You are on page 1of 67

A PROJECT REPORT ON

IMPACT OF FIIs AND MUTUAL FUNDS ON


THE INDIAN STOCK MARKET

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS


FOR MASTER OF MANAGEMENT STUDIES

BY
MISS KHUSHBOO DAMANI
MMS II (FINANCE - 21)
2009-11

UNDER THE GUIDANCE OF


PROF. BALASUBRAMANIAN

EXTERNAL GUIDE
MR. RAKESH PATEL

LALA LAJPATRAI INSTITUTE OF MANAGEMENT


UNIVERSITY OF MUMBAI
MAHALAXMI, MUMBAI 400 034

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

STUDENTS DECLARATION

I hereby declare that this dissertation submitted in partial fulfillment of the requirement for the
award of Master of Management Studies (MMS) of the University of Mumbai is my original
work and has not been submitted for award of any other degree or diploma fellowship or other
similar title or prizes.
I further certify that I have no objection and grant the rights to LLIM to publish any chapter or
project if they deem fit in journals or magazines and newspaper etc. without my permission.

Name: Khushboo Damani


Class: MMS II (Finance)
Batch: 2009-2011
Roll No.: 21
Date: 10/03/2011
Place: Mumbai

Signature

(Khushboo Damani)

MMS II SEM IV
2

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

PROJECT GUIDE CERTIFICATE FORM

I, KHUSHBOO DAMANI, the undersigned Roll No.21 studying in the Second Year of MMS is
doing my project work under the guidance of Prof. Balasubramanian wish to state that I have
met my internal guide on the following dates mentioned below for Project Guidance:-

Sr. No.

Date

Signature of the
Internal Guide

______________________

__________________________

Signature of the Candidate

Signature of Internal Guide

MMS II SEM IV
3

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

PROJECT GUIDE CERTIFICATE FORM

This is to certify that the dissertation submitted in partial fulfillment of the requirement for the
award of MMS of the University of Mumbai is a result of the bonafide work carried out by
Miss. Khushboo Damani under my supervision and guidance. No part of this report has been
submitted for award of any other degree, diploma fellowship or other similar titles or prizes. The
work has also not been published in any scientific journals/ magazines.

Date: 05/03/2011

Name: Khushboo Damani

Place: Mumbai

Roll No.: 21

------------------------------

---------------------------

Dr. V. B. Angadi

Prof Balasubramanian

(Director, LLIM)

(Project Guide)

MMS II SEM IV
4

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

EXTERNAL GUIDE CONSENT LETTER

MMS II SEM IV
5

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

ACKNOWLEDGEMENT

This report involved the efforts of lot of people. I would like to firstly start by thanking my
internal guide from the Lala Lajpathrai Institute of Management Prof Balasubramanian who
firstly went through my synopsis and later approved the topic.

I wish to express my sincere thanks and deep sense of gratitude towards my respected guide Mr.
Rakesh Patel. I am highly indebted to him for his esteemed and inspiring guidance and constant
encouragement.
In addition, I would like to thank the respondents who participated in the interviews.
I am confident that this report will prove useful to everybody in some or the other way.

KHUSHBOO
DAMANI

MMS II SEM IV
6

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

EXCUETIVE SUMMARY

This project deals with the impact of the foreign institutional investors and the domestic
institutional investors on the Indian Stock Market.
An important feature of the development of stock market in India in the last 15 years has been
the growing participation of institutional Investors, both foreign institutional investors and the
Indian mutual funds combined together, the total assets under their management amounts to
almost 18% of the entire market capitalization. This report examines the role of these investors in
Indian stock markets and finds that the market movement can be explained using the direction of
the funds flow from these investors.
I present empirical evidence on the impact of foreign institutional investment flows on stock
market volatility in India. I have analyzed the net purchases and sales of equities by foreign
institutional investors (FIIs). The evidence does support the hypothesis that foreign institutional
investors and the domestic institutional investors destabilize prices in the Indian Stock Market.
This study has been carried out by collecting information from various secondary sources such as
the Internet, Magazines, and News Papers.

MMS II SEM IV
7

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

TABLE OF CONTENTS
SR.NO

1.
2.
3.
4.
5.
6.
7.
8.
9.

TOPIC
Introduction
A brief about important institutions
Market Basics
About Mutual Funds
Advantages of investing in Mutual Fund
Risk Factors of Mutual Funds
Future of Mutual Funds in India
Foreign Institutional Investors
Foreign Institutional Investment in India

PAGE NO.
9
14
20
27
32
35
37
40
43

10.

Influence Of Fiis On Indian Stock Market

45

11.

A Case Study To Show The Impact Of Fii Activity On The Price


Of A Stock

51

12.
13.

Primary Findings

58
62

Conclusion

MMS II SEM IV
8

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

LIST OF TABLES
SR.NO

TABLES/GRAPHS

PAGE NO.

1.
2.
3.
4.
5.
6.
7.
8.
9.

Market Capitalization Of India And Other Countries


Funds Mobilization Of Mutual Fund
Gross Mutual Fund Mobilization
How Mutual Fund Operates
Assets Under Management
Net Resources Mobilized By Mf
10 Biggest Falls Of Stock Market
Net Investments of FII from 2003-08
FIIs Gross Purchases & Sales from 2003-08

10
28
30
31
38
39
45
46
47

10.

FII's Percentage Change in Investment

48

11.

Net Investments Of Fii (Month Wise)


Historical Price Chart Historical Price Chart Of Vakrangee

50

12.

41

Software
13.

Share Holding Pattern (Old) Of Vakrangee Software

54

14.

Share Holding Pattern (New) Of Vakrangee Software

54

15.

Are You Bullish Or Bearish On Indian Stock Market

58

16.

If You Are An Investor What Induces You To Invest In A Particular

59

Stock?
17.

According To You, What Are The Factors Leading Indian Stock

59

Market To Rise?
18.

According To You Have The FII's And The Mutual Funds

60

Dominated The Indian Stock Market?

MMS II SEM IV
9

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

INTRODUCTI
ON

MMS II SEM IV
10

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

INTRODUCTION
Brief History of Stock Exchanges: As per the records available the world's foremost marketplace, New York Stock Exchange
(NYSE), started its trading under a tree (now known as 68 Wall Street) over 200 years ago?
Similarly, India's premier stock exchange Bombay Stock Exchange (BSE) can also trace back its
origin to as far as 125 years when it started as a voluntary non-profit making association. They
say it was under a tree that it all started in 1875.Bombay Stock Exchange (BSE) was the major
exchange in India till 1994.National Stock Exchange (NSE) started operations in 1994.
An important early event in the development of the stock market in India was the formation of
the native share and stock brokers 'Association at Bombay in 1875, the precursor of the present
day Bombay Stock Exchange. This was followed by the formation of associations/exchanges in
Ahemedabad (1894), Calcutta (1908), and Madras (1937). In addition, a large number of
ephemeral exchanges emerged mainly in buoyant periods to recede into oblivion during
depressing times subsequently.
Stock exchanges are inter-woven in the fabric of a nation's economic life. Without a stock
exchange, the saving of the community- the economic progress and productive efficiency- would
remain underutilized. The task of mobilization and allocation of savings could be attempted in
the old days by a much less specialized institution than the stock exchanges. But as business and
industry expanded and the economy assumed more complex nature, the need for 'permanent
finance' arose. Entrepreneurs needed money for long term whereas investors demanded liquidity
the facility to convert their investment into cash at any given time. The answer was a ready
market for investments and this was how the stock exchange came into being.
With over 20 million shareholders, India has the third largest investor base in the world after the
USA and Japan. Over 9600 companies are listed on the stock exchanges, which are serviced by
approximately 9400 stockbrokers. The Indian capital market is significant in terms of the degree
of development, volume of trading and its tremendous growth potential.
MMS II SEM IV
11

Project Report On
Market

Sr.No
1
2
3
4
5
6
7
8
9
10

Impact of Mutual Funds & FIIs on Indian Stock

Country
USA
Japan
United Kingdom
China
France
Hong Kong
Germany
Canada
Switzerland
India

Market cap (US$ billion)


17,923
4,615
3,722
3,059
2,653
2,180
1,976
1,620
1,207
1,090

India has emerged as the worlds 10th largest equity market after it added several companies to
the billion dollar club in terms of capitalization, taking the total to 81 companies. India has
become the third largest Asian market (excluding Japan and Australia) after having toppled
Korea, China and Singapore that have 80, 50 and 47 firms with billion-dollar market
capitalization respectively. India is also inching closer to outpacing Taiwan that has 84 such
companies but lags far behind Hong Kong which has 107, the highest in Asia.
MEANING OF STOCK EXCHANGE
Stock exchange means anybody of individuals, whether incorporated or not, constituted for the
purpose of regulating or controlling the business of buying, selling or dealing in securities. These
securities include: 1) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like
nature in or of any incorporated company or other body corporate.
2) Government securities.
3) Rights or interests in securities.

