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“Foreign direct investment (FDI) and foreign institutional investors
(FII) in India”

Submitted By:

Nitin Kansal
Enrollment No: 07BS2683
Mobile no. – 9861888252, 9238822258
E-mail Id-

“Foreign direct investment (FDI) and foreign institutional
investors (FII) in India”

Submitted By:

Nitin Kansal
Enrollment No: 07BS2683
Mobile no. – 9861888252, 9238822258
E-mail Id-

A report submitted in partial fulfillment of

the requirements of
MBA program

Distribution list: Dr. Jyotirmayee Kar.


Any accomplishment requires the effort of many people and this work is no
different. I take this opportunity to thank Dr. Jyotirmayee Kar (Faculty
Guide of ICFAI Business School) for providing me valuable product
training and guidance at various stages of my project.

I will also remain highly indebted to Dr. Pradeep Kumar Samanta (MRP
Co-coordinator) for giving me the opportunity to work for this MRP.

Lastly I am thankful to all my colleagues who have given time to help me

during completion of the report.

Table of contents


1. Introduction…………………………………………………………………………………

1.1 Objective of project……………………………………………………………………


1.2 Methodology…………………….………………………………………………………

1.3 Limitation…………………………………………………………………………………

2. Main text (FDI)……………………………………………………………………………


2.1 About foreign direct investment ……………………………………………………


2.2 FDI Indian scenario……………………………………………………………………


2.3 FDI in India approval route……………………………………………………………


2.4 Analysis of sector specific policy of FDI……………………………………………


2.5 Analysis of share of top ten investing countries in India……………………


2.6 Analysis of sectors attracting highest FDI equity in flows……………………


3. Main text (FII)……………………………………………………………………………


3.1 Introduction to FII……………………………………………..…………………………


3.2 Market design in India for FIIs…………………………………..……………………

3.3 Registration process of FIIs………………………………….………………………

3.4 Prohibition on investment……………………………………………………………


3.5 Trends of FIIs in India…………………………………………………………………


3.6 Analysis of trends in FIIs investment………………………………………………


3.7 Details of indices taken………………………………………………………………


3.8 Framing of hypothesis…………………………………………………………………


3.9 Recording of observation………………………………………………………………


4. Key findings…………………………………………………………………………………

5. Conclusion ……………………………………………………………………………..…

6. Appendices 1…………..…………………………………………………………………

7. Reference……………………………………………………………………………………

7.1 Internet sites……………………………………………………………………………


7.2 Journal……………………………………………………………………………………

7.3 Books……….………………………………………………………………………………

List of illustrations- list of tables.

Table no. Table name Page no.
1. Sector-specific policy for FDI. 12
2. Share of top investing countries FDI equity inflows. 16
3. Sectors attracting highest FDI equity inflows. 18
4. SEBI Registered FIIs in India. 25
5. Trends in FII Investment. 26
6. Indices period of study and observations. 28
7. Key finding for objective 2. 31
8. Data of monthly closing indices of various Nifty indexes. 33

The report of the project “Foreign direct investment (FDI) and foreign institutional investors
(FII) in India” mainly focused on the following areas:


Net foreign direct investment (FDI) flows into India reached 70630 crore in India’s 2006–07 fiscal
year, means increase of 187% of the 24613 crore recorded during 2005–06, with the largest share of
FDI flows from Mauritius, followed by the United States and the United Kingdom. This study
examines FDI in India, in the context of the Indian economic and regulatory environment. This study
present FDI trends in India, by country and by sectors during the post liberalization period that is
1991 to 2007 year, using official government data from Indian official government internet site like
that of RBI, SEBI. To illustrate the driving forces behind these trends, the study also discusses the
investment climate in India, Indian government incentives to foreign investors, the Indian regulatory
environment as it affects investment, and the effect of India’s global, regional, and bilateral trade
agreements on investment from top 10 FDI investing countries. Finally, the study examines global
FDI in India’s in top 10 sectors of industry.


Institutional Investor is any investor or investment fund that is from or registered in a country outside
of the one in which it is currently investing. Institutional investors include hedge funds, insurance
companies, pension funds and mutual funds. The growing Indian market had attracted the foreign
investors, which are called Foreign Institutional Investors (FII) to Indian equity market, and this study
present try to explain the impact and extent of foreign institutional investors in Indian stock market
and examining whether market movement can be explained by these investors. It is often hear that
whenever there is a rise in market, it is explained that it is due to foreign investors' money and a
decline in market is termed as withdrawal of money from FIIs. This study tries to examine the
influence of FII on movement of Indian stock exchange during the post liberalization period that is
1991 to 2007.


Foreign investment refers to investments made by the residents of a country in the financial assets and
production processes of another country. The effect of foreign investment, however, varies from
country to country. It can affect the factor productivity of the recipient country and can also affect the
balance of payments. Foreign investment provides a channel through which countries can gain access
to foreign capital. It can come in two forms: foreign direct investment (FDI) and foreign institutional
investment (FII). Foreign direct investment involves in direct production activities and is also of a
medium- to long-term nature. But foreign institutional investment is a short-term investment, mostly
in the financial markets. FII, given its short-term nature, can have bidirectional causation with the
returns of other domestic financial markets such as money markets, stock markets, and foreign
exchange markets. Hence, understanding the determinants of FII is very important for any emerging
economy as FII exerts a larger impact on the domestic financial markets in the short run and a real
impact in the long run. India, being a capital scarce country, has taken many measures to attract
foreign investment since the beginning of reforms in 1991.

India is the second largest country in the world, with a population of over 1 billion people. As a
developing country, India’s economy is characterized by wage rates that are significantly lower than
those in most developed countries. These two traits combine to make India a natural destination for
foreign direct investment (FDI) and foreign institutional investment (FII). Until recently, however,
India has attracted only a small share of global foreign direct investment (FDI) and foreign
institutional investment (FII), primarily due to government restrictions on foreign involvement in the
economy. But beginning in 1991 and accelerating rapidly since 2000, India has liberalized its
investment regulations and actively encouraged new foreign investment, a sharp reversal from
decades of discouraging economic integration with the global economy.

The world is increasingly becoming interdependent. Goods and services followed by the financial
transaction are moving across the borders. In fact, the world has become a borderless world. With the
globalization of the various markets, international financial flows have so far been in excess for the
goods and services among the trading countries of the world. Of the different types of financial
inflows, the foreign direct investment (FDI) and foreign institutional investment (FII)) has played an
important role in the process of development of many economies. Further many developing countries
consider foreign direct investment (FDI) and foreign institutional investment (FII) as an important
element in their development strategy among the various forms of foreign assistance.

The Foreign direct investment (FDI) and foreign institutional investment (FII) flows are usually
preferred over the other form of external finance, because they are not debt creating, nonvolatile in
nature and their returns depend upon the projects financed by the investor. The Foreign direct
investment (FDI) and foreign institutional investment (FII) would also facilitate international trade
and transfer of knowledge, skills and technology.

The Foreign direct investment (FDI) and foreign institutional investment (FII) is the process by
which the resident of one country(the source country) acquire the ownership of assets for the purpose
of controlling the production, distribution and other productive activities of a firm in another
country(the host country).

According to the international monetary fund (IMF), foreign direct investment (FDI) and foreign
institutional investment (FII) is defined as “an investment that is made to acquire a lasting interest in
an enterprise operating in an economy other than that of investor”.

The government of India(GOI) has also recognized the key role of the foreign direct investment
(FDI) and foreign institutional investment (FII) in its process of economic development, not only as
an addition to its own domestic capital but also as an important source of technology and other global
trade practices. In order to attract the required amount of foreign direct investment (FDI) and foreign
institutional investment (FII), it has bought about a number of changes in its economic policies and
has put in its practice a liberal and more transparent foreign direct investment (FDI) and foreign
institutional investment (FII) policy with a view to attract more foreign direct investment (FDI) and
foreign institutional investment (FII) inflows into its economy. These changes have heralded the
liberalization era of the foreign direct investment (FDI) and foreign institutional investment (FII)
policy regime into India and have brought about a structural breakthrough in the volume of foreign
direct investment (FDI) and foreign institutional investment (FII) inflows in the economy. In this
context, this report is going to analyze the trends and patterns of foreign direct investment (FDI) and

foreign institutional investment (FII) flows into India during the post liberalization period that is 1991
to 2007 year.

1.1 Objective of the project:

Objective 1 pertaining to FDI: examines the trends and patterns in the foreign direct investment (FDI)
across different sectors and from different countries in India during 1991-2007 period means during
post liberalization period.

Objective 2 pertaining to FII: influence of FII on movement of Indian stock exchange during the post
liberalization period that is 1991 to 2007.

1.2 Methodology

The lifeblood of business and commerce in the modern world is information. The ability to gather,
analyze, evaluate, present and utilize information is therefore is a vital skill for the manager of today.
In order to accomplish this project successfully I will take following steps.
1) Sampling- The study is limited to a sample of top 10 investing countries e.g. Mauritius, USA
etc. and top 10 sectors e.g. electrical instruments, telecommunications etc. which had attracted
larger inflow of FDI and data of NSE stock exchange will be taken to know the impact of FII.

