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Foreign Institutional Investor project 2013-14

This document is a grand project report submitted by Mr. Vineeth V. Poliyath to Gujarat Technological University for his MBA degree. The report studies the influence of foreign institutional investors on the BSE stock market in India from 2002-2012. It includes an introduction, literature review, research methodology, data analysis and interpretation, findings, conclusions and suggestions.

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A GRAND PROJECT REPORT ON A STUDY OF FII INFLUENCE ON BSE STOCK MARKET. BY MR. VINEETH V. POLIYATH ENROLLMENT NO: 107310592005 BATCH: 2010-12 UNDER THE GUIDANCE OF Dr. PRANAV RAYTHATHA (Internal) Associate Professor Laxmi Institute of Management Sarigam SUBMITTED TO GUJARAT TECHNOLOGICAL UNIVESITY, AHMEDABAD FOR THE AWARD OF THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION THROUGH LAXMI VIDYAPEETH`S LAXMI INSTITUTE OF MANAGEMENT, SARIGAM College Code: 731 Branch Code: 92
Subject code: 84001 – Comprehensive Project Laxmi Institute of Management, Page 2
DECLARATION We hereby declare that the work incorporated in this grand project report entitled ““FII’s INFLUENCE ON BSE STOCK MARKET OVER THE PERIOD 2002-2012” is the outcome of original study undertaken by me under the guidance of Mr. Pranav Raythatha (Internal) Associate Professor, Laxmi Institute of Management, Sarigam during 14 th January 2013 to 30th April 2013. This project report has not been submitted earlier to any other University or Institution for the award of any Degree or Diploma. Mr. VINEETH V. POLIYATH 107310592005 BATCH: 2010-12 Laxmi Institute of Management, Page 3
CERTIFICATE This is to certify that the content of this grand project report entitled “FII’s INFLUENCE ON BSE STOCK MARKET OVER THE PERIOD 2002-2012 AT ARCADIA, VAPI””by Mr.Vineeth V .Poliyath, Enrollment No. 107310592005 submitted to Gujarat Technological University, Ahmadabad for the Award of Master of Business Administration is original research work carried out by him under my supervision during 14th January 2012 to 30th May 2012. On the basis of the declaration made by him I recommend this project report for the evaluation. This report has not been submitted either partly or fully to any other University or Institute for award of any degree or diploma. MR. PRANAV RAYTHATHA Project Guide Associate Professor Laxmi Institute of Management, Sarigam Laxmi Institute of Management, Page 4
INDEX SR. NO. 1 2 3 4 5 6 PARTICULAR GENERAL INFORMATION OVERVIEW OF INDIAN ECONOMY THEORITICAL FRAMEWORK STOCK EXCHANGE - BSE & NSE FOREIGN INSTITUTIONAL INVESTORS PRIMARY DATA INTRODUCTION OF THE STUDY LITERATURE REVIEW BACKGROUND OF THE STUDY RESEARCH METHODOLOGY OBJECTIVE OF THE STUDY SCOPE OF THE STUDY METHODOLOGY OF THE STUDY LIMITATION DATA ANALYSIS & INTERPRETATION PERFORMANCE OF Sensex FII'S NET INVESTMENT V/S Sensex RETURN NUMBER OF FII'S REGISTERED V/S Sensex RETURN COEFFICIENT OF CORELATION & REGRESSION ANALYSIS BETWEEN FII'S & Sensex RETURN TREND ANALYSIS OF FII'S INVESTMENT FINDING, CONCLUSION & SUGGESTION Laxmi Institute of Management, Page 5 PAGE NO.
LIST OF TABLES PAGE NO TABLE NO TABLE 4.1 LIST OF BSE SENSEX COMPANIES 4.2 INTERNATIONAL STOCK EXCHANGES 5.1 PERFORMANCE OF SENSEX 1991-2010 5.2 SENSEX RETURN FROM 2000-2010 5.3 FII’s NET INFLOW FROM 2000-2010 5.4 FII’s NET INFLOW V/S SENSEX RETURN 5.5 SENSEX RETURN 2010 5.6 FII NET INFLOW 5.7 FII INFLOW V/S SENSEX RETURN 5.8 NUMBER OF FII VS SENSEX RETURN 5.9 SENSEX FLUCTUATION 5.10 CORRELATION 5.11 CORRELATION 2010 5.12 CURRENT TREND OF FII’s INVESTMENT 5. 13 ANALYSIS OF TREND 5.14 TREND ANALYSIS-FUTURE Laxmi Institute of Management, Page 6
LIST OF CHARTS CHART NO CHART NAME PAGE NO 5.1 SENSEX 1991-2010 5.2 SENSEX RETURN 2000-10 5.3 FII NET INFLOW 2000-10 5.4 FII INFLOW 2000-2010 V/S SENSEX RETURN 5.5 SENSEX RETURN 2010 5.6 FII NET INFLOW 2010 5.7 SENSEX RFTURN V/S NET INFLOW 2010 5.8 NUMBER OF FII VS SENSEX RETURN 5.9 TREND ANALYSIS Laxmi Institute of Management, Page 7
ACKNOWLEDGEMENT The satiation and euphonies that accompany the success completion of a task would be incomplete without a mention of people who made it possible. So, with immense gratitude, I acknowledge all those, whose guidance and encouragement served as a beacon light and crowned my effort with success. I have taken efforts in this grand project. However, it would not have been possible without the kind support and help of many individuals and organizations. I would like to extend my sincere thanks to all of them. We are highly indebted to Mr. Pranav Raythatha, Associate Professer of Laxmi Institute of Management, Sarigam for his guidance, constant help and for providing necessary information regarding the stock market operation and various industry sectors. I express my thanks for his encouragement which help me in completion of this project. I would like to express my special gratitude to my parents who gave us continuous support during the grand project work. Mr Vineeth Poliyath 107310592005 BATCH: 2010-12 Laxmi Institute of Management, Page 8
EXECUTIVE SUMMARY The project deals with the “Impact of Foreign Institutional Investors on Indian Stock Market”. This research project studies the relationship between FIIs investment and stock indices. For this purpose India’s major index i.e. BSE Sensex is selected. This index would be used for to represent the picture of India’s stock markets. So this project reveals the impact of FII on the Indian capital market. There may be many other factors on which a stock index may depend i.e. Government policies, budgets, bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar exchange rate etc. But for this study I have selected only one independent variable i.e. FII. This study uses the concept of correlation, regression and hypothesis to study the relationship between FII and stock index. The FII started investing in Indian capital market from year 1991 when the Indian economy was opened up in the same year. Their investments include equity only. Laxmi Institute of Management, Page 9
CHAPTER-I GENERNAL INFORMATION Laxmi Institute of Management, Page 10
OVERVIEW OF INDIAN ECONOMY The Indian economy has continuously recorded high growth rates and has become an attractive destination for investments, according to Ms Pratibha Patil, the Indian President. "India's growth offers many opportunities for mutually beneficial cooperation," added Ms Patil. "Today India is among the most attractive destinations globally, for investments and business and FDI had increased over the last few years," said Ms Patil. The Indian economy is expected to grow at around 7.5 per cent, according to Dr Manmohan Singh, the Indian Prime Minister. The PM acknowledged Asia's emerging economies were "growing well" and were, "in fact, contributing to the recovery of the world economy". The overall growth of gross domestic product (GDP) at factor cost at constant prices, as per Revised Estimates, was 8.5 per cent in 2010-11 representing an increase from the revised growth of 8 per cent during 2009-10, according to the monthly economic report released for the month of September 2011 by the Ministry of Finance. Overall growth in the Index of Industrial Production (IIP) was 4.1 per cent during August 2011. The eight core Infrastructure industries grew by 3.5 per cent in August 2011 and during April-August 2011-12, these sectors increased by 5.3 per cent. In addition, exports and imports in terms of US dollar increased by 44.3 per cent 41.8 per cent respectively, during August 2011. Over the next two years India could attract foreign direct investment (FDI) worth US$ 80 billion, according to a research report by Morgan Stanley. India has received US$ 48 billion FDI in the last two years. Considering the pace of FDI growth in India, KPMG officials believe that FDI in 2011-12 might cross US$ 35 billion mark. Laxmi Institute of Management, Page 11
In addition, India has entered the club of top 20 exporters of goods and reclaimed its position among top 10 services exporters in 2010. India's goods exports rose by 31 per cent in 2010, helping it to improve its world ranking moving up two places to 20 from 22 in 2009. Laxmi Institute of Management, Page 12
The Economic Scenario: • A report titled, 'World Investment Prospects Survey 2009-2012' by the United Nations Conference on Trade and Development (UNCTAD) has ranked India at the second place in global foreign direct investments (FDI) in 2010 and expects India to remain among the top five attractive destinations for international investors during 2010-12. • India Inc announced 177 mergers and acquisitions (M&A) deals worth US$ 26.8 billion in the first nine months of 2011. For the quarter July-September 2011, inbound deals worth US$ 7.32 billion were registered as against the deals worth US$ 2.65 billion in the previous quarter. Foreign institutional investors (FIIs) have invested more than Rs 41,000 crore (US$ 7.81 billion) in government papers and Rs 68,000 crore (US$ 12.95 billion) in corporate bonds as on October 31, 2011 • The latest available data from the Reserve Bank of India show a 77 per cent jump in the FDI in the first half of the current financial year (AprilSeptember), compared to what was US$ 19.5 billion during the same period a year ago • The total amount of FDI equity inflows during financial year 2011-12 from April 2011 to September 2011 stood at US$ 19.14 billion aggregating to 74 per cent growth over last year • India's foreign exchange (Forex) reserves have increased by US$ 2 billion to US$ 320 billion for the week ended October 28, 2011, on account of revaluation of foreign currency assets, according to the weekly statistical bulletin released by the Reserve Bank of India (RBI) Laxmi Institute of Management, Page 13
• The Government has approved fund raising worth Rs 60,950 crore (US$ 11.61billion) by companies through external commercial borrowings (ECB) or foreign currency convertible bonds (FCCB) for infrastructure projects in the financial years 2009-2011 • India's merchandise exports have registered an increase of nearly 82 per cent during July 2011 from a year ago to touch US$ 29.3 billion, according to a release by the Ministry of Commerce and Industry. Exports during April-July 2011 reached US$ 108.3 billion, up 54 per cent over the same period a year ago, according to Mr. Rahul Khullar, Commerce Secretary. Exports in the referred period increased on back of demand for engineering and petroleum products, gems and jewellery and readymade garments • Private equity (PE) investments in India stood at US$ 6.14 billion in value terms, while the number of deals increased by 33 per cent to 195, during January-June 2011, according to data compiled by Chennai-based Venture Intelligence. The rise in the value of the deals so far (June 2011) recorded a growth of 52 per cent, as compared to US$ 4.04 billion raised last year • The Indian metals and minerals sector has received PE investments worth US$ 650 million in the first half of 2011, according to estimates by VC Edge. The metal making industry has attracted PE players; in addition the mining assets are also a major draw due to the sharp demand for ownership of raw materials • India currently holds the 12th position in Asia and 68th position in the overall list world's most attractive tourist destinations, as per the Travel and Tourism Competitiveness Report 2011 by the World Economic Forum (WEF). A study conducted by global hospitality services firm, HVS, to measure marketing effectiveness on Internet puts Karnataka Tourism's Web site in the sixth position in India Laxmi Institute of Management, Page 14
• The wind energy sector has attracted foreign direct investment (FDI) worth Rs 1,510 crore (US$ 287.62 million) over the past three years. In the renewable energy sector, wind energy has emerged as the fastest growing category, according to Dr Farooq Abdullah, Union Minister for New and Renewable Energy Furthermore, the Indian Railways has generated Rs 37,392.88 crore (US$ 7.12 billion) of revenue earnings from commodity-wise freight traffic during AprilOctober 2011 as compared to Rs 34,337.11 crore (US$ 6.54 billion) during the corresponding period last year, registering an increase of 8.90 per cent. Railways carried 536.92 million tons (MT) of commodity-wise freight traffic during AprilOctober 2011 as compared to 516.89 MT carried during the corresponding period last year, registering an increase of 3.88 per cent. Laxmi Institute of Management, Page 15
Growth Potential Story: • India's exports grew by 36.3 per cent in September 2011, demonstrating impressive growth. Exports stood at US$ 24.8 billion compared to US$ 18.2 billion in the same period last year, while imports grew by 17.2 per cent to record US$ 34.5 billion. • Exports from special economic zones (SEZs) during April-September 2011 increased by 26.2 per cent to Rs 176,479.69 crore (US$ 33.62 billion), as per a statement by the Export Promotion Council for EOUs and SEZs (EPCES). • Andhra Pradesh (AP) with 75 notified special economic zones (SEZs), which is the highest number of SEZs in any State in India, has attracted investment of approximately Rs 15,000 crore (US$ 2.86 billion) • The July-September 2011 quarter observed an increase in foreign institutional investor (FII) stakes in major automakers as compared to the previous quarter of 2011 • Information technology (IT) spending in India by enterprises will rise by 9.1 per cent in 2012, according to a report by research firm Gartner. IT spending in India is projected to touch US$ 79.8 billion in 2012 as compared to US$ 73.1 billion in 2011. The telecommunications market is the largest IT segment in India with IT spending forecast to reach US$ 54.7 billion in 2012, followed by the IT services market with spending of US$ 11.1 billion. The computing hardware market in India is projected to reach US$ 10.7 billion in 2012, while software spending will total to US$ 3.2 billion, reported Gartner Laxmi Institute of Management, Page 16
• The Government plans to set up an Rs 2,500 crore (US$ 476.19 million) development fund for the auto component sector. The industry, which aims to almost triple its size to US$ 115 billion by 2020, envisages annual capital investment of up to US$ 3 billion • India is the 9th or 10th largest car maker in the world, but given its very ambitious production plans, in the next five to ten years it will jump to the third or fourth spot, according to Diane H Gulyas, President, DuPont Performance Polymers. The firm's Innovation Centre will focus on automobile trends working towards making vehicles faster, lighter, safer and fuel efficient • The Rs 15,000 crore (US$ 2.86 billion) Indian forging industry is poised to grow over 20 per cent per year and see investments of about US$ 3 billion by 2015 for capacity expansion, according to the Association of Indian Forging Industry. • A public-private partnership (PPP) fund worth Rs 5,000 crore (US$ 952.38 million) is being set up to support research and development efforts-especially in the field of vaccines, drugs and pharmaceuticals, supercomputing, solar energy and electronic hardware-as well as commercialization of products and services, according to Mr. Ashwani Kumar, Minister of State for Science & Technology. • In addition, the Indian banking sector is poised to become the world's thirdlargest in terms of assets over the next 14 years—with its assets poised to touch US$ 28,500 billion by 2025—according to a report titled ‘Being fivestar in productivity — Roadmap for excellence in Indian banking', prepared for the Indian Banks' Association (IBA) by The Boston Consultancy Group (BCG), IBA and an industry body. Laxmi Institute of Management, Page 17
• Investment in logistics sector in India is projected to grow annually at 10 per cent. India's logistics market achieved revenues of US$ 82.1 billion in 2010 and is expected to reach revenue worth US$ 90 billion in 2011. The logistics industry forecasts to generate revenues worth US$ 200 billion by 2020, as per Eredene Capital PLC's 2010-11 annual report. • India's engineering research and development (ER&D) providers is estimated to capture about 40 per cent share of global offshore revenues in 11 key verticals by 2020, according to a new report titled 'The Futures Report 2011', by Global Futures and Foresight (GFF). • India's power sector will generate revenue of Rs 1,300,000 crore (US$ 247.62 billion) during the Twelfth Five Year Plan (2012-17), as per Mr. P Uma Shankar, Secretary, Ministry of Power. The plan is to generate 17,000 MW power during the referred period • The food processing industry is set to triple to reach US$ 900 billion by 2020, provided the key issues are addressed, as per a study by Boston Consulting Group (BCG) and an industry body. • The National Agricultural Innovation Programme (NAIP) will spend Rs 500 crore (US$ 95.24 million) more in the next two years on different projects to add value to agriculture and allied sectors. This programme aims at developing technology-based innovations to improve the income of farmers and those living on allied sectors. • Gaining momentum from fashion trends, many Indian consumers now spend an equivalent amount on footwear as on their apparels, as they associate variety of shoes to different occasions. The footwear industry in India has Laxmi Institute of Management, Page 18
almost doubled in the past five years to an estimated Rs 20,000 crore (US$ 3.81 billion). Laxmi Institute of Management, Page 19
CHAPTER- II THEORETICAL FRAMEWORK Laxmi Institute of Management, Page 20
2.1 STOCK EXCHANGE: Stock Exchange is an organized marketplace where securities are traded. These securities are by the government, semi-government Bodies, Public sector undertakings and companies for borrowing funds and raising resources. Securities are defined as monetary claims and include stock, shares, debentures, bonds etc. If these securities are marketable as in the case of Government stock, they are transferable by endorsement and are like movable property. Under the securities Contract Regulation Act of 1956, securities trading are regulated by the Central Government and such trading can take place only in Stock Exchange recognized by the Government under this Act. At present there are 23 recognized stock Exchanges in India. Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. BOMBAY STOCK EXCHANGE: Bombay Stock Exchange is the oldest stock exchange in Asian with a rich heritage, now spanning three centuries in its 133 years of existence. What is now popularly known as BSE was established as “The Native Share & Stock Brokers’ Association” in 1875. BSE is the first stock exchange in the country which obtained permanent recognition (in 1956) from the government of India under the Securities Countracts (Regulation) Act 1956. BSE’s pivotal and pre-eminent role in the development of the Indian capital market is widely recognized. It migrated from the open outcry system to an online screen- based order driven trading system in 1955. Earlier an Association Of Persons (AOP), BSE is now a corporatized and demutualised entity incorporated under the provisions of the companies Act, 1956, pursuant to the BSE (Corporatization and Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI). With demutualization, BSE has two of world’s best exchanges, Deutsche Borse and Singapore Exchange, as its strategic partners. Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by providing it with an efficient access to resources. There is Laxmi Institute of Management, Page 21