MMS II SEM IV
12

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

NAMES OF THE STOCK EXCHANGES IN INDIA


1. Bombay stock exchange,
2. Ahemedabad share and stock brokers association,
3. Calcutta stock exchange association Ltd,
4. Delhi stock exchange association Ltd,
5. Madras stock exchange association Ltd,
6. Indore stock brokers association Ltd,
7. Banglore stock exchange,
8. Hyderabad stock exchange,
9. Cochin stock exchange,
10. Pune stock exchange,
11. U.P.stock exchange,
12. Ludhiana stock exchange,
13. Jaipur stock exchange Ltd,
14. Gauhati stock exchange Ltd,
15. Manglore stock exchange,
16. Maghad stock exchange Ltd, Patna,
17. Bhuvaneshwar stock exchange association Ltd,
18. Over the counter exchange of India, Bombay,
19. Saurastra kuth stock exchange Ltd,
20. Vadodara stock exchange Ltd,
21. Coimbatore stock exchange Ltd,
22. The Meerut stock exchange,
23. National stock exchange,
24. Integrated stock exchange
In general, the financial market divided into two parts, Money market and capital market.
Securities market is an important, organized capital market where transaction of capital is
facilitated by means of direct financing using securities as a commodity. Securities market can be
divided into a primary market and secondary market.

MMS II SEM IV
13

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

PRIMARY MARKET
The primary market is an intermittent and discrete market where the initially listed shares are
traded first time, changing hands from the listed company to the investors. It refers to the process
through which the companies, the issuers of stocks, acquire capital by offering their stocks to
investors who supply the capital. In other words primary market is that part of the capital
markets that deals with the issuance of new securities. Companies, governments or public sector
institutions can obtain funding through the sale of a new stock or bond issue. This is typically
done through a syndicate of securities dealers. The process of selling new issues to investors is
called underwriting. In the case of a new stock issue, this sale is called an initial public offering
(IPO). Dealers earn a commission that is built into the price of the security offering, though it can
be found in the prospectus.
SECONDARY MARKET
The secondary market is an on-going market, which is equipped and organized with a place,
facilities and other resources required for trading securities after their initial offering. It refers to
a specific place where securities transaction among many and unspecified persons is carried out
through intermediation of the securities firms, i.e., a licensed broker, and the exchanges, a
specialized trading organization, in accordance with the rules and regulations established by the
exchanges.
NSE was floated by major banks and financial institutions. It came as a result of Harshad Mehta
scam of 1992. Contrary to popular belief the scam was more of a banking scam than a stock
market scam. The old methods of trading in BSE were people assembling on what as called a
ring in the BSE building. They had a unique sign language to communicate apart from all the
shouting. Investors weren't allowed access and the system was opaque and misused by brokers.
The shares were in physical form and prone to duplication and fraud.
NSE was the first to introduce electronic screen based trading. BSE was forced to follow suit.
The present day trading platform is transparent and gives investors prices on a real time basis.
MMS II SEM IV
14

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

With the introduction of depository and mandatory dematerialization of shares chances of fraud
reduced further. The trading screen gives you top 5 buy and sell quotes on every scrip.
A typical trading day starts at 9 ending at 3.30. Monday to Friday. BSE has 30 stocks which
make up the Sensex .NSE has 50 stocks in its index called Nifty. FII s (Foreign Institutional
Investors), Banks, Financial Institutions, and Mutual Funds are biggest players in the market.
Then there are the retail investors and speculators. The last ones are the ones who follow the
market morning to evening; Market can be very addictive like blogging, social networking sites
though stakes are higher in the former.
STRUCTURE AND SIZE OF THE MARKETS
Today India has two national exchanges, the Bombay Stock Exchange (BSE) and the National
Stock Exchange (NSE). Each has fully electronic trading platforms with around 9400
participating broking outfits. Foreign brokers account for 29 of these.
There are some 9600 companies listed on the respective exchanges with a combined market
capitalization near $125.5bn.

MMS II SEM IV
15

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

A BRIEF ABOUT THE IMPORTANT INSTITUTIONS


SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
The capital markets in India are regulated by the Securities and Exchange Board of India (SEBI)
under the provisions of the Securities Contracts (Regulations) Act, 1956 and Securities and
Exchange Board of India Act, 1922. SEBI has issued detailed guidelines for capital issues,
disclosure by public companies and investor protection.
Under the SEBI Act, 1992, the SEBI has been empowered to conduct inspection of stock
exchanges. The SEBI has been inspecting the stock exchanges once every year since 1995-96.
During these inspections, a review of the market operations, organizational structure and
administrative control of the exchange is made to ascertain whether:
1) The exchange provides a fair, equitable and growing market to investors.
2) The exchange's organization, systems and practices are in accordance with the Securities
Contracts (Regulation) Act (SC(R) Act), 1956 and rules framed there under.
3) The exchange has implemented the directions, guidelines and instructions issued by the
SEBI from time to time.
During the year 1997-98, inspection of stock exchanges was carried out with a special focus on
the measures taken by the stock exchanges for investor's protection. Stock exchanges were,
through inspection reports, advised to effectively follow-up and redress the investors' complaints
against members/listed companies. The stock exchanges were also advised to expedite the
disposal of arbitration cases within four months from the date of filing.
During the earlier years' inspections, common deficiencies observed in the functioning of the
exchanges were delays in post trading settlement, frequent clubbing of settlements, delay in
conducting auctions, inadequate monitoring of payment of margins by brokers, non-adherence to
Capital Adequacy Norms etc. It was observed during the inspections conducted in 1997-98 that
there has been considerable improvement in most of the areas, especially in trading, settlement,
collection of margins etc.
MMS II SEM IV
16

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

The basic objectives of the Board were identified as:

To protect the interests of investors in securities,

To promote the development of Securities Market,

To regulate the securities market,

For matters connected therewith or incidental thereto.

Since its inception SEBI has been working targeting the securities and is attending to the
fulfillment of its objectives with commendable zeal and dexterity. The improvements in the
securities markets like capitalization requirements, margining, establishment of clearing
corporations etc. reduced the risk of credit and also reduced the market.
SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the
eligibility criteria, the code of obligations and the code of conduct for different intermediaries
like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers,
credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and
risk management systems for Clearing houses of stock exchanges, surveillance system etc. which
has made dealing in securities both safe and transparent to the end investor.
Another significant event is the approval of trading in stock indices (like S&P CNX Nifty &
Sensex) in 2000.
A market Index is a convenient and effective product because of the following reasons:

It acts as a barometer for market behavior,

It is used to benchmark portfolio performance,

It is used in derivative instruments like index futures and index options,

It can be used for passive fund management as in case of Index Funds.

