirements of theinvestor, subject to equity caps in respect of the area of activities under the Foreign DirectInvestment (FDI) policy.1.1.1 Important terms to know about FIIs:Sub-account:Sub-account includes those foreign corporations, foreign individuals, and institutions, funds orportfolios established or incorporated outside India on whose behalf investments are proposed tobe made in India by a FII.Designated Bank:Designated Bank means any bank in India which has been authorized by the Reserve Bank ofIndia to act as a banker to FII.Domestic Custodian:Domestic Custodian means any entity registered with SEBI to carry on the activity of providingcustodial services in respect of securities.Broad Based Fund:Broad Based Fund means a fund established or incorporated outside India, which has at leasttwenty investors with no single individual investor holding more than 10% shares or units of thefund. Provided that if the fund has institutional investor(s) it shall not be necessary for the fund tohave twenty investors.If the fund has an institutional investor holding more than 10% of shares or units in the fund, thenthe institutional investor must itself be broad based fund.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 2
  3. 3. A Study On Impact of Foreign Institutional Investors On Indian Stock Market1.1.2 Foreign Institutional Investors RegistrationFollowing entities / funds are eligible to get registered as FII:• Pension Funds• Mutual Funds• Investment Trust• Insurance or reinsurance companies• Investment Trusts• Banks• Endowments• University Funds• Foundations• Charitable Trusts or Charitable SocietiesFurther, following entities proposing to invest on behalf of broad based funds, are also eligible to beregistered as FIIs:• Asset Management Companies• Institutional Portfolio Managers• Trustees• Power of Attorney Holders.The eligibility criteria for applicant seeking FII registrationAs per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required tofulfill the following conditions to qualify for grant of registration:CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 3
  4. 4. A Study On Impact of Foreign Institutional Investors On Indian Stock Market• 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 thesame capacity/category where registration is sought from SEBI. Registration with authorities, whichare 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 ForeignExchange 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 thecustodian. 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 FIIregistration.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 ofAssociation 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 theperiod covered shall not be less than twelve months.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 4
  5. 5. A Study On Impact of Foreign Institutional Investors On Indian Stock Market• A declaration by the applicant with registration number and other particulars in support ofits registration or regulation by a Securities Commission or Self Regulatory Organisation or anyother 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 adomestic 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 theinformation furnished by the applicants is incomplete, seven days shall be counted from the dayswhen all necessary information sought, reaches SEBI.In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from theReserve Bank of India (RBI). In such cases, 7 working days would be counted from the day noobjection is received from RBI.The FII registration is valid for 5 years. After expiry of 5 years, the registration needs to berenewed. Same as initial registration, Along with "Form A" and all the relevant documents, theapplicants are required to fill in additional form (Annexure 1) while applying for renewal. US $ 5,000needs to be paid for renewal of FII registration. The application for renewal should be submitted three months before expiry of the FIIregistration. 100 % debt FIIs are debt dedicated FIIs which invest in debt securities only. Theprocedure for registration of FII/sub-account, under 100% debt route is similar to that of normalfunds besides a clear statement by the applicant that it wishes to be registered as FII/sub-accountunder 100% debt route.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 5
  6. 6. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketThe FII registration application should be sent to:Securities and Exchange Board of IndiaDivision of FII & CustodianMittal Court "B" Wing, First Floor224, Nariman PointMumbai 400 021India.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 6
  7. 7. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketChart 1.1- showing FII registration Process:CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 7
  8. 8. A Study On Impact of Foreign Institutional Investors On Indian Stock Market1.1.3 Sub-Account Registrationa) Institution or funds or portfolios established outside India, whether incorporated or not.b) Proprietary fund of FII.c) Foreign Corporatesd) Foreign Individuals.The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account arerequired 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-accountregistration is US$ 1,000. The fee is to be submitted at the time of submitting the application. Themode 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 daysshall be counted from the days when all necessary information sought, reaches SEBI. The validityof sub-account registration is co-terminus with the FII registration under which it is registered. Theprocess of renewal of sub-account is same as initial registration. Renewal fee in this case is US $1,000. OCBs / NRIs are not permitted to get registered as FII/sub-account.1.1.4 Post-Registration Process If a registered FII/sub-account undergoes name change, then the FII need to promptlyinform SEBI about the change. It should also mention the reasons for the name change and givean undertaking that there has been no change in beneficiary ownership. In case of name change of FII, the request should be accompanied with documents fromhome regulator and registrar of the company evidencing approval of name change, and the originalFII registration certificate issued by SEBI should be sent back for necessary amendment.Procedure for transferring a sub-account from one FII to another:CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 8
  9. 9. A Study On Impact of Foreign Institutional Investors On Indian Stock Market The FII to whom the Sub-account is proposed to be transferred has to send a requestalong with a declaration that it is authorized to invest on behalf of the Sub-account. The transferorFII 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 itsSub-account/s clearly mentioning the name and registration number of the entity. The FII shouldensure 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 beintimated to SEBI by the FII. On receipt of no objection from the existing custodian and acceptancefrom the proposed custodian, the change of custodian would be approved - by SEBI.Procedure for registration as FII/sub account under 100% debt route: The procedure for registration of FII/sub account under 100% debt route is similar to that ofnormal funds besides a clear statement by the applicant that it wishes to be registered as FII/subaccount under 100% debt route. However, Government of India allocates the overall investmentlimit for 100% debt funds annually. The grant of investment limit for individual 100% debt funds iswithin this overall limit. The funds have to seek further investment limit in case the limit allotted tothem is exhausted and they wish to invest further. A Foreign Institutional Investor having an account with one custodian can open accountswith different custodians for its different sub-accounts. However, one sub-account cannot becustodial with more than one custodian.Procedure if an existing sub-account wants to get registered as a Foreign Institutional Investor:In case if a registered sub-account wishes to get itself registered as a Foreign Institutional Investor,then it will have to apply in Form A to SEBI for the same and has to satisfy all the eligibility criteriaCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 9