2) Data Collection:
➢ The research will be done with the help Secondary data (from internet site and

➢ The data is collected mainly from websites, annual reports, World Bank reports,
research reports, already conducted survey analysis, database available etc.

3) Analysis:
Appropriate Statistical tools like correlation and regression will be used to analyze the data
like to analyze the growth and patterns of the FDI and FII flows in India during the post
liberalization period, the liner trend model will be used. Further the percentage analysis will be
used to measure the share of each investing countries and the share of each sectors in the
overall flow of FDI and FII into India.

1.3 Limitations of the study:

A) The study has limited itself to a sample of top ten investing countries and top ten level sectors
which have attracted higher inflow of FDI.

B) The data for analysis of impact of FII on stock exchange is limited to National stock exchange
(NSE) only.


In this section I am going to discuss or describe the main business of the report i.e. analysis of
secondary data. It includes data in an organized form, discussion on its significance and analyzing the
results. For this I had divided this section in further two subsections i.e. the first subsection fulfill the
requirement of first objective which is pertaining to FDI. The objective for FDI is to examine the
trends and patterns in the foreign direct investment (FDI) across different sectors and from different
countries in India during 1991-2007 period means during post liberalization period. And the second
subsection fulfills the analysis of second objective which is pertaining to FII. The objective for FII is
to examine the influence of FII on movement of Indian stock exchange during the post liberalization
period that is 1991 to 2007.

Subsection I: objective 1: Examine the trends and patterns in the foreign direct
investment (FDI) across different sectors and from different countries in India
during 1991-2007 period means during post liberalization period.

2.1 About foreign direct investment.

Is the process whereby residents of one country (the source country) acquire ownership of assets for
the purpose of controlling the production, distribution, and other activities of a firm in another country
(the host country). The international monetary fund’s balance of payment manual defines FDI as an
investment that is made to acquire a lasting interest in an enterprise operating in an economy other
than that of the investor. The investors’ purpose being to have an effective voice in the management of
the enterprise’. The united nations 1999 world investment report defines FDI as ‘an investment
involving a long term relationship and reflecting a lasting interest and control of a resident entity in
one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy
other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise or foreign affiliate).

2.2 Foreign direct investment: Indian scenario

Foreign Direct Investment (FDI) is permitted as under the following forms of investments –
• Through financial collaborations.

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• Through joint ventures and technical collaborations.
• Through capital markets via Euro issues.
• Through private placements or preferential allotments.
Forbidden Territories –
FDI is not permitted in the following industrial sectors:
Arms and ammunition.
Atomic Energy.
Railway Transport.
Coal and lignite.
Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.
Retail Trading (except single brand product retailing).
Lottery Business
Gambling and Betting
Business of chit fund
Nidhi Company
Trading in Transferable Development Rights (TDRs).
Activity/sector not opened to private sector investment.

Foreign Investment through GDRs (Euro Issues) –

Indian companies are allowed to raise equity capital in the international market through the issue of
Global Depository Receipt (GDRs). GDR investments are treated as FDI and are designated in dollars
and are not subject to any ceilings on investment. An applicant company seeking Government's
approval in this regard should have consistent track record for good performance (financial or
otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure
projects such as power generation, telecommunication, petroleum exploration and refining, ports,
airports and roads.
1. Clearance from FIPB –
There is no restriction on the number of Euro-issue to be floated by a company or a group of
companies in the financial year. A company engaged in the manufacture of items covered under
Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is
likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to
obtain prior FIPB clearance before seeking final approval from Ministry of Finance.
2. Use of GDRs –
The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure
including domestic purchase/installation of plant, equipment and building and investment in software
development, prepayment or scheduled repayment of earlier external borrowings, and equity
investment in JV/WOSs in India.
3. Restrictions –
However, investment in stock markets and real estate will not be permitted. Companies may retain the
proceeds abroad or may remit funds into India in anticipation of the use of funds for approved end
uses. Any investment from a foreign firm into India requires the prior approval of the Government of

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2.3 Foreign direct investments in India are approved through two routes –
1. Automatic approval by RBI –
The Reserve Bank of India accords automatic approval within a period of two weeks (subject to
compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and
100% is allowed depending on the category of industries and the sectoral caps applicable. The lists are
comprehensive and cover most industries of interest to foreign companies. Investments in high-
priority industries or for trading companies primarily engaged in exporting are given almost automatic
approval by the RBI.
2. The FIPB Route – Processing of non-automatic approval cases –
FIPB stands for Foreign Investment Promotion Board which approves all other cases where the
parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is
liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign
investors to have a local partner, even when the foreign investor wishes to hold less than the entire
equity of the company. The portion of the equity not proposed to be held by the foreign investor can
be offered to the public.

2.4 Analysis of sector specific policy for FDI

Table no. 1: Sector-specific policy for FDI: (source of following table is
Sector-specific policy for FDI:

Sr. Sector/Activity FDI Cap /Equity Entry/Route

1. Floriculture, Horticulture, Development 100% Automatic
of Seeds, Animal Husbandry,
Pisciculture, Aqua-culture and
Cultivation of Vegetables & Mushrooms
under controlled conditions and services
related to agro and allied sectors.

2. Tea Sector, including tea plantation 100% FIPB

3. Mining covering exploration and mining 100% Automatic
of diamonds & precious stones; gold,
silver and minerals.
4. Coal & Lignite mining for captive 100% Automatic
consumption by power projects, and
iron & steel, cement production and
other eligible activities permitted under
the Coal Mines (Nationalization)
5. Mining and mineral separation of 100% FIPB
titanium bearing minerals and ores, its
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value addition and integrated
6. Alcohol- Distillation & Brewing 100% Automatic

7. Cigars & Cigarettes- Manufacture 100% FIPB

8. Coffee& Rubber processing & 100% Automatic

9. Defense production 26% FIPB

10. Hazardous chemicals, viz., hydrocyanic 100% Automatic

acid and its derivatives; phosgene and its
derivatives; and isocyanates and
diisocyantes of hydrocarbon.
11. Industrial explosives - Manufacture 100% Automatic

12. Drugs & Pharmaceuticals including 100% Automatic

those involving use of recombinant
DNA technology


13. Power including generation 100% Automatic

(Except Atomic energy); transmission,
distribution and Power Trading.


i. Airports-

a. Greenfield projects 100% Automatic

b. Existing projects 100% FIPB

Beyond 74%
ii. Air Transport Services including Domestic Scheduled Passenger Airlines; Non-Schedules
Airlines; Chartered Airlines; Cargo Airlines; Helicopter and Seaplane Services

c. Scheduled Air Transport Services/ 49%- FDI; 100%- for Automatic

Domestic Scheduled Passenger Airline NRI investment
d. Non-Scheduled Air Transport Service/ 74%- FDI 100%- for Automatic
Non-Scheduled airlines, Chartered NRIs investment
airlines, and Cargo airlines

e. Helicopter Services/Seaplane services 100% Automatic

requiring DGCA approval

iii. Other services under Civil Aviation Sector

f. Ground Handling Services 74%- FDI, 100%- for Automatic

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NRIs investment
g. Maintenance and Repair 100% Automatic
organizations; flying training
institutes; and technical training

15. Asset Reconstruction Companies 49% (only FDI) FIPB

16. Banking - Private sector 74% (FDI+FII) Automatic

17. Broadcasting

a. FM Radio FDI +FII investment FIPB

up to 20%
b. Cable network 49% (FDI+FII) FIPB

c. Direct-To-Home 49% (FDI+FII). Within FIPB

this limit, FDI
component not to exceed
d. Setting up hardware facilities such as up- 49% (FDI+FII) FIPB
linking, HUB, etc
e. Up-linking a News & Current Affairs 26% FDI+FII FIPB
TV Channel
f. Up-linking a Non- news & Current 100% FIPB
Affairs TV Channel
18. Commodity Exchanges 49% (FDI+FII) FIPB
Investment by
Registered FII under
PIS will be limited to
23% and Investment
under FDI Scheme
limited to 26%.

19. Construction Development projects, 100% Automatic

including housing, commercial premises,
resorts, educational institutions,
recreational facilities, city and regional
level infrastructure, townships.
20. Courier services for carrying 100% FIPB
packages, parcels and other items
which do not come within the ambit
of the Indian Post Office Act, 1898.
21. Credit Information Companies 49 % (FDI+FII) FIPB
Investment by
Registered FII under
PIS will be limited to
24% only in the CICs
listed at the Stock
Exchanges within the
overall limit of 49%
foreign investment.

