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that this project titled “Impact of FII and FDI’s On Indian Stock Market.
” has been prepared by me in partial fulfilment of the requirements of the
I further declare that this project has not been submitted earlier in any other university or
institution for the award of any degree or diploma.


The satiation and euphonies that accompany the success completion of a task would be
incomplete without a mention of people who made it possible. So, with immense
gratitude, I acknowledge all those, whose guidance and encouragement served as a
beacon light and crowned my effort with success.
MANAGEMENT & TECHNOLOGY, JAGADHARI and my project guide for his
valuable guidance and suggestions, and external guide Mr. Sandeep Saini center manager
at reliance money Amballa which were vital inputs towards the completion of the project.
Lastly, I would like to thank all those who have directly or indirectly helped me complete
the project successfully.


Management ideas without any action based on them mean nothing. That is why practical
experience is vital for any management studies. Theoretical studies in the class room are
not sufficient to understand the functioning climate and the real problems coming in the
way of management. So, practical exposures are indispensable to such courses. Thus,
practical experience acts as a supplement to the classroom studies. This report
deals with Impact of FII’s And FDI’s On Indian Stock Market. has been completed. I
have learnt a lot of new things which could never been learnt from theory classes. The
next part include whole of research process used for the project. It contains research
methodology, research objective, scope analysis and interpretation of the data, collected
from secondary resources. It also consists limitations of the study.
In this study I have collected data from secondary source. In this study in
used descriptive research design is used. This part includes observations analysis and
discussion on collected data then suggestions are given these are based are on the
usefulness of the study, applicability in the business industry, in decision making, in
system development so far.



A STOCK EXCHANGE is a platform where buyers and sellers of securities issued by

governments, finance institutions, corporate houses etc., meet and where trading of these
corporate securities take place. This is a market of speculation. If speculation of investors
become wrong than the investors loss. Nobody knows what will happen even after a
A Stock Exchange refers to the segments of the capital market where the securities issued
by corporate are trade. It is open auction market where buyers and sellers meet and
involve competitive prices of the securities. It reflects hopes aspiration fair of people
regarding the performance of the economy. I t provides necessary mobility to capital and
direct flow of the capital into possible and successful enterprise.
Since buying and selling of the different of securities take place on stock exchange. The
prices of particular securities reflect there demand and supply. In fact, stock exchange is
said to be a barometer of economy and financial health.
The stock market in India, Securities and Exchange Board of India (SEBI) is on the issue
of acceptance of hedge funds into Indian financial market. At the some time world wide
trade shows that hedge funds are important force to the reckoned with us. The impact of
hedge funds activity is new to the Indian financial investors (FII) flows volatility of the
stock market. This is so because hedge funds activity in Indian primary through
participatory notes (PN) and the some is reflected under FII inflows. Large stock
operators and investment arms certain large corporate in India in the period consideration
used to use oversees body (OCB) as a mechanism to take exposure to the India n market.
OCB activity in the Indian context is pretty similar to funds trading historically OCB
flows also used to appear under the head of FII flows traditionally a large chunck of the
PN and OCB activity in India use to happen through the Mauritius route due to taxation
benefits. With the latest budget presented by the Indian government .(will become
effective from 1st September 2004 ) reducing long term capital gains to zero and short
term capital gains to 10 % the taxation to Mauritious to exist .

A” STOCK EXCHANGE “is a platform where buyers and sellers of securities issued by
governments, finance institutions, corporate houses etc., meet and where trading of
These corporate securities take place. This is a market of speculation. If speculation of
investors become wrong than the investors loss. Nobody knows what will happen even
after a second.
A Stock Exchange refers to the segments of the capital market where the securities issued
by corporate are trade. It is open auction market where buyers and sellers meet and
involve competitive prices of the securities. It reflects hopes aspiration fair of people
regarding the performance of the economy. I t provides necessary mobility to capital and
direct flow of the capital into possible and successful enterprise.
Since buying and selling of the different of securities take place ion stock exchange. The
prices of particularl securities reflect there demand and supply. In fact, stock exchange is
said to be a barometer of economy and financial health.
The stock exchange is the nerve center of capital market. The stock exchange discharges
three essential functions in the process of capital formation not in raising resources for
the corporate sector.
It provides places for sale and purchase of securities i.e. share, bonds etc. . . .
It [provides linkage between the saving of household sector and investment in corporate
sector of economy.
It provides market quotation for shares debenture and bonds and serves as a role of
barometer, not only of the state of health of individual companies but also of the
economy as a whole.
Therefore, by providing market place quotation of the prices of shares and bonds or sort
of collective judgment. Simultaneously reached by many buyers and sellers in the
market stock exchange serve the role of barometer, not only of the state of health of
individual companies but also of the nation’s economy as a whole.


 It is the place where listed securities are bought and sold.

 It is an association of persons known as members.

 Trading in securities is allowed under rules and regulations of stock exchange.

 Membership is must for transacting business.

 Investors and speculators, who want to buy and sell securities, can do so through
members of stock exchange i.e. brokers

A STOCK EXCHANGE is a platform where buyers and sellers of securities issued by
governments, finance institutions, corporate houses etc., meet and where trading of these
corporate securities take place.

MUTUAL FUNDS: - A Mutual fund is a trust that pools the saving of a number of
investors who share a common financial goal.

FOREIGN DIRECT MARKET (FDI): - This category refers to international investment

in which the investor obtains a lasting interest in an enterprise in another country. Most
concretely, it may take the form of buying or constructing a factory in a foreign country
or adding improvements to such a facility, in the form of property, plants or equipment.

FOREIGN INSTITUTIONAL INVESTOR (FII):- An investor or investment fund that is

from of or registered in a country outside of the one in which it is currently investing.
Foreign institutional investors have made a sizable investment in Indian financial
markets. There are currently about 1324 FIIs registered in India.

FOREIGN PORTFOLIO INVESTMENT (FPI):- FPI is a category of investment

instruments that are more easily traded, may be less permanent, and do not represent a
controlling stake in an enterprise. These include investments via equity instruments
(stocks) or debt (bonds) of a foreign enterprise that does not necessarily represent a long-
term interest.

BULL MARKET: - A Bull market is a market that is consistently going up. It is a market
where there is optimism of further rise batter, business results and other positive factors.
Bull Market can sometimes continue for years, for investors this is the preferred market
trend. However no bull market can continue for very long.
BEAR MARKET: - Bear Market is a market that is showing a persistent downtrend. A
15-20% downward movement of the market generally termed as a bear market.

DIVERSIFICATION: - diversification is the technique of investing in unrelated business

sectors simultaneous so that risk that affects a particular sector does not affect your
overall investment. For example your portfolio of share includes sectors like Information
Technology, Real estate capital Goods, Autos etc.
Exchange rate of a nation's currency- Currency like other commodities rises or falls in
"price" with demand. When investors leave, they sell their holdings in a country's
currency and as demand falls, the "price" of that currency will also fall

ECONOMIES OF SCALE: - Produces are often able to enjoy considerable production

cost savings by buying inputs in bulk, mass-producing or retailing their end product.
These lower costs achieved through expanded production are called Economies of Scale.

DEBT/EQUITY RATIO-The debt/equity ratio measures the extent to which a firm's

capital is provided by lenders (through debt instruments such as fixed-return bonds) or
owners (through variable-return stocks). A greater reliance on financing through debt can
mean greater profitability for shareholders, but also greater risk in the event things go

INTERNATIONAL MONETARY FUND-The IMF is an international organization of

186 member countries, established in 1947 to promote international monetary
cooperation, exchange stability, and orderly exchange arrangements; to foster economic
growth and high levels of employment; and to provide temporary financial assistance to
countries to help ease balance of payments adjustment.

