A

Project
ON

“INTERNATIONAL MARKET ENTRY”

INDIAN STOCK MARKET
Submitted to

University of Mumbai for partial completion of the

Degree of Bachelor Management Studies

Under the Faculty of Commerce By

MOHIT GANPAT BHOIR

Roll No.:-46

Under the Guidance of

DR. MADHU SHUKREY

B.K. BIRLA COLLEGE OF ARTS, SCIENCE AND
COMMERCE (AUTONOMOUS), KALYAN
2020-2021
B.K. BIRLA COLLEGE OF ARTS, SCIENCE AND COMMERCE
(AUTONOMOUS), KALYAN

CERTIFICATE

This is to certify that Ms/ Mr. MOHIT GANPAT BHOIR has word ked and duly
completed her/his project for the degree of Bachelor in Management Studies under
the Faculty of Commerce and her/his project is entitled, “INTERNATIONAL
MARKET ENTRY – INDIAN STOCK MARKET” under my Supervision.

Name and Signature of Guiding Teacher

Date of submission:
 DECLARATION

I, the under signed Miss/Mr. MOHIT GANPAT BHOIR here by, declare that the
work embodied in this project work titled ,““INTERNATIONAL MARKET
ENTRY – INDIAN STOCK MARKET” “forms my own contribute on to the
research work carried out under the guidance of DR. MADHU SHUKREY is a result
of my own

research work and has not been previously submitted to any other University for any other
Degree to this or any other University.

Wherever reference has been made to previous works of others, it has been

Clearly indicated as such and included in the bibliography.

I, here by further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

Name and Signature of the

learner

Certified by

Name and signature of the Guiding Teacher

 TABLE OF CONTENT

Chapter Particulars Page no.

1 1.1 About the Industry 9

1.2 Overview of World Market 16

1.3 Overview of Indian market 19
1.4 Growth of the industry 24
2 2.1 Literature Review 33
3 Methodology 41
3.1market index 42
3.2 who can invest in India 44
3.3 Investment Opportunities for Retail 46
Foreign Investors

4 Data Analysis 48
4.1 Data Interpection 48
4.2 Background of the study 52
4.3 Problem statement of the study 53

4.4 Objective 54
Research Methodology 56
5.1 Research Design 56
5.2 Sources of Data 56
5
5.3 Data Collection Method 56
5.4 Population 56
5.5 Sampling size 56
6 Discussion & Finding 63
7 Conclusion 66
 LIST OF TABLE

table no. name of table page no.

1.1 BRIC Ranking for 6 pillars 16

1.2 Global Competitive Index 2019-2020 for BRICS Global rank 17

1.4 growth of FII 24
1.5 net invest by FII 2017 to 2020 30
Companies in which FII Investment is allowed up to 30% of their paid up capital
2.1 36
Companies in which FII Investment is allowed upto 40% of their paid up capital
2.2 37
Companies in which FII Investment is allowed upto 49% of their paid up capital
2.3 37
Companies in which FII Investment is allowed up to 49% of their paid up capital
2.4 38
Companies in which FII Investment is allowed upto sectoral cap/statutory ceiling of
2.5 their paid up capital 38

Companies where 22% FII investment limit has been reached and further purchases are
2.6 allowed with prior approval of RBI 39

2.7 top 10 FII in india as per 2005 39

6.1 FII and CNX NIFTY Regression 57
6.2 FII and CNX 500 Regression 59
6.3 FII and BSE sensex Regression 61
Anexture 68
LIST OF GRAPH

Graph no. Particular Page no.

1.1 growth of FII 25
1.2 Net investment by last 7 year 31
1.3 FII equity and debt data (April 2006 to december 2015) 32
3.1 BSE sensex index 43
CHAPTER-1 ABOUT THE INDUSTRY
FIIs were allowed to trade in the Indian stock market from 14th September
1992 but they made first investment in the month of January 1993. FII is defined
as an institution organized outside of India for the purpose of making investments
into the Indian securities market under the system prescribed by SEBI. „FIIs‟
include “Overseas pension funds, mutual funds, investment trust, asset
management company, nominee company, bank, institutional portfolio manager,
university funds, endowments, foundations, charitable trusts, charitable societies, a
trustee or power of attorney holder incorporated or established outside India
proposing to make proprietary investments or investments on behalf of a broad-
based fund. FIIs can invest their own funds as well as invest on behalf of their
overseas clients registered as such with SEBI. These client accounts that the FII
manages are known as „sub-accounts‟. Foreign institutional investor means an
entity established or incorporated outside India which proposes to make
investment in India. Positive word about the Indian economy combined with a
fast-growing market has made India an attractive destination for foreign
institutional investors. FII is defined as an institution organized outside of India for
the purpose of making investments into the Indian securities market under the
regulations.

MEANING : Foreign institutional investors play a very important role in any

economy. These are the big companies such as investment banks, mutual funds
etc, who invest considerable amount of money in the Indian markets.
With the buying of securities by these big players, markets trend to move upward
and vice-versa. They exert strong influence on the total inflows coming into the
economy. The FIIs are considered as both a trigger and a catalyst for the market
performance by encouraging investment from all classes of investors which further
leads to growth in financial market trends under a self-organized system.
FIIs are those institutional investors which invest in the assets belonging to a
different country other than that where these organizations are based.

Foreign investments in the country can take the form of investments in listed
companies (i.e. FII investments); investments in listed/unlisted companies other
than through stock exchanges (i.e. Foreign Direct Investment, Private Equity /
Foreign Venture Capital Investment route); investments through American
Depository Receipts / Global Depository Receipts (ADR/GDR) or investments by
Non Resident Indians (NRIs) and Persons of Indian Origin (PIO) in various forms.

ABOUT FOREIGN INSTITUTIONAL INVESTOR

“Foreign Institutional Investor” means an institution established or incorporated

outside India, which proposes to make investment in India in securities
(Regulation 2(f) of the FII regulation).

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.- Economic
times
Foreign institutional investors (FIIs) are those institutional investors which invest
in the assets belonging to a different country other than that where these
organizations are based.

‗FII‘ include ―Overseas pension funds, mutual funds, investment trust, asset
management company, nominee company, bank, institutional portfolio manager,
university funds, endowments, foundations, charitable trusts, charitable societies, a
trustee or power of attorney holder incorporated or established outside India
proposing to make proprietary investments or investments on behalf of a broad-
based fund.

A) Foreign Institutional Investors Registration

Currently, entities eligible to invest under FII route are as follows
(A.1) As FII
Overseas pension funds, mutual funds, investment trust, asset Management
Company, nominee company, bank, institutional portfolio manager, university
funds, endowments, foundations, charitable trusts, charitable societies, a trustee or
power of attorney holder incorporated or established outside India proposing to
make proprietary investments or investments on behalf of a broad-based fund (i.e.,
fund having more than 20 investors with no single investor holding more than 10
per cent of the shares or units of the fund).

(A.2) As Sub-accounts
The sub account is generally the underlying fund on whose behalf the FII invests.
The following entities are eligible to be registered as sub-accounts, viz. partnership
firms, private company, public company, pension fund, investment trust, and
individuals.
(A.3) Domestic entity
A domestic portfolio manager or a domestic asset management company shall also
be Eligible to be registered as FII to manage the funds of sub- accounts.
(B) FIIS REGISTERED WITH SEBI FALL UNDER THE FOLLOWING
CATEGORIES
(B.1) Regular FIIs – those who are required to invest not less than 70 Per cent of
their investment in equity -related instruments and up to 30 per cent in non-equity
instruments.

(B.2) 100 per cent debt-fund FIIs – those who are permitted to invest only in debt
instruments.
(C) MECHANISM OF FOREIGN INSTITUTIONAL INVESTORS

 FII flows help supplement the domestic savings and augment domestic
investments without increasing the foreign debt of the recipient countries,
correct current account deficits in the external balance of payments'
position, reduce the required rate of return for equity, and enhance stock
prices of the host countries, yet there are worries about the vulnerability of
recipient countries' capital markets to such flows.
 FII flows, often referred to as 'hot money' (i.e., short-term and overly
speculative), are extremely volatile in character compared to other forms of
capital flows. Foreign portfolio investors are regarded as 'fair weather
friends' who come in when there is money to be made and leave at the first
sign of impending trouble in the host country thereby destabilizing the
domestic economy of the recipient country.

 Often, they have been blamed for exacerbating small economic problems in
the host nation by making large and concerted withdrawals at the slightest
hint of economic weakness.

 It is also alleged that as they make frequent marginal adjustments to their

portfolios on the basis of a change in their perceptions of a country's
solvency rather than variations in underlying asset value, they tend to spread
crisis even to countries with strong fundamentals thereby causing 'contagion'
in international financial markets.