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22. Industrial Parks both setting up and 100% Automatic
in established Industrial Parks

23. Insurance 26% Automatic

24. Investing companies in infrastructure / 100% FIPB

services sector (except telecom sector)
25. Non Banking Finance Companies

i) Merchant Banking 100% Automatic

ii)Underwriting Portfolio Management
iii)Investment Advisory Services
iv) Financial Consultancy
v) Stock Broking
vi) Asset Management
vii) Venture Capital
viii) Custodial Services
ix) Factoring
x) Credit Rating Agencies
xi) Leasing & Finance
xii) Finance
xiii) Housing Finance
xiv) Forex Broking
xv) Credit card Business
xvi) Money changing business
xvii) Micro credit
xviii) Rural credit
26. Petroleum & Natural Gas sector

a. Refining 49% in case of PSUs Automatic (in case of

100% in case of Private private companies)
companies FIPB (in case of
b. Other than Refining and including 100% Automatic
study and formulation; investment/
financing; setting up infrastructure
for marketing in Petroleum & Natural
27. Print Media

a. Publishing of newspaper and 26% FIPB

periodicals dealing with news and
current affairs
b. Publishing of scientific magazines/ 100% FIPB
specialty journals/ periodicals
28. Telecommunications

a. Basic and cellular, Unified Access 74% (Including FDI, Automatic up to 49%.
Services, National/ International Long FII, NRI, FCCBs,
Distance, V-Sat, Public Mobile Radio ADRs, GDRs, FIPB beyond 49%.
Trunked Services (PMRTS), Global convertible preference

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Mobile Personal Communications shares, and proportio-
Services (GMPCS) and other value nate foreign equity in
added telecom services Indian promoters/
Investing Company)
b. ISP with gateways, radio- paging, end- 74% Automatic up to 49%.
to- FIPB beyond 49%.
end bandwidth.
c. a) ISP without gateway, 100% Automatic up to 49%.
(b) infrastructure provider providing FIPB beyond 49%.
fibre, right of way,duct space,tower
(Category I);
(c) electronic mail and voice mail
d. Manufacture of telecom equipments 100% Automatic
29. Trading

i) Wholesale/cash & carry trading 100% Automatic

ii) Trading for exports
iii) Trading of items sourced from small
scale sector
iv) Test marketing of such items for
which a company has approval for
v)Single Brand product retailing
30. Satellites - Establishment and 74% FIPB
31. Special Economic Zones and Free 100% Automatic
Trade Warehousing Zones covering
setting up of these Zones and setting up
units in the Zones

2.5 Analysis of share of top ten investing countries FDI equity in flows
Table no. 2: Share of top investing countries FDI equity inflows. (Source:
Cumulative amount of FDI inflows (From Aug. 1991 to march 2007): Rs. 2,32,041 crore
and US$ 54,628 million.

Ranks Country Cumulative inflows %age with total

(from Aug. 1991 to march inflows (in terms of
2007) rupees)
Amount Rupees in crore.
1. Mauritius 79162 34.11
2. U.S.A. 24536 10.57
3. U.K 16660 7.17
4. Netherlands 11402 4.91
5. Japan 9313 4.01
6. Germany 7060 3.04

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7. Singapore 7050 3.03
8. France 3803 1.63
9. South Korea 3234 1.39
10. Switzerland 2879 1.24

Foreign investors have begun to take a more active role in the Indian economy in recent years. By
country, the largest direct investor in India is Mauritius; largely because of the India-Mauritius
double-taxation treaty. Firms based in Mauritius invested 79162 crores in India between Aug. 1991
and March 2007, equal to 34.11 percent of total FDI inflows. The second largest investor in India is
the United States, with total capital flows of 24536 crore during the 1991–2007 periods, followed by
the United Kingdom, the Netherlands, and Japan.


According to Indian government statistics, Mauritius accounts for the largest share of cumulative FDI
inflows to India from 1991 to 2007, nearly 34.11 percent. Many companies based outside of India
utilize Mauritian holding companies to take advantage of the India- Mauritius Double Taxation
Avoidance Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains taxes,
and may allow some India-based firms to avoid paying certain taxes through a process known as
“round tripping.”
The extent of round tripping by Indian companies through Mauritius is unknown. However, the Indian
government is concerned enough about this problem to have asked the government of Mauritius to set
up a joint monitoring mechanism to study these investment flows. The potential loss of tax revenue is
of particular concern to the Indian government. The existence of the treaty makes it difficult to clearly
understand the pattern of FDI flows, and likely leads to reduced tax revenues collected by the Indian

United States

The United States is the second largest source of FDI in India (10.57 % of the total), valued at 24536
crore in cumulative inflows between August 1991 and March 2007. According to the Indian
government, the top sectors attracting FDI from the United States to India during 1991–2007 (latest
available) are fuel (36 percent), telecommunications (11 percent), electrical equipment (10 percent),
food processing (9 percent), and services (8 percent). According to the available M&A data, the two
top sectors attracting FDI inflows from the United States are computer systems design and
programming and manufacturing.

Since 2002, many of the major U.S. software and computer brands, such as Microsoft, Honeywell,
Cisco Systems, Adobe Systems, McAfee, and Intel have established R&D operations in India,
primarily in Hyderabad or Bangalore. The majority of U.S. electronics companies that have
announced greenfield projects in India are concentrated in the semiconductor sector. By far the largest
such project is AMD’s chip manufacturing facility in Hyderabad, Andhra Pradesh. The largest share
(36 percent) was found in the manufacturing sector, most prominently in the machinery, chemicals,
and transportation equipment manufacturing segments. Other important categories of employment are
professional, scientific, and technical services; and wholesale trade, with 29 percent and 18 percent of
U.S. affiliate employment, respectively.
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European Union

Within the European Union, the largest country investors were the United Kingdom and the
Netherlands, with 16660 crore and 11402 crore, respectively, of cumulative FDI inflows between
Aug. 1991 and March 2007. The United Kingdom, the Netherlands, and Germany together accounted
for almost 75 percent of all FDI flows from the EU to India. All EU countries together accounted for
approximately 25 percent of all FDI inflows to India between August 1991 and March 2007. FDI from
the EU to India is primarily concentrated in the power/energy, telecommunications, and transportation
sectors. The top sectors attracting FDI from the European Union are similar to FDI from the United
States. Manufacturing; information services; and professional, scientific, and technical services have
attracted the largest shares of FDI inflows from the EU to India since 2000. Unilever, Reuters Group,
P&O Ports Ltd, Vodafone, and Barclays are examples of EU companies investing in India by means
of mergers and acquisitions. European companies accounted for 31 percent of the total number and 43
percent of the total value for all reported Greenfield FDI projects. The number of EU Greenfield
projects was distributed among four major clusters: ICT (17 percent), heavy industry (16 percent),
business and financial services (15 percent), and transport (11 percent). However, the heavy industry
cluster accounted for the majority (68 percent) of the total value of these projects.


Japan was the Fifth largest source of cumulative FDI inflows in India between August 1991 and
March 2007, i.e. the cumulative flow is 9313 crore and it is 4.01% of total inflow. FDI inflows to
India from most other principal source countries have steadily increased since 2000, but inflows from
Japan to India have decreased during this time period. There does not appear to be a single factor that
explains the recent decline in FDI inflows from Japan to India. India is, however, one of the largest
recipients of Japanese Official Development Assistance (ODA), through which Japan has assisted
India in building infrastructure, including electricity generation, transportation, and water supply. It is
possible that this Japanese government assistance may crowd out some private sector Japanese
investment. The top sectors attracting FDI inflows from Japan to India are transportation (54 percent),
electrical equipment (7 percent), telecommunications, and services (3 percent). The available M&A
data corresponds with the overall FDI trends in sectors attracting inflows from Japan to India.
Companies dealing in the transportation industry, specifically automobiles, and the auto
component/peripheral industries dominate M&A activity from Japan to India, including Yamaha
Motors, Toyota, Kirloskar Auto Parts Ltd., and Mitsubishi Heavy Industries Ltd. Japanese companies
have also invested in an estimated 148 Greenfield FDI projects valued at least at $3.7 billion between
2002 and 2006. In April 2007, Japanese and Indian officials announced a major new collaboration
between the two countries to build a new Delhi-Mumbai industrial corridor, to be funded through a
public-private partnership and private-sector FDI, primarily from Japanese companies. The project
was begun in January 2008 with initial investment of $2 billion from the two countries. The corridor
will cross 6 states and extend for 1,483 km, in an area inhabited by 180 million people. At completion
in 2015, the corridor is expected to include total FDI of $45–50 billion. A large share of that total is
destined for infrastructure, including a 4,000 MW power plant, 3 ports, and 6 airports, along with
additional connections to existing ports. Private investment is expected to fund 10-12 new industrial
zones, upgrade 5–6 existing airports, and set up 10 logistics parks. The Indian government expects
that by 2020, the industrial corridor will contribute to employment growth of 15 percent in the region,
28 percent growth in industrial output, and 38 percent growth in exports.
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2.6 Analysis of sectors attracting highest FDI equity inflows

Table no. 3: Sectors attracting highest FDI equity inflows :( source:

Cumulative Inflows
(from August 1991
to March 2007)
Amount in rupees in %age with total
Ranks Sector crore inflows
Electrical Equipments
1. (including computer software & electronics) 36,034 18.77
Services Sector
2. (financial & non-financial) 34,238 17.84
3. (radio paging, cellular mobile, basic telephone services) 16,691 8.7
4 Transportation Industry 15,427 8.04
5. (power + oil refinery) 12,105 6.31
6. (other than fertilizers) 9,510 4.95
Construction activities
7. (including roads & highways) 6,396 3.33
8. Drugs & Pharmaceuticals 5,281 2.75
9. Food Processing Industries 5,143 2.68
10. Cement and Gypsum Products 4,329 2.26

The sectors receiving the largest shares of total FDI inflows between August 1991 and March 2007
were the electrical equipment sector and the services sector, each accounting for 18.77 and 17.84
percent respectively. These were followed by the telecommunications, transportation, fuels, and
chemicals sectors. The top sectors attracting FDI into India via M&A activity were manufacturing;
information; and professional, scientific, and technical services. These sectors correspond closely with
the sectors identified by the Indian government as attracting the largest shares of FDI inflows overall.

