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Aricles of FII
 

Aricles of FII

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    Aricles of FII Aricles of FII Document Transcript

    • PHASE 2 FII Submitted To Prof. RamanaRao Submitted By Bantu (B503) SakethRaj(B520) Sindhur(B523) SriyaSha(B528) Tejaswi(B530) Vinod (B532)
    • 1.Name of the article: India trumps rest of Asia in FII inflowsBL Research Bureau, July 29, 2012Author: ArvindJayaram,Indian equities are seen as a better bet for parking foreign funds than their peers inemerging Asia. Foreign institutional investors have pumped $10 billion into Indianstocks so far in 2012. This translates into a 336 per cent rise in net FII investmentcompared with the first seven months of 2011.According to Bloomberg, Indian equities top the table of net FII inflows in Asianemerging markets in 2012. South Korea is the other country in the group that hasreceived substantial inflows of $4.9 billion.Net FII flows into the Philippines alsoshot up by 267.7 per cent to $2.1 billion, while net FII investment in Thailand roseby 161.8 per cent to almost $2 billion. Indonesia, on the other hand, witnessed an82.1 per cent dip in net FII investment to $498.2 million during the period underreview. Taiwan also saw net outflows of $2.8 billion, but this was still a 92.8 percent improvement compared with the previous year, when the FIIs pulled out evenmore money.
    • India‟s neighbors Pakistan saw net outflows of $2.1 million Which caused concernamong the policy makers in Pakistan, while Sri Lanka saw net FII investment of$189 million in the January-July 27 period of 2012.Impact on marketIt appears that domestic investors and FIIs do not always see eye-to-eye on marketpotential. The BSE Sensex rose by 11.2 per cent in January, but despite higher FIIinflows in the subsequent month, it rose by just 2.6 per cent.In March, the Sensex shed two per cent even as FIIs pumped in more money. Butwhen FIIs reduced their exposure to the market in June, domestic investors pushedthe Sensex up by 7.5 per cent. The Sensex is down 3.2 per cent so far in Julydespite robust net FII inflows. The impact of FII flows on the rupee also bringsfortune. In January, the rupee gained 6.8 per cent against the dollar, but inFebruary, it lost 0.8 per cent despite higher inflows. In March, the rupee slidfurther by 3.8 per cent. It fell by 3.7 per cent and then 6.4 per cent over the nexttwo months, but gained 0.9 per cent in June despite net FII outflows. In July, therupee has gained 0.5 per cent against the dollar.
    • 2. Name of the Article: FIIs warm up to infra bonds, help firm up rupeeLive mint.com, The Wall Street Journal,Author: Arup Roy, July 4th,2012Foreign institutional investors (FIIs) expressed their eagerness to invest in Indianbonds by lapping up the new bond investment limit on offer, auctioned by marketregulator Securities Exchange Board of India (SEBI). They committed to buy up toRs. 20,469 crore of government bonds and up to Rs. 19,777 crore of infrastructurebonds. Thus, FIIs now can invest up to $20 billion in government bonds, up to $25billion in infrastructure corporate bonds and up to $20 billion in other corporatebonds.Reserve Bank of India (RBI) allowed FIIs to invest an additional $5 billion ingovernment bonds and relaxed the guidelines regarding the lock-in period ininfrastructure bonds to one year from three years earlier. While FIIs have alwaysbeen enthusiastic about investing in government bonds, they shied away fromincreasing their exposures in infrastructure bonds due to the lock-in period. Bonddealers termed the latest auction results as impressive, given that FIIs bid for morethan half of what was offered in the infrastructure segment. This has resulted instrengthening the rupee.In spite of the decrease in yield of bonds, FIIs are interested in investing in Indiadespite whatever rating agencies forecast. For foreign investors, although India‟seconomic growth slowed considerably, it‟s still doing better than many othercountries in the west and emerging markets in terms of growth. Also, because ofthe extreme pessimism over policy paralysis and twin deficits, valuations hadbecome more reasonable. This caused foreign banks such as UBS AG, DeutscheBank AG and JP Morgan Chase and Co. to turn overweight on In
    • The above graph depicts the shift in sentiment of foreign investors in IndianMarket.