 Further, it is feared that too much of FII inflows may build up sizeable
surpluses on a country's balance of payments, create excess liquidity and
hence exert upward pressure on the exchange rate of the domestic currency
or on domestic prices.

 The fear of foreigners capturing a large part of the securities' market is also
associated with FII flows. Accordingly, it is viewed that as securities
markets in developing countries like India are narrow and shallow and as the
foreign investors have command over
 considerable funds and occupy a dominant position in the capital market, FII
flows have the potential for major capital flight out of India driving the
prices down sharply and hence inducing considerable instability in the
Indian stock market.
(D) SEVERAL REASONS ON FIIs SELLING
It is always good to keep an eye on what the big movers are doing and plan
individual strategy accordingly. There are several reasons on FIIs selling, but there
are three predominant factors that are cited as being largely responsible.
 The swings in the market forced several FIIs to withdraw from India and
invest their dollars in other emerging markets. Some of the other markets
include Uruguay, Russia, the Ukraine, and several other former Soviet
countries. Though there have been swing‘s in the past too but FII response this
time was different because of margin pressures back home as even they have
to provide regular returns to their investors.

 The Indian markets are not seen as a good short-term bet any more. India is
seen as a good investment for the medium to long term. FIIs seem to fear the
pace of growth and the fundamentals of the markets.

 Most FIIs are looking at corporate governance and execution abilities, which
could be significant drivers in creating a strong portfolio of Indian stocks.
Recent action taken by the market regulator indicates that the Indian
government would like to moderate the inflow of FII money.
(E) BENEFITS OF ENCOURAGING FIIS
(E.1) Reduced cost of equity capital
FII inflows augment the sources of funds in the Indian capital markets. In a
common sense way, the impact of FIIs upon the cost of equity capital may be
visualized by asking what stock prices would be if there were no FIIs operating in
India. FII investment reduces the required rate of return for equity, enhances stock
prices, and fosters investment by Indian firms in the country.

(E.2) Imparting stability to India's Balance of Payments

For promoting growth in a developing country such as India, there is need to
augment domestic investment, over and beyond domestic saving, through capital
flows. The excess of domestic investment over domestic savings result in a current
account deficit and this deficit is financed by capital flows in the balance of
payments.
(E.3) Knowledge flows
The activities of international institutional investors help strengthen Indian
finance. FIIs advocate modern ideas in market design, promote innovation,
development of sophisticated products such as financial derivatives, enhance
competition in financial intermediation, and lead to pullovers of human capital by
exposing Indian participants to modern financial techniques, and international best
practices and systems

(E.4) Strengthening corporate governance

Domestic institutional and individual investors, used as they are to the ongoing
practices of Indian corporate, often accept such practices, even when these do not
measure up to the international benchmarks of best practices. FIIs, with their
invest experience with modern corporate
governance practices, are less tolerant of malpractice by corporate managers and
owners (dominant shareholder). FII participation in domestic capital markets often
lead to vigorous advocacy of sound corporate governance practices, improved
efficiency and better shareholder value.

(E.5) Improvements to market efficiency

A significant presence of FIIs in India can improve market efficiency through two
channels. First, when adverse macroeconomic news, such as a bad monsoon,
unsettles many domestic investors, it may be easier for a globally diversified
portfolio manager to be more dispassionate about India's prospects, and engage in
stabilizing trades. Second, at the level of individual stocks and industries, FIIs may
act as a channel through which knowledge and ideas about valuation of a firm or
an industry can more rapidly propagate into India.
For example, foreign investors were rapidly able to assess the potential of firms
like Infosys, which are primarily export-oriented, applying valuation principles
that prevailed outside India for software services companies.
(F) Rationale for encouraging FII flows

Foreign investment – both portfolio and direct varieties – can supplement domestic
savings and augment domestic investment without increasing the foreign debt of
the country. Such investment constitutes non-debt creating financing instruments
for the current account deficits in the external balance of payments. Capital
inflows into the equity market give higher stock prices, lower cost of equity
capital, and encourage investment by Indian firms. Foreign investors often help
spur domestic reforms aimed at
improving the market design of the securities markets, and help strengthen
corporate governance. These benefits do require concomitant policy effort in terms
of improving financial regulation and corporate governance.

OVERVIEW OF WORLD MARKET

World Economic Forum came out with The Global Competitiveness Report
2014- 2015 as per which Switzerland continues to top the overall ranking in
Global Competitive Index (GCI), characterized by an excellent capacity for
innovation and a very sophisticated business culture. Sweden has moved
ahead of Singapore and United States to claim 2nd position this year.
Singapore, United States ,Netherland and Germany round out the top five.
continue to prevail in the top 10 with Japan, Finland, Sweden, Hong Kong
and united kingdom following suit. After having fallen four positions over
the past two years, the United Kingdom moves up one spot to 10th place this
year, with a stable performance.
Table1.1 BRIC Ranking for 6 pillars

NO PILLARS BRAZIL RUSSIA INDIA CHINA

1 Recivedforegin 13 16 20 4
investment
2 Exports 6 8 12 1
3 Imports 21 17 8 2
4 foreignexchange 8 7 9 1
reserve
5 GDP(nominal) 8 15 7 2
6 GDP(PPP) 7 6 3 1
(source:-2014-15world economy report )
Here we show in table 1 BRIC ranking here we see the china economy during
2014-15 very strong and high import export and foreign exchange reserve and
GDP rate also high and also see that world highest economy. India is GDP are
high and good to Brazil and Russia but compares to china, Brazil and Russia we
less received foreign investment. China export are more compare to import in 2nd
and export in 1st number so its show china’s economy condition are very good and
attractive to investor but in India exports are more and rank are 12 and import is 8
so our economy are in deficit and low of our import and export rate because that
our economy is slow down that’s less foreign investor to invest our country
compare to china.

Table 1.2 Global Competitive Index 2014-2015 for BRICS Global rank

The Global competitiveness report 2014-15 and the Global Competitiveness

Index 12 pillars through process GCI gives above rank that pillars Quality of
institute, Energy and transfer infrastructure,
 Macroeconomic stability, health and primary education efficiency enhance,
Higher education and training, Goods and market efficiency, Labor market
efficiency, financial market sophistication, Technology readiness, Market
size innovation- driven, business sophistication and innovation are that
pillars give table-2 GCI rank.
China are high 12 pillars and that china is high rank(28) in
BRICS, After that Russia came 53rd GCI rank and second in BRICS,South
Africa is 56th GCI rank and 3rd country in BRICS, Brazil 57th rank and 4th
country in BRICS country and India is 71st country in GCI index through 12
pillars of GCI and it show that China is Developed country in BRICS
country and India is developing country.

All of the BRIC country rankings either improve slightly or stay the same.
China is to 28th place. Brazil 57th , India 71st , and Russia stays
53rd.
 CHAPTER 2: INTRODUCTION TO THE TOPIC

Indian Stock Markets: An Overview

It all started in India, when twenty-two agents started the Bombay Stock Exchange
(BSE). That was way back in 1875. From then on, Indian markets have evolved
continuously. Transparency is a buzzword in the Indian business finance scene.
Characterized by operational excellence, and conformity to rules and regulations,
the Indian financial market is a beacon of the economy. The Indian stock market is
probably the oldest in Asia. In 1994, the National Stock Exchange (NSE) was
commenced. NSE‘s objectives are to provide for speedy transactions. It also
encouraged small investors.

The Company Act of 1956 governs the securities market in India. Having the
powers to regulate companies, the central government and the company law board
abide by the companies act of 1956. Powers such as auditing of accounting
information, reviewing the business finance model and looking into the other
affairs of the company are given to the government. Investigators from the
directorate of investigation do the audits.

The Securities Contracts (Regulation) Act of 1956 and the Securities and Exchange
Board of India (SEBI) Act of 1992.are the other body of rules that govern the
Indian capital markets. Control of stocks, listings, contracts and a variety of other
things are dealt by the former act. SEBI is concerned with the growth of the
securities and business finance market in India. It looks into various other things
like eligibility criteria for registration, developing the code of conduct, and so on.
One of SEBI‘s main activities is to protect the business finance interests of
investors, by providing the facilities to safeguard their wealth. In many ways, SEBI
is instrumental in attracting investments, due to the safe nature in the Indian
business finance scene.

At a broad level, the Indian security market can be grouped into the savers and the
spenders. The savers are normal households, and the spenders are companies and
the government. If the money of the savers is put in financial securities, then
spenders get money to operate, and in turn the savers get interest or dividend to
enjoy. Hence the security market is where the companies meet the savers.
The changes in economic scenario(after the liberalization) and the economic
growth have raised the interest of Indian as well as Foreign Institutional
Investors(FII‘s) in the Indian capital market. The recent massive structural
reforms on the economic and industry front in the form of de-licensing rupee
convertibility, tapping of foreign funds, allowing foreign investors to come to
India, have resulted, on one hand, in the quantum leap in activities/volume in the
Indian capital market, and on the other hand and more importantly, that the Indian
capital market has undergone a metamorphosis in terms of institutions,
instruments, etc. The capital market in India is rightly termed as an emerging and
promising capital market. During last 20 years or so, the Indian capital market has
witnessed growth in volume of funds raised as well as of.