  10. 10. A Study On Impact of Foreign Institutional Investors On Indian Stock Marketnorms mentioned in SEBI (Foreign Institutional Investor) Regulations, 1995. It should also submit aletter from the old FII indicating its No-objection to such registration.Procedure for renewal of FII/Sub-Account registration:They have to apply before 3 months of the expiry of registration in Form A. Circular NoFITTC/CUST/09/2000 dated September 21, 2000 may be referred.If the FII does not renew its/sub-account‘s registration: The registration of the FII / Sub-account would get expired at due date and it would not beallowed to trade in Indian securities markets. If it is not interested in renewal but has certainresidual assets, it can apply for disinvestment in terms of Circular No. FITTC/CUST/12/2001 datedJune 04, 2001 and abides by the guidelines specified in this regard.1.1.5 Scope of Investments under the Portfolio Investment Scheme. FIIs, under the Portfolio Investment Scheme, are permitted to make both primary andsecondary investments in the India capital markets. Unlike an investor which relies solely on FDIregulations, a foreign investor which registers as a FII would be allowed to buy and sell securitiesover Indian stock exchanges. In addition, FIIs are entitled to effect transactions in a broadercategory of securities than an investor relying on FDI regulations alone. FIIs are permitted topurchase equity securities (both listed and unlisted), units of schemes floated by the Unit Trust ofIndia and other domestic municipal funds, warrants, debentures, bonds, governmental securitiesand derivative instruments which are traded on a recognized stock exchange. There is no limit onthe amount that FIIs may invest in the Indian market, and no lock-up periods apply to investmentsmade by FIIs.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 10
  11. 11. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketExchange ControlsFIIs are required to open up one or more bank accounts with certain designated banks and mustalso appoint a domestic custodian for custody of investment made by the FII. Through thedesignated accounts, FIIs are authorized to freely transfer funds from foreign currency accounts toRupee accounts and vice versa; make Rupee denominated investments in Indian companies;freely transfer after-tax proceeds from Rupee accounts to foreign currency accounts, and repatriatecapital, capital gain, dividends interest income and other gains, subject to deduction for applicablewithholding taxes. So long as FIIs execute purchases and sales on a recognized Indian stockexchange, they are not required to obtain transaction specific approval from the Reserve Bank. FIIsare also entitled to effect transactions using their own proprietary funds, or the funds of their subaccounts.Investment Restrictions Certain limitations apply to investments by FIIs into India. First, FIIs‘ and their sub-accounts‘ investment in an Indian company cannot exceed ten percent (10%) of the total issuedshare capital of the Indian company (five percent if the subaccount is a foreign corporation orindividual). In addition, the aggregate investment of all FIIs in an Indian company may not exceedtwenty four percent (24%) of its total issued share capital, without the express approval of its boardof directors and shareholders. Even with board of director and shareholder approval, the samesectoral limits which apply to foreign direct investment would continue to apply. FIIs may registerwith SEBI as a debt fund or an equity fund. FIIs which are registered as equity funds are requiredto invest at least seventy percent (70%) of their funds in equity and equity-related securities. A FIIregistered as a debt fund, on the other hand, must invest one hundred percent (100%) of its fundsin debt instruments. Foreign corporations and individuals are not eligible subaccounts of a FII thatis registered as a debt fund. FIIs are not permitted to engage in short selling, other than in respectof derivative securities traded over a recognized exchange, and must effect transactions through aregistered stock broker. Sector investment prohibitions and caps which apply to foreign directinvestment also apply to investments by FIIs, and FII investments must also comply with the pricingCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 11
  12. 12. A Study On Impact of Foreign Institutional Investors On Indian Stock Marketrequirements applicable to foreign direct investment. In addition, FIIs are not permitted to invest inprint media.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 12
  13. 13. A Study On Impact of Foreign Institutional Investors On Indian Stock Market1.2 TREND OF FIIS WITH THE HELP OF ECONOMIC FIGURES• In 2004, FII investments crossed $9 billion, the highest in the history of Indian capitalmarkets.• The total net investment for the year up to December 29 stood at US$9,072 million whileforeign 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 in2004 that India managed to receive the second highest FII inflow at over $8.5bn.• In 2005 FIIs invested more in Indian equities than in Korean or Taiwanese equities.• On 9th March 2009, Indias exceptional growth story and its booming economy have madethe country a favourite destination with foreign institutional investors (FIIs). It has continued toattract investment despite the Satyam non-governance issue and the global economic contagionimpact on Indian markets.• According to Mr Gautam Chand, CEO of Instanex, said FIIs are the largest institutionalinvestors in India with holdings valued at over US$ 751.14 billion as on December 31, 2008.• They are also the most successful portfolio investors in India with 102 per centappreciation 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 Indias land area isCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 13
  14. 14. A Study On Impact of Foreign Institutional Investors On Indian Stock Market almost half of Chinas 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.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 14
  15. 15. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketChart 1.2- Investment structure of FIICANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 15
  16. 16. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketChart 1.3- FII and THE FINANCIAL SYSTEMCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 16
  17. 17. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketTable 1.1- Number of registered FIIs in IndiaAs of March 2011 there were 1722 FIIs registered with SEBI, as against 1711 in March 2010SEBI Registered FIIs in India End of March1992-93 01993-94 31994-95 1561995-96 3531996-97 4391997-98 4961998-99 4501999-00 5062000-01 5272001-02 4902002-03 5022003-04 5402004-05 6852005-06 8822006-07 9972007-08 13192008-09 16182010-11 1711Till March 2011 1722CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 17
  18. 18. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketTable 1.2- FII share in different sectors of companies listed on NSESectors Percentage of Foreign Institutional Investors Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Sep-11Banks 18.41 19.15 14.27 16.02 17.62 18.17Engineering 11.45 10.63 7.34 8.28 9.36 9.30Finance 18.18 17.44 13.01 16.53 23.35 19.20FMCG 11.91 14.07 12.72 14.09 16.34 17.00Information 14.53 16.00 12.44 11.68 21.16 17.07TechnologyInfrastructure 7.15 8.86 7.31 8.90 7.87 7.50Manufacturing 9.57 9.46 7.28 8.79 9.41 9.60Media & 15.20 11.71 11.42 7.06 10.97 11.63EntertainmentPetrochemicals 5.83 4.73 4.77 6.08 6.52 6.49Pharmaceuticals 11.17 10.69 7.88 8.78 10.19 10.13Services 13.09 10.70 8.39 8.05 7.41 9.50Telecommunication 11.17 9.12 6.85 8.64 8.44 8.46Miscellaneous 8.19 9.30 8.39 8.10 13.65 13.37Total stake of FIIs in 10.78 10.62 8.40 9.58 10.32 10.45all sectorsCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 18
  19. 19. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketTable 1.3- Foreign Investment InflowsFOREIGN INVESTMENT INFLOWSYEAR A. Direct Investment B. Portfolio Investment Total(A+B) Rs. US $ RS. US $ Rs. US $ crore Million Crore Million Crore Million1992-93 965 315 748 244 1713 5591993-94 1838 586 11188 3567 13026 41531994-95 4126 1314 12007 3824 16133 51381995-96 7172 2144 9192 2748 16364 48921996-97 10015 2821 11758 3312 21773 61331997-98 13220 3557 6794 1828 20014 53851998-99 10358 2462 -257 -61 10101 24011999-00 9338 2155 13112 3026 22450 51812000-01 18406 4029 12609 2760 31015 67892001-02 29235 6130 9639 2021 38874 81512002-03 24367 5035 4738 979 29105 60142003-04 19860 4322 52279 11377 72139 156992004-05 27188 6051 41854 9315 69042 153662005-06 39674 8961 55307 12492 94981 214532006-07 103367 22826 31713 7003 135080 298292007-08 140180 34835 109741 27271 249921 621062008-09 173741 37838 -63618 -13855 110123 239832009-10 179059 37763 153516 32376 332575 701392010-11 138462 30380 143435 31471 281897 61851(Sources RBI, Statistics on Indian Economy)CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 19