perhaps no major corporate in India which has not sourced BSE’s services in raising resources from the capital market. Today, BSE is the world’s number 1 exchange in terms of the number of listed companies and the world’s 5th in transaction numbers. The market capitalization as on December 31, 2007 stood at USD 1.79 trillion. An inventor can choose from more than 4700 listed companies, which for easy reference, are classified into A, B, S, T and Z groups.The BSE Index, SENSEX, is Indian’s first stock market index that enjoys an iconic stature, and is tracked worldwide. It is an index of 30 stocks representing 12 malor sectors. The SENSEX is constructed on a ‘free-float’ methodology, and is sensitive to market sentiments and market realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indicates. BSE has entered into an index cooperation agreement with Deutsche Borse. This agreement has made SENSEEX and other BSE indices available to investors in Europe and America. Moreover, Barclays Global Investors (BGI), the global leader in ETF’S through its Trader which tracks the SENSEX. The ETF enables investors in Hong Kong to take an exposure to the Indian equity market. BSE provides an efficient and transparent market for trading in equity, debt instruments and derivatives. It has a nation- wide reach with a pressure in more than 450 cities and towns of India. BSE has always been at par with the international standards. The systems and processes are designed to safeguard market integrity and enhance transparency in operations.BSE is the first exchange in India and the second is the world to obtain an ISO 9001:2000 certification. It is also the first exchange in India and the second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its BSE On-line Trading System (BOLT).BSE continues to innovate. In recent times, it has become the first national level stock exchange to launch its website in Gujarati and Hindi to reach out to a large number of investors. It has successfully launched a reporting platform for corporate bonds in India christened the ICDM or Indian Corporate Dept Market and a unique ticker screen aptly named ‘BSE Broadcast’ which enables information dissemination to the common man on the street. In 2006, BSE launched the Directors Database and ICERS (India Corporate Electronic Reporting System) to facilitate information flow and increase transparency in Indian capital market. While the Directors database provides a single-point access Laxmi Institute of Management, Page 22
to information in the boards of directors of listed companies, the ICERS facilities the corporate in sharing with BSE their corporate announcements. BSE also has a wide range of services to empower investors and facilitate smooth transactions: Investors Services: The Department of Investor Services redresses grievances of investors. BSE was the first exchange in the country to provide an amount of Rs.1 million towards the investor protection fund; it is an amount higher than that of any exchange in the country. BSE launched a nationwide investor awareness programme‘safe investing in the Stock Market’ under which 264vprogrammes were held in more than 200 cities. The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-line screen based trading in securities. BOLT is currently operating in 25,000 Trader Workstations located across over 450 cities in India. BSEWEBX.com: In February 2001, BSE introduced the world’s first centralized exchange-based Internet trading system, BSEWEBX.com. This initiative enables investors anywhere in the world to trade on the BSE platform. Surveillance: BSE’s On-line Surveillance System (BOSS) monitors on a real-time basis the price movements, volume positions and members’ positions an real-time measurement of default risk, market reconstruction and generation of cross market alerts. BSE Trading Institution: BTI imparts capital market trading and certification, in collaboration with reputed management institutes and universities. It offers over 40 courses on various aspects of the capital market and financial sector. More than 20,000 people have attended the BTI programmes. Laxmi Institute of Management, Page 23
Companies in the Sensex List of BSE Sensex companies provides the full list of companies that have been part of the BSE Sensex since its inception in 1986 (base lined to 1979). Code Name Sector Adj. Weight in Factor Index(%) 500410 ACC Housing Related 0.55 0.77 500103 BHEL Capital Goods 0.35 3.26 532454 Bharti Airtel Telecom 0.35 3 532868 DLF Universal Limited Housing related 0.25 1.02 500300 Grasim Industries Diversified 0.75 1.5 500010 HDFC Finance 0.90 5.21 500180 HDFC Bank Finance 0.85 5.03 0.50 1.43 0.7 1.75 500696 Hindustan Lever Limited FMCG 0.50 2.08 532174 ICICI Bank Finance 1.00 7.86 500209 Infosys Information Technology 0.85 10.26 500875 ITC Limited FMCG 0.70 4.99 532532 Jaiprakash Associates Housing Related 0.55 1.25 500510 Larsen & Toubro Capital Goods 0.90 6.85 Transport Equipments 0.75 1.71 532500 Maruti Suzuki Transport Equipments 0.50 1.71 532541 NIIT Technologies Information Technology 0.15 2.03 532555 NTPC Power 0.15 2.03 500304 NIIT Information Technology 0.15 2.03 500312 ONGC Oil & Gas 0.20 3.87 Telecom 0.35 0.92 500325 Reliance Industries Oil & Gas 0.50 12.94 500390 Reliance Infrastructure Power 0.65 1.19 500112 State Bank of India Finance 0.45 4.57 0.45 2.39 500182 Hero Honda Motors Ltd. Transport Equipments 500440 Hindalco Industries Ltd. 500520 532712 Mahindra & Mahindra Limited Reliance Communications 500900 Sterlite Industries Laxmi Institute of Management, Metal,Metal Products & Mining Metal, Metal Products, and Mining Page 24
524715 Sun Pharmaceutical 0.40 1.03 Information Technology 0.25 3.61 500570 Tata Motors Transport Equipments 0.55 1.66 500400 Tata Power Power 0.70 1.63 0.70 2.88 Information Technology 0.20 1.61 532540 Industries Tata Consultancy Services 500470 Tata Steel 507685 Wipro Healthcare Metal, Metal Products & Mining TABLE NO 4.1 • DLF replaced Dr. Reddy's Lab on November 19, 2007. • Jaiprakash Associates Ltd replaced Bajaj Auto Ltd on March 14, 2008. • Sterlite Industries replaced Ambuja Cements on July 28, 2008. • Tata Power Company replaced Cipla Ltd. on July 28, 2008. • Sun Pharmaceutical Industries replaced Satyam Computer Services on January 8, 2009 • Hero Honda Motors Ltd. replaced Ranbaxy on June 29, 2009 • Cipla to replace Sun Pharma from May 3, 2010 • Grasim replaced JSPL in 2010 Laxmi Institute of Management, Page 25
13. SECTORS OF BSE • HC (health care) • REALITY • AUTO • METAL • IT • CG (capital goods) • ONG (oil and gas) • POWER • PSU • CD (consumer durables) • BANK • TECH • FMCG NAME OF BSE 30 COMPANIES ACC, BHARTI AIRTEL, BHEL, DLF, GRASIM, HDFC, HDFC BANK, HINDALCO, HUL, ICICI BANK, INFOSYS, ITC, JAIPRAKASH ASSOCIATES, L&T, MAHINDRA & MAHINDRA, MARUTI SUZUKI, ONGC, NTPC, RANABAXY LAB, RELIENCE, RELIENCE COMM, RELIENCE INFRASTRUCTURE, SATYAM, SBI, STERLITE INDUSTRY, TATA MOTORS, TATA POWER, TATA STEEL. TCS, WIPRO. Laxmi Institute of Management, Page 26
AS ON- FEB 15,2011 NATIONAL STOCK EXCHANGE (NSE): With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high-powered Pherwani Committee, Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others incorporated the National Stock Exchange in 1992. Trading at NSE can be classified under two broad categories: (a) Wholesale debt market and (b) Capital market. There are two kinds of players in NSE: (a) Trading members and (b) Participants. Trading at NSE takes place through a fully automated screen-based trading mechanism, which adopts the principle of an order-driven market. Trading members can stay at their offices and execute the trading, since they are linked through a communication network. 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 and a confirmation slip will be printed at the office of the trading member. NSE has several advantages over the traditional trading exchanges. They are as follows:  NSE brings an integrated stock market trading network across the nation.  Investors can trade at the same price from anywhere in the country since intermarket operations are streamlined coupled with the countrywide access to the securities.  Delays in communication, late payments and the malpractice's prevailing in the traditional trading mechanism can be done away with greater operational Laxmi Institute of Management, Page 27
efficiency and informational transparency in the stock market operations, with the support of total computerized network. Laxmi Institute of Management, Page 28
List of Top 50 Companies of NSE (National Stock Exchange ) • RELIANCE INDUSTRIES LTD, OIL AND NATURAL GAS CORPORATION LTD, BHARTI AIRTEL LIMITED, NTPC LTD, RELIANCE COMMUNICATIONS LTD., ICICI BANK LTD, • INFOSYS TECHNOLOGIES LTD, TATA CONSULTANCY SERVICES LTD, BHEL, STATE BANK OF INDIA, • STEEL AUTHORITY OF INDIA, LARSEN & TOUBRO LTD., HERO HONDA MOTORS LTD, ZEE ENTERTAINMENT LTD, INDIAN PETROCHEMICALS CORPORATION LTD., CIPLA LTD, BHARAT PETROLEUM CORPORATION LTD.,VIDESH SANCHAR NIGAM LTD, DR. REDDY'S LABORATORIES, • MAHANAGAR TELEPHONE NIGAM LTD, GLAXOSMITHKLINE PHARMA LTD.,ABB LTD. POWER GRID CORPORATION OF INDIA, RELIANCE ENERGY LTD, SIEMENS LTD, ACC LIMITED, AMBUJA CEMENTS LTD, • HCL TECHNOLOGIES LTD, HINDALCO INDUSTRIES LTD, • NATIONAL ALUMINIUM CO LTD, SUN PHARMACEUTICALS IND., • MAHINDRA & MAHINDRA LTD, TATA POWER CO LTD, PUNJAB NATIONAL BANK, RANBAXY LABS LTD, ITC LTD, RELIANCE PETROLEUM LTD., HDFC LTD, WIPRO LTD, STERLITE INDUSTRIES LTD., • HDFC BANK LTD, TATA STEEL LIMITED, HINDUSTAN UNILEVER LTD., SUZLON ENERGY LIMITED, GAIL (INDIA) LTD, GRASIM INDUSTRIES LTD, TATA MOTORS LIMITED, MARUTI UDYOG LIMITED AS ON- FEB 15,2011 Laxmi Institute of Management, Page 29
INTERNATIONAL STOCK EXCHANGES Rank Economy Stock Exchange 1 United States 2 United States New York Stock Exchange NASDAQ 3 Japan Tokyo Stock Exchange 4 United London Stock Kingdom Exchange 5 Hong Kong Hong Kong Stock Exchange 6 Europe Euronext 7 China Shanghai Stock Exchange 8 Canada Toronto Stock Exchange 9 India Bombay Stock Exchange 10 India National Stock Exchange of India 11 Brazil BM&F Bovespa 12 Germany Deutsche Börse 13 Australia Australian Securities Exchange 14 China Shenzhen Stock Exchange 15 Switzerland SIX Swiss Exchange 16 Spain BME Spanish Exchanges Americas 21244 Asia - Pacific 18287 Europe - Africa - Middle 13975 East Total 51752 Laxmi Institute of Management, Page 30 (TABLE NO 4.2) Market Capitalization (USD Billions) Trade Value (USD Billions) 13041 1439 3649 954 3542 311 3354 229 2696 179 2695 2681 165 686 2002 134 1540 231 1503 791 1447 1320 1309 704 123 101 1284 548 1122 674 1077 149 2617 2262 954 5833
2.2 INTRODUCTION TO FII International portfolio flows, as are commonly known as Foreign Institutional Investment (FII) flows, refer to capital flows made by individual and institutional investors across national borders with a view to creating an internationally diversified portfolio. ‘FII’ include “Overseas pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or investments on behalf of a broad-based fund. Foreign institutional investor means an entity established or incorporated outside India which proposes to make investment in India. Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for foreign institutional investors. Unlike Foreign Direct Investment (FDI) flows which refer to that category of international investment aimed at obtaining a lasting interest by a resident entity in one economy in an enterprise resident in another economy by way of exercising significant control over its management, FII flows are not directed at acquiring management control over foreign companies. FII flows were almost non-existent until 1980s. Global capital flows were primarily characterized by syndicated bank loans in 1970s followed by FDI flows in 1980s. But a strong trend towards globalization leading to widespread liberalization and implementation of financial market reforms in many countries of the world had actually set the pace for FII flows during 1990s. Laxmi Institute of Management, Page 31
According to Bekaert and Harvey (2000), FII investment as a proportion of a developing country's GDP increases substantially with liberalization as such integration of domestic financial markets with the global markets permits free flow of capital from 'capital-rich' to 'capital-scarce' countries in pursuit of higher rate of return and increased productivity and efficiency of capital at global level. Diversifying internationally i.e., holding a well-diversified portfolio of securities from around the world in proportion to market capitalizations, irrespective of the investor's country of residence, has long been advocated as the means to reduce overall portfolio risk and maximize risk-adjusted returns by the classical capital asset pricing model (CAPM). But a persistent 'home bias' (i.e., the tendency to hold a greater proportion of stocks from the home country vis-a-vis the foreign country) was noticed in the portfolios of investors in capital-rich industrialized countries in early 1990s. With more and more emerging market economies (EMEs) 1 deregulating their financial markets by eliminating foreign exchange controls, reducing taxes imposed on foreign investors, relaxing the restrictions on the purchase / sale of securities by foreign investors in domestic markets etc., such 'home bias' has decreased over the years. Today, EMEs, by virtue of their lower correlations in stock market returns with the developed markets, offer greater scope to investors in developed countries to reduce their overall portfolio risk and effectively enhance the portfolio performance and hence have become the most preferred destinations for FII flows. Several research studies on FII flows to EMEs over the world have highlighted that financial market infrastructure such as the market size, market liquidity, trading costs, extent of information dissemination etc., legal mechanisms relating to property rights etc., harmonization of corporate governance, accounting, listing and other rules with those followed in developed markets, and strengthening of securities markets' enforcement are important determinants of foreign portfolio investments into emerging markets. Of late, the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) have initiated a string of measures like allowing overseas pension funds, mutual funds, investment trusts, asset management Laxmi Institute of Management, Page 32
companies, banks, institutional portfolio managers, university funds, endowments, foundations or charitable trusts etc. but banning non-resident Indians (NRIs) and overseas corporate bodies (OCBs) from trading as foreign portfolio investors, raising the caps for FII from 24% to 49% of a non-bank company's issued capital subject to sectoral caps / statutory ceiling as applicable, enhancing the individual investment limit from 5% to 10% of issued capital, permitting foreign investors to trade in Government securities and derivatives, easing the norms for FII registration, reducing procedural delays, lowering fees, mandating stricter disclosure norms, improved regulatory standards etc. with a view to improving the scope, coverage and quality of FII flows into India. As a result, India, also supported by her strong economic fundamentals, has become one of the attractive destinations for FII flows in the emerging market space today. The expansionary effect of various reform measures on FII flows over the years can be gauged from the fact that net (i.e., gross purchases minus gross sales) FII flows into India have risen sharply from Rs. 5126 crore in 1993-1994 2 to Rs. 46,215 crore in 2004-2005, with the number of foreign institutional investors being registered with SEBI increasing from 3 in 1993-1994 to 685 in 2004-2005 (Source : SEBI website). This increasing dominance of foreign investors in Indian market has necessitated research on the implications of FII flows for the Indian stock market time and again. Although FII flows help supplement the domestic savings and augment domestic investments without increasing the foreign debt of the recipient countries, correct current account deficits in the external balance of payments' position, reduce the required rate of return for equity, and enhance stock prices of the host countries, yet there are worries about the vulnerability of recipient countries' capital markets to such flows. FII flows, often referred to as 'hot money' (i.e., short-term and overly speculative), are extremely volatile in character compared to other forms of capital flows. Foreign portfolio investors are regarded as 'fairweather friends' who come in when there is money to be made and leave at the first sign of impending trouble in the host country thereby destabilizing the domestic economy of the recipient country. Laxmi Institute of Management, Page 33
Often, they have been blamed for exacerbating small economic problems in the host nation by making large and concerted withdrawals at the slightest hint of economic weakness. It is also alleged that as they make frequent marginal adjustments to their portfolios on the basis of a change in their perceptions of a country's solvency rather than variations in underlying asset value, they tend to spread crisis even to countries with strong fundamentals thereby causing 'contagion' in international financial markets (FitzGerald,1999). TRENDS OF FOREIGN INSTITUTIONAL INVESTMENTS IN INDIA. Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds. Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India. Thereafter, the Indian stock markets were opened up for direct participation by FIIs. They were allowed to invest in all the securities traded on the primary and the secondary market including the equity and other securities/instruments of companies listed/to be listed on stock exchanges in India • In 2004, FII investments crossed $9 billion, the highest in the history of Indian capital markets. • The total net investment for the year up to December 29 stood at US$9,072 million while foreign investors pumped in about US$2,113 million in December. • Korea and Taiwan have always been the biggest recipients of FII money. It was only in 2004 that India managed to receive the second highest FII inflow at over $8.5bn. • In 2005 FIIs invested more in Indian equities than in Korean or Taiwanese equities. • On 9th March 2009, India's exceptional growth story and its booming economy Laxmi Institute of Management, Page 34
have made the country a favourite destination with foreign institutional investors (FIIs). It has continued to attract investment despite the Satyam non-governance issue and the global economic contagion impact on Indian markets. • They are also the most successful portfolio investors in India with 102 per cent Appreciation since September 30, 2003. • As per SEBI, number of registered FIIs stood at 1626 and number of registered subaccounts stood at 4972 as on March 17, 2009 Prohibitions on Investments: Foreign Institutional Investors are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities: • Business of chit fund • Nidhi Company • Agricultural or plantation activities • Real estate business or construction of farm houses (real estate business does not include development of townships, construction of residential/commercial premises, roads or bridges). • Trading in Transferable Development Rights (TDRs). Laxmi Institute of Management, Page 35