The buoyancy in the capital market has appeared as a result of increasing

industrialisation, growing awareness globalisation of the capital market, etc.
Several financial institutions, financial instruments and financial services have
emerged as a result of economic liberalisation policy of the Government of India.

The capital market has two interdependent segments : the primary market and
the secondary market. The primary market is the channel for creation of new
securities. These securities are issued by public limited companies or by
government agencies‘ In the primary market, the resources are mobilized either
through the public issue or through private placement route. It is a public issue if
anybody and everybody can subscribe for it, whereas if the issue is made available
to a selected group of persons it is termed as private placement. There are two
major types of issuers of securities, the corporate entities who issue mainly debt
and equity instruments and the Government (Central as well as State) who issue
debt securities. These new securities issued in the primary market are traded in
the secondary market. The secondary market enables participants who hold
securities to adjust their holdings in response to changes in their assessment of
 risks and returns.

Foreign Institutional Investments (FIIs)

In present era of globalization no country or economy has been left untouched
from international trade and commerce. More access to international capital
markets and foreign investments has helped developing countries surmount their
less developed capital markets. During the past few years, a flow of capital has
been seen from the developed part of the world to the less developed economies
which has led to decrease in the vulnerability of developing countries to financial
crisis by reduction in their external debt burden from 39% of gross national
income in 1995 to 26% in 2006 and increase in foreign exchange reserves to 92%
of long term debt and 423% of more volatile short term debt in 2006. Over the
years same scenario has been witnessed in the Indian economy also. And thus,
today most of the market entities are interested in attracting foreign capital as it not
only helps in creating liquidity for the firms stock and the stock market but also
leads to lowering of the cost of the capital for the firms and allows them to
compete more effectively in the global market place.

Foreign Investment

It has been defined as ―a transfer of funds or materials from one country (called
capital exporting country) to another country (called host country) in return for a
direct or indirect participation in the earnings of that enterprise.‖ Foreign
investments provide a channel through which one can have access to foreign
capital and after the opening up of the Indian economy; these have grown in leaps
and bounds.

Basically foreign investment can be made through following routes:

Foreign Direct Investment

(FDI) Foreign Portfolio
Investment (FPI).
Private Equity investments-Foreign venture capital investor(FVCI)

Firstly, foreign direct investment pertains to international investment in which the

investor obtains a lasting interest in an enterprise in another country. Mostly it
takes the form of buying or constructing a factory in a foreign country or adding
improvements to such a facility in form of property, plants or equipments and thus
is generally long term in nature. On the other hand, a private equity investment is
one made by foreign investors in Indian Venture Capital Undertakings (VCU) and
Venture Capital Funds (VCF). Thirdly, a foreign portfolio investment is a short-
term to medium- term investment mostly in the financial markets and is commonly
made through foreign Institutional Investors (FIIs), non resident Indian (NRI) and
persons of Indian origin (PIO).
FOREIGN INSTITUTIONAL INVESTORS

The term ‗FII‘ is used to denote an investor, mostly in the form of an institution
or entity which invests money in the financial markets of a country different from
the one where in the institution or the entity is originally incorporated. According
to Securities and Exchange Board of India (SEBI) it is ―an institution that is a
legal entity established or incorporated outside India proposing to make
investments in India only in securities‖. These can invest their own funds or invest
funds on behalf of their overseas clients registered with SEBI. The client accounts
are known as ‗sub-accounts‘. A domestic portfolio manager can also register as
FII to manage the funds of the sub-accounts. From the early 1990s, India has
developed a framework through which foreign investors participate in the Indian
capital market. A foreign investor can either come into India as a FII or as a sub-
account. As on March 31, 2011, there were 1,722 FIIs registered with SEBI and
5,686 sub-accounts registered with SEBI as on March 31, 2011

Basically FIIs have a huge financial strength and invest for the purpose of income
and capital appreciation. They are no interested in taking control of a company.
Some of the big American mutual funds are fidelity, vanguard, Merrill lynch,
capital research etc. They are permitted to trade in securities in primary as well as
secondary markets and can trade also in dated government securities, listed equity
shares, listed non convertible debentures/bonds issued by Indian company and
schemes of mutual funds but the sale should be only through recognized stock
exchange. These also include domestic asset management companies or domestic
portfolio managers who manage funds raised or collected or bought from outside
India for the purpose of making investment in India on behalf of foreign corporate
or foreign individuals. In the Indian context, foreign institutional investors (FIIs)
and their sub-accounts mostly use these instruments for facilitating the
participation of their overseas clients, who are not interested in participating
directly in the Indian stock market.

FIIs contribute to the foreign exchange inflow as the funds from multilateral
finance institutions and FDI are insufficient.

It lowers cost of capital, access to cheap

global credit. It supplements domestic
savings and investments.
It leads to higher asset prices in the Indian market.
And has also led to considerable amount of reforms in capital market and
financial sector.
 BACKGROUND

In the late 1980s India suffered an acute financial crunch. At that time Indian
foreign exchange stood at mere US $1.2 bn which could barely finance 3 weeks‘
worth of imports. And India had to pledge its gold reserve with IMF to secure a
loan of just US $457 mn. The gross fiscal deficit of the government rose from
9.0% of GDP in 1980-81 to 10.4 percent in 1985-86 and to 12.7% in 1990-91.
Since these deficits had to be met by borrowings, the internal debt of the
government accumulated rapidly, rising from 35% of GDP at the end of 1980-81 to
53% of GDP at the end of 1990-91.

According to India Report, Astaire Research

“A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an
IMF bailout, gold was transferred to London as collateral, the rupee devalued and economic
reforms were forced upon India. That low point was the catalyst required to transform the
economy through badly needed reforms to unshackle the economy. Controls started to be
dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the
economy was opened to trade and investment, private sector enterprise and competition were
encouraged and globalization was slowly embraced. The reforms process continues today and is
accepted by all political parties, but the speed is often held hostage by coalition politics and
vested interests.”

Thus it was decided to open up the economy, the economic policies were
liberalized and private sector was given the freedom to participate in the Indian
economy more effectively. The Indian market was integrated with the world
economy and international investors were invited to participate in India.
Consequently, the committee on ―the reforms of the financial system‖ under the
chairmanship of Mr M. Narsimham Rao was made which sought for reforms in the
financial sector. One of its recommendation included developing an active
government securities market and strengthening the open market operations as an
instrument of monetary policy. And thus this reform paved way for foreign
investments which were at that time the need of the hour. As a result of this, Indian
stock market witnessed metamorphic changes and a transition-from a ―dull‖ to a
highly ―buoyant‖ stock market. Improved market surveillance system, trading
mechanism and introduction of new financial instruments made it a center of
attraction for the international investors.

Until the 1980s, India‘s development strategy was focused on self-reliance and
Import- substitution. Current account deficits were financed largely through debt
flows and official development assistance. There was a general disinclination
towards foreign investment or private
commercial flows. Since the initiation of the reform process in the early 1990s,
however, India‘s policy stance has changed substantially, with a focus on
harnessing the growing global foreign direct investment (FDI) and portfolio flows.
The broad approach to reform in the external sector after the Gulf crisis was
delineated in the Report of the High Level Committee on Balance of Payments
(Chairman: C. Rangarajan). It recommended:

a compositional shift in capital flows away from debt to non-debt

creating flows; strict regulation of external commercial borrowings,
especially short-term debt; discouraging volatile elements of flows
from non-resident Indians (NRIs); gradual liberalisation of outflows;
disintermediation of Government in the flow of external assistance.

