Impact of Foreign Institutional Investors on Indian Stock Market

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 Impact of Foreign Institutional Investors on Indian
 Stock Market
 Posted Date:    Total Responses: 0     Posted By: hardeep Member Level: Silver Points/Cash: 10

     CHAPTER I

     INTRODUCTION


 1.1 INTRODUCTION


 1.1.1 FOREIGN INSTITUTIONAL INVESTORS

 FII is defined as an institution organized outside of India for the purpose of making investments into the
 Indian securities market under the regulations prescribed by SEBI.
 ‘FII’ include “Overseas pension funds, mutual funds, investment trust, asset management company, nominee
 company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts,
 charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing
 to make proprietary investments or investments on behalf of a broad-based fund. FIIs can invest their own
 funds as well as invest on behalf of their overseas clients registered as such with SEBI. These client accounts
 that the FII manages are known as ‘sub-accounts’. A domestic portfolio manager can also register itself as an
 FII to manage the. funds of sub-accounts

 Foreign institutional investor means an entity established or incorporated outside India which proposes to
 make investment in India. Positive tidings about the Indian economy combined with a fast-growing market
 have made India an attractive destination for foreign institutional investors. FII is defined as an institution
 organized outside of India for the purpose of making investments into the Indian securities market under the
 regulations prescribed by SEBI.

 Entry Options For FII
 A foreign company planning to set up business operations in India has the following options:
 Incorporated Entity
 By incorporating a company under the Companies Act,1956 through
• Joint Ventures; or
• Wholly Owned Subsidiaries
Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor,
subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy.
1.1.2 Important terms to know about FIIs:
Sub-account :
Sub-account includes those foreign corporations, foreign individuals, and institutions, funds or portfolios
established or incorporated outside India on whose behalf investments are proposed to be made in India by a
FII.
Designated Bank:
Designated Bank means any bank in India which has been authorized by the Reserve Bank of India to act as a
banker to FII.
Domestic Custodian:
Domestic Custodian means any entity registered with SEBI to carry on the activity of providing custodial
services in respect of securities.
Broad Based Fund:
Broad Based Fund means a fund established or incorporated outside India, which has at least twenty investors
with no single individual investor holding more than 10% shares or units of the fund. Provided that if the fund
has institutional investor(s) it shall not be necessary for the fund to have twenty investors.
If the fund has an institutional investor holding more than 10% of shares or units in the fund, then the
institutional investor must itself be broad based fund.


1.1.3 FOREIGN INSTITUTIONAL INVESTORS REGISTRATION
Following entities / funds are eligible to get registered as FII:
• Pension Funds
• Mutual Funds
• Investment Trust
• Insurance or reinsurance companies
• Investment Trusts
• Banks
• Endowments
• University Funds
• Foundations
• Charitable Trusts or Charitable Societies
Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered
as FIIs:
• Asset Management Companies
• Institutional Portfolio Managers
• Trustees
• Power of Attorney Holders.
The eligibility criteria for applicant seeking FII registration
As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required to fulfill the
following conditions to qualify for grant of registration:
• Applicant should have track record, professional competence, financial soundness, experience, general
reputation of fairness and integrity.
• The applicant should be regulated by an appropriate foreign regulatory authority in the same
capacity/category where registration is sought from SEBI. Registration with authorities, which are responsible
for incorporation, is not adequate to qualify as Foreign Institutional Investor.
• The applicant is required to have the permission under the provisions of the Foreign Exchange Management
Act, 1999 from the Reserve Bank of India.
• Applicant must be legally permitted to invest in securities outside the country or its in-corporation /
establishment.
• The applicant must be a "fit and proper" person.
• The applicant has to appoint a local custodian and enter into an agreement with the custodian. Besides it also
has to appoint a designated bank to route its transactions.
• Payment of registration fee of US $ 5,000.00
"Form A" as prescribed in SEBI (FII) Regulations, 1995 is to be filled before applying for FII registration.

Supporting documents required are:
• Application in Form A duly signed by the authorized signatory of the applicant.
• Certified copy of the relevant clauses or articles of the Memorandum and Articles of Association or the
agreement authorizing the applicant to invest on behalf of its clients
• Audited financial statements and annual reports for the last one year , provided that the period covered shall
not be less than twelve months.
• A declaration by the applicant with registration number and other particulars in support of its registration or
regulation by a Securities Commission or Self Regulatory Organisation or any other appropriate regulatory
authority with whom the applicant is registered in its home country.
• A declaration by the applicant that it has entered into a custodian agreement with a domestic custodian
together with particulatrs of the domestic custodian.
• A signed declaration statement that appears at the end of the Form.
• Declaration regarding fit & proper entity.
The fee for registration as FII is US $ 5,000. The mode of payment is Demand Draft in favour of "Securities
and Exchange Board of India" payable at New York”.
SEBI generally takes 7 working days in granting FII registration. However, in cases where the information
furnished by the applicants is incomplete, seven days shall be counted from the days when all necessary
information sought, reaches SEBI.
In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from the Reserve Bank
of India (RBI). In such cases, 7 working days would be counted from the day no objection is received from
RBI.
The FII registration is valid for 5 years. After expiry of 5 years, the registration needs to be renewed.
Same as initial registration, Along with "Form A" and all the relevant documents, the applicants are required
to fill in additional form (Annexure 1) while applying for renewal. US $ 5,000 needs to be paid for renewal of
FII registration.
The application for renewal should be submitted three months before expiry of the FII registration. 100 %
debt FIIs are debt dedicated FIIs which invest in debt securities only. The procedure for registration of
FII/sub-account, under 100% debt route is similar to that of normal funds besides a clear statement by the
applicant that it wishes to be registered as FII/sub-account under 100% debt route.
The FII registration application should be sent to:
Securities and Exchange Board of India
Division of FII & Custodian
Mittal Court "B" Wing, First Floor
224, Nariman Point
Mumbai 400 021
India.

1.1.4 SUB-ACCOUNT REGISTRATION
a) Institution or funds or portfolios established outside India, whether incorporated or not.
b) Proprietary fund of FII.
c) Foreign Corporates
d) Foreign Individuals.
The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account are required to sign
the Sub-account application form.
"Annexure B" to "Form A" (FII application form) needs to be filled when applying for sub-account
registration. No document is needed to be sent with annexure B. The fee for sub-account registration is US$
1,000. The fee is to be submitted at the time of submitting the application. The mode of payment is Demand
Draft in the name of "Securities and Exchange Board of India" payable at New York. SEBI generally takes
three working days in granting FII registration. However, in cases where the information furnished by the
applicants is incomplete, three days shall be counted from the days when all necessary information sought,
reaches SEBI. The validity of sub-account registration is co-terminus with the FII registration under which it
is registered. The process of renewal of sub-account is same as initial registration. Renewal fee in this case is
US $ 1,000. OCBs / NRIs are not permitted to get registered as FII/sub-account.
1.1..5 POST-REGISTRATION PROCESSES:
If a registered FII/sub-account undergoes name change, then the FII need to promptly inform SEBI about the
change. It should also mention the reasons for the name change and give an undertaking that there has been no
change in beneficiary ownership.
In case of name change of FII, the request should be accompanied with documents from home regulator and
registrar of the company evidencing approval of name change, and the original FII registration certificate
issued by SEBI should be sent back for necessary amendment.
Procedure for transferring a sub-account from one FII to another:
The FII to whom the Sub-account is proposed to be transferred has to send a request along with a declaration
that it is authorized to invest on behalf of the Sub-account. The transferor FII should also submit a No-
objection certificate.
The FII should send a request, along with no-objection certificate from existing domestic custodian, for
change in domestic custodian.
The FII would be required to send a request for cancellation of its registration or registration of its Sub-
account/s clearly mentioning the name and registration number of the entity. The FII should ensure that it /
Sub-account has nil cash / securities holdings.
Procedure for change of local custodian:
In case of change of the local custodian of the FII / sub-account, the change should be intimated to SEBI by
the FII. On receipt of no objection from the existing custodian and acceptance from the proposed custodian,
the change of custodian would be approved - by SEBI.
Procedure for registration as FII/sub account under 100% debt route:
The procedure for registration of FII/sub account under 100% debt route is similar to that of normal funds
besides a clear statement by the applicant that it wishes to be registered as FII/sub account under 100% debt
route. However, Government of India allocates the overall investment limit for 100% debt funds annually.
The grant of investment limit for individual 100% debt funds is within this overall limit. The funds have to
seek further investment limit in case the limit allotted to them is exhausted and they wish to invest further.
A Foreign Institutional Investor having an account with one custodian can open accounts with different
custodians for its different sub-accounts. However, one sub-account cannot be custodial with more than one
custodian.
Procedure if an existing sub-account wants to get registered as a Foreign Institutional Investor:
In case if a registered sub-account wishes to get itself registered as a Foreign Institutional Investor, then it will
have to apply in Form A to SEBI for the same and has to satisfy all the eligibility criteria norms mentioned in
SEBI (Foreign Institutional Investor) Regulations, 1995. It should also submit a letter from the old FII
indicating its 'No-objection' to such registration.
Procedure for renewal of FII/Sub-Account registration:
They have to apply before 3 months of the expiry of registration in Form A. Circular No
FITTC/CUST/09/2000 dated September 21, 2000 may be referred.
If the FII does not renew its/sub-account’s registration:
The registration of the FII / Sub-account would get expired at due date and it would not be allowed to trade in
Indian securities markets. If it is not interested in renewal but has certain residual assets, it can apply for
disinvestment in terms of Circular No. FITTC/CUST/12/2001 dated June 04, 2001 and abides by the
guidelines specified in this regard.
1.1.6 Scope of Investments under the Portfolio Investment Scheme.

