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A PROJECT REPORT ON VOLATILITY IN INDIAN STOCK MARKET AND FOREIGN INSTITUTIONAL INVESTOR
SUBMITTED TO THE UNIVERSITY OF MUMBAI IN PARTIAL FULFILLMENT FOR THE AWARD OF THE DEGREE OF BACHELOR OF COMMERCE FINANCIAL MARKETS SEMESTER V
TABEL OF CONTENTS
DESCRIPTION SR NO. 1. CERTIFICATE 2. 3. 4. 5. 6. DECLARATION ACKNOWLEDGEMENT LIST OF ABBREVATIONS LIST OF CHARTS / GRAPHS CHAPTER. 1 1 MARKET AND FOREIGN INSTITUTIONAL INVESTORS. 7. CHAPTER. 2 INDIAN STOCK MARKET A THEORETICAL VIEW 8. CHAPTER. 3 IMPACT OF FIIs ON STOCK MARKET INSTABILITY 9. CHAPTER. 4 CONCLUSION 10. ANNEXURE MILESTONES OF FII IN INDIAN STOCK MARKET 11. BIBLIOGRAPHY 12. WEBLIOGRAPHY PAGE NO. I II
III
IV V
30
37 41 44 45
DECLARATION
I, PRANJA CHOPDA STUDENT OF L BACHELOR OF COMMERCE, FINANCIAL MARKETS, SEMESTER V OF KERALEEYA SAMAJAM DOMBIVALIS MODEL COLLEGE, HEREBY DECLARE THAT I HAVE COMPLETED PROJECT REPORT ON VOLATILITY IN INDIAN STOCK MARKET AND FOREIGN INSTITUTIONAL INVESTOR FOR THE ACADEMIC YEAR 2012-13.
ACKNOWLEDGEMENT
I would like to extent my sincere gratitude to all those people who have helped in the successful completion of my project entitled VOLATILITY IN INDIAN STOCK MARKET AND FOREIGN INSTITUTIONAL INVESTORS
I would also like to express my deep sense of my gratitude to Mrs. REENA PILLAI, the faculty member, for her help and untrying efforts constant inspiration and stimulating guidance to me in my academics endeavor and in my project.
I would also like to thank the college for giving me this opportunity for doing this project. I would also like to thank my family for giving me the support to do the same.
I would also like to express my sincere thanks to all my friends who help me in finding the information and support for the successful completion.
PRANJAL CHOPADA
LIST OF ABBREVATION
BSE : Bombay Stock Exchange CAPM : Capital Asset Pricing Model CMR : Call Money Rate EMEs : Emerging market economies EMEs : Emerging Market Economies FII : Foreign Institutional Investment FIIN : Net Foreign Institutional Investment FIIP : Foreign Institutional InvestmentPurchase FIIS : Foreign Institutional Investment-Sale FPI : Foreign Portfolio Investment GDP : Gross Domestic Product IIP : Index of Industrial Production KYC : Know Your Client NRIs : Non-Resident Indians NSE : National Stock Exchange OCBs : Overseas Corporate Bodies QIPs : Qualified Institutional placements RBI : Reserve Bank of India SEBI : Securities and Exchange Board of India VAR : Vector Auto Regression
3.
Sr No. 1. 2.
Graph particulars NUMBER OF REGISTERED FIIs Debt and Equity FII flow
The safe way to double the money is to fold it over once and put it in your pocket.
Since then, portfolio flows from foreign institutional investors (FII) have emerged as a major source of capital for emerging market
economies (EMEs) such as Brazil, Russia, India, China and South
Africa. Besides, the surge in foreign portfolio flows since 1990s can be attributed to greater integration among international financial markets, advancement in information technology and growing interest in EMEs among FIIs such as private equity funds and hedge funds so as to achieve international diversification and reduce the risk in their portfolios.
the economy, many EMEs have been competing with each other to
flows.
