'Foreign Institutional Investor

Definition of 'Foreign Institutional Investor - FII'
An 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.

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Who are Foreign Institutional Investors (FIIs)?
Foreign Institutional investors (FIIs) are entities established or incorporated outside India and make proposals for investments in India. These investment proposals by the FIIs are made on behalf of sub accounts, which may include foreign corporates, individuals, funds etcetera. In order to act as a banker to the FIIs, the RBI has designated banks that are authorised to deal with them. The biggest source through which FIIs invest is the issuance of Participatory Notes (P-Notes), which are also known as Offshore Derivatives. Can FIIs invest in Indian companies? Yes, FIIs can invest in the stocks and debentures of the Indian companies. In order to invest in the primary and secondary capital markets in India, they have to venture through the portfolio investment scheme (PIS). According to RBI regulations, the ceiling for overall investment for FIIs is 24% of the paid up capital of the Indian company. The limit is 20% of the paid up capital in the case of public sector banks. However, if the board and the general body approves and passes a special resolution, then the ceiling of 24% for FII investment can be raised up to sectoral cap for that particular segment. In fact, recently Sebi allowed FIIs to invest in unlisted exchanges as well, which means both BSE and NSE (the unlisted bourses) can now allot shares to FIIs also. Who all can get registered as FIIs? There is a long list of entities that are eligible to get registered as FIIs such as pension funds, mutual funds, insurance companies, investment trusts, banks, university funds, endowments, foundations, sovereign wealth funds, hedge funds and charitable trusts. In fact, asset management companies, investment managers, advisors or institutional portfolio managers set up and/or owned by NRIs are also eligible to be registered as FIIs. The nodal point for FII registrations is Sebi and hence all FIIs must register themselves with Sebi and should also comply with the exchange control regulations of the central bank. Apart from being allowed to invest in securities in primary and secondary markets, FIIs can also invest in mutual funds, dated government securities, derivatives traded on a recognised stock exchange and commercial papers. Why are FIIs important for Indian mkts? FIIs are among the major sources of liquidity for the Indian markets. If FIIs are investing huge amounts in the Indian stock exchanges then it reflects their high confidence and a healthy investor sentiment for our markets. But with the current global financial turmoil and a liquidity and credit freeze in the international markets, FIIs have become net sellers (on a day to day basis). The entry of FIIs in India has brought mixed consequences for our markets, on one hand they have improved the breadth and depth of Indian

markets and on the other hand they have also become the major sources of speculation in testing times like these

Advantages and disadvantages of FII flows into a country

Advantages   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 hedging instruments. Also, it not only enhances competition in financial markets, but also improves the alignment of asset prices to fundamentals.   Improving capital markets. FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets.   Equity market development aids economic development. By increasing the availability of riskier long term capital for projec ts, and increasing firms‟ incentives to provide more information about their operations, FIIs can help in the process of economic 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. Disadvantages   Problems of Inflation: Huge amounts of FII fund inflow into the 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 country‟s 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

[3] Before the increase. While aspects of the increased quota seem likely to take business from Hong Kong. China granted $910 million worth of investment quotas to 11 foreign institutional investors in March 2013 The quotas.A. [7] Pursuant to "Regulation on Domestic Securities Investment by Qualified Foreign Institutional Investor" ,to qualify as a QFII.  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. and "Regulation on Domestic Securities Investment by Qualified Foreign Institutional Investor"(合格境外机构投资者境内证券投资管理办法). When money is injected into a country.7 billion to invest in China's capital markets under the QFII program. which is publicized on 24th Aug 2006. Development[edit source | editbeta] By the end of April 2011. Background[edit source | editbeta] Regulations of the QFII program were based on "Temporary Regulation on Domestic Securities Investment by Qualified Foreign Institutional Investor" ( 合格境外机构投资者境内证券投资管理暂行办法). the exchange rate for the country gaining the money strengthens. while the exchange rate for the country losing the money weakens. China had awarded a combined $41. whose fortunes get driven by the actions of the large FIIs. and came into effect on 1st Sep 2006. high interest rate investment opportunities. the banking institution will experience a shortage of funds. These investors scan the market for short-term. This creates problems for the small retail investor. If money is withdrawn on short notice. 103 licenced QFII investors had been granted a combined quota of $20. a pilot program in Wenzhou for domestic investors to invest abroad was considered a possible offset for the financial [4] center. the Qualified Foreign investment quota was increased from US$30 billion to US$80 billion. which was publicized on 5th Nov 2002 and ceased to be in effect on 1st Sep 2006.the stock market the downward path.  Hot Money: “Hot money” refers to funds that are controlled by investors who actively seek short -term returns. 2012. the candidate must: . In April. The QFII expansion was also followed quickly by the "approval of new ETF products that will be [5] denominated in offshore yuan (CNH) but will trade on the Hong Kong Stock Exchange".745 billion of QFII [6] quotas to 197 foreign institutions. Foreign access to China's yuan-denominated [2] "A" stocks are still limited. with quotas placed under the QFII program amounting to US$30 billion. “Hot money” can have economic and financial repercussions on countries and banks. the overall value of approved QFII and RQFII (offshore Renminbi QFII ) funds was only 0. IDG Capital Management (HK) Ltd and Cutwater Investor Services Corp. were awarded to overseas institutions including Generali Fund Management S. under the Qualified Foreign Institutional Investor (QFII) scheme.8% of total market capitalization and only US$25 billion of the US$30 billion quota was used. y the end of March 2013.