    • 3.Name of the Article: Foreign Institutional Investment in IndianCapital Market: A Study of Last One DecadeInternational Research Journal of Finance and EconomicsAuthor: Narendra Singh Bohra, AkashDuttSince the beginning of liberalization(1991) FII flows to India have steadily grownin importance, any economy in the world is major affected by the foreigninvestment and the movement of its capital market, as an indicator of performanceof its various companies in a particular industry. The dawn of 21st century hasshown the real dynamism of stock market and the various benchmarking ofsensitivity index (Sensex) in terms of its highest peaks and sudden falls. Thisarticle attempts to understand the behavioral pattern of FII in India and figure outthe reason for indifferent responses of BSE Sensex due to FII inflows.Research Objective• To study the behavioral pattern of FII in India with special reference to 2000 to2009.• To establish a relationship between FII and different groups of shares in BSEIndia.Research MethodologyThe study describes the behavioral pattern and correlation between FII investmentsin India with special reference to BSE Sensex and also with groups of shares inBSE Sensex. It is based on secondary data obtained from websites, newspaper andjournals. The main objective of the present paper is to determine impact andrelationship between the Indian stock market, net foreign institutional investment.Section - 01Exploring the behavioral pattern of FII in India with special reference to BSESensex.FII in India (2000 – 2009)Foreign institutional investors have gained a significant role in Indian capitalmarkets. Availability of foreign capital depends on many firm specific factorsother than economic development of the country. The relationship between foreigninstitutional investment and firm specific characteristics in terms of ownership
    • structure, financial performance and stock performance is examined here. It isobserved that foreign investors invested more in companies with a higher volumeof shares owned by the general public. The promoters‟ holdings and the foreigninvestments are inversely related. Foreign investors choose the companies wherefamily shareholding of promoters is not substantial. Among the financialperformance variables the share returns and earnings per share are significantfactors influencing their investment decision.FII in India was maximum in 2004 then it starts declining,then it faced thechallenge of global crisis, in 2007 the net sale of shares by foreign investors ismare then net purchases.FII and BSE Sensex IndiaIthas been found by the studythat BSE Sensex and foreign institutional investmenthas followed a closed relationship, when net Sensex was moved up than the FIIwas also increased and when net Sensex was down the total FII also goes down.
    • Section – 02Attempts to establish the correlation between FII and individual group‟s securitiesin BSESensex.FII and Individual Group Securities in BSEIt has been found that some group of shares attract the attention of FII at larger,some at very low and some group of shares are completely unable to attract theattention of foreign investors these groups are negatively co-related with the totalFII in India.FII & Group-A SharesThese are companies with fairly good growth record in terms of dividend andcapital appreciation. The scrip‟s in this group are classified on the basis of equitycapital, market capitalization, number of years of listing on the exchange, publicshareholding, floating stock, trading volume etc. This group of shares in the stockmarket attracts the high interest of foreign institutional investors in India.