FII flows into India registered substantial growth from a meager US$4 million in 199293 to over US$ 32 billion in 201011 (SEBI, 2011:
76). FII inflows underwent a sea-saw movement in India during the last decade. They registered spectacular growth especially since the
middle of 2003 due to the higher growth rate in Indian GDP, robust
corporate performance and an investment-friendly environment.
meltdown.
Ever since foreign portfolio investors were allowed to invest in Indian financial markets in September 1992, there have been extensive deliberations on the impact of such flows. It is said that portfolio flows from FIIs inject global liquidity into the capital markets, raise the priceto-earnings ratios, thereby reducing the cost of capital. This, in turn,
leads to further issues of equity capital and stimulates investment
growth in the host economy, apart from bringing in best international corporate governance practices. Yet, FIIs have been targets of criticism due to characteristics such as return chasing behaviour,
herd mentality, hot money flows, short-term speculative gains and their influence on domestic policy-making.
of FII flows into India, most of them have been confined to assessing
the impact of such flows on stock markets. Very few studies have
focused on the overall impact of FII flows on all segments of the Indian financial markets, viz., the capital market, the foreign
exchange market, the money market and other macro-economic variables, such as inflation, money supply and Index of Industrial
markets in a holistic manner, by considering various macro-economic parameters, such as IIP, interest rates, inflation, exchange rates,
causes and effects of FII net flows into Indian financial markets with
the support of empirical data for the period April 2003March 2011,
i.e., a time span of eight years, covering the period before, during and after the eruption of the global financial crisis.
The present study is titled as A PROJECT REPORT ON Volatility in India n Stock Markets and Foreign Institutional Investors. The study made with special reference to Foreign Institutional Investors.
Objectives of Study:
To study in depth FDI & FII & its role in Indian stock market.
To know the changing scenario of Indian stock market after FII
For the purpose of the present study Secondary data were used. The data is collected from Books , Journals & websites.
The study has got all the limitations of using Secondary data
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
Chapter Layout:
Chapter 1 Gives an Introduction to volatility in Indian stock market and foreign institutional investors.
CHAPTER 2.
INDIAN STOCK MARKET - A THEORETICAL VIEW
Diversifying globally i.e., holding a well diversified portfolio of securities from around the globe in proportion to market
capitalizations, irrespective of investors country of residence, has
long been advocated as means to reduce overall portfolio risk and maximize risk-adjusted returns by the traditional capital asset pricing model (CAPM). Foreign investment inflow depends on returns in the
stock market, rates of inflation (both home and foreign), and extant risk. In terms of magnitude, the impact of stock market returns and
the ex-ante risk turned out to be the key determinants of FII inflows. An investment will always carry the consideration of risk factor in its risk-return behaviour. In an investment friendly environment the bullish behaviour dominates the trends and at a given huge volume of investments, foreign investors may 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 (Gordon & Gupta, 2003). Hence, there is
a possibility of bi-directional relationship between FII and the equity
returns. Although FII flows help supplement the domestic surplus resources and augment domestic investments without rising the foreign debt of the recipient countries, helps to maintain stabilized
balance of payments particularly current account segment. Entry of
FII may also leads to decrease the required rate of return for equity, and improve stock prices of the host economies / nations. However, there are uncertainties about the defenselessness of recipient countrys capital markets to such flows. FII flows, often referred to as
'hot money' (i.e., short-term and overly tentative), are extremely unstable in character compared to other forms of capital flows.
Foreign portfolio investors are regarded as 'fair weather friends' who come in when there is money to be made and leave at the first sign of
impending trouble in the host country thereby destabilizing the domestic economy of the recipient country. Often, they have been
blamed for exacerbating small economic problems in the host nation by making large and concerted withdrawals at the slightest hint of economic weakness. It is also alleged that as they make frequent marginal adjustments to their portfolios on the basis of a change in their perceptions of a country's solvency rather than variations in underlying asset value, they tend to spread crisis even to countries
with strong fundamentals thereby causing 'contagion' in international
financial markets.