MMS II SEM IV
17

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

Two broad approaches of SEBI is to integrate the securities market at the national level, and also
to diversify the trading products, so that there is an increase in number of traders including
banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact
through the Exchanges. In this context the introduction of derivatives trading through Indian
Stock Exchanges permitted by SEBI in 2000 AD is a real landmark.
BOMBAY STOCK EXCHANGE:
Of the 22 stock exchanges in the country, Mumbai's (earlier known as Bombay), Bombay Stock
Exchange is the largest, with over 6,000 stocks listed. The BSE accounts for over two thirds of
the total trading volume in the country. Established in 1875, the exchange is also the oldest in
Asia. Among the twenty-two Stock Exchanges recognized by the Government of India under the
Securities Contracts (Regulation) Act, 1956, it was the first one to be recognized and it is the
only one that had the privilege of getting permanent recognition ab-initio.
Approximately 70,000 deals are executed on a daily basis, giving it one of the highest per hour
rates of trading in the world. There are around 3,500 companies in the country which are listed
and have a serious trading volume. The market capitalization of the BSE is Rs.5 trillion. The
BSE `Sensex' is a widely used market index for the BSE.
The main aims and objectives of the BSE are to provide a market place for the purchase and sale
of security evidencing the ownership of business property or of a public or business debt. It aims
to promote, develop and maintain a well-regulated market for dealing in securities and to
safeguard the interest of members and the investing public having dealings on the Exchange. It
helps industrial development of the country through efficient resource mobilization. To establish
and promote honorable and just practices in securities transactions
BSE SENSEX
The BSE Sensex is a value-weighted index composed of 30 companies with the base April 1979
= 100. It has grown by more than four times from January 1990 till date. The set of companies in
the index is essentially fixed. These companies account for around one-fifth of the market
capitalization of the BSE.
MMS II SEM IV
18

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

NATIONAL STOCK EXCHANGE OF INDIA


The National Stock Exchange of India Limited has genesis in the report of the High Powered
Study Group on Establishment of New Stock Exchanges, which recommended promotion of a
National Stock Exchange by financial institutions (FIs) to provide access to investors from all
across the country on an equal footing. Based on the recommendations, NSE was promoted by
leading Financial Institutions at the behest of the Government of India and was incorporated in
November 1992 as a tax-paying company unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in
April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June
1994. The Capital Market (Equities) segment commenced operations in November 1994 and
operations in Derivatives segment commenced in June 2000.
STANDARD & POOR (S&P) CNX Nifty
S&P CNX Nifty is a well-diversified 50 stock index accounting for 23 sectors of the economy. It
is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives
and index funds.
S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which
is a joint venture between NSE and CRISIL. IISL is India's first specialized company focused
upon the index as a core product. IISL have a consulting and licensing agreement with Standard
& Poor's (S&P), who are world leaders in index services.
The average total traded value for the last six months of all Nifty stocks is approximately 58% of
the traded value of all stocks on the NSE

MMS II SEM IV
19

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

Nifty stocks represent about 60% of the total market capitalization as on March 31, 2005.
Impact cost of the S&P CNX Nifty for a portfolio size of Rs.5 million is 0.07% S&P CNX Nifty
is professionally maintained and is ideal for derivatives trading.

MMS II SEM IV
20

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

RESERVE BANK OF INDIA


India's Central Bank - the RBI - was established on 1 April 1935 and was nationalized on 1
January 1949. Some of its main objectives are regulating the issue of bank notes, managing
India's foreign exchange reserves, operating India's currency and credit system with a view to
securing monetary stability and developing India's financial structure in line with national socioeconomic objectives and policies.
The RBI acts as a banker to Central/State governments, commercial banks, state cooperative
banks and some financial institutions. It formulates and administers monetary policy with a view
to promoting stability of prices while encouraging higher production through appropriate
deployment of credit. The RBI plays an important role in maintaining the exchange value of the
Rupee and acts as an agent of the government in respect of India's membership of IMF. The RBI
also performs a variety of developmental and promotional functions.
The first concern of a central bank is the maintenance of a soundly based commercial banking
structure. While this concern has grown to comprehend the operations of all financial
institutions, including the several groups of non-bank financial intermediaries, the commercial
banks remain the core of the banking system. A central bank must also cooperate closely with the
national government. Indeed, most governments and central banks have become intimately
associated in the formulation of policy.
They are often responsible for formulating and implementing monetary and credit policies,
usually in cooperation with the government. they have been established specifically to lead or
regulate the banking system.

MMS II SEM IV
21

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

MMS II SEM IV
22

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

MARKET BASICS
ELECTRONIC TRADING
Electronic trading eliminates the need for physical trading floors. Brokers can trade from their
offices, using fully automated screen-based processes. Their workstations are connected to a
Stock Exchange's central computer via satellite using Very Small Aperture Terminus (VSATs).
The orders placed by brokers reach the Exchange's central computer and are matched
electronically.
INDEX
An Index is a comprehensive measure of market trends, intended for investors who are
concerned with general stock market price movements. An Index comprises stocks that have
large liquidity and market capitalization. Each stock is given a weightage in the Index equivalent
to its market capitalization. At the NSE, the capitalization of NIFTY (fifty selected stocks) is
taken as a base capitalization, with the value set at 1000. Similarly, BSE Sensitive Index or
Sensex comprises 30 selected stocks. The Index value compares the day's market capitalization
vis--vis base capitalization and indicates how prices in general have moved over a period of
time.
EXECUTE AN ORDER
Select a broker of your choice and enter into a broker-client agreement and fill in the client
registration form. Place your order with your broker preferably in writing. Get a trade
confirmation slip on the day the trade is executed and ask for the contract note at the end of the
trade date.
NEED A BROKER

MMS II SEM IV
23

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

As per SEBI (Securities and Exchange Board of India.) regulations, only registered members can
operate in the stock market. One can trade by executing a deal only through a registered broker
of a recognized Stock Exchange or through a SEBI-registered sub-broker.
CONTRACT NOTE
A contract note describes the rate, date, time at which the trade was transacted and the brokerage
rate. A contract note issued in the prescribed format establishes a legally enforceable relationship
between the client and the member in respect of trades stated in the contract note. These are
made in duplicate and the member and the client both keep a copy each. A client should receive
the contract note within 24 hours of the executed trade.
DEMATERIALIZATION
Dematerialization in short called as 'demat' is the process by which an investor can get physical
certificates converted into electronic form maintained in an account with the Depository
Participant. The investors can dematerialize only those share certificates that are already
registered in their name and belong to the list of securities admitted for dematerialization at the
depositories.
DEPOSITORY
The organization responsible to maintain investor's securities in the electronic form is called the
depository. In other words, a depository can therefore be conceived of as a "Bank" for securities.
In India there are two such organizations viz. NSDL and CDSL. The depository concept is
similar to the Banking system with the exception that banks handle funds whereas a depository
handles securities of the investors. An investor wishing to utilize the services offered by a
depository has to open an account with the depository through Depository Participant.
DEPOSITORY PARTICIPANT
The market intermediary through whom the depository services can be availed by the investors is
called a Depository Participant (DP). As per SEBI regulations, DP could be organizations
MMS II SEM IV
24

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

involved in the business of providing financial services like banks, brokers, custodians and
financial institutions. This system of using the existing distribution channel (mainly constituting
DPs) helps the depository to reach a wide cross section of investors spread across a large
geographical area at a minimum cost. The admission of the DPs involves a detailed evaluation by
the depository of their capability to meet with the strict service standards and a further evaluation
and approval from SEBI. Realizing the potential, all the custodians in India and a number of
banks, financial institutions and major brokers have already joined as DPs to provide services in
a number of cities .
ADVANTAGES OF A DEPOSITORY SERVICES
Trading in demat segment completely eliminates the risk of bad deliveries. In case of transfer of
electronic shares, you save 0.5% in stamp duty. Avoids the cost of courier/ notarization/ the need
for further follow-up with your broker for shares returned for company objection No loss of
certificates in transit and saves substantial expenses involved in obtaining duplicate certificates,
when the original share certificates become mutilated or misplaced.
Lower interest charges for loans taken against demat shares as compared to the interest for loan
against physical shares. RBI has increased the limit of loans availed against dematerialized
securities as collateral to Rs 20 lakh per borrower as against Rs 10 lakh per borrower in case of
loans against physical securities. RBI has also reduced the minimum margin to 25% for loans
against dematerialized securities, as against 50% for loans against physical securities. Fill up the
account opening form, which is available with the DP. Sign the DP-client agreement, which
defines the rights and duties of the DP and the person wishing to open the account. Receive your
client account number (client ID).
This client id along with your DP id gives you a unique identification in the depository system.
Fill up a dematerialization request form, which is available with your DP, Submit your share
certificates along with the form; write "surrendered for demat" on the face of the certificate
before submitting it for demat) Receive credit for the dematerialized shares into your account
within 15 days.
MMS II SEM IV
25