    have stable finance. and its home country or home area has signed Memorandum of Understanding(MOU) with CSRC. probably benefactor of the gymnasium in Athens.. In some African colonies in particular. the number of staffs meet the requirement set by the authority in its own country or area. the 4th century BC in Greece) sometimes led to the creation of revenues-producing capital which may be interpreted as an early form of charitable institution. at least. yet at the time the practice of privateevergetism (which dates to. Musée du Louvre. aqueducts were sometimes [2] financed in a similar fashion. In the South of Gaul. good credibility. and maintains effective supervision cooperation. late third or second century BC. candidate's home country has complete legal and supervision system. Custody banks    HSBC ICBC BoC  History[edit source | editbeta] Ancient Rome and medieval Islam[edit source | editbeta] Inscription honoring Aristoxénos. other requirements set by CSRC based on prudence. meet the minimum asset scale set by China Securities Regulatory Commission (CSRC). has healthy governing structure and complete internal control system. received no significant punishment in the last 3 years. Roman law ignored the concept of juristic person. part of the city's entertainment was financed by the revenue generated by shops and baking[1] ovens originally offered by a wealthy benefactor. . son of Demophon.

donating sometimes large sums of money to institutions became a common practice in medieval Western Europe. welfare [3] [4] and even the construction of monuments. Overview[edit source | editbeta] Financial participants market  Collective investment schemes  Credit unions . institutions solely owned 2% of the [8] arable land in England and Wales. The concept then might have been adopted by the emerging Islamic law. for instance. Alongside some Christian monasteries the waqfs created in the 10th century AD are amongst the longest standing charities in the world (see for instance the Imam Reza shrine). The importance of lay and religious institutional ownership in the pre-industrial European economy cannot be overstated. private investors pool their resources to pursue lottery tickets and tontine shares allowing them to spread risk and become some of the earliest speculative institutions known in the West. [9] by 1950. The waqf (charitable institution) became a cornerstone of the financing of education. they failed to attract a large share of the public's savings and. almhouses and other hospitals.The legal principle of juristic person might have appeared with the rise of monasteries in the early centuries of Christianity. waterworks. yet despite some success stories. In the process. In the 18th century. and the 17th [6] [7] century for France and the Dutch Republic ). New types of institutions emerged (banks. over the centuries those institutions acquired sizable estates and large fortunes in bullion. Before 1980[edit source | editbeta] Following several waves of dissolution (mostly during the Reformation and the Revolutionary period) the weight of the traditional charities in the economy collapsed. Following the collapse of the agrarian revenues. by 1800. Pre-industrial Europe[edit source | editbeta] Following the spread of monasteries. many of these institution moved away from rural real estate to concentrate on [5] bonds emitted by the local sovereign (the shift dates back to the 15th century for Venice. insurance companies). they commonly possessed 10 to 30% of a given region arable land. they owned only 7% of US equities and certainly even less in other countries.