(EMEs) over the world have found that financial market infrastructure like market size, market liquidity, trading cost, extent of informational
dissemination etc., legal mechanisms relating property rights,
harmonization of corporate governance, accounting, listing and other rules with those followed in developed economies etc., are some of
the important determinants of foreign portfolio investments into
emerging markets. The Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) have initiated several measures such as allowing overseas pension funds, mutual funds,
investment trusts and asset management companies, banks, institutional portfolio managers, universal funds, endowments, easing
the norms for registration of FIIs, reducing procedural delays, lowering the fees of registration, mandating strict disclosure norms,
improved regulatory mechanisms etc. all these are supported by
From the above table it is clear that there is constant growth in the
number of registered FIIs in India. In the year 2006(January, 2006), the number of registered FIIs were 833 only. The same number has
been increased to 1697 by the year 2010 (January 2010). The
number has been increased by more than 100 per cent. In spite of the global financial crisis the number of registered FIIs has shown a significant increase. Irrespective of the situation in Indian stock
markets these FIIs has earmarked their presence. But the investment made by FIIs has experienced drastic decline in the recent past. This is mainly because of the global economic meltdown. Though the number of registered FIIs increased the net investments were not increased proportionately. The important reasons for growth in
number of registered FIIs are easing of registration norms, lowering
the registration fees, reducing the procedural delays. The most important is strong economical foundation of Indian economy. Though the entire globe affected with the global financial meltdown, India could face the global financial meltdown effectively. Compared too many other markets Indian markets are offering attractive returns on the investments. The growth rates of Gross Domestic Product (GDP) even during the financial crisis was attractive than many other economies. This resulted in increased number of registered FIIs in the last half decade. The following table (Table 2) provides a cross
section of data on the FIIs inflow and stock market movement from
pulled out money mainly due to higher interest rates in U.S. after Federal Reserve increased 7interest rates to 4.5% under their new governor. Similar changes took place many times in the history since opening and few times in the study.
Additional the
indicators the
and two
data
reflect
that
movements
in
SENSEX during
values
(The
indicate
positive
and
correlation
the
between
of
the
foreign
institutional
investments
movement
Sensex.
The above table (Table:3) shows the proportion of investment made by the FIIs in Sensex scrips. It is observed that almost
half of the companies are equipped with FII investment to the tune of 10% to 20%. Nearly 25% of the companies (Sensex 30 scrips) are having the FII investment between 30% and 40%. Another important thing is all the thirty scrips are showing the presence of foreign institutional investment. The pattern of change is
also very minimal in respect of these companies regard to FIIs are
concerned. It can be understood that the FIIs may enter and exit
frequently form the other scrips but not the Sensex scrips. The above table depicts the consistency of FIIs over a period of time.
From the above table (Table:3) it can be understood that fifty percent of the companies which are included in BSE SENSEX are having
fifteen to twenty percent of capital from the overseas. This
indicates the level of influence by the foreign institutional investment on those companies particularly and on the stock market in general. Any withdrawal of foreign institutional investment may result in huge volatility in the market as well as share price movements. Similarly, any increase in the shareholding pattern by the foreign institutional investors may result huge rally in the market. The
psychology of domestic investors is also affected by the decisions of foreign institutional investors.
Being
an
agricultural
based
economy
India
has
faced
large
number
of
problems
decades. Indian economy has experienced the problem of capital in many instances. Particularly, to start large scale industries where capital requirement was more. While planning to start the steel
companies under government control, due to shortage of
resources it has taken the aid of foreign countries. Likewise we have received aid from Russia, Britain and Germany for establishing
Bhiloy, Rourkela and Durgapur steel plants. The foreign institutional investment was increased during the years 2006 and
2007. Later on, due to global financial crisis the investments by FIIs were reduced.
Enhanced flows of equity capital FIIs have a greater appetite for equity than debt in their asset
structure. The opening up the economy to FIIs has been in line with the accepted preference for non-debt creating foreign inflows over
foreign debt. Enhanced flow of equity capital helps improve capital structures and contributes towards building the investment gap.