Introduction to FII
Since 1990-91, the Government of India embarked on liberalization and economic
reforms with a view of bringing about rapid and substantial economic growth and
move towards globalization of the economy. As a part of the reforms process, the
Government under its New Industrial Policy revamped its foreign investment
policy recognizing the growing importance of foreign direct investment as an
instrument of technology transfer, augmentation of foreign exchange reserves and
globalization of the Indian economy. Simultaneously, the Government, for the first
time, permitted portfolio investments from abroad by foreign institutional investors
in the Indian capital market. The entry of FIIs seems to be a follow up of the
recommendation of the Narsimhan Committee Report on Financial System. While
recommending their entry, the Committee, however did not elaborate on the
objectives of the suggested policy. The committee only suggested that the capital
market should be gradually opened up to foreign portfolio investments. From
September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all
the securities traded on the primary and secondary markets, including shares,
debentures and warrants issued by companies which were listed or were to be
listed on the Stock Exchanges in India. While presenting the Budget for 1992-93,
the then Finance Minister Dr. Manmohan Singh had announced a proposal to
allow reputed foreign investors, such as Pension Funds etc., to invest in Indian
capital market. To operationalise this policy announcement, it had become
necessary to evolve guidelines for such investments by Foreign Institutional
Investors (FIIs).
A major development in our country post 1991 has been liberalization of the financial
sector, especially that of capital markets. Our country today has one of the most
prominent and followed stock exchanges in the world. Further, India has also been
consistently gaining prominence in various international forums, though we still have
a long way to go.
EVOLUTION OF FII POLICIES IN INDIA

After the launch of the reforms in the early 1990s, there was a gradual shift
towards capital account convertibility. From September 14, 1992, with suitable
restrictions, FIIs and Overseas Corporate Bodies (OCBs) were permitted to invest
in financial instruments.

The policy framework for permitting FII investment was provided under the
Government of India guidelines, which enjoined upon FIIs to obtain an initial
registration with SEBI and also RBI‘s general permission under FERA. The
Government guidelines of 1992 also provided for eligibility conditions for
registration, such as track record, professional competence, financial soundness
and other relevant criteria, including registration with a regulatory organisation in
the home country. The guidelines were suitably incorporated under the SEBI (FIIs)
Regulations, 1995.With coming into force of the Foreign Exchange Management
Act, (FEMA), 1999 foreign exchange related transactions of FIIs were permitted
by RBI. Right from 1992, FIIs have been allowed to invest in all securities traded
on the primary and secondary markets, including shares, debentures and warrants
issued by companies which were listed or were to be listed on the Stock Exchanges
in India and in schemes floated by domestic mutual funds. The holding of a single
FII, and of all FIIs, NRIs and OCBs together in any company were initially subject
to the limit of 5 per cent and 24 per cent of the company‘s total issued capital,
respectively. Furthermore, to ensure a broad base and prevent such investment
acting as a camouflage for individual investment in the nature of FDI and requiring
Government approval, funds invested by FIIs have to have at least 50 participants
(changed to 20 investors in August, 1999) with no single participant holding more
than 5 per cent (revised to 10 per cent in February, 2000).

However, this was allowed to be increased subject to passing of resolution by the

Board of Directors of the company followed by passing of a special resolution by
the General Body of the company. The ceiling limit under special procedure was
enhanced in stages as follows:

to 30 per cent from April 4, 1997

to 40 per cent from March 1, 2000,
to 49 per cent from March 8, 2001,and
 to sectoral cap/statutory ceiling from September 20,2001.
The Government guidelines for FII of 1992 allowed, inter-alia, entities such as
asset management companies, nominee companies and incorporated/institutional
portfolio managers or their power of attorney holders (providing discretionary and
non discretionary portfolio management services) to be registered as FIIs. While
the guidelines did not have a specific provision regarding clients, in the application
form the details of clients on whose behalf investments were being made were
sought. While granting registration to the FII, permission was also granted for
making investments in the names of such clients. Asset management
companies/portfolio managers are basically in the business of managing funds and
investing them on behalf of their funds/clients. Hence, the intention of the
guidelines was to allow these
categories of investors to invest funds in India on behalf of their ‗clients‘. These
‗clients' later came to be known as sub-accounts. The broad strategy consisted of
having a wide variety of clients, including individuals, intermediated through
institutional investors, who would be registered as FIIs in India. A Working Group
for Streamlining of the Procedures relating to FIIs, constituted in April, 2003, inter
alia, recommended streamlining of SEBI registration procedure, and suggested that
dual approval process of SEBI and RBI be changed to a single approval process of
SEBI. This recommendation was implemented in December 2003.

Under eligibility conditions, the definition of broad based funds was relaxed in
August, 1999 and in February, 2000 and newer entities, such as foreign firms were
allowed to invest as sub- accounts. In order to have a level playing field in
intermediation, domestic portfolio managers were allowed in February, 2000 to
manage the funds of sub-accounts, so as to give end- customers a greater choice
about the identity of their fund manager in India. FIIs were initially allowed to only
invest in listed securities of companies. Gradually, they were allowed to invest in
unlisted securities, rated government securities, commercial paper and derivatives
traded on a recognised stock exchange. From November 1996, any registered FII
willing to make 100 per cent investment in debt securities were permitted to do so
subject to specific approval from SEBI as a separate category of FIIs or sub-
accounts as 100 per cent debt funds In order to increase transparency, SEBI issued
a circular on October 31, 2001 to all FIIs and their custodians advising the FIIs to
report as and when any derivative instruments with Indian underlying securities are
issued/renewed/redeemed by them, either on their own account or on behalf of sub-
accounts registered under them. In 2003 this circular was further revised to include
disclosure of more details about terms, nature and contracting parties.

The overall cap on investments in Government securities, both through the normal
route and the 100 per cent debt fund route, was revised from US$1 billion to
US$1.75 billion in November, 2004. Moreover, investments were allowed only in
debt securities of companies listed or to be listed in stock exchanges. Investments
were free from maturity limitations. From April 1998, FII investments were also
allowed in dated Government securities. Treasury bills, being money market
instruments, were originally outside the ambit of such investments, but were
included subsequently from May, 1998.In April 2006 there was a rise in the
cumulative debt investment limits from US $1.75 billion to US $2 billion and US
$0.5 billion to US $1.5 billion for FII/Sub Account investments in Government
securities and Corporate Debt, respectively.
 Investments by FIIs

A FII may invest through 2 routes:

Equity Investment
100% investments could be in equity related instruments or upto 30% could
be invested in debt instruments i.e.70 (Equity Instruments): 30 (Debt
Instruments)
100% Debt
100% investment has to be made in debt securities only

Equity Investment route: In case of Equity route the FIIs can invest in the following
instruments:

A. Securities in the primary and secondary market including shares which are unlisted, listed
or to be listed on a recognized stock exchange in India.
B. Units of schemes floated by the Unit Trust of India and other domestic mutual funds,
whether listed or not.
C. Warrants

100% Debt route: In case of Debt Route the FIIs can invest in the following
instruments:

A. Debentures (Non Convertible Debentures, Partly Convertible Debentures etc.)

B. Bonds
C. Dated government securities
D. Treasury Bills
E. Other Debt Market Instruments

It should be noted that foreign companies and individuals are not be eligible to invest
through the 100% debt route.

The evolution of FII policy in India has displayed a steady and cautious
approach to liberalisation of a system of quantitative restrictions (QRs). The
policy liberalization has taken the form of,
(i) relaxation of investment limits for FIIs;

(ii) relaxation of eligibility conditions;

Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated

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

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

As FII: Overseas pension funds, mutual funds, investment trust, asset

management company, nominee company, bank, institutional portfolio
manager, university funds, endowments, foundations, charitable trusts,
charitable societies, a trustee or power of attorney holder incorporated or
established outside India proposing to make proprietary investments or with
no single investor holding more than 10 per cent of the shares or units of the
fund.
As Sub-accounts: The sub account is generally the underlying fund on
whose behalf the FII invests. The following entities are eligible to be
registered as sub-accounts, viz. partnership firms, private company, public
company, pension fund, investment trust, and individuals.

FIIs registered with SEBI fall under the following categories:

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

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as
asset management companies, nominee companies and incorporated/institutional
portfolio managers or their power of attorney holders (providing discretionary and
non-discretionary portfolio management services) to be registered as Foreign
 Institutional Investors. While the guidelines did not have a specific provision
regarding clients, in the application form the details of clients on whose behalf
investments were being made were sought.

While granting registration to the FII, permission was also granted for making
investments in the names of such clients. Asset management companies/portfolio
managers are basically in the business of managing funds and investing them on
behalf of their funds/clients. Hence, the intention of the guidelines was to allow
these categories of investors to invest funds in India on
behalf of their ‗clients‘. These ‗clients‘ later came to be known as sub-accounts.
The broad strategy consisted of having a wide variety of clients, including
individuals, intermediated through institutional investors, who would be registered
as FIIs in India. FIIs are eligible to purchase shares and convertible debentures
issued by Indian companies under the Portfolio Investment Scheme.

Prohibitions on Investments:

Foreign Institutional Investors are not permitted to invest in equity issued by an

Asset Reconstruction Company. They are also not allowed to invest in any
company which is engaged or proposes to engage in the following activities:

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

Trends of Foreign Institutional Investments in India.

Portfolio investments in India include investments in American Depository

Receipts (ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional
Investments and investments in offshore funds. Before 1992, only Non-Resident
Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio
investments in India. Thereafter, the Indian stock markets were opened up for
direct participation by FIIs. They were allowed to invest in all the securities traded
on the primary and the secondary market including the equity and other
securities/instruments of companies listed/to be listed on stock exchanges in India.