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

SPLIT
A Split is book entry wherein the face value of the share is altered to create a greater number of
shares outstanding without calling for fresh capital or altering the share capital account. For
example, if a company announces a two-way split, it means that a share of the face value of Rs
10 is split into two shares of face value of Rs 5 each and a person holding one share now holds
two shares.
BUY BACK
As the name suggests, it is a process by which a company can buy back its shares from
shareholders. A company may buy back its shares in various ways: from existing shareholders on
a proportionate basis; through a tender offer from open market; through a book-building process;
from the Stock Exchange; or from odd lot holders.A company cannot buy back through
negotiated deals on or off the Stock Exchange, through spot transactions or through any private
arrangement.
SETTLEMENT CYCLE
The accounting period for the securities traded on the Exchange. On the NSE, the cycle begins
on Wednesday and ends on the following Tuesday, and on the BSE the cycle commences on
Monday and ends on Friday. At the end of this period, the obligations of each broker are
calculated and the brokers settle their respective obligations as per the rules, bye-laws and
regulations of the Clearing Corporation. If a transaction is entered on the first day of the
settlement, the same will be settled on the eighth working day excluding the day of transaction.
However, if the same is done on the last day of the settlement, it will be settled on the fourth
working day excluding the day of transaction.
ROLLING SETTLEMENT
The rolling settlement ensures that each day's trade is settled by keeping a fixed gap of a
specified number of working days between a trade and its settlement. At present, this gap is five
MMS II SEM IV
26

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

working days after the trading day. The waiting period is uniform for all trades. In a Rolling
Settlement, all trades outstanding at end of the day have to be settled, which means that the buyer
has to make payments for securities purchased and seller has to deliver the securities sold. In
India, we have adopted the T+5 settlement cycle, which means that a transaction entered into on
Day 1 has to be settled on the Day 1 + 5 working days, when funds pay in or securities pay out
takes place.
WHAT ARE THE ADVANTAGES OF ROLLING SETTLEMENTS?
As mentioned earlier, this is the system practiced in developed countries. Pay outs are quicker
than in weekly settlements, and investors will benefit from increased liquidity. The other benefit
of the modified system is that it keeps cash and forward markets separate. In the current system,
the trader has five days to square off his transaction which leads to a high level of speculation as
people even without funds tend to "play" the market. During volatile markets, especially in a
bearish market, this often leads to a payment problem which has dogged the Indian stock
exchanges for a long time. It provides for a higher degree of safety, and once mechanisms such
as futures and stock-lending become popular, it would result in quality speculation and genuine
investor interest.
WHEN DOES ONE DELIVER THE SHARES AND PAY THE MONEY TO BROKER
As a seller, in order to ensure smooth settlement you should deliver the shares to your broker
immediately after getting the contract note for sale but in any case before the pay-in day.
Similarly, as a buyer, one should pay immediately on the receipt of the contract note for purchase
but in any case before the pay-in day.
SHORT SELLING
Short selling is a trading strategy. It is a sale of a security that the seller does not own, or any sale
that is completed by the delivery of a security borrowed by the seller. Short sellers take the risk
that they will be able to buy the stock at a more favorable price than the price at which they "sold
short."
MMS II SEM IV
27

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

AUCTION
An auction is conducted for those securities that members fail to deliver/short deliver during payin.

MMS II SEM IV
28

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

SEPARATE MARKET FOR AUCTIONS


The buy/sell auction for a capital market security is managed through the auction market. As
opposed to the normal market where trade matching is an on-going process, the trade matching
process for auction starts after the auction period is over.
IF THE SHARES ARE NOT BOUGHT IN THE AUCTION
If the shares are not bought at the auction i.e. if the shares are not offered for sale, the Exchange
squares up the transaction as per SEBI guidelines. The transaction is squared up at the highest
price from the relevant trading period till the auction day or at 20 per cent above the last
available Closing price whichever is higher. The pay-in and pay-out of funds for auction square
up is held along with the pay-out for the relevant auction.
BAD DELIVERY
SEBI has formulated uniform guidelines for good and bad delivery of documents. Bad delivery
may pertain to a transfer deed being torn, mutilated, overwritten, defaced, or if there are spelling
mistakes in the name of the company or the transfer. Bad delivery exists only when shares are
transferred physically. In "Demat" bad delivery does not exist.
BULL MARKET
A Bull market is a market that is consistently going up. It is a market where there is optimism of
further rise batter, business results and other positive factors. Bull Market can sometimes
continue for years, for investors this is the preferred market trend. However no bull market can
continue for very long.
BEAR MARKET
Bear Market is a market that is showing a persistent downtrend. A 15-20% downward movement
of the market generally termed as a bear market.
MMS II SEM IV
29

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

DIVERSIFICATION
Diversification is the technique of investing in unrelated business sectors simultaneous so that
risk that affects a particular sector does not affect your overall investment. For example your
portfolio of share includes sectors like Information Technology, Real estate capital Goods, Autos
etc.

MMS II SEM IV
30

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

ABOUT MUTUAL FUNDS


WHAT ARE MUTUAL FUNDS?
A mutual fund is a professionally managed type of collective investment scheme that pools
money from many investors and invests typically in investment securities (stocks, bonds, shortterm money market instruments, other mutual funds, other securities, and/or commodities such
as precious metals.
HISTORY OF MUTUAL FUNDS.
The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in
the year 1963. The primary objective at that time was to attract the small investors and it was
made possible through the collective efforts of the Government of India and the Reserve Bank of
India. The history of mutual fund industry in India can be better understood divided into
following phases:PHASE 1
ESTABLISHMENT AND GROWTH OF UNIT TRUST OF INDIA - 1964-87
Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an
act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under
the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was
transferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first
scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of
investors in any single investment scheme over the years.
UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors.
It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift Growth Fund and
India Fund (India's first offshore fund) in 1986, Mastershare (Indias first equity diversified

MMS II SEM IV
31

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By the
end of 1987, UTI's assets under management grew ten times to Rs 6700 crores.
PHASE II
ENTRY OF PUBLIC SECTOR FUNDS - 1987-1993
The Indian mutual fund industry witnessed a number of public sector players entering the market
in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the
first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canbank Mutual
Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual
Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased
seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80%
market share.