    • FII & Group-B1 & B2B1, B2’ Group is a subset of the other listed shares that enjoy higher marketCapitalization and liquidity than the rest. It is another group of shares which holdhigh market capital. As per the study it has been observed that this group of sharesattracts the attention of investors quiet well till 2007-08 but after the global crisisthis group of shares unable to attract the attention of foreign institutional investors.FII & Group-SThe “S” Group represents scripts forming part of the “BSE-Indonext” segment.“S” group consists of scripts from “B1” & “B2” group on BSE and companiesexclusively listed on regional stock exchanges having capital of 3 crores to 30crores. All trades in this segment are done through BOLT system under S group.This group of shares attract the highest attention of investors in 2007 after that ithas been decreased substantially, as far as the correlation of total FII and S –Group share is concern it has shown substantially correlated.FII & T Group Shares‘T’‟ Also termed as the trade to trade group this category comprises of shareswhich have to be settled in delivery for all buys and sells and square off of boughtand sold positions during the day is not permitted. This is a part of the surveillancefrom the BSE to counter any backward unwarranted movements in such scrip‟. In2007 there is maximum FII in T – Group shares and lowest in 2008, year 2008 was
    • the year when Indian economy faced impact of global crises and FII was directlyby correlated, but one interesting fact has been found that, in 2008 the total FII inIndia Rs 220568 crore and Rs 1773.1 crore that is minimum after 2005.GROUP-Z: ‘Z’ Group category comprises of shares of the companies which doesnot comply with the rules and regulations of the Stock Exchange and are at timessuspended from trading. This group of shares does not shown any co relation withthe total FII in India but it has attract the small attention of foreign portfolio invest.
    • GROUP-F: ‘F’ Group represents the debt market segment or represents the FixedIncome Securities. FII are always interested in high return that is the main reasonsbehind the slow attention of FII in this group of shares.Group-G": G" group consist Trading in Govt. Securities for retail investors. Thisgroup of sharesunable to attract the attention of foreign institutional investors.Because the investment in governmentsecurity is tighten by strong regulations inIndiaGROUP-B2: „B‟ Group is a subset of the other listed shares that enjoy highermarketcapitalization and liquidity than the rest. This group of shares was unable to findthe attention of foreign investors till 2007. In 2008 this group of shares has attractthe attention of FII in India.Findings This study found that the behavior of FII in last decade was opportunistic; profit accumulation was prime objective behind the portfolio investments in India. Year 2007 – 08 is the witness the world global crises and its impact in India, inflow of foreign capital (FDI/FII) decreased/ stopped in the year 2011.
    • A good co – relation was found in the total FII turnovers and A group shares turnover, as well as this has been attracted the highest attention of portfolio investors in India. There were certain groups of shares like G-group, B-group, ST-group, which do not find the substantial place in the investment basket of portfolio investors in India. The lack of proper regulation has been found in the stock market for guiding the movement of foreign portfolio investors in India.ConclusionThe result shown a positive correlation between stock market and investment ofFII‟s in a relation that Sensex follows the investment behavior of FII‟s, but thereare some exception seen in year 2005 and 2008.The net foreign institutionalinvestment, thus implying that the market informational efficiency hypothesis canbe rejected for BSE Sensitive Index with respect to the FII. It also shows thatpositive or negative movement of FII‟s leads to a major change/shift in thesentiments of domestic or related investors in market. It suggests the policyimplication that the authorities can focus on domestic economic policies tostabilize the stock market. Where as in the case of individual group securities FII‟shad shown a positive correlation in less regulated and high capitalized securities inthe market to earn high equity yield. Investors can therefore apply profitabletrading rules to earn supernormal profits. Under the circumstances, the Indian stockmarket seems to be bearing the underlying strain not currently visible at thesurface. The implementation of profitable trading strategy may at any point of timegenerate over-enthused investment and this, if coupled with market overreaction,may result in a destabilized system. A point also to be noted here is the heavyinvestment and selling attitude of FII‟s causing a major hurdle in stabilization ofmarket sentiments.
    • 4.Name of the Article: FDI v/s FII. Which is good for India & stockmarket?Equity Desk, 25thoct 2008Author: - MuralimohanThere is too much liquidity across the globe that rich people looking for marketsthat are growing like US.Too much liquidity of those consumer economies ischasing Indian stocks. Their money is welcomed in India but the risk ofwithdrawal comes along with that. In the last five years, $45 billion investment hascome to the Indian markets from FII. Today, the market value of their moneyshould be around $120 billion.Japan has invested $5 billion in the Indian market. These days, as soon as newpublic issue opens, it gets filled up within the first few hours. Because Japan hassaved money for years. Investors there get zero or negligible interest. At someplaces, bank charges them for keeping deposits. In our banks, on the contrary, weget four per cent, at least. The Japanese are tired of dead investment. So they arelooking out. In the last one year, the Japanese have got return of 48 per cent in theIndian stock exchange. They had started with $1 billion. Now it has reached $5billion.Politics can make India to go against realizing its dream. If something happens tothis government and there is instability at the Centre, it can affect our growth.Example In 2004, between May 13 and 18, the stock index plunged when SoniaGandhi delayed her decision to announce (Dr. Manmohan Singhs name as theprime minister).China has not grown with the help of FII investment because China has grownwith the help of bank money, or peoples money. China has got four prime banksowned by the government and non-performing assets is approximately above 30per cent. They have issued loans to whoever came to the bank. To buildinfrastructure, they were fast to disburse money.