INSTITUTIONAL INVESTOR An organization whose primary purpose is to invest its

own assets or those held in trust by it for others. Includes pension funds, investment
companies, insurance companies, universities and banks.
INTEREST RATES-Interest rates have a powerful effect on the volume of a nation's
money supply. By raising interest rates, i.e., making the cost of borrowing money more
expensive, governments or banks can decrease the money supply. A decrease in the
money supply tends to be counter-inflationary, which makes a currency more valuable
compared to other currencies.

MOST FAVORED NATION TREATMENT-The phrase "most favored nation" refers to

the obligation of the country receiving the investment to give that investment the same
treatment as it gives to investments from its "most favored" trading partner.

BALANCE OF PAYMENT-The Balance of Payments (BOP) is a statistical statement

that summarizes, for a specific period (typically a year or quarter), the economic
transactions of an economy with the rest of the world. It covers:
All the goods, services, factor income and current transfers an economy receives from or
provides to the rest of the world
Capital transfers and changes in an economy's external financial claims and liabilities

PORTFOLIO INVESTMENT – covers the acquisition and disposal of equity and debt
securities that cannot be classified under direct investment or reserve asset transactions.
These securities are tradable in organized financial markets.

FDI FLOWS AND STOCKS – Through direct investment flows the investors builds up a
direct investment stock (position), making part of the investor’s balance sheet. The FDI
stock (position) normally differs from accumulated flows because of revaluation (changes
in prices or exchange rates) and other adjustments like rescheduling or cancellation of
loans, debt forgiveness or debt-equity swaps with different values.

MULTINATIONAL COMPANIES (MNCs) – are incorporated or unincorporated

enterprises comprising parent enterprises and their foreign affiliates.
FOREIGN DIRECT INVESTOR – A foreign direct investor is an individual, an
incorporated or unincorporated public or private enterprise, a government, a group of
related individuals, or a group of related incorporated and/or unincorporated enterprises
which have a direct investment enterprise that is a subsidiary, associate or branch –
operating in a country other than the country or countries of residence of the direct
investor or investors.

HOST ECONOMY – is the country that receives FDI or FPI from the foreign investor(s).

HOME ECONOMY – is the country of origin/residence of the company that invests in

the foreign economy/host economy.

SUBSIDIARY– is an incorporated enterprise in the host country in which the foreign

investor owns more than 50 per cent of the shareholder’s voting power or has the right to
appoint or remove a majority of the members of this enterprise’s administrative,
management or supervisory body.

EQUITY CAPITAL – comprises of equity in branches and ordinary shares in subsidiaries

and associates.
Reinvested earnings – consist of the direct investor’s share of earnings not distributed as
dividends by subsidiaries or associates and earnings of branches not remitted to the direct

OTHER CAPITAL – covers inter-company debt (including short-term loans such as

trade credits) between direct investors and subsidiaries, branches and associates.

WTO – World Trade Organization.


Bruce A. Blonigen
This paper surveys the recent burgeoning literature that empirically examines the foreign
direct investment (FDI) decisions of multinational enterprises (MNEs) and the resulting
aggregate location of FDI across the world. The contribution of the paper is to evaluate
what we can say with relative confidence about FDI as a profession, given the evidence,
and what we cannot have much confidence in at this point. Suggestions are made for
future research directions.

Hugo Rojas-Romagosa
Foreign Direct Investment (FDI) flows have increased substantially in the past two
decades. These developments have motivated the appearance of a large number of
empirical papers that test the expected benefits that FDI inflows are assumed to bring to
the host countries. We survey the recent theoretical and empirical literature, but restrict
our attention to the productivity changes that are induced by increased FDI inflows. We
review both the aggregate productivity effects, as well as the spillover effects of FDI on
local firms.

Giorgio De Saints
This paper study the dynamics of expected stock return and volatility in emerging
financial market. We find clustering predict ability and persistence in conditional
volatility and others have documented for mature market. However, emerging market
exhibit higher volatility and conditional probability of large price changes then mature
market exposure to high country specific risk does not appear to be rewarded with higher
expected return. We deduct a risk reward relation in Latin America but not in Asia.
The article examines the impact of foreign institutional investor s FII equity investment
behavior in the Indian stock market. It attempts to find out the two-way causality between
foreign institutional investors (FIIs) behavior and performance of Indian stock market for
the period of January 1997 to June 2007.this article seeks to examine the idea that
financial liberalization induces increased efficiency in the financial market as permission
of FIIs equity investment is an important example of financial liberalization. Return in
the stock market is used as proxy for the efficiency of the stock market in India .granger
causality test has been applied to test the bidirectional causality. Apart from net
investment of FIIs, the purchase and sales behavior of FIIs are analyzed separately. The
results indicate that stock market performance is a major determinant of both the FIIs
purchase and sales behavior. But we did not find strong evidence that the variations in the
stock market indices are determined by FIIs investment behavior.

Blockholder, Market efficiency and managerial myopia:

This paper shows holders can add value even if they cannot interview in a firm’s
operations. Blockholders have strong incentive to monitor the firm’s fundamental value,
since they can sell their stakes upon bad news. By trading on their private information
(following the “Wall Street rule”) they cause prices to reflect fundamental value rather
than current earnings. This in turn encourages managers to invest for long term growth
rather than short term profits. Contrary to the view that the U.S.’s liquid markets and
transient shareholders exacerbate myopia, this paper shows that they can encourage

Robert Lensink and Oliver Morrissey

This paper contributes to the literature on FDI and economic growth. We deviate from
previous studies by introducing measures of the volatility of FDI Inflows. As introduced
into the model, these are predicted to have a negative effect on growth. We estimate the
standard model using cross-section, panel data and instrumental variable techniques.
Whilst all results are not entirely robust, there is a consistent finding that FDI has a
positive effect on growth whereas volatility of FDI has a negative impact. The evidence
for a positive effect of FDI is not sensitive to which other explanatory variables are
included. In particular, it is not conditional on the level of human capital (as found in
some previous studies). There is a suggestion that it is not the volatility of FDI per se that
retards growth but that such volatility captures the growth-retarding effects of unobserved

Foreign direct investment in Bangladesh; an analysis of perception of prospective

Bangladesh had gone through several major policy changes regarding the ownership and
control of industries with a view of promoting economic growth . one of the strategies the
government of Bangladesh (GOB) followed to accelerate economic growth was to attract
foreign direct investment (FDI) into country

To know the performance of Indian stock market.

To know the impact of FIIs on Indian stock market.

To know the impact of FDIs on Indian stock market.


Research Methodology has many dimensions, it include not only research methods but
also considers the logic behind the methods used in the context of the study and explains
why only a particular method of technique had been used so that research lend
themselves to proper evaluations. Thus in a way it is a written game plan for concluding
research therefore in order to solve research problem it is necessary to design a research
methodology for the problem as the same differ from problem to problem.

Research Design:
The research design is a pattern or an outline of a research project . It is a statement only
the essential of a study those provide the basic guidelines for the detail of the project. The
present study being conducted follows a descriptive research design has the data would
be responses from a simple containing g a large numbers of sources .It is a cross section
of the situation design of the descriptive studies including the nature and the analytical

Data Collection
After the research problem has been defied and the research design has been chalked out,
the task of date collection begins. Data can be collected from other primary or secondary
The main source of obtaining necessary data for the study was Secondary Data. This
study is empirical in nature and hence secondary data is used to conduct the research. The
data was collected from the Internet by exploring the Secondary sources available on
websites. Secondary Data: The secondary data constitutes of daily FII flows data which
was collected from Money Control and Equity Master, the daily returns of SENSEX and
NIFTY from BSE and NSE websites respectively. The trends in FII flow from the RBI
website and information on FII from SEBI.

Magazines and Bulletins: - NSE News Bulletins etc.

Sampling is an effective step in collection of primary and secondary data and has a great
influence on the quality of the results. The sampling plan includes population, sample
size and sample design.