Managing uncertainty and controlling risks. FII inflows help in financial innovation and development of
fundamentals.
Improving capital markets. FIIs as professional bodies of asset managers and financial
Equity market development aids economic development. By increasing the availability of riskier long term capital for
development.
Improved corporate governance. FIIs constitute professional bodies of asset managers and
financial analysts, who, by contributing to better understanding of firms operations, improve corporate governance. Bad corporate
governance makes equity finance a costly option. Also, institutionalization increases dividend payouts, and enhances
productivity growth.
country creates a lot of demand for rupee, and the RBI pumps the
amount of Rupee in the market as a result of demand created. Problems for small investor: The FIIs profit from investing in
emerging financial stock markets. If the cap on FII is high then they can bring in huge amounts of funds in the countrys stock markets and thus have great influence on the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their selling shows the stock market the downward path. This creates
problems for the small retail investor, whose fortunes get driven by
the actions of the large FIIs. Adverse impact on Exports: FII flows leading to appreciation of
the currency may lead to the exports industry becoming uncompetitive due to the appreciation of the rupee. Hot Money: Hot money refers to funds that are controlled by
exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the banking institution will experience a shortage of funds.
FII and FDI connection: The relationship between FII and FDI (Foreign Direct Investment) is
intertwined. In 1998 1999 a number of reforms were initiated, that were designed specifically for attracting FDI. In India FDI is allowed
through FIIs. This is done through private equity, preferential allotment, joint ventures and capital market operations. The only industries in which FDI isnt allowed are arms, railways, coal, nuclear
and mining. 100% financing by FDI is allowed in infrastructural
projects such as construction of the bridges and the tunnels. In the financial sector, insurance and banking operations can have foreign investors.
physical assets such as plant and equipment, with operating control residing in the parent corporation. It is an investment made to acquire
a lasting management interest (usually 10 percent of voting stock) in
an enterprise operating in a country other than that of the investor, the investors purpose being an effective voice in the management of the enterprise. It includes equity capital, reinvestment of earnings, other long-term capital, and short-term capital. Usually countries regulate such investments through their periodic policies. through the Foreign Investment Promotion Board). In India such regulation is usually done by the Finance Ministry at the Centre
Types of Investments: FDI typically brings along with the financial investment, access to
modern technologies and export market. The impact of the FDI in
India is far more than that of FII largely because the former generally involve setting up of production base - factories, power
would
because of further domestic investment in related downstream and upstream projects and a host of other services. Korean Steel maker Pascos USD 8 billion steel plants in Orissa would be the largest FDI in India once it commences. Maruti Suzuki has been an exemplary case in the India's experience. However, the issue is that it puts
an to impact on local entrepreneur as he may not be able
always successfully compete in the face of superior technology and financial power of the foreign investor. Therefore, it is often regulated that Foreign Direct Investments should ensure minimum level of local content, have export commitment from the investor and ensure foreign technology transfer to India.FII investments into a country are usually not associated with the direct benefits in terms of creating real investments. However, they provide large amounts of capital through the markets. The indirect benefits of the market include alignment of local practices to international standards in trading, equities research. These enable markets to become more deep, liquid, feeding in more information better into prices resulting in a risk management, new instruments and
allocation
of
capital
to
globally
competitive
sectors
of
the
economy. Foreign Institutional Investors Since, these portfolio flows can technically reverse at any time, the need for adequate and appropriate economic regulations are imperative.