    • FDI is not needed in India because we are getting more money from the FIIs andneed infrastructure to manage incoming FDI. We are getting around $12 billionfrom them (FII). India gets around FDI worth $5 billion; China gets around $50billion. In India, when FIIs pump in $12 billion, it means a few Indians have soldtheir shares toFIIs, so that free cash gets invested somewhere within India byIndians. That money goes into land, buying of new stocks and into banks. MittalSteel, Reliance, Tata, Vedanta and other Indian companies are going to invest morethan Rs 2 lakh crore in the coming years.Thus, FDI is not a big issue because Indians are in now a position to raise bigmoney.
    • 5.Name of the Article: Analytical Study of Impact of FII on IndianStock Market with Special Reference to BSE SENSEXAuthor: Vikram K. Joshi & Miss RichaSaxenaThe article on “Analytical Study of Impact of FII on Indian Stock Market withSpecial Reference to BSE SENSEX” focusses on the impact of variation in FII onSENSEX and how FIIs are allowed to enter in India only through stock exchangeseither in the form of equity or debt which makes an impact on the rise or fall ofSENSEX as FIIs are allowed to be purchased or sold daily. The volatility in thestock markets are caused mainly by the daily transactions of FIIs and also has astrong impact on the various macro- economic variables and the economy as awhole.Despite a shortage of investments in under developed countries because of lowlevel of income and capital accumulation there has been a drastic improvement inindustrialization and economic development. Shortage of domestic demand andother reasons lead to increase in foreign capital inflows. FII inflows plays aprominent role in the improvement of liquidity of stock prices of both NSE andBSE. A strong correlation exists between FIIs investments and marketcapitalization, FIIs investments and BSE & NSE indices. High level of FII inflowsare influences by volatility and liquidity which we were mainly determined orcapital market prices by FII investments.The investment limit of registered FIIs or sub-accounts in primary or secondarymarkets under Portfolio Investment Scheme(PIS) is subject to a ceiling of 24% ofissued share capital of a company. The limit can be extended to 49% per sectoralcap if the general body of the company approves it.
    • The need for the foreign capital/ foreign investments arises due to the followingreasons: Development of basic infrastructure, Rapid industrialization To undertake the initial risk Global imperatives Competitive advantage To remove the technological gapForeign investors are initiated in Indian Capital markets from 1991 and under thenew industrial policy of the government there has been measures to attract foreigncapital. The no. of registered FIIs are increasing every year from 2006 and in thepast four years there has been more than $41 trillion worth of FII funds invested inIndia and the increased by more than 100%. FIIs have earmarked their presenceirrespective of the situation in Indian Stock markets but also there has been adecline in FIIs inflows recently i.e., during 2010-11 because of the economicposition such as increasing inflation, rupee depreciation etc.,
    • Source: www.sebi.gov.inBombay Stock Exchange (BSE):The Bombay Stock Exchange Ltd. (BSE) was originally established in 1875 and isthe oldest exchange in Asia and in the year 1986 it came up with an index knownas SENSEX . Approximately more than 4500 companies are traded in the indexand is one of the largest exchange in the world.Bombay Stock Exchange Sensitive Index:A value - weighted stock market index, which tracks the performance of the 30largest stocks on the Bombay Stock Exchange and the index comprises of one-fifthof the market capitalization of the entire stock exchange.