In essence institutional investor.S. institutional investors may often participate in private placements of securities. Securities and Exchange Commission. Insurance companies   Investment banks Pension funds  Prime brokers  Trusts Finance series  Financial market   Participants Corporate finance   Personal finance Public finance    Banks and banking Financial regulation V  T  E Because of their sophistication. a private placement under Rule 506 ofRegulation D may be made to an "accredited investor" without registering the offering of securities with the U. For example. in which certain aspects of the securities laws may be inapplicable. in the United States. an accredited investor is defined in the rule as: .

a business in which all the equity owners are accredited investors. insurance company. Others like pension funds can predict long ahead when they will have to repay their investors allowing them to invest in less liquid assets such as private equities. Unsourced material may be challenged and removed. they do not have a phase of accumulation (active work life) followed by one of consumption (retirement). not formed to acquire the securities offered. whose purchases a sophisticated person makes. or general partner of the company selling the securities. This specificity has majors consequences in the eyes of economic theory. a director. executive officer. corporation. A famous example of this type of investors are US universities endowment funds. or joint net worth with the person's spouse. or small business investment company. a charitable organization. a natural person who has individual net worth. if a bank. Unlike individuals. as they cannot guess when they will have to repay their clients. Institutional investors as financial intermediaries[edit source | editbeta] Numerous institutional investors act as intermediaries between lenders and borrowers. Acting as savings pools. or partnership with assets exceeding $5 million. other institutions have an investment horizon extremely vast allowing them to invest in highly illiquid assets since they are unlikely to be forced to sell them before term. that exceeds $1 million at the time of the purchase.  a bank. or a trust with assets in excess of $5 million. business development company.(September 2011) By definition. Life cycle[edit source | editbeta] Institutional investors differ among each other but they all have in common the fact of not sharing the same life cycle as human beings. registered investment company (generally speaking. they need highly liquid assets which reduces their investment opportunities. Finally. institutional investors are opposed to individual actors on the financial markets. As such. a mutual fund).       Economic theory[edit source | editbeta] This section does not cite any references or sources. .000 in each of the two most recent years or joint income with a spouse exceeding $300. Their greater ability to monitor corporate behaviour as well to select investors profiles implies that they help diminish agency costs. a natural person with income exceeding $200. Economies of scale imply that they increase returns on investments and diminish the cost of capital for entrepreneurs. within the meaning of the Employee Retirement Income Security Act. insurance company. or registered investment adviser makes the investment decisions. and they do not die. an employee benefit plan. they have a critical importance in the functioning of the financial markets. they also play a critical role in guaranteeing a sufficient diversification of the investors' portfolios.000 for those years and a reasonable expectation of the same income level in the current year. or if the plan has total assets in excess of $5 million. hedge funds orcommodities. Here insurance companies differ from the rest of the institutional investors. Please help improve this section byadding citations to reliable sources.

14 billion. statutory agencies like the Securities and Exchange Board of India have prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs. In 2008. This expression is mostly used in emerging markets such [citation needed] as Malaysia and India. . with an estimated US$ 751. institutional investors are sometimes called foreign institutional investors (FIIs). In countries like India. FIIs [10] represented the largest institution investment category.Institutional-investor types[edit source | editbeta]          endowment fund hedge fund insurance companies investment banking investment trust mutual fund pension fund sovereign wealth fund unit trust and unit investment trust Globalization of financial markets[edssit source | editbeta] When considered from a strictly local standpoint.

127 4.438 93.236 53.765 45.811 142.467 30.334 168.179 -45.033 628.726 140.805 1.738 Debt 0 0 0 0 29 691 -867 453 -273 690 162 5.763 2.221 110.670 10. 2013 .881 41.127 4.759 -7.467 168.584 10.122 9.840 66.942 8.377 28.Financial Year INR crores Financial Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13* Total Equity 13 5.527 39.072 2.546 5.FII Investment .775 1.207 8.689 45.801 25.895 32.404 -47.796 6.958 -1.367 796.121 43.706 110.942 8.438 36.796 6.658 146.844 * As on March 31.317 49.933 8.267 -717 9.123 48.575 5.960 44.334 5.605 12.988 Total 13 5.