FUTURE PROSPECTS OF FOREIGN INSTITUTIONAL INVESTMENTS: • Sustaining the growth momentum and achieving an annual average growth of 9-10 % in the next five years. • Simplifying procedures and relaxing entry barriers for business activities and Providing investor friendly laws and tax system. • Checking the growth of population; India is the second highest populated country in the world after China. However in terms of density India exceeds China, as India's land area is almost half of China's total land. Due to a high population growth, GNI per capita remains very poor. It was only $ 2880 in 2003 (World Bank figures). • Boosting agricultural growth through diversification and development of agro processing. • Expanding industry fast, by at least 10% per year to integrate not only the surplus labour in agriculture but also the unprecedented number of women and teenagers joining the labour force every year. • Developing world-class infrastructure for sustaining growth in all the sectors • Allowing foreign investment in more areas. • Effecting fiscal consolidation and eliminating the revenue deficit through revenue enhancement and expenditure management. Market Outcome in the previous years Foreign Portfolio investments in India come in the form of investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in Offshore funds. Laxmi Institute of Management, Page 36
However, FIIs constitute a major proportion of such portfolio. The share of FIIs in total portfolio flows was as high as 95.97% in 2003-04 and 93.25% in 2004-05. It declined to 46% in 2006-07. This decline in FII investment in 2006-07 can be attributed to global developments like meltdown in global commodities markets and equity market during the three month period between May 2006 to July 2006, fall in Asian Equity markets, tightening of capital controls in Thailand and its spillover effects. The share of FII investment in total portfolio investment for 2007-08 is provisionally estimated to be 69.15%. The large FII inflows (net) in 2007-08 at USD 16 billion as against USD 6.7 billion in 2006-07 reflects increased participation of FIIs in the primary market as corporates raised large resources through 85 initial public offerings (IPOs) and 7 follow-on public offers (FPOs) aggregating to Rs 545,110 million. (US $ 13,638 million). Looking at monthly trend in FII investments during 2007-08 it can be seen that net FII investment has been positive during most of the months. The months of August 2007, November 2007, January, 2008 and March, 2008 saw net outflows of FII investment, with the largest pull out of US $ 2727 mn in January, 2008. During 2008-09, till June 2008, FIIs have been net sellers to the tune of US $ 4,189 million. This can be attributed to the generally weak sentiments of investors following the global credit crisis which has engulfed the developed countries and is seen to be affecting the developing countries as well. Laxmi Institute of Management, Page 37
CHAPTER III PRIMARY STUDY Laxmi Institute of Management, Page 38
INTRODUCTION OF THE STUDY “ FII’s influence on the Sensex over the period 2000-2010 ”- is a study of the influence of FOREIGN INSTITUTIONAL INVESTERS whose activities play a vital role in the ups and downs of the share market. The study is conducted on the Indian stock exchange market ( BSE SENSEX) . There are conflicting theories on the issue of whether FII flows affect or are affected by domestic stock market returns. So, the present empirical study has been undertaken to throw some light on the direction of causality between FII flows and Indian stock market returns using data on both the variables from over the period 2002- 2012.International portfolio flows, as are commonly known as Foreign Institutional Investment (FII) flows, refer to capital flows made by individual and institutional investors across national borders with a view to creating an internationally diversified portfolio. Unlike Foreign Direct Investment (FDI) flows which refer to that category of international investment aimed at obtaining a lasting interest by a resident entity in one economy in an enterprise resident in another economy by way of exercising significant control over its management, FII flows are not directed at acquiring management control over foreign companies. FII flows were almost non-existent until 1980s. With more and more emerging market economies (EMEs), deregulating their financial markets by eliminating foreign exchange controls, reducing taxes imposed on foreign investors, relaxing the restrictions on the purchase / sale of securities by foreign investors in domestic markets etc. they are increasing in number. Foreign Institutional Investment (FII) flows, i.e., capital flows across national borders, to emerging market economies (EMEs) have risen sharply over the past one and half decade due to globalization and India is no exception in this regard. However, there is a lot of apprehension regarding the volatile nature of such flows thereby raising questions about the need to encourage FII flows in a narrow and shallow stock market like that of India. Laxmi Institute of Management, Page 39
LITERATURE REVIEW Purendra Verma (2002) has investigated the impact of FII on Capital Market to find the relation between FII and Stock indices. For this he has taken seven indices into consideration, out of them five are Consumer Durables, Capital Goods, Fast Moving Consumer Goods, Health Care, Information Technology and the other two are Sensex and Nifty. He observed these indices during January 1993 to September 2001. If BSE & Nifty increase with rise in FII investment, He has taken hypothesis for this study. To find out the results he used least square method. Finally, after completing his study he concluded that except IT sector on all other indices the impact is very low during January 1993 to September 2001 as the correlation is negative in Consumer Durables, Capital Goods, Fast Moving Consumer Goods, Health Care, Sensex and Nifty. Paramita Mukherjee, Suchismita Bose and Dipankar Coondoo (2002) carried out research on the topic Foreign Institutional Investment in The Indian Equity Market an Analysis of daily flows during Jan 1999 - May 2002. The paper was conducted to understand the relationship of foreign institutional investment (FII) flows to the Indian equity market. FII flows to and from the Indian market tend to be caused by return in the domestic equity market and not the other way round. Returns in the equity market are very important to influence the flows of FIIs in the country. They concluded that in India the prime focus should be on regaining investor’s confidence in the equity market so as to strengthen the domestic investor’s base of the market. S.S.S. Kumar (2005) of IIM-Kozhikode carried out research on the Role of Institutional Investors in Indian Stock Market during 1992 - 2005. The paper was conducted to examining whether the institutional investors, with their war chests of money, set the direction to the market. He concluded with the use of Regression analysis that the combined force of the FIIs and MF are a powerful force and in fact their direction can forecast market direction. It gives it Laxmi Institute of Management, Page 40
constantly rise in Indian context since all their trades are delivery based and Market become more efficient with the growing presence of institutional investors who primarily go by fundamentals. Anand Bansal and J.S. Pasricha (2009) in the paper titled Foreign Institutional Investor’s Impact on Stock Prices in India for the purpose of analyzing Impact of FIIs entry and the stock market behavior. Average return before and after the event day has been calculated for different sub sample days, the change of volatility in the Indian stock prices has been examined by comparing the variance of the returns of sub sample days before and after the event day. They concluded that return declined reasonably after the entry of FIIs, the correlation between FIIs investments and market volatility and market return has been comparatively low. It means volatility in Indian market is not the function of FIIs investment flows. TIMS Batch 2008-10, Leena Kanjani, Sulabh Mehta, Anita Pariyani, Amin Pattani, Mehul Rakholiya & Krishna Vyas conducted a research study on FII in India, they analyzed the monthly movement of stock market from 2006 to 2009. The paper was conducted to understand influence of FII on movement of Indian Stock market and to understand the FII policy in India.They used Correlation and Hypothesis test methodology and concluded that FII did have significant impact on Sensex but there is less co-relation with Benkex and IT. Sandhya Ananthanarayanan from CRISIL, Chandrasekhar Krishnamurti from Department of Finance and Nilanjan Sen from Nanyang Technological University conducted this research of Foreign Institutional Investors and Security Returns: Evidence from Indian Stock Exchanges for understanding the impact of trading of Foreign Institutional Investors on the major stock indices of India. Their contribution to this growing literature pertaining to globalization is twofold. First, they separate the flows into expected and unexpected and found that unexpected flows have a Laxmi Institute of Management, Page 41
greater impact than expected flows. Second, they identify the specific flows of foreign institutional investors flowing into (or out of) each exchange and examine the impact on the specific stock market indices. Their principal conclusions are as follows. They found strong evidence consistent with the base-broadening hypothesis consistent with prior work. They do not found compelling confirmation regarding momentum or contrarian strategies being employed by foreign institutional investors. Their findings supported the price pressure hypothesis. They do not found any substantiation to the claim that foreigners’ destabilize the market. Laxmi Institute of Management, Page 42
BACKGROUND OF THE STUDY “FII’s influence on the Sensex over the period 2000-2010”- is a study of the influence of FOREIGN INSTITUTIONAL INVESTERS whose activities play a vital role in the ups and downs of the share market. The study is conducted on the Indian stock exchange market (BSE SENSEX) . There are conflicting theories on the issue of whether FII flows affect or are affected by domestic stock market returns. So, the present empirical study has been undertaken to throw some light on the direction of causality between FII flows and Indian stock market returns using data on both the variables from over the period 2000- 2010. International portfolio flows, as are commonly known as Foreign Institutional Investment (FII) flows, refer to capital flows made by individual and institutional investors across national borders with a view to creating an internationally diversified portfolio. Unlike Foreign Direct Investment (FDI) flows which refer to that category of international investment aimed at obtaining a lasting interest by a resident entity in one economy in an enterprise resident in another economy by way of exercising significant control over its management, FII flows are not directed at acquiring management control over foreign companies. FII flows were almost non-existent until 1980s. With more and more emerging market economies (EMEs), deregulating their financial markets by eliminating foreign exchange controls, reducing taxes imposed on foreign investors, relaxing the restrictions on the purchase / sale of securities by foreign investors in domestic markets etc. they are increasing in number. Foreign Institutional Investment (FII) flows, i.e., capital flows across national borders, to emerging market economies (EMEs) have risen sharply over the past one and half decade due to globalization and India is no exception in this regard. However, there is a lot of apprehension regarding the volatile nature of such flows Laxmi Institute of Management, Page 43
thereby raising questions about the need to encourage FII flows in a narrow and shallow stock market like that of India. Laxmi Institute of Management, Page 44
INDUSTRY PROFILE BROKERAGE INDUSTRY The Indian retail brokerage industry consists of companies that primarily act as agents for the buying and selling of securities (e.g. stocks, shares, and similar financial instruments) on a commission or transaction fee basis. It has two main interdependent segments: Primary market and the Secondary market. Now this market is extended to fields like currency, commodity, mutual fund, insurance etc... The Indian equity brokerage industry thrived on the back of equity markets' sustained bull run during 2003-07. Although high competitive pressure meant continuous compression of brokerage commissions and low electronic penetration kept operating costs high, industry revenue was growing. Furthermore, the industry attracted domestic and foreign investment interest at high valuations of upto 45x P/E multiples. During this time, many of the key players started expanding their portfolio of services to include wealth management and advisory services, sale of insurance and mutual fund products, consumer financing and so on. However, post-2008, the economic downturn - muted trading turnover, relentless competitive pressure and decreasing margins, continued high operating costs and high margining requirements - has put the industry under pressure. Profitability is muted and the major players are under pressure to build scale. Expansion of scale and investments into technological systems has the potential to lead the top brokerage firms into paths of higher growth, but the current economic climate is clearly against heavy investments. The basic function of a brokerage firm is to execute buy and sell orders for clients. Traditionally these firms have offered the investigation of the quality and the possibilities of investing in a variety of investment products. It is still accustomed for brokerage firms to offer information about possible investments free of charge. This activity of bringing free of charge stock investment reports is one of the main tools that are utilized by brokerage houses to compete against other firms and to investors it continues to be an important service Laxmi Institute of Management, Page 45
The History of Stock Brokerage Firms Stock brokerage firms have been an established feature in the financial industry for nearly one thousand years. Dealing in debt securities, brokers employ a variety of systems to aid investors with the purchase and sales of stocks and bonds in a variety of markets. The firms have changed over the years, growing to massive organizations that can affect the entire financial sector positively or negatively with their performance. Changing with the times, the early twenty-first century saw a rise of online trading that enabled the average investor to take part in the stock market for the first time. 1. History During the 11th century, the French began regulating and trading agricultural debts on behalf of the banking community, creating the first brokerage system. In the 1300s, houses began to be set up in major cities like Flanders and Amsterdam in which commodity traders would hold meetings. Soon, Venetian brokers began to trade in government securities, expanding the importance of the firms. In 1602, the Dutch East India Company became the first publicly traded company in which shareholders could own a portion of the business. The stocks improved the size of companies and became the standard bearer for the modern financial system. 2. Significance The earliest brokerage firms were established in London coffee houses, enabling individuals to purchase stocks from a variety of organizations. They formally founded the London Stock Exchange in 1801 and created regulations and memberships. The system was copied by brokerage firms across the world, most notably on Chestnut Street in Philadelphia. Soon, the US exchange was moved to New York City and various firms like Morgan Stanley and Merrill Lynch were created to assist in the brokering of stocks and securities. The firms limited themselves to researching and trading stocks for investment groups and individuals. 3. Considerations Laxmi Institute of Management, Page 46
During the 1900s, stock brokerage firms began to move in a direction of market makers. They adopted the policy of quoting both the buying and selling price of a security. This allows a firm to make a profit from establishing the immediate sale and purchase price to an investor. The conflict with brokerage firms setting prices creates the concern that insider trading can result from the sharing of information. Regulators have enforced a system called Chinese Walls to prevent communication between different departments within the brokerage company. This has resulted in increased profits and greater interconnection within the financial industry. 4. Effects The creation of high valued brokerage firms like Goldman Sachs and Bear Sterns created a system of consolidation. Working with hundreds of billions of dollars, the larger firms began to merge and take over smaller firms in the last half of the 20th century. Firms like Smith Barney were acquired by Citigroup and other investment banks, creating massive financial institutions that valued, held, sold, insured and invested in securities. This conglomeration of the financial sector created an environment of volatility that caused a chain reaction when other firms like Bear Sterns and Lehman Brothers filed for bankruptcy. Trillions of dollars of assets were tied together in different companies and resulted in a large economic collapse in late 2008. 5. Features A large share of the brokerage firms have moved to an online format. Smaller brokers such as E*Trade, TD Ameritrade and Charles Schwab have taken control of most individual investors accounts. The added convenience and personal attention paid to the small investor has resulted in a large influx of activity. In addition, the fact that the online resources offer up-to-the-minute pricing and immediate trades makes their format appealing to the modern user. Discounted commissions have lessened the price of trades, giving access to a wider swath of people and adding liquidity to the market. The role of the stock brokerage firm is ever-changing and proves to be a boon for the future of the financial industry. Laxmi Institute of Management, Page 47
Full service v/s Discount brokerage houses Full service brokerage firms continue to offer informative stock reports and a level of service much higher than other brokerage houses. Discount brokerage houses only dedicate themselves to execute orders for clients. Full service brokers are sellers looking for purchasing and selling for clients and offering more customer service than is available from discount brokers. It is many times possible that a client will not even know who is taking care of the buy or sell order that they placed. MARKET SIZE AND CHARACTERISTICS: The Indian retail brokerage market is showing phenomenal growth. The total trading volume of brokerage companies has increased from US$1239.1 billion in 2004 to US$1492.1 billion in 2005, and is expected to reach US$6535.7 billion by 2015. Some of the main characteristics of the brokerage industry include growth in ebroking; growing derivatives market, decline in brokerage fees etc. Today, as per NSDL statistics, we have only 2.4 million investors with demat accounts in the country. Considering various investor combinations that are holding accounts, we can presume the country has roughly 5-7.5 lakh active investors now. This figure is unbelievably small compared to the potential number of investors, which is anything between 200 million and 250 million. When we take into consideration the way transaction risk and cost in the Indian capital market is coming down, there will be a massive surge in the number of investors and also in volumes. The only way to manage this kind of potential growth is to adopt state-of-the-art trading techniques. The growth of Internet-based trading as a mass trading technique in the country is unstoppable, going by the indicators available and the signals for the future. When it ultimately gathers momentum, the biggest beneficiary will be the investor, who will be able to trade with greater speed and transparency, and at lower costs... Laxmi Institute of Management, Page 48