Government Preference: FDI is preferred over FII investments since it is considered to be the most beneficial form of foreign investment for the economy as a whole. Direct investment targets a specific enterprise, with the aim of enhancing capacity and productivity or changing its management
control. Direct investment to create or augment capacity ensures
that the capital inflow translates into additional production. In the case of FII investment that flows into the secondary market, the effect is to increase capital availability in general, rather than availability of capital to a particular enterprise. Translating
by someone other than the foreign investor some
an
FII
investor has to draw upon the additional capital made available via FII inflows to augment production. In the case of FDI that flows in for acquiring an existing asset, no addition to production capacity takes place as a direct result of the FDI inflow. Just like in the case of FII inflows, in this case too, addition to production capacity does not
result from the action of the foreign investor the domestic seller has
boost
domestic FII
production.
There
is
a widespread
notion
that
are
hot
money
that
it
comes
and
goes,
in
the
stock
market
and
exchange
rates.
While this
might be true of individual funds, cumulatively, FII inflows have only provided net inflows of capital
Stability: FDI tends to be much more stable than FII inflows. Moreover, FDI brings not just capital but also better management and governance practices and, often, technology transfer. The know-how transferred along with FDI is often more crucial than the capital per se. No such benefit accrues in the case of FII inflows, although
the search by FIIs for credible investment options improve accounting and governance practices has tended listed to among
thus
Indian companies.
non-equity instruments
dated
government
securities and treasury bills in the Indian capital market) should not exceed the ratio of 70:30. Equity related instruments would include fully convertible debentures, convertible portion of partially convertible debentures and tradable warrants.
in dated
treasury
bills,
non-convertible
debentures/bonds issued by an Indian company subject to limits, if any. A FII needs to submit a clear statement that it wishes to be registered as FII/sub-account under 100% debt routes.
investors with no single investor holding more than 10 per cent of the shares or units of the fund) or of foreign corporate and individuals and belong to any of the under given categories can be registered for FII. Pension Funds Mutual Fund Investment Trust Insurance or reinsurance companies Endowment Funds University Funds Foundations or Charitable Trusts Charitable Societies who propose to in On their own behalf, and
Asset Management Companies Nominee Companies Institutional Portfolio Managers Trustees Power of Attorney Holders Banks Foreign Government Agency Foreign Central Bank International or Multilateral Organization or an Agency
Trends in FIIs:
In 1993, when investments in FII s were introduced, Picket
Umbrella Trust Emerging Markets Fund, an institutional investor from Switzerland, Indian market. While in 1994, no new registrations were reported, between 1995 and 2003, an average of 51 new FIIs began operations in the country each year. The graph below clearly indicates the steep increase in number of FII to the number of
registered FIIs at the end of each calendar year). Currently, there are
1,695 registered FIIs and 5,264 registered sub accounts (As on 11th September, 2009).
Since 1993 when FIIs were first allowed to enter the India,
there has always been a preference towards investing in equity
than debt. The following graph shows the debt and equity FII flows.
accordance
provisions
nationwide terminals the BSE and NSE have been raising capital through the QIP route. primarily because appetite, possess the general expertise and have the experience to make an informed decision. In August 2008, SEBI liberalized the pricing conditions for QIPs by
reducing the period of reckoning stock earlier price, prior to the to an average date, of two weeks the relevant against
Quarterly entities
these
requirement of taking the higher of the previous six months or 15 days average price. The pre-existing slowdown in the markets led to
attractive valuations for the investors.