ICT and electronics have been the largest industry recipients of Greenfield FDI into India in recent
years, but have seen the number of new Greenfield projects plateau since 2004. Rather, the size of the
projects in these industries has increased substantially. For example, global semiconductor
manufacturers Advanced Micro Devices (AMD - United States) and Flextronics (Singapore) have
entered into separate joint ventures with SemIndia to build semiconductor manufacturing facilities in
Hyderabad. The $3 billion AMD-SemIndia joint venture will produce semiconductor chips which can
then be used to manufacture electronic products in the Flextronics-SemIndia $3 billion joint venture.
The chip fabrication facility will manufacture chips for cell phones, set-top boxes, personal
computers, and similar products.

The heavy industry and transport equipment sectors together attracted over FDI of 15427 crore in
Greenfield FDI projects during 1991 to 2007. The cluster with the highest reported value during

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2002–06 is heavy industry. Projects in this sector tend to be highly capital intensive, with single
projects frequently requiring upwards of $6 billion in startup investment costs. The largest recent
examples include the POSCO and Arcelor-Mittal Steel projects, and Vedanta Resources’ (United
Kingdom) aluminum smelter project, all planned for the state of Orissa.


Subsection II: objective 2: Pertaining to FII: influence of FII on

movement of Indian stock exchange during the post liberalization period
that is 1991 to 2007.

3.1 Introduction to FII

Since 1990-91, the Government of India embarked on liberalization and economic reforms with a
view of bringing about rapid and substantial economic growth and move towards globalization of the
economy. As a part of the reforms process, the Government under its New Industrial Policy revamped
its foreign investment policy recognizing the growing importance of foreign direct investment as an
instrument of technology transfer, augmentation of foreign exchange reserves and globalization of the
Indian economy. Simultaneously, the Government, for the first time, permitted portfolio investments
from abroad by foreign institutional investors in the Indian capital market. The entry of FIIs seems to
be a follow up of the recommendation of the Narsimhan Committee Report on Financial System.
While recommending their entry, the Committee, however did not elaborate on the objectives of the
suggested policy. The committee only suggested that the capital market should be gradually opened
up to foreign portfolio investments.

From September 14, 1992 with suitable restrictions, FIIs were permitted 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 on the Stock Exchanges in India. While presenting
the Budget for 1992-93, the then Finance Minister Dr. Manmohan Singh had announced a proposal to
allow reputed foreign investors, such as Pension Funds etc., to invest in Indian capital market. To
operationalise this policy announcement, it had become necessary to evolve guidelines for such
investments by Foreign Institutional Investors (FIIs).

The policy framework for permitting FII investment was provided under the Government of
India guidelines vide Press Note date September 14, 1992. The guidelines formulated in this
regard were as follows:

1) Foreign Institutional Investors (FIIs) including institutions such as Pension Funds, Mutual
Funds, Investment Trusts, Asset Management Companies, Nominee Companies and
Incorporated/Institutional Portfolio Managers or their power of attorney holders (providing
discretionary and non-discretionary portfolio management services) would be welcome to
make investments under these guidelines.

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2) FIIs would be welcome to invest in all the securities traded on the Primary and Secondary
markets, including the equity and other securities/instruments of companies which are listed/to
be listed on the Stock Exchanges in India including the OTC Exchange of India. These would
include shares, debentures, warrants, and the schemes floated by domestic Mutual Funds.
Government would even like to add further categories of securities later from time to time.

3) FIIs would be required to obtain an initial registration with Securities and Exchange Board of
India (SEBI), the nodal regulatory agency for securities markets, before any investment is
made by them in the Securities of companies listed on the Stock Exchanges in India, in
accordance with these guidelines. Nominee companies, affiliates and subsidiary companies of
a FII would be treated as separate FIIs for registration, and may seek separate registration with

4) Since there were foreign exchange controls in force, for various permissions under exchange
control, along with their application for initial registration, FIIs were also supposed to file with
SEBI another application addressed to RBI for seeking various permissions under FERA, in a
format that would be specified by RBI for the purpose. RBI's general permission would be
obtained by SEBI before granting initial registration and RBI's FERA permission together by
SEBI, under a single window approach.

5) For granting registration to the FII, SEBI should take into account the track record of the FII,
its professional competence, financial soundness, experience and such other criteria that may
be considered by SEBI to be relevant. Besides, FII seeking initial registration with SEBI were
be required to hold a registration from the Securities Commission, or the regulatory
organization for the stock market in the country of domicile/incorporation of the FII.

6) SEBI's initial registration would be valid for five years. RBI's general permission under FERA
to the FII would also hold good for five years. Both would be renewable for similar five year
periods later on.

7) RBI's general permission under FERA would enable the registered FII to buy, sell and realize
capital gains on investments made through initial corpus remitted to India, subscribe/renounce
rights offerings of shares, invest on all recognized stock exchanges through a designated bank
branch, and to appoint a domestic Custodian for custody of investments held.

8) This General Permission from RBI would also enable the FII to:
a. Open foreign currency denominated accounts in a designated bank. (There could even be
more than one account in the same bank branch each designated in different foreign
currencies, if it is so required by FII for its operational purposes);
b. Open a special non-resident rupee account to which could be credited all receipts from the
capital inflows, sale proceeds of shares, dividends and interests;
c. Transfer sums from the foreign currency accounts to the rupee account and vice versa, at the
market rate of exchange;
d. Make investments in the securities in India out of the balances in the rupee account;
e. Transfer repairable (after tax) proceeds from the rupee account to the foreign currency

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f. Repatriate the capital, capital gains, dividends, incomes received by way of interest, etc. and
any compensation received towards sale/renouncement of rights offerings of shares subject to
the designated branch of a bank/the custodian being authorized to deduct withholding tax on
capital gains and arranging to pay such tax and remitting the net proceeds at market rates of
g. Register FII's holdings without any further clearance under FERA.

9) There would be no restriction on the volume of investment minimum or maximum-for the

purpose of entry of FIIs, in the primary/secondary market. Also, there would be no lock-in
period prescribed for the purposes of such investments made by FIIs. It was expected that the
differential in the rates of taxation of the long term capital gains and short term capital gains
would automatically induce the FIIs to retain their investments as long term investments.

10) Portfolio investments in primary or secondary markets were subject to a ceiling of 30% of
issued share capital for the total holdings of all registered FIIs, in any one company. The
ceiling was made applicable to all holdings taking into account the conversions out of the fully
and partly convertible debentures issued by the company. The holding of a single FII in any
company would also be subject to a ceiling of 10% of total issued capital. For this purpose, the
holdings of an FII group would be counted as holdings of a single FII.

11) The maximum holdings of 24% for all non-resident portfolio investments, including those of
the registered FIIs, were to include NRI corporate and non-corporate investments, but did not
include the following:
a. Foreign investments under financial collaborations (direct foreign investments),
which are permitted up to 51% in all priority areas.
b. Investments by FIIs through the following alternative routes:
i. Offshore single/regional funds;
ii. Global Depository Receipts;
iii. Euro convertibles.

12) Disinvestment would be allowed only through stock exchange in India, including the OTC
Exchange. In exceptional cases, SEBI may permit sales other than through stock exchanges,
provided the sale price is not significantly different from the stock market quotations, where

13) All secondary market operations would be only through the recognized intermediaries on the
Indian Stock Exchange, including OTC Exchange of India. A registered FII would be expected
not to engage in any short selling in securities and to take delivery of purchased and give
delivery of sold securities.

14) A registered FII can appoint as Custodian an agency approved by SEBI to act as custodian of
Securities and for confirmation of transactions in Securities, settlement of purchase and sale,
and for information reporting. Such custodian should establish separate accounts for detailing
on a daily basis the investment capital utilization and securities held by each FII for which it is
acting as custodian. The custodian was supposing to report to the RBI and SEBI semi-annually
as part of its disclosure and reporting guidelines.

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15) The RBI should make available to the designated bank branches a list of companies where no
investment will be allowed on the basis of the upper prescribed ceiling of 30% having been
reached under the portfolio investment scheme.

16) Reserve Bank of India may at any time request by an order a registered FII to submit
information regarding the records of utilization of the inward remittances of investment capital
and the statement of securities transactions. Reserve Bank of India and/or SEBI may also at
any time conduct a direct inspection of the records and accounting books of a registered FII.

17) FIIs investing under this scheme will benefit from a concessional tax regime of a flat rate tax
of 20% on dividend and interest income and a tax rate of 10% on long term (one year or more)
capital gains.