Procedure for Registration: The Procedure for registration of FII has been given by
SEBI regulations. It states- ―no person shall buy, sell or otherwise deal in securities as
a Foreign
Institutional Investor unless he holds a certificate granted by the Board under
these regulations‖. An application for grant of registration has to be made in Form
A, the format of which is provided in the SEBI (FII) Regulations, 1995.
Entities which can register as FII‟s in India- Eligibility

Entities who propose to invest their proprietary funds or on behalf of ―broad

based‖ funds (fund having more than twenty investors with no single investor
holding more than 10 per cent of the shares or units of the fund) or of foreign
corporate and individuals and belong to any of the under given categories can be
registered for Foreign Institutional Investors (FII‘s)

Pension
Funds
Mutual Funds
Investment Trust
Insurance or reinsurance
companies Endowment Funds
University Funds
Foundations or Charitable Trusts or Charitable Societies who propose to
invest on their own behalf
Asset Management
Companies Nominee
Companies
Institutional Portfolio
Managers Trustees
Power of Attorney
Holders Banks
Foreign Government
Agency Foreign Central
 Bank
International or Multilateral
Organization or an Agency thereof

Some of the above mentioned types are described below:

Pension funds: A pension fund is a pool of assets that form an independent legal
entity that are bought with the contributions to a pension plan for the exclusive
purpose of financing pension plan benefits. It manages pension and health benefits
for employees, retirees, and their families. FII activity in India gathered momentum
mainly after the entry of CalPERS (California Public Employees‘ Retirement
System), a large US-based pension fund in 2004.

Mutual funds: A mutual fund is a professionally managed type of collective

investment scheme that pools money from many investors and invests it in stocks,
bonds, short-term money market instruments, or other such securities. The mutual
fund will have a fund manager that trades the pooled money on a regular basis. The
net proceeds or losses are then distributed to the investors.

Investment trust: An Investment trust is a form of collective investment

.Investment trusts are closed-end funds and are constituted as public limited
companies. A collective investment
scheme is a way of investing money with others to participate in a wider range of
investments than feasible for most individual investors, and to share the costs and
benefits of doing so

Investment banks: An investment bank is a financial institution that raises capital,

trades in securities and manages corporate mergers and acquisitions. Investment
banks profit from companies and governments by raising money through issuing
and selling securities in capital markets (both equity, debt) and insuring bonds (e.g.
selling credit default swaps), as well as providing advice on transactions such as
mergers and acquisitions.

Hedge funds: A hedge fund is an investment fund open to a limited range of

investors that is permitted by regulators to undertake a wider range of investment
and trading activities than other investment funds, and that, in general, pays a
performance fee to its investment manager. Every hedge fund has its own
investment strategy that determines the type of investments and the methods of
investment it undertakes. Hedge funds, as a class, invest in a broad range of
investments including shares, debt and commodities. Many hedge funds
investments in India were facilitated by global investors borrowing at near zero
interest rates in Japan and investing the proceeds in High interest markets like
India.

University Fund: The purpose of investments of these funds is to establish an

asset mix for each of the University funds according to the individual fund‘s
spending obligations, objectives, and liquidity requirements. It consists of the
University‘s endowed trust funds or other funds of a permanent or long-term
nature. In addition, external funds may be invested including funds of affiliated
organizations and funds where the University is a beneficiary.

Endowment fund: It is a transfer of money or property donated to an institution,

usually with the stipulation that it be invested, and the principal remain intact in
perpetuity or for a defined time period. This allows for the donation to have an
impact over a longer period of time than if it were spent all at once.

Insurance Funds: An insurance company‘s contract may offer a choice of unit-

linked funds to invest in. All types of life assurance and insurers pension plans,
both single premium and regular premium policies offer these funds. They
facilitate access to wide range and types of assets for different types of investors.

Asset Management Company: An asset management company is an investment

management firm that invests the pooled funds of retail investors in securities in
line with the stated investment objectives. For a fee, the investment company
provides more diversification, liquidity, and professional management consulting
service than is normally available to individual investors. The diversification of
portfolio is done by investing in such securities which are inversely correlated to
each other. They collect money from investors by way of floating various mutual
fund schemes.
 Nominee Company: Company formed by a bank or other fiduciary organization
to hold and administer securities or other assets as a custodian (registered owner)
on behalf of an actual owner (beneficial owner) under a custodial agreement.

Charitable Trusts or Charitable Societies: A trust created for advancement of

education, promotion of public health and comfort, relief of poverty, furtherance of
religion, or any other purpose regarded as charitable in law. Benevolent and
philanthropic purposes are not necessarily charitable unless they are solely and
exclusively for the benefit of public or a class or section of it. Charitable trusts
(unlike private or non-charitable trust) can have perpetual existence and are not
subject to laws against perpetuity. They are wholly or partially exempt from almost
all taxes.

An application for registration has to be made in Form A, the format of which is

provided in the SEBI(FII) Regulations, 1995 and submitted with under mentioned
documents in duplicate addressed to SEBI as well as to Reserve Bank of India
(RBI) and sent to the following address within 10 to 12 days of receipt of
application.
1. Also the rigid criteria of requiring FIIs and sub-account to register as a 70:30 FII/ sub-account
or 100% debt FII/sub-account has recently been done away with(as has been discussed above in
the essay).

With regard to investments in the secondary market, SEBI states that:

The Foreign Institutional Investor is allowed to transact business only on the

basis of taking and giving deliveries of securities bought and sold.
Short selling in securities is not allowed. However, in December 2007,
abroad regulatory framework enabling short selling by FIIs was put in place.
Which stipulated that naked short selling was not permitted and settlement
of securities sold short would be through a mechanism for borrowing of
securities.
FIIs are not permitted to short sell equity shares which are in the caution
list of RBI. Equity shares can be borrowed by FIIs only for the purpose
of delivery into short sale. No transactions on the stock exchange can be
carried forward.
Transaction of business in securities can be carried out only through stock
brokers who has been granted a certificate by the Board.
A Foreign institutional Investor or a sub-account having an aggregate of
securities worth rupees ten crore or more, as on the latest balance sheet date,
can settle their only through dematerialised securities.
Securities have to be registered in the name of the Foreign Institutional
Investor, if he is making investments on his own behalf or in his name on
account of his sub-account, or in the name of the sub-account, in case he is
investing on behalf of the sub-account.
The purchase of equity shares of each company by a Foreign Institutional
Investor investing on his own account cannot exceed ten percent of the total
issued capital of that company.
Investment by individual FIIs cannot exceed 10% of paid up capital.
Investment by foreign registered as sub accounts of FII cannot exceed 5% of
paid up capital. All FIIs and their subaccounts taken together cannot acquire
more than 24% of the paid up capital of an Indian Company. An Indian
Company can raise the 24% ceiling to the Sectoral Cap
/ Statutory Ceiling by passing a resolution by its Board of Directors followed
by passing a Special Resolution to that effect by their General Body.
For FIIs investing in the equity shares of a company on behalf of his sub-
accounts, the investment on behalf of each such sub-account cannot exceed
ten percent of the total issued capital of that company.
The FII position limits in a derivative contracts (Individual Stocks)

The FII position limits in a derivative contract on a particular underlying stock

i.e. stock option contracts and single stock futures contracts are:
For stocks in which the market wide position limit is less than or equal to Rs.
250 Cr, the FII position limit in such stock is 20% of the market wide limit.
For stocks in which the market wide position limit is greater than Rs.
250 Cr, the FII position limit in such stock is Rs. 50 Cr.

FII Position limits in Index options contracts

FII position limit in all index options contracts on a particular underlying index is
Rs. 250 Crore or 15 % of the total open interest of the market in index options,
whichever is higher, per exchange. This limit is applicable on open positions in all
option contracts on any underlying index.

FII Position limits in Index futures contracts

FII position limit in all index futures contracts on a particular underlying index is
Rs. 250 Crore or 15 % of the total open interest of the market in index futures,
whichever is higher, per exchange.

This limit is applicable on open positions in all futures contracts on a particular

underlying index. In addition to the above, FIIs can take exposure in equity index
derivatives subject to the conditions that :

Short positions in index derivatives (short futures, short calls and long puts)
cannot exceed (in notional value) the FII‘s holding of stocks.
Long positions in index derivatives (long futures, long calls and short puts)
can not exceed (in notional value) the FII‘s holding of cash, government
securities, TBills and similar instruments.

FII Position Limits in Interest rate derivative contracts

 At the level of the FII – The notional value of gross open position of a FII
in exchange traded interest rate derivative contracts is US $ 100 million.
In addition to the above, FIIs can take exposure in exchange traded in
interest rate derivative contracts to the extent of the book value of their cash
market exposure in Government Securities.
At the level of the sub-account – The position limits for a Sub-account in
near month exchange traded interest rate derivative contracts is the higher
of: Rs. 100 Cr Or 15% of total open interest in the market in exchange
traded interest rate derivative contracts.