1992-93
UTI
Public
sector
Total

Amt
Mobilised
11057
1964

Assets
Mobilisation as % of gross
under Mgm domestic savings
38,247
5.2%
8,757

0.9%

13021

47,004

6.1%

PHASE III
EMERGENCE OF PRIVATE SECOR FUNDS - 1993-96
The permission given to private sector funds including foreign fund management companies
(most of them entering through joint ventures with Indian promoters) to enter the mutal fund
industry in 1993, provided a wide range of choice to investors and more competition in the
industry. Private funds introduced innovative products, investment techniques and investorservicing technology. By 1994-95, about 11 private sector funds had launched their schemes.
MMS II SEM IV
32

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

PHASE IV
GROWTH AND SEBI REGULATION - 1996-2004
The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the
year 1996. The mobilisation of funds and the number of players operating in the industry reached
new heights as investors started showing more interest in mutual funds.
Investors interests were safeguarded by SEBI and the Government offered tax benefits to the
investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by
SEBI that set uniform standards for all mutual funds in India. The Union Budget in 1999
exempted all dividend incomes in the hands of investors from income tax. Various Investor
Awareness Programmes were launched during this phase, both by SEBI and AMFI, with an
objective to educate investors and make them informed about the mutual fund industry.
In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as a
trust formed by an Act of Parliament. The primary objective behind this was to bring all mutual
fund players on the same level. UTI was re-organised into two parts: 1. The Specified
Undertaking, 2. The UTI Mutual Fund
Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past schemes
(like US-64, Assured Return Schemes) are being gradually wound up. However, UTI Mutual
Fund is still the largest player in the industry. In 1999, there was a significant growth in
mobilization of funds from investors and assets under management which is supported by the
following data:

MMS II SEM IV
33

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

GROSS FUND MOBILISATION (RS. CRORES)

FROM

TO

UTI

PUBLIC
SECTOR

PRIVATE
SECTOR

TOTAL

01-April-98

31-March-99

11,679

1,732

7,966

21,377

01-April-99

31-March-00

13,536

4,039

42,173

59,748

01-April-00

31-March-01

12,413

6,192

74,352

92,957

01-April-01

31-March-02

4,643

13,613

1,46,267

1,64,523

01-April-02

31-Jan-03

5,505

22,923

2,20,551

2,48,979

01-Feb.-03

31-March-03

7,259

58,435

65,694

01-April-03

31-March-04

68,558

5,21,632

5,90,190

01-April-04

31-March-05

1,03,246

7,36,416

8,39,662

01-April-05

31-March-06

1,83,446

9,14,712

10,98,158

PHASE V
GROWTH AND CONSOLIDATION - 2004 ONWARDS
The industry has also witnessed several mergers and acquisitions recently, examples of which are
acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and
PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutual fund
players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29
funds as at the end of March 2006. This is a continuing phase of growth of the industry through
consolidation and entry of new international and private sector players.
MMS II SEM IV
34

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

HOW MUTUAL FUND OPERATES


The following chart gives us operational flow of a Mutual Fund

ADVANTAGES OF INVESTING IN MUTUAL FUNDS


There are numerous benefits of investing in mutual funds and one of the key reasons for its
success in the developed markets like US and UK is the range of benefits they offer, which are
unmatched by most investment avenues. The benefits are broadly classified as follows:1) AFFORDABILITY
A mutual fund invests in a portfolio of assets i.e. bonds, shares, etc. depending upon the
investment objective of the scheme. An investor can buy in to a portfolio of equities , which
MMS II SEM IV
35

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

would otherwise be extremely expensive. Each unit holder thus gets an exposure to such
portfolios with an investment as modest as Rs.500/-. This amount today would get you less than
quarter of an Infosys share. Thus it would be affordable for an investor to build a portfolio of
investments through a MF rather than investing directly in stock market.
Diversification the nuclear weapon in your arsenal for your fight against risk. It simply means
that you must spread your investment across different securities (stock, bonds, money market
instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, IT, etc.). This kind
of diversification may add stability to your returns, for example- during one point of time the
equities may underperform but bonds and money markets may do well enough to offset the effect
of a slump in the equity market. Similarly the IT sector might be faring poorly but the auto and
textile sectors might do well and protect your principal investment as well as help you meet your
return objectives. Variety MFs offer a tremendous variety of schemes. This variety is beneficial
in two ways:
1) It offers different types of schemes to investors with different needs and risk appetites.
2) It offers an opportunity to an investor to invest sums across a variety of schemes, both
debt and equity.
For example, an investor can invest his money in a Growth Fund (equity scheme) and Income
Fund (debt scheme) depending on his risk appetite and thus create a balanced portfolio easily or
simply just buy a Balanced Scheme.
2) PROFESSIONAL MANAGEMENT
Qualified investment professionals who seek to maximize returns and minimize risk monitor
investor's money. When you buy into a mutual fund, you are handing your money to an
investment professional that has experience in making investment decisions. It is the Fund
Manager's job to
(a) Find the best securities for the fund, given the fund's stated investment objectives and
MMS II SEM IV
36

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

(b) Keep track of investments and changes in market conditions and adjust the
the mix of the portfolio , as and when required.
3) TAX BENEFITS
Any income distributed after March 31, 2002 will be subject to tax in the assessment of all Unit
holders. However, as a measure of concession to Unit holders of open-ended equity-oriented
funds, income distributions for the year ending March 31, 2003, will be taxed at a concessional
rate of 10.5%.In case of Individuals and Hindu Undivided Families a deduction upto Rs. 9,000
from the Total Income will be admissible in respect of income from investments specified in
Section 80L, including income from Units of the Mutual Fund. Units of the schemes are not
subject to Wealth-Tax and Gift-Tax.
Regulations: Securities Exchange Board of India (SEBI), the mutual funds regulator has
clearly defined rules, which govern mutual funds. These rules relate
to the formation, administration and management of mutual funds and also prescribe disclosure
and accounting requirements. Such a high level of regulation seeks to protect the interest of
investors.
4) FLEXIBILITY
Mutual Funds offering multiple schemes allow investors to switch easily between various
schemes. This flexibility gives the investor a convenient way to change the mix of his portfolio
over time.
5) TRANSPARENCY
Open-ended mutual funds disclose their Net Asset Value (NAV) daily and the entire portfolio
monthly. This level of transparency, where the investor himself sees the underlying assets bought
with his money, is unmatched by any other financial instrument. Thus the investor is in the know
of the quality of the portfolio and can invest further or redeem depending on the kind of the
portfolio that has been constructed by the investment manager.

MMS II SEM IV
37

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

RISK FACTORS OF MUTUAL FUNDS


THE RISK-RETURN TRADE-OFF
The most important relationship to understand is the risk-return trade-off. Higher
the risk greater the returns/loss and lower the risk lesser the returns/loss.Hence it is up to the
investor to decide how much risk he is willing to take. In order to do this he must first be aware
of the different types of risks involved with his investment decision.
MARKET RISK
Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the
market in general lead to this. This is true, may it be big corporations or smaller mid-sized
companies. This is known as Market Risk. A Systematic Investment Plan (SIP) that works on
the concept of Rupee Cost Averaging (RCA) might help mitigate this risk.
CREDIT RISK
The debt servicing ability (may it be interest payments or repayment of principal) of a company
through its cash flows determines the Credit Risk faced by you. This credit risk is measured by
independent rating agencies like CRISIL, CARE, etc who rate companies. A AAA rating is
considered the safest whereas a D rating is considered poor credit quality. A well-diversified
portfolio might help mitigate this risk.
INFLATION RISK
Things you hear people talk about:"Rs. 100 today is worth more than Rs. 100 tomorrow. The root
cause, Inflation. Inflation is the loss of purchasing power over time. A lot of times people make
conservative investment decisions to protect their capital but end up with a sum of money that
can buy less than what the principal could at the time of the investment. This happens when
inflation grows faster than the return on your investment. A well-diversified portfolio with some
investment in equities might help mitigate this risk.
INTEREST RATE RISK
In a free market economy interest rates are difficult if not impossible to predict. Changes in
interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of bonds
MMS II SEM IV
38

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

fall and vice versa. Equity might be negatively affected as well in a rising interest rate
environment. A well-diversified portfolio might help mitigate this risk.
POLITICAL/GOVERNMENT POLICY RISK
Changes in government policy and political decision can change the investment environment.
They can create a favorable environment for investment or vice versa.
LIQUIDITY RISK
Liquidity risk arises when it becomes difficult to sell the securities that one has purchased.
Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as
internal risk controls that lean towards purchase of liquid securities.
FUTURE OF MUTUAL FUNDS IN INDIA
Mutual fund got an profitable and exceptionally bright future if to be go through the data of the
past and future expectations. By December 2004, Indian mutual fund industry reached Rs 1,
50,537 crores. It is estimated that by 2011 March-end, the total assets of all scheduled
commercial banks should be Rs 40,90,000 crores.
The annual rate of growth is expected to reach 13.4% during the rest of the decade. In the last 5
years MFs have seen annual growth rate of 9%. According to the current growth rate, by year
2011, mutual fund assets will be double.
Some facts for the growth of mutual funds in India:1) 100% growth in the last 6 years.
2) Number of foreign AMCs is in the que to enter the Indian markets like Fidelity
Investments, US based, with over US$1trillion assets under management worldwide.
3) Saving rate is over 23%, highest in the world. Only channelizing these savings in mutual
funds sector is required.
4) We have approximately 29 mutual funds which is much less than US having more than
800. There is a big scope for expansion.
5) B and C class cities are growing rapidly. Today most of the mutual funds are
concentrating on the A class cities. Soon they will find scope in the growing cities.
6) Mutual fund can penetrate rural areas like the Indian insurance industry with simple and
limited products.