These guidelines were suitably incorporated under the SEBI (FIIs) Regulations, 1995. These
regulations continue to maintain the link with the government guidelines through an inserted clause
that the investment by FIIs should also be subject to Government guidelines. This linkage has allowed
the Government to indicate various investment limits including in specific sectors.

3.2 Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside India which
proposes to make investment in India in securities. A Working Group for Streamlining of the
Procedures relating to FIIs, constituted in April, 2003, inter alia, recommended streamlining of SEBI
registration procedure, and suggested that dual approval process of SEBI and RBI be changed to a
single approval process of SEBI. This recommendation was implemented in December 2003.

Currently, entities eligible to invest under the FII route are as follows:

i) As FII: Overseas pension funds, mutual funds, investment trust, asset management company,
nominee company, bank, institutional portfolio manager, university funds, endowments, foundations,
charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established
outside India proposing to make proprietary investments or with no single investor holding more than
10 per cent of the shares or units of the fund).

(ii) As Sub-accounts: The sub account is generally the underlying fund on whose behalf the FII
invests. The following entities are eligible to be registered as sub-accounts, viz. partnership firms,
private company, public company, pension fund, investment trust, and individuals.

FIIs registered with SEBI fall under the following categories:

a) Regular FIIs- those who are required to invest not less than 70 % of their investment in
equity-related instruments and 30 % in non-equity instruments.
b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset management
companies, nominee companies and incorporated/institutional portfolio managers or their power of
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attorney holders (providing discretionary and non-discretionary portfolio management services) to be
registered as FIIs. While the guidelines did not have a specific provision regarding clients, in the
application form the details of clients on whose behalf investments were being made were sought.
While granting registration to the FII, permission was also granted for making investments in the
names of such clients. Asset management companies/portfolio managers are basically in the business
of managing funds and investing them on behalf of their funds/clients. Hence, the intention of the
guidelines was to allow these categories of investors to invest funds in India on behalf of their
'clients'. These 'clients' later came to be known as sub-accounts. The broad strategy consisted of
having a wide variety of clients, including individuals, intermediated through institutional investors,
who would be registered as FIIs in India. FIIs are eligible to purchase shares and convertible
debentures issued by Indian companies under the Portfolio Investment Scheme.

3.3 Registration Process of FIIs

A FII is required to obtain a certificate by SEBI for dealing in securities. SEBI grants the certificate
SEBI by taking into account the following criteria:

i) The applicant's track record, professional competence, financial soundness, experience,

general reputation of fairness and integrity.

ii) Whether the applicant is regulated by an appropriate foreign regulatory authority.

iii) Whether the applicant has been granted permission under the provisions of the Foreign
Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for making
investments in India as a Foreign Institutional Investor.

iv) Whether the applicant is a) an institution established or incorporated outside India as a

pension fund, mutual fund, investment trust, insurance company or reinsurance
company. b) an International or Multilateral Organization or an agency thereof or a
Foreign Governmental Agency or a Foreign Central Bank. c) an asset management
company, investment manager or advisor, nominee company, bank or institutional
portfolio manager, established or incorporated outside India and proposing to make
investments in India on behalf of broad based funds and its proprietary funds in if any
or d) university fund, endowments, foundations or charitable trusts or charitable

v) Whether the grant of certificate to the applicant is in the interest of the development of
the securities market.

vi) Whether the applicant is a fit and proper person.

The SEBIs initial registration is valid for a period of three years from the date of its grant of renewal.

Investment Conditions and Restrictions for FIIs:

A Foreign Institutional Investor may invest only in the following:-

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(a) Securities in the primary and secondary markets including shares, debentures and warrants of
companies, unlisted, listed or to be listed on a recognized stock exchange in India.
(b) units of schemes floated by domestic mutual funds including Unit Trust of India, whether
listed or not listed on a recognised stock exchange.
(c) Dated Government securities.
(d) Derivatives traded on a recognised stock exchange.
(e) Commercial paper.
(f) Security receipts.

The total investments in equity and equity related instruments (including fully convertible debentures,
convertible portion of partially convertible debentures and tradable warrants) made by a Foreign
Institutional Investor in India, whether on his own account or on account of his sub- accounts, should
not be less than seventy per cent of the aggregate of all the investments of the Foreign Institutional
Investor in India, made on his own account and on account of his sub-accounts. However, this is not
applicable to any investment of the foreign institutional investor either on its own account or on
behalf of its sub-accounts in debt securities which are unlisted or listed or to be listed on any stock
exchange if the prior approval of the SEBI has been obtained for such investments. Further, SEBI
while granting approval for the investments may impose conditions as are necessary with respect to
the maximum amount which can be invested in the debt securities by the foreign institutional investor
on its own account or through its sub-accounts. A foreign corporate or individual is not eligible to
invest through the hundred percent debt route.

Even investments made by FIIs in security receipts issued by securitization companies or asset
reconstruction companies under the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 are not eligible for the investment limits mentioned above.
No foreign institutional should invest in security receipts on behalf of its sub-account.

3.4 Prohibitions on Investments:

FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also
not allowed to invest in any company which is engaged or proposes to engage in the following

1) Business of chit fund

2) Nidhi Company
3) Agricultural or plantation activities
4) Real estate business or construction of farm houses (real estate business does not include
development of townships, construction of residential/commercial premises, roads or
5) Trading in Transferable Development Rights (TDRs).

3.5 Trends of Foreign Institutional Investments in India.

Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global
Depository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds.
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Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to
undertake portfolio investments in India. Thereafter, the Indian stock markets were opened up for
direct participation by FIIs. They were allowed to invest in all the securities traded on the primary and
the secondary market including the equity and other securities/instruments of companies listed/to be
listed on stock exchanges in India. It can be observed from the table below that India is one of the
preferred investment destinations for FIIs over the years. As of March 2007, there were 996 FIIs
registered with SEBI.

Table no. 4: SEBI Registered

FIIs in India
Year End of March
1992-93 0
1993-94 3
1994-95 156
1995-96 353
1996-97 439
1997-98 496
1998-99 450
1999-00 506
2000-01 527
2001-02 490
2002-03 502
2003-04 540
2004-05 685
2005-06 882
2006-07 996

3.6 Analysis of trends in FII investment

Table no. 5: Trends in FII Investment

Gross Purchases Gross Sales (b) Net Investment (a-b)

Year (a) (Rs.crore) (Rs.crore) (Rs.crore) % increase
1992-93 17 4 13
1993-94 5593 466 5127 39338.46154
1994-95 7631 2835 4796 -6.456017164
1995-96 9694 2752 6942 44.74562135
1996-97 15554 6979 8575 23.52348027

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1997-98 18695 12737 5958 -30.51895044
1998-99 16115 17699 -1584 -126.5861027
1999-00 56856 46734 10122 739.0151515
2000-01 74051 64116 9935 -1.847460976
2001-02 49920 41165 8755 -11.87720181
2002-03 47061 44373 2688 -69.29754426
2003-04 144858 99094 45764 1602.529762
2004-05 216953 171072 45881 0.25565947
2005-06 346978 305512 41466 -9.622719644
2006-07 520508 489667 30841 -25.62340231

During the initial year 1992-93, the FII flows started in September, 1992 which amounted to Rs. 13
crore because at this moment government was framing policy guidelines for FIIs. However, within a
year, the FIIs rose 39338.46% of 1992-93 during 1993-94 because government had opened door for
investment in India. Thereafter, the FII inflows witnessed a dip of 6.45%. The year 1995-1996
witnessed a turnaround, gliding up the contribution of FII to a massive of Rs. 6942 crore. Investment
by FIIs during 1996-1997 rose a little i.e. 23.52% of the preceding year. This period was ripe enough
for FII Investments because at that time where international capital markets were in the phase of
overheating; the Indian economy posted strong fundamentals, stable exchange rate expectations and
offered investment incentives and congenial climate for investment of these funds in India. During
1997-98, FII inflows posted a fall of 30.51%. This slack in investments by FIIs was primarily due to
the South-East Asian Crisis and the period of volatility experienced between November 1997 and
February 1998. The net investment flows by FIIs have always been positive from the year of their
entry. Only in the year 1998-99, an outflow to the tune of Rs. 17699 crore was witnessed for the first
time. This was primarily because of the economic sanctions imposed on India by the US, Japan and
other industrialized economies. These economic sanctions were the result of the testing of series of
nuclear bombs by India in May 1998. Thereafter, the FII portfolios investments quickly recovered and
showed positive net investments for all the subsequent years.