The data gathered from various sources were primarily studied and necessary data was
sorted out sequentially keeping in mind the procedure of the study. The analysis has been
made by, correlating the FII purchases, sales and net investment with equity market
returns to identify whether a relation exists between them. Findings are included which
transmits the important points, which were gathered from the study.
The data has been analyzed with the help of various graphs like bar graph etc.

The report examines The Impact of Foreign Institutional Investments and Foreign Direct
Investment on Equity Stock Market in India. The scope of the research comprises of
information derived from secondary data from various websites. The various information
and statistics were derived from the websites of BSE, NSE, Money Control, RBI and
SEBI. Sensex and Nifty was a natural choice for inclusion in the study, as it is the most
popular market indices and widely used by market participants for benchmarking.


 As the time available is limited and the subject is very vast.

 The study is general.

 It is mainly based on the data available in various websites &other secondary

sources ;

 The inferences made is purely from the past year’s performance;

 There is no particular format for the study;

 Sufficient time is not available to conduct an in-depth study;



India is believed to be a good investment despite political uncertainty, bureaucratic
hassles, shortages of power and infrastructure deficiencies. India presents a vast potential
for overseas investment and is actively encouraging the entrance of foreign players into
the market. No company, of any size, aspiring to be a global player can, for long ignore
this country, which is expected to become one of the top three emerging economies.

Success in India
Success in India will depend on the correct estimation of the country's potential;
underestimation of its complexity or overestimation of its possibilities can lead to failure.
While calculating, due consideration should be given to the factor of the inherent
difficulties and uncertainties of functioning in the Indian system. Entering India's
marketplace requires a well-designed plan backed by serious thought and careful
research. For those who take the time and look to India as an opportunity for long-term
growth, not short-term profit- the trip will be well worth the effort.

Market potential
India is the fifth largest economy in the world (ranking above France, Italy, the United
Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It is
also the second largest among emerging nations. (These indicators are based on
purchasing power parity). India is also one of the few markets in the world, which offers
high prospects for growth and earning potential in practically all areas of business.
Despite the practically unlimited possibilities in India for overseas businesses, the world's
most populous democracy has, until fairly recently, failed to get the kind of enthusiastic
attention generated by other emerging economies such as China.
Lack of enthusiasm among investors
The reason being, after independence from Britain 50 years ago, India developed a highly
protected, semi-socialist autarkic economy. Structural and bureaucratic impediments
were vigorously fostered, along with a distrust of foreign business. Even as today the
climate in India has seen a sea change, smashing barriers and actively seeking foreign
investment, many companies still see it as a difficult market. India is rightfully quoted to
be an incomparable country and is both frustrating and challenging at the same time.
Foreign investors should be prepared to take India as it is with all of its difficulties,
contradictions and challenges.
Developing a basic understanding or potential of the Indian market
Envisaging and developing a Market Entry Strategy and implementing these strategies
when actually entering the market are three basic steps to make a successful entry into
India. The Indian middle class is large and growing; wages are low; many workers are
well educated and speak English; investors are optimistic and local stocks are up; despite
political turmoil, the country presses on with economic reforms. But there is still cause
for worries- Infrastructure hassles.
The rapid economic growth of the last few years has put heavy stress on India's
infrastructure facilities. The projections of further expansion in key areas could snap the
already strained lines of transportation unless massive programs of expansion and
modernization are put in place. Problems include power demand shortfall, port traffic
capacity mismatch, poor road conditions (only half of the country's roads are surfaced)
and low telephone penetration.

Indian Bureaucracy
Although the Indian government is well aware of the need for reform and is pushing
ahead in this area, business still has to deal with an inefficient and sometimes still slow-
moving bureaucracy.
Diverse Market
The Indian market is widely diverse. The country has 17 official languages, 6 major
religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ
greatly among sections of consumers. Therefore, it is advisable to develop a good
understanding of the Indian market and overall economy before taking the plunge.


International portfolio flows, as opposed to foreign direct investment (FDI) flows, refer to
capital flows made by individuals or investors seeking to create an internationally
diversified portfolio rather than to acquire management control over foreign companies.
Diversifying internationally has long been known as a way to reduce the overall portfolio
risk and even earn higher returns. Investors in developed countries can effectively
enhance their portfolio performance by adding foreign stocks particularly those from
emerging market countries where stock markets have relatively low correlations with
those in developed countries.
International portfolio flows are largely determined by the performance of the stock
markets of the host countries relative to world markets. With the opening of stock
markets in various emerging economies to foreign investors, investors in industrial
countries have increasingly sought to realize the potential for portfolio diversification that
these markets present.
It is likely that for quite a few years to come, FII flows would increase with global
integration. The main question is whether capital flew in to these countries primarily as a
result of changes in global (largely US) factors or in response to events and indicators in
the recipient countries like its credit rating and domestic stock market return. The answer
is mixed – both global and country-specific factors seem to matter, with the latter being
particularly important in the case of Asian countries and for debt flows rather than equity


 India embarked on a programme of economic reforms in the early 1990s to tie

over its balance of payment crisis and also as a step towards globalisation.
 An important milestone in the history of Indian economic reforms happened on
September 14, 1992, when the FIIs (Foreign Institutional Investors) were allowed
to invest in all the securities traded on the primary and secondary markets,
including shares, debentures and warrants issued by companies which were listed
or were to be listed the stock exchanges in India and in the schemes floated by
domestic mutual funds.
 Initially, the holding of a single FII and of all FIIs, NRIs (Non-Resident Indians)
and OCBs (Overseas Corporate Bodies) in any company were subject to a limit of
5% and 24% of the company's total issued capital respectively.
 ( In order to broad base the FII investment and to ensure that such an investment
would not become a camouflage for individual investment in the nature of FDI
(Foreign Direct Investment), a condition was laid down that the funds invested by
FIIs had to have at least 50 participants with no one holding more than 5%. Ever
since this day, the regulations on FII investment have gone through enormous
changes and have become more liberal over time.
 ( From November 1996, FIIs were allowed to make 100% investment in debt
securities subject to specific approval from SEBI as a separate category of FIIs or
sub-accounts as 100% debt funds. Such investments were, of course, subjected to
the fund-specific ceiling prescribed by SEBI and had to be within an overall
ceiling of US $ 1.5 billion. The investments were, however, restricted to the debt
instruments of companies listed or to be listed on the stock exchanges.
 In 1997, the aggregate limit on investment by all FIIs was allowed to be raised
from 24% to 30% by the Board of Directors of individual companies by passing a
resolution in their meeting and by a special resolution to that effect in the
company's General Body meeting.
 ( From the year 1998, the FII investments were also allowed in the dated
government securities, treasury bills and money market instruments.
 ( In 2000, the foreign corporates and high net worth individuals were also allowed
to invest as sub-accounts of SEBI-registered FIIs. FIIs were also permitted to seek
SEBI registration in respect of sub-accounts. This was made more liberal to
include the domestic portfolio managers or domestic asset management
 ( 40% became the ceiling on aggregate FII portfolio investment in March 2000.
 ( This was subsequently raised to 49% on March 8, 2001 and to the specific
sectoral cap in September 2001.
 ( As a move towards further liberalization a committee was set up on March 13,
2002 to identify the sectors in which FIIs portfolio investments will not be subject
to the sectoral limits for FDI.
 ( Later, on December 27, 2002 the committee was reconstituted and came out
with recommendations in June 2004. The committee had proposed that, 'In
general, FII investment ceilings, if any, may be reckoned over and above
prescribed FDI sectoral caps. The 24 per cent limit on FII investment imposed in
1992 when allowing FII inflows was exclusive of the FDI limit. The suggested
measure will be in conformity with this original stipulation.' The committee also
has recommended that the special procedure for raising FII investments beyond
24 per cent up to the FDI limit in a company may be dispensed with by amending
the relevant regulations.
 ( Meanwhile, the increase in investment ceiling for FIIs in debt funds from US $ 1
billion to US $ 1.75 billion has been notified in 2004. The SEBI also has reduced
the turnaround time for processing of FII applications for registrations from 13
working days to 7 working days except in the case of banks and subsidiaries.
 All these are indications for the country's continuous efforts to mobilize more
foreign investment through portfolio investment by FIIs. The FII portfolio flows
have also been on the rise since September 1992. Their investments have always
been net positive, but for 1998-99, when their sales were more than their purchase

FII registration and investment are mainly governed by SEBI (FII) Regulations, 1995.