Major players in Indian share broking industry are follows  ICICI Securities Ltd. (www.icicidirect.com)  Kotak Securities Ltd. (www.kotaksecurities.com)  Indiabulls Financial Services Limited (www.indiabulls.com)  IL&FS investmart Limited (www.investsmartindia.com)  SSKI Ltd. (www.sharekhan.com)  Motilal Oswal Securities (www.motilaloswal.com)  Fortis Securities (Religare) (www.fortissecurities.com)  Karvy securities (www.karvy.com)  Geojit BNP paribas (www.geojitbnpparibas.com)  HDFC Securities (www.hdfcsec.com)  Hedge equities (www.hedgeequities.com)  Jrg securities  India infoline (www.indiainfoline.com) Laxmi Institute of Management, Page 49
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CHAPTER 4 RESEARCH METHODOLOGY 4.1 Objectives of the Study  To know the Indian stock exchange market- BSE, NSE  To study the performance of Sensex over the period 2000-10  To know about FII  To study the effect of FII’s investment in BSE Sensex  To study the relationship between FII activity and Sensex  To find the trend in FII’s investment 1.3 Scope of the Study  To get in touch with the industrial and organizational environment.  To familiarize with the trends in the stock market(BSE) over the years  To familiarize with the importance of FII in Indian stock market 1.4 Methodology of the Study The methodology of the study is through collecting the primary and secondary data. Primary data refers to the data collected by the investigator directly through primary sources. It includes;  Direct observation.  Interview (personal). Secondary data refers to the data collected from; Laxmi Institute of Management, Page 51
 Books  Journals  Websites  Company manuals etc. 1.5 Limitation of the study  Time  Analysis is conducted only on the basis of some factors therefore cent percent accuracy is not possible.  Lack of reliability of Secondary data Laxmi Institute of Management, Page 52
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CHAPTER- V DATA ANALYSIS AND INTERPRETATION Laxmi Institute of Management, Page 54
TYPES OF STUDY AND ANALYSIS CONDUCTED 1. THE PERFORMANCE OF SENSEX By Sensex return • From 2002-2013 • In 2012 ( monthly basis) 2. INFLUENCE OF FII ON SENSEX By Sensex return V/S FII’s net inflow • From 2002-2012 • In 2012 (monthly basis) Number of FII’s registered and the Sensex returns 3. FII’S INFLOW V/S SENSEX RETURNS • Coefficient of Correlation method • 4 Regression method TRENDS IN THE FII’S INVESTMENT Laxmi Institute of Management, Page 55
• Trend analysis Laxmi Institute of Management, Page 56
5.1 SENSEX PERFORMANCE OVER THE YEARS Indices :SENSEX Period : ( Year 1991 to Year 2013 ) Year Open High Low Close 1991 1,027.38 1,955.29 947.14 1,908.85 1992 1957.33 4,546.58 1945.48 2,615.37 1993 2,617.78 3,459.07 1980.06 3,346.06 1994 3,436.87 4,643.31 3405.88 3,926.90 1995 3,910.16 3,943.66 2891.45 3,110.49 1996 3,114.08 4,131.22 2,713.12 3,085.20 1997 3,096.65 4,605.41 3,096.65 3,658.98 1998 3,658.34 4,322.00 2,741.22 3,055.41 1999 3,064.95 5,150.99 3,042.25 5,005.82 2000 5,209.54 6,150.69 3,491.55 3,972.12 2001 3,990.65 4,462.11 2,594.87 3,262.33 2002 3,262.01 3,758.27 2,828.48 3,377.28 2003 3,383.85 5,920.76 2,904.44 5,838.96 2004 5,872.48 6,617.15 4,227.50 6,602.69 2005 6,626.49 9,442.98 6,069.33 9,397.93 2006 9,422.49 14,035.30 8,799.01 13,786.91 2007 13,827.77 20,498.11 12,316.10 20,286.99 2008 20,325.27 21,206.77 7,697.39 9,647.31 2009 9,720.55 17,530.94 8,047.17 17,464.81 2010 17,473.45 21,108.64 15,651.99 20,509.09 2011 20,621.61 20,664.80 15,135.86 15,454.92 2012 15,534.67 19,612.18 15,358.02 19,426.71 Laxmi Institute of Management, Page 57
2013 19,513.45 20,443.62 18,144.22 19,704.33 INTERPRETATION The Bombay stock exchange (BSE SENSEX) which is one of the most important secondary market in India ,has seen many ups and downs from its years of its starting in 1991. The market opened at 1027.38 point and closed at 1908.85 with a high value of 1955.29 and with a low value of 947.14 in the same year. Since then, the values in the Sensex has increased and decreased. From the table, it can be found that the Sensex crossed the four digit number in 2006 , and at 13786.91 from the previous year value of 9397.93 (2005) The changes in the value of Sensex depends upon many factors, like .. • National and global issues • Legal and political issues • GDP growth rate of the nation Laxmi Institute of Management, Page 58
• Activities of the foreign investments Etc…. From the table it is found that in the year 2008 the Sensex closed at 9647.31 from the previous years 20286.99. The reason for the huge fall in market was due to global recession which not only caught Indian market but also the over all international markets too When the recession began to end in the world, the Sensex and other markets could see increase in value. And at the end of 2010 the Sensex closed at 20509.09 Laxmi Institute of Management, Page 59
5.2 ANALYSIS OF SENSEX RETURNS V/S FII’s INVESTMENTS TABLE OF SENSEX RETURN FROM 2000-10 Month Close Return % Jan-12 17,193.55 Feb-12 17,752.68 3.251975 Mar-12 17,404.20 -1.96297 Apr-12 17,318.81 -0.49063 May-12 16,218.53 -6.35309 Jun-12 17,429.98 7.469543 Jul-12 17,236.18 -1.11188 Aug-12 17,429.56 1.121942 Sep-12 18,762.74 7.64896 Oct-12 18,505.38 -1.37165 Nov-12 19,339.90 4.509607 Dec-12 19,426.71 0.448865 Jan-13 19,894.98 2.410444 Feb-13 18,861.54 -5.19448 Mar-13 18,835.77 -0.13663 TABLE NO 5.2 The BSE SENSEX performance is calculated on a percentage basis from the year 2000 to 2010. Sensex return in percent, is calculated by the % change in the closing point of the Sensex in previous year to the current year Laxmi Institute of Management, Page 60
SENSEX RETURN FROM 2000-10 CHART NO 5.2 Laxmi Institute of Management, Page 61
FII’s INVESTMENT TABLE OF FII’s NET INFLOW Year Gross Purchase (Cr) Gross Sale (Cr) Net Investment (Cr) 2000 74791.5 68421.6 6370.08 2001 51761.2 38651 13128.2 2002 46479.1 42849.8 3629.6 2003 94412 63953.5 30459 2004 185672 146706.8 38965.8 2005 286021.4 238840.9 47181.9 2006 475624.9 439084.1 36540.2 2007 814877.9 743392 71486.3 2008 721607 774594.3 -52987.4 2009 624239.7 540814.7 83424.2 2010 766283.2 633017.1 133266.8 2011 611055.6 613770.8 -2714.2 2012 669184.4 540823.9 128360.7 2013 till MAY 65796.04 50791.74 15004.46 Source : moneycontrol.com TABLE NO 5.3 Laxmi Institute of Management, Page 62
FII’s NET INFLOW Laxmi Institute of Management, Page 63
FII NET INFLOW VS SENSEX RETURN Year Net INVESTMENT FLOW Return % 2000 6370.08 2001 13128.2 106.0916032 2002 3629.6 -72.35264545 2003 30459 739.1833811 2004 38965.8 27.92869103 2005 47181.9 21.08541336 2006 36540.2 -22.5546237 2007 71486.3 95.63740757 2008 -52987.4 -174.1224542 2009 83424.2 -257.4415805 2010 133266.8 59.74597299 2011 -2714.2 -102.0366663 2012 128360.7 -4829.227765 2013 till MAY 15004.46 -88.31070569 Laxmi Institute of Management, Page 64
SENSEX RETURN (%) V/S FII NET INFLOW Laxmi Institute of Management, Page 65
INTERPRETATION When comparing the Sensex returns and the FII net inflow from the years , it can be found that the Sensex gain height returns in the year 2009 (81.03%) and the FII net inflow at that year was 85367 Cr. And the Sensex loss maximum point (-46.522) when the net inflow was - 53051 Cr in the year 2008. Recession and many other global and national issues were key factors for this change. The negative sign show that in 2008 FII’s were not investing their money. They were sellers. *(The Sensex return is not only depend upon FII)* Laxmi Institute of Management, Page 66
ANALYSIS OF SENSEX RETURN TO FII’s INVESTMENT 2012 TABLE OF SENSEX RETURN 2012 Month Close Return % Jan-12 17,193.55 Feb-12 17,752.68 3.251975 Mar-12 17,404.20 -1.96297 Apr-12 17,318.81 -0.49063 May-12 16,218.53 -6.35309 Jun-12 17,429.98 7.469543 Jul-12 17,236.18 -1.11188 Aug-12 17,429.56 1.121942 Sep-12 18,762.74 7.64896 Oct-12 18,505.38 -1.37165 Nov-12 19,339.90 4.509607 Dec-12 19,426.71 0.448865 Jan-13 19,894.98 2.410444 Feb-13 18,861.54 -5.19448 Mar-13 18,835.77 -0.13663 TABLE NO 5.5 The Sensex gain maximum return 11.670% during the month of September 2010. And loss -3.49% in May by making the Sensex to close at 16944.63 CHART OF SENSEX RETURN 2012 Laxmi Institute of Management, Page 67
CHART NO 5.5 Laxmi Institute of Management, Page 68
FII NET INFLOW IN 2012 TABLE OF FII NET INFLOW 2012 Month Gross Purchase(Cr) Gross Sale(Cr) Net Investment(Cr) Jan 50,467.40 40,109.90 10,357.70 Feb 79,898.60 54,686.60 25,212.10 Mar 63,795.10 55,413.80 8,381.10 Apr 41,091.90 42,200.50 -1,109.10 May 42,443.30 42,790.70 -347.1 Jun 44,751.20 45,252.40 -501.3 Jul 49,557.40 39,284.80 10,272.70 Aug 48,136.50 37,332.50 10,803.90 Sep 66,752.50 47,491.20 19,261.50 Oct 56,832.40 45,468.20 11,364.20 Nov 51,143.80 41,567.00 9,577.20 Dec 74,314.30 49,226.30 25,087.80 Source : moneycontrol.com TABLE NO 5.6 Laxmi Institute of Management, Page 69
CHART OF NET INFLOW 2012 CHART 5.6 Laxmi Institute of Management, Page 70
SENSEX GAIN VS FII NET INFLOW 2012 TABLE NO 5.7 Month Net Investment(Cr) Return % Feb-12 25,212.10 3.251975 Mar-12 8,381.10 -1.96297 Apr-12 -1,109.10 -0.49063 May-12 -347.1 -6.35309 Jun-12 -501.3 7.469543 Jul-12 10,272.70 -1.11188 Aug-12 10,803.90 1.121942 Sep-12 19,261.50 7.64896 Oct-12 11,364.20 -1.37165 Nov-12 9,577.20 4.509607 Dec-12 25,087.80 0.448865 Laxmi Institute of Management, Page 71
CHART NO 5.7 INTERPRETATION From the given table, the Sensex gain maximum return 11.670% during the month of September 2010 when the FII’s inflow was 29195 Cr.. And the Sensex loss -3.49% in the month of May, where the FII net inflow was -8629.90. That means the Sensex was changing according to the inflow and out flow of investment during the months of 2010. *(The Sensex return is not only depend upon FII)* Laxmi Institute of Management, Page 72
5.4 Calculation of correlation between FII investment and sensex movement Analysis is done for finding the correlation between FII investment and the sensex fluctuation during the period from 2000-2010. Net yearly FII investment is calculated by subtracting the gross sell value from the gross purchase value in the particular year by FII. And the fluctuation in sensex is calculated by subtracting previous years closing point from the current year. CALCULATION OF SENSEX FLUCTUATION Years CLOSE PRICE FLUCTUATION 2000 3972.12 -1033.70 2001 3262.33 -709.79 2002 3377.28 114.95 2003 5838.96 2461.68 2004 6602.69 763.73 2005 9397.93 2795.24 2006 13786.91 4388.98 2007 20286.99 6500.08 2008 9647.31 -10639.68 2009 17464.81 7817.50 2010 20509.09 3044.28 2011 15454.92 -5054.17 2012 19426.71 3971.79 2013 20223.98 797.27 TABLE NO 5.8 AnalysisTABLE OF CORRELATION Years BSE (Cr)(Y) Laxmi Institute of Management, n(XY) Page 73 X^2 Y^2
FLUCTUATION(X) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 ∑ ∑/n 114.95 2461.68 763.73 2795.24 4388.98 6500.08 -10639.68 7817.50 3044.28 -5054.17 3971.79 16164.38 1469.49 3629.6 30459 38965.8 47181.9 36540.2 71486.3 -52987.4 83424.2 133266.8 -2714.2 128360.7 517612.9 0 47055.72 4589447.72 824783422.32 327352854.77 1450732075.72 1764116276.96 5111333357.94 6201458780.35 7173855518.50 4462715992.94 150898310.35 5608039191.18 33079875228.7 6 3007261384.43 TABLE NO 5.9 ΣX= 16164.38Cr Mean , ΣX/11 =1469.49 Cr ΣY = 517612.90 Cr Mean Σy/11 = 47055.72Cr Laxmi Institute of Management, Page 74 13213.5025 13173996.16 6059868.422 927750681 583283.5129 1518333570 7813366.658 2226131688 19263145.44 1335186216 42251040.01 5110291088 113202790.5 2807664559 61113306.25 6959597146 9267640.718 17760039982 25544634.39 7366881.64 15775115.8 16476469304 300887405.2 1 55142005110.91
Coefficient of Correlation Coefficient of Correlation = r = -53596330224.069 / √32129925359.72 r= -0.17 INTERPRETATION The Coefficient of Correlation analysis between FII’s net inflow and Sensex return from 2002-2012 gives a correlation of -0.17 which is a low degree negative correlation that means the Sensex movement is negatively corelated to the FII investment during the period 2002 to 2012. Negative values indicate a relationship between x and y such that as values for x increase, values for y decrease. . Laxmi Institute of Management, Page 75
CORRELATION BETWEEN FII & BSE FLUCTUATIONS IN THE YEAR 2012 Month Jan Net Investment(Cr)(X) FLUCTUATION(Y) n(XY) X^2 Feb 25,212.10 559.13 1,40,96,841.473 63,56,49,986.41 312 Mar 8,381.10 -348.48 -29,20,645.728 7,02,42,837.21 121 Apr -1,109.10 -85.39 94,706.049 12,30,102.81 72 May -347.1 -1,100.28 3,81,907.188 1,20,478.41 121 Jun -501.3 1,211.45 -6,07,299.885 2,51,301.69 146 Jul 10,272.70 -193.80 -19,90,849.260 10,55,28,365.29 3 Aug 10,803.90 193.38 20,89,258.182 11,67,24,255.21 37 Sep 19,261.50 1,333.18 2,56,79,046.570 37,10,05,382.25 177 Oct 11,364.20 -257.36 -29,24,690.512 12,91,45,041.64 66 Nov 9,577.20 834.52 79,92,364.944 9,17,22,759.84 696 Dec 25,087.80 86.81 21,77,871.918 62,93,97,708.84 75 ∑ 1,18,003.00 2,233.16 4,40,68,510.94 2,15,10,18,219.6 0 57, TABLE NO 5.11 ∑X = 118003.00 Mean = ∑X/11 = 10727.55 ∑Y = 2233.16 Mean = ∑Y/11 = 203.01 COEFFICIENT OF CORRELATION Laxmi Institute of Management, Page 76
R = 221234040.85/ √ (98673.67*7627.33) = 5068770244.14 / 752616202.39 = 0.29 INTERPRETATION It is a low degree positive correlation. It means that the Coefficient of Correlation analysis between FII’s net inflow and Sensex return gives a correlation of 0.29 which is a low degree positive correlation that means the Sensex movement is not much related to the FII investment during the period 2012. Positive values indicate a relationship between x and y variables such that as values for x increase, values for y also increase. However the performance of Sensex is less dependent to Net FII Inflow since it is indirectly proportional to the movement of FII’s Investment. Laxmi Institute of Management, Page 77
5.5 TREND ANALYSIS TABLE OF TREND ANALYSIS Years Net Investment (Cr) % Change 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 6370.1 13128 3629.6 30459 38966 47182 36540 71486 -52987 83424 133267 -2714 128361 100 106.09 -72.35 739.18 27.929 21.085 -22.55 95.637 -174.1 -257.4 59.746 -102 -4829 2013 till MAY 15004 -88.31 TABLE NO 5.11 Laxmi Institute of Management, Page 78
Here the base year is 2000, in which FII net inflow was 6370.50 Cr. And it is assigned as 100 point. The trend analysis is conducted by calculating percentage change in FII net inflow in each year in relation to the base year INTERPRETATION From the analysis it is known that the net inflow of money by FII during the period from 2001-08 is fluctuating in nature. The growing Indian economy and increasing GDP growth rate has resulted in a positive trend towards FII investment, and from the year 2010 it shows the negative growth. Laxmi Institute of Management, Page 79
FUTURE TREND ANALYSIS TABLE OF TREND ANALYSIS YEARS NET FII INFLOW 2013 86338 2014 92770 2015 99202 2016 105634 2017 112065 2018 118497 2019 124929 2020 131360 TABLE NO 5.12 Based on calculation in Excel TABLE NO 5.13 Laxmi Institute of Management, Page 80
CHART NO 5.9 INTERPRETATION From the trend analysis (advanced) of FII net inflow to the Indian economy, it is found that the trend is increasing in nature. That means the FII’s will increase their inflow of money in future also. Laxmi Institute of Management, Page 81
CHAPTER VI FINDINGS, CONCLUSION & SUGGESTIONS Laxmi Institute of Management, Page 82
6.1 FINDINGS THE PERFORMANCE OF SENSEX • From the study it is found that the performance of Sensex is fluctuating. The Sensex saw many ups and downs from its opening year 1991 FII’S INFLOW TO INDIAN MARKET • The study on the inflow of FII to the Indian equity market has shown that the inflow is also fluctuating and it is increasing in recent years. NUMBER OF REGISTERD FII’s V/S SENSEX RETURN • The study on increasing number of FII registered under by SEBI, shows that the value of Sensex is not much related to the number of FII registered in recent years .Today ,there are 1747 FII registered in the country as against last year number of 1706 an additional of 41. Year 2009 saw 112 FII getting registered. This means despite record inflow, the number of registered FIIs had declined. This means that the investment that the Indian market has received is majority through the FII registered earlier RELATIONSHIP BETWEEN FII’S INVESTMENT AND SENSEX RETURN • From the correlation study between sensex movement and FII inflow , found that the fluctuations in sensex is not much related to the FII investment FINDINGS FROM TREND ANALYSIS From the trend analysis it is observed that the trend in FII inflow to the economy is positive in nature. Laxmi Institute of Management, Page 83 Indian
6.2 CONCLUSION Foreign Institutional Investors, who invest their money in different countries in order to get a good portfolio of investment. And India has been in the list of their portfolio for many years. The increasing GDP growth rate and the overall development of India in different sectors like industrial and agricultural field and others are the prime reason for the increasing nature of FII’s inflow. There is a positive as well as negative correlation between stock indices and FIIs but FIIs didn’t have any significant impact on Indian Stock Market. Also the coefficient of determination is less in all the case. It shows the absence of linear relation between FII and stock index. This does not mean that there is no relation between them. One of the reasons for absence of any linear relation can also be due to the sample data. The data was taken on yearly basis. Also FII is not the only factor affecting the stock indices. There are other major factors that influence the bourses in the stock market. And from the FII’s analysis on Sensex return, it can be concluded that FII do have any significant impact on the Indian Stock Market but there are other factors like government policies, budgets, bullion market, inflation, economical and political condition, etc. do also have an impact on the Indian stock market. Laxmi Institute of Management, Page 84
6.3 SUGGESTIONS & RECOMMENDATIONS After the analysis of the project study, following recommendations can be made: • From the analysis there could not find a good positive relationship between FII's and sensex return (may be because of the data collected is on the yearly basis & Sensex return is not only dependent upon FII's investment only). They are needed to be encouraged to enter in Indian market. Because their absence result in huge change in the market • Number of FII's get registered is decreasing in nature. It may be because of nature of procedure. Simplifying procedures and relaxing entry barriers for business activities and providing investor friendly laws and tax system for foreign investors helps them to come and invest in India • Somewhere, a restriction related to the track record of Sub- Accounts is also to be made on the investors who withdraw money out of the Indian stock market . • Encourage industries to grow to make FIIs an attractive junction to invest. Laxmi Institute of Management, Page 85
BIBLIOGRAPHY BOOKS I.M Panday “Financial Management”, Vikas Publishing house Private ltd, New Delhi, 2009 Kothary CR “Reserch Methodology” New Age International Publishers, New Delhi 2006 Prasanna Chandra, ‘Financial Management’, Tata McGraw – Hill publishing company Ltd, New Delhi. 2001. Uma Sekaran ,”Reserch Methodology For Business, John Wile And Sons,Inc WEBSITES www . bse.india..com www . nse india. com www. money control. com www.hedgeequities.com www.sebi.com Laxmi Institute of Management, Page 86
Laxmi Institute of Management, Page 87

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Foreign Institutional Investor project 2013-14

  • 1.