Companies have taken advantage of this revision in pricing
raised capital through QIPs were HDIL, Shobha Developers, Network 18, Dewan Housing and Bajaj Hindustan. Most of the companies
which came out with QIPs were in the real-estate/infrastructure sector. However, some companies like GMR Infrastructure were not GVK so successful and had to withdraw their issue and
valuation concerns.
purchased Rs 9,500 crores in the same period. This led several FIIs to pick up the target stocks via QIP before the July 6thBudget and offload the same after the budget session. As per a CRISIL study, 10 out of 13 QIPs are currently quoting below the offer price. Since most of QIPs were in the
reality and infrastructure sectors, one explanation is that FIIs came in expecting some quick gains from significant sops to the infrastructure and housing sectors in the Budget. It is also possible that the rush
for QIPs was driven largely by short-term considerations, where the FIIs hedged their bets by taking short positions in the issuers
were usually not favoured by SEBI owning to lack of transparency and difficulty in establishing the owner base. Consequently, these investments were viewed unfavorably and any Cayman fund seeking to invest in India had to be carefully examined.
Post which Caymans grades of admission to Iosco, Sebi is now
and which should be examined more carefully. Presently, there are 19 registered foreign institutional investors from Cayman Islands, taking the total to 19. The two recent additions have been Fir Tree Capital Opportunity Master Fund and Fir Tree Value Master Fund. The fund base of Cayman Islands is huge. There are about 9870 funds based there. Indian markets can expect more inflow from Cayman Island if SEBI agrees to let them come in.
Market seeking -
Firms may go overseas to find new buyers for goods and services. Market-seeking may happen when producers have saturated sales in
their home market, or when they believe investments overseas will bring higher returns than additional investments at home. This is often the case with high technology goods. Resource seeking Put simply, a company may find it cheaper to produce its production a
foreign subsidiary- for the purpose of selling it either at home or in foreign markets. The foreign facility may be able to obtain superior or less costly access to the inputs of production (land, labor, capital and natural resources) than at home. Strategic asset seeking Firms may seek to invest in other companies abroad to help build strategic assets, such as distribution networks or new
technology. This may involve the establishment of partnerships with other existing foreign firms that specialize in certain aspects of
production. Efficiency seeking Multinational companies may also seek to reorganize their overseas holdings in response to broader economic changes.
its resources.
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 8. Foundations 9. Charitable Trusts / Charitable Societies
Further, following entities proposing to invest on behalf of broad
Funds
7. Endowments
registered as FIIs:
Asset Management Companies Institutional Portfolio Managers Trustees Power of Attorney Holders
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.
TAXATION:
The taxation norms available to a FII are shown in the table below. Nature of Income Long-term capital gains Short-term capital gains Dividend Income
Interest Income
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
The real measure of your wealth is how much youd be worth if you lost all your money.
widely
about
held perception
the emerging
among
equity
academicians
markets
and
practitioners
is that price
return indices in these markets are frequently subject to extended deviations from fundamental values with subsequent reversals and that these swings are in large part due to the influence of highly mobile foreign capital. Volatility is an unattractive feature that has adverse implications for decisions pertaining to the effective allocation of resources and therefore investment. Volatility makes investors averse to holding stock due to increased uncertainty. Investors in turn demand higher risk premium so as to ensure against increased uncertainty. A greater risk premium of In addition, great volatility may increase the option to wait thereby
delaying investment. Also weak regulatory system in emerging
implies physical
higher
cost
capital
and
consequently
lowers
investment.
market
economies
(EMEs)
reduce
the efficiency
of
and
the
processing
of
information, which
further magnifies the problem of volatility. But some researchers opposite assumption of non-disestablishing hypothesis that says FIIs have no adverse impact
Trading by FIIs happens on a continuous basis and therefore has a lasting impact on the local stock market. There is, however, surprisingly little empirical evidence on the impact of FIIs trading on
the host countrys stock return volatility, thereby making it imperative
that this aspect of local equity markets, which is important for both risk analysis and portfolio construction, be examined. This chapter attempts to fill the gap. Beside the introduction, this chapter is classified into two parts.