FIIs and their impact on Indian Stock market

It is influence of the FIIs which changed the face of the Indian stock markets.
Screen based trading and depository are realities today largely because of FIIs.
Equity research was something unheard of in the Indian market a decade ago. It
was FII which based the pressure on the rupee from the balance of payments
position and lowered the cost of capital to Indian business. It is due to the FIIs that
a concept like corporate governance is being increasingly adopted by Indian
companies; this is benefiting domestic investors also. FIIs are the trendsetters in
any market.
They were the first ones to identify the potential of Indian technology stocks.
When the rest of the investors invested in these scrips, they exited the scrips and
booked profits. Before the arrival of FIIs, the activity in stocks used to be evenly
attributed with little differences between volumes in specified and cash groups.
However since FIIs concentrate on the top 200 companies against the 6,000 listed
companies on BSE, the stock trading activity has concentrated to these liquid
scrips making them less liquid scrips totally illiquid. Thus, FIIs have become the
driving force behind the movements of the stock indices on the Indian stock
markets.

Rolling settlement was introduced at the insistence of FIIs as they were

uncomfortable with the badla system. The major beneficiaries of the rolling
settlement system are FIIs as short settlement cycles offer them quick exit from
the market.
With their massive financial muscle FIIs have almost replaced conventional
market of the Indian bourse. Today financial institutions and mutual funds
including UTI can do little to help the stock markets at a time of crisis. Even UTI,
which used to be counter force for FIIs has ceased to play that role in the Indian
stock markets.

It is expected that with the adoption of international practices such as rolling

settlement and derivatives FII participation will increase and more money will
flow into the Indian capital market.
entity of Merrill Lynch has picked up 49% stake in seven residential projects of real
estate major, DLF.

This boost, though good for Indian economy has led to a number of negative
consequences. Let us study the positive and the negative side of this rise of
investments by FIIs one by one.

Positive impact: It has been emphasized upon the fact that the capital market
reforms like improved market transparency, automation, dematerialization and
regulations on reporting and disclosure standards were initiated because of the
presence of the FIIs. But FII flows can be considered both as the cause and the
effect of the capital market reforms. The market reforms were initiated because of
the presence of them and this in turn has led to increased flows.

A. Enhanced flows of equity capital: FIIs are well known for a greater appetite for equity than
debt in their asset structure. For example, pension funds in the United Kingdom and United
States had 68 per cent and 64 per cent, respectively, of their portfolios in equity in 1998. Not
only it can help in supplementing the domestic savings for the purpose of development projects
like building economic and social infrastructure but can also help in growth of rate of
investment, it boosts the production, employment and income of the host country.

B. Managing uncertainty and controlling risks: FIIs promote financial innovation and
development of hedging instruments. These because of their interest in hedging risks, are known
to have contributed to the development of zero-coupon bonds and index futures. FIIs not only
enhance competition in financial markets, but also improve the alignment of asset prices to
fundamentals. FIIs in particular are known to have good information and low transaction costs.
By aligning asset prices closer to fundamentals, they stabilize markets. In addition, a variety of
FIIs with a variety of risk-return preferences also help in dampening volatility.
C. Improving capital markets: FIIs as professional bodies of asset managers and financial
analysts enhance competition and efficiency of financial markets. By increasing the availability
of riskier long term capital for projects, and increasing firms‘ incentives to supply more
information about them, the FIIs can help in the process of economic development.

D. Improved corporate governance: Good corporate governance is essential to overcome the

principal-agent problem between share-holders and management. Information asymmetries and
incomplete contracts between share-holders and management are at the root of the agency costs.
Bad corporate governance makes equity finance a costly option. With boards often captured by
managers or passive, ensuring the rights of shareholders is a problem that needs to be addressed
efficiently in any economy. 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. FIIs constitute professional bodies of asset managers and
financial analysts, who, by contributing to better understanding of firms‘ operations, improve
corporate governance. Among the four models of corporate control - takeover or
market control via equity, leveraged control or market control via debt, direct
control via equity, and direct control via debt or relationship banking-the third
model, which is known as corporate governance movement, has institutional
investors at its core. In this third model, 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. And this dependence has to a great extent caused a lot of
trouble for the Indian economy. Some of the factors are:

A. Potential capital outflows: ―Hot money‖ refers to funds that are controlled by investors who
actively seek short-term returns. These investors scan the market for short-term, high interest rate
investment opportunities. ―Hot money‖ can have economic and financial repercussions on
countries and banks. When money is injected into a country, the exchange rate for the country
gaining the money strengthens, while the exchange rate for the country losing the money
weakens. If money is withdrawn on short notice, the banking institution will experience a
shortage of funds.

B. 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. This
situation leads to excess liquidity thereby leading to inflation where too much money chases too
few goods.
C. Problem to small investors: 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 the stock market the downward path. This creates problems for the
small retail investor, whose fortunes get driven by the actions of the large FIIs.

D. 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.

E. Issue related to participatory notes: When Indian-based brokerages 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. Any entity investing in
participatory notes is not required to register with SEBI (Securities and Exchange Board of
India), whereas all FIIs have to compulsorily get registered. 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.
The hedge funds borrow money cheaply from western markets and invest these
funds into stocks in emerging economies. It is also feared that the hedge funds,
acting through participatory notes, will cause economic volatility in Indian
exchange and generally these are blamed for the sudden fall in indices. These
unlike FIIs are not directly registered under SEBI, but they operate through sub
accounts with FIIs and according to a number of studies it has been found that
more than 50% of the funds are flowing through this anonymous route, which can
lead to a great loss to the Indian economy.

Further, FIIs have contributed a lot in making Indian economy one of the fastest
growing economy in the world today. Foreign institutional investment can play a
useful role in development by adding to the savings of low and middle income
developing countries. And India among the world inventors is believed to be a
good investment destination inspite of all the political uncertainty and
infrastructural inefficiencies. After the liberalization of financial policies India has
been able to attract a lot of FII from rest of the world and which in turn has played
 its part very well by helping in development of Indian economy from what it was
in early 1990s to a would be super power that it is today. But still the harsh
consequences of FIIs should not be ignored by the government and further reforms
should be introduced in the economic sector to counter the tendency of the FIIs to
destabilize the emerging equity market. And also attempts should be made to
encourage small domestic investors to participate in the equity market.

Chart 1 : FII Investments in India

Source : SEBI Annual Report 2005-06

Chart 2: Trends in FII Investment

The FII investment in equity increased significantly since 2003-04. During

2005-06, FIIs increased their net investment in equities, but reduced their
 commitments in debt Securities (Table 2). The net FII investment in equity during
2005-06 was Rs.48,801 crore, the highest ever in a single year. Buoyancy in the
markets was sustained in 2005-06 on account of surge in net investment by the
institutional investors with FIIs playing a
SOURCES OF FIIS

As on March 31, 2006, SEBI had registered FIIs from 37 countries. The highest
number of FIIs, as on March 31, 2006, was from the USA (342), followed by the
UK (148). About 90 per cent FIIs come from the top 13 countries. There has been
increase in the number of FII registrations from non-traditional countries like
Malaysia, Australia, Saudi Arabia, Trinidad and Tobago, Denmark, Italy, Belgium,
Canada, Sweden, Ireland etc. (chart 3). These developments have helped improve
the diversity of the set of FIIs operating in India.
Chart 3: Country-wise FIIs Registered with SEBI as on 31st March 2006

Several factors were responsible for increasing confidence of FIIs on the Indian
stock market which include:

Strong economic fundamentals and attractive valuations of companies.

Improved regulatory standards, high quality of disclosure and corporate
governance requirement, accounting standards, shortening of settlement
cycles, efficiency of clearing and settlement systems and risk management
mechanisms.
Product diversification and introduction of derivatives.

Strengthening of the rupee dollar exchange rate and low interest rates in the US.
 2.11 FII ACTIVITY FOM 2006-2010

2008 FII sell-off the largest ever

The Indian equity market kept on sliding in September 2008 with the S&P
CNX NIFTY, showing the second sharpest fall since January 2008, with a decline
of around 10%. With all courtesy to the US financial markets and its crisis bug, an
estimated amount of Rs 2.3 trillion of shareholders' wealth were eroded in the
Indian stock markets.

We hear a lot about sales and purchases made by foreign institutional

investors (FIIs) in Indian equity markets, with these numbers often making
headlines. Why are we so obsessed with FIIs? The answer, is "Indian markets are
primarily driven by FII fund flows."