    • BSE is a de-mutualized and was registered as a corporate entity under theprovisions of the Companies Act, 1956.Data collection:The data is collected for values of Sensex, FII in terms of totalinvestment(Equity+Debt) & FII in terms of total turnover( Purchase & sales ofequity& debt)
    • Statistical tools used:  Hypothesis t-test f-test  Regression
    • Data analysis:The regression equation indicates that as FII increases by 1 unit, Sensex decreasesby 0.1707 units. Sensex is an index measured in hundreds, the co-efficient ofSensex implies that Sensex decreases by 100 for every Rs.17.07 FII turnoverincrease. The t-test statistics indicates there is a relationship between Sensex & FIIand f-test statistics indicates that the variation between FII & Sensex is significant.Findings:  The relationship between Sensex and FII total turnover is tested and there exists a relationship between the two. Reason for such trend in Sensex due to FII is that on account of high purchase and sales figures of FII.  The relationship between Sensex and FII net investment is tested and the net investment was very low causing the SENSEX to remain relatively stable and the variation between FII and SENSEX was not very significant.Conclusion:  FII turnover is relatively a weak measure of Sensex as it explains 32% influence on the fluctuation in the Sensex and is unable to determine 68% influence of the other extraneous variables.  The short and long term investors were not very optimistic about the macroeconomic conditions of India when there was a comparison between SENSEX vs. Total turnover & SENSEX vs.Net investment. European countries invested huge amount of money in the form of FII and also
    • withdrew in almostsame proportion immediately from the Indian capitalmarket. This resulted into the strong impact of total turnover on SENSEX.
    • 6.Name of the Article: Impact of FIIs on Stock Market InstabilitySource: shodhganga.inflibnet.ac.inThe main objective of the article is to measure the impact of foreign investorsportfolio investments on volatility of Indian stock market.Domestic, external economic conditions and short run expectations also known asmarket sentiment motivate the FIIs investments and speculation, high mobility canincrease the volatility of stock return in emerging markets. The Price or returnindices in equity markets are frequently subject to extended deviations fromfundamental values with subsequent reversals and that these swings are in largepart due to the influence of highly mobile foreign capital.Volatility has adverse implications to the effective allocation of resources andinvestment and make investors averse to hold stock because of uncertainty in turndemand higher premium. A high risk premium implies a high cost of capital, lowphysical investment and great volatility increases the “option to wait” which resultsin delaying investment.Scope of the study:The scope of the study focusses on attraction for FIIs in recent years where theemerging markets of many developing countries have been attracting large privatecapital inflows in recent years. There has been an increasing importance of foreignportfolio investments(FPI) which is a buying and selling of stocks on a daily basis.Post economic reforms there has been a significant improvement relating to theflow of foreign capital. A major change in capital flows especially in Foreigninstitutional investors(FIIs) investments took place after the changes in trade andindustrial policy.
    • Statistical tools used: ARCH and GARCH models, Fisher F-testData AnalysisARCH and GARCH models were used for the time varying nature of the volatility.Return and volatility increase much better compared to pre-liberalization periodand the volatility has declined in indian stock market after year 2000 as the secondgeneration reforms brought much better things in the capital markets as riskhas decreased but stock return has went up during the period. The variation inIndian stock market returns reduced considerably after introduction of foreigninstitutional investors.There has been a positive and significant impact on the share market volatilitythrough coefficient of GARCH whereas its impact is higher in comparison toARCH which implies that the past volatility affect is more on the future volatility.The impact of the dummy variable, which is net investment by foreign institutionalinvestors is negative.