MMS II SEM IV
39

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

The above table depicts the increased involvement of the Mutual Funds in the Stock Market. It
has always been increasing year on year except for in the year 1999 and 2001. Reliance MF itself
has assets more than 125000 crores under its management and is no 1 in the charts.
No 2 on the chart is HDFC MF which is having AUM of around 104000 crores.

MMS II SEM IV
40

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

MMS II SEM IV
41

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

FOREIGN INSTITUTIONAL INVESTORS (FII)


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.
FII (Foreign Institutional Investors) is used to denote an investor; it is mostly of the form of an
institution or entity which invests money in the financial markets of a country. The term FII is
most commonly used in India to refer to companies that are established or incorporated outside
India, and is investing in the financial markets of India. These investors must register with the
Securities & Exchange Board of India (SEBI) to take part in the market.
HISTORY OF FII
India opened its stock market to foreign investors in September 1992, and in 1993, received
portfolio investment from foreigners in the form of foreign institutional investment in equities.
This has become one of the main channels of FII in India for foreigners. Initially, there were
many terms and conditions which restricted many FIIs to invest in India.
But in the course of time, in order to attract more investors, SEBI has simplified many terms
such as:

The ceiling for overall investments of FIIs was increased 24% of the paid up capital of

Indian company.
Allowed foreign individuals and hedge funds to directly register as FIIs.

Investment in government securities was increased to US $ 5 Billion.

Simplified registration norms.

MMS II SEM IV
42

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

What does the name FII means? It is the abbreviation of Foreign Institutional Investors. The term
is used most commonly in India to refer to outside companies investing in the financial markets
of India. International institutional investors must register with the Securities & Exchange Board
of India (SEBI) to participate in the market. One of the major market regulations pertaining to
FIIs involves placing limits on FII ownership in Indian companies. They actually evaluate the
shares and deposits in a portfolio. The major source (almost 50%) of money the FIIs invest is
from the issue of Participatory Notes (P-Notes) or what are sometimes called Offshore
Derivatives.
P-Notes (Participatory Notes) are instruments used by foreign investors that are not registered
with the SEBI (Securities & Exchange Board of India) to invest in Indian stock markets. For
example, Indian-based brokerage houses buy India-based securities and then issue Participatory
Notes to foreign investors. Any dividends or capital gains collected from the underlying
securities go back to the investors. That is why they are also called Offshore Derivative
Instruments. Trading through Participatory Notes is easy because participatory notes are like
contract notes transferable by endorsement and delivery. Secondly, some of the entities route
their investment through Participatory Notes to take advantage of the tax laws of certain
preferred countries. Thirdly, Participatory Notes are popular because they provide a high degree
of anonymity, which enables large hedge funds to carry out their operations without disclosing
their identity.
After 1991, due to our liberalization process, there was large flow of foreign funds from abroad.
Current investments by FII are Rs. 2, 55,464.40 Crores as compared to Rs. 2, 83,468.40 Crores
by the end of 31 December 2007. That implies that they had withdrawn almost 9% of money
they had deposited till December 2007. The amount was much in the months of 2008 as
compared to corresponding months of 2007, and that is a reason for the volatility of the stock
market. In 2008, the net buying is only Rs. 5,603 Crores compared to Rs. 36,869 Crores in 2007.
From all this, we can analyze prima facie that the FII's influence market.

MMS II SEM IV
43

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

A more investments by FIIs indicate that they are confident in Indian market. Usually, the mode
of operations of FIIs was taking loans from countries where interest is low (like Japan) and
invests in booming markets like India.
But the sub-prime crisis and other economic conditions had caused a liquidity crunch for these
institutions. So they are forced to withdraw money from Indian market so as to repay loans they
had taken. These withdrawals had caused panic in market, and even domestic investors are
making them sell their shares.
But one aspect we should agree on is that the FII's increased role had changed the face of Indian
stock market. It had brought both quantitative and qualitative change. It had also increased the
market depth and breadth. The emphasize on fundamentals had caused efficient pricing of shares.
Since there is no condition on FIIs that they should disclose in which company they are
investing, those figures are not available.
The first question that we need to ask is the necessity of FIIs as an instrument for investment into
India. This is not a common place of markets; if, for example, a non-resident of the US or of
England chooses to invest in an American or an English or a German stock, he does not have to
hold his investment indirectly through an FII, but can hold it directly in his own name. An FII in
India is a superfluous addition created simply to suit the regulatory requirements of SEBI.
FIIs serve no economic purpose but they exist in order to provide SEBI with a bureaucratic layer
between a foreign investor and the regulator. It enables SEBI to pretend that it controls foreign
investors when in fact SEBI has no control on the ultimate investor. It is a good example of
obscuring the true character of foreign investment in India through a non-transparent and
expensive set-up. The P-Note is an additional twist in this indirect investment as it enables those
who wish to invest in the Indian market to do so without disclosing their identity.

MMS II SEM IV
44

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

FOREIGN INSTITUTIONAL INVESTMENT IN INDIA


MILESTONES

India embarked on a programme of economic reforms in the early 1990s to tie over its
balance of payment crisis and also as a step towards globalization.

An important milestone in the history of Indian economic reforms happened on


September 14, 1992, when the FIIs (Foreign Institutional Investors) were allowed to
invest in all the securities traded on the primary and secondary markets, including shares,
debentures and warrants issued by companies which were listed or were to be listed the
stock exchanges in India and in the schemes floated by domestic mutual funds.

Initially, the holding of a single FII and of all FIIs, NRIs (Non-Resident Indians) and
OCBs (Overseas Corporate Bodies) in any company were subject to a limit of 5% and
24% of the company's total issued capital respectively.

In order to broad base the FII investment and to ensure that such an investment would not
become a camouflage for individual investment in the nature of FDI (Foreign Direct
Investment), a condition was laid down that the funds invested by FIIs had to have at
least 50 participants with no one holding more than 5%. Ever since this day, the
regulations on FII investment have gone through enormous changes and have become
more liberal over time.

From November 1996, FIIs were allowed to make 100% investment in debt securities
subject to specific approval from SEBI as a separate category of FIIs or sub-accounts as
100% debt funds. Such investments were, of course, subjected to the fund-specific ceiling
prescribed by SEBI and had to be within an overall ceiling of US $ 1.5 billion. The
investments were, however, restricted to the debt instruments of companies listed or to be
listed on the stock exchanges.

MMS II SEM IV
45

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

In 1997, the aggregate limit on investment by all FIIs was allowed to be raised from 24%
to 30% by the Board of Directors of individual companies by passing a resolution in their
meeting and by a special resolution to that effect in the company's General Body meeting.

From the year 1998, the FII investments were also allowed in the dated government
securities, treasury bills and money market instruments.

In 2000, the foreign corporates and high net worth individuals were also allowed to invest
as sub-accounts of SEBI-registered FIIs. FIIs were also permitted to seek SEBI
registration in respect of sub-accounts. This was made more liberal to include the
domestic portfolio managers or domestic asset management companies.

40% became the ceiling on aggregate FII portfolio investment in March 2000.

This was subsequently raised to 49% on March 8, 2001 and to the specific sectoral cap in
September 2001.