    A GRAND PROJECTREPORT ON A STUDY OF FII INFLUENCE ON BSE STOCK MARKET. BY MR. VINEETH V. POLIYATH ENROLLMENT NO: 107310592005 BATCH: 2010-12 UNDER THE GUIDANCE OF Dr. PRANAV RAYTHATHA (Internal) Associate Professor Laxmi Institute of Management Sarigam SUBMITTED TO GUJARAT TECHNOLOGICAL UNIVESITY, AHMEDABAD FOR THE AWARD OF THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION THROUGH LAXMI VIDYAPEETH`S LAXMI INSTITUTE OF MANAGEMENT, SARIGAM College Code: 731 Branch Code: 92
  • 2.
    Subject code: 84001– Comprehensive Project Laxmi Institute of Management, Page 2
  • 3.
    DECLARATION We hereby declarethat the work incorporated in this grand project report entitled ““FII’s INFLUENCE ON BSE STOCK MARKET OVER THE PERIOD 2002-2012” is the outcome of original study undertaken by me under the guidance of Mr. Pranav Raythatha (Internal) Associate Professor, Laxmi Institute of Management, Sarigam during 14 th January 2013 to 30th April 2013. This project report has not been submitted earlier to any other University or Institution for the award of any Degree or Diploma. Mr. VINEETH V. POLIYATH 107310592005 BATCH: 2010-12 Laxmi Institute of Management, Page 3
  • 4.
    CERTIFICATE This is tocertify that the content of this grand project report entitled “FII’s INFLUENCE ON BSE STOCK MARKET OVER THE PERIOD 2002-2012 AT ARCADIA, VAPI””by Mr.Vineeth V .Poliyath, Enrollment No. 107310592005 submitted to Gujarat Technological University, Ahmadabad for the Award of Master of Business Administration is original research work carried out by him under my supervision during 14th January 2012 to 30th May 2012. On the basis of the declaration made by him I recommend this project report for the evaluation. This report has not been submitted either partly or fully to any other University or Institute for award of any degree or diploma. MR. PRANAV RAYTHATHA Project Guide Associate Professor Laxmi Institute of Management, Sarigam Laxmi Institute of Management, Page 4
  • 5.
    INDEX SR. NO. 1 2 3 4 5 6 PARTICULAR GENERAL INFORMATION OVERVIEW OFINDIAN ECONOMY THEORITICAL FRAMEWORK STOCK EXCHANGE - BSE & NSE FOREIGN INSTITUTIONAL INVESTORS PRIMARY DATA INTRODUCTION OF THE STUDY LITERATURE REVIEW BACKGROUND OF THE STUDY RESEARCH METHODOLOGY OBJECTIVE OF THE STUDY SCOPE OF THE STUDY METHODOLOGY OF THE STUDY LIMITATION DATA ANALYSIS & INTERPRETATION PERFORMANCE OF Sensex FII'S NET INVESTMENT V/S Sensex RETURN NUMBER OF FII'S REGISTERED V/S Sensex RETURN COEFFICIENT OF CORELATION & REGRESSION ANALYSIS BETWEEN FII'S & Sensex RETURN TREND ANALYSIS OF FII'S INVESTMENT FINDING, CONCLUSION & SUGGESTION Laxmi Institute of Management, Page 5 PAGE NO.
  • 6.
    LIST OF TABLES PAGENO TABLE NO TABLE 4.1 LIST OF BSE SENSEX COMPANIES 4.2 INTERNATIONAL STOCK EXCHANGES 5.1 PERFORMANCE OF SENSEX 1991-2010 5.2 SENSEX RETURN FROM 2000-2010 5.3 FII’s NET INFLOW FROM 2000-2010 5.4 FII’s NET INFLOW V/S SENSEX RETURN 5.5 SENSEX RETURN 2010 5.6 FII NET INFLOW 5.7 FII INFLOW V/S SENSEX RETURN 5.8 NUMBER OF FII VS SENSEX RETURN 5.9 SENSEX FLUCTUATION 5.10 CORRELATION 5.11 CORRELATION 2010 5.12 CURRENT TREND OF FII’s INVESTMENT 5. 13 ANALYSIS OF TREND 5.14 TREND ANALYSIS-FUTURE Laxmi Institute of Management, Page 6
  • 7.
    LIST OF CHARTS CHARTNO CHART NAME PAGE NO 5.1 SENSEX 1991-2010 5.2 SENSEX RETURN 2000-10 5.3 FII NET INFLOW 2000-10 5.4 FII INFLOW 2000-2010 V/S SENSEX RETURN 5.5 SENSEX RETURN 2010 5.6 FII NET INFLOW 2010 5.7 SENSEX RFTURN V/S NET INFLOW 2010 5.8 NUMBER OF FII VS SENSEX RETURN 5.9 TREND ANALYSIS Laxmi Institute of Management, Page 7
  • 8.
    ACKNOWLEDGEMENT The satiation andeuphonies that accompany the success completion of a task would be incomplete without a mention of people who made it possible. So, with immense gratitude, I acknowledge all those, whose guidance and encouragement served as a beacon light and crowned my effort with success. I have taken efforts in this grand project. However, it would not have been possible without the kind support and help of many individuals and organizations. I would like to extend my sincere thanks to all of them. We are highly indebted to Mr. Pranav Raythatha, Associate Professer of Laxmi Institute of Management, Sarigam for his guidance, constant help and for providing necessary information regarding the stock market operation and various industry sectors. I express my thanks for his encouragement which help me in completion of this project. I would like to express my special gratitude to my parents who gave us continuous support during the grand project work. Mr Vineeth Poliyath 107310592005 BATCH: 2010-12 Laxmi Institute of Management, Page 8
  • 9.
    EXECUTIVE SUMMARY The projectdeals with the “Impact of Foreign Institutional Investors on Indian Stock Market”. This research project studies the relationship between FIIs investment and stock indices. For this purpose India’s major index i.e. BSE Sensex is selected. This index would be used for to represent the picture of India’s stock markets. So this project reveals the impact of FII on the Indian capital market. There may be many other factors on which a stock index may depend i.e. Government policies, budgets, bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar exchange rate etc. But for this study I have selected only one independent variable i.e. FII. This study uses the concept of correlation, regression and hypothesis to study the relationship between FII and stock index. The FII started investing in Indian capital market from year 1991 when the Indian economy was opened up in the same year. Their investments include equity only. Laxmi Institute of Management, Page 9
  • 10.
  • 11.
    OVERVIEW OF INDIANECONOMY The Indian economy has continuously recorded high growth rates and has become an attractive destination for investments, according to Ms Pratibha Patil, the Indian President. "India's growth offers many opportunities for mutually beneficial cooperation," added Ms Patil. "Today India is among the most attractive destinations globally, for investments and business and FDI had increased over the last few years," said Ms Patil. The Indian economy is expected to grow at around 7.5 per cent, according to Dr Manmohan Singh, the Indian Prime Minister. The PM acknowledged Asia's emerging economies were "growing well" and were, "in fact, contributing to the recovery of the world economy". The overall growth of gross domestic product (GDP) at factor cost at constant prices, as per Revised Estimates, was 8.5 per cent in 2010-11 representing an increase from the revised growth of 8 per cent during 2009-10, according to the monthly economic report released for the month of September 2011 by the Ministry of Finance. Overall growth in the Index of Industrial Production (IIP) was 4.1 per cent during August 2011. The eight core Infrastructure industries grew by 3.5 per cent in August 2011 and during April-August 2011-12, these sectors increased by 5.3 per cent. In addition, exports and imports in terms of US dollar increased by 44.3 per cent 41.8 per cent respectively, during August 2011. Over the next two years India could attract foreign direct investment (FDI) worth US$ 80 billion, according to a research report by Morgan Stanley. India has received US$ 48 billion FDI in the last two years. Considering the pace of FDI growth in India, KPMG officials believe that FDI in 2011-12 might cross US$ 35 billion mark. Laxmi Institute of Management, Page 11
  • 12.
    In addition, Indiahas entered the club of top 20 exporters of goods and reclaimed its position among top 10 services exporters in 2010. India's goods exports rose by 31 per cent in 2010, helping it to improve its world ranking moving up two places to 20 from 22 in 2009. Laxmi Institute of Management, Page 12
  • 13.
    The Economic Scenario: • Areport titled, 'World Investment Prospects Survey 2009-2012' by the United Nations Conference on Trade and Development (UNCTAD) has ranked India at the second place in global foreign direct investments (FDI) in 2010 and expects India to remain among the top five attractive destinations for international investors during 2010-12. • India Inc announced 177 mergers and acquisitions (M&A) deals worth US$ 26.8 billion in the first nine months of 2011. For the quarter July-September 2011, inbound deals worth US$ 7.32 billion were registered as against the deals worth US$ 2.65 billion in the previous quarter. Foreign institutional investors (FIIs) have invested more than Rs 41,000 crore (US$ 7.81 billion) in government papers and Rs 68,000 crore (US$ 12.95 billion) in corporate bonds as on October 31, 2011 • The latest available data from the Reserve Bank of India show a 77 per cent jump in the FDI in the first half of the current financial year (AprilSeptember), compared to what was US$ 19.5 billion during the same period a year ago • The total amount of FDI equity inflows during financial year 2011-12 from April 2011 to September 2011 stood at US$ 19.14 billion aggregating to 74 per cent growth over last year • India's foreign exchange (Forex) reserves have increased by US$ 2 billion to US$ 320 billion for the week ended October 28, 2011, on account of revaluation of foreign currency assets, according to the weekly statistical bulletin released by the Reserve Bank of India (RBI) Laxmi Institute of Management, Page 13
  • 14.
    • The Government hasapproved fund raising worth Rs 60,950 crore (US$ 11.61billion) by companies through external commercial borrowings (ECB) or foreign currency convertible bonds (FCCB) for infrastructure projects in the financial years 2009-2011 • India's merchandise exports have registered an increase of nearly 82 per cent during July 2011 from a year ago to touch US$ 29.3 billion, according to a release by the Ministry of Commerce and Industry. Exports during April-July 2011 reached US$ 108.3 billion, up 54 per cent over the same period a year ago, according to Mr. Rahul Khullar, Commerce Secretary. Exports in the referred period increased on back of demand for engineering and petroleum products, gems and jewellery and readymade garments • Private equity (PE) investments in India stood at US$ 6.14 billion in value terms, while the number of deals increased by 33 per cent to 195, during January-June 2011, according to data compiled by Chennai-based Venture Intelligence. The rise in the value of the deals so far (June 2011) recorded a growth of 52 per cent, as compared to US$ 4.04 billion raised last year • The Indian metals and minerals sector has received PE investments worth US$ 650 million in the first half of 2011, according to estimates by VC Edge. The metal making industry has attracted PE players; in addition the mining assets are also a major draw due to the sharp demand for ownership of raw materials • India currently holds the 12th position in Asia and 68th position in the overall list world's most attractive tourist destinations, as per the Travel and Tourism Competitiveness Report 2011 by the World Economic Forum (WEF). A study conducted by global hospitality services firm, HVS, to measure marketing effectiveness on Internet puts Karnataka Tourism's Web site in the sixth position in India Laxmi Institute of Management, Page 14
  • 15.
    • The wind energysector has attracted foreign direct investment (FDI) worth Rs 1,510 crore (US$ 287.62 million) over the past three years. In the renewable energy sector, wind energy has emerged as the fastest growing category, according to Dr Farooq Abdullah, Union Minister for New and Renewable Energy Furthermore, the Indian Railways has generated Rs 37,392.88 crore (US$ 7.12 billion) of revenue earnings from commodity-wise freight traffic during AprilOctober 2011 as compared to Rs 34,337.11 crore (US$ 6.54 billion) during the corresponding period last year, registering an increase of 8.90 per cent. Railways carried 536.92 million tons (MT) of commodity-wise freight traffic during AprilOctober 2011 as compared to 516.89 MT carried during the corresponding period last year, registering an increase of 3.88 per cent. Laxmi Institute of Management, Page 15
  • 16.
    Growth Potential Story: • India'sexports grew by 36.3 per cent in September 2011, demonstrating impressive growth. Exports stood at US$ 24.8 billion compared to US$ 18.2 billion in the same period last year, while imports grew by 17.2 per cent to record US$ 34.5 billion. • Exports from special economic zones (SEZs) during April-September 2011 increased by 26.2 per cent to Rs 176,479.69 crore (US$ 33.62 billion), as per a statement by the Export Promotion Council for EOUs and SEZs (EPCES). • Andhra Pradesh (AP) with 75 notified special economic zones (SEZs), which is the highest number of SEZs in any State in India, has attracted investment of approximately Rs 15,000 crore (US$ 2.86 billion) • The July-September 2011 quarter observed an increase in foreign institutional investor (FII) stakes in major automakers as compared to the previous quarter of 2011 • Information technology (IT) spending in India by enterprises will rise by 9.1 per cent in 2012, according to a report by research firm Gartner. IT spending in India is projected to touch US$ 79.8 billion in 2012 as compared to US$ 73.1 billion in 2011. The telecommunications market is the largest IT segment in India with IT spending forecast to reach US$ 54.7 billion in 2012, followed by the IT services market with spending of US$ 11.1 billion. The computing hardware market in India is projected to reach US$ 10.7 billion in 2012, while software spending will total to US$ 3.2 billion, reported Gartner Laxmi Institute of Management, Page 16
  • 17.
    • The Government plansto set up an Rs 2,500 crore (US$ 476.19 million) development fund for the auto component sector. The industry, which aims to almost triple its size to US$ 115 billion by 2020, envisages annual capital investment of up to US$ 3 billion • India is the 9th or 10th largest car maker in the world, but given its very ambitious production plans, in the next five to ten years it will jump to the third or fourth spot, according to Diane H Gulyas, President, DuPont Performance Polymers. The firm's Innovation Centre will focus on automobile trends working towards making vehicles faster, lighter, safer and fuel efficient • The Rs 15,000 crore (US$ 2.86 billion) Indian forging industry is poised to grow over 20 per cent per year and see investments of about US$ 3 billion by 2015 for capacity expansion, according to the Association of Indian Forging Industry. • A public-private partnership (PPP) fund worth Rs 5,000 crore (US$ 952.38 million) is being set up to support research and development efforts-especially in the field of vaccines, drugs and pharmaceuticals, supercomputing, solar energy and electronic hardware-as well as commercialization of products and services, according to Mr. Ashwani Kumar, Minister of State for Science & Technology. • In addition, the Indian banking sector is poised to become the world's thirdlargest in terms of assets over the next 14 years—with its assets poised to touch US$ 28,500 billion by 2025—according to a report titled ‘Being fivestar in productivity — Roadmap for excellence in Indian banking', prepared for the Indian Banks' Association (IBA) by The Boston Consultancy Group (BCG), IBA and an industry body. Laxmi Institute of Management, Page 17
  • 18.
    • Investment in logisticssector in India is projected to grow annually at 10 per cent. India's logistics market achieved revenues of US$ 82.1 billion in 2010 and is expected to reach revenue worth US$ 90 billion in 2011. The logistics industry forecasts to generate revenues worth US$ 200 billion by 2020, as per Eredene Capital PLC's 2010-11 annual report. • India's engineering research and development (ER&D) providers is estimated to capture about 40 per cent share of global offshore revenues in 11 key verticals by 2020, according to a new report titled 'The Futures Report 2011', by Global Futures and Foresight (GFF). • India's power sector will generate revenue of Rs 1,300,000 crore (US$ 247.62 billion) during the Twelfth Five Year Plan (2012-17), as per Mr. P Uma Shankar, Secretary, Ministry of Power. The plan is to generate 17,000 MW power during the referred period • The food processing industry is set to triple to reach US$ 900 billion by 2020, provided the key issues are addressed, as per a study by Boston Consulting Group (BCG) and an industry body. • The National Agricultural Innovation Programme (NAIP) will spend Rs 500 crore (US$ 95.24 million) more in the next two years on different projects to add value to agriculture and allied sectors. This programme aims at developing technology-based innovations to improve the income of farmers and those living on allied sectors. • Gaining momentum from fashion trends, many Indian consumers now spend an equivalent amount on footwear as on their apparels, as they associate variety of shoes to different occasions. The footwear industry in India has Laxmi Institute of Management, Page 18
  • 19.
    almost doubled inthe past five years to an estimated Rs 20,000 crore (US$ 3.81 billion). Laxmi Institute of Management, Page 19
  • 20.
    CHAPTER- II THEORETICAL FRAMEWORK LaxmiInstitute of Management, Page 20
  • 21.