ELIGIBILITY FOR REGISTRATION AS FII: Following entities / funds are eligible to

get registered as FII:
1. Pension Funds
2. Mutual Funds
3. Insurance Companies
4. Investment Trusts
5. Banks
6. University Fund s
7. Endowments
8. Foundations
9. Charitable Trusts / Charitable Societies
Further, following entities proposing to invest on behalf of broad based funds(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) , are also
eligible to be registered as FIIs:
1. Asset Management Companies
2. Institutional Portfolio Managers
3. Trustees
4. Power of Attorney Holders


The following 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
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 a prescribed by
Government of India / Reserve Bank of India.

Investment limits on debt investments

The FII investments in debt securities are governed by the policy if the Government of
India. Currently following limits are in effect:
For FII investments in Government debt, currently following limits are applicable:

For corporate debt the investment limit is fixed at US $ 500 million.

The taxation norms available to a FII is shown in the table below.
Nature of Income Tax Rate
Long-term capital gains 10%
Short-term capital gains 30%
Dividend Income Nil
Interest Income 20%
Long term capital gain: Capital gain on sale of securities held for a period of more than
one year.
Short term capital gain: Capital gain on sale of securities held for a period of less than
one year.

A brief profile of important institutions included in the study is given below.


India's Central Bank - the RBI - was established on 1 April 1935 and was nationalized on
1 January 1949. Some of its main objectives are regulating the issue of bank notes,
managing India's foreign exchange reserves, operating India's currency and credit system
with a view to securing monetary stability and developing India's financial structure in
line with national socio-economic objectives and policies.
The RBI acts as a banker to Central/State governments, commercial banks, state
cooperative banks and some financial institutions. It formulates and administers monetary
policy with a view to promoting stability of prices while encouraging higher production
through appropriate deployment of credit. The RBI plays an important role in
maintaining the exchange value of the Rupee and acts as an agent of the government in
respect of India's membership of IMF. The RBI also performs a variety of developmental
and promotional functions.
The first concern of a central bank is the maintenance of a soundly based commercial
banking structure. While this concern has grown to comprehend the operations of all
financial institutions, including the several groups of non-bank financial intermediaries,
the commercial banks remain the core of the banking system. A central bank must also
cooperate closely with the national government. Indeed, most governments and central
banks have become intimately associated in the formulation of policy.
They are often responsible for formulating and implementing monetary and credit
policies, usually in cooperation with the government. they have been established
specifically to lead or regulate the banking system.
In 1988 the Securities and Exchange Board of India (SEBI) was established by the
Government of India through an executive resolution, and was subsequently upgraded as
a fully autonomous body (a statutory Board) in the year 1992 with the passing of the
Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place
of Government Control, a statutory and autonomous regulatory board with defined
responsibilities, to cover both development & regulation of the market, and independent
powers has been set up.

The basic objectives of the Board were identified as:

To protect the interests of investors in securities;
To promote the development of Securities Market;
To regulate the securities market and
For matters connected therewith or incidental thereto.
Since its inception SEBI has been working targeting the securities and is attending to the
fulfillment of its objectives with commendable zeal and dexterity. The improvements in
the securities markets like capitalization requirements, margining, establishment of
clearing corporations etc. reduced the risk of credit and also reduced the market.
SEBI has introduced the comprehensive regulatory measures, prescribed registration
norms, the eligibility criteria, the code of obligations and the code of conduct for different
intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers,
registrars, portfolio managers, credit rating agencies, underwriters and others. It has
framed bye-laws, risk identification and risk management systems for Clearing houses of
stock exchanges, surveillance system etc. which has made dealing in securities both safe
and transparent to the end investor.
Another significant event is the approval of trading in stock indices (like S&P CNX Nifty
& Sensex) in 2000. A market Index is a convenient and effective product because of the
following reasons:
It acts as a barometer for market behavior;
It is used to benchmark portfolio performance;
It is used in derivative instruments like index futures and index options;
It can be used for passive fund management as in case of Index Funds.
Two broad approaches of SEBI is to integrate the securities market at the national level,
and also to diversify the trading products, so that there is an increase in number of traders
including banks, financial institutions, insurance companies, mutual funds, primary
dealers etc. to transact through the Exchanges. In this context the introduction of
derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is a
real landmark.


Of the 22 stock exchanges in the country, Mumbai's (earlier known as Bombay), Bombay
Stock Exchange is the largest, with over 6,000 stocks listed. The BSE accounts for over
two thirds of the total trading volume in the country. Established in 1875, the exchange is
also the oldest in Asia. Among the twenty-two Stock Exchanges recognized by the
Government of India under the Securities Contracts (Regulation) Act, 1956, it was the
first one to be recognized and it is the only one that had the privilege of getting
permanent recognition ab-initio.
Approximately 70,000 deals are executed on a daily basis, giving it one of the highest per
hour rates of trading in the world. There are around 3,500 companies in the country
which are listed and have a serious trading volume. The market capitalization of the BSE
is Rs.5 trillion. The BSE `Sensex' is a widely used market index for the BSE.

The main aims and objectives of the BSE are to provide a market place for the purchase
and sale of security evidencing the ownership of business property or of a public or
business debt. It aims to promote, develop and maintain a well-regulated market for
dealing in securities and to safeguard the interest of members and the investing public
having dealings on the Exchange. It helps industrial development of the country through
efficient resource mobilization. To establish and promote honorable and just practices in
securities transactions
BSE Sensex
The BSE Sensex is a value-weighted index composed of 30 companies with the base
April 1979 = 100. It has grown by more than four times from January 1990 till date. The
set of companies in the index is essentially fixed. These companies account for around
one-fifth of the market capitalization of the BSE.


The National Stock Exchange of India Limited has genesis in the report of the High
Powered Study Group on Establishment of New Stock Exchanges, which recommended
promotion of a National Stock Exchange by financial institutions (FIs) to provide access
to investors from all across the country on an equal footing. Based on the
recommendations, NSE was promoted by leading Financial Institutions at the behest of
the Government of India and was incorporated in November 1992 as a tax-paying
company unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts (Regulation) Act,
1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM)
segment in June 1994. The Capital Market (Equities) segment commenced operations in
November 1994 and operations in Derivatives segment commenced in June 2000.

S&P CNX Nifty

S&P CNX Nifty is a well-diversified 50 stock index accounting for 23 sectors of the
economy. It is used for a variety of purposes such as benchmarking fund portfolios, index
based derivatives and index funds.
S&P CNX Nifty is owned and managed by India Index Services and Products Ltd.
(IISL), which is a joint venture between NSE and CRISIL. IISL is India's first specialized
company focused upon the index as a core product. IISL have a consulting and licensing
agreement with Standard & Poor's (S&P), who are world leaders in index services.
The average total traded value for the last six months of all Nifty stocks is approximately
58% of the traded value of all stocks on the NSE
Nifty stocks represent about 60% of the total market capitalization as on March 31, 2005.
Impact cost of the S&P CNX Nifty for a portfolio size of Rs.5 million is 0.07%
S&P CNX Nifty is professionally maintained and is ideal for derivatives trading.
The Reliance – Anil Dhirubhai Ambani Group is among India’s top three private sector
business houses on all major financial parameters, with a market capitalisation of Rs
100,000 crore (US$ 22 billion), net assets in excess of Rs 31,500 crore (US$ 7 billion),
and net worth to the tune of Rs 27,500 crore (US$ 6 billion).