As a move towards further liberalization a committee was set up on March 13, 2002 to
identify the sectors in which FIIs portfolio investments will not be subject to the sectoral
limits for FDI.

Later, on December 27, 2002 the committee was reconstituted and came out with
recommendations in June 2004. The committee had proposed that, 'In general, FII
investment ceilings, if any, may be reckoned over and above prescribed FDI sectoral
caps. The 24 per cent limit on FII investment imposed in 1992 when allowing FII inflows
was exclusive of the FDI limit. The suggested measure will be in conformity with this
original stipulation.' The committee also has recommended that the special procedure for
raising FII investments beyond 24 per cent up to the FDI limit in a company may be
dispensed with by amending the relevant regulations.

Meanwhile, the increase in investment ceiling for FIIs in debt funds from US $ 1 billion
to US $ 1.75 billion has been notified in 2004. The SEBI also has reduced the turnaround
MMS II SEM IV
46

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

time for processing of FII applications for registrations from 13 working days to 7
working days except in the case of banks and subsidiaries.

All these are indications for the country's continuous efforts to mobilize more foreign
investment through portfolio investment by FIIs. The FII portfolio flows have also been
on the rise since September 1992. Their investments have always been net positive, but
for 1998-99, when their sales were more than their purchase.

MMS II SEM IV
47

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

INFLUENCE OF FIIS ON INDIAN STOCK MARKET


The current investments of FIIs is Rs. 2,55,464.40 Crores. This is almost 9% of the total market
capitalization. If we explain the things in simple terms, market pundits often attribute the rally of
stock market and fall of stock market to the flow of funds by FIIs. We often hear the terms "FIIs
Fuel the Market Run". If we analyze the impacts, then the major impacts are:

They increased depth and breadth of the market.

They played major role in expanding securities business.

Their policy on focusing on fundamentals of the shares had caused efficient pricing of
shares.

These impacts made the Indian stock market more attractive to FIIs and also domestic investors,
which involves the other major player MF (Mutual Funds). The impact of FIIs is so high that
whenever FIIs tend to withdraw the money from market, the domestic investors become fearful
and they also withdraw from market.
Just to show the impact, we analyze below the 10 biggest falls of stock market: Day (Points Loss in Gross Purchases (Rs. Gross Sales (Rs. Net Investments (Rs.
Sensex)
Crores)
Crores)
Crores)
21/01/2008 (1408)
3062.00
1060.30
2001.80
22/01/2008 (875)
2813.30
1618.20
1195.10
18/05/2006 (856)
761.80
527.40
234.40
17/12/2007 (826)
670.00
869.00
-199.00
18/10/2007 (717)
1107.00
1372.50
-265.50
18/01/2008 (687)
1077.20
1348.40
-271.20
21/11/2007 (678)
640.70
791.80
-151.10
16/08/2007 (643)
989.50
750.30
239.20
02/08/2007 (617)
534.50
542.00
-7.50
01/08/2007 (615)
809.40
956.90
-147.50

MMS II SEM IV
48

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

MAJOR INTRA DAY COLLAPSES IN BSE SENSEX


From this table, it is very clear that the major falls are accompanied by the withdrawal of
investments by FIIs. Take the case on January 18, 2008, the Sensex lost almost 687 points. Here,
the net sales by FIIs was Rs. 1348.40 Crores. This is a major contributor to the fall on that day.
But contrary to that day, take the case on January 21, 2008, the Sensex lost 1408 points and the
gross sales was Rs. 1060.30 Crores and the purchases were Rs. 3062.00 Crores. So this can be
concluded that after the fall of market, FIIs had invested again into the market. From this, we can
see the effect of FIIs.
Net Investments of FII from 2003-08
Year
2003
2004
2005
2006
2007
2008 (10/08/08)

Net Investment
30458.7
38965.1
47181.2
36539.7
71486.5
-29169

MMS II SEM IV
49

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

Now we analyze the net investments' graph from 2003 to 2008. From this, we can see that there
is an increase in net investments till 2005 and there was small decrease in investments in the year
2006. But there was a steep increase in the year 2007-08. This was the best period in Indian stock
market where stock prices were increased and the market was in good mood.
When we take the investments in 2008, the net investments is negative. And we know the market
is volatile in this year. So we find that there is direct relation between net investments and
movement of stock market.
FIIs Gross Purchases & Sales from 2003-08
Year
2003
2004
2005
2006
2007
2008 (10/08/08)

Gross Purchases
94410.5
185671.5
286020.5
475622.5
814877
560480.9

Gross Sales
63951.8
146706.4
238839.4
439082.8
743390.7
589650

Now this graph represents the relation between gross purchases and gross sales. We can see from
the graph that gross purchases are increasing from 2003 to 2007 and gross sales are lower than
gross purchases. So we conclude that this caused the market to reach the magical figure of
21,000 in Sensex. But when we look at the year of 2008, the involvement of FIIs is reduced, and
MMS II SEM IV
50

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

we can also find in this year the gross sales is higher than gross purchases. This analysis also
indicates the impact of FIIs in markets.
FII's Percentage Change in Investment
(Here we are taking 2003 as the base year and calculating the percentage change for remaining
years.)
Year
2003
2004
2005
2006
2007
2008 (10/08/08)

Gross Purchases
94410.5
185671.5
286020.5
475622.5
814877
560480.9

Gross Sales
63951.8
146706.4
238839.4
439082.8
743390.7
589650

Net Investment
30458.7
38965.1
47181.2
36539.7
71486.5
-29169

% Change
0
27.92765
54.90221
19.96474
134.6998
-195.766

In this graph, we took the base year as 2003 and the trends of the investments by FIIs are plotted.
We can see from the graph that till 2007, the investment is more than that of 2003, and the most
interesting thing is that when we look at 2008, the percentage change in investments is much
MMS II SEM IV
51

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

lower than 2003, even going to the negative side. This finding also leads to our conclusion that
the FII's impact on stock market is high.

MMS II SEM IV
52

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

A CASE STUDY TO SHOW THE IMPACT OF FII ACTIVITY ON THE PRICE OF A STOCK
MMS II SEM IV
53

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

An important feature of the development of stock market in India in the last 15 years has been
the growing participation of Institutional Investors. Institutional investors comprise both foreign
institutional investors and the domestic institutions like (mutual funds, insurance companies etc).
In India, these institutional investors manage large amount of funds which constitutes a
significant share of the entire market capitalization. The role of these investors especially FIIs
(also known as foreign portfolio investors) in Indian stock market has been a matter of debate.
FII investments seem to have influenced the Indian stock market to a considerable extent.
Looking at the direction of the funds flow from these investors, we can explain the market
movement.
WHY ARE FIIS IMPORTANT?
Attracting foreign capital appears to be the main reason for opening up of the stock markets for
FIIs. In order to attract portfolio investments, it has been advocated to develop stock markets.
The general perception about the foreign portfolio investments is that, not only do they expand
the demand base of the stock market, but they can also stabilize the market through investor
diversification.
IMPACT ON SHARE PRICE
Price discovery of stocks are results of the interaction between supply-demand forces. Buying
equities in huge chunks leads to a steep rise in the prices and heavy selling leads to a massive fall
in the prices. Heavy buy and selling of stocks create a demand-supply gap situation for that
particular stock and which ultimately result in the fall or rise in the price. This is what happened
when FIIs come into play.
General perception about FIIs that they bring good money and also their entry symbolizes a
mature market. Though, it is true that FIIs do help in formation of an efficient market, their
sudden movements of funds have been responsible for some of the biggest stock market crash in
the history.