The market slide can be attributed to lower FII inflows in 2011. A look at stock
indices since 2006 shows that the markets peak when FII inflows are the highest
and fall when FIIs are missing in action. For instance, in 2008, the BSE Sensex fell
almost 50% due to the global financial meltdown, wiping out the gains of 2007.
The year 2008 has seen the biggest ever FIIs sell-off for the Indian markets. FIIs
were allowed to invest since 1991 when the economy opened up. FIIs sell-off of
USD 13.16 billion or Rs 53,000 crores has accounted for a 20% sell-off of the total
FII's equity investment since 1991. FIIs have invested USD 53.16 billion or Rs 2.3
lakh crores.

The number of registered FIIs have increased from 1,219 in 2007 to 1,595 in
2008, while the number of registered sub-accounts have increased from 3644 in
2007 to 4872 in 2008. In 2008, there were negative FIIs' flows seen for 10 months,
and the longest selling streak was seen from May to November. Since 1999, there
have been 32 months of negative FIIs flows as against 88 months of positive flows.
Since 2003, there have been 19 months of negative FIIs' flows as against 53 months
of positive flows. October and January were two carnage months, where USD
3.8 billion and UDS 3.2 billion, respectively, were sold.

The depreciation by 23% in rupee and the 51% sell-off in the markets has
resulted in the Defty falling 61%, making India one of the worst emerging market
performers for 2008. The biggest sell-off was seen in March, when the FIIs sold
36
Rs 1,881 crore. In January, a correction bought the most at Rs 7,702 crore follwed
by Rs 3,179 crore in June.

"What hurt in 2008 was not the performance of companies but rapid
outflow of $13 billion (Rs 55,000 crore) as investors fled risky assets," says
Nick Paulson-Ellis, India head, Espirito Santo Securities.The markets were flat
during the first three months of 2009 as FIIs stayed away. After that,
governments across the globe implemented plans to boost their economies.
India, helped by robust economic growth, became a preferred destination for
investors.
Table 5 shows the impact of FII‟s on SENSEX. In 2006 the foreign
institutional investors (FII) inflows were a bit slow, but they once again proved
that they were the drivers of the Indian equity market. Interestingly, the
dependence of the Indian equity markets on the foreign investors was further
proved by the fact that in the period between May 10, 2006 to June 14, 2006,
when the SENSEX moved from a high of 12,612.38 to a low of 8,928.44.
In the year 2007 when FIIs were pumping money in stock market and were Net
Buyers of Equity worth Rs. 70940.05 Crores; the SENSEX was moving upwards
on the weekly basis. It took nearly two months for the SENSEX to move from the
level of 15000 to 17000. But from 17000 to 20000 it moved in a span of few weeks
i.e. from 26th September 2007 to 29th October 2007. As the Indian markets move
from one peak to another this year, foreign institutional investors (FIIs) have
pumped top dollar into stocks. Investments during 2007 by foreign funds were the
most influential group of investors in the market. In September, FIIs injected $2.7
billion into the markets, sending the benchmark indices to record peaks. The bulk
of this amount came in after the US Fed cut interest rates on September 18 which
ultimately led to increasing liquidity in global markets.

In January 2008 the SENSEX touched the new height of 21000. This rally of
1000 points of SENSEX infused Rs. 2403 Crores during a period of just 49 trading
days. But in the later part of 2008 the SENSEX crashed affecting large number of
investors. The major cause of this crash was attributed to the recession in the global
economies, especially with the US dollar losing its strength to the Indian rupee. A
large amount of equity in the form of shares was floated in the Indian economy as
an impact of Foreign Institutional Investors (FII‟s) withdrawing their money from
the Indian markets. This has disturbed the demand and supply ratio to a great
37
 extent resulting in easy availability of shares of well-performing companies, thus
leading to a dip in the selling price of these shares.
However, in 2009 with the sign of revival of economies, the trend turned positive
and overseas investors started betting big on the domestic bourses as the liquidity
conditions started improving. In 2010 most of the stocks which have shown an
increase in prices were driven by huge FII buying. India continued to be a favored
destination for FIIs and would continue to be so because of its strong
fundamentals. This could well be reflected in the FII inflows towards the country,
which had already reached all-time highs. Thus it can be observed that there is a
positive correlation between FII inflows and SENSEX.
PROPPING UP STOCKS
Investing in stocks with high FII interest can give good returns. For instance, the
FII holding in HDFC has been 58-60% since 2008. Similarly, the FII holding in
ICICI Bank has been 38-40% for years. Between March 2008 and 29 September
2011, HDFC Bank and ICICI Bank have risen 35% and 20%, respectively.

38
 PRESENT SCENARIO (2010-2011)

Recent Trends in Foreign Institutional Investment

Foreign Institutional Investors play an important role in Indian securities
markets.Since 1992-93, when FIIs were allowed entry into Indian financial
markets, foreign institutional investment has increased over the years except in
2008-09. In tandem with the boom in stock markets and a better global scenario,
investments by FIIs into India were quite high in last few years, particularly since
2003-04. FIIs made a record investment in the Indian equity market in
2010-11, surpassing the 2009-10 inflows.

Chart: Trends in Foreign Institutional Investment

The gross purchases of debt and equity by FIIs increased by 17.3 percent to
9,92,599 crore in 2010-11 from 8,46,438 crore in 2009-10 (Table 2.50). The
combined gross sales by FIIs also increased by 20.2 percent to 8,46,161 crore
from ` 7,03,780 crore during the same period in previous year. The total net
39
investment of FII was 1,46,438 crore as compared to of 1,42,658 crore in 2009-
10. This was the highest net FII investments into Indian securities market in any
financial year so far.

Chart: Net Institutional Investment (crore) and Monthly Average Nifty

Registration of Foreign Institutional Investors and Custodians of Securities

There was a small increase in the number of Foreign Institutional Investors (FIIs)
registered with SEBI. As on March 31, 2011, there were 1,722 FIIs registered with
SEBI as compared to 1,713 a year ago, showing an increase of 0.53 percent during
the year. There were 5,686 sub-accounts registered with SEBI as on March 31,
2011 as compared to 5,378 as on March 31, 2010, an increase of 5.73 percent The
number of custodians registered with SEBI under the SEBI (Custodian of
Securities) Regulations, 1996 was 19, as on March 31, 2011, as compared to 17 a
year ago. Status of registration of FIIs, sub-accounts and custodians during 2010-
11 is provided in below Table

40
 FII activity in 2012

The investment by overseas investors into Indian stock market since the
beginning of 2012 has crossed $7 billion level, out of which more than $5 billion
were pumped in the month of February. Foreign Institutional Investors (FIIs)
purchased equities and debt securities worth a gross amount of Rs 76,548 crore in
January 2012, while their gross sales for the month were worth Rs 50,219 crore,
translating into a net inflow of Rs 26,329 crore, as per data compiled by the
market regulator Sebi.

Overseas investors poured in over Rs 26,000 crore ($5.08 billion) in Indian markets
in January
2012, the highest one-month net inflow in 16
months, as sentiments got a boost from easing
inflation concerns and attractive valuations.

The Foreign Institutional Investors (FIIs) infused a net

amount of $ 5.12 billion (about Rs 25,212 crore)
during February, taking the total for 2012 so far to
$7.16 billion for the Indian stocks.

Market analysts attributed strong FII inflows to

signs of a reversal in RBI‘s monetary policy and the subsequent impact of
improved liquidity position. They expect the positive trend to continue further,
given that the liquidity conditions remain strong.Market analysts attributed
strong FII inflows to signs of a reversal in RBI's monetary policy and the
subsequent impact of improved liquidity position.

During February, FIIs were gross buyers of shares worth Rs 79,898.6 crore, while
they sold equities amounting to Rs 54,686.6 crore, translating into a net
investment of Rs 25,212 crore ($
5.12 billion), as per data available with market regulator Sebi. This is the
highest monthly net investment by FIIs in equities since October 2010, where
they had infused Rs 28,563 crore.

The foreign fund houses also infused Rs 1,0016 crore ($2.03 billion) in the debt
market last month. This takes the overall net investments by FIIs into debt markets
41
to Rs 25,987 crore ($5.08 billion) so far this year. ―FIIs have been infusing money
into the Indian market due to change in RBI‘s monetary policy that have added
liquidity to the system. This liquidity will help in growth of the country,‖ Wellindia
Executive Director Hemant Mamtani said. ―Indian market will continue to witness
inflows in the whole year, if the liquidity conditions remain strong,‖ he added.
Strong surge in FII inflows in 2012 so far has helped boost the equity markets, as
also the rupee.

The stock market barometer Sensex has gained 15 per cent in 2012, despite a fall
of about 3.25 percent last month. The index finished at 17,752.68 on February 29.
FIIs had mostly stayed away
from Indian equities in 2011. They flocked towards the debt market last year
with a net investment of Rs 20,293 crore, while pulling out Rs 2,812 crore
from equities.