Reliance Money Limited has been promoted by Reliance Capital Limited a part of Anil
Dhirubhai Ambani Group with the Net-worth – Rs. 4500 cr., amongst the top 3 banking
& financial services companies in the private sector.


Anil DhiruBhai Ambani, Chairman

Amitabh Jhunjhunwala, Vice-Chairman

Rajendra Chitale, Independent Director

Shri C. P. Jain

Reliance ADA Group Structure

Reliance Capital

Reliance Reliance Reliance

Mutual fund Reliance Reliance Consumer
Mutual Fund General Insurance Insurance Money Finance

Reliance money is a part of the reliance Anil Dhirubai Ambani Group and is promoted by
Reliance capital, the fastest growing private sector financial services company in India,
ranked amongst the top 3 private sector financial companies in terms of net worth.
Reliance money is a comprehensive financial solution provider that enables you to carry
out trading and investment activities in a secure, cost-effective and convenient manner.
Through reliance money, you can invest in a wide range of asset classes from Equity,
Equity and commodity Derivatives, Mutual Funds, insurance products, IPO’s to availing
services of Money Transfer & Money changing.
Reliance Money offers the convenience of on-line and offline transactions through a
variety of means, including its Portal, Call & Transact, Transaction Kiosks and at it’s
network of affiliates.

Some key steps of the company that are as…..

“Success is a journey, not a destination.” If we look for examples to prove this quote
then we can find many but there is none like that of Reliance Money. The company
which is today known as the largest financial service provider of India.

Success sutras of Reliance Money:

The success story of the company is driven by 8 success sutras adopted by it namely
trust, integrity, dedication, commitment, enterprise, hard work and team play, learning
and innovation, empathy and humility. These are the values that bind success with
Reliance Money.

Vision of Reliance Money

To achieve & sustain market leadership, Reliance Money shall aim for complete
customer satisfaction, by combining its human and technological resources, to provide
world class quality services. In the process Reliance Money shall strive to meet and
exceed customer's satisfaction and set industry standards.

Mission statement:
“Our mission is to be a leading and preferred service provider to our customers, and we
aim to achieve this leadership position by building an innovative, enterprising , and
technology driven organization which will set the highest standards of service and
business ethics.”
Reliance Capital has interests in asset management and mutual funds, life and general
insurance, private equity and proprietary investments, stock broking, depository services,
distribution of financial products, consumer finance and other activities in financial
Reliance Mutual Fund is India's no.1 Mutual Fund. Reliance Life Insurance is India's
fastest growing life insurance company and among the top 4 private sector insurers.
Reliance General Insurance is India's fastest growing general insurance company and the
top 3 private sector insurers. Reliance Money is the largest brokerage and distributor of
financial products in India with more than 2.5 million customers and the largest
distribution network. Reliance Consumer finance has a loan book of over Rs. 8,000
crores at the end of June 2008.
Reliance Capital has a net worth of Rs.6,862 crores (US$ 1.6 billion) and total assets of
Rs. 19,940 crores (US$ 4.6 billion) as of June 30, 2008 and over 26,000 employees.
Money has increased its market share among private financial companies to nearly
Convenient & effective – Anytime & anywhere financial transaction capability.
Launched in April 2007. It provides the Flat fees system. It has 2.2 million customers in 1
year of official launch. It has over 5,000 outlets across 700 towns/cities. Average daily
turnover – in excess of Rs 2,000 crores.
Considering the entire life market, including the Rs. 12,890 crores booked by life
insurance Corporation, Reliance life insurance market share works out to around 6.25% .
The life insurance market continuous to be dominated by LIC which has about 67% share
this only a marginal dip from its 73% share in end-July. These comparisons are only for
first year or new business premium.
The gap between Reliance life insurance and the second-in-line private insurer is vast. In
fact, this scenario has led some analysts to wonder if the company is not a trifle too
aggressive. But others say this has more to do with the companies’ customer-centric
focus, its pan-India presence and superior risk management and investment strategies.
Reliance Money is not, however, resting on its laurels.
Company’s customer centric approach will be studied during the training period and the
finding of the research work will definitely focus on the present condition & future
requirement (if any) relating to products of company.
Thus, Reliance Money provides a comprehensive platform, offering an investment
avenue for a wide range of asset classes. Its endeavor is to change the way India transacts
in financial market and avails financial services. Reliance Money offers a single window
facility, enabling you to access amongst others, Equities, Equity and Commodity
derivatives, Offshore Investments, IPO’s, Mutual Funds, Life Insurance and General
Insurance products.
Advantages offered by Reliance money over other companies:
Cost Effective
Single Window for Multiple Products
3 in 1 Integrated Access
Demat Account with Reliance Capital
Trading Portal (with almost negligible brokerage )
Equity Broking
Commodity Broking
Derivatives ( Futures & Options )
Offshore Investments (Contract For Differences)
D-Mat Account.
Financial Products
Mutual Funds
Life Insurance
ULIP plan
Money Back Plan
General Insurance
Vehicle/Motor Insurance
Health Insurance
House insurance
Value-Added Services
National Level : National Head
Zonal Level : Zonal Head
Regional Level : Regional head
Divisional level : Cluster Head
Branch Level : Center Manager
Area Level : Business Development Executives & Freelancers


Indices : sensex For the period : from year 1991 To year 2008

year Open High low close Price/earnings Price/book Dividend

value yield
199 1027.38 19554.81.2 947.14 1908.85 22.30 3.58 1.24
1 9
199 1957.33 4546.58 1945.48 2615.37 36.19 6.35 .80
199 2617.78 3459.07 1980.6 3346.06 31.78 4.81 .98
199 3436.87 4643.31 3405.88 3926.90 45.45 6.07 .68
199 3910.16 3943.66 2891.45 3110.49 23.63 3.81 1.13
199 3114.08 4131.22 2713.12 3085.20 16.07 3.02 1.50
199 3096.65 4605.41 3096.65 3658.98 14.45 2.80 1.52
199 3658.34 4322.00 2741.22 3055.41 13.00 2.25 1.80
199 3064.95 5150.99 3042.25 5005.82 17.35 3.07 1.38
200 9209.54 6150.69 3491.55 3972.12 24.48 3.81 1.14
200 3990.65 4462.11 2594.87 3262.33 17.60 2.51 1.83
200 3262.01 3758.27 2828.48 3377.28 15.22 2.30 2.14
200 3383.85 5920.76 2904.44 5838.96 15.02 2.49 2.14
200 5872.48 6617.15 4227.50 6602.69 17.26 3.28 2.01
200 6626.8 9442.98 6069.33 9397.93 16.21 3.94 1.58
200 9422.49 14035.30 8799.01 13786.9 20.18 4.75 1.35
6 1
200 83827.7 20498.11 12316.1 20286.9 22.25 5.32 1.10
7 7 0 9
200 20325.2 21206.77 14677.2 16481.2 22.44 5.71 .98
8 7 4 0


Indices: AUTO For the period :From year 2000 to 2008

year Open High Low close

2000 0.00 0.00 0.00 21.12
2001 0.00 0.00 0.00 755.55
2002 0.00 0.00 0.00 1015.62
2003 0.00 0.00 0.00 2533.79
2004 -- 2871.63 0.00 2836.39
2005 2852.05 4299.07 2525.72 4256.45
2006 4251.97 5843.51 3959.66 5518.50
2007 5604.44 5881.83 4435.21 5667.45
2008 5671.41 5796.87 4063.38 4548.08


Indices: POWER For the period :From year 2005 to 2008

Year Open High low close Price/earnings Price/book Dividend

value yield
2005 -- 0.00 0.00 1457.9 0.00 0.00 0.00
2006 -- 0.00 0.00 2048.4 0.00 0.00 0.00
2007 4395.76 4729.00 4023.09 4548.8 6.35 1.08 .10
2008 4584.38 4929.34 2896.47 3281.2 34.40 5.90 .73