FIIs, under the Portfolio Investment Scheme, are permitted to make both primary and secondary investments
in the India capital markets. Unlike an investor which relies solely on FDI regulations, a foreign investor
which registers as a FII would be allowed to buy and sell securities over Indian stock exchanges. In addition,
FIIs are entitled to effect transactions in a broader category of securities than an investor relying on FDI
regulations alone. FIIs are permitted to purchase equity securities (both listed and unlisted), units of schemes
floated by the Unit Trust of India and other domestic municipal funds, warrants, debentures, bonds,
governmental securities and derivative instruments which are traded on a recognized stock exchange. There is
no limit on the amount that FIIs may invest in the Indian market, and no lock-up periods apply to investments
made by FIIs.

Exchange Controls

FIIs are required to open up one or more bank accounts with certain designated banks and must also appoint a
domestic custodian for custody of investment made by the FII. Through the designated accounts, FIIs are
authorized to freely transfer funds from foreign currency accounts to Rupee accounts and vice versa; make
Rupee denominated investments in Indian companies; freely transfer after-tax proceeds from Rupee accounts
to foreign currency accounts, and repatriate capital, capital gain, dividends interest income and other gains,
subject to deduction for applicable withholding taxes. So long as FIIs execute purchases and sales on a
recognized Indian stock exchange, they are not required to obtain transaction specific approval from the
Reserve Bank. FIIs are also entitled to effect transactions using their own proprietary funds, or the funds of
their sub accounts.

Investment Restrictions.

Certain limitations apply to investments by FIIs into India. First, FIIs’ and their sub- accounts’ investment in
an Indian company can not exceed ten percent (10%) of the total issued share capital of the Indian company
(five percent if the subaccount is a foreign corporation or individual). In addition, the aggregate investment of
all FIIs in an Indian company may not exceed twenty four percent (24%) of its total issued share capital,
without the express approval of its board of directors and shareholders. Even with board of director and
shareholder approval, the same sectoral limits which apply to foreign direct investment would continue to
apply. FIIs may register with SEBI as a debt fund or an equity fund. FIIs which are registered as equity funds,
are required to invest at least seventy percent (70%) of their funds in equity and equity-related securities. A
FII registered as a debt fund, on the other hand, must invest one hundred percent (100%) of its funds in debt
instruments. Foreign corporations and individuals are not eligible subaccounts of a FII that is registered as a
debt fund. FIIs are not permitted to engage in short selling, other than in respect of derivative securities traded
over a recognized exchange, and must effect transactions through a registered stock broker. Sector investment
prohibitions and caps which apply to foreign direct investment also apply to investments by FIIs, and FII
investments must also comply with the pricing requirements applicable to foreign direct investment. In
addition, FIIs are not permitted to invest
in print media.
1.1.7 Trend of FIIs with the help of economic figures:
• In 2004, FII investments crossed $9 billion, the highest in the history of Indian capital markets.
• The total net investment for the year up to December 29 stood at US$9,072 million while foreign investors
pumped in about US$2,113 million in December.
• Korea and Taiwan have always been the biggest recipients of FII money. It was only in 2004 that India
managed to receive the second highest FII inflow at over $8.5bn.
• In 2005 FIIs invested more in Indian equities than in Korean or Taiwanese equities.
• On 9th March 2009, India's exceptional growth story and its booming economy have made the country a
favourite destination with foreign institutional investors (FIIs). It has continued to attract investment despite
the Satyam non-governance issue and the global economic contagion impact on Indian markets.
• According to Mr Gautam Chand, CEO of Instanex, said FIIs are the largest institutional investors in India
with holdings valued at over US$ 751.14 billion as on December 31, 2008.
• They are also the most successful portfolio investors in India with 102 per cent appreciation since September
30, 2003.
• As per SEBI, number of registered FIIs stood at 1626 and number of registered sub-accounts stood at 4972
as on March 17, 2009.
Future Prospects of Foreign Institutional Investments:
? Sustaining the growth momentum and achieving an annual average growth of 9-10 % in the next five years.
? Simplifying procedures and relaxing entry barriers for business activities and Providing investor friendly
laws and tax system.
? Checking the growth of population; India is the second highest populated country in the world after China.
However in terms of density India exceeds China, as India's land area is almost half of China's total land. Due
to a high population growth, GNI per capita remains very poor. It was only $ 2880 in 2003 (World Bank
figures).
? Boosting agricultural growth through diversification and development of agro processing.
? Expanding industry fast, by at least 10% per year to integrate not only the surplus labour in agriculture but
also the unprecedented number of women and teenagers joining the labour force every year.
? Developing world-class infrastructure for sustaining growth in all the sectors of the economy
? Allowing foreign investment in more areas.
? Effecting fiscal consolidation and eliminating the revenue deficit through revenue enhancement and
expenditure management.
? Global corporations are responsible for global warming, the depletion of natural resources, and the
production of harmful chemicals and the destruction of organic agriculture.
? The government should reduce its budget deficit through proper pricing mechanisms and better direction of
subsidies. It should develop infrastructure with what Finance Minister P Chidambaram International Research
Journal of Finance and Economics - Issue 5 (2006) 171 of India called “ruthless efficiency” and reduce
bureaucracy by streamlining government procedures to make them more transparent and effective.
? Empowering the population through universal education and health care, India must maximize the benefits
of its youthful demographics and turn itself into the knowledge hub of the world through the application of
information and communications technology (ICT) in all aspects of Indian life although, the government is
committed to furthering economic reforms and developing basic infrastructure to improve lives of the rural
poor and boost economic performance. Government had reduced its controls on foreign trade and investment
in some areas and has indicated more liberalization in civil aviation, telecom and insurance sector in the
future.

1.2.1 OBJECTIVES OF THE STUDY:

Following are the objectives of the study:

• To study the scope and trading mechanism of Foreign Instititutional investors in India.

• To find the relationship between the FIIs equity investment pattern and Indian stock indices.

• To analyze the impact of FIIs equity investment on specific industrial sector (FMCG, Consumer Durables,
Auto, Banking, Real Estate) indices.

1.2.2 SCOPE AND NEED OF STUDY:

Scope of the study is very broader and covers both the stock indices and its comparison with foreign
institutional investments. But, study is only going to cover foreign investments in form of equity. The time
period is limited from January 2007 to December 2008 as it will give exact impact in both the bullish and
bearish trend.

The study will provide a very clear picture of the impact of foreign institutional investors on Indian stock
indices. It will also describe the market trends due to FIIs inflow and outflow.

The study would be helpful for further descriptive studies on the ideas that will be explored. Moreover, it
would be beneficial to gain knowledge regarding foreign institutional investments, their process of registration
and their impact on Indian stock market.



1.2.3 RESEARCH METHODOLOGY:

Research methodology is the arrangement of conditions for collection and analysis of data in a manner that
aims to combine relevance to the research purpose with economy in procedure. Research methodology is the
conceptual structure within which research is conducted. It constitutes the blueprint for the collection
measurement and analysis of the data.

The research methodology here includes:
• Research problem
• Research design
• Sampling design
• Sampling technique
• Data collection method

Research Problem

An adage says “a problem well defined is half solved”. The project deals with the “Impact of Foreign
Institutional Investors on Indian Stock Market”. This research project studies the relationship between FIIs
investment and stock indices. For this purpose India’s two major indices i.e. Sensex and S&P CNX Nifty are
selected. These two indices, in a way, represent the picture of India’s stock markets. Five indices of BSE i.e.
BSE Auto, BSE Bankex, BSE Consumer Durables, BSE FMCG, BSE Realty are also selected so as to further
observe the effect of FII in particular industry . So this project reveals the impact of FII on the Indian capital
market.

There may be many other factors on which a stock index may depend i.e. Government policies, budgets,
bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar exchange rate etc.
But for this study I have selected only one independent variable i.e. FII. This study uses the concept of
correlation and regression to study the relationship between FII and stock index. The FII started investing in
Indian capital market from September 1992when the Indian economy was opened up in the same year. Their
investments include equity only. The sample data of FIIs investments consists of monthly average from
January 2007 to December 2008.
RESEARCH DESIGN

Null Hypothesis (Ho): The various BSE indices and S&P CNX Nifty index does not rise with the increase in
FIIs investment.

Alternate Hypothesis (Ha): The various BSE indices and S&P CNX Nifty index rises with the increase in FIIs
investment.

Exploratory Research

As an exploratory study is conducted with an objective to gain familiarity with the phenomenon or to achieve
new insight into it, this study aims to find the new insights in terms of finding the relationship between FII’S
and Indian Stock Indices.

SAMPLING DESIGN

• Universe
In this study the universe is finite and will take into the consideration related news and events that have
happened in last few year.

• Sampling Unit: -
As this study revolves around the foreign institutional investment and Indian stock market. So for the
sampling unit is confined to only the Indian stock market.

SAMPLING TECHNIQUE: -

Convenient Sampling: Study conducted on the basis of availability of the Data and requirement of the project.
Study requires the events that have impact on the Indian stock market.

Data collection Method

Secondary data: For the secondary data various literatures, books, journals, magazines, web links are used. As
there are not possibilities of collecting data personally so no questionnaire is made.

RESEARCH ANALYSIS TOOLS

Regression analysis and Correlation analysis:

Regression Analysis: We can analyze how a single dependent variable is affected by the values of one or more
independent variables — for example, how an athlete's performance is affected by such factors as age, height,
and weight. We can apportion shares in the performance measure to each of these three factors, based on a set
of performance data, and then use the results to predict the performance of a new, untested athlete.