Part I presents the impact of foreign institutional investors on
the Indian stock market volatility. Part II shows the structure of the volatility before and after
The scope of the study is limited to the India which has become an attraction for FIIs in recent years, in fact the emerging markets of many developing countries have been attracting large inflows of private capital in recent years. The surge in capital flows occurred first in Latin America, then South East Asia and is now clearly visible
in South Asia. A significant feature of these capital flows is the increasing importance of foreign portfolio investment (FPI), whose buying and selling of stocks on a daily basis determines the magnitude of such capital flows. A significant improvement has
also taken place in India relating to the flow of foreign capital
during the period of post economic reforms. The major change in the capital flows particularly in Foreign Institutional Investors
(FIIs) in investments has taken place following the changes
trade and industrial policy. Over the past 15 years or so India has gradually emerged an important destination of global investors investments in emerging equity markets. In 2006, India had a share of about 0.55% of global investment which is quite high in comparison to year 2001 in which Indias share was only 0.12%. On the other hand some of the developed countries have shown a downward trend.
The foreign financial inflows, beside other factors, helped the Indian stock market to rise at a great height according to financial analysts. Sensex crossed a new high. It crossed 20000- mark in December
2007, which was 13786.91 in December 2006 and
9397.93 In December 2005. This historical movement is also due to the other parameters of the economy, which are favorable for the investment. The returns on investment are also much favorable. The profit performance of the firms High return on investment. may explain the reasons for There are other factors such as
favorable tax laws and relaxation on the caps of various kinds of investments. The policy measures and economic factors are also
the reasons for the investors confidence.
during
higher than those found pre-liberalization period (i.e.1961-80). Interestingly, return and volatility increase further to 0.074 and 1.92 respectively. In era of first generation reforms financial sector reforms
(i.e. 1991-2000).It is appreciable to see from the table that the second generation reforms have brought in more cheers for the capital market as the risk (i.e. Standard Deviation of return) decreased but the stock return went up in the period. Clearly the volatility has declined in Indian stock market after year 2000.
Table 5 further reveals that the stock return has remained
around
standard
half
percent
during
1986-92
to
1.59
percent
1992-2007. Thus, both volatility and return have declined after the
cap on G-Sec Bond Markets: Currently, the cap on FII investments in the bond market is USD 6 Billion. As per the new budget, proposes to borrow Rs.4.5 lakh crore in 2009-10 to support its infrastructure and other developmental projects. This could be opened up to the FIIs so that they can take part in Indias hitherto almost closed debt market. The Indian debt markets are not fully developed and see low volumes. The lifting of the cap on FIIs will increase the traded volumes and it will also help in preventing the crowding out of investment for private enterprises.
The suggestion by SEBI to permit dollar settlements for FIIs would revolutionize the way in which they invest in the country. This will help
mitigate risks of currency fluctuations for FIIs, and help in improve the volume and liquidity of the derivatives market. With dollar
settlements, many participants, who want to take exposure to Indian markets through index buying, will be able to participate
freely. This, in turn, will give stability to Indian markets as there will be buying of underlying stocks by the sellers of these contracts to FIIs. At present, settlements in India are done in rupee denominations. As a result, a number of FIIs, who intend to trade in Nifty futures, take the Singapore route where CNX Nifty index futures are traded on SGX. About 50 per cent of the total open interest (OI) build-up in Nifty futures takes place on the SGX, which allows settlements in US dollar. This enables different types of FIIs to operate there. Also, low transaction costs due to the absence of securities transaction tax,
stamp duty and P-note complications have resulted in a gradual shift of FIIs into offshore markets. Settlements in dollar would also help in reducing the volatility in dollar-rupee conversion
value caused due to FII flows. Each time a settlement is done, a seller of futures contracts to an FII would buy an equivalent amount of underlying stocks to hedge his/her exposure due to the sale. This
would increase the trading volume and liquidity of Indian markets, once dollar settlement is allowed.
-notes etc.
stricter
is of
implementation
the opinion
of the
that
regulations.
Tough
for FIIs
should be made simpler after which P-Notes should be done away with.
CHAPTER 4 CONCLUSION
Those who start with too little money are more likely to succeed than those who start with too much. Energy and imagination are the springboards to wealth creation.