current account deficit-. pension and insurance and central banks of other countries. and USD 15 billion for longterm government papers.) Percentage allocated 100% Total no.294 3.touched a record high of 6.955. Finance Minister P Chidambaram had said.984 26.38 23.0281 16. Hit by high gold and petrol imports and slowdown in exports.655 47. The eligible investors for these two categories are FIIs.398 Corp Debt TOTAL LT 26. investors may invest in commercial papers only upto USD 3.110 The first category will consist of government securities of USD 25 billion which merges USD 10 billion for investment limit in short-term government papers.) Govt Old 1. "The above changes will come into effect from April 1.959 0 100% 49 50 2 0. eligible investors may invest in treasury bills only up to USD 5. including a sub-limit of USD 25 billion each for bonds of infrastructure sector and non-infrastructure sector.BIDDING DETAILS – FEBRUARY 20.919 2.959 36.5 1 2. In the other category.1 0.the difference between inflow and outflow of foreign currency-.232 Debt Govt Debt LT Corp Debt Old 33.) Amount left after auction (INR 0 Cr. of successful bids Total no. 2013.669 Total amount allocated (INR 1.845.173 122 131 78. The second category is for the corporate debt with a limit of USD 51 billion.2 5.010 3.667 33.5 billion within the limit of USD 25 billion.669 34.7 per cent in OctoberDecember period of 2012-13. of bids Highest bid in bps Lowest successful bid in bps Fee Amount (INR) 9 10 1. including Treasury Bills." it said. .925 0 100% 43 49 2 0. The Current Account Deficit (CAD) can be financed only through foreign inflows.447.379. 2013 Particulars Total Available Limit (INR Cr. and USD 1 billion for QFIs (Qualified Foreign Investors) in non-infrastructure sector. multilateral agencies.925 66.) Total amount bid for (INR Cr.5 billion within the limit of USD 51 billion.283. QFIs and Long terms investors registered with SEBI-Sovereign Wealth Funds (SWFs). In case of investment in G-secs category.177 66.866 4.919 Cr.866 0 100% 21 22 2.

it said. macro-economic requirements and a prudent off-shore and on-shore balance. demand from foreign investors. The Finance Ministry said in a separate statement that these sub-limits have been carved out based on the current holdings of such short term instruments by FIIs and have been provided so that existing investments are not adversely affected. it said the government will review the foreign investor limit in corporate bonds when 80 per cent of the current limit is taken up. based on utilisation levels. In order to allow large investors to plan their investments. the Non-Resident Indians are not subject to any limit for investment in Government Securities as well as corporate debt. the current SEBI auction mechanism allocating debt limits for corporate bonds will be replaced by the 'on tap system' currently in place for infrastructure bonds. .However. Because of the room created by unifying categories. it will enhance the limit on government bonds as and when needed. Further. it said. They will continue to be regulated as per existing guidelines.

Monthly FII Net Investment INR crores Month Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Total .2 163350.1 ABSTRACT Foreign institutional investors have gained a significant role in Indian stock markets.1 -347.1 19884 19215.6 3222 1180.1 -501.4 Total 26328.2 10015.3 10272. We attempted to explain the impact of foreign institutional investment on stock market and Indian economy.9 1792.8 3391.3 26792.1 8381. The dawn of 21st century has shown the real dynamism of stock market and the various benchmarking of sensitivity index (Sensex) in terms of its highest peaks and sudden falls.4 11069.5 3569.1 1681.2012* Equity 10357.5 127736.2 24463.7 10803.4 34989.9 35227.7 25212.2 622. Also attempts to understand the behavioral pattern of FII during the period of 2001 to 2010 and examine the volatility of BSE Sensex due to FII.5 7851. The data for the study uses the information obtained from the secondary resources like website of BSE sensex.9 19261.7 292.7 265. .5 13664. In this context present paper examines the contribution of foreign institutional investment in sensitivity index (Sensex).5 -4896.1 -1109.8 -6588.5 11364 9577.6 -3787.9 9869. Also attempts to present the correlation between FII and BSE sensex by the Karl Pearson‟ Coefficient of correlation test.2 Debt 15971.1 1704.

70 (Equity Instruments): 30 (Debt Instruments) • 100% DEB 100% investment has to be made in debt securities only . • EQUITY INVESTMENT 100% investments could be in equity related instruments or up to 30% could be invested in debt instruments i. access to cheap global credit. • It supplements domestic savings and investments.WHY FIIS REQUIRED? FIIs contribute to the foreign exchange inflow as the funds from multilateral finance institutions and FDI (Foreign direct investment) are insufficient.e. • And has also led to considerable amount of reforms in capital market and financial sector. • It leads to higher asset prices in the Indian market. Following are the some advantages of FIIs. INVESTMENTS BY FIIS There are generally two ways to invest for FIIs. • It lowers cost of capital.