    2.1 STOCK EXCHANGE: StockExchange is an organized marketplace where securities are traded. These securities are by the government, semi-government Bodies, Public sector undertakings and companies for borrowing funds and raising resources. Securities are defined as monetary claims and include stock, shares, debentures, bonds etc. If these securities are marketable as in the case of Government stock, they are transferable by endorsement and are like movable property. Under the securities Contract Regulation Act of 1956, securities trading are regulated by the Central Government and such trading can take place only in Stock Exchange recognized by the Government under this Act. At present there are 23 recognized stock Exchanges in India. Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. BOMBAY STOCK EXCHANGE: Bombay Stock Exchange is the oldest stock exchange in Asian with a rich heritage, now spanning three centuries in its 133 years of existence. What is now popularly known as BSE was established as “The Native Share & Stock Brokers’ Association” in 1875. BSE is the first stock exchange in the country which obtained permanent recognition (in 1956) from the government of India under the Securities Countracts (Regulation) Act 1956. BSE’s pivotal and pre-eminent role in the development of the Indian capital market is widely recognized. It migrated from the open outcry system to an online screen- based order driven trading system in 1955. Earlier an Association Of Persons (AOP), BSE is now a corporatized and demutualised entity incorporated under the provisions of the companies Act, 1956, pursuant to the BSE (Corporatization and Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI). With demutualization, BSE has two of world’s best exchanges, Deutsche Borse and Singapore Exchange, as its strategic partners. Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by providing it with an efficient access to resources. There is Laxmi Institute of Management, Page 21
  • 22.
    perhaps no majorcorporate in India which has not sourced BSE’s services in raising resources from the capital market. Today, BSE is the world’s number 1 exchange in terms of the number of listed companies and the world’s 5th in transaction numbers. The market capitalization as on December 31, 2007 stood at USD 1.79 trillion. An inventor can choose from more than 4700 listed companies, which for easy reference, are classified into A, B, S, T and Z groups.The BSE Index, SENSEX, is Indian’s first stock market index that enjoys an iconic stature, and is tracked worldwide. It is an index of 30 stocks representing 12 malor sectors. The SENSEX is constructed on a ‘free-float’ methodology, and is sensitive to market sentiments and market realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indicates. BSE has entered into an index cooperation agreement with Deutsche Borse. This agreement has made SENSEEX and other BSE indices available to investors in Europe and America. Moreover, Barclays Global Investors (BGI), the global leader in ETF’S through its Trader which tracks the SENSEX. The ETF enables investors in Hong Kong to take an exposure to the Indian equity market. BSE provides an efficient and transparent market for trading in equity, debt instruments and derivatives. It has a nation- wide reach with a pressure in more than 450 cities and towns of India. BSE has always been at par with the international standards. The systems and processes are designed to safeguard market integrity and enhance transparency in operations.BSE is the first exchange in India and the second is the world to obtain an ISO 9001:2000 certification. It is also the first exchange in India and the second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its BSE On-line Trading System (BOLT).BSE continues to innovate. In recent times, it has become the first national level stock exchange to launch its website in Gujarati and Hindi to reach out to a large number of investors. It has successfully launched a reporting platform for corporate bonds in India christened the ICDM or Indian Corporate Dept Market and a unique ticker screen aptly named ‘BSE Broadcast’ which enables information dissemination to the common man on the street. In 2006, BSE launched the Directors Database and ICERS (India Corporate Electronic Reporting System) to facilitate information flow and increase transparency in Indian capital market. While the Directors database provides a single-point access Laxmi Institute of Management, Page 22
  • 23.
    to information inthe boards of directors of listed companies, the ICERS facilities the corporate in sharing with BSE their corporate announcements. BSE also has a wide range of services to empower investors and facilitate smooth transactions: Investors Services: The Department of Investor Services redresses grievances of investors. BSE was the first exchange in the country to provide an amount of Rs.1 million towards the investor protection fund; it is an amount higher than that of any exchange in the country. BSE launched a nationwide investor awareness programme‘safe investing in the Stock Market’ under which 264vprogrammes were held in more than 200 cities. The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-line screen based trading in securities. BOLT is currently operating in 25,000 Trader Workstations located across over 450 cities in India. BSEWEBX.com: In February 2001, BSE introduced the world’s first centralized exchange-based Internet trading system, BSEWEBX.com. This initiative enables investors anywhere in the world to trade on the BSE platform. Surveillance: BSE’s On-line Surveillance System (BOSS) monitors on a real-time basis the price movements, volume positions and members’ positions an real-time measurement of default risk, market reconstruction and generation of cross market alerts. BSE Trading Institution: BTI imparts capital market trading and certification, in collaboration with reputed management institutes and universities. It offers over 40 courses on various aspects of the capital market and financial sector. More than 20,000 people have attended the BTI programmes. Laxmi Institute of Management, Page 23
  • 24.
    Companies in theSensex List of BSE Sensex companies provides the full list of companies that have been part of the BSE Sensex since its inception in 1986 (base lined to 1979). Code Name Sector Adj. Weight in Factor Index(%) 500410 ACC Housing Related 0.55 0.77 500103 BHEL Capital Goods 0.35 3.26 532454 Bharti Airtel Telecom 0.35 3 532868 DLF Universal Limited Housing related 0.25 1.02 500300 Grasim Industries Diversified 0.75 1.5 500010 HDFC Finance 0.90 5.21 500180 HDFC Bank Finance 0.85 5.03 0.50 1.43 0.7 1.75 500696 Hindustan Lever Limited FMCG 0.50 2.08 532174 ICICI Bank Finance 1.00 7.86 500209 Infosys Information Technology 0.85 10.26 500875 ITC Limited FMCG 0.70 4.99 532532 Jaiprakash Associates Housing Related 0.55 1.25 500510 Larsen & Toubro Capital Goods 0.90 6.85 Transport Equipments 0.75 1.71 532500 Maruti Suzuki Transport Equipments 0.50 1.71 532541 NIIT Technologies Information Technology 0.15 2.03 532555 NTPC Power 0.15 2.03 500304 NIIT Information Technology 0.15 2.03 500312 ONGC Oil & Gas 0.20 3.87 Telecom 0.35 0.92 500325 Reliance Industries Oil & Gas 0.50 12.94 500390 Reliance Infrastructure Power 0.65 1.19 500112 State Bank of India Finance 0.45 4.57 0.45 2.39 500182 Hero Honda Motors Ltd. Transport Equipments 500440 Hindalco Industries Ltd. 500520 532712 Mahindra & Mahindra Limited Reliance Communications 500900 Sterlite Industries Laxmi Institute of Management, Metal,Metal Products & Mining Metal, Metal Products, and Mining Page 24
  • 25.
    524715 Sun Pharmaceutical 0.40 1.03 Information Technology0.25 3.61 500570 Tata Motors Transport Equipments 0.55 1.66 500400 Tata Power Power 0.70 1.63 0.70 2.88 Information Technology 0.20 1.61 532540 Industries Tata Consultancy Services 500470 Tata Steel 507685 Wipro Healthcare Metal, Metal Products & Mining TABLE NO 4.1 • DLF replaced Dr. Reddy's Lab on November 19, 2007. • Jaiprakash Associates Ltd replaced Bajaj Auto Ltd on March 14, 2008. • Sterlite Industries replaced Ambuja Cements on July 28, 2008. • Tata Power Company replaced Cipla Ltd. on July 28, 2008. • Sun Pharmaceutical Industries replaced Satyam Computer Services on January 8, 2009 • Hero Honda Motors Ltd. replaced Ranbaxy on June 29, 2009 • Cipla to replace Sun Pharma from May 3, 2010 • Grasim replaced JSPL in 2010 Laxmi Institute of Management, Page 25
  • 26.
    13. SECTORS OFBSE • HC (health care) • REALITY • AUTO • METAL • IT • CG (capital goods) • ONG (oil and gas) • POWER • PSU • CD (consumer durables) • BANK • TECH • FMCG NAME OF BSE 30 COMPANIES ACC, BHARTI AIRTEL, BHEL, DLF, GRASIM, HDFC, HDFC BANK, HINDALCO, HUL, ICICI BANK, INFOSYS, ITC, JAIPRAKASH ASSOCIATES, L&T, MAHINDRA & MAHINDRA, MARUTI SUZUKI, ONGC, NTPC, RANABAXY LAB, RELIENCE, RELIENCE COMM, RELIENCE INFRASTRUCTURE, SATYAM, SBI, STERLITE INDUSTRY, TATA MOTORS, TATA POWER, TATA STEEL. TCS, WIPRO. Laxmi Institute of Management, Page 26
  • 27.
    AS ON- FEB15,2011 NATIONAL STOCK EXCHANGE (NSE): With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high-powered Pherwani Committee, Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others incorporated the National Stock Exchange in 1992. Trading at NSE can be classified under two broad categories: (a) Wholesale debt market and (b) Capital market. There are two kinds of players in NSE: (a) Trading members and (b) Participants. Trading at NSE takes place through a fully automated screen-based trading mechanism, which adopts the principle of an order-driven market. Trading members can stay at their offices and execute the trading, since they are linked through a communication network. 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 and a confirmation slip will be printed at the office of the trading member. NSE has several advantages over the traditional trading exchanges. They are as follows:  NSE brings an integrated stock market trading network across the nation.  Investors can trade at the same price from anywhere in the country since intermarket operations are streamlined coupled with the countrywide access to the securities.  Delays in communication, late payments and the malpractice's prevailing in the traditional trading mechanism can be done away with greater operational Laxmi Institute of Management, Page 27
  • 28.
    efficiency and informationaltransparency in the stock market operations, with the support of total computerized network. Laxmi Institute of Management, Page 28
  • 29.
    List of Top50 Companies of NSE (National Stock Exchange ) • RELIANCE INDUSTRIES LTD, OIL AND NATURAL GAS CORPORATION LTD, BHARTI AIRTEL LIMITED, NTPC LTD, RELIANCE COMMUNICATIONS LTD., ICICI BANK LTD, • INFOSYS TECHNOLOGIES LTD, TATA CONSULTANCY SERVICES LTD, BHEL, STATE BANK OF INDIA, • STEEL AUTHORITY OF INDIA, LARSEN & TOUBRO LTD., HERO HONDA MOTORS LTD, ZEE ENTERTAINMENT LTD, INDIAN PETROCHEMICALS CORPORATION LTD., CIPLA LTD, BHARAT PETROLEUM CORPORATION LTD.,VIDESH SANCHAR NIGAM LTD, DR. REDDY'S LABORATORIES, • MAHANAGAR TELEPHONE NIGAM LTD, GLAXOSMITHKLINE PHARMA LTD.,ABB LTD. POWER GRID CORPORATION OF INDIA, RELIANCE ENERGY LTD, SIEMENS LTD, ACC LIMITED, AMBUJA CEMENTS LTD, • HCL TECHNOLOGIES LTD, HINDALCO INDUSTRIES LTD, • NATIONAL ALUMINIUM CO LTD, SUN PHARMACEUTICALS IND., • MAHINDRA & MAHINDRA LTD, TATA POWER CO LTD, PUNJAB NATIONAL BANK, RANBAXY LABS LTD, ITC LTD, RELIANCE PETROLEUM LTD., HDFC LTD, WIPRO LTD, STERLITE INDUSTRIES LTD., • HDFC BANK LTD, TATA STEEL LIMITED, HINDUSTAN UNILEVER LTD., SUZLON ENERGY LIMITED, GAIL (INDIA) LTD, GRASIM INDUSTRIES LTD, TATA MOTORS LIMITED, MARUTI UDYOG LIMITED AS ON- FEB 15,2011 Laxmi Institute of Management, Page 29
  • 30.
    INTERNATIONAL STOCK EXCHANGES Rank Economy StockExchange 1 United States 2 United States New York Stock Exchange NASDAQ 3 Japan Tokyo Stock Exchange 4 United London Stock Kingdom Exchange 5 Hong Kong Hong Kong Stock Exchange 6 Europe Euronext 7 China Shanghai Stock Exchange 8 Canada Toronto Stock Exchange 9 India Bombay Stock Exchange 10 India National Stock Exchange of India 11 Brazil BM&F Bovespa 12 Germany Deutsche Börse 13 Australia Australian Securities Exchange 14 China Shenzhen Stock Exchange 15 Switzerland SIX Swiss Exchange 16 Spain BME Spanish Exchanges Americas 21244 Asia - Pacific 18287 Europe - Africa - Middle 13975 East Total 51752 Laxmi Institute of Management, Page 30 (TABLE NO 4.2) Market Capitalization (USD Billions) Trade Value (USD Billions) 13041 1439 3649 954 3542 311 3354 229 2696 179 2695 2681 165 686 2002 134 1540 231 1503 791 1447 1320 1309 704 123 101 1284 548 1122 674 1077 149 2617 2262 954 5833
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    2.2 INTRODUCTION TOFII International portfolio flows, as are commonly known as Foreign Institutional Investment (FII) flows, refer to capital flows made by individual and institutional investors across national borders with a view to creating an internationally diversified portfolio. ‘FII’ include “Overseas pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or investments on behalf of a broad-based fund. Foreign institutional investor means an entity established or incorporated outside India which proposes to make investment in India. Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for foreign institutional investors. Unlike Foreign Direct Investment (FDI) flows which refer to that category of international investment aimed at obtaining a lasting interest by a resident entity in one economy in an enterprise resident in another economy by way of exercising significant control over its management, FII flows are not directed at acquiring management control over foreign companies. FII flows were almost non-existent until 1980s. Global capital flows were primarily characterized by syndicated bank loans in 1970s followed by FDI flows in 1980s. But a strong trend towards globalization leading to widespread liberalization and implementation of financial market reforms in many countries of the world had actually set the pace for FII flows during 1990s. Laxmi Institute of Management, Page 31
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    According to Bekaertand Harvey (2000), FII investment as a proportion of a developing country's GDP increases substantially with liberalization as such integration of domestic financial markets with the global markets permits free flow of capital from 'capital-rich' to 'capital-scarce' countries in pursuit of higher rate of return and increased productivity and efficiency of capital at global level. Diversifying internationally i.e., holding a well-diversified portfolio of securities from around the world in proportion to market capitalizations, irrespective of the investor's country of residence, has long been advocated as the means to reduce overall portfolio risk and maximize risk-adjusted returns by the classical capital asset pricing model (CAPM). But a persistent 'home bias' (i.e., the tendency to hold a greater proportion of stocks from the home country vis-a-vis the foreign country) was noticed in the portfolios of investors in capital-rich industrialized countries in early 1990s. With more and more emerging market economies (EMEs) 1 deregulating their financial markets by eliminating foreign exchange controls, reducing taxes imposed on foreign investors, relaxing the restrictions on the purchase / sale of securities by foreign investors in domestic markets etc., such 'home bias' has decreased over the years. Today, EMEs, by virtue of their lower correlations in stock market returns with the developed markets, offer greater scope to investors in developed countries to reduce their overall portfolio risk and effectively enhance the portfolio performance and hence have become the most preferred destinations for FII flows. Several research studies on FII flows to EMEs over the world have highlighted that financial market infrastructure such as the market size, market liquidity, trading costs, extent of information dissemination etc., legal mechanisms relating to property rights etc., harmonization of corporate governance, accounting, listing and other rules with those followed in developed markets, and strengthening of securities markets' enforcement are important determinants of foreign portfolio investments into emerging markets. Of late, the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) have initiated a string of measures like allowing overseas pension funds, mutual funds, investment trusts, asset management Laxmi Institute of Management, Page 32
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    companies, banks, institutionalportfolio managers, university funds, endowments, foundations or charitable trusts etc. but banning non-resident Indians (NRIs) and overseas corporate bodies (OCBs) from trading as foreign portfolio investors, raising the caps for FII from 24% to 49% of a non-bank company's issued capital subject to sectoral caps / statutory ceiling as applicable, enhancing the individual investment limit from 5% to 10% of issued capital, permitting foreign investors to trade in Government securities and derivatives, easing the norms for FII registration, reducing procedural delays, lowering fees, mandating stricter disclosure norms, improved regulatory standards etc. with a view to improving the scope, coverage and quality of FII flows into India. As a result, India, also supported by her strong economic fundamentals, has become one of the attractive destinations for FII flows in the emerging market space today. The expansionary effect of various reform measures on FII flows over the years can be gauged from the fact that net (i.e., gross purchases minus gross sales) FII flows into India have risen sharply from Rs. 5126 crore in 1993-1994 2 to Rs. 46,215 crore in 2004-2005, with the number of foreign institutional investors being registered with SEBI increasing from 3 in 1993-1994 to 685 in 2004-2005 (Source : SEBI website). This increasing dominance of foreign investors in Indian market has necessitated research on the implications of FII flows for the Indian stock market time and again. Although FII flows help supplement the domestic savings and augment domestic investments without increasing the foreign debt of the recipient countries, correct current account deficits in the external balance of payments' position, reduce the required rate of return for equity, and enhance stock prices of the host countries, yet there are worries about the vulnerability of recipient countries' capital markets to such flows. FII flows, often referred to as 'hot money' (i.e., short-term and overly speculative), are extremely volatile in character compared to other forms of capital flows. Foreign portfolio investors are regarded as 'fairweather friends' who come in when there is money to be made and leave at the first sign of impending trouble in the host country thereby destabilizing the domestic economy of the recipient country. Laxmi Institute of Management, Page 33
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    Often, they havebeen blamed for exacerbating small economic problems in the host nation by making large and concerted withdrawals at the slightest hint of economic weakness. It is also alleged that as they make frequent marginal adjustments to their portfolios on the basis of a change in their perceptions of a country's solvency rather than variations in underlying asset value, they tend to spread crisis even to countries with strong fundamentals thereby causing 'contagion' in international financial markets (FitzGerald,1999). TRENDS OF FOREIGN INSTITUTIONAL INVESTMENTS IN INDIA. Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds. Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India. Thereafter, the Indian stock markets were opened up for direct participation by FIIs. They were allowed to invest in all the securities traded on the primary and the secondary market including the equity and other securities/instruments of companies listed/to be listed on stock exchanges in India • In 2004, FII investments crossed $9 billion, the highest in the history of Indian capital markets. • The total net investment for the year up to December 29 stood at US$9,072 million while foreign investors pumped in about US$2,113 million in December. • Korea and Taiwan have always been the biggest recipients of FII money. It was only in 2004 that India managed to receive the second highest FII inflow at over $8.5bn. • In 2005 FIIs invested more in Indian equities than in Korean or Taiwanese equities. • On 9th March 2009, India's exceptional growth story and its booming economy Laxmi Institute of Management, Page 34
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    have made thecountry a favourite destination with foreign institutional investors (FIIs). It has continued to attract investment despite the Satyam non-governance issue and the global economic contagion impact on Indian markets. • They are also the most successful portfolio investors in India with 102 per cent Appreciation since September 30, 2003. • As per SEBI, number of registered FIIs stood at 1626 and number of registered subaccounts stood at 4972 as on March 17, 2009 Prohibitions on Investments: Foreign Institutional Investors are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities: • Business of chit fund • Nidhi Company • Agricultural or plantation activities • Real estate business or construction of farm houses (real estate business does not include development of townships, construction of residential/commercial premises, roads or bridges). • Trading in Transferable Development Rights (TDRs). Laxmi Institute of Management, Page 35