FIIs investments declined from Rs. 10122 crore during 1999-2000 to Rs. 9935 crore during 2000-01.
FII investment posted a year-on-year decline of 1.8 % in 2000-01, 11.87 % in 2001-02 and 69.29 % in
2002-03. Investments by FII posted a fall of 80 % in 2002-03 as compared with investments in the
period of 1999-00. Investments by FIIs rebounded from depressed levels from the year 2003-04 and
witnessed an unprecedented surge. FIIs flows were recycled to India following readjustment of global
portfolios of institutional investors, triggered by robust growth in Indian economy and attractive
valuations in the Indian equity market as compared with other emerging market economies in Asia.
The slowdown in 2004-05 was on account of global uncertainties caused by hardening of crude oil
prices and the upturn in the interest rate cycle. The resumption in the net FII inflows to India from
August 2004 continued till end 2004-05. The inflows of FIIs during the year 2004-05 was Rs. 45881
crore. During 2006-07 the foreign institutional investors continued to invest large funds in Indian
securities market. However, due to global developments like meltdown in global commodities
markets and equity market during the three month period between May 2006 to July 2006, fall in
Asian Equity markets, tightening of capital controls in Thailand and its spillover effects, there was a
slack in FII investments.

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As I had discussed FIIs environment in India like what is FII in India, policy framework for
FIIs, market design in India for foreign institutional investors, registration process in India,
Trends of Foreign Institutional Investments in India. Now to fulfill the objective of this project
i.e. influence of FII on movement of Indian stock exchange (national stock exchange of India)
during the post liberalization period that is 1991 to 2007, the following research methodology is

This project, in a way, reveals the influence of FIIs investment on movement of Indian stock exchange
(national stock exchange of India) during the post liberalization period that is 1991 to 2007. I have
applied a simple linear model to estimate the effect of FII on the stock index. The data analysis tools
used in the research is correlation and regression.

I have taken six indices to study the impact of FII on Indian bourses. One of these indices is Nifty
while other five are some specific index of NSE. These six indices give the close picture of Indian
stock exchanges. I have taken average monthly data of FIIs and monthly closing index of all the

There may be many other factors on which a stock index may depend i.e. Government policies,
budgets, bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar
exchange rate etc. But for my study I have selected only one independent variable i.e. FII and
dependent variable is indices of nifty. This study uses the concept of correlation and regression to
study the relationship between FII and stock index. The FII started investing in Indian capital market
from September 1992 when the Indian economy was opened up in the same year. Their investments
include equity only. The sample data of FIIs investments consists of monthly average from April 1992
to March 2007 and indices value consist monthly closing value with period of study and various
observations which is given below in table.

Table no. 6: indices period of study and observations.

Indices Period of study Observation

S&P CNX NIFTY 30/Apr/91- 30/Mar/07 180
BANK NIFTY 31/Jan/00- 30/Mar/07 87
CNX 100 31/Jan/03- 30/Mar/07 51
CNX IT 31/Jan/96- 30/Mar/07 135
CNX NIFTY JUNIOR 31/Oct/95- 30/Mar/07 138
S&P CNX 500 30/Jun/99- 30/Mar/07 94

3.7 Details of indices taken:

The CNX 100 tracks the behavior of combined portfolio of two indices viz. S&P CNX Nifty and
CNX Nifty Junior. It includes 100 of the 935 companies currently listed on the NSE. CNX 100 is
computed using market capitalisation weighted method, wherein the level of the index reflects the
total market value of all the stocks in the index relative to a particular base period. The method also
takes into account constituent changes in the index and importantly corporate actions such as stock

28 | P a g e
splits, rights, etc without affecting the index value. The CNX 100 Index has a base date of Jan 1, 2003
and a base value of 1000.

The S&P CNX 500 is India's first broad-based benchmark of the Indian capital market for comparing
portfolio returns vis-à-vis market returns. The S&P CNX 500 represents about 92.66% of total market
capitalization and about 86.44% of the total turnover on the NSE. The S&P CNX 500 Equity Index is
desegregated into 72 Industry sectors, which are separately maintained by IISL. These industry
indices are derived out of the S&P CNX 500 and care is taken to see that the industry representation
in the entire universe of securities is reflected in the S&P CNX 500. e.g., if in the entire universe of
securities, banking sector has a 5% weightage then the Banking sector (as determined by the Banking
stocks in S&P CNX 500) would have a 5% weightage in the S&P CNX 500. The Banking sector
index would be derived out of the Banking stocks in the S&P CNX 500. The changes to the weightage
of various sectors in the S&P CNX 500 would dynamically reflect the changes in the entire universe
of securities. The calendar year 1994 has been selected as the base year for S&PCNX 500. The base
value of the index is set at 1000.

The CNX Bank Index is an index comprised of the most liquid and large capitalized Indian Banking
stocks. It provides investors and market intermediaries with a benchmark that captures the capital
market performance of Indian Banks. The Index has 12 stocks from the banking sector, which trade
on the National Stock Exchange. The CNX Bank Index has a base date of Jan 1, 2000 and base value
of 1000.

The CNX IT Companies in this index are those that have more than 50% of their turnover from IT
related activities like software development, hardware manufacture, vending, support and
maintenance. The CNX IT Index constituents represent about 12.80% of the total market
capitalization as on September 1, 2006. The CNX IT Index has a base date of Jan 1, 1996 and a base
value of 1000.
The Base Value of the index was revised from 1000 to 100 w.e.f. May 28, 2004.

The CNX Nifty Junior Index comprises of the next rung of liquid securities after those forming part
of S&P CNX Nifty. It may be useful to think of the S&P CNX Nifty and the CNX Nifty Junior as
making up the 100 most liquid stocks in India. CNX Nifty Junior represents about 8.98% of the total
market capitalization as on September 1, 2006. The average traded value for the last six months of all
Junior Nifty stocks is approximately 9.17% of the traded value of all stocks on the NSE. Impact cost
for CNX Nifty Junior for a portfolio size of RS.2.50 million is 0.15%. The CNX Nifty Junior was
introduced on January 1, 1997, with base date and base value being November 03, 1996 and 1000
respectively and a base capital of Rs.0.43 trillion.

The S&P CNX Nifty is a well-diversified 50 stock index accounting for 22 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 based upon solid economic research and is well respected
internationally as a pioneering effort in better understanding how to make a stock market index. The
average total traded value for the last six months of all S&P CNX Nifty stocks is approximately 56.31
% of the traded value of all stocks on the NSE. S&P CNX Nifty stocks represent about 59.91 % of the
total market capitalization as on September 1, 2006. The base period selected for S&P CNX Nifty
index is the close of prices on November 3, 1995, which marks the completion of one year of

29 | P a g e
operations of NSE's Capital Market Segment. The base value of the index has been set at 1000 and a
base capital of RS.2.06 trillion.

3.8 Framing of hypothesis:

Null Hypothesis (Ho): The various NSE indices do not rise with the increase in FIIs investment means
FIIs have no influence on Indian stock exchange.
Alternate Hypothesis (H1): The various NSE indices rise with the increase in FIIs investment means
FIIs have influence on Indian stock exchange.

The data regarding indices of NSE was taken from the site of NSE (the data for monthly closing value
is given in appendice 1). I got the data on FIIs investment from “HANDBOOK OF STATISTICS ON

3.9 Recording of observation:

I have taken the monthly closing index of all the indices. For FIIs I have recorded monthly average of
the net investments made by them in the Indian capital market.
Net Investments = gross purchases – gross sales (fig. is in Rs crore)

Use of Model: A simple linear relationship has been shown between two variables using correlation
and regression as the data analysis tools. One variable is dependent and the other is independent. I
have taken FII as the independent variable while the stock index has been taken as dependent variable.
The impact of FII has been separately analyzed with each of the index. So, correlation and regression
has been separately run between FII and six indices taking one index at a time with help of Microsoft

Inference: If the hypothesis holds good then we can infer that FIIs have significant impact on the
Indian capital market. This will help the investors to decide on their investments in stocks and shares.
If the hypothesis is rejected, or in other words if the null hypothesis is accepted, then FIIs will have no
significant impact on the Indian bourses.

Regression Analysis: This analysis tool performs linear regression analysis by using the "least
squares" method to fit a line through a set of observations. I can analyze how a single dependent
variable is affected by the values of one or more independent variables — for example, how an
athlete's performance is affected by such factors as age, height, and weight.

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

30 | P a g e

For objective 1

a) Net FDI in India was valued at $4.7 billion in the 2005–06 Indian fiscal year, and more than
tripled, to $15.7 billion, in the 2006–07 fiscal year. Almost one-half of all FDI is invested in
the Mumbai and New Delhi regions.

b) By country, the largest investors in India are Mauritius, the United States, and the United
Kingdom. Investors based in many countries have taken advantage of the India-Mauritius
bilateral tax treaty to set up holding companies in Mauritius which subsequently invest in
India, thus reducing their tax obligations.

c) By industry, the largest destinations for FDI are electrical equipment (including computer
software and electronics), services, telecommunications, and transportation.

For objective 2

Table no. 7: correlation and regression matrix

Correlation with FII Multiple R R2 Standard Error n
S&P CNX NIFTY 0.651 0.651 0.423 575.658 180
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BANK NIFTY 0.634 0.634 0.402 1229.644 87
CNX 100 -0.159 0.159 0.025 898.820 51
CNX IT -0.191 0.191 0.036 12896.703 135
CNX NIFTY JUNIOR 0.656 0.656 0.431 1319.629 138
S&P CNX 500 0.540 0.540 0.292 670.583 94

1. Impact of FII on S&P CNX Nifty: The effect of FII on Nifty is positive and the co-efficient of
correlation is high so the effect is also high. The standard error comes out to be 575.658 which are
high. This does not mean the relation is false but we can say that the error in linear relation is high.