  20. 20. A Study On Impact of Foreign Institutional Investors On Indian Stock Market1.3 PORTFOLIO INVESTMENT With greater openness in the emerging market economies and developing countries,portfolio investment flows became net outflows in four out of the last years ending 2008. Accordingto the WEO, private net portfolio flows to these economies, after being overall outflows in theperiod 2002-05, recorded modest levels of positive inflows of US $ 2.1 billion and US $ 23.3 billionin 2005, respectively. The year 2006 witnessed a great reversal with a massive net outflow of us $111.9 billion. The reversal in emerging Asia was the highest with an outflow of US $ 120.8 billion in2006. There was no such outflow from India in 2006, Though the level of portfolio inflows waslower than in 2005. With heightened volatility in Asian and global financial markets in 2006-07, net portfolioinflows into India amounted to US $ 7.1 billion for 2006-07. Portfolio net inflows after beingnegative in the initial months (May-July 2006) picked up momentum in August-November 2006only to slow down again in March 2008. Euro equities, which were relatively a very smallcomponent of portfolio flows (less than US $ 1 billion in the period 1997-98 to 2004-05), have risenin 2006-07 and 2007-08 to reach US $ 2.6 billion and US $ 3.* billion, respectively. IN 2007-08,Euro equities constituted 54.3 percent of the total portfolio net flows. However this composition wasmore due to lower net inflows under FII. Portfolio investment inflows in the first six months wasUS $ 83.4 billion and outflows was US $ 65 billion leaving a net inflow of US $ 18.3 billion, whichimplies a growth of 1,015.2 percent, year on year. In the scheme of classification based on duration, portfolio investment flows fall undershort term variety. The proportion of net portfolio outflows to total portfolio flows under this headindicates the nature of such flows. In the seven year period from 2000-01, the proportion of netflows to total gross flows (inflows plus outflows) were below 13 percent, with the exception of 2003-04 when it was higher at 25.2 percent. IN 2006-08, the proportion was by abysmally low at 3.3percent.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 20
  21. 21. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketTable 1.4- FII Sale and Purchase activity for the past years on annual basis: Equity DebtYEAR Gross Gross Net Gross Gross Net Purch. Sales Invest. Purch. Sales Invest. (Rs. Cr) (Rs. Cr) (Rs.Cr) (Rs. Cr) (Rs. Cr) (Rs. Cr)2011 608086.40 611728.80 -3642.40 288365.70 245767.90 42597.802010 768402.60 634110.70 140497 213849.20 161749 54442.802009 624237.5 540813.69 83423.9 111772.1 107208.91 4563.32008 719536.8 772378.7 -52841.9 46296.4 33964 12332.42007 811621.8 741276.4 70345.6 31176 21989.7 9186.42006 475622.5 439082.8 36539.7 11060.9 7011.7 4049.22005 284354.10 237642.20 46711.90 6890.90 12418.00 -5527.102004 184608.40 146396.00 38212.40 12478.70 10572.10 1906.702003 94122.20 63385.10 30737.10 10956.90 6363.90 4593.002002 46854.10 43272.80 3581.30 2970.60 2540.83 429.772001 47340.60 34558.30 12752.90 5346.90 4828.30 518.802000 74791.50 68421.60 6509.90 2834.80 2735.40 106.001999 36395.50 29817.10 6578.10 817.70 698.80 118.60Source: Securities and Exchange Board of India According to data released by the market regulator Securities and Exchange Board ofIndia (SEBI), FIIs transferred a record US $ 17.46 billion in domestic equities during the calendaryear 2009. This FII investment in 2009 proved to be the highest ever inflow in the country in rupeeterms in a single year, breaking the previous high of US $ 14.96 billion parked by foreign fundhouses in domestic equities in 2007. FIIs infused a net US $ 1.05 billion in debt instruments duringthe above said period.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 21
  22. 22. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketCHART 1.4- GROSS PURCHASES & SALES OF EQUITY (RS. CR) 900000 800000 700000 600000 500000 Gross Purchases 400000 Gross Sales 300000 200000 100000 0 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999Inference: From the above graph it‘s clear that FIIs reached its peak in equity in 2007 period andbecause of the recession the investments came down in year 2008. In 2011 also the FIIinvestments are at good levels. It would depend upon the various government policies which wouldsupport the foreign investors. If the registration and Investment processes become easier then wecould see more investments in the further near future.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 22
  23. 23. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketCHART 1.5- GROSS PURCHASES & SALES OF DEBT (RS. CR) 350000 300000 250000 200000 Gross Purchase 150000 Gross sales 100000 50000 0 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999Inference: From above graph we can say that the trend in the investment in debts suddenly raisedsince 2008 as there is a steep ascent in the graph. Due to economical policies of our country andgood market conditions the debt investments has increased.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 23
  24. 24. A Study On Impact of Foreign Institutional Investors On Indian Stock Market CHAPTER 2 REVIEW OF LITERATURE & DESIGN OF THE STUDY2.1 Introduction to the problemThe term Foreign Institutional Investor is defined by SEBI as under: ―Means an institution established or incorporated outside India to make investment inIndian securities. Provided that a domestic asset management company or domestic portfoliomanagers who manages funds raised or collected or brought from outside India for Investment inIndia on behalf of a sub-account, shall be deemed to be Foreign Institutional Investor.‖ The study attempts understand the behavioral pattern of FII during the period from March-2007 to February-2012 and examine the volatility of BSE Sense and S&P CNX NIFTY due to FII.THE data for the study uses the information obtained from the secondary sources like websites ofBSE sensex.We have attempted to explain the impact of foreign institutional investment on stockmarket and Indian economy. Also attempts to present the correlation between FII and BSE sensexand S&P CNX NIFTY by Karl Pearson‘s CO-efficient of correlation and Regression analysis.2.2 Review of Literature1. Richard W.Sias (1996) has found that a trader-intensified transactions database isemployed to investigate: (1) the relation between order-flow imbalance closed-end funds shareprices and discounts (2) the role of institutional investors in closed-end funds. Empirical results areconsistent 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 toaccurately reflect institutional investors‘ importance in closed-end funds market. The results failedto provide the evidence that institutional investors offset the position of individual investors or thatinstitutional investors face systematic ―noise trader risk‖.2. Ilangovan Prof. D. et al (1997) held that Steps are taken to gain extra mileage as regardsthe level of foreign investment receipts is concerned. Foreign direct investment is proven to haveCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 24
  25. 25. A Study On Impact of Foreign Institutional Investors On Indian Stock Marketwell-known positive effect through technology spillovers and stable investments tied to plant andequipment, but portfolio capital is associated more closely with volatility and its capacity to betriggered by both domestic as well as exogenous factors, making it extremely difficult to manageand control.3. Arshanapalli Bala et al (1997) has examined the nature and extent of linkage between theU.S. and the Indian stock markets. The study uses the theory of co-integration to studyinterdependence between the BSE, NYSE and NASDAQ. The sample data consisted of dailyclosing 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 notinterrelated to the US stock markets for the entire sample period. It should be noted that stockmarkets of many countries became increasingly interdependent with the US stock markets duringthe same time period. India was late in effecting the liberalization policy and when it implantedthese policies it did so in a careful and slow manner. However, as the effect of economicliberalizations started to take place, the BSE became more integrated with the NASDAQ and theNYSE, particularly after 1998. It must be noted that though BSE stock market is integrated with USstock markets, it does not influence the NASDAQ and NYSE markets.4. Michael Mosebach et al (2000) have examined the long run equilibrium relation betweenthe net flow of funds into equity MF and the S&P 500 index. Applying the Engel and Grangercorrection methodology followed by a state space procedure, we find that the levels of the stockmarket are influenced by the net flow of funds into equity MFs. Their findings indicate that the USequity market appears to be rationally adjusting to a structural change in the behaviour of the USinvesting public.5. Chakrabarti (2001) has examined in his research that following the Asian crisis and thebust of info-tech bubble internationally in 1998-99 the net FII has declined by US$ 61 million. ButCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 25
