1. THESIS ON :
STUDY ON THE IMPACT OF INDIAN FINANCIAL MARKET
POLICIES ON FII INVESTMENT
PRESENTED BY:
KINJAL JAIN
HELI DESAI
2. Content:
Introduction
Objective of study
FII And Regulatory Framework
Research methodology
Finding and result discussion
Conclusion
Recommendations
Limitations
References
4. Objectives of Study
To gain knowledge of stock market.
To find out the relationship between FIIs investment and Indian
financial market.
Influence of FII in decision making of Indian investors.
To know the volatility of BSE NSE due to FIIs
5.
6. FIIs are Foreign Institutional Investors. A term
that is commonly found whenever there’s a
discussion on stock markets. FIIs are entities
(banks, insurance companies, mutual funds
etc) registered in a country other than in
which they are investing. For e.g. a US
Mutual Fund which invests in the Indian
Stock Market. FIIs usually pool large sums of
money and invest those in securities; real
property and other investment assets, the
inflow or outflow of money by FIIs affect the
stock market movement significantly.
7. FII’s
Pros
leads to increase in demands on
companies to become more
transparent and more authentic.
Increase in more trade
opportunities because of this class
investment.
Inflow of foreign capital.
Becomes key indicator for healthy
market.
Professionalism increases .
Cons
increases volatility in market &
price fluctuations.
Firms losing domestic control.
FII flows leading to appreciation of
the currency may lead to the
exports industry becoming
uncompetitive
8. Evolution of FIIs in India:
14th September,1992 coming in of
FII in India.
The government guidelines of 1992
also provided the eligibility
conditions for registration, such as
track record, professional
competence, financial soundness,
and other relevant criteria,
including registration with a
regulatory organization in the
home country and incorporated in
1995.
2000 FEMA came into force after
that FII were allowed to invest in all
securities.
11. Regulatory Framework
Entities eligible to invest under FII route As FII:
An institution established or incorporated outside India as a pension fund, mutual fund,
investment trust, insurance company, or reinsurance company.
An international or multilateral organization or an agency thereof, or a foreign
governmental agency, sovereign wealth fund, or a foreign central bank.
An asset management company, investment manager or advisor, bank, or
institutional portfolio manager that is established or incorporated outside India and
proposes to make investments in India on behalf of broad-based funds and its
proprietary funds, if any;
A trustee of a trust established outside India who proposes to make investments in
India on behalf of broad-based funds and its proprietary funds, if any;
University funds, endowments, foundations, charitable trusts, or charitable societies.
Broad-based fund means a fund that is established or incorporated outside India,
which has at least 20 investors with no single individual investor holding more than 49
percent of the shares or units of the fund. If the broad-based fund has institutional
investor(s), then it is not necessary for the fund to have 20 investors. Further, if the
broad-based fund has an institutional investor who holds more than 49 percent of the
shares or units in the fund, then the institutional investor must itself be a broad-based
fund.
12. Sub-Account: - refers to any person who is resident outside India on
whose behalf investments are proposed to be made in India by a
foreign institutional investor, and who is registered as a sub-account
under the SEBI (FII) Regulations, 1995.
The applicant for a sub-account can fall into any of the following
categories:
Broad-based fund or portfolio that is broad-based, incorporated, or
established outside India.
Proprietary fund of a registered foreign institutional investor.
Foreign individual who has a net worth of not less than US $ 50 million,
holds a valid passport of a foreign country for a period of at least five
years, holds a certificate of good standing from a bank, and is the
client of the FII for a period of at least three years
Foreign corporate that has its securities listed on a stock exchange
outside India, having an asset base of not less than US $ 2 billion and
having an average net profit of not less than US $ 50 million during the
three financial years preceding the date of application. A non-resident
Indian shall not be eligible to invest as a sub-account.