CHAPTER 4. CONCLUSION
A number of studies in the past have observed that investments by
FIIs and the movements of Sensex are quite closely correlated in India and FIIs wield significant influence on the movement of Sensex (Rangarajan 2000, Samal 1997, Pal 1998). NSE (2001) 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
when there are positive inflows of FIIs and there were decrease in Sensex when there were negative FII inflows. It has been perceived
in some quarters that FII flows are major drivers of stock
markets in India and hence a sudden reversal of flows may harm the stability of its markets. The nature of relationship between FII flows and Indian stock market returns can be explained in terms of cumulative informational disadvantage of foreign portfolio investors vis-a-vis domestic investors. The theory says that domestic investors
knowledge
about
Indian
financial
markets
The whole process also highlights another disturbing feature. During the post election period, the sudden volatility in the stock market and
the subsequent decline of Sensex was almost treated as a national
emergency in India by the financial media and to a certain extent, by the incoming UPA government. It is very difficult to understand why the government feels so concerned about speculative investors and the movements in Sensex. Most studies have shown that Sensex is neither a good barometer of economic fundamentals it is not an
indicator of future growth prospects of the economy. Moreover, this
study
necessarily indicate a significant alteration of actual shareholding pattern of different investor groups even in the Sensex companies. As
far as the real economy is concerned, the stock market has a very
limited role to play. In India, for the year 2002-03, new capital issues
by non- government public limited companies raised a combined capital of Rs 1,878 crores from ordinary shares, preference share and
debentures. This amount is only 0. 33 percent of gross domestic capital formation of the economy and about 1. 6 percent of gross domestic capital formation by private corporate sector for that year. This is not surprising because even in developed stock market s like
USA, the stock market has not been a significant source of finance
Handbook
debentures10 and units of UTI account for only 1.37 percent of total
household financial savings for t h e y ear 2003- 04. In comparison,
bank deposits account for about 42 .8 percent of household financial savings for the same year. Under this circumstance s, it is not clear
why so much importance is given to the stock market and portfolio
investors by policy makers in India. It is high time to realize that in spite of the impression given by the financial media, movements of
imply any stock markets and Sensex do not necessarily
fundamental changes in the economy and these movements affect a very small be unfortunate if movements of speculative capital and the resultant stock market gyrations are allowed to influence macro-economic policy making 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 FIIs 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
population.
It will
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
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 favored 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 behaviour 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 focusing on only a few
CHAPTER 5 ANNEXURE
ANNEXURE
MILESTONES OF FOREIGN INSTITUTIONAL INVESTMENT IN INDIAN STOCK MARKET
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. ng of a single FII and of all FIIs, NRIs (NonResident Indians) and OCBs (Overseas Corporate Bodies) in any company was subject to a limit of 5% and 24% of the company's total issued capital respectively.
nvestment 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. ere 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.
ent 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.
were also allowed to invest as sub-accounts of SEBI-registered FIIs. FIIs were also permitted to seek SEBI registration in respect of subaccounts. This was made more liberal to include domestic portfolio managers or domestic asset management companies. the
(40% became the ceiling on aggregate FII portfolio investment in March 2000.
on March 13, 2002 to identify the sectors in which FIIs portfolio investments will not be subject to the sectoral limits for FDI.
was reconstituted
and came out with recommendations in June 2004. The committee had proposed that, 'In general, FII investment ceilings, if any,
may sectoral be reckoned over and above prescribed FDI
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.
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.
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 199899, their sales were more than their purchase.
CHAPTER 6 BIBLIOGRAPHY
No matter how hard you hug your money, it never hugs back.
BIBLIOGRAPHY
12.
NEWS PAPER: ECONOMICS TIMES TIMES OF INDIA
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CHAPTER 7 WEBLIOGRAPHY
WEBLIOGRAPHY