  26. 26. A Study On Impact of Foreign Institutional Investors On Indian Stock Marketthere was not much effect on the equity returns. This negative investment would possibly disturbthe long-term relationship between FII and the other variables like equity returns, inflation, etc. hasmarked 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 inthe post-Asian crisis period it was found the reverse relation that change in FII is mainly due tochange 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 toexamine the inter-temporal relation between stock indices and exchange rates for a sample ofeight advanced economies. An error correction model (ECM) of two variables employed tosimultaneously estimate short-run and long-run dynamics of variables. The ECM result revealedsignificant short-run and long-run relationship between two financial markets. Specifically, theresults show that increase in aggregate stock prices has negative short-run effect on domesticcurrency value. In the long-run, however, stock prices have positive effect on domestic currencyvalue. On the other hand currency depreciation has negative short-run and long-run effects onstock market.7. Stanley Morgan (2002) has examined that FIIs have played a very important role inbuilding up India‘s forex reserves, which have enabled a host of economic reforms. Secondly, FIIsare 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 duringbear markets. However, the correlation between returns and flows reduces during bull markets asother market participants raise their involvement reducing the influence of FIIs. Research byMorgan Stanley shows that the correlation between foreign inflows and market returns is highduring bear and weakens with strengthening equity prices due to increased participation by otherplayers.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 26
  27. 27. A Study On Impact of Foreign Institutional Investors On Indian Stock Market8. Sivakumar S (2003) has analysed the net flows of foreign institutional investment over theyears, it also briefly analyses the nature of FII flows based on research, explores somedeterminants of FII flows and examines if the overall experience has been stabilising ordestabilising for the Indian capital market.9. Rai Kulwant et al (2003) heldf that the present study tries to examine the determinants ofForeign Institutional Investments in India, which have crossed almost US$ 12 billions by the end of2002. Given the huge volume of these flows and its impact on the other domestic financial marketsunderstanding the behavior of these flows becomes very important at the time of liberalizing capitalaccount. In this study, by using monthly data, we found that FII inflow depends on stock marketreturns, inflation rate (both domestic and foreign) and ex-ante risk. In terms of magnitude, theimpact of stock market returns and the ex-ante risk turned out to be major determinants of FIIinflow. This study did not find any causation running from FII inflow to stock returns as it was foundby some studies. Stabilizing the stock market volatility and minimizing the ex-ante risk would helpin 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 asignificant and positive impact on the FII. But given the huge volume of investments, foreigninvestors could play a role of market makers and book their profits, i.e., they can buy financialassets when the prices are declining thereby jacking-up the asset prices and sell when the assetprices are increasing. Hence, there is a possibility of bi-directional relationship between FII and theequity returns.11. Raju M.T, Ghosh Anirban (2004) held that volatility estimation is important for severalreasons and for different people in the market. Pricing of securities is supposed to be dependenton volatility of each asset. In this paper we not only extend the study period of the earlier paper butalso expand coverage in terms of number of countries and statistical techniques. Mature markets /CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 27
  28. 28. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketDeveloped 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 shorthistory, both provide as high a return as the US and the UK market could provide but the volatilityin both countries is higher. The third and fourth order moments exhibit large asymmetry in some ofthe developed markets. Comparatively, Indian market show less of skewness and Kurtosis. Indianmarkets have started becoming informationaly more efficient. Contrary to the popular perception inthe recent past, volatility has not gone up. Intra day volatility is also very much under control andhas came down compared to past years.12. Sandhya Ananthanarayanan (2004) held that as part of its initiative to liberalize its financialmarkets, India opened her doors to foreign institutional investors in September, 1992. This eventrepresents a landmark event since it resulted in effectively globalizing its financial servicesindustry. We study the impact of trading of Foreign Institutional Investors on the major stock indicesof India. Our major findings are as follows. First, we find that unexpected flows have a greaterimpact than expected flows on stock indices. Second, we find strong evidence consistent with thebase broadening hypothesis. Third, we do not detect any evidence regarding momentum orcontrarian strategies being employed by foreign institutional investors. Fourth, our findings supportthe price pressure hypothesis. Finally, we do not find any substantiation to the claim thatforeigners‘ destabilize the market.13. Kwangsoo Ko et al (2004) have examined the characteristics of institutional and foreigninvestor stock ownership, and the stock price performance according to their ownership for twomajor Asian markets, Japan and Korea. The differences in abnormal returns are more evident forforeign ownership portfolios than for institutional ownership portfolios, especially in Korea. If weconsider either institutional or foreign investors, the differences in abnormal returns remain stillsignificant in Korea, but not in Japan. Both institutional investors‘ incentive for stock holding andCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 28
  29. 29. A Study On Impact of Foreign Institutional Investors On Indian Stock Marketthe extent of stock market efficiency would be the possible explanations for the different resultsbetween Japan and Korea.14. David A. Carpenter et al (2005) has examined that the Indian government has establisheda 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 foreigninvestment in India.15. Bose Suchismita et al (2005) has examined the impact of reforms of the foreigninstitutional investors (FIIs) investment policy, on FII portfolio flows to the Indian stock markets, anaspect, studies on determinants of FII flows to India so far have not taken into consideration. FIIshave been allowed to invest in the domestic financial market since 1992; the decision to open upthe Indian financial market to FII portfolio flows was influenced by several factors such as thedisarray in Indias external finances in 1991 and a disorder in the countrys capital market. Aimedprimarily at ensuring non-debt creating capital inflows at a time of an extreme balance of paymentcrisis and at developing and disciplining the nascent capital market, foreign investment funds werewelcomed to the country. Analysis also helps to evaluate the impact of liberalization policies as wellas measures for strengthening of policy framework for FII flows, in the post-Asian crisis period16. Samy Dr. P. Chella et al (2006) held that Investors can pick up stocks at these levels for agrowth story for long term i.e. for equities a 5 years holding period is reasonable to give a veryabove average return. Caution may be exercised to buy only good, well established market moversand never, to buy on margins or play intraday or dabble in derivatives market, which is high risk.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 29
  30. 30. A Study On Impact of Foreign Institutional Investors On Indian Stock Market17. Sikdar Soumyen (2006) held that the surge in inflows has not been matched by acorresponding growth in the absorptive capacity of the Indian economy. The major reason is thepersistent 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 fewyears. 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 foreigninstitutional 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 regulatoryrestrictions on foreigners‘ stock investment holdings as a cutoff point, the research uses thehighest and lowest 10 stocks of QFII holdings in three industry sectors as sample portfolios tostudy the prior- and post-event returns.19. Dhamija Nidhi (2007) held that the increase in the volume of foreign institutionalinvestment (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 regulatoryregimes. The determinants and destinations of these flows and how are they influencing economicdevelopment in the country have also been debated. This paper examines the role of variousfactors relating to individual firm-level characteristics and macroeconomic-level conditionsinfluencing FII investment. The regulatory environment of the host country has an important impacton FII inflows. As the pace of foreign investment began to accelerate, regulatory policies havechanged to keep up with changed domestic scenarios. The paper also provides a review of thesechanges.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 30