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    FUTURE PROSPECTS OFFOREIGN INSTITUTIONAL INVESTMENTS: • Sustaining the growth momentum and achieving an annual average growth of 9-10 % in the next five years. • Simplifying procedures and relaxing entry barriers for business activities and Providing investor friendly laws and tax system. • Checking the growth of population; India is the second highest populated country in the world after China. However in terms of density India exceeds China, as India's land area is almost half of China's total land. Due to a high population growth, GNI per capita remains very poor. It was only $ 2880 in 2003 (World Bank figures). • Boosting agricultural growth through diversification and development of agro processing. • Expanding industry fast, by at least 10% per year to integrate not only the surplus labour in agriculture but also the unprecedented number of women and teenagers joining the labour force every year. • Developing world-class infrastructure for sustaining growth in all the sectors • Allowing foreign investment in more areas. • Effecting fiscal consolidation and eliminating the revenue deficit through revenue enhancement and expenditure management. Market Outcome in the previous years Foreign Portfolio investments in India come in the form of investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in Offshore funds. Laxmi Institute of Management, Page 36
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    However, FIIs constitutea major proportion of such portfolio. The share of FIIs in total portfolio flows was as high as 95.97% in 2003-04 and 93.25% in 2004-05. It declined to 46% in 2006-07. This decline in FII investment in 2006-07 can be attributed to global developments like meltdown in global commodities markets and equity market during the three month period between May 2006 to July 2006, fall in Asian Equity markets, tightening of capital controls in Thailand and its spillover effects. The share of FII investment in total portfolio investment for 2007-08 is provisionally estimated to be 69.15%. The large FII inflows (net) in 2007-08 at USD 16 billion as against USD 6.7 billion in 2006-07 reflects increased participation of FIIs in the primary market as corporates raised large resources through 85 initial public offerings (IPOs) and 7 follow-on public offers (FPOs) aggregating to Rs 545,110 million. (US $ 13,638 million). Looking at monthly trend in FII investments during 2007-08 it can be seen that net FII investment has been positive during most of the months. The months of August 2007, November 2007, January, 2008 and March, 2008 saw net outflows of FII investment, with the largest pull out of US $ 2727 mn in January, 2008. During 2008-09, till June 2008, FIIs have been net sellers to the tune of US $ 4,189 million. This can be attributed to the generally weak sentiments of investors following the global credit crisis which has engulfed the developed countries and is seen to be affecting the developing countries as well. Laxmi Institute of Management, Page 37
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    CHAPTER III PRIMARY STUDY LaxmiInstitute of Management, Page 38
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    INTRODUCTION OF THESTUDY “ FII’s influence on the Sensex over the period 2000-2010 ”- is a study of the influence of FOREIGN INSTITUTIONAL INVESTERS whose activities play a vital role in the ups and downs of the share market. The study is conducted on the Indian stock exchange market ( BSE SENSEX) . There are conflicting theories on the issue of whether FII flows affect or are affected by domestic stock market returns. So, the present empirical study has been undertaken to throw some light on the direction of causality between FII flows and Indian stock market returns using data on both the variables from over the period 2002- 2012.International portfolio flows, as are commonly known as Foreign Institutional Investment (FII) flows, refer to capital flows made by individual and institutional investors across national borders with a view to creating an internationally diversified portfolio. Unlike Foreign Direct Investment (FDI) flows which refer to that category of international investment aimed at obtaining a lasting interest by a resident entity in one economy in an enterprise resident in another economy by way of exercising significant control over its management, FII flows are not directed at acquiring management control over foreign companies. FII flows were almost non-existent until 1980s. With more and more emerging market economies (EMEs), deregulating their financial markets by eliminating foreign exchange controls, reducing taxes imposed on foreign investors, relaxing the restrictions on the purchase / sale of securities by foreign investors in domestic markets etc. they are increasing in number. Foreign Institutional Investment (FII) flows, i.e., capital flows across national borders, to emerging market economies (EMEs) have risen sharply over the past one and half decade due to globalization and India is no exception in this regard. However, there is a lot of apprehension regarding the volatile nature of such flows thereby raising questions about the need to encourage FII flows in a narrow and shallow stock market like that of India. Laxmi Institute of Management, Page 39
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    LITERATURE REVIEW Purendra Verma(2002) has investigated the impact of FII on Capital Market to find the relation between FII and Stock indices. For this he has taken seven indices into consideration, out of them five are Consumer Durables, Capital Goods, Fast Moving Consumer Goods, Health Care, Information Technology and the other two are Sensex and Nifty. He observed these indices during January 1993 to September 2001. If BSE & Nifty increase with rise in FII investment, He has taken hypothesis for this study. To find out the results he used least square method. Finally, after completing his study he concluded that except IT sector on all other indices the impact is very low during January 1993 to September 2001 as the correlation is negative in Consumer Durables, Capital Goods, Fast Moving Consumer Goods, Health Care, Sensex and Nifty. Paramita Mukherjee, Suchismita Bose and Dipankar Coondoo (2002) carried out research on the topic Foreign Institutional Investment in The Indian Equity Market an Analysis of daily flows during Jan 1999 - May 2002. The paper was conducted to understand the relationship of foreign institutional investment (FII) flows to the Indian equity market. FII flows to and from the Indian market tend to be caused by return in the domestic equity market and not the other way round. Returns in the equity market are very important to influence the flows of FIIs in the country. They concluded that in India the prime focus should be on regaining investor’s confidence in the equity market so as to strengthen the domestic investor’s base of the market. S.S.S. Kumar (2005) of IIM-Kozhikode carried out research on the Role of Institutional Investors in Indian Stock Market during 1992 - 2005. The paper was conducted to examining whether the institutional investors, with their war chests of money, set the direction to the market. He concluded with the use of Regression analysis that the combined force of the FIIs and MF are a powerful force and in fact their direction can forecast market direction. It gives it Laxmi Institute of Management, Page 40
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    constantly rise inIndian context since all their trades are delivery based and Market become more efficient with the growing presence of institutional investors who primarily go by fundamentals. Anand Bansal and J.S. Pasricha (2009) in the paper titled Foreign Institutional Investor’s Impact on Stock Prices in India for the purpose of analyzing Impact of FIIs entry and the stock market behavior. Average return before and after the event day has been calculated for different sub sample days, the change of volatility in the Indian stock prices has been examined by comparing the variance of the returns of sub sample days before and after the event day. They concluded that return declined reasonably after the entry of FIIs, the correlation between FIIs investments and market volatility and market return has been comparatively low. It means volatility in Indian market is not the function of FIIs investment flows. TIMS Batch 2008-10, Leena Kanjani, Sulabh Mehta, Anita Pariyani, Amin Pattani, Mehul Rakholiya & Krishna Vyas conducted a research study on FII in India, they analyzed the monthly movement of stock market from 2006 to 2009. The paper was conducted to understand influence of FII on movement of Indian Stock market and to understand the FII policy in India.They used Correlation and Hypothesis test methodology and concluded that FII did have significant impact on Sensex but there is less co-relation with Benkex and IT. Sandhya Ananthanarayanan from CRISIL, Chandrasekhar Krishnamurti from Department of Finance and Nilanjan Sen from Nanyang Technological University conducted this research of Foreign Institutional Investors and Security Returns: Evidence from Indian Stock Exchanges for understanding the impact of trading of Foreign Institutional Investors on the major stock indices of India. Their contribution to this growing literature pertaining to globalization is twofold. First, they separate the flows into expected and unexpected and found that unexpected flows have a Laxmi Institute of Management, Page 41
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    greater impact thanexpected flows. Second, they identify the specific flows of foreign institutional investors flowing into (or out of) each exchange and examine the impact on the specific stock market indices. Their principal conclusions are as follows. They found strong evidence consistent with the base-broadening hypothesis consistent with prior work. They do not found compelling confirmation regarding momentum or contrarian strategies being employed by foreign institutional investors. Their findings supported the price pressure hypothesis. They do not found any substantiation to the claim that foreigners’ destabilize the market. Laxmi Institute of Management, Page 42
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    BACKGROUND OF THESTUDY “FII’s influence on the Sensex over the period 2000-2010”- is a study of the influence of FOREIGN INSTITUTIONAL INVESTERS whose activities play a vital role in the ups and downs of the share market. The study is conducted on the Indian stock exchange market (BSE SENSEX) . There are conflicting theories on the issue of whether FII flows affect or are affected by domestic stock market returns. So, the present empirical study has been undertaken to throw some light on the direction of causality between FII flows and Indian stock market returns using data on both the variables from over the period 2000- 2010. International portfolio flows, as are commonly known as Foreign Institutional Investment (FII) flows, refer to capital flows made by individual and institutional investors across national borders with a view to creating an internationally diversified portfolio. Unlike Foreign Direct Investment (FDI) flows which refer to that category of international investment aimed at obtaining a lasting interest by a resident entity in one economy in an enterprise resident in another economy by way of exercising significant control over its management, FII flows are not directed at acquiring management control over foreign companies. FII flows were almost non-existent until 1980s. With more and more emerging market economies (EMEs), deregulating their financial markets by eliminating foreign exchange controls, reducing taxes imposed on foreign investors, relaxing the restrictions on the purchase / sale of securities by foreign investors in domestic markets etc. they are increasing in number. Foreign Institutional Investment (FII) flows, i.e., capital flows across national borders, to emerging market economies (EMEs) have risen sharply over the past one and half decade due to globalization and India is no exception in this regard. However, there is a lot of apprehension regarding the volatile nature of such flows Laxmi Institute of Management, Page 43
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    thereby raising questionsabout the need to encourage FII flows in a narrow and shallow stock market like that of India. Laxmi Institute of Management, Page 44
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    INDUSTRY PROFILE BROKERAGE INDUSTRY TheIndian retail brokerage industry consists of companies that primarily act as agents for the buying and selling of securities (e.g. stocks, shares, and similar financial instruments) on a commission or transaction fee basis. It has two main interdependent segments: Primary market and the Secondary market. Now this market is extended to fields like currency, commodity, mutual fund, insurance etc... The Indian equity brokerage industry thrived on the back of equity markets' sustained bull run during 2003-07. Although high competitive pressure meant continuous compression of brokerage commissions and low electronic penetration kept operating costs high, industry revenue was growing. Furthermore, the industry attracted domestic and foreign investment interest at high valuations of upto 45x P/E multiples. During this time, many of the key players started expanding their portfolio of services to include wealth management and advisory services, sale of insurance and mutual fund products, consumer financing and so on. However, post-2008, the economic downturn - muted trading turnover, relentless competitive pressure and decreasing margins, continued high operating costs and high margining requirements - has put the industry under pressure. Profitability is muted and the major players are under pressure to build scale. Expansion of scale and investments into technological systems has the potential to lead the top brokerage firms into paths of higher growth, but the current economic climate is clearly against heavy investments. The basic function of a brokerage firm is to execute buy and sell orders for clients. Traditionally these firms have offered the investigation of the quality and the possibilities of investing in a variety of investment products. It is still accustomed for brokerage firms to offer information about possible investments free of charge. This activity of bringing free of charge stock investment reports is one of the main tools that are utilized by brokerage houses to compete against other firms and to investors it continues to be an important service Laxmi Institute of Management, Page 45
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    The History ofStock Brokerage Firms Stock brokerage firms have been an established feature in the financial industry for nearly one thousand years. Dealing in debt securities, brokers employ a variety of systems to aid investors with the purchase and sales of stocks and bonds in a variety of markets. The firms have changed over the years, growing to massive organizations that can affect the entire financial sector positively or negatively with their performance. Changing with the times, the early twenty-first century saw a rise of online trading that enabled the average investor to take part in the stock market for the first time. 1. History During the 11th century, the French began regulating and trading agricultural debts on behalf of the banking community, creating the first brokerage system. In the 1300s, houses began to be set up in major cities like Flanders and Amsterdam in which commodity traders would hold meetings. Soon, Venetian brokers began to trade in government securities, expanding the importance of the firms. In 1602, the Dutch East India Company became the first publicly traded company in which shareholders could own a portion of the business. The stocks improved the size of companies and became the standard bearer for the modern financial system. 2. Significance The earliest brokerage firms were established in London coffee houses, enabling individuals to purchase stocks from a variety of organizations. They formally founded the London Stock Exchange in 1801 and created regulations and memberships. The system was copied by brokerage firms across the world, most notably on Chestnut Street in Philadelphia. Soon, the US exchange was moved to New York City and various firms like Morgan Stanley and Merrill Lynch were created to assist in the brokering of stocks and securities. The firms limited themselves to researching and trading stocks for investment groups and individuals. 3. Considerations Laxmi Institute of Management, Page 46
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    During the 1900s,stock brokerage firms began to move in a direction of market makers. They adopted the policy of quoting both the buying and selling price of a security. This allows a firm to make a profit from establishing the immediate sale and purchase price to an investor. The conflict with brokerage firms setting prices creates the concern that insider trading can result from the sharing of information. Regulators have enforced a system called Chinese Walls to prevent communication between different departments within the brokerage company. This has resulted in increased profits and greater interconnection within the financial industry. 4. Effects The creation of high valued brokerage firms like Goldman Sachs and Bear Sterns created a system of consolidation. Working with hundreds of billions of dollars, the larger firms began to merge and take over smaller firms in the last half of the 20th century. Firms like Smith Barney were acquired by Citigroup and other investment banks, creating massive financial institutions that valued, held, sold, insured and invested in securities. This conglomeration of the financial sector created an environment of volatility that caused a chain reaction when other firms like Bear Sterns and Lehman Brothers filed for bankruptcy. Trillions of dollars of assets were tied together in different companies and resulted in a large economic collapse in late 2008. 5. Features A large share of the brokerage firms have moved to an online format. Smaller brokers such as E*Trade, TD Ameritrade and Charles Schwab have taken control of most individual investors accounts. The added convenience and personal attention paid to the small investor has resulted in a large influx of activity. In addition, the fact that the online resources offer up-to-the-minute pricing and immediate trades makes their format appealing to the modern user. Discounted commissions have lessened the price of trades, giving access to a wider swath of people and adding liquidity to the market. The role of the stock brokerage firm is ever-changing and proves to be a boon for the future of the financial industry. Laxmi Institute of Management, Page 47
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    Full service v/sDiscount brokerage houses Full service brokerage firms continue to offer informative stock reports and a level of service much higher than other brokerage houses. Discount brokerage houses only dedicate themselves to execute orders for clients. Full service brokers are sellers looking for purchasing and selling for clients and offering more customer service than is available from discount brokers. It is many times possible that a client will not even know who is taking care of the buy or sell order that they placed. MARKET SIZE AND CHARACTERISTICS: The Indian retail brokerage market is showing phenomenal growth. The total trading volume of brokerage companies has increased from US$1239.1 billion in 2004 to US$1492.1 billion in 2005, and is expected to reach US$6535.7 billion by 2015. Some of the main characteristics of the brokerage industry include growth in ebroking; growing derivatives market, decline in brokerage fees etc. Today, as per NSDL statistics, we have only 2.4 million investors with demat accounts in the country. Considering various investor combinations that are holding accounts, we can presume the country has roughly 5-7.5 lakh active investors now. This figure is unbelievably small compared to the potential number of investors, which is anything between 200 million and 250 million. When we take into consideration the way transaction risk and cost in the Indian capital market is coming down, there will be a massive surge in the number of investors and also in volumes. The only way to manage this kind of potential growth is to adopt state-of-the-art trading techniques. The growth of Internet-based trading as a mass trading technique in the country is unstoppable, going by the indicators available and the signals for the future. When it ultimately gathers momentum, the biggest beneficiary will be the investor, who will be able to trade with greater speed and transparency, and at lower costs... Laxmi Institute of Management, Page 48