Correlation: This analysis tool and its formulas measure the relationship between two data sets that are scaled
to be independent of the unit of measurement. The population correlation calculation returns the covariance of
two data sets divided by the product of their standard deviations. We can use the Correlation tool to determine
whether two ranges of data move together — that is, whether large values of one set are associated with large
values of the other (positive correlation), whether small values of one set are associated with large values of
the other (negative correlation), or whether values in both sets are unrelated (correlation near zero).
CHAPTER II

INTRODUCTION TO INDIAN

STOCK MARKET

2.1 OVERVIEW OF INDIAN STOCK MARKET
The working of stock exchanges in India started in 1875. BSE is the oldest stock market in India. The history
of Indian stock trading starts with 318 persons taking membership in Native Share and Stock Brokers
Association, which we now know by the name Bombay Stock Exchange or BSE in short. In 1965, BSE got
permanent recognition from the Government of India. National Stock Exchange comes second to BSE in
terms of popularity. BSE and NSE represent themselves as synonyms of Indian stock market. The history of
Indian stock market is almost the same as the history of BSE.
The 30 stock sensitive index or Sensex was first compiled in 1986. The Sensex is compiled based on the
performance of the stocks of 30 financially sound benchmark companies. In 1990 the BSE crossed the 1000
mark for the first time. It crossed 2000, 3000 and 4000 figures in 1992. The reason for such huge surge in the
stock market was the liberal financial policies announced by the then financial minister Dr. Man Mohan
Singh.
The up-beat mood of the market was suddenly lost with Harshad Mehta scam. It came to public knowledge
that Mr. Mehta, also known as the big-bull of Indian stock market diverted huge funds from banks through
fraudulent means. He played with 270 million shares of about 90 companies. Millions of small-scale investors
became victims to the fraud as the Sensex fell flat shedding 570 points.
To prevent such frauds, the Government formed The Securities and Exchange Board of India, through an Act
in 1992. SEBI is the statutory body that controls and regulates the functioning of stock exchanges, brokers,
sub-brokers, portfolio managers investment advisors etc. SEBI oblige several rigid measures to protect the
interest of investors. Now with the inception of online trading and daily settlements the chances for a fraud is
nil, says top officials of SEBI.
Sensex crossed the 5000 mark in 1999 and the 6000 mark in 2000. The 7000 mark was crossed in June and
the 8000 mark on September 8 in 2005. Many foreign institutional investors (FII) are investing in Indian stock
markets on a very large scale. The liberal economic policies pursued by successive Governments attracted
foreign institutional investors to a large scale. Experts now believe the sensex can soar past 14000 mark
before 2010.
The unpredictable behavior of the market gave it a tag – ‘a volatile market.’ The factors that affected the
market in the past were good monsoon, Bharatiya Janatha Party’s rise to power etc. The result of a cricket
match between India and Pakistan also affected the movements in Indian stock market. The National
Democratic Alliance led by BJP, during 2004 public elections unsuccessfully tried to ride on the market
sentiments to power. NDA was voted out of power and the sensex recorded the biggest fall in a day amidst
fears that the Congress-Communist coalition would stall economic reforms. Later prime minister Man Mohan
Singh’s assurance of ‘reforms with a human face’ cast off the fears and market reacted sharply to touch the
highest ever mark of 8500.
India, after United States hosts the largest number of listed companies. Global investors now ardently seek
India as their preferred location for investment. Once viewed with skepticism, stock market now appeals to
middle class Indians also. Many Indians working in foreign countries now divert their savings to stocks. This
recent phenomenon is the result of opening up of online trading and diminished interest rates from banks. The
stockbrokers based in India are opening offices in different countries mainly to cater the needs of Non
Resident Indians. The time factor also works for the NRIs. They can buy or sell stock online after returning
from their work places.
The recent incidents that led to growing interest among Indian middle class are the initial public offers
announced by Tata Consultancy Services, Maruti Udyog Limited, ONGC and big names like that. Good
monsoons always raise the market sentiments. A good monsoon means improved agricultural produce and
more spending capacity among rural folk.
The bullish run of the stock market can be associated with a steady growth of around 6% in GDP, the growth
of Indian companies to MNCs, large potential of growth in the fields of telecommunication, mass media,
education, tourism and IT sectors backed by economic reforms ensure that Indian stock market continues its
bull run.
2.2 History of the Indian Stock Market - The Origin

Stock markets refer to a market place where investors can buy and sell stocks. The price at which each buying
and selling transaction takes is determined by the market forces (i.e. demand and supply for a particular stock.
Let us take an example for a better understanding of how market forces determine stock prices. ABC Co. Ltd.
enjoys high investor confidence and there is an anticipation of an upward movement in its stock price. More
and more people would want to buy this stock (i.e. high demand) and very few people will want to sell this
stock at current market price (i.e. less supply). Therefore, buyers will have to bid a higher price for this stock
to match the ask price from the seller which will increase the stock price of ABC Co. Ltd. On the contrary, if
there are more sellers than buyers (i.e. high supply and low demand) for the stock of ABC Co. Ltd. in the
market, its price will fall down.
In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction but now with the
dawn of IT, most of the operations are done electronically and the stock markets have become almost
paperless. Now investors don’t have to gather at the Exchanges, and can trade freely from their home or office
over the phone or through Internet.
One of the oldest stock markets in Asia, the Indian Stock Markets has a 200 years old history.



18th Century East India Company was the dominant institution and by end of the century, busuness in its loan
securities gained full momentum
1830's Business on corporate stocks and shares in Bank and Cotton presses started in Bombay. Trading list by
the end of 1839 got broader
1840's Recognition from banks and merchants to about half a dozen brokers
1850's Rapid development of commercial enterprise saw brokerage business attracting more people into the
business
1860's The number of brokers increased to 60
1860-61 The American Civil War broke out which caused a stoppage of cotton supply from United States of
America; marking the beginning of the "Share Mania" in India
1862-63 The number of brokers increased to about 200 to 250
1865 A disastrous slump began at the end of the American Civil War (as an example, Bank of Bombay Share
which had touched Rs. 2850 could only be sold at Rs. 87)


2.3 ACHIEVEMENTS AND MILESTONES

Pre-Independance Scenario - Establishment of Different Stock Exchanges
1874 With the rapidly developing share trading business, brokers used to gather at a street (now well known
as "Dalal Street") for the purpose of transacting business.
1875 "The Native Share and Stock Brokers' Association" (also known as "The Bombay Stock Exchange") was
established in Bombay

1880's Development of cotton mills industry and set up of many others
1894 Establishment of "The Ahmedabad Share and Stock Brokers' Association"
1880 - 90's Sharp increase in share prices of jute industries in 1870's was followed by a boom in tea stocks
and coal
1908 "The Calcutta Stock Exchange Association" was formed
1920 Madras witnessed boom and business at "The Madras Stock Exchange" was transacted with 100 brokers.
1923 When recession followed, number of brokers came down to 3 and the Exchange was closed down
1934 Establishment of the Lahore Stock Exchange
1936 Merger of the Lahoe Stock Exchange with the Punjab Stock Exchange
1937 Re-organisation and set up of the Madras Stock Exchange Limited (Pvt.) Limited led by improvement in
stock market activities in South India with establishment of new textile mills and plantation companies
1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was established
1944 Establishment of "The Hyderabad Stock Exchange Limited"
1947 "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks and Shares Exchange
Limited" were established and later on merged into "The Delhi Stock Exchange Association Limited"

Post Independance Scenario

The depression witnessed after the Independance led to closure of a lot of exchanges in the country. Lahore
Estock Exchange was closed down after the partition of India, and later on merged with the Delhi Stock
Exchange. Bnagalore Stock Exchange Limited was registered in 1957 and got recognition only by 1963. Most
of the other Exchanges were in a miserable state till 1957 when they applied for recognition under Securities
Contracts (Regulations) Act, 1956. The Exchanges that were recognized under the Act were:
1. Bombay
2. Calcutta
3. Madras
4. Ahmedabad
5. Delhi
6. Hyderabad
7. Bangalore
8. Bombay
9. Calcutta
10. Madras
11. Ahmedabad
12. Delhi
13. Hyderabad
14. Bangalore
15. Indore
Many more stock exchanges were established during 1980's, namely:
• Cochin Stock Exchange (1980)
• Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982)
• Pune Stock Exchange Limited (1982)
• Ludhiana Stock Exchange Association Limited (1983)
• Gauhati Stock Exchange Limited (1984)
• Kanara Stock Exchange Limited (at Mangalore, 1985)
• Magadh Stock Exchange Association (at Patna, 1986)
• Jaipur Stock Exchange Limited (1989)
• Bhubaneswar Stock Exchange Association Limited (1989)
• Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989)
• Vadodara Stock Exchange Limited (at Baroda, 1990)
• Coimbatore Stock Exchange
• Meerut Stock Exchange
2.4 PERFORMANCE OF INDIAN STOCK MARKET OVER FEW YEARS
At present, there are twenty one recognized stock exchanges in India which does not include the Over The
Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL).
Government policies during 1980's also played a vital role in the development of the Indian Stock Markets.
There was a sharp increase in number of Exchanges, listed companies as well as their capital, which is visible
from the table:
S. No. As on 31st December 1946 1961 1971 1981 1991 1995 2001 2005
1 No. of Stock Exchanges 7 7 8 8 9 14 20 23
2 No. of Listed Cos. 1125 1203 1599 1552 2265 4344 6229 8593
3 No. of Stock Issues of Listed Cos. 1506 2111 2838 3230 3697 6174 8967 11784
4 Capital of Listed Cos. (Cr. Rs.) 270 753 1812 2614 3973 9723 32041 59583
5 Market value of Capital of Listed Cos. (Cr. Rs.) 971 1292 2675 3273 6750 25302 110279 478121
6 Capital per Listed Cos. (4/2) (Lakh Rs.) 24 63 113 168 175 224 514 693
7 Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) 86 107 167 211 298 582 1770 5564

Figure 2.1
2.5 TRADING PATTERN OF THE INDIAN STOCK MARKET
Indian Stock Exchanges allow trading of securities of only those public limited companies that are listed on
the Exchange(s). They are divided into two categories:
Types of Transactions
The flowchart below describes the types of transactions that can be carried out on the Indian stock exchanges:

Figure 2.2

Indian stock exchange allows a member broker to perform following activities:
• Act as an agent,
• Buy and sell securities for his clients and charge commission for the same,
• Act as a trader or dealer as a principal,
Buy and sell securities on his own account and risk.