  31. 31. A Study On Impact of Foreign Institutional Investors On Indian Stock Market20. P. Krishna Prasanna (2008) has examined the contribution of foreign institutionalinvestment particularly among companies included in sensitivity index (Sensex) of Bombay StockExchange. Also examined is the relationship between foreign institutional investment and firmspecific characteristics in terms of ownership structure, financial performance and stockperformance. It is observed that foreign investors invested more in companies with a higher volumeof shares owned by the general public. The promoters‘ holdings and the foreign investments areinversely related. Foreign investors choose the companies where family shareholding of promotersis not substantial. Among the financial performance variables the share returns and earnings pershare are significant factors influencing their investment decision2.3 Statement of the problem An adage says ―a problem well defined is half solved‖. The project deals with the ―Impactof Foreign Institutional Investors on Indian Stock Market‖. This research project studies therelationship between FIIs investment and stock indices. For this purpose India‘s two major indicesi.e. BSE Sensex and S&P CNX Nifty are selected. These two indices, in a way, represent thepicture of India‘s stock markets. So this project reveals the impact of FII on the Indian capitalmarket. There may be many other factors on which a stock index may depend i.e. Governmentpolicies, 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 FIIand stock index. The FII started investing in Indian capital market from September 1992 when theIndian economy was opened up in the same year. Their investments include equity only. Thesample data of FIIs investments consists of monthly average from March 2007 to February 2012.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 31
  32. 32. A Study On Impact of Foreign Institutional Investors On Indian Stock Market2.4 Scope of the study Scope of the study is very broader and covers both the stock indices and its comparisonwith foreign institutional investments. But, study is only going to cover foreign investments in formof equity. The time period is limited from March 2007 to February 2012 as it will give good ideaabout FII trend. The study will provide a very clear picture of the impact of foreign institutional investors onIndian 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, theirprocess of registration and their impact on Indian stock market.2.5 Objectives of the studyFollowing are the objectives of the study:• To study the scope and trading mechanism of Foreign Instititutional investors in India.• To find the impact of net investments made by foreign institutional investors on S&P CNXNIFTY.• To find the impact of net investments made by foreign institutional investors on BSESensex.• To find the trend of foreign institutional investmentCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 32
  33. 33. A Study On Impact of Foreign Institutional Investors On Indian Stock Market2.6 HypothesisA hypothesis describes the relationship between or among variables. A good hypothesis is one thatcan explain what it claims to explain, is testable and has greater range, probability and simplicitythan its rivalsNull Hypothesis (Ho): The BSE Sensex and S&P CNX Nifty indices do not vary with the variation inForeign Institutional InvestmentsAlternate Hypothesis (Ha): The BSE Sensex and S&P CNX Nifty indices vary with the variation inForeign Institutional Investments.2.7. Research Methodology Research methodology is the arrangement of conditions for collection and analysis of datain 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. Itconstitutes the blueprint for the collection measurement and analysis of the data.The research methodology here includes:• Research design• Sampling design• Sampling technique• Data collection methodCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 33
  34. 34. A Study On Impact of Foreign Institutional Investors On Indian Stock Market2.7.1 Research DesignExploratory Research As an exploratory study is conducted with an objective to gain familiarity with thephenomenon or to achieve new insight into it, this study aims to find the new insights in terms offinding the relationship between FII‘S and Indian Stock Indices.2.7.2 Sampling Design• Universe In this study the universe is finite and will take into the consideration related news andevents that have happened in last few year.• Sampling Unit: - As this study revolves around the foreign institutional investment and Indian stock market.So for the sampling unit is confined to only the Indian stock market.2.7.3 Sampling Technique Convenient Sampling: Study conducted on the basis of availability of the Data andrequirement of the project. Study requires the events that have impact on the Indian stock market.Data collection Method: Secondary data: For the secondary data various literatures, books, journals, magazines,web links are used. As there are not possibilities of collecting data personally so no questionnaireis made.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 34
  35. 35. A Study On Impact of Foreign Institutional Investors On Indian Stock Market2.7.4 RESEARCH ANALYSIS TOOLSCorrelation and Regression Analysis:Correlation: This analysis tool and its formulas measure the relationship between two data sets thatare scaled to be independent of the unit of measurement. The population correlation calculationreturns the covariance of two data sets divided by the product of their standard deviations. We canuse the Correlation tool to determine whether two ranges of data move together — that is, whetherlarge values of one set are associated with large values of the other (positive correlation), whethersmall values of one set are associated with large values of the other (negative correlation), orwhether values in both sets are unrelated (correlation near zero).Regression Analysis: We can analyze how a single dependent variable is affected by the values ofone or more independent variables — for example, how an athletes performance is affected bysuch factors as age, height, and weight. We can apportion shares in the performance measure toeach of these three factors, based on a set of performance data, and then use the results to predictthe performance of a new, untested athlete.2.8 Limitations of the study1. The project has been prepared in two months, so due to time limitations depth analysis of such awide concept may contain some lacuna. IN this report impact of FII on the stock market has beenanalyzed considering BSE Sensex ans S&P CNX NIFTY. But only these two may not depict exactpicture of the entire stock market.2. The data for calculation is taken on monthly basis. The data on daily basis can give morepositive results.3. The secondary data that I have used in this study may not give true picture of the concern.4. For calculation purpose I have used only Correlation and Regression methods. Only these twomethods may not give accurate information about the impact of FII on stock marketCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 35
  36. 36. A Study On Impact of Foreign Institutional Investors On Indian Stock Market2.9 Chapter SchemeCHAPTER 1 - INTRODUCTION1.1 Foreign Institutional Investors1.2 Trend of FIIs with the help of economic figures1.3 Portfolio InvestmentCHAPTER 2 - REVIEW OF LITERATURE AND RESEARCH DESIGN2.1 Introduction to the Problem2.2 Review of Literature2.3 Statement of the Problem2.4 Scope of the Study2.5 Objectives of the Study2.6 Hypothesis2.7 Research Methodology2.8 Limitations of the Study2.9 Chapter SchemeCHAPTER 3 - PROFILE OF THE INDUSTRY3.1 Overview of Indian Stock Market3.2 Trading Pattern of Indian Stock Market3.3 S&P CNX NIFTY3.4 Issues StudiedCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 36
  37. 37. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketCHAPTER 4 - RESULTS, ANALYSIS AND DISCUSSIONS4.1 FII Flows and Volatility of BSE Sensex and S&P CNX NIFTY4.2 Correlation and Regression Analysis4.3 Correlation and Regression with determinants of FII and Indian Stock MarketCHAPTER 5 – SUMMARY OF FINDINGS, CONCLUSIONS & SUGGESTIONS5.1 Summary of Findings5.2 Conclusion5.3 SuggestionsCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 37