Bonds C. received portfolio investment from foreigners in the form of foreign institutional investment in equities. and in 1993. Dated government securities D. . • Investment in government securities was increased to US$5 billion.B.“no person shall buy. Partly Convertible Debentures etc. • Allowed foreign individuals and hedge funds to directly register as FII. Debentures (Non Convertible Debentures. whether listed or not. But in the course of time. HISTORY OF FII India opened its stock market to foreign investors in September 1992. • Simplified registration norms. sell or otherwise deal in securities as a Foreign Institutional Investor unless he holds a certificate granted by the Board under these regulations”. Treasury Bills E. SEBI has simplified many terms such as:• The ceiling for overall investment of FII was increased 24% of the paid up capital of Indian company. there were terms and conditions which restricted many FIIs to invest in India. PROCEDURE FOR REGISTRATION: The Procedure for registration of FII has been given by SEBI regulations. Initially. Other Debt Market Instruments It should be noted that foreign companies and individuals are not be eligible to invest through the 100% debt route. It states. An application for grant of registration has to be made in Form A. Units of schemes floated by the Unit Trust of India and other domestic mutual funds.) B. professional competence and financial soundness. in order to attract more investors. This has become one of the main channels of FII in India for foreigners. 1995. Warrants 100% DEBT ROUTE: In case of Debt Route the FIIs can invest in the following instruments: A. the format of which is provided in the SEBI (FII) Regulations. THE ELIGIBILITY CRITERIA FOR APPLICANT SEEKING FII REGISTRATION IS AS FOLLOWS: Good track record. C.

A copy of the application form is sent by SEBI to RBI along with their 'No Objection' so as to enable RBI to grant necessary permission under FEMA. • Security receipts REGULATION RELATING TO FII OPERATION • Investment by FIIs is regulated under SEBI (FII) Regulations. 1999 (FEMA) from the RBI.20 dated May 3. ELIGIBLE SECURITIES A FII can make investments only in the following types of securities: • Securities in the primary and secondary markets including shares. 1995 and Regulation 5(2) of FEMA Notification No. • FIIs are required to apply to SEBI in a common application form in duplicate. SEBI acts as the nodal point in the entire process of FII registration. to. • The applicant must be a „fit and proper‟ person. whether listed on a recognized stock exchange or not. • Legally permitted to invest in securities outside country or its incorporation/establishment. • Units of schemes floated by domestic mutual funds including Unit Trust of India. 2000. debentures and warrants of unlisted. and units of scheme floated by a Collective Investment Scheme. 2009. • Permission under the provisions of the Foreign Exchange Management Act.• Regulated by appropriate foreign regulatory authority in the same capacity/cat egory where registration is sought from SEBI. • Local custodian and designated bank to route its transactions. • Commercial paper. FIIs can now invest in interest rate futures that were launched at the National Stock Exchange (NSE) on 31st August. .be-listed companies or companies listed on a recognized stock exchange. • Government Securities • Derivatives traded on a recognized stock exchange – like futures and options. • RBI approval under FEMA enables a FII to buy/sell securities on stock exchanges and open foreign currency and Indian Rupee accounts with a designated bank branch.

Indian Companies can raise the above mentioned 24% ceiling to the Sectoral Cap / Statutory Ceiling as applicable by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by its General Body. Indian Companies can raise the above mentioned 24% ceiling to the Sectoral Cap / Statutory Ceiling as applicable by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by its General Body. Further. However. sovereign wealth funds. it is also possible for an FII to declare itself a 100% debt FII in which case it can make its entire investment in debt instruments. in 2008 amendments were made to attract more foreign investors to register with SEBI. these amendments are: • The definition of “broad based fund” under the regulations was substantially widened allowing several more sub accounts and FIIs to register with SEBI. foreign individual. • RBI approval under FEMA enables a FII to buy/sell securities on stock exchanges and open foreign currency and Indian Rupee accounts with a designated bank branch. • Several new categories of registration viz. • Also the application fee for foreign investors applying for registration has recently been reduced by 50% for FIIs and sub accounts Also. A copy of the application form is sent by SEBI to RBI along with their 'No Objection' so as to enable RBI to grant necessary permission under FEMA.• FIIs are required to allocate their investment between equity and debt instruments in the ratio of 70:30.aijsh. lending and borrowing of Indian securities from February 1. ISSN 2249 7323 Journal of Asian Research Consortium 35 http://www. However. • All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. foreign corporate etc.2 Issue 4. were introduced. AJRBF Asian Journal of Research in Banking and Finance Vol. it is also possible for an FII to declare itself a 100% debt FII in which case it can make its entire investment in debt instruments. 2008. • Registration once granted to foreign investors was made permanent without a need to apply for renewal from to time thereby substantially reducing the administrative burden. institutional investors including FIIs and their sub-accounts have been allowed to undertake short-selling. • FIIs are required to allocate their investment between equity and debt instruments in the ratio of 70:30. in 2008 amendments were made to attract more foreign investors to register with . Further. • All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. April 2012.org • FIIs are required to apply to SEBI in a common application form in duplicate.