Over The Counter Exchange of India (OTCEI)
Traditionally, trading in Stock Exchanges in India followed a conventional style where people used to gather
at the Exchange and bids and offers were made by open outcry.

This age-old trading mechanism in the Indian stock markets used to create many functional inefficiencies.
Lack of liquidity and transparency, long settlement periods and benami transactions are a few examples that
adversely affected investors. In order to overcome these inefficiencies, OTCEI was incorporated in 1990
under the Companies Act 1956. OTCEI is the first screen based nationwide stock exchange in India created by
Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of
India, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its
subsidiaries and CanBank Financial Services.
Advantages of OTCEI
• Greater liquidity and lesser risk of intermediary charges due to widely spread trading mechanism across
India
• The screen-based scripless trading ensures transparency and accuracy of prices
• Faster settlement and transfer process as compared to other exchanges
• Shorter allotment procedure (in case of a new issue) than other exchanges
National Stock Exchange

In order to lift the Indian stock market trading system on par with the international standards. On the basis of
the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated
in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India,
Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others.



NSE provides exposure to investors in two types of markets, namely:
1. Wholesale debt market
2. Capital market
Wholesale Debt Market - Similar to money market operations, debt market operations involve institutional
investors and corporate bodies entering into transactions of high value in financial instrumets like treasury
bills, government securities, etc.
Trading at NSE
• Fully automated screen-based trading mechanism
• Strictly follows the principle of an order-driven market
• Trading members are linked through a communication network
• This network allows them to execute trade from their offices
• The prices at which the buyer and seller are willing to transact will appear on the screen.
• When the prices match the transaction will be completed , a confirmation slip will be printed at the office of
the trading member.

Advantages of trading at NSE
• Integrated network for trading in stock market of India
• Fully automated screen based system that provides higher degree of transparency
• Investors can transact from any part of the country at uniform prices
• Greater functional efficiency supported by totally computerized network


CHAPTER III

SURVEY OF LITERATURE

REVIEW OF LITERATURE


1. Richard W.Sias (1996) has found that a trader-intensified transactions database is employed to investigate:
(1) the relation between order-flow imbalance closed-end funds share prices and discounts (2) the role of
institutional investors in closed-end funds. Empirical results are consistent with the hypothesis that buyers
(sellers) of closed-end funds face upward (downward) sloping supply (demand) curves. The results also
demonstrate that ownership statistics fail to accurately reflect institutional investors’ importance in closed-end
funds market. The results failed to provide the evidence that institutional investors offset the position of
individual investors or that institutional investors face systematic “noise trader risk”.

2. Ilangovan Prof. D. et al (1997) held that Steps are taken to gain extra mileage as regards the level of foreign
investment receipts is concerned. Foreign direct investment is proven to have well-known positive effect
through technology spillovers and stable investments tied to plant and equipment, but portfolio capital is
associated more closely with volatility and its capacity to be triggered by both domestic as well as exogenous
factors, making it extremely difficult to manage and control.

3. Arshanapalli Bala et al (1997) has examined the nature and extent of linkage between the U.S. and the
Indian stock markets. The study uses the theory of co-integration to study interdependence between the BSE,
NYSE and NASDAQ. The sample data consisted of daily closing prices for the three indices from January
1991 to December 1998 with 2338 observations. The results were in support of the intuitive hypothesis that
the Indian stock market was not interrelated to the US stock markets for the entire sample period. It should be
noted that stock markets of many countries became increasingly interdependent with the US stock markets
during the same time period. India was late in effecting the liberalization policy and when it implanted these
policies it did so in a careful and slow manner. However, as the effect of economic liberalizations started to
take place, the BSE became more integrated with the NASDAQ and the NYSE, particularly after 1998. It
must be noted that though BSE stock market is integrated with US stock markets, it does not influence the
NASDAQ and NYSE markets.

4. Michael Mosebach et al (2000) have examined the long run equilibrium relation between the net flow of
funds into equity MF and the S&P 500 index. Applying the Engel and Granger correction methodology
followed by a state space procedure, we find that the levels of the stock market are influenced by the net flow
of funds into equity MFs. Their findings indicate that the US equity market appears to be rationally adjusting
to a structural change in the behaviour of the US investing public.

5. Chakrabarti (2001) has examined in his research that following the Asian crisis and the bust of info-tech
bubble internationally in 1998-99 the net FII has declined by US$ 61 million. But there was not much effect
on the equity returns. This negative investment would possibly disturb the long-term relationship between FII
and the other variables like equity returns, inflation, etc. has marked a regime shift in the determinants of FII
after Asian crisis. The study found that in the pre-Asian crisis period any change in FII found to have a
positive impact on the equity returns. But in the post-Asian crisis period it was found the reverse relation that
change in FII is mainly due to change in equity returns. Hence, any empirical exercise on FII has to take care
of this fact.

6. Richard A.Ajayi et al (2001) have studied recent advances in the time-series analysis to examine the inter-
temporal relation between stock indices and exchange rates for a sample of eight advanced economies. An
error correction model (ECM) of two variables employed to simultaneously estimate short-run and long-run
dynamics of variables. The ECM result revealed significant short-run and long-run relationship between two
financial markets. Specifically, the results show that increase in aggregate stock prices has negative short-run
effect on domestic currency value. In the long-run, however, stock prices have positive effect on domestic
currency value. On the other hand currency depreciation has negative short-run and long-run effects on stock
market.

7. Stanley Morgan (2002) has examined that FIIs have played a very important role in building up India’s
forex reserves, which have enabled a host of economic reforms. Secondly, FIIs are now important investors in
the country’s economic growth despite sluggish domestic sentiment. The Morgan Stanley report notes that FII
strongly influence short-term market movements during bear markets. However, the correlation between
returns and flows reduces during bull markets as other market participants raise their involvement reducing
the influence of FIIs. Research by Morgan Stanley shows that the correlation between foreign inflows and
market returns is high during bear and weakens with strengthening equity prices due to increased participation
by other players.

8. Sivakumar S (2003) has analysed the net flows of foreign institutional investment over the years, it also
briefly analyses the nature of FII flows based on research, explores some determinants of FII flows and
examines if the overall experience has been stabilising or destabilising for the Indian capital market.

9. Rai Kulwant et al (2003) heldf that the present study tries to examine the determinants of Foreign
Institutional Investments in India, which have crossed almost US$ 12 billions by the end of 2002. Given the
huge volume of these flows and its impact on the other domestic financial markets understanding the behavior
of these flows becomes very important at the time of liberalizing capital account. In this study, by using
monthly data, we found that FII inflow depends on stock market returns, inflation rate (both domestic and
foreign) and ex-ante risk. In terms of magnitude, the impact of stock market returns and the ex-ante risk
turned out to be major determinants of FII inflow. This study did not find any causation running from FII
inflow to stock returns as it was found by some studies. Stabilizing the stock market volatility and minimizing
the ex-ante risk would help in attracting more FII inflow that has positive impact on the real economy.

10. Agarwal, Chakrabarti et al (2003) have found in their research that the equity return has a significant and
positive impact on the FII. But given the huge volume of investments, foreign investors could play a role of
market makers and book their profits, i.e., they can buy financial assets when the prices are declining thereby
jacking-up the asset prices and sell when the asset prices are increasing. Hence, there is a possibility of bi-
directional relationship between FII and the equity returns.

11. Raju M.T, Ghosh Anirban (2004) held that volatility estimation is important for several reasons and for
different people in the market. Pricing of securities is supposed to be dependent on volatility of each asset. In
this paper we not only extend the study period of the earlier paper but also expand coverage in terms of
number of countries and statistical techniques. Mature markets / Developed markets continue to provide over
long period of time high return with low volatility. Amongst emerging markets except India and China, all
other countries exhibited low returns (sometimes negative returns with high volatility). India with long history
and China with short history, both provide as high a return as the US and the UK market could provide but the
volatility in both countries is higher. The third and fourth order moments exhibit large asymmetry in some of
the developed markets. Comparatively, Indian market show less of skewness and Kurtosis. Indian markets
have started becoming informationaly more efficient. Contrary to the popular perception in the recent past,
volatility has not gone up. Intra day volatility is also very much under control and has came down compared
to past years.

12. Sandhya Ananthanarayanan (2004) held that as part of its initiative to liberalize its financial markets, India
opened her doors to foreign institutional investors in September, 1992. This event represents a landmark event
since it resulted in effectively globalizing its financial services industry. We study the impact of trading of
Foreign Institutional Investors on the major stock indices of India. Our major findings are as follows. First, we
find that unexpected flows have a greater impact than expected flows on stock indices. Second, we find strong
evidence consistent with the base broadening hypothesis. Third, we do not detect any evidence regarding
momentum or contrarian strategies being employed by foreign institutional investors. Fourth, our findings
support the price pressure hypothesis. Finally, we do not find any substantiation to the claim that foreigners’
destabilize the market.

13. Kwangsoo Ko et al (2004) have examined the characteristics of institutional and foreign investor stock
ownership, and the stock price performance according to their ownership for two major Asian markets, Japan
and Korea. The differences in abnormal returns are more evident for foreign ownership portfolios than for
institutional ownership portfolios, especially in Korea. If we consider either institutional or foreign investors,
the differences in abnormal returns remain still significant in Korea, but not in Japan. Both institutional
investors’ incentive for stock holding and the extent of stock market efficiency would be the possible
explanations for the different results between Japan and Korea.