One of the most important distinctions between Portfolio and Direct investment to have
emerged from this young era of globalisation is that portfolio investment can be much
more volatile.
TABLE: Foreign Investment Flows in India

A. Direct B. Portfolio
Year Investment Investment Total (A + B)
(US $ million) (US $ million) (US $ million)
1990-91 97 6 103
1991-92 129 4 133
1992-93 315 244 559
1993-94 586 3567 4153
1994-95 1314 3824 5138
1995-96 2144 2748 4892
1996-97 2821 3312 6133
1997-98 3557 1828 5385
1998-99 2462 61 2523
1999-00 2155 3026 5181
2000-01 4029 2760 6789
2001-02 6131 2021 8152
2002-03 4660 979 5639
2003-04 4675 11377 16052

From a net foreign investment inflow of US $ 5.3 billion in 1997-98, such inflows
declined to US $ 2.4 billion in 1998-99. This is because of the lower portfolio inflows, as
a result of which the net investment has dropped. The changes in the investment
conditions in a country or region can lead to dramatic swings in portfolio investment. For
a country on the rise, in other words for developing countries, FPI can bring about rapid
development, helping an emerging economy move quickly to take advantage of economic
opportunity, creating many new jobs and significant wealth. However, when a country's
economic situation takes a downturn, sometimes just by failing to meet the expectations
of international investors, the large flow of money into a country can turn into a stampede
away from it.







1990-91 1991-92 1992- 1993- 1994-95 1995-96 1996-97 1997-98 1998- 1999- 2000- 2001- 2002- 2003-
93 94 99 00 01 02 03 04


Foreign portfolio investments have been allowed in India on the basis of the
recommendations of the Narasimham committee which stated:
The committee would also suggest that the capital markets should be gradually opened up
to foreign portfolio investments and simultaneously efforts should be initiated to improve
the depth of the market by facilitating the issue of new types of equities and innovative
debt instruments.’ (Narasimham committee report)
Prior to 1992, only non-resident Indians (NRIs) and Overseas corporate bodies (OCBs)
were allowed to undertake portfolio investment in India. Only on September 14, 1992 the
Government of India issued guidelines on FII investments in India which was followed
by a notification by Securities and Exchange Board of India (SEBI) three years later in
November 1995.
TABLE: Trends in FII investment

in crores in crores in crores US$ million US$ million
1993-94 5593 466 5126 1634 1638
1994-95 7631 2835 4796 1528 3167
1995-96 9694 2752 6942 2036 5202
1996-97 15554 6979 8575 2432 7634
1997-98 18695 12737 5958 1649 9284
1998-99 16115 17699 -1584 -386 8898
1999-00 56856 46734 10122 2339 11237
2000-01 74051 64116 9934 2160 13396
2001-02 49920 41165 8755 1846 15242
2002-03 47060 44371 2689 562 15804
2003-04 144858 99094 45765 9949 25754

Source: Reserve Bank of India Annual Report 2004

INFERENCE: The investments by FIIs have been registering a steady growth since the
opening of the Indian capital markets in September 1992. Their investments have always
been net positive, but for 1998-99, when their sales were more than their purchases.

It can be observed from the above table that the portfolio investment inflows have always
been on the increase. But the years 2001-02 and 2002-03 saw some reversal in the trend.
From a net inflow of US $ 2.1 billion in 2000-01, such inflows declined to US $ 1.8
billion in 2001-02, and further dropped to US $ 0.562 billion in 2002-03. The decline is
because of the lower portfolio inflows, as a result of which the net investment has
dropped in these years. However, this decline witnessed a sharp reversal in the year 2003-
04. FIIs have made a net investment of Rs. 45,764 crores during this year registering a
growth of 1602% over the previous year, creating a record in the history of FII
investment in India. Gross purchases in this year amounted to Rs.144,857 crores, a
growth rate of 208% compared to the year before. This trend continued in April 2004,
only to suffer reversal again during May and June 2004, when the net investment became
negative. Fortunately, the year from July 2004 has been seeing a net positive portfolio
flows by FIIs. As of September 2004, the net FII portfolio investment stands at US $
27,637 million. If it is so, then increasing the FII investment cap per se will not be
helpful. The country has to work on specific measures to encourage more FII
investments. The analysis of data indicates that there has been substantial divestment by
the FIIs during the year 1998-99. The maximum outflow was during the months of May
and June 1998 (almost US$430 millions).
TABLE: Monthly Trends of FIIs for the Year 1998-99

Month Purchases Sales Net Net

(Rs mn) (Rs mn) (Rs mn) (US$ mn)
Apr-98 11422 11756 -335 -8.4
May-98 8253 13284 -5031 -124.3
Jun-98 8023 16072 -8049 -190.5
Jul-98 13098 12154 944 22.2
Aug-98 7932 11783 -3851 -90.1
Sep-98 14381 12458 1923 45.2
Oct-98 10737 16470 -5733 -135.4
Nov-98 10391 9845 546 12.9
Dec-98 11089 8789 2300 104.8
Jan-99 16355 11894 4462 104.8
Feb-99 16477 13084 3393 79.8
Mar-99 25207 23973 1233 29

A major factor which led to continuous outflow of funds during the middle and end of the
year 1998 was the worsening outlook on the emerging markets. Credit worthiness of
almost all the South-east Asian nations was severely damaged by the crises which started
in July 1997. As a result, the FIIs were facing heavy redemption pressures from the
Emerging Markets Funds. The stock markets in all these countries fell continuously from
March 1998 till about September 1998. The integration of the Indian capital markets with
the international markets thus spilled over to Indian markets as well. However, the net
outflow from the Indian markets was much lower than the other Asian countries. A
further indication of the integration of the Indian markets can be seen from the upsurge in
the valuations and funds inflows during the first quarter of 1999, when all the other Asian
countries have also seen rising trend in stocks indices.

The sluggishness in investment in the emerging markets was exacerbated by the fact that
hroughout 1998-99, US and European markets showed historically high valuations, and
the expectations of further rise because of the strong economic indicators there which led
to reduced allocations elsewhere.

INFERENCE: The trickle of FII flows to India that began in January 1993 has gradually
expanded to an average monthly inflow of close to Rs. 1900 crores during the first six
months of 2001. By June 2001, over 500 FIIs were registered with SEBI. The total
amount of FII investment in India had accumulated to a formidable sum of over
Rs.50,000 crores during this time. In terms of market capitalization too, the share of FIIs
has steadily climbed to about 9% of the total market capitalization of BSE (which, in
turn, accounts for over 90% of the total market capitalization in India).



APRIL -0.308891015 -0.486299015 -0.122510317
MAY -0.203839618 -0.226174846 0.127555673
JUNE 0.40719847 0.013881057 0.556762421
JULY 0.231397721 -0.008199745 0.352195939
AUGUST -0.296292834 -0.009987101 -0.288696993
SEPTEMBER 0.631541276 0.478957403 0.377141924
OCTOBER -0.107835133 -0.303940405 0.118451125
NOVEMBER 0.103856902 0.232269601 -0.020576251
DECEMBER -0.689594568 -0.692805116 -0.496878284
JANUARY -0.02034654 -0.57330261 0.64885866
FEBRUARY 0.124176605 -0.056354197 0.233709555
MARCH 0.419911809 -0.255570154 0.483718703
FII flows and contemporaneous stock returns are strongly correlated in India. The
correlation coefficients between different measures of FII flows and market returns on the
Bombay Stock Exchange during different sample periods are shown in Table above.
While the correlations are quite high throughout the sample period, they exhibit a
significant rise since the beginning of the 1999-00. The calculations show that there
exists a relationship between FIIs and Nifty since 6 out of 12 months show positive
correlation in the case of Gross Purchass and 8 out of 12 months indicate a positive
correlation in the case of Net FII Investment and Nifty.