3 Anglo. • To study the behavioral pattern of FII in India during 2000 to 2010. OBJECTIVES • To get the knowledge of stock market. 14 Classic Financial Services & Enterprises Ltd. 12 Ceenik Exports (India) Ltd. sovereign wealth funds.India Jute Mills Co. Ahmedabad. 16 Crest Communication Ltd. 13 Cifco Finance Ltd. 2 Amar Investments Ltd. these amendments are: • The definition of “broad based fund” under the regulations was substantially widened allowing several more sub accounts and FIIs to register with SEBI. 5 Ashima Syntex Ltd. Infrastructure Ltd) Mumbai.. 2008. • To know the volatility of BSE Sensex due to FIIs. foreign corporate etc. 2010) Upto 24% 1 Alembic Chemical Works Co.SEBI. November 29. Ltd. • Several new categories of registration viz. • Registration once granted to foreign investors was made permanent without a need to apply for renewal from time to time thereby substantially reducing the administrative burden. Ahmedabad. HYPOTHESIS • There is close correlation between BSE Sensex volatility and FIIs. foreign individual. • To find out the relationship between the FIIs investment and stock market.f. Mumbai. List of companies List of companies which have raised the ceiling from 10% in respect of NRIs investments under PIS (w. lending and borrowing of Indian securities from February 1.e. . Ltd. 6 Ashoka Viniyoga Ltd. (Reliance Ind.. 7 Bharat Nidhi Ltd. 15 CPPL Ltd. institutional investors including FIIs and their sub-accounts have been allowed to undertake short-selling. • Also the application fee for foreign investors applying for registration has recently been reduced by 50% for FIIs and sub accounts Also. Calcutta. 10 Burr Brown (India) Ltd 11 Camac Commercial Company Ltd. 8 BLB Shares & Financial Services Ltd 9 BPL Ltd. Calcutta. 4 Arvind Mills. were introduced.

C. 20 Dharani Sugars & Chemicals Ltd These impacts made the Indian stock market more attractive to FII & also domestic investors. IMPROVING CAPITAL MARKETS: FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. The impact of FII is so high that whenever FII tend to withdraw the money from market. 19 DCM Shriram Consolidated Ltd.17 CRISIL 18 DCM Ltd. By increasing the . the domestic investors fearful and they also withdraw from market.