MMS II SEM IV
54

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

Investment by FIIs is heavily dependent on the expected return. Whenever there is a change in
the expected return scenario (due to political situation, restrictions etc) or availability of a better
investment opportunity, a movement of funds can be seen by these FIIs. This comes through
heavy selling of the stock holdings in their portfolio. And due to this heavy selling massive falls
in stock prices take place.
Individual investors who jumped into the fray when market was rising feel the pinch most when
these FIIs sell off their holdings. These investors incur heavy losses due to the sudden fall. The
stocks also take severe beatings as these stocks takes a long time to recover due to loss of
confidence, despite the companies good financial performance.
Here, we will see the effect of FIIs fund movement on stock prices through the analysis of
historical price and shareholding pattern of Vakrangee Software, a domestic mid-cap IT
Company.

MMS II SEM IV
55

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

THE COMPANY: VAKRANGEE SOFTWARE


Vakrangee Software Ltd is a domestic IT company. The companys businesses include Document
Management Services (DMS), Printing Management Services (PMS) and IT & IT Enabled
Services. The company has a good business model and expected to grow with a rapid growth
rate in future.
The companys stock price had fallen from all time high of Rs.291 to Rs. 19 due to heavy sell off
by FIIs. The fall of stock price started from September, 2008 onwards due to heavy selling by
FIIs. Their stake in company has come down to zero in Dec, 2008. The sudden fall in stock price
can be seen in historical price chart (between 31/07/09 to 28/11/09).

These two Pi-Charts explain the change in the share holding pattern of the company in last two
quarters. Before September quarter, FIIs had a major share (18%) in the company. Their share
was almost equals to the promoters share. Now, in December quarter, FIIs share came down to
zero due to their sudden exit which led to a massive fall in stock price. Currently, the company is
MMS II SEM IV
56

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

available at a deep discount and with almost no risk. Here no risk implies zero FIIs stake in the
company.

CONCLUSION
By the analysis of Vakrangee Software, we can conclude that the companies in which FIIs have
very large stake are more prone to have stock price crash than the companies in which FIIs has
no or very low stake. Before investing in such companies, investors should always do some
research and try to find out whether FIIs are dumping the stocks.
MMS II SEM IV
57

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

Here the result of this analysis also applies to the whole market. A very large amount of fund
under FIIs management without any restrictions on their movements can destabilize the market.

QUESTIONNAIRE
1) From the following age group, could you tell me which applies to you?
1) 26 -35
2) 36 50
3) 51 Above
2) From the following income brackets, could you tell me which applies to you, with respect to
your annual household income?
1) 300000 - 600000
2) 600000 - 1000000
3) 1000000 Above
3) From how many years are you trading or investing in stock market?
1) 2 - 3 years
2) 3 - 5 years
3) 5 years Above
4) Are you Bullish or Bearish on Indian Stock Market? And reasons for the same.
___________________________________________________________________
5) If you are a Investor what induces you to invest in a particular stock? (Mark all that applies)

MMS II SEM IV
58

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

1) Tips
2) News
3) Research Report
4) Personal Homework
6) According to you what percentage of the income does one need to invest in the stock market?
__________________________________________________________________________
7) According to you, what are the factors leading Indian Stock Market to rise? (Mark all that
applies)
1) FII
2) FDI
3) Goverment Policies
4) Rise in Asian Markets
5) Rise in American & European Markets
6) Rise in National Income
7) Others please specify
___________________________________________________________________
8) Which according to you are the best Mutual Funds in India? (Please specify your top 3)
_______________________________________________________________________
9) Which type OF Mutual funds you would prefer?
________________________________________________________________________
MMS II SEM IV
59

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

9) According to you have the FII's and the Mutual funds dominated the Indian Stock market?
__________________________________________________________________________
10) According to you how much money will the FII's will pump into the Indian stock market in
the next four quarters?
_________________________________________________________________________

MMS II SEM IV
60

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

DATA INTERPRETATION ON
PRIMARY FINDINGS
Are you Bullish or Bearish on Indian Stock Market? And reasons for the same.

Almost 72% respondants said that they are bullish on the stock market as they are confident
about the FIIs and other institutional investors investing in the country. And 28% of the
respondants feel that there will be a bearish phase in the market in the near future as the market
which is growing currently is solely because of the foreign money or investment.
If you are an Investor what induces you to invest in a particular stock?

MMS II SEM IV
61

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

According to you, what are the factors leading Indian Stock Market to rise?

The above chart show that mostly the FII involvement, Asian American and European markets
have a greater influence on the stock market as compared to other factors like government
policies and rise in national income.

MMS II SEM IV
62

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

According to you have the FII's and the Mutual funds dominated the Indian Stock market?

The above graph makes it very clear that 98% of the respondants believe that yes the FII's and
the Mutual funds have dominated the Indian stock market.

MMS II SEM IV
63

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

RESEARCH OBJECTIVES & METHODOLOGY

Research objective:
The research objective is to find out that whether or not the Foreign Institutional Investors and
the big mutual fund houses are dominating the Indian stock market.

Research Methodology:

Primary Data - Questionnaire

Secondary Data

Tool used:
Interviews with professionals from the finance sector.
Articles from various magazines and newsletters such as Dalal Street, Capital Market, Money
Times, etc. and Internet.

Target Audience:
Professionals from the finance sector.

Sample size:
15 respondents.

Sampling method used:


Qualitative Research.

Research Area:
The research is aimed at how the Indian stock market responds or reacts to the money or funds
induced by the Foreign Institutional Investors and the mutual funds.

MMS II SEM IV
64

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

CONCLUSION
The Indian stock markets have really come of age there were so many developments in the last
15 years that make the markets on par with the developed markets. The important feature of
developed markets is the growing clout of institutional investors and this paper sets out to find
whether our markets have also being dominated by institutional investors. The results show that
the combined might of the Flls and mutual funds are a potent force, and they in fact can forecast
market direction using the direction of the flow of funds from Flls and mutual funds, the results
has showed that the Flls in fact lead the market rise or fall and mutual funds follow suit. This
may actually raise questions on the market efficiency but on the contrary, markets become more
efficient with the growing presence of institutional investors who predominantly go by
fundamentals.
From all the above discussions and data analysis, I can conclude that FII has a major impact in
Indian stock market. Particularly, the fall on October 17, 2007, in which just a speculation about
governments plan to control P-Notes had caused the biggest fall in Indian stock market, even
market had to be closed for one hour without trade. The impact is that even the domestic players
and MFs also follow a close look on FIIs. So if FIIs are confident in Indian markets, there is a
general perception that market is strong.
I had also found that the major (almost 50%) of FIIs' investments are from P-Notes. So it implies
that major forces behind the FII investments are anonymous. This has a negative impact on stock
market. Because money launders and even terrorists use this facility to pump money to Indian
market and their sudden withdrawal causes volatility in markets.
From the graphs drawn in the above parts, we can see that the major falls in stock market is
accompanied by the withdrawal of money by FIIs and MFs. So there is a direct relation
between the FII's and MFs money flow and the movement of Sensex. The biggest fall in stock
markets occurred in 2007 and 2008. This means the volatility of market is more because during
this period there was an increase in registration of FIIs and the investments reached almost Rs.
283468.40 Crores by the end of 2007. The condition is that the investments had reduced by 9%
MMS II SEM IV
65

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

to 255464.40 Crores as on September 5, 2009. So this reduction is one cause of volatility. In


2008, the net buying is only Rs. 5603 Crores compared to Rs. 36,869 Crores in 2007. From all
this, we can analyze prime facie that the FIIs influence market.
It is quite clear Indian growth rate was achieved by foreign investment in equity market. Due to
financial crisis the foreign investors has withdrawn their monies to support their parent
companies.

MMS II SEM IV
66

Project Report On
Market

Impact of Mutual Funds & FIIs on Indian Stock

BIBLIOGRAPHY
Internet
www.bseindia.com
www.nseindia.com
www.moneycontrol.com
www.sebi.gov.in
www.wikipedia.com
www.thehindubusinessline.com
www.economictimes.com
www.rbi.org.in
www.coolavenues.com
www.sharetipsinfo.com

Magazines and Newsletters


Dalal Street
Capital Market
Money Times
bala_suresh2009@yahoo.co.in

MMS II SEM IV
67