13. Investment Restrictions
An FII can invest only in the following:
Securities in the primary and secondary markets including shares, debentures,
and warrants of companies, unlisted, listed, or to be listed on a recognized stock
exchange in India
Units of schemes floated by domestic mutual funds including the Unit Trust of
India, whether listed or not listed on a recognized stock exchange, or units of
schemes floated by a Collective Investment Scheme
Dated government securities
Derivatives traded on a recognized stock exchange
Commercial papers
Security receipts
Indian Depository Receipts
14. Securities in Which FII Commonly
Trade In
DEBT SECUTRIES
EQUITY
OFFSHORE DERIVATIVE INSTRUMENTS (ODIS)
I. P-Notes
II. F&O
15. Debt
Any debt instrument that can be
bought or sold between two
parties and has basic terms
defined, such as notional amount
(amount borrowed), interest rate
and maturity/renewal date. Debt
securities include government
bonds, corporate bonds, CDs,
municipal bonds, preferred stock,
collateralized securities (such as
CDOs, CMOs, GNMAs) and zero-
coupon securities.
16. Equity
A stock or any other security
representing an ownership interest. On
company's balance sheet, the
amount of the funds contributed by
the owners (the stockholders) plus the
retained earnings (or losses). Also
referred to as "shareholders' equity".
17. ODIs
Participatory notes are the most common
type of ODIs. The PNs are instruments used by
foreign funds that are not registered in SEBI in
the country for trading in the domestic
market.
ODIs means any
instrument issued outside
India by a FII against
underlying securities held
by it that are listed or
proposed to be listed on
any recognized stock
exchange in India.
18. Futures - A futures contract is a type
of derivative instrument, or financial
contract, in which two parties agree
to transact a set of financial
instruments or physical commodities
for future delivery at a particular
price. If you buy a futures contract,
you are basically agreeing to buy
something that a seller has not yet
produced for a set price.
Options-A financial derivative that
represents a contract sold by one
party (option writer) to another party
(option holder). The contract offers
the buyer the right, but not the
obligation, to buy (call) or sell (put) a
security or other financial asset at an
agreed-upon price (the strike price)
during a certain period of time or on
a specific date (exercise date)
ODIs Continued..
19. FII Investment Route
Introduction to GAAR
It was proposed by the then finance minister, introduced to chapter X-A to
the income tax Act 1961. It directly targets the tax evaders from routing
investments through tax havens like Mauritius, Luxemburg, Switzerland.
In India Law, GAAR is an acronym for General Anti-Avoidance Rules which
are framed to minimize tax avoidance, for example by siphoning of profits
to Tax Haven. GAAR could be termed as a general set of rules enacted limit
tax avoidance. It was proposed by the Union Budget 2012-13.
20. Research Methodology
The scope of the research comprises of information derived from
secondary data from various sources. The various information and
statistics were derived from the different sources
The study period covered under this is for the years 2004-2013 and in
some cases on availability of data as India is still forming norms for
financial markets.
The type of research is Causality research . It is descriptive report.
The analysis has been made by, correlating the FII purchases, sales
and net investment with equity market returns to identify whether a
relation exists between them
Use of excel ,word , internet and PowerPoint has been done.
22. FII equity
-60,000
-40,000
-20,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
INRcrores
years
Equity
From the year 2005 and
onwards low investment due to
recession in US and European
countries.
A major downfall in the year
2008 due to the recession in
euro zone and due to that
India had to change its policies
causing market crash down.
Due to fall in equity a
complete opposite pattern
was seen in debt securities and
people started investing in it
considering to be more safe
and trustworthy.
23. FII Debt
Worst performance in
2013 as foreign investors
pulled out more money
than invested.
The behind this was an
announcement made by
Ben Bemanke regarding
US federal going for
tapering QE by end of the
year leading to fall in
rupee and arbitration.
Rupee hit the record of
lowest to 68.-60,000
-40,000
-20,000
0
20,000
40,000
60,000
2005
2006
2007
2008
2009
2010
2011
2012
2013
INRcrores
years
Debt
24. P-notes
The rules related to pnotes
have been strengthened by
the regulatory body.
Initially most of the foreign
investment was through
pnotes which was
unaccounted.