14. David A. Carpenter et al (2005) has examined that the Indian government has established a regulatory
framework for three separate investment avenues: foreign direct investment; investment by foreign
institutional investors; and investment by foreign venture capital investors. While these investment
alternatives have created clear avenues for foreign investment in India, they remain subject to many
conditions and restrictions which continue to hamper foreign investment in India.
15. Bose Suchismita et al (2005) has examined the impact of reforms of the foreign institutional investors'
(FIIs) investment policy, on FII portfolio flows to the Indian stock markets, an aspect, studies on determinants
of FII flows to India so far have not taken into consideration. FIIs have been allowed to invest in the domestic
financial market since 1992; the decision to open up the Indian financial market to FII portfolio flows was
influenced by several factors such as the disarray in India's external finances in 1991 and a disorder in the
country's capital market. Aimed primarily at ensuring non-debt creating capital inflows at a time of an extreme
balance of payment crisis and at developing and disciplining the nascent capital market, foreign investment
funds were welcomed to the country. Analysis also helps to evaluate the impact of liberalization policies as
well as measures for strengthening of policy framework for FII flows, in the post-Asian crisis period

16. Samy Dr. P. Chella et al (2006) held that Investors can pick up stocks at these levels for a growth story for
long term i.e. for equities a 5 years holding period is reasonable to give a very above average return. Caution
may be exercised to buy only good, well established market movers and never, to buy on margins or play
intraday or dabble in derivatives market, which is high risk.

17. Sikdar Soumyen (2006) held that the surge in inflows has not been matched by a corresponding growth in
the absorptive capacity of the Indian economy. The major reason is the persistent slowdown of industrial
activity since 1997. At the same time, the Reserve Bank of India (RBI) has been reluctant to let the rupee find
its market-clearing level under the circumstances. This has resulted in steady accretion to our foreign
exchange reserves (FER) over the last few years. Problems of Foreign Capital are widening of current account
deficit, monetization, appreciation of real exchange, etc.

18. Andy Lin Chih-Yuan Chen (2006) has explored the relationship between qualified foreign institutional
investors (QFIIs) and Taiwan’s stock market and evaluates the effect of QFIIs’ investment transactions on
Taiwan’s stock market. By taking the date of easing regulatory restrictions on foreigners’ stock investment
holdings as a cutoff point, the research uses the highest and lowest 10 stocks of QFII holdings in three
industry sectors as sample portfolios to study the prior- and post-event returns.

19. Dhamija Nidhi (2007) held that the increase in the volume of foreign institutional investment (FII) inflows
in recent years has led to concerns regarding the volatility of these flows, threat of capital flight, its impact on
the stock markets and influence of changes in regulatory regimes. The determinants and destinations of these
flows and how are they influencing economic development in the country have also been debated. This paper
examines the role of various factors relating to individual firm-level characteristics and macroeconomic-level
conditions influencing FII investment. The regulatory environment of the host country has an important
impact on FII inflows. As the pace of foreign investment began to accelerate, regulatory policies have
changed to keep up with changed domestic scenarios. The paper also provides a review of these changes.

20. P. Krishna Prasanna (2008) has examined the contribution of foreign institutional investment particularly
among companies included in sensitivity index (Sensex) of Bombay Stock Exchange. Also examined is the
relationship between foreign institutional investment and firm specific characteristics in terms of ownership
structure, financial performance and stock performance. It is observed that foreign investors invested more in
companies with a higher volume of shares owned by the general public. The promoters’ holdings and the
foreign investments are inversely related. Foreign investors choose the companies where family shareholding
of promoters is not substantial. Among the financial performance variables the share returns and earnings per
share are significant factors influencing their investment decision.

CHAPTER IV

ISSUE STUDIED
4.1 To study the scope and trading mechanism of Foreign Instititutional Investors in India.

The scope and the trading mechanism of Foreign Institutional investors in India is discussed as follow:
The eligibility criteria for applicant seeking FII registration
As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required to fulfill the
following conditions to qualify for grant of registration:
• Applicant should have track record, professional competence, financial soundness, experience, general
reputation of fairness and integrity.
• The applicant should be regulated by an appropriate foreign regulatory authority in the same
capacity/category where registration is sought from SEBI. Registration with authorities, which are responsible
for incorporation, is not adequate to qualify as Foreign Institutional Investor.
• The applicant is required to have the permission under the provisions of the Foreign Exchange Management
Act, 1999 from the Reserve Bank of India.
• Applicant must be legally permitted to invest in securities outside the country or its in-corporation /
establishment.
• The applicant must be a "fit and proper" person.
• The applicant has to appoint a local custodian and enter into an agreement with the custodian. Besides it also
has to appoint a designated bank to route its transactions.
• Payment of registration fee of US $ 5,000.00
"Form A" as prescribed in SEBI (FII) Regulations, 1995 is to be filled before applying for FII registration.


Supporting documents required are:
• Application in Form A duly signed by the authorized signatory of the applicant.
• Certified copy of the relevant clauses or articles of the Memorandum and Articles of Association or the
agreement authorizing the applicant to invest on behalf of its clients
• Audited financial statements and annual reports for the last one year , provided that the period covered shall
not be less than twelve months.
• A declaration by the applicant with registration number and other particulars in support of its registration or
regulation by a Securities Commission or Self Regulatory Organisation or any other appropriate regulatory
authority with whom the applicant is registered in its home country.
• A declaration by the applicant that it has entered into a custodian agreement with a domestic custodian
together with particulatrs of the domestic custodian.
• A signed declaration statement that appears at the end of the Form.
• Declaration regarding fit & proper entity.
The fee for registration as FII is US $ 5,000. The mode of payment is Demand Draft in favour of "Securities
and Exchange Board of India" payable at New York”.
SEBI generally takes 7 working days in granting FII registration. However, in cases where the information
furnished by the applicants is incomplete, seven days shall be counted from the days when all necessary
information sought, reaches SEBI.
In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from the Reserve Bank
of India (RBI). In such cases, 7 working days would be counted from the day no objection is received from
RBI.
The FII registration is valid for 5 years. After expiry of 5 years, the registration needs to be renewed.
Same as initial registration, Along with "Form A" and all the relevant documents, the applicants are required
to fill in additional form (Annexure 1) while applying for renewal. US $ 5,000 needs to be paid for renewal of
FII registration.
The application for renewal should be submitted three months before expiry of the FII registration. 100 %
debt FIIs are debt dedicated FIIs which invest in debt securities only. The procedure for registration of
FII/sub-account, under 100% debt route is similar to that of normal funds besides a clear statement by the
applicant that it wishes to be registered as FII/sub-account under 100% debt route.
SUB-ACCOUNT REGISTRATION
e) Institution or funds or portfolios established outside India, whether incorporated or not.
f) Proprietary fund of FII.
g) Foreign Corporates
h) Foreign Individuals.
The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account are required to sign
the Sub-account application form.
"Annexure B" to "Form A" (FII application form) needs to be filled when applying for sub-account
registration. No document is needed to be sent with annexure B. The fee for sub-account registration is US$
1,000. The fee is to be submitted at the time of submitting the application. The mode of payment is Demand
Draft in the name of "Securities and Exchange Board of India" payable at New York. SEBI generally takes
three working days in granting FII registration. However, in cases where the information furnished by the
applicants is incomplete, three days shall be counted from the days when all necessary information sought,
reaches SEBI. The validity of sub-account registration is co-terminus with the FII registration under which it
is registered. The process of renewal of sub-account is same as initial registration. Renewal fee in this case is
US $ 1,000. OCBs / NRIs are not permitted to get registered as FII/sub-account.
POST-REGISTRATION PROCESSES:
If a registered FII/sub-account undergoes name change, then the FII need to promptly inform SEBI about the
change. It should also mention the reasons for the name change and give an undertaking that there has been no
change in beneficiary ownership.
In case of name change of FII, the request should be accompanied with documents from home regulator and
registrar of the company evidencing approval of name change, and the original FII registration certificate
issued by SEBI should be sent back for necessary amendment.
Procedure for transferring a sub-account from one FII to another:
The FII to whom the Sub-account is proposed to be transferred has to send a request along with a declaration
that it is authorized to invest on behalf of the Sub-account. The transferor FII should also submit a No-
objection certificate.
The FII should send a request, along with no-objection certificate from existing domestic custodian, for
change in domestic custodian.
The FII would be required to send a request for cancellation of its registration or registration of its Sub-
account/s clearly mentioning the name and registration number of the entity. The FII should ensure that it /
Sub-account has nil cash / securities holdings.
Procedure for change of local custodian:
In case of change of the local custodian of the FII / sub-account, the change should be intimated to SEBI by
the FII. On receipt of no objection from the existing custodian and acceptance from the proposed custodian,
the change of custodian would be approved - by SEBI.