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    Major players inIndian share broking industry are follows  ICICI Securities Ltd. (www.icicidirect.com)  Kotak Securities Ltd. (www.kotaksecurities.com)  Indiabulls Financial Services Limited (www.indiabulls.com)  IL&FS investmart Limited (www.investsmartindia.com)  SSKI Ltd. (www.sharekhan.com)  Motilal Oswal Securities (www.motilaloswal.com)  Fortis Securities (Religare) (www.fortissecurities.com)  Karvy securities (www.karvy.com)  Geojit BNP paribas (www.geojitbnpparibas.com)  HDFC Securities (www.hdfcsec.com)  Hedge equities (www.hedgeequities.com)  Jrg securities  India infoline (www.indiainfoline.com) Laxmi Institute of Management, Page 49
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    Laxmi Institute ofManagement, Page 50
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    CHAPTER 4 RESEARCH METHODOLOGY 4.1Objectives of the Study  To know the Indian stock exchange market- BSE, NSE  To study the performance of Sensex over the period 2000-10  To know about FII  To study the effect of FII’s investment in BSE Sensex  To study the relationship between FII activity and Sensex  To find the trend in FII’s investment 1.3 Scope of the Study  To get in touch with the industrial and organizational environment.  To familiarize with the trends in the stock market(BSE) over the years  To familiarize with the importance of FII in Indian stock market 1.4 Methodology of the Study The methodology of the study is through collecting the primary and secondary data. Primary data refers to the data collected by the investigator directly through primary sources. It includes;  Direct observation.  Interview (personal). Secondary data refers to the data collected from; Laxmi Institute of Management, Page 51
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     Books  Journals Websites  Company manuals etc. 1.5 Limitation of the study  Time  Analysis is conducted only on the basis of some factors therefore cent percent accuracy is not possible.  Lack of reliability of Secondary data Laxmi Institute of Management, Page 52
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    Laxmi Institute ofManagement, Page 53
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    CHAPTER- V DATA ANALYSISAND INTERPRETATION Laxmi Institute of Management, Page 54
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    TYPES OF STUDYAND ANALYSIS CONDUCTED 1. THE PERFORMANCE OF SENSEX By Sensex return • From 2002-2013 • In 2012 ( monthly basis) 2. INFLUENCE OF FII ON SENSEX By Sensex return V/S FII’s net inflow • From 2002-2012 • In 2012 (monthly basis) Number of FII’s registered and the Sensex returns 3. FII’S INFLOW V/S SENSEX RETURNS • Coefficient of Correlation method • 4 Regression method TRENDS IN THE FII’S INVESTMENT Laxmi Institute of Management, Page 55
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    • Trend analysis Laxmi Instituteof Management, Page 56
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    5.1 SENSEX PERFORMANCEOVER THE YEARS Indices :SENSEX Period : ( Year 1991 to Year 2013 ) Year Open High Low Close 1991 1,027.38 1,955.29 947.14 1,908.85 1992 1957.33 4,546.58 1945.48 2,615.37 1993 2,617.78 3,459.07 1980.06 3,346.06 1994 3,436.87 4,643.31 3405.88 3,926.90 1995 3,910.16 3,943.66 2891.45 3,110.49 1996 3,114.08 4,131.22 2,713.12 3,085.20 1997 3,096.65 4,605.41 3,096.65 3,658.98 1998 3,658.34 4,322.00 2,741.22 3,055.41 1999 3,064.95 5,150.99 3,042.25 5,005.82 2000 5,209.54 6,150.69 3,491.55 3,972.12 2001 3,990.65 4,462.11 2,594.87 3,262.33 2002 3,262.01 3,758.27 2,828.48 3,377.28 2003 3,383.85 5,920.76 2,904.44 5,838.96 2004 5,872.48 6,617.15 4,227.50 6,602.69 2005 6,626.49 9,442.98 6,069.33 9,397.93 2006 9,422.49 14,035.30 8,799.01 13,786.91 2007 13,827.77 20,498.11 12,316.10 20,286.99 2008 20,325.27 21,206.77 7,697.39 9,647.31 2009 9,720.55 17,530.94 8,047.17 17,464.81 2010 17,473.45 21,108.64 15,651.99 20,509.09 2011 20,621.61 20,664.80 15,135.86 15,454.92 2012 15,534.67 19,612.18 15,358.02 19,426.71 Laxmi Institute of Management, Page 57
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    2013 19,513.45 20,443.62 18,144.22 19,704.33 INTERPRETATION The Bombay stockexchange (BSE SENSEX) which is one of the most important secondary market in India ,has seen many ups and downs from its years of its starting in 1991. The market opened at 1027.38 point and closed at 1908.85 with a high value of 1955.29 and with a low value of 947.14 in the same year. Since then, the values in the Sensex has increased and decreased. From the table, it can be found that the Sensex crossed the four digit number in 2006 , and at 13786.91 from the previous year value of 9397.93 (2005) The changes in the value of Sensex depends upon many factors, like .. • National and global issues • Legal and political issues • GDP growth rate of the nation Laxmi Institute of Management, Page 58
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    • Activities ofthe foreign investments Etc…. From the table it is found that in the year 2008 the Sensex closed at 9647.31 from the previous years 20286.99. The reason for the huge fall in market was due to global recession which not only caught Indian market but also the over all international markets too When the recession began to end in the world, the Sensex and other markets could see increase in value. And at the end of 2010 the Sensex closed at 20509.09 Laxmi Institute of Management, Page 59
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    5.2 ANALYSIS OF SENSEXRETURNS V/S FII’s INVESTMENTS TABLE OF SENSEX RETURN FROM 2000-10 Month Close Return % Jan-12 17,193.55 Feb-12 17,752.68 3.251975 Mar-12 17,404.20 -1.96297 Apr-12 17,318.81 -0.49063 May-12 16,218.53 -6.35309 Jun-12 17,429.98 7.469543 Jul-12 17,236.18 -1.11188 Aug-12 17,429.56 1.121942 Sep-12 18,762.74 7.64896 Oct-12 18,505.38 -1.37165 Nov-12 19,339.90 4.509607 Dec-12 19,426.71 0.448865 Jan-13 19,894.98 2.410444 Feb-13 18,861.54 -5.19448 Mar-13 18,835.77 -0.13663 TABLE NO 5.2 The BSE SENSEX performance is calculated on a percentage basis from the year 2000 to 2010. Sensex return in percent, is calculated by the % change in the closing point of the Sensex in previous year to the current year Laxmi Institute of Management, Page 60
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    SENSEX RETURN FROM2000-10 CHART NO 5.2 Laxmi Institute of Management, Page 61
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    FII’s INVESTMENT TABLE OFFII’s NET INFLOW Year Gross Purchase (Cr) Gross Sale (Cr) Net Investment (Cr) 2000 74791.5 68421.6 6370.08 2001 51761.2 38651 13128.2 2002 46479.1 42849.8 3629.6 2003 94412 63953.5 30459 2004 185672 146706.8 38965.8 2005 286021.4 238840.9 47181.9 2006 475624.9 439084.1 36540.2 2007 814877.9 743392 71486.3 2008 721607 774594.3 -52987.4 2009 624239.7 540814.7 83424.2 2010 766283.2 633017.1 133266.8 2011 611055.6 613770.8 -2714.2 2012 669184.4 540823.9 128360.7 2013 till MAY 65796.04 50791.74 15004.46 Source : moneycontrol.com TABLE NO 5.3 Laxmi Institute of Management, Page 62
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    FII’s NET INFLOW LaxmiInstitute of Management, Page 63
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    FII NET INFLOWVS SENSEX RETURN Year Net INVESTMENT FLOW Return % 2000 6370.08 2001 13128.2 106.0916032 2002 3629.6 -72.35264545 2003 30459 739.1833811 2004 38965.8 27.92869103 2005 47181.9 21.08541336 2006 36540.2 -22.5546237 2007 71486.3 95.63740757 2008 -52987.4 -174.1224542 2009 83424.2 -257.4415805 2010 133266.8 59.74597299 2011 -2714.2 -102.0366663 2012 128360.7 -4829.227765 2013 till MAY 15004.46 -88.31070569 Laxmi Institute of Management, Page 64
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    SENSEX RETURN (%)V/S FII NET INFLOW Laxmi Institute of Management, Page 65
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    INTERPRETATION When comparing theSensex returns and the FII net inflow from the years , it can be found that the Sensex gain height returns in the year 2009 (81.03%) and the FII net inflow at that year was 85367 Cr. And the Sensex loss maximum point (-46.522) when the net inflow was - 53051 Cr in the year 2008. Recession and many other global and national issues were key factors for this change. The negative sign show that in 2008 FII’s were not investing their money. They were sellers. *(The Sensex return is not only depend upon FII)* Laxmi Institute of Management, Page 66
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    ANALYSIS OF SENSEXRETURN TO FII’s INVESTMENT 2012 TABLE OF SENSEX RETURN 2012 Month Close Return % Jan-12 17,193.55 Feb-12 17,752.68 3.251975 Mar-12 17,404.20 -1.96297 Apr-12 17,318.81 -0.49063 May-12 16,218.53 -6.35309 Jun-12 17,429.98 7.469543 Jul-12 17,236.18 -1.11188 Aug-12 17,429.56 1.121942 Sep-12 18,762.74 7.64896 Oct-12 18,505.38 -1.37165 Nov-12 19,339.90 4.509607 Dec-12 19,426.71 0.448865 Jan-13 19,894.98 2.410444 Feb-13 18,861.54 -5.19448 Mar-13 18,835.77 -0.13663 TABLE NO 5.5 The Sensex gain maximum return 11.670% during the month of September 2010. And loss -3.49% in May by making the Sensex to close at 16944.63 CHART OF SENSEX RETURN 2012 Laxmi Institute of Management, Page 67
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    CHART NO 5.5 LaxmiInstitute of Management, Page 68
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    FII NET INFLOWIN 2012 TABLE OF FII NET INFLOW 2012 Month Gross Purchase(Cr) Gross Sale(Cr) Net Investment(Cr) Jan 50,467.40 40,109.90 10,357.70 Feb 79,898.60 54,686.60 25,212.10 Mar 63,795.10 55,413.80 8,381.10 Apr 41,091.90 42,200.50 -1,109.10 May 42,443.30 42,790.70 -347.1 Jun 44,751.20 45,252.40 -501.3 Jul 49,557.40 39,284.80 10,272.70 Aug 48,136.50 37,332.50 10,803.90 Sep 66,752.50 47,491.20 19,261.50 Oct 56,832.40 45,468.20 11,364.20 Nov 51,143.80 41,567.00 9,577.20 Dec 74,314.30 49,226.30 25,087.80 Source : moneycontrol.com TABLE NO 5.6 Laxmi Institute of Management, Page 69
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    CHART OF NETINFLOW 2012 CHART 5.6 Laxmi Institute of Management, Page 70
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    SENSEX GAIN VSFII NET INFLOW 2012 TABLE NO 5.7 Month Net Investment(Cr) Return % Feb-12 25,212.10 3.251975 Mar-12 8,381.10 -1.96297 Apr-12 -1,109.10 -0.49063 May-12 -347.1 -6.35309 Jun-12 -501.3 7.469543 Jul-12 10,272.70 -1.11188 Aug-12 10,803.90 1.121942 Sep-12 19,261.50 7.64896 Oct-12 11,364.20 -1.37165 Nov-12 9,577.20 4.509607 Dec-12 25,087.80 0.448865 Laxmi Institute of Management, Page 71
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    CHART NO 5.7 INTERPRETATION Fromthe given table, the Sensex gain maximum return 11.670% during the month of September 2010 when the FII’s inflow was 29195 Cr.. And the Sensex loss -3.49% in the month of May, where the FII net inflow was -8629.90. That means the Sensex was changing according to the inflow and out flow of investment during the months of 2010. *(The Sensex return is not only depend upon FII)* Laxmi Institute of Management, Page 72
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    5.4 Calculation ofcorrelation between FII investment and sensex movement Analysis is done for finding the correlation between FII investment and the sensex fluctuation during the period from 2000-2010. Net yearly FII investment is calculated by subtracting the gross sell value from the gross purchase value in the particular year by FII. And the fluctuation in sensex is calculated by subtracting previous years closing point from the current year. CALCULATION OF SENSEX FLUCTUATION Years CLOSE PRICE FLUCTUATION 2000 3972.12 -1033.70 2001 3262.33 -709.79 2002 3377.28 114.95 2003 5838.96 2461.68 2004 6602.69 763.73 2005 9397.93 2795.24 2006 13786.91 4388.98 2007 20286.99 6500.08 2008 9647.31 -10639.68 2009 17464.81 7817.50 2010 20509.09 3044.28 2011 15454.92 -5054.17 2012 19426.71 3971.79 2013 20223.98 797.27 TABLE NO 5.8 AnalysisTABLE OF CORRELATION Years BSE (Cr)(Y) Laxmi Institute of Management, n(XY) Page 73 X^2 Y^2
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    FLUCTUATION(X) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 ∑ ∑/n 114.95 2461.68 763.73 2795.24 4388.98 6500.08 -10639.68 7817.50 3044.28 -5054.17 3971.79 16164.38 1469.49 3629.6 30459 38965.8 47181.9 36540.2 71486.3 -52987.4 83424.2 133266.8 -2714.2 128360.7 517612.9 0 47055.72 4589447.72 824783422.32 327352854.77 1450732075.72 1764116276.96 5111333357.94 6201458780.35 7173855518.50 4462715992.94 150898310.35 5608039191.18 33079875228.7 6 3007261384.43 TABLE NO 5.9 ΣX=16164.38Cr Mean , ΣX/11 =1469.49 Cr ΣY = 517612.90 Cr Mean Σy/11 = 47055.72Cr Laxmi Institute of Management, Page 74 13213.5025 13173996.16 6059868.422 927750681 583283.5129 1518333570 7813366.658 2226131688 19263145.44 1335186216 42251040.01 5110291088 113202790.5 2807664559 61113306.25 6959597146 9267640.718 17760039982 25544634.39 7366881.64 15775115.8 16476469304 300887405.2 1 55142005110.91
  • 75.
    Coefficient of Correlation Coefficientof Correlation = r = -53596330224.069 / √32129925359.72 r= -0.17 INTERPRETATION The Coefficient of Correlation analysis between FII’s net inflow and Sensex return from 2002-2012 gives a correlation of -0.17 which is a low degree negative correlation that means the Sensex movement is negatively corelated to the FII investment during the period 2002 to 2012. Negative values indicate a relationship between x and y such that as values for x increase, values for y decrease. . Laxmi Institute of Management, Page 75
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    CORRELATION BETWEEN FII& BSE FLUCTUATIONS IN THE YEAR 2012 Month Jan Net Investment(Cr)(X) FLUCTUATION(Y) n(XY) X^2 Feb 25,212.10 559.13 1,40,96,841.473 63,56,49,986.41 312 Mar 8,381.10 -348.48 -29,20,645.728 7,02,42,837.21 121 Apr -1,109.10 -85.39 94,706.049 12,30,102.81 72 May -347.1 -1,100.28 3,81,907.188 1,20,478.41 121 Jun -501.3 1,211.45 -6,07,299.885 2,51,301.69 146 Jul 10,272.70 -193.80 -19,90,849.260 10,55,28,365.29 3 Aug 10,803.90 193.38 20,89,258.182 11,67,24,255.21 37 Sep 19,261.50 1,333.18 2,56,79,046.570 37,10,05,382.25 177 Oct 11,364.20 -257.36 -29,24,690.512 12,91,45,041.64 66 Nov 9,577.20 834.52 79,92,364.944 9,17,22,759.84 696 Dec 25,087.80 86.81 21,77,871.918 62,93,97,708.84 75 ∑ 1,18,003.00 2,233.16 4,40,68,510.94 2,15,10,18,219.6 0 57, TABLE NO 5.11 ∑X = 118003.00 Mean = ∑X/11 = 10727.55 ∑Y = 2233.16 Mean = ∑Y/11 = 203.01 COEFFICIENT OF CORRELATION Laxmi Institute of Management, Page 76
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    R = 221234040.85/ √(98673.67*7627.33) = 5068770244.14 / 752616202.39 = 0.29 INTERPRETATION It is a low degree positive correlation. It means that the Coefficient of Correlation analysis between FII’s net inflow and Sensex return gives a correlation of 0.29 which is a low degree positive correlation that means the Sensex movement is not much related to the FII investment during the period 2012. Positive values indicate a relationship between x and y variables such that as values for x increase, values for y also increase. However the performance of Sensex is less dependent to Net FII Inflow since it is indirectly proportional to the movement of FII’s Investment. Laxmi Institute of Management, Page 77
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    5.5 TREND ANALYSIS TABLEOF TREND ANALYSIS Years Net Investment (Cr) % Change 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 6370.1 13128 3629.6 30459 38966 47182 36540 71486 -52987 83424 133267 -2714 128361 100 106.09 -72.35 739.18 27.929 21.085 -22.55 95.637 -174.1 -257.4 59.746 -102 -4829 2013 till MAY 15004 -88.31 TABLE NO 5.11 Laxmi Institute of Management, Page 78
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    Here the baseyear is 2000, in which FII net inflow was 6370.50 Cr. And it is assigned as 100 point. The trend analysis is conducted by calculating percentage change in FII net inflow in each year in relation to the base year INTERPRETATION From the analysis it is known that the net inflow of money by FII during the period from 2001-08 is fluctuating in nature. The growing Indian economy and increasing GDP growth rate has resulted in a positive trend towards FII investment, and from the year 2010 it shows the negative growth. Laxmi Institute of Management, Page 79
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    FUTURE TREND ANALYSIS TABLEOF TREND ANALYSIS YEARS NET FII INFLOW 2013 86338 2014 92770 2015 99202 2016 105634 2017 112065 2018 118497 2019 124929 2020 131360 TABLE NO 5.12 Based on calculation in Excel TABLE NO 5.13 Laxmi Institute of Management, Page 80
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    CHART NO 5.9 INTERPRETATION Fromthe trend analysis (advanced) of FII net inflow to the Indian economy, it is found that the trend is increasing in nature. That means the FII’s will increase their inflow of money in future also. Laxmi Institute of Management, Page 81
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    CHAPTER VI FINDINGS, CONCLUSION& SUGGESTIONS Laxmi Institute of Management, Page 82
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    6.1 FINDINGS THE PERFORMANCEOF SENSEX • From the study it is found that the performance of Sensex is fluctuating. The Sensex saw many ups and downs from its opening year 1991 FII’S INFLOW TO INDIAN MARKET • The study on the inflow of FII to the Indian equity market has shown that the inflow is also fluctuating and it is increasing in recent years. NUMBER OF REGISTERD FII’s V/S SENSEX RETURN • The study on increasing number of FII registered under by SEBI, shows that the value of Sensex is not much related to the number of FII registered in recent years .Today ,there are 1747 FII registered in the country as against last year number of 1706 an additional of 41. Year 2009 saw 112 FII getting registered. This means despite record inflow, the number of registered FIIs had declined. This means that the investment that the Indian market has received is majority through the FII registered earlier RELATIONSHIP BETWEEN FII’S INVESTMENT AND SENSEX RETURN • From the correlation study between sensex movement and FII inflow , found that the fluctuations in sensex is not much related to the FII investment FINDINGS FROM TREND ANALYSIS From the trend analysis it is observed that the trend in FII inflow to the economy is positive in nature. Laxmi Institute of Management, Page 83 Indian
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    6.2 CONCLUSION Foreign InstitutionalInvestors, who invest their money in different countries in order to get a good portfolio of investment. And India has been in the list of their portfolio for many years. The increasing GDP growth rate and the overall development of India in different sectors like industrial and agricultural field and others are the prime reason for the increasing nature of FII’s inflow. There is a positive as well as negative correlation between stock indices and FIIs but FIIs didn’t have any significant impact on Indian Stock Market. Also the coefficient of determination is less in all the case. It shows the absence of linear relation between FII and stock index. This does not mean that there is no relation between them. One of the reasons for absence of any linear relation can also be due to the sample data. The data was taken on yearly basis. Also FII is not the only factor affecting the stock indices. There are other major factors that influence the bourses in the stock market. And from the FII’s analysis on Sensex return, it can be concluded that FII do have any significant impact on the Indian Stock Market but there are other factors like government policies, budgets, bullion market, inflation, economical and political condition, etc. do also have an impact on the Indian stock market. Laxmi Institute of Management, Page 84
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    6.3 SUGGESTIONS &RECOMMENDATIONS After the analysis of the project study, following recommendations can be made: • From the analysis there could not find a good positive relationship between FII's and sensex return (may be because of the data collected is on the yearly basis & Sensex return is not only dependent upon FII's investment only). They are needed to be encouraged to enter in Indian market. Because their absence result in huge change in the market • Number of FII's get registered is decreasing in nature. It may be because of nature of procedure. Simplifying procedures and relaxing entry barriers for business activities and providing investor friendly laws and tax system for foreign investors helps them to come and invest in India • Somewhere, a restriction related to the track record of Sub- Accounts is also to be made on the investors who withdraw money out of the Indian stock market . • Encourage industries to grow to make FIIs an attractive junction to invest. Laxmi Institute of Management, Page 85
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    BIBLIOGRAPHY BOOKS I.M Panday “FinancialManagement”, Vikas Publishing house Private ltd, New Delhi, 2009 Kothary CR “Reserch Methodology” New Age International Publishers, New Delhi 2006 Prasanna Chandra, ‘Financial Management’, Tata McGraw – Hill publishing company Ltd, New Delhi. 2001. Uma Sekaran ,”Reserch Methodology For Business, John Wile And Sons,Inc WEBSITES www . bse.india..com www . nse india. com www. money control. com www.hedgeequities.com www.sebi.com Laxmi Institute of Management, Page 86
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    Laxmi Institute ofManagement, Page 87