APRIL -0.267580403 -0.509025858 -0.076211493
MAY -0.184653959 -0.224809346 0.1484205
JUNE 0.405635894 -0.004710378 0.575995013
JULY 0.291205286 0.045396684 0.353391901
AUGUST -0.315900375 -0.033391574 -0.301709231
SEPTEMBER 0.661834837 0.506184274 0.389776394
OCTOBER -0.067640059 -0.311421901 0.18995454
NOVEMBER 0.083505749 0.244942636 -0.057919794
DECEMBER -0.666663184 -0.688620778 -0.46494095
JANUARY 0.02201209 -0.551509386 0.679227006
FEBRUARY 0.00689661 -0.170243004 0.149373722
MARCH 0.417854257 -0.250893125 0.479619465

The behaviour of the foreign portfolio investors matched the behaviour of Sensex during
this period. Net FII investment in the Indian capital markets started fluctuating sharply
during April and it turned negative. Net FII investment in the Indian stock market was
positive from May to July. During this period, the Sensex and net FII investment showed
very high degree of correlation. For the month of June showed a correlation as high as
0.60. The months of September, October, November and December shows a declining
trend, the FII investment reversed from that day. On the whole, there exists a relationship
between FIIs and Sensex since 7 out of 12 months show positive correlation in the case
of Gross Purchases and 8 out of 12 months indicate a positive correlation in the case of
Net FII Investment and Sensex.


APRIL 0.095413659 0.236486732 0.015009
MAY 0.04155059 0.051155061 0.01627
JUNE 0.165810594 0.000192684 0.309984
JULY 0.053544905 6.72358E-05 0.124042
AUGUST 0.087789444 9.97422E-05 0.083346
SEPTEMBER 0.398844383 0.229400194 0.142236
OCTOBER 0.011628416 0.09237977 0.014031
NOVEMBER 0.010786256 0.053949168 0.000423
DECEMBER 0.475540669 0.479978929 0.246888
JANUARY 0.000413982 0.328675883 0.421018
FEBRUARY 0.015419829 0.003175796 0.05462
MARCH 0.176325927 0.065316104 0.233984

Coefficient of Determination (R2), ranges from 0 - 1, is always part of the standard

regression output, the important measure of goodness of fit. R2 = correlation coefficient
(r) squared, since the range of r is from -1 to +1, squaring r forces R2 to fall between 0
and 1. R2 in the above table gives the percentage (%) of the total variation in Nifty that is
explained by the regression equation, or explained by FIIs. During the month of January
the total variation in Nifty explained by FII amounted to 42% and the remaining 58% is
explained by other factors which influence Nifty.



APRIL 0.071599272 0.259107325 0.005808
MAY 0.034097085 0.050539242 0.022029
JUNE 0.164540479 2.21877E-05 0.33177
JULY 0.084800519 0.002060859 0.124886
AUGUST 0.099793047 0.001114997 0.091028
SEPTEMBER 0.438025352 0.256222519 0.151926
OCTOBER 0.004575178 0.0969836 0.036083
NOVEMBER 0.00697321 0.059996895 0.003355
DECEMBER 0.444439801 0.474198576 0.21617
JANUARY 0.000484532 0.304162603 0.461349
FEBRUARY 4.75632E-05 0.028982681 0.022313
MARCH 0.17460218 0.06294736 0.230035
Similarly, in the case of FII and Sensex we have R2 = .46, indicating that variation in FII
explains about 46% of the variation in Sensex. 54% of the variation in Sensex is
unexplained by FII, explainable by other factors, omitted variables, random variation, etc.
We shouldn't put too much emphasis on R2, t-stat are more important. However, R2, or
some other measure of goodness of fit is expected in reported empirical results.

Share of top investing countries in FDI Approvals

Rank Country Aug.199 %of 2002 2003 2004 2005- Cumulative % of

1 to total -03 -04 -05 06(April approvals total
march20 approval Jan.) aug 1991 approvals
02 s to Jan 2006 till Jan
1 U.S.A. 56,631 24.71 818 881 779 260 59394 22.92
2 Mauritius 32,919 14.37 1432 1572 2838 3565 42340 16.34
3 U.K. 21,396 9.34 1819 590 1178 1019 26011 10.04
4 Japan 10794 4.71 566 345 172 73 11955 4.61
5 SouthKore 9,798 4.28 29 65 15 64 9975 3.85
6 Germany 8,976 3.92 292 172 177 222 9843 3.80
7 Netherlan 8618 3.76 315 628 76 117 9758 3.77
8 Australia 6,768 2.95 47 34 39 40 6931 2.67
9 France 6,28 2.72 323 37 71 94 6756 2.61
10 Singapore 7,943 3.47 330 369 578 164 9387 3.62
FDI 229,150 7,90 6,224 8,728 7112 259,118
appro 4

Share of top investing countries in FDI inflow in India

Rank Country Aug.199 %of 2002- 2003- 2004- 2005- Cumulativ % of

1 to total 03 04 05 06(April e FDI total
march20 approval Jan.) inflows to appr
02 s Jan 2006 ovals
aug 1991 till
to Jan Jan
2006 2006
1 Mauritius 27446 29.64 3766 2609 5141 9120 48112 36.9
2 U.S.A. 12248 13.23 1504 1658 3055 1705 20183 15.4
3 U.K. 4263 4.60 1617 769 458 1645 8757 6.72
4 Japan 5099 5.51 1971 360 575 669 8680 6.66
5 Netherlan 3856 4.61 836 2247 1217 329 8489 6.51
6 Germany 3455 3.73 684 373 663 1302 6481 4.97
7 Singapore 1997 2.16 180 172 822 1013 4186 3.21
8 France 1947 2.10 534 176 537 63 3259 2.50
9 South 2189 2.36 188 110 157 257 2903 2.23
10 Switzerlan 1299 1.30 437 207 353 332 2530 1.94
Total 92611 14932 12117 17138 19356 156154

Sources of FDI inflows in India

Top 10 countries have accounted for more than a half of India’s FDI approvals during
1991-95, while is share increased to about 70% over 2004-05. this able shows ranking of
cumulative investment approved during the period 1991 to January 2006 reveals that
USA was the largest investor in India with an investment of Rs. 59394crores Netherlands
, France and Singapore follows in that order . but the share of USA has been declining ,
whereas the shares of Mauritius has been increasing from past few years . it has b
increased by more than 80% in2004-05 compared to 2003-04 , mainly due to FDI being
routed through Mauritius , as it has a double Taxation avoidance treaty with India . in
terms of FDI inflow into the country , Mauritius topped the list with90% share of total
FDI inflows , whereas USA holds the 2nd position with 15.48% of total FDI inflows in
India . thus in terms of FDI inflows Mauritius is way ahead from UK ,Japan Netherlands
Germany , Singapore ,France South Korea and Switzerland follows in that order .South
Korea who holds2.23%share Australia who holds 8th positioning FDI approvals with
2.65% share ,does not figure in top 10 countries in FDI inflows . O the other hand ,
Switzerland , which does not come in FDI approvals holds holds 10th position in FDI
inflows with 1.94% share .Above table shows that FDI inflows from all countries have
been increased in 2004-05
Total FDI and FDI in ICT Sector

Year FDI inflow Growth in FDI FDI in ICT Growth in FDI

Amount in Rs. Amount in Rs. sector in ICT
Cr. Cr.
1991-92 409 351
1992-93 1094 167.48 675 92.31
1993-94 2018 84.46 2380 252.59
1994-95 4312 113.68 4132 73.61
1995-96 6916 60.39 6750 63.36
1996-97 9654 39.59 9211 36.46
1997-98 13548 40.34 11817 28.29
1998-99 12343 -8.89 8644 -26.85
1999-00 10311 -16.46 7271 -15.88
2000-01 12645 22.64 10323 41.97
2001-02 19361 53.11 14419 39.68
2002-03 14932 -22.88 8423 -41.58
2003-04 121117 -18.85 6703 -20.42
2004-05 17138 41.44 3869 -42.28