Procedure for registration as FII/sub account under 100% debt route:
The procedure for registration of FII/sub account under 100% debt route is similar to that of normal funds
besides a clear statement by the applicant that it wishes to be registered as FII/sub account under 100% debt
route. However, Government of India allocates the overall investment limit for 100% debt funds annually.
The grant of investment limit for individual 100% debt funds is within this overall limit. The funds have to
seek further investment limit in case the limit allotted to them is exhausted and they wish to invest further.
A Foreign Institutional Investor having an account with one custodian can open accounts with different
custodians for its different sub-accounts. However, one sub-account cannot be custodial with more than one
custodian.
Procedure if an existing sub-account wants to get registered as a Foreign Institutional Investor:
In case if a registered sub-account wishes to get itself registered as a Foreign Institutional Investor, then it will
have to apply in Form A to SEBI for the same and has to satisfy all the eligibility criteria norms mentioned in
SEBI (Foreign Institutional Investor) Regulations, 1995. It should also submit a letter from the old FII
indicating its 'No-objection' to such registration.
Procedure for renewal of FII/Sub-Account registration:
They have to apply before 3 months of the expiry of registration in Form A. Circular No
FITTC/CUST/09/2000 dated September 21, 2000 may be referred.
If the FII does not renew its/sub-account’s registration:
The registration of the FII / Sub-account would get expired at due date and it would not be allowed to trade in
Indian securities markets. If it is not interested in renewal but has certain residual assets, it can apply for
disinvestment in terms of Circular No. FITTC/CUST/12/2001 dated June 04, 2001 and abide by the guidelines
specified in this regard.
INVESTMENT OPPORTUNITIES
Financial instruments are available for FII investments:
a. Securities in primary and secondary markets including shares, debentures and warrants of companies,
unlisted, listed or to be listed on a recognized stock exchange in India;
b. Units of mutual funds;
c. Dated Government Securities;
d. Derivatives traded on a recognized stock exchange;
e. Commercial papers.
Investment limits on equity investments by FII/sub-account:
a. FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of an Indian company.
b. Investment on behalf of each sub-account shall not exceed 10% of total issued capital of an India company.
c. For the sub-account registered under Foreign Companies/Individual category, the investment limit is fixed
at 5% of issued capital.
These limits are within overall limit of 24% / 49 % / or the sectoral caps prescribed by Government of India /
Reserve Bank of India.
Investment limits on debt investments by FII/sub-account:
The FII investments in debt securities are governed by the policy if the Government for FII investments in
Government debt, currently of India. Currently following limits are in effect:
100 % Debt Route US $ 1.55 billion
70 : 30 Route US $ 200 million
Total Limit US $ 1.75 billion

o For corporate debt the investment limit is fixed at US $ 500 million.
Other investment limits:
Normal FII (70:30 Route) 100% Debt FII
Total investment in equity and equity related instruments shall not be less than 70% of aggregate of all
investments. 100% investment shall be made in debt security only.
Securities to be registered in name of :
a. In the name of FII when making investments on its own behalf
b. In the name of sub-account when making investments on behalf of Sub-account
DERIVATIVES POSITION LIMITS
a. The FII position limits in a derivative contracts (Individual Stocks)
The FII position limits in a derivative contract on a particular underlying stock i.e. stock option contracts and
single stock futures contracts are:
o For stocks in which the market wide position limit is less than or equal to Rs. 250 Cr, the FII position limit
in such stock shall be 20% of the market wide limit.
o For stocks in which the market wide position limit is greater than Rs. 250 Cr, the FII position limit in such
stock shall be Rs. 50 Cr.
b. FII Position limits in Index options contracts
FII position limit in all index options contracts on a particular underlying index shall be Rs. 250 Crores or 15
% of the total open interest of the market in index options, whichever is higher, per exchange.
This limit would be applicable on open positions in all option contracts on a particular underlying index.
c. FII Position limits in Index futures contracts:
FII position limit in all index futures contracts on a particular underlying index shall be Rs. 250 Crore or 15 %
of the total open interest of the market in index futures, whichever is higher, per exchange.
This limit would be applicable on open positions in all futures contracts on a particular underlying index.
In addition to the above, FIIs shall take exposure in equity index derivatives subject to the following limits:
i. Short positions in index derivatives (short futures, short calls and long puts) not exceeding (in notional
value) the FII’s holding of stocks.
ii. Long positions in index derivatives (long futures, long calls and short puts) not exceeding (in notional
value) the FII’s holding of cash, government securities, T-Bills and similar instruments.
d. FII Position Limits in Interest rate derivative contracts
At the level of the FII
The notional value of gross open position of a FII in exchange traded interest rate derivative contracts shall
be:
i. US $ 100 million.
ii. In addition to the above, the FII may take exposure in exchange traded in interest rate derivative contracts
to the extent of the book value of their cash market exposure in Government Securities.
At the level of the sub-account
The position limits for a Sub-account in near month exchange traded interest rate derivative contracts shall be
higher of:
? Rs. 100 Cr or
? 15% of total open interest in the market in exchange traded interest rate derivative contracts.

4.2 To find the relationship between the FIIs equity investment pattern and Indian stock indices.

The sample data consists of 24 observations for FII, Sensex and S&P CNX Nifty starting from January 2007
to December 2008. Average index of all the indices and monthly average of net investments made by FII is
taken into consideration in the study. FII was taken as independent variable. Stock indices were taken as
dependent variable. The data was taken from various financial sites.

The relationship between the FII’s equity investment pattern and Indian stock indices is studied for the year
2007 & 2008 with the help of correlation and regression analysis. The results and the analysis are shown
below:

Correlations(2007)
FIIs Sensex
FIIs Pearson Correlation 1 .173
Sig. (2-tailed) .590
N 12 12
Sensex Pearson Correlation .173 1
Sig. (2-tailed) .590
N 12 12

Fig 4.1: Correlation between the FII’s equity investment pattern and Sensex for the year 2007

Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .173a .030 -.067 2727.50409
a. Predictors: (Constant), FII

Model Sum of Squares df Mean Square F Sig.
1 Regression 2302261.126 1 2302261.126 .309 .590a
Residual 7.439E7 10 7439278.580
Total 7.670E7 11
a. Predictors: (Constant), FII
b. Dependent Variable: sensex

Fig 4.2 Regression between the FII’s equity investment pattern and Sensex for the year 2007
Analysis for the year 2007 on the basis of the above results obtained:

The data includes 12 observations of monthly Sensex and FIIs in year 2007. The correlation and regression is
calculated with the help of SPSS.
Number of Observations = 12
Correlation = 0.173 and regression = 0.590

? There is positive effect of FII on Sensex but the correlation coefficient is low. This means that Sensex has a
relation with FII but the FII is not influencing the Sensex much.
? The regression coefficient is 0.590 which reflects 59.0 % variability in Sensex with the independent variable
i.e FII and how much the FII affects the Sensex in 2007.
? The standard error comes out to be 2727.50409 which is very high and so it means that the deviation from
the mean value is very high. This does not mean the relation is false but we can say that the error in linear
relation is high.

Correlations
FII Sensex
FII Pearson Correlation 1 .130
Sig. (2-tailed) .688
N 12 12
Sensex Pearson Correlation .130 1
Sig. (2-tailed) .688
N 12 12

Fig 4.3 Correlation between the FII’s equity investment pattern and Sensex for the year 2008

Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .130a .017 -.082 3262.54183
a. Predictors: (Constant), FII

Model Sum of Squares df Mean Square F Sig.
1 Regression 1815662.926 1 1815662.926 .171 .688a
Residual 1.064E8 10 1.064E7
Total 1.083E8 11

Fig 4.4 Regression between the FII’s equity investment pattern and Sensex for the year 2008

Analysis for the year 2008 on the basis of the above results obtained:
The data includes 12 observations of monthly Sensex and FIIs in year 2008. The correlation and regression is
calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.130,
Regression = 0.688, Standard Error = 3262.54183

? The effect of FII on Sensex if positive, But the correlation coefficient is very low and it is only 0.130. This
means that Sensex has a relation with FII but the FII is not influencing the Sensex much.
? The standard error comes out to be 3262.54183 which is high. This does not mean that the relation is false
but the error in linear relation is high.
? In 2008, the regression coefficient is 0.688 which means 68.8% variability in BSE Sensex due to
independent variable FII which is much higher than during 2007 in the bullish run.

Correlations
FII nifty
FII Pearson Correlation 1 .036
Sig. (2-tailed) 0.642
N 12 12
nifty Pearson Correlation .036 1
Sig. (2-tailed) 0.642
N 12 12

Fig 4.5 Correlation between the FII’s equity investment pattern and Nifty for the year 2007

Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .036a .001 -.099 491.63092
a. Predictors: (Constant), FII


Model Sum of Squares df Mean Square F Sig.
1 Regression 3183.097 1 3183.097 .013 0.642
Residual 2417009.575 10 241700.957
Total 2420192.672 11

Fig 4.6 Regression between the FII’s equity investment pattern and Nifty for the year 2007

Analysis for the year 2007 on the basis of the above results obtained:

The data includes 12 observations of monthly Nifty and FIIs in year 2007. The correlation and regression is
calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.36,
Regression = 0.642, Standard Error = 491.63092
? The nifty is positively correlated with FIIs. The correlation coefficient is 0.036 which is almost near to zero
and so we can say that FII are almost unrelated to nifty in 2007.
? The coefficient of determination = Explained Variance/Total Variance
Explained Variance = FIIs impact on overall fluctuation in Nifty
Unexplained Variance = impact of other factors
R square is 0.001 which means 1% change in nifty due to explained variance and all other volatility is due to
other factors.
? The standard error is 491.63092 which is high. This does not mean that the relation is false but the error in
linear relation is high.
? The regression coefficient is 0.642 which means 64.2% variability in Nifty due to a single factor FII.

Correlations
FII nifty
FII Pearson Correlation 1 .348
Sig. (2-tailed) 0.267
N 12 12
nifty Pearson Correlation -.348 1
Sig. (2-tailed) 0.267
N 12 12

Fig 4.7 Correlation between the FII’s equity investment pattern and Nifty for the year 2008
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .348a .121 .033 713.96136

Model Sum of Squares df Mean Square F Sig.
1 Regression 703762.386 1 703762.386 1.381 0.267
Residual 5097408.282 10 509740.828
Total 5801170.668 11
a. Predictors: (Constant), FII
b. Dependent Variable: nifty

Fig 4.8 Regression between the FII’s equity investment pattern and Nifty for the year 2008

Analysis for the year 2008 on the basis of the above results obtained:

The data includes 12 observations of monthly Nifty and FIIs in year 2008. The correlation and regression is
calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.348,
Regression = 0.267, Standard Error = 713.96136

? The nifty in 2008 is positively correlated to FII. The correlation coefficient is 0.348 which is much higher
than 0.036 of last year. It interprets that Nifty is more correlated to FII in 2008 as comparable to the 2007.
? The regression coefficient is 0.267 in 2008. By regression it is analyzed how a single dependent variable is
affected by an independent variable. It can be interpreted that with the fall in market in 2008 the FII have
started withdrawing from the NSE.
? But the correlation is high due to withdrawing of money by FIIs in 2008 which reflects the relationship
between the two.
? The coefficient of determination is 0.121 which is 12.1% change in Nifty due to explained variance i.e. FII.