2. Impact of FII on Bank Nifty: The effect of FII on Bank Nifty is positive. So, FII is directly related
to Bank Nifty. But the co-efficient of correlation is high so the effect is also high. The standard error
comes out to be 1229.644 which are very high. This means that the deviation from the mean value is
high. This does not mean the relation is false but we can say that the error in linear relation is high.
The value of multiple-R is also high. We can say that FII have significant impact on Bank Nifty
during the period of 31-January-2000- 30-March-07.

3. Impact of FII on CNX 100: CNX 100 is inversely related to FII for the period of 31-January-
03- 30-March-2007. But the extent of impact is low as co-efficient of correlation is -0.159.

4. Impact of FII on CNX IT: FII has inversely little significant relation with CNX IT, as the value of
correlation is -0.191. This does not mean that there is no relation at all between them. It shows the
absence of linear relation between the two variables but not a lack of relationship altogether.

5. Impact of FII on CNX NIFTY JUNIOR: CNX NIFTY JUNIOR directly related to FII for the
period of 31-Oct-1995- 30-March-2007. But the value of R is high so the degree of relation is also
high low. Standard error in this case is 1319.6 which is high compared to other standard errors
between FII and other stock indices.

6. Impact of FII on S&P CNX 500: S&P CNX 500 is also highly correlated with FII. In this case
again the degree of relation is high.


For objective 1:

The process of economic reforms which was initiated in July 1991 to liberalize and globalize the
economy had gradually opened up many sectors of its economy for the foreign investors. A large
number of changes that were introduced in the country’s regulatory economic policies heralded the
liberalization era of the FDI policy regime in India and brought about a structural breakthrough in the
volume of the FDI inflows into the economy maintained a fluctuating and unsteady trend during the
study period. It might be of interest to note that more than 50% of the total FDI inflows received by
India during the period from 1991-2007 came from Mauritius and the USA. The main reason for
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higher levels of investment from Mauritius was that the fact that India entered into a double taxation
avoidance agreement (DTAA) with Mauritius were protected from taxation in India. Among the
different sectors, the electrical and equipment had received the larger proportion followed by service
sector and telecommunication sector.

For objective 2:

According to findings and results, I concluded that FII did have high significant impact on the Indian
capital market. Therefore, the alternate hypothesis is accepted. S&P CNX NIFTY, BANK NIFTY,
CNX NIFTY JUNIOR, S&P CNX 500 showed positive correlation but CNX 100, CNX IT showed
negative correlation with FII. Also the degree of relation was high in all the case. It shows high degree
of linear relation between FII and stock index. This shows that there is relationship between them.

One of the reasons for high degree of any linear relation can also be due to the sample data. The data
was taken on monthly basis. The data on daily basis can give more positive results (may be). Also FII
is not the only factor affecting the stock indices. There are other major factors that influence the
bourses in the stock market. I also analyzed that FII had significant impact on the stock index for the
period starting from January 1991 to March 2007. The sample data available for other indices like
BANK NIFTY, CNX 100, S&P CNX 500 was low with just 51, 87 and 94 respectively observations
that have also hampered the results.


Date Monthly Monthly Monthly Monthly Monthly Monthly
closing closing closing closing closing closing
30-Apr-91 389.01 _ _ _ _ _
31-May-91 403.18 _ _ _ _ _
28-Jun-91 391.96 _ _ _ _ _
31-Jul-91 498.71 _ _ _ _ _
30-Aug-91 531.97 _ _ _ _ _
30-Sep-91 553.79 _ _ _ _ _
31-Oct-91 554.4 _ _ _ _ _
29-Nov-91 563.17 _ _ _ _ _
24-Dec-91 558.63 _ _ _ _ _
31-Jan-92 684.93 _ _ _ _ _
29-Feb-92 889.3 _ _ _ _ _
31-Mar-92 1261.65 _ _ _ _ _