  38. 38. A Study On Impact of Foreign Institutional Investors On Indian Stock Market CHAPTER 3 PROFILE OF THE INDUSTRY3.1 OVERVIEW OF INDIAN STOCK MARKET The working of stock exchanges in India started in 1875. BSE is the oldest stock market inIndia. The history of Indian stock trading starts with 318 persons taking membership in NativeShare and Stock Brokers Association, which we now know by the name Bombay Stock Exchangeor BSE in short. In 1965, BSE got permanent recognition from the Government of India. NationalStock Exchange comes second to BSE in terms of popularity. BSE and NSE represent themselvesas synonyms of Indian stock market. The history of Indian stock market is almost the same as thehistory of BSE. The 30 stock sensitive index or Sensex was first compiled in 1986. The Sensex iscompiled based on the performance of the stocks of 30 financially sound benchmark companies. In1990 the BSE crossed the 1000 mark for the first time. It crossed 2000, 3000 and 4000 figures in1992. The reason for such huge surge in the stock market was the liberal financial policiesannounced by the then financial minister Dr. Man Mohan Singh. The up-beat mood of the market was suddenly lost with Harshad Mehta scam. It came topublic knowledge that Mr. Mehta, also known as the big-bull of Indian stock market diverted hugefunds from banks through fraudulent means. He played with 270 million shares of about 90companies. Millions of small-scale investors became victims to the fraud as the Sensex fell flatshedding 570 points. To prevent such frauds, the Government formed The Securities and Exchange Board ofIndia, through an Act in 1992. SEBI is the statutory body that controls and regulates the functioningof stock exchanges, brokers, sub-brokers, portfolio managers, investment advisors etc. SEBIoblige several rigid measures to protect the interest of investors. Now with the inception of onlinetrading and daily settlements the chances for a fraud is nil, says top officials of SEBI.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 38
  39. 39. A Study On Impact of Foreign Institutional Investors On Indian Stock Market Sensex crossed the 5000 mark in 1999 and the 6000 mark in 2000. The 7000 mark wascrossed in June and the 8000 mark on September 8 in 2005. Many foreign institutional investors(FII) are investing in Indian stock markets on a very large scale. The liberal economic policiespursued by successive Governments attracted foreign institutional investors to a large scale.Experts now believe the sensex can soar past 14000 mark before 2010. The unpredictable behavior of the market gave it a tag – ‗a volatile market.‘ The factorsthat affected the market in the past were good monsoon, Bharatiya Janatha Party‘s rise to poweretc. The result of a cricket match between India and Pakistan also affected the movements inIndian stock market. The National Democratic Alliance led by BJP, during 2004 public electionsunsuccessfully tried to ride on the market sentiments to power. NDA was voted out of power andthe sensex recorded the biggest fall in a day amidst fears that the Congress-Communist coalitionwould stall economic reforms. Later prime minister Man Mohan Singh‘s assurance of ‗reforms witha human face‘ cast off the fears and market reacted sharply to touch the highest ever mark of8500. India, after United States hosts the largest number of listed companies. Global investorsnow ardently seek India as their preferred location for investment. Once viewed with skepticism,stock market now appeals to middle class Indians also. Many Indians working in foreign countriesnow divert their savings to stocks. This recent phenomenon is the result of opening up of onlinetrading and diminished interest rates from banks. The stockbrokers based in India are openingoffices in different countries mainly to cater the needs of Non Resident Indians. The time factoralso works for the NRIs. They can buy or sell stock online after returning from their work places. The recent incidents that led to growing interest among Indian middle class are the initialpublic offers announced by Tata Consultancy Services, Maruti Udyog Limited, ONGC and bignames like that. Good monsoons always raise the market sentiments. A good monsoon meansimproved agricultural produce and more spending capacity among rural folk. The bullish run of the stock market can be associated with a steady growth of around 6%in GDP, the growth of Indian companies to MNCs, large potential of growth in the fields ofCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 39
  40. 40. A Study On Impact of Foreign Institutional Investors On Indian Stock Markettelecommunication, mass media, education, tourism and IT sectors backed by economic reformsensure that Indian stock market continues its bull run.3.1.1 History of the Indian Stock Market - The Origin Stock markets refer to a market place where investors can buy and sell stocks. The priceat which each buying and selling transaction takes is determined by the market forces (i.e. demandand supply for a particular stock. Let us take an example for a better understanding of how market forces determine stockprices. ABC Co. Ltd. enjoys high investor confidence and there is an anticipation of an upwardmovement 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 willincrease 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 atransaction but now with the dawn of IT, most of the operations are done electronically and thestock markets have become almost paperless. Now investors don‘t have to gather at theExchanges, 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 momentum1830s Business on corporate stocks and shares in Bank and Cotton presses started in Bombay.Trading list by the end of 1839 got broader1840s Recognition from banks and merchants to about half a dozen brokersCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 40
  41. 41. A Study On Impact of Foreign Institutional Investors On Indian Stock Market1850s Rapid development of commercial enterprise saw brokerage business attracting morepeople into the business1860s The number of brokers increased to 601860-61 The American Civil War broke out which caused a stoppage of cotton supply from UnitedStates of America; marking the beginning of the "Share Mania" in India1862-63 The number of brokers increased to about 200 to 2501865 A disastrous slump began at the end of the American Civil War (as an example, Bank ofBombay Share which had touched Rs. 2850 could only be sold at Rs. 87)3.1.2 Achievements and MilestonesPre-Independence Scenario - Establishment of Different Stock Exchanges1874 With the rapidly developing share trading business, brokers used to gather at a street (nowwell known as "Dalal Street") for the purpose of transacting business.1875 "The Native Share and Stock Brokers Association" (also known as "The Bombay StockExchange") was established in Bombay1880s Development of cotton mills industry and set up of many others1894 Establishment of "The Ahmedabad Share and Stock Brokers Association"1880 - 90s Sharp increase in share prices of jute industries in 1870s was followed by a boomin tea stocks and coal1908 "The Calcutta Stock Exchange Association" was formed1920 Madras witnessed boom and business at "The Madras Stock Exchange" was transactedwith 100 brokers.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 41
  42. 42. A Study On Impact of Foreign Institutional Investors On Indian Stock Market1923 When recession followed, number of brokers came down to 3 and the Exchange wasclosed down1934 Establishment of the Lahore Stock Exchange1936 Merger of the Lahoe Stock Exchange with the Punjab Stock Exchange1937 Re-organisation and set up of the Madras Stock Exchange Limited (Pvt.) Limited led byimprovement in stock market activities in South India with establishment of new textile mills andplantation companies1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited wasestablished1944 Establishment of "The Hyderabad Stock Exchange Limited"1947 "Delhi Stock and Share Brokers Association Limited" and "The Delhi Stocks and SharesExchange Limited" were established and later on merged into "The Delhi Stock ExchangeAssociation Limited"Post Independence ScenarioThe depression witnessed after the Independence led to closure of a lot of exchanges in thecountry. Lahore Estock Exchange was closed down after the partition of India, and later on mergedwith the Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and gotrecognition only by 1963. Most of the other Exchanges were in a miserable state till 1957 whenthey applied for recognition under Securities Contracts (Regulations) Act, 1956. The Exchangesthat were recognized under the Act were:1. Bombay2. Calcutta3. MadrasCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 42
  43. 43. A Study On Impact of Foreign Institutional Investors On Indian Stock Market4. Ahmedabad5. Delhi6. Hyderabad7. Bangalore8. IndoreMany more stock exchanges were established during 1980s, 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 ExchangeCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 43
  44. 44. A Study On Impact of Foreign Institutional Investors On Indian Stock Market3.1.3 Performance of Indian Stock Market Over Few YearsAt present, there are twenty one recognized stock exchanges in India which does not include theOver The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of IndiaLimited (NSEIL).Government policies during 1980s also played a vital role in the development of the Indian StockMarkets. There was a sharp increase in number of Exchanges, listed companies as well as theircapital, which is visible from the table:CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 44