4.3 To analyze the impact of FIIs equity investment on specific industrial sector (FMCG, Consumer Durables,
Auto, Banking, Real Estate) indices.

The relationship between the FII’s equity investment pattern and specific industrial stock indices is studied for
the year 2007 & 2008 with the help of correlation and regression analysis. The results and the analysis is
shown below:
Correlations
FII auto
FII Pearson Correlation 1 .084
Sig. (2-tailed) .807
N 12 11
auto Pearson Correlation .084 1
Sig. (2-tailed) .807
N 11 11

Fig 4.9 Correlation between the FII’s equity investment pattern and Auto sector for the year 2007



Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .053a .003 -.097 326.82145
a. Predictors: (Constant), FII


Model Sum of Squares df Mean Square F Sig.
1 Regression 3009.574 1 3009.574 .028 .807a
Residual 1068122.632 10 106812.263
Total 1071132.206 11

Fig 4.10 Regression between the FII’s equity investment pattern and Auto sector for the year 2007

Analysis for the year 2007 on the basis of the above results obtained:
The data includes 12 observations of monthly Auto sector indices and FIIs in year 2007. The correlation and
regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.084,
Regression = 0.807, Standard Error = 326.82145

? FII has no significant relation with BSE Automobiles, as the value of correlation is 0.084. This does not
mean that there is no relation at all between them. It shows the absence of linear relation between the two
variables but not a lack of relationship altogether.
? The regression coefficient is 0.807 which means 80.7 % impact of FII on BSE automobiles. It reflects how
the market is going up with the increase in FIIs.
? The standard error comes out to be 326.82145 which is high. This does not mean that the relation is false but
the error in linear relation is high.

Correlations
FII auto
FII Pearson Correlation 1 .116
Sig. (2-tailed) .719
N 12 12
auto Pearson Correlation .116 1
Sig. (2-tailed) .719
N 12 12
Fig 4.11 Correlation between the FII’s equity investment pattern and Auto sector for the year 2008.


Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .116a .013 -.085 957.46389
a. Predictors: (Constant), FII

Model Sum of Squares df Mean Square F Sig.
1 Regression 125352.999 1 125352.999 .137 .719a
Residual 9167371.017 10 916737.102
Total 9292724.016 11
a. Predictors: (Constant), FII
b. Dependent Variable: auto

Fig 4.12 Regression between the FII’s equity investment pattern and Auto sector for the year 2008


Analysis for the year 2008 on the basis of the above results obtained:

The data includes 12 observations of monthly Automobiles sector indices and FIIs in year 2008. The
correlation and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.116,
Regression = 0.807, Standard Error = 326.82145

? The correlation coefficient is 0.116 which means there is no significant correlation between Automobiles
sector and FIIs in 2008. It shows the absence of linear relation between the two variables but not a lack of
relationship altogether. But as comparable to 2007 there is more positive relation between the above two
variables.
? The coefficient of determination which is 13% also reflects more clear picture that how explained variance
i.e. FII are affecting BSE Auto index.
? The regression coefficient is 0.719 which means that in 2008 with the withdrawal of money by FIIs in 2008
the Auto Sector index has also fallen. This can easily be seen as the reduction in regression coefficient from
0.807 to 0.719.
? The standard error comes out to be 2727.50409 which is very high and so it means that the deviation from
the mean value is very high. This does not mean the relation is false but we can say that the error in linear
relation is high.

Correlations
FII bankex
FII Pearson Correlation 1 .166
Sig. (2-tailed) .606
N 12 12
bankex Pearson Correlation .166 1
Sig. (2-tailed) .606
N 12 12
Fig 4.13 Correlation between the FII’s equity investment pattern and banking sector for the year 2007

Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .053a .003 -.097 326.82145
a. Predictors: (Constant), FII

Model Sum of Squares df Mean Square F Sig.
1 Regression 3009.574 1 3009.574 .028 .606a
Residual 1068122.632 10 106812.263
Total 1071132.206 11
a. Predictors: (Constant), FII




Fig 4.14 Regression between the FII’s equity investment pattern and banking sector for the year 2007

Analysis for the year 2007 on the basis of the above results obtained:

The data includes 12 observations of monthly Banking sector indices and FIIs in year 2007. The correlation
and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.166,
Regression = 0.870, Standard Error = 326.82145

? There is positive effect of FII on BSE Banking sector index but the correlation coefficient is 0.166 which is
low. This means that BSE Banking sector index has a relation with FII but the FII is not influencing the the
index much.
? The R square is 0.03 which means FII has a 3% influence on all fluctuations in the Banking index.

? The standard error comes out to be 326.82145 which is very high and so it means that the deviation from the
mean value is very high. This does not mean the relation is false but we can say that the error in linear relation
is high.
? The regression is 0.870 from which it can be analysed that how BSE banking is affected by the values of
independent variable FII. It can be seen that BSE banking is affected a lot by FII and with more FIIs index is
also going up.

Correlations
FII bankex
FII Pearson Correlation 1 .149
Sig. (2-tailed) .662
N 12 11
bankex Pearson Correlation .149 1
Sig. (2-tailed) .662
N 11 11

Fig 4.15 Correlation between the FII’s equity investment pattern and banking sector for the year 2008

Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .064a .004 -.096 2021.30305
a. Predictors: (Constant), FII


Model Sum of Squares df Mean Square F Sig.
1 Regression 165442.207 1 165442.207 .040 .662a
Residual 4.086E7 10 4085666.028
Total 4.102E7 11
a. Predictors: (Constant), FII
b. Dependent Variable: bankex

Fig 4.16 Regression between the FII’s equity investment pattern and banking sector for the year 2008
Analysis for the year 2008 on the basis of the above results obtained:

The data includes 12 observations of monthly Banking sector indices and FIIs in year 2008. The correlation
and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.149,
Regression = 0.662, Standard Error = 2021.30305

? The correlation coefficient is 0.149 which means there is no significant correlation between banking sector
and FIIs in 2008. It shows the absence of linear relation between the two variables but not a lack of
relationship altogether. But as comparable to 2007 there is less positive relation between the above two
variables.
? The coefficient of determination = Explained Variance/Total Variance
Explained Variance = FIIs impact on overall fluctuation in BSE Banking
Unexplained Variance = impact of other factors
R square is 0.004 which means 4% change in nifty due to explained variance and all other volatility is due to
other factors.
? The regression coefficient is 0.662 which means that with the change in FII there is less change in the
banking sector index and fewer amounts is withdrawn from this.

Correlations
FII consumerdurables
FII Pearson Correlation 1 .173
Sig. (2-tailed) .610
N 12 11
consumerdurables Pearson Correlation .173 1
Sig. (2-tailed) .610
N 11 11
Fig 4.17 Correlation between the FII’s equity investment pattern and consumer durables sector for the year
2007

Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .077a .006 -.093 1035.50370
a. Predictors: (Constant), FII


Model Sum of Squares df Mean Square F Sig.
1 Regression 64755.976 1 64755.976 .060 .610a
Residual 1.072E7 10 1072267.920
Total 1.079E7 11
a. Predictors: (Constant), FII
b. Dependent Variable: consumerdurables

Fig 4.18 Regression between the FII’s equity investment pattern and consumer durables sector for the year
2007

Analysis for the year 2007 on the basis of the above results obtained:

The data includes 12 observations of monthly Consumer durables sector indices and FIIs in year 2007. The
correlation and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.173,
Regression = 0.610, Standard Error = 1035.5070

? There is positive effect of FII on BSE CD sector index but the correlation coefficient is 0.166 which is low.
This means that BSE CD sector index has a relation with FII but the FII is not influencing the the index much.

? The coefficient of determination = Explained Variance/Total Variance
Explained Variance = FIIs impact on overall fluctuation in BSE CD
Unexplained Variance = impact of other factors
R square is 0.006 which means 6% change in nifty due to explained variance and all other volatility is due to
other factors.
? The regression is 0.610 from which it can be analyzed that how BSE CD is affected by the values of
independent variable FII. It can be seen that BSE banking is affected a lot by FII and with more FIIs index is
also going up.

Correlations
FII consumerdurables
FII
Pearson Correlation 1 .192
Sig. (2-tailed) .572
N 12 11
consumerdurables Pearson Correlation .192 1
Sig. (2-tailed) .572


Fig 4.19 Correlation between the FII’s equity investment pattern and consumer durables sector for the year
2008

Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .045a .002 -.098 1175.87269
a. Predictors: (Constant), FII
Model Sum of Squares df Mean Square F Sig.
1 Regression 28461.276 1 28461.276 .021 .572a
Residual 1.383E7 10 1382676.572
Total 1.386E7 11
a. Predictors: (Constant), FII
b. Dependent Variable: consumerdurables
Fig 4.20 Regression between the FII’s equity investment pattern and consumer durables sector for the year
2008

Analysis for the year 2008 on the basis of the above results obtained:

The data includes 12 observations of monthly Consumer durables sector indices and FIIs in year 2008. The
correlation and regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.192
Regression = 0.572, Standard Error = 1175.87269

? The correlation coefficient is 0.192 which means there is no significant correlation between BSE CD sector
and FIIs in 2008. It shows the absence of linear relation between the two variables but not a lack of
relationship altogether. But as comparable to 2007 there is more positive relation between the above two
variables.
? The coefficient of determination = Explained Variance/Total Variance
Explained Variance = FIIs impact on overall fluctuation in Nifty
Unexplained Variance = impact of other factors
R square is 0.004 which means 2% change in nifty due to explained variance and all other volatility is due to
other factors.
? The regression coefficient is 0.572 which means that in 2008 with the withdrawal of money by FIIs in 2008
the Auto Sector index has also fallen. This can easily be seen as the reduction in regression coefficient from
0.610 to 0.572.