Now the regulatory has
divided into 3 categories
based on the risk to keep a
narrow check.-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
incrores
PNotes Value
25. Increase in their investment pattern
and there is decrease in banks by
0.2,foreign cooperates by
0.7,institutional portfolio manager by
0.4,insurance by 0.1,investment
manager by0.3 and
other(unspecified ) by 1.
The pnotes policy has become
supportive for sectors like pension
and welfare funds.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Change In Investment Segment
Due To Change In P-notes Policy.
2013 2012
26. The main reason for rise is
higher returns.
The FII also has the freedom
of not to buy stocks in heavy
cash.
It was low during 2008 due
to the economic crisis.
It gradually picked up as the
economy revived and was
at peak during 2011.
0
100000
200000
300000
400000
500000
600000
700000
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
F&O Investment Pattern
Buy Amount(Rs. Cr.) Sell Amount(RS. cr.)
27. The stock indices show
that it is at high when FII
investment is high and
goes down with fall in
investment.
The movement of both of
these are closely
correlated.
The major downfall was in
year 2008 but now over
past few years it has
increased pulling the
market up.
0
1000
2000
3000
4000
5000
6000
7000
-100,000
-50,000
0
50,000
100,000
150,000
200,000
trend of market
total fii investment in Debt and eqity (in
cr.)(LHS)
stock exchange trend(RHS)
28. Until 2012 the
investment brought in
India was mainly by
Mauritius but in 2013
US has topped the list.
It has been suspected
that it must be
because of the
Double tax avoidance
agreement policy
changes.
Total asset 14.65 lakhs
crore which was 13.35
lakhs crore in 2012.
Total equity market is
5.13 lakhs crores and
total debt market is
78000 lakhs crore.
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
Graph 8 Country investent inflow
2013
29. FII investment in Indian sector (in per.)
Sectors 2012 2013
Automobiles & Auto Components 5 5
Total Financial Services 29 24
Capital Goods 6 5
Oil & Gas 6 6
Pharmaceuticals & Biotechnology 5 6
Software & Services 9 15
Others 40 38
For automobile sector and oil & gas sector there
has been no change.
Downfall by 1% in financial service and
pharmaceuticals sector and major fall in software
service.
Increase in 1% in capital and other undefined
sectors.
30. The data shown is of past 3
years.
Here most attractive companies
by FII are listed.
The most preferred being the
other company not from
banking sector and which may
fall in infrastructure sector the
second best is Tata consultancy
service.0
5
10
15
20
25
30
35
40
45
50
Top FIIs Attracting
Companies in India
31.
32. Conclusions
Global market and political influence, Changes in Rules and
Regulation and Internal political scenario
Risk
Inflation
Interest rates
Sensitivity towards events/news
Equity Returns
Balance of payment
Fluctuating Rupee
Stock Market
33. Recommendations
There are following policy implications, which come forward from this analysis.
India should move to influence both the size and composition of capital flows.
India should focus on strengthening their banking system rather than promoting
financial markets.
Banks can provide the surest vehicle for promoting long-term growth and
industrialization. Since financial markets in India are here to stay, Government
should try to shield the real economy from their queries.
The new code which has been brought that categorizes the securities is not up
to the mark and the capital flow has reduced due to this so the government
should either make necessary changes or remove the new codes and retrieve
the old ones.
Government should set a minimum limit as well as maximum limit, within which FII
invest in India , in order to avoid volatility in Indian stock market ( Sensex & nifty)
Implementation of act is must & imperative in order to eschew from seasonal
variation, Rules & regulation are made, but follow up is not there.
34. Limitations
The new policy changes for GAAR were not available and so it
restricted our analysis and its counter effect on FII.
Due to lack of information and non availability of past data for
various factors that involved FII investment further analysis could not
be done and it compeled us to restrict our findings and analysis.
Details of PN, equity, and debt and derivatives data compilation
were changed and which caused hindrance while doing analysis.
The data available for the entire study is purely secondary data and
so the actual accuracy cannot be measured
35. References
Web links
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