  45. 45. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketTABLE 3.1-NO. OF STOCK EXCHANGES YEAR WISESl. As on 31st 1946 1961 1971 1981 1991 1995 2001 2005No. December1 No. of Stock 7 7 8 8 9 14 20 23 Exchanges2 No. of Listed 1125 1203 1599 1552 2265 4344 6229 8593 Cos.3 No. of Stock 1506 2111 2838 3230 3697 6174 8967 11784 issues of Listed Cos.4 Capital of 270 753 1812 2614 3973 9723 32041 59583 Listed Cos.(Cr. Rs.)5 Market Value 971 1292 2675 3273 6750 25302 110279 478121 of Capital of Listed Cos. (Cr. Rs.)6 Capital per 24 63 113 168 175 224 514 693 Listed Cos.(4/2) (Lakh Rs)7 Market Value 86 107 167 211 298 582 1770 5564 of capital per Listed Cos. (Lakh Rs.) (5/2)CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 45
  46. 46. A Study On Impact of Foreign Institutional Investors On Indian Stock Market3.2 TRADING PATTERN OF THE INDIAN STOCK MARKETIndian Stock Exchanges allow trading of securities of only those public limited companies that arelisted on the Exchange(s).Indian stock exchange allows a member broker to perform following activities:• Act as an agent,• Buy and sell securities for his clients and charge commission for the same,• Act as a trader or dealer as a principal, Buy and sell securities on his own account andrisk.Over The Counter Exchange of India (OTCEI) Traditionally, trading in Stock Exchanges in India followed a conventional style wherepeople used to gather at the Exchange and bids and offers were made by open outcry. This age-old trading mechanism in the Indian stock markets used to create manyfunctional inefficiencies. Lack of liquidity and transparency, long settlement periods and benamitransactions are a few examples that adversely affected investors. In order to overcome theseinefficiencies, OTCEI was incorporated in 1990 under the Companies Act 1956. OTCEI is the firstscreen based nationwide stock exchange in India created by Unit Trust of India, Industrial Creditand Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets,Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries andCanBank Financial Services.Advantages of OTCEI• Greater liquidity and lesser risk of intermediary charges due to widely spread tradingmechanism across India• The screen-based scripless trading ensures transparency and accuracy of pricesCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 46
  47. 47. A Study On Impact of Foreign Institutional Investors On Indian Stock Market• Faster settlement and transfer process as compared to other exchanges• Shorter allotment procedure (in case of a new issue) than other exchangesNATIONAL STOCK EXCHANGEIn order to lift the Indian stock market trading system on par with the international standards. Onthe basis of the recommendations of high powered Pherwani Committee, the National StockExchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit andInvestment Corporation of India, Industrial Finance Corporation of India, all InsuranceCorporations, selected commercial banks and others.NSE provides exposure to investors in two types of markets, namely:1. Wholesale debt market2. Capital marketWholesale Debt Market - Similar to money market operations, debt market operations involveinstitutional investors and corporate bodies entering into transactions of high value in financialinstrumets like treasury bills, government securities, etc.Trading at NSE• Fully automated screen-based trading mechanism• Strictly follows the principle of an order-driven market• Trading members are linked through a communication network• This network allows them to execute trade from their offices• The prices at which the buyer and seller are willing to transact will appear on the screen.• When the prices match the transaction will be completed , a confirmation slip will beprinted at the office of the trading member.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 47
  48. 48. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketAdvantages of trading at NSE• Integrated network for trading in stock market of India• Fully automated screen based system that provides higher degree of transparency• Investors can transact from any part of the country at uniform prices• Greater functional efficiency supported by totally computerized networkCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 48
  49. 49. A Study On Impact of Foreign Institutional Investors On Indian Stock Market3.3 S&P CNX Nifty:Nifty Fifty was an informal term used to refer to 50 popular large cap stocks on the New York StockExchange in the 1960s and 1970s that were widely regarded as solid buy and hold growth stocks.The fifty are credited with propelling the bull market of the early 1970s. Most are still solidperformers, although a few are now defunct or otherwise worthless.The long bear market of the 1970s that lasted until 1982 caused valuations of the nifty fifty to fall tolow levels along with the rest of the market, with most of these stocks under-performing thebroader market averages. A notable exception was Wal-Mart, the best performing stock on the list,with a 29.65% compounded annualized return over a 29 year period.Because of the under-performance of most of the nifty fifty list, it is often cited as an example ofunrealistic investor expectations for growth stocks. However, those who held on until the late 1990sbull market saw many of the stocks return to market valuations.[2]CharacteristicsThe stocks were often described as "one-decision", as they were viewed as extremely stable, evenover long periods of time.The most common characteristic by the constituents were solid earnings growth for which thesestocks were assigned extraordinary high price-earnings ratios. Fifty times earnings was notuncommon.NIFTY means National Index for FiftyS&P CNX Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy. It isused for a variety of purposes such as benchmarking fund portfolios, index based derivatives andindex funds.S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is ajoint venture between NSE and CRISIL. IISL is Indias first specialised company focused upon theCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 49
  50. 50. A Study On Impact of Foreign Institutional Investors On Indian Stock Marketindex as a core product. IISL has a marketing and licensing agreement with Standard & Poors(S&P), who are world leaders in index services. The traded value for the last six months of all Nifty stocks is approximately 44.89% of the traded value of all stocks on the NSE Nifty stocks represent about 58.64% of the total market capitalization as on March 31, 2008. Impact cost of the S&P CNX Nifty for a portfolio size of Rs.2 crore is 0.15% S&P CNX Nifty is professionally maintained and is ideal for derivatives tradingCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 50
  51. 51. A Study On Impact of Foreign Institutional Investors On Indian Stock Market3.4 ISSUE STUDIEDTo study the scope and trading mechanisms of Foreign Institutional Investors in India.The scope and the trading mechanism of Foreign Institutional investors in India is discussed asfollows:The eligibility criteria for applicant seeking FII registrationAs per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required tofulfill 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 thesame capacity/category where registration is sought from SEBI. Registration with authorities, whichare 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 ForeignExchange 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 thecustodian. 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 FIIregistration.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 51
  52. 52. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketSupporting 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 ofAssociation 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 theperiod covered shall not be less than twelve months.• A declaration by the applicant with registration number and other particulars in support ofits registration or regulation by a Securities Commission or Self Regulatory Organisation or anyother 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 adomestic custodian together with particulars of the domestic custodian.• A signed declaration statement that appears at the end of the Form.• Declaration regarding fit & proper entity.The fee for registration as FII is US $ 5,000. The mode of payment is Demand Draft in favour of"Securities and Exchange Board of India" payable at New York‖.SEBI generally takes 7 working days in granting FII registration. However, in cases where theinformation furnished by the applicants is incomplete, seven days shall be counted from the dayswhen all necessary information sought, reaches SEBI.In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from theReserve Bank of India (RBI). In such cases, 7 working days would be counted from the day noobjection is received from RBI.The FII registration is valid for 5 years. After expiry of 5 years, the registration needs to berenewed.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 52