    • The total of ARCH and GARCH model in coefficient is less than 1 which shows itis perfect.Impact of FIIs on stock market instability:A correlation exists between the FIIs inflows and stock returns. And recent yearsthe foreign financial inflows have been increasing and along with this the otherparameters of the economy lead SENSEX crosses 20000- mark in Dec 2007. Theprofits of the firm lead to the high return on investment including other factorssuch as favourable tax laws and relaxation on the caps of various kinds ofinvestments.There were many developments like compulsory rolling settlement,dematerialization of securities, emphasis on free trading practices and strictcorporate governance practices adopted by the SEBI etc. took place in the marketleading to bringing efficiency and reduction in the volatility in the market. Thereduction in the volatility of the market is linked to introduction of FIIs is reallyambiguous.FII investments behavior during some events affect the investments of foreigninstitutional investors for short term. For example East Asian Crisis, Stock marketscam 2001, Black Monday 2004 FIIs were net sellers and there was a decline inBSE Sensex, there was a net outgo of capital but there used to be a positive inflowduring the following months.Conclusion:FIIs tend to support stock market purely to ensure stability and safety of their owninvestments and supports the broad base hypotheses which also suggests that FIIsshould add liquidity to the local market and reduce volatility.
    • 7.Name of the Article: GAAR and its ImplicationsArticle from CARE Ratings on May 12th 2012Mauritius has been used as a holding company jurisdiction for making investmentsin India, with the investors in the holding companies being tax residents of othercountries. Because of Article 13 of the Indo-Mauritian tax treaty, which providesfor attribution of taxation rights among the two countries for capital gains? Article13 (4) provides that gains derived by a resident of a contracting State shall betaxable only in that State and for other DTAA countries. This has made Mauritius an attractive route for the purpose of investment in India.A Foreign enterprise can set up a subsidiary in Mauritius, and use it to derivecapital gains from acquisition and sale of shares. Although India follows the sourcerule for taxation of non-residents, which makes this transaction taxable under theIncome Tax Act, 1961, Article 13(4) of the DTAA gives Mauritius the right to taxthis transaction. Since such gains are exempt from tax in Mauritius, the transactionbecomes completely tax exempt, resulting in double non-taxation. As a result,much of the Mauritian investment into India is actually round tripping by Indiancompanies setting up a Mauritian entity to avoid capital gains tax in India.Mauritius mostly depend on import of capital so when India tried to renegotiateand on DTAA, not able to achieve that. So, more than 30 countries have introducedGAAR provisions in their respective tax codes to check evasion.GAAR has been in force in Australia (1981), Canada (1988), Singapore (1988),South Africa (2006) and China (2008) according to a study compiled by Deloitte.UK is considering it in 2013 while USA is also working towards it.The Budget sought to make an amendment to section 90 and Section 90A of theincome tax law, a clause which says that just by “submission of a tax ResidencyCertificate containing prescribed particulars” a firm or an individual which carrieson some real business in a tax haven cannot claim the benefits of a tax avoidancetreaty signed with that country.Net FIIs have been illustrating an inflow since December, 2011. Net FII inflowspeaked to $7 bn in February, 2012. However, foreign institutional investments
    • have declined post the announcement of GAAR on 16th March, 2012. March saw anet inflow of mere $0.4 bn while April registered an outflow of $8 bn. This clearlyindicates that the adoption of GAAR by India was not found to be favorable byforeign investors.GAAR will now be applicable from April 1st , 2013. The rupee should be drivenmore by fundamentals of which FII inflows are an integral part. In FY11, FIIs werearound 72% of the current account deficit and 56% of net capital inflows. In thefirst 9 months of FY12, however, as the current account deficit widened and theFII flows slowed down, the coverage level was just 11%. Also FIIs contributed tojust 12.5% of net capital flows. Therefore, any reduction in these inflows couldimpact the fundamentals.Since government have clarified over may issues on GAAR implementation, FIIare seemed to be coming back. Economic activities are expected to pick up withthe Indian economy seen to grow at around 7-7.2% during 2012-13. Inflation isalso believed to moderate and hover around 6% by the end of March 2013.Therefore, it can be deduced by March 2013 when the GAAR is likely to be re-implemented the investor sentiment and confidence in the Indian economy wouldhave improved.