Correlations
FII fmcg
FII Pearson Correlation 1 .252
Sig. (2-tailed) .454
N 12 11
fmcg Pearson Correlation .252 1
Sig. (2-tailed) .454
N 11 11

Fig 4.21 Correlation between the FII’s equity investment pattern and fmcg sector for the year 2007

Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .178a .032 -.065 187.05383
a. Predictors: (Constant), FII


Model Sum of Squares df Mean Square F Sig.
1 Regression 11453.182 1 11453.182 .327 .454a
Residual 349891.339 10 34989.134
Total 361344.521 11
a. Predictors: (Constant), FII
b. Dependent Variable: fmcg

Fig 4.22 Regression between the FII’s equity investment pattern and fmcg sector for the year 2007
Analysis for the year 2007 on the basis of the above results obtained:

The data includes 12 observations of monthly FMCG sector indices and FIIs in year 2007. The correlation and
regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.252
Regression = 0.454, Standard Error = 187.05383

? There is a positive correlation between FMCG and FIIs and the correlation coefficient is 0.252. It reflects
FMCG and FII inflow/Outflow moving in same direction.
? The R square is .032 which means that FII has a big impact on the FMCG sector index.
? The regression is 0.454 from which it can be analyzed that how BSE FMCG is affected by the values of
independent variable FII. It can be seen that BSE banking is affected a lot by FII and with more FIIs index is
also going up.

Correlations
FII fmcg
FII Pearson Correlation 1 .403
Sig. (2-tailed) .194
N 12 12
fmcg Pearson Correlation .403 1
Sig. (2-tailed) .194
N 12 12

Fig 4.23 Correlation between the FII’s equity investment pattern and fmcg sector for the year 2008




Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .403a .162 .078 185.75990
a. Predictors: (Constant), FII


Model Sum of Squares df Mean Square F Sig.
1 Regression 66780.008 1 66780.008 1.935 .194a
Residual 345067.407 10 34506.741
Total 411847.415 11
a. Predictors: (Constant), FII
b. Dependent Variable: fmcg

Fig 4.24 Regression between the FII’s equity investment pattern and fmcg sector for the year 2008

Analysis for the year 2008 on the basis of the above results obtained:

The data includes 12 observations of monthly FMCG sector indices and FIIs in year 2008. The correlation and
regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.403
Regression = 0.194, Standard Error = 185.75990
? The correlation coefficient is 0.192 which means there is no significant correlation between BSE FMCG
sector and FIIs in 2008. It shows the absence of linear relation between the two variables but not a lack of
relationship altogether. But as comparable to 2007 there is more positive relation between the above two
variables.
? The regression coefficient is 0.194 which means that in 2008 with the withdrawal of money by FIIs in 2008
the FMCG Sector index has also fallen. The less investment in FMCG sector index is the reason for this. This
can easily be seen as the reduction in regression coefficient from 0.494 to 0.194.

Correlations
FII realty
FII Pearson Correlation 1 .228
Sig. (2-tailed) .501
N 12 11
realty Pearson Correlation .228 1
Sig. (2-tailed) .501
N 11 11

Fig 4.25 Correlation between the FII’s equity investment pattern and realty sector for the year 2007
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .146a .021 -.077 2294.77791



Model Sum of Squares df Mean Square F Sig.
1 Regression 1143793.783 1 1143793.783 .217 .501a
Residual 5.266E7 10 5266005.670
Total 5.380E7 11
a. Predictors: (Constant), FII
b. Dependent Variable: realty

Fig 4.26 Regression between the FII’s equity investment pattern and realty sector for the year 2007

Analysis for the year 2007 on the basis of the above results obtained:

The data includes 12 observations of monthly Realty sector indices and FIIs in year 2007. The correlation and
regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.228
Regression = 0.501, Standard Error = 2294.77791

? There is a positive correlation between Realty and FIIs and the correlation coefficient is 0.252. It reflects
Realty and FII inflow/Outflow moving in same direction.
? The coefficient of determination = Explained Variance/Total Variance
Explained Variance = FIIs impact on overall fluctuation in Nifty
Unexplained Variance = impact of other factors
R square is 0.021 which means 21% change in realty sectoral indices due to explained variance and all other
volatility is due to other factors.
? The regression is 0.501 from which it can be analyzed that how BSE realty is affected by the values of
independent variable FII. It can be seen that BSE realty is affected a lot by FIIs inflow and with more FIIs
inflow, index is also going up.
Correlations
FII realty
FII Pearson Correlation 1 .129
Sig. (2-tailed) .690
N 12 12
realty Pearson Correlation .129 1
Sig. (2-tailed) .690
N 12 12

Fig 4.27 Correlation between the FII’s equity investment pattern and realty sector for the year 2008
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .348a .121 .033 713.96136
a. Predictors: (Constant), FII


Model Sum of Squares df Mean Square F Sig.
1 Regression 703762.386 1 703762.386 1.381 .690a
Residual 5097408.282 10 509740.828
Total 5801170.668 11
a. Predictors: (Constant), FII
b. Dependent Variable: nifty

Fig 4.28 Regression between the FII’s equity investment pattern and realty sector for the year 2008

Analysis for the year 2008 on the basis of the above results obtained:

The data includes 12 observations of monthly Realty sector indices and FIIs in year 2007. The correlation and
regression is calculated with the help of SPSS.
No, of Observations = 12, Correlation = 0.129
Regression = 0.690, Standard Error = 713.96136

? The correlation coefficient is 0.129 which means there is no significant correlation between BSE realty
sector and FIIs in 2008. It shows the absence of linear relation between the two variables but not a lack of
relationship altogether. But as comparable to 2007 there is less positive relation between the above two
variables.
? The regression coefficient is 0.690 in 2008 which means that with the fall in FIIs in this year there is a big
variability in realty sector as well. But there are many other factors which are affecting realty sector other than
FII in 2008.
CHAPTER V

FINDINGS, CONCLUSIONS,
LIMITATIONS
&
RECOMMENDATIONS

5.1 FINDINGS
After the analysis following are the findings of the study:

1) Impact of FIIs on Sensex: In 2007, the correlation coefficient is more than in 2008 which interprets that the
relationship between these two variables is more in the period when there is bearish trend. But in both the
years FIIs were not much positively correlated, so a less significant impact of FIIs is seen. The error is very
high in both the years which doesn’t mean that relation is false but we can say that the error in linear relation
is high.

2) Impact of FIIs on Nifty: The correlation coefficient of FIIs and Nifty is unrelated in 2007 and 2008. The
regression coefficient predicts the value from an independent variable i.e. FII for the dependent variable Nifty.
Regression coefficient is 0.267 in 2008 and 0.911 in 2007 which replicates that how Nifty index has gone
down by withdrawal of FIIs.

3) Impact of FIIs on Industrial Sectoral Indices: In different Industrial sectoral indices of BSE ( BSE Auto,
BSE Banking, BSE CD, BSE FMCG, BSE Realty) the correlation is always less. And also the coefficient of
determination reveals that the explained variance ( FII ) doesn’t has much impact on the sectoral indices. And
in 2008 the regression coefficient is giving a clear picture that the withdrawal by FIIs is resulting a fall in
indices and so FIIs are playing good role during this time.

4) FIIs have less impact on Indian stock indices and other unexplained variables are also influencing the
Indices.

5) In bearish trend of 2008 the volatility in Indian Stock indices due to FIIs is more than in bullish trend of
2007. No doubt FII inflow is more in 2007. The domestic investors were also playing an important role in
2007 but in 2008 FIIs are influencing market more as domestic investors are not in the market.


5.2 CONCLUSION

In developing countries like India foreign capital helps in increasing the productivity of
labour and to build up foreign exchange reserves to meet the current account deficit. Foreign Investment
provides a channel through which country can have access to foreign
capital.

According to Data analysis and findings, it can be concluded that FII do have any significant impact on the
Indian Stock Market but there are other factors like government policies, budgets, bullion market, inflation,
economical and political condition, etc. do also have an impact on the Indian stock market. There is a positive
correlation between stock indices and FIIs but FIIs didn’t have any significant impact on Indian Stock Market.
The null hypothesis is rejected. BSE CD and Nifty showed some positive correlation with FII in 2007 and
2008 but rest of the indices showed very less positive correlation with FII. Also the coefficient of
determination is less in all the case. It shows the absence of linear relation between FII and stock index. This
does not mean that there is no relation between them.

One of the reasons for absence of any linear relation can also be due to the sample data. The data was taken on
monthly basis. The data on daily basis can give more positive results (may be). Also FII is not the only factor
affecting the stock indices. There are other major factors that influence the bourses in the stock market.

5.3 LIMITATIONS

Besides following scientific methodologies the study has come across some limitations. These are:
? The study is based on Sensex sample. The Sensex companies have an external image that they are the best
performers in the country. If the sample companies consist of probably a heterogeneous group then the results
may give better insight in to relationship of the specific variables.

? The data is taken on monthly basis. The data on daily basis can give more positive results.

? Due to time constraint, my project report is not fully exhaustive.

? Secondary data that I have used in this study may not give true picture of the concern.


.4 RECOMMENDATIONS

After the analysis of the project study, following recommendations can be made:

1) Simplifying procedures and relaxing entry barriers for business activities and providing investor friendly
laws and tax system for foreign investors.

2) Allowing foreign investment in more areas. In different industries indices the FIIs should be encouraged
through different patterns like futures, options, etc.

3) Somewhere, a restriction related to the track record of Sub- Accounts is also to be made on the investors
who withdraw money out of the Indian stock market who have invested with the help of participatory notes.

4) We have to modernize and also have to save our culture. Similarly the laws should be such that it protect
domestic investors and also promote trade in country through FIIs.

5) Encourage industries to grow to make FIIs an attractive junction to invest.

				
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