Under consideration , it has been observed that there are some fluctuations in the growth
rate both in positive rates. From 1991-92 to 1997-98 , there has been a steady growth in
FDI inflow but it drastically fall is again noticed in 2002-03 and 2003-04.The most
probable reasons behind these alarming downfalls is the result of various asian crise and
sanctions amposed on India as a cosequence of nuclear explosion test by government of
India that cast a shadow on FDI inflows to India during the period 1998-2000. further
there seems a declining trend in FDI in the period 2001-4 . This trend was felt across the
world ( 108 countries according to world investment report 2003 ) as the world was
experiencing an economic slowdown . Reduction in M&As( merger and acquisitions )
was the major reason and also the war in Iraq and SARS had a negative impact on global
capital flows in 2003. In 2004 , global FDI inflows began to recover after the stock of
previous year .
The statistical description in terms of mean, standard deviation , minimum ,
maximum and coefficient of variance shows:

FDI inflows FDI in ICT

Mean 9771 6783
Std. dev. 6005 4133
Min 409 351
Max 19361 14419
CV% 61.45 60.93
AAGR 42.77 37.02

The CV% is almost equal as seen in above tables ,which represents that the variability in
the FDI inflows and FDI in ICT sector is approximately similar . This depicts that
whenever there is a change in the FDI inflows , the FDI in ICT as also affected.

Year Wise FDI inflows into Infrastructure sector during April 2000 to December

(In US$ million)

Year amt.
2000-01 292.37
2001-02 1902.26
2002-03 347.33
2003-04 388.37
2004-05 456.00
2005-06 914.04
2006-07 2179.39
Total 10575.56

It is an accepted fact now that FIIs have significant influence on the movements of the
stock market indexes in India. If one looks at the total FII trade in equity in India and its
relationship with the stock market major indexes like Sensex and Nifty, it shows a
steadily growing influence of FIIs in the domestic stock market.
FIIs and the movements of Sensex are quite closely correlated in India and FIIs wield
significant influence on the movement of Sensex. NSE also observes that in the Indian
stock markets FIIs have a disproportionately high level of influence on the market
sentiments and price trends. This is so because other market participants perceive the FIIs
to be infallible in their assessment of the market and tend to follow the decisions taken by
FIIs. This ‘herd instinct’ displayed by other market participants amplifies the importance
of FIIs in the domestic stock market in India.
Results of this study show that not only the FIIs are the major players in the domestic
stock market in India, but their influence on the domestic markets is also growing. Data
on trading activity of FIIs and domestic stock market turnover suggest that FII’s are
becoming more important at the margin as an increasingly higher share of stock market
turnover is accounted for by FII trading. Moreover, the findings of this study also indicate
that Foreign Institutional Investors have emerged as the most dominant investor group in
the domestic stock market in India. Particularly, in the companies that constitute the
Bombay Stock Market Sensitivity Index (Sensex) and NSE Nifty, their level of control is
very high. Dominant position of FIIs in the Sensex companies, it is not surprising that
FIIs are in a position to influence the movement of Sensex and Nifty in a significant way.
Since FIIs are dominating the Indian Market, individual investors are forced to accept the
dictates of major FIIs and hence join the group by entering the Mutual Fund group. Many
Mutual Funds floated specific funds for the sectors favoured by the FIIs. An implication
of MFs gaining strength in the Indian stock market could be that unlike individual
investors, whose monies they manage, MFs can create market trends whereas the small
individual investors can only follow the trends. The situation becomes quite difficult if
the funds gain a vested interest in certain sectors by floating sector specific funds. One
can even venture to say that the behavior of MFs in India has turned the very logic that
mutual funds invest wisely on the basis of well-researched strategies and individual
investors do not have the time and resources to study and monitor corporate performance,
upside down. Thus, the entry of FIIs has not resulted in greater depth in Indian stock
market; instead it led to focussing on only a few sectors. Ultimately to provide a level
playing field, even the domestic investors had to be offered lower rates of capital gains
While it can be expected that foreign affiliated mutual funds would follow the investment
pattern of FIIs, it is important to note that many domestic ones also followed FIIs. The
sectors favoured by FIIs account for a substantial portion of the net assets under control
of many Mutual Funds. The Mutual funds are gaining prominence in the Indian Stock
market and that the share of foreign affiliated MFs is growing, a number of Indian funds
are following the investment strategies of the foreign ones.
On the other hand if FII investments constitute a large share of the equity capital of a
financial entity, an FII pullout, even if driven by development outside the country can
have significant implications for the financial health of what is an important institution in
the financial sector of this country.
Similarly, if any set of developments encourages an unusually high outflow of FII capital
from the market, it can impact adversely on the value of the rupee and set of speculation
in the currency that can in special circumstances result in a currency crisis. There are now
too many instances of such effects worldwide for it be dismissed on the ground that
India's reserves are adequate to manage the situation.
FII investments, seem to have influenced the Indian stock market to a considerable
extent. FIIs are interested in the Indian stock market increases its vulnerability to
fluctuations. Analysis suggested a strong influence of FII investment on the Sensex and
Nifty index. This finding takes quite further the general understanding that net FII
investments influences stock prices in India as it traces the relationship

In this study I tried to find out the impact of FDIs and FIIs on Indian Stock Market .the
important result of this study is that the foreign investment is determined by stock market
return. But foreign investment is not a major factor for the stock market boom in India
the FII are increasingly dominant in the stock market. The domestic investors and
domestic companies remain not so dominant. There is therefore the fear of sudden
outflows of the foreign capital and this may be a trigger a third stock market scam as
most regulatory changes re being made only as a follow up of an adverse event.
Some of the steps that can be taken to help influence the choices made by foreign
institutional investors include:
 The Government should cut its fiscal deficits, which would result in strengthening the
economy as a whole.
 Creating infrastructure and other facilities to attract foreign investment. As described
earlier, an array of services can help promote foreign institutional investment in India,
ranging from basic services such as the provision of electricity and clean water, to fair
and effective dispute resolution systems.
 The ability of governments to prevent or reduce financial crises also has a great
impact on the growth of capital flows. Steps to address these crises include strengthening
banking supervision, requiring more transparency in international financial transactions
and ensuring adequate supervision and regulation of financial markets.
 An attempt should be made to bring down the inflation level to attract more foreign
institutional investments into India.
 The Banking system needs to be strengthened which could be achieved by reducing
the number of Non Performing Assets.
 The FIIs investments, though shown an increasing trend over time, are still far below
the permissible limits. One such measure in this line could be the newly announced
INDONEXT, the platform for trading the small and mid-cap companies, which might
bring some focus on these companies and hopefully add some liquidity and volume to
their trading, which may attract some further investments in them by FIIs.

 The fact is that developing country like India has its own compulsions arising out of
the very state of their social, political and economic development. To attract portfolio
investments and retain their confidence, the host countries have to follow stable macro-
economic policies,
 The provision for clear procedures must be followed in the event of disputes between
investors and host governments, to ensure that rules are adhered to and that arbitration
may be established by mutual consent.
 Countries may impose these kinds of measures like expropriation, domestic content
requirements, restrictions on capital outflows of short term investments, etc with the
intention of protecting domestic industries from international competition and promoting
their economic development, but this usually leads to misallocation of resources away
from the natural economic capabilities of nations.
 There has been a significant shift in the character of global capital flows to the
developing countries in recent years in that the predominance of private account capital
transfer and especially portfolio investments (FPI) increased considerably. In order to
attract portfolio investments which prefer liquidity, it has been advocated to develop
stock markets.

Business environment (Suresh Bedi)
The Journal of Amity Management Analyst (Jan. June 2007)
The Journal of Business ,vol.59,no.3, 383-403.
The Journal of Finance India
Apeejay journal of management and technology.(Jan 2009)
JIMS 8M April June 2007