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30-Apr-92 1105.55 _ _ _ _ _
29-May-92 826.16 _ _ _ _ _
26-Jun-92 855.84 _ _ _ _ _
31-Jul-92 767.94 _ _ _ _ _
28-Aug-92 850.86 _ _ _ _ _
30-Sep-92 938.14 _ _ _ _ _
30-Oct-92 809.87 _ _ _ _ _
30-Nov-92 726.38 _ _ _ _ _
24-Dec-92 761.31 _ _ _ _ _
29-Jan-93 785.28 _ _ _ _ _
27-Feb-93 774.18 _ _ _ _ _
31-Mar-93 660.51 _ _ _ _ _
30-Apr-93 622.42 _ _ _ _ _
31-May-93 656.16 _ _ _ _ _
30-Jun-93 667.5 _ _ _ _ _
30-Jul-93 706.83 _ _ _ _ _
30-Aug-93 799.65 _ _ _ _ _
30-Sep-93 827.13 _ _ _ _ _
29-Oct-93 817.18 _ _ _ _ _
26-Nov-93 988.88 _ _ _ _ _
24-Dec-93 1042.59 _ _ _ _ _
31-Jan-94 1246.59 _ _ _ _ _
28-Feb-94 1349.49 _ _ _ _ _
31-Mar-94 1177.11 _ _ _ _ _
29-Apr-94 1150.66 _ _ _ _ _
31-May-94 1187.19 _ _ _ _ _
30-Jun-94 1249.44 _ _ _ _ _
29-Jul-94 1278.54 _ _ _ _ _
31-Aug-94 1373.29 _ _ _ _ _
30-Sep-94 1290.53 _ _ _ _ _
31-Oct-94 1267.21 _ _ _ _ _
30-Nov-94 1245.75 _ _ _ _ _
23-Dec-94 1182.28 _ _ _ _ _
31-Jan-95 1071.23 _ _ _ _ _
28-Feb-95 1014.72 _ _ _ _ _
31-Mar-95 990.24 _ _ _ _ _
28-Apr-95 941.83 _ _ _ _ _
31-May-95 997.4 _ _ _ _ _
30-Jun-95 961.23 _ _ _ _ _
31-Jul-95 994.25 _ _ _ _ _
31-Aug-95 971.74 _ _ _ _ _
29-Sep-95 1011.97 _ _ _ _ _
31-Oct-95 988.26 _ _ _ 1167.18 _
30-Nov-95 862.1 _ _ _ 991.7 _
29-Dec-95 908.53 _ _ _ 1057.86 _
31-Jan-96 848.42 _ _ 922.44 989 _
29-Feb-96 992.51 _ _ 1023.85 1152.08 _
29-Mar-96 985.3 _ _ 1012.78 1151.15 _
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30-Apr-96 1114.36 _ _ 1144.16 1273.72 _
31-May-96 1089.92 _ _ 1068.8 1238.8 _
28-Jun-96 1122 _ _ 1122.31 1297.27 _
31-Jul-96 1042.81 _ _ 980.02 1198.72 _
30-Aug-96 1029 _ _ 973.15 1155.67 _
30-Sep-96 943.96 _ _ 878.9 1041.61 _
31-Oct-96 909.29 _ _ 849.73 1018.7 _
29-Nov-96 830.32 _ _ 811.14 960.45 _
31-Dec-96 899.1 _ _ 835.01 1035.07 _
31-Jan-97 972.65 _ _ 922.71 1067.8 _
28-Feb-97 998.65 _ _ 1046.02 1053.11 _
31-Mar-97 968.3 _ _ 1049.07 1032.95 _
30-Apr-97 1079.85 _ _ 1324.93 1104.65 _
30-May-97 1050.9 _ _ 1330.07 1116.15 _
30-Jun-97 1192.4 _ _ 1574.84 1163.9 _
31-Jul-97 1221.5 _ _ 2017.48 1322 _
29-Aug-97 1105 _ _ 2171.41 1255.15 _
30-Sep-97 1123.8 _ _ 2680.7 1261.55 _
30-Oct-97 1085.25 _ _ 2646.56 1246 _
28-Nov-97 1023.95 _ _ 2447.39 1159.2 _
31-Dec-97 1079.4 _ _ 2399.71 1189 _
30-Jan-98 963.45 _ _ 2324.85 1106.3 _
27-Feb-98 1060.75 _ _ 2755.26 1213.15 _
31-Mar-98 1116.9 _ _ 3422.16 1339.4 _
30-Apr-98 1159.35 _ _ 5383.9 1588.9 _
29-May-98 1063.15 _ _ 6919.05 1620.2 _
30-Jun-98 941.65 _ _ 5989.93 1342.2 _
31-Jul-98 931.4 _ _ 6513.97 1450.45 _
31-Aug-98 852.8 _ _ 6589.55 1483.65 _
30-Sep-98 904.95 _ _ 6581.99 1538.5 _
31-Oct-98 824 _ _ 6404.64 1419.75 _
30-Nov-98 817.75 _ _ 5894.12 1379.5 _
31-Dec-98 884.25 _ _ 7051.82 1519 _
29-Jan-99 966.2 _ _ 11244.07 1692.5 _
27-Feb-99 981.3 _ _ 12545.26 1773.45 _
31-Mar-99 1078.05 _ _ 14081.01 2069.2 _
30-Apr-99 978.2 _ _ 11357.5 1809 _
31-May-99 1132.3 _ _ 13318.37 1968.45 _
30-Jun-99 1187.7 _ _ 13575.23 1955.6 806.1
30-Jul-99 1310.15 _ _ 16489.64 2227.65 905.05
31-Aug-99 1412 _ _ 17911.89 2524.4 999.65
30-Sep-99 1413.1 _ _ 22528.22 2763.6 1025.1
29-Oct-99 1325.45 _ _ 20330.09 2588.55 972.6
30-Nov-99 1376.15 _ _ 25468.88 3057.45 1039.1
30-Dec-99 1480.45 _ _ 41742.03 3983.8 1205
31-Jan-00 1546.2 1148.89 _ 50705.62 4351.9 1316.25
29-Feb-00 1654.8 1075.15 _ 74537.88 4447.25 1486.65
31-Mar-00 1528.45 1106.83 _ 65240.55 3695.75 1322.9
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28-Apr-00 1406.55 1056.2 _ 45085.8 2788.65 1067.6
31-May-00 1380.45 1001.24 _ 32394.06 2448.7 967.6
30-Jun-00 1471.45 1087.18 _ 42411.04 2672.45 1073.7
31-Jul-00 1332.85 993.58 _ 34587.23 2464.95 959.7
31-Aug-00 1394.1 1003.07 _ 42979.41 2548.25 1026.45
29-Sep-00 1271.65 907.53 _ 36285.95 2369.3 925.4
31-Oct-00 1172.75 861.27 _ 32309.49 2234.3 851.05
30-Nov-00 1268.15 941.08 _ 33382.18 2477.25 920.9
29-Dec-00 1263.55 971.73 _ 29383.46 2426.05 912.85
31-Jan-01 1371.7 1094.09 _ 33896.98 2407.7 981.2
28-Feb-01 1351.4 1171.65 _ 30116.65 2141.45 950.53
30-Mar-01 1148.2 991.51 _ 17468.25 1601.8 754.2
30-Apr-01 1125.25 992.76 _ 17267.4 1525.2 746.2
31-May-01 1167.9 1034.54 _ 18982.64 1627.15 791
29-Jun-01 1107.9 986.95 _ 16302.17 1415.4 725.85
31-Jul-01 1072.85 960.83 _ 15972.81 1342.55 697.05
31-Aug-01 1053.75 939.57 _ 15724.37 1277.35 684.2
28-Sep-01 913.85 797.97 _ 10902.19 1084.4 583.55
31-Oct-01 971.9 875.15 _ 12139.67 1174.2 622.2
29-Nov-01 1067.15 928.1 _ 16778.78 1334.15 703.2
31-Dec-01 1059.05 868.61 _ 18282.17 1298.3 700.6
31-Jan-02 1075.4 917.79 _ 18362.8 1348.55 714.5
28-Feb-02 1142.05 1028.48 _ 17554.44 1495.55 767.6
28-Mar-02 1129.55 1033.58 _ 18557.8 1566.95 775.5
30-Apr-02 1084.5 1044.13 _ 17936.8 1607.75 771.3
31-May-02 1028.8 1039.46 _ 16828.27 1497.1 739.55
28-Jun-02 1057.8 1094.7 _ 16561.81 1617.4 772.85
31-Jul-02 958.9 1055.87 _ 13652.87 1455.85 706.65
30-Aug-02 1010.6 1073.63 _ 15543.52 1452.6 737.15
30-Sep-02 963.15 1045.23 _ 15273 1257.85 691
31-Oct-02 951.4 1011.86 _ 15702.7 1255.3 691.95
29-Nov-02 1050.15 1094.95 _ 18909.9 1337.1 741.55
31-Dec-02 1093.5 1226.5 _ 19073.4 1413.05 772.85
31-Jan-03 1041.85 1273.62 963.55 16624.71 1376.85 749.1
28-Feb-03 1063.4 1306.02 982.26 17109.16 1387.1 762
31-Mar-03 978.2 1265.19 902.42 14966.88 1259.55 701.35
30-Apr-03 934.05 1314.71 872.71 11351.13 1339.75 697.2
30-May-03 1006.8 1630.94 959.99 10993.4 1664.15 807.2
30-Jun-03 1134.15 1657.56 1073.41 13002.4 1783.7 894.5
31-Jul-03 1185.85 1807.94 1135.3 13675.94 2012.3 938.55
29-Aug-03 1356.55 1940.75 1296.31 15056.3 2275.25 1100.45
30-Sep-03 1417.1 2029.28 1361.52 17315.55 2456.95 1138.55
31-Oct-03 1555.9 2294.55 1491.08 18550.6 2656.15 1218.3
28-Nov-03 1615.25 2202.46 1551.99 20644.8 2801.2 1285.4
31-Dec-03 1879.75 2588.78 1819.59 23542.25 3405.7 1531.35
30-Jan-04 1809.75 2639.88 1760.02 21370.45 3367.65 1459.8
27-Feb-04 1800.3 2603.97 1749.02 20599.2 3330.6 1442.8
31-Mar-04 1771.9 2813.7 1731.29 19372.9 3392.05 1457.5
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30-Apr-04 1796.1 3059.79 1770.36 20687 3639.8 1507.55
31-May-04 1483.6 2243.9 1450.66 2042.15 2846.9 1226.55
30-Jun-04 1505.6 2256.12 1473.22 2115.2 2903.35 1248
30-Jul-04 1632.3 2332.29 1592.43 2269.2 3082.1 1351.45
31-Aug-04 1631.75 2345.16 1600.42 2340.15 3199 1377.2
30-Sep-04 1745.5 2505.7 1717.99 2496.2 3504.25 1478.75
29-Oct-04 1786.9 2466.96 1751.04 2667.15 3481.55 1502.05
30-Nov-04 1958.8 2997.66 1924.45 2996.5 3884.55 1653.2
31-Dec-04 2080.5 3497.36 2067.62 2936.9 4453.3 1804.9
31-Jan-05 2057.6 3429.6 2033.62 2849.4 4247.8 1768.25
28-Feb-05 2103.25 3676.5 2082.2 2919.05 4388.2 1827.4
31-Mar-05 2035.65 3536.64 2017.21 2923.15 4275.15 1772.85
29-Apr-05 1902.5 3162.21 1887.3 2539.75 4024.4 1688.65
31-May-05 2087.55 3467.72 2067.26 2933 4364.55 1834.85
30-Jun-05 2220.6 3638.4 2181.42 3072.1 4393.25 1906.2
29-Jul-05 2312.3 4361.15 2295.81 2985.95 4919.1 2027.4
31-Aug-05 2384.65 4062.6 2366.23 3177.15 5053 2126.35
30-Sep-05 2601.4 4622.1 2566.58 3296.5 5303.5 2274
31-Oct-05 2370.95 4003.85 2330.81 3211.95 4714.45 2067.8
30-Nov-05 2652.25 4298.2 2647.93 3533.95 5242 2306.15
30-Dec-05 2836.55 4534.2 2781.55 3906.9 5541.45 2459.2
31-Jan-06 3001.1 4617.6 2944.15 4010.3 5882.9 2585.95
28-Feb-06 3074.7 4579.05 3011.8 3972.9 5966.65 2658.95
31-Mar-06 3402.55 4661.5 3318.45 4352.9 6412.1 2910.35
29-Apr-06 3557.6 4549.8 3481.3 4341.85 6856 3064.7
31-May-06 3071.05 4123.55 2998.25 3869.65 5827.4 2635.25
30-Jun-06 3128.2 3708.9 3003.15 3957.55 5264.3 2562.5
31-Jul-06 3143.2 4078.8 3020.85 4113.55 5335.1 2562.55
31-Aug-06 3413.9 4594.85 3291.7 4445.6 5940.5 2807.95
29-Sep-06 3588.4 5276.25 3479.75 4540.5 6510.4 2988.25
31-Oct-06 3744.1 5588.7 3633.1 4888.95 6823.15 3114.55
30-Nov-06 3954.5 6198.3 3818.55 5267.85 6967.25 3280.45
29-Dec-06 3966.4 6008.75 3839.3 5432.25 7106.35 3295.05
31-Jan-07 4082.7 5953.95 3948.25 5535 7268.05 3393.1
28-Feb-07 3745.3 5240.3 3626.2 5129.6 6722.1 3107.75
30-Mar-07 3821.55 5308.5 3701.55 5180.7 6878.05 3145.35

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A number of websites, newspaper article annual reports of RBI, magazines etc.

7.1 Internet sites:


7.2 Journals:

a) ICFAI Journal: E.g. the ICFAI journal of public finance, issue- February, vol. VI.
b) Handbook of statistics on the Indian securities market 2008.

7.3 Books:

a) Foreign direct investment in India by Lata Chakravarthy.

b) FDI (issues in emerging economies) by K. Seethe Pathi.
c) Foreign institutional investors by G Gopal Krishna Murthy.

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