  53. 53. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketSame as initial registration, Along with "Form A" and all the relevant documents, the applicants arerequired to fill in additional form (Annexure 1) while applying for renewal. US $ 5,000 needs to bepaid 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 forregistration of FII/sub-account, under 100% debt route is similar to that of normal funds besides aclear statement by the applicant that it wishes to be registered as FII/sub-account under 100% debtroute.Sub-Account Registratione) Institution or funds or portfolios established outside India, whether incorporated or not.f) Proprietary fund of FII.g) Foreign Corporatesh) Foreign Individuals.The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account arerequired to sign the Sub-account application form."Annexure B" to "Form A" (FII application form) needs to be filled when applying for sub-accountregistration. No document is needed to be sent with annexure B. The fee for sub-accountregistration is US$ 1,000. The fee is to be submitted at the time of submitting the application. Themode 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 daysshall be counted from the days when all necessary information sought, reaches SEBI. The validityof sub-account registration is co-terminus with the FII registration under which it is registered. Theprocess 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.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 53
  54. 54. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketPost-Registration ProcessIf a registered FII/sub-account undergoes name change, then the FII need to promptly inform SEBIabout the change. It should also mention the reasons for the name change and give anundertaking that there has been no change in beneficiary ownership.In case of name change of FII, the request should be accompanied with documents from homeregulator and registrar of the company evidencing approval of name change, and the original FIIregistration 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 adeclaration that it is authorized to invest on behalf of the Sub-account. The transferor FII shouldalso 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 itsSub-account/s clearly mentioning the name and registration number of the entity. The FII shouldensure 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 toSEBI by the FII. On receipt of no objection from the existing custodian and acceptance from theproposed custodian, the change of custodian would be approved - by SEBI.Procedure for registration as FII/sub account under 100% debt route:The procedure for registration of FII/sub account under 100% debt route is similar to that of normalfunds besides a clear statement by the applicant that it wishes to be registered as FII/sub accountunder 100% debt route. However, Government of India allocates the overall investment limit forCANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 54
  55. 55. A Study On Impact of Foreign Institutional Investors On Indian Stock Market100% debt funds annually. The grant of investment limit for individual 100% debt funds is withinthis overall limit. The funds have to seek further investment limit in case the limit allotted to them isexhausted and they wish to invest further.A Foreign Institutional Investor having an account with one custodian can open accounts withdifferent custodians for its different sub-accounts. However, one sub-account cannot be custodialwith more than one custodian.Procedure if an existing sub-account wants to get registered as a Foreign Institutional Investor:In case if a registered sub-account wishes to get itself registered as a Foreign Institutional Investor,then it will have to apply in Form A to SEBI for the same and has to satisfy all the eligibility criterianorms mentioned in SEBI (Foreign Institutional Investor) Regulations, 1995. It should also submit aletter from the old FII indicating its No-objection to such registration.Procedure for renewal of FII/Sub-Account registration:They have to apply before 3 months of the expiry of registration in Form A. Circular NoFITTC/CUST/09/2000 dated September 21, 2000 may be referred.If the FII does not renew its/sub-account‘s registration:The registration of the FII / Sub-account would get expired at due date and it would not be allowedto trade in Indian securities markets. If it is not interested in renewal but has certain residualassets, it can apply for disinvestment in terms of Circular No. FITTC/CUST/12/2001 dated June 04,2001 and abide by the guidelines specified in this regard.INVESTMENT OPPORTUNITIESFinancial instruments are available for FII investments:a. Securities in primary and secondary markets including shares, debentures and warrants ofcompanies, unlisted, listed or to be listed on a recognized stock exchange in India;b. Units of mutual funds;CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 55
  56. 56. A Study On Impact of Foreign Institutional Investors On Indian Stock Marketc. Dated Government Securities;d. Derivatives traded on a recognized stock exchange;e. Commercial papers.Investment limits on equity investments by FII/sub-account:a. FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of anIndian company.b. Investment on behalf of each sub-account shall not exceed 10% of total issued capital ofan India company.c. For the sub-account registered under Foreign Companies/Individual category, theinvestment limit is fixed at 5% of issued capital.These limits are within overall limit of 24% / 49 % / or the sectoral caps prescribed by Governmentof India / Reserve Bank of India.Investment limits on debt investments by FII/sub-account:The FII investments in debt securities are governed by the policy if the Government for FIIinvestments in Government debt, currently of India. Currently following limits are in effect:100 % Debt Route US $ 1.55 billion70 : 30 Route US $ 200 millionTotal Limit US $ 1.75 billiond. For corporate debt the investment limit is fixed at US $ 500 million.Other investment limits:Normal FII (70:30 Route) 100% Debt FIICANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 56
  57. 57. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketTotal investment in equity and equity related instruments shall not be less than 70% of aggregateof all investments. 100% investment shall be made in debt security only.Securities to be registered in name of:a. In the name of FII when making investments on its own behalfb. In the name of sub-account when making investments on behalf of Sub-accountDERIVATIVES POSITION LIMITSa. The FII position limits in a derivative contracts (Individual Stocks)The FII position limits in a derivative contract on a particular underlying stock i.e. stock optioncontracts and single stock futures contracts are:i. For stocks in which the market wide position limit is less than or equal to Rs. 250 Cr, theFII position limit in such stock shall be 20% of the market wide limit.ii. For stocks in which the market wide position limit is greater than Rs. 250 Cr, the FIIposition limit in such stock shall be Rs. 50 Cr.b. FII Position limits in Index options contractsFII position limit in all index options contracts on a particular underlying index shall be Rs. 250Crores or 15 % of the total open interest of the market in index options, whichever is higher, perexchange.This limit would be applicable on open positions in all option contracts on a particular underlyingindex.c. FII Position limits in Index futures contracts:FII position limit in all index futures contracts on a particular underlying index shall be Rs. 250Crore or 15 % of the total open interest of the market in index futures, whichever is higher, perexchange.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 57
  58. 58. A Study On Impact of Foreign Institutional Investors On Indian Stock MarketThis limit would be applicable on open positions in all futures contracts on a particular underlyingindex.In addition to the above, FIIs shall take exposure in equity index derivatives subject to the followinglimits:i. Short positions in index derivatives (short futures, short calls and long puts) not exceeding(in notional value) the FII‘s holding of stocks.ii. Long positions in index derivatives (long futures, long calls and short puts) not exceeding(in notional value) the FII‘s holding of cash, government securities, T-Bills and similar instruments.d. FII Position Limits in Interest rate derivative contractsAt the level of the FIIThe notional value of gross open position of a FII in exchange traded interest rate derivativecontracts shall be:i. US $ 100 million.ii. In addition to the above, the FII may take exposure in exchange traded in interest ratederivative contracts to the extent of the book value of their cash market exposure in GovernmentSecurities.At the level of the sub-accountThe position limits for a Sub-account in near month exchange traded interest rate derivativecontracts shall be higher of:i. Rs. 100 Cr orii. 15% of total open interest in the market in exchange traded interest rate derivativecontracts.CANARA BANK SCHOOL OF MANAGEMENT STUDIES Page 58

×