availability of riskier long term capital for projects. and increasing firms‟ incentives to supply more information about them. ensuring the rights of shareholders is a problem that needs to be addressed efficiently in any economy. The FII buying pushes the stocks up and their selling shows the stock market the downward path. leveraged control or market control via debt. high interest rate investment opportunities. The term FII is used most commonly in India to refer to outside companies investing in the financial markets of India. board representation is supplemented by direct contacts by institutional investors. NEGATIVE IMPACT: If we see the market trends of past few recent years it is quite evident that Indian equity markets have become slaves of FIIs inflow and are dancing to their tune. Information asymmetries and incomplete contracts between share-holders and management are at the root of the agency costs. When money is injected into a country. who. This situation leads to excess liquidity thereby leading to inflation where too much money chases too few goods. and the RBI pumps the amount of Rupee in the market as a result of demand created. BSE SENSEX AND FII INVESTMENT CORRELATION Sensex is the commonly used name for the Bombay Stock Exchange Sensitive Index – an index Composed of 30 of the largest and most actively traded stocks on the Bombay Stock Exchange (BSE). the exchange rate for the country gaining the money strengthens. direct control via equity. B. whose fortunes get driven by the actions of the large FIIs. Among the four models of corporate control takeover or market control via equity. And this dependence has to a great extent caused a lot of trouble for the Indian economy. Some of the factors are: A. 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. and direct control via debt or relationship banking-the third model. These investors scan the market for short-term. If the cap on FII is high then they can bring in huge amounts of funds in the country‟s stock markets and thus have great influence on the way the stock markets behaves. the FIIs can help in the process of economic development. With boards often captured by managers or passive. improve corporate governance. while the exchange rate for the country losing the money weakens. PROBLEM TO SMALL INVESTORS: The FIIs profit from investing in emerging financial stock markets. This creates problems for the small retail investor. . the banking institution will experience a shortage of funds. going up or down. D. In this third model. by contributing to better understanding of firms‟ operations. POTENTIAL CAPITAL OUTFLOWS: “Hot money” refers to funds that are controlled by investors who actively seek short-term returns. Incentives for shareholders to monitor firms and enforce their legal rights are limited and individuals with small share-holdings often do not address the issue since others can free-ride on their endeavor. D. “Hot money” can have economic and financial repercussions on countries and banks. In country like India. C. INFLATION: Huge amounts of FII fund inflow into the country creates a lot of demand for rupee. Bad corporate governance makes equity finance a costly option. IMPROVED CORPORATE GOVERNANCE: Good corporate governance is essential to overcome the principal-agent problem between share-holders and management. If money is withdrawn on short notice. which is known as corporate governance movement. has institutional investors at its core. FIIs constitute professional bodies of asset managers and financial analysts. FII investment is frequently referred to as hot money for the reason that it can leave the country at the same speed at which it comes in.

April 2012.914.663. Asian Journ Vol.397 41. (TABLE 02) BSE SENSEX AND FII (IN RS CR.00 50.464 87.5 2006 13.509 179.987.647 -41.786 40.286 80.262 12.5 2009 17.00 250.972 6.6 2010 20.00 150.00 nal of Research i 4.statutory agencies like SEBI have prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs.9 2003 5.602 42.494.1 2005 9.00 100.) Years Sensex Value (points) Net Investment of FII 2000 3.6 This table shows the relationship between Sensex value and FII investment.215. IS 00 0 00 00 00 00 00 2000 200 n Banking and F SSN 2249 7323 01 2002 2003 FII inv FII inv Finance 2004 2005 2 vestment an vestment (in Rs 2006 2007 200 nd Sensex R s cr.153.8 2008 9.674.8 2002 3.838 35.677.9 2001 3.00 200.589.2 2007 20.510.377 3.) 08 2009 2010 Relationship Sensex Val .049.2 Issue •]50.8 2004 6.

20 7.397 1.688.621.10 6.18 172795757.18 2004 6.84 179.262 -7.82 1063791714 302322558.786 2.049.989.494.64 40.80 .18 1281939305 277654255.602 4.48 8012842130 122616934.80 13.7 2008 9.145.249.709.286 9.60 131.78 59440707.44 35.84 87.514.674.6 482.80 32.615.375.04 3.677.620 2623752.04 42.64 80.0 p ue (points) ( TABLE 03) FII & BSE SENSEX CORRELATION Years Sensex value(X) Deviation(dx) 11016.492 90101860.60 39.987.50 6.8 Standard Deviation FII investment(Y) Deviation(dy) 48298.168 0 394568785.377 7.663.48 44029594.01 27591970.179 26819969.804.22 2005 9.415 19490459.78 2007 20.640 58366544.215.83 10748150.62 17259553530 1247043660 Total 110.635.50 89.62 1575186558 255880470.370 1876352.90 44.04 41.914.80 35.464 6.9 2010 20.04 12.647 1.447 41566387.08 1991040780 340896127 2003 5.65 21349922.509 9.5 2006 13.755 60136923.589.88 39061000.04 41.98 Standard Deviation dxdy 2001 3.838 5.2 68076258.153.269 85918068.7 2009 17.1 2002 3.769 7668468.

00 31499681077 2631480463 X N 11016.‡” N .0.6 10 = 6281.8 ó ‡”d x N ó 394568785. The Pearson correlation values indicate positive correlation between the foreign institutional investments and the movement of sensex ( pearson‟ correlation value is ( 0.80 10 = 48298.471051 Y fyN 482.746424196 It has been founded by the study ( Table: 3) that BSE sensex and foreign institutional investment has followed a close relationship.989.746424196 ).98 ó ‡”d y N ó 31499681077 10 = 56124. =0. .57668 Karl Pearson‟ coefficient of Correlation r ‡” N ‡” N .