In the year 2011, FIIs purchased stocks and bonds worth Rs 8 lakh crore, but sold
securities worth Rs 7.9 lakh crore, resulting in a net investment of Rs 17,480 crore
during the year. Strong surge in FII inflow in 2012 has helped boost the equity
markets as well as helped the Indian rupee to strengthen. The foreign fund houses
have also infused Rs 17,281 crore in the debt market so far this year. Strong surge
in FII inflow in 2012 has helped boost the equity markets as well as helped the
Indian rupee to strengthen.

It is not only India which has witnessed an upsurge in investment, equity funds
focused on all emerging markets put together have seen an inflow of over $24
billion in 2012. "FIIs investments in debt market are rising because of higher
yields on local bonds," Bandyopadhyay said. In terms of equity investment,
foreign funds have poured in maximum money in infrastructure and pharma
stocks, he added. This is the highest net investment by FIIs in stocks and bonds
since September 2010.

―In 2012, FIIs infused money into the Indian market mainly on account of easing
inflation, a relaxing of foreign investor restrictions and the RBI‘s policy moves,‖
CNI Research Head Kishor Ostwal said. Stock market inflows in the first 17 days
of February, at Rs 13,867 crore, were higher than that for the entire month of
January 2012, which stood at Rs 10,358 crore.
42
 Secret of the Sensex: Biggest FII turn-on since 2000

The Sensex crossed the 18,000 mark and closed at a six-month high. India, which
was among the worst performing markets by December 2011, is one of the best
performing ones today.

Fundamentally, nothing seems to have changed, either in India or in the world. In

fact, after the December quarter corporate numbers, the outlook is even more bleak.

So what is the secret behind this sudden rally? The answer is the largest foreign
inflows since the turn of the decade.

The main reason for the sharp 18 percent rise in indices is the Rs 22,000 crore FII
money that has entered the country, the highest ever, since Sebi started disclosing
the data in 2000. Inflows in the first 15 days of February, at Rs 11,681.7 crore,
were higher than that for the entire month of January 2012, which stood at Rs
10,907 crore. This means around $4 billion of money has already flown into the
country in the first 45 days of this year. It has resulted in Sensex moving from a
low of 15,358 0n 2 January 2012 to 18,231 on 15 February.

While emerging markets trade at a valuation of 12 times their reported

profits, developed markets are trading at 14 times their reported profits.
Reuters

The MSCI (Morgan Stanley Capital International) Emerging Markets Index has
already gained 15 percent in 2012, the best start to a year since 1991. It has
outperformed the MSCI World Index by 6 percentage point.
According to a report in Bloomberg, Jonathan Garner, the chief Asia and
emerging markets strategist at Morgan Stanley, said the surge in optimism is a
contrarian indicator that may signal the rally has gone too far, too fast. Michael
Hartnett, chief global equity strategist at Bank of America Investor, says holdings
in emerging markets have climbed to a level that historically foreshadowed short-
term underperformance.

From the chart below, it‘s clear that the banking sector has been the favourite
among sector investments. The banking sector retained its top position for eight of
the the nine quarters analysed by the investment research firm. FIIs had an 11
percent exposure to this sector in the December quarter. Power and metal
companies also received allocations of 6.6-7.9 percent, although their shares have
declined slightly from the September quarter.

At the moment, it‘s difficult to tell whether foreigners will continue to invest
robustly in India‘s capital markets. Some experts believe the results could inhibit
the government from taking any bold reform measures and lower the prospects of
the economy, which could dampen the appetite of foreign investors. Indeed, the
Sensex reported volatility as it closed lower at 17,173 points on Tuesday, 500
points lower from its intra-day high on the elections results, as investors sensed
more economic policy-making delays ahead. The rupee also plunged below 50
 CHAPTER 4: FUTURE PROSPECTS

4.1 Reasons Why FIIs Will Keep Pumping Money Into Indian Market

The Foreign Institutional Investors (FIIs) infused a net amount of $ 5.12 billion (about
Rs 25,212 crore) during February, taking the total for 2012 so far to $7.16 billion for the
Indian stocks. For some, it may be just another factoid, but when we look at it from the
perspective of the Indian equity market the massive inflow has far-reaching
consequences. The inflow helped Indian equity market to turn around from the negative
return of year 2011 and post one of the best returns in the last two decades . The last
time we witnessed return in excess of 75 per cent was in 1991. That was mainly because
the then Finance Minister and present Prime Minister Dr Manmohan Singh ushered in
new economic policy of liberalization, privatization and globalization and creating
euphoria that resulted in historic market returns. So will India be lucky to repeat the
inflows of 2007 again in 2012? But before we come to that, we will try to understand the
nature of FII investments and their importance in shaping the market direction and
returns.

India may attract better portfolio flows this year. Various conducive factors are present
that can encourage these flows. To begin, there is little risk to the long-term GDP growth
in our country. Over the last 30 years, India's real GDP growth has averaged about 6.2
per cent. With little dependence on the western world for its growth, a slowdown
elsewhere in the world will have little impact on India.

Domestic consumption continues to be key factor driving growth. Good monsoons and
higher farm prices should keep the rural economy humming.

Those worried about inflation need to remember that, for India, this is not new
phenomenon. In the early 1990s, India had grown despite the high interest rates and
inflation. However, for FIIs coming into India with an 8-9 per cent GDP growth
assumption, a 6.5 per cent growth could be a disappointment.

The second factor is that valuations of Indian stocks are attractive and earnings growth is
good. If the price-to-earnings multiple of our market is considered, stocks are not as
cheap as they were in 2003 or 2008 when valuations were less than 10x. If the euro crisis
escalates further, we might see those kinds of valuations; however, at the current levels,
given the current earnings growth rates in India, it is still attractive as it is below the
long-term average of 17.6x. According to Bloomberg's consensus estimate, earnings is
expected to grow 25.6 per cent in FY2012 and 16.8 per cent in 2013. Based on these
growth estimates, valuations appear reasonable. While no one prefers the policy freeze
in New Delhi, a rate of growth in GDP of 6.5- 7 per cent with more equitable growth is
far better than a 9 per cent growth number with massive corruption.
In the first half of 2012, slowing inflation and lower economic activity would set the stage
for the RBI to reverse its monetary policy by cutting interest rates and adding liquidity, thus
improving investment sentiment.

As things stand today, foreign investors get to buy more Indian assets for the same dollar
due to a weaker rupee. On a long-term basis, given the huge deficits in India, we are of the
view that the rupee will depreciate. However, the 16 per cent depreciation in the rupee since
August seems unwarranted. So there is a case for currency appreciation, which is positive
for an FII. Year-to- date, the rupee has appreciated 7.6 per cent.

Shaky Beginning
At the dawn of year 2009 we were staring at uncertainty in the global markets and also
facing one of the worst corporate governance issues (Satyam Computers) in India. But as
we stand at the dusk of 2012, we find most of the crises have blown away and although
certain patches of uncertainty in the global recovery still remain, things are clearer than they
were at the start of the year. Undoubtedly, this has helped attract record inflow of FII
money into Indian equity market, despite 70 per cent fall in new registrations of FIIs in
2009 (see graph)
. In 2008, when market was down 53 per cent and FIIs pulled out about Rs 53,000 crore
(USD
billion) from Indian market, 375 new FIIs got registered in India as compared
to just 111 in 2009. At the end of November 2009, there were 1705 FIIs
registered in India. One of the reasons for such low registration numbers might
be that many of the hedge funds that were very active during pre-crisis time
have either liquidated or significantly cut down their exposure to emerging
markets and are still treading with caution. This means that the amount has
been pumped by the existing FIIs only, which is also substantiated by the fact
that registration of new sub-accounts has declined by 60 per cent. There was a
small
increase in the number of Foreign Institutional Investors (FIIs) registered with SEBI. As on
March 31, 2011, there were 1,722 FIIs registered with SEBI as compared to 1,713 a year
ago, showing an increase of 0.53 percent during the year. There were 5,686 sub-accounts
registered with SEBI as on March 31, 2011 as compared to 5,378 as on March 31, 2010, an
increase of 5.73 percent
OVERVIEW OF INDIAN MARKET

Introduction
Economies like India, which offer relatively higher growth than the developed
economies, have gain favour among investors as attractive investment destinations
for foreign institutional investors (FIIs). Investors are optimistic on India and
sentiments are favourable following government’s announcement of a series of
reform measures in recent months.
According to a poll conducted by Bank of America Merrill Lynch (BofA-ML)
recently, in which 50 investors participated, India was the most favourite equity
market for the global investors for the year 2015 at 43 per cent, followed by China
at 26 per cent. The global investment bank is of the view that India remains to be
in a structural bull market.
India is poised to become the second biggest ecosystem option after the US in the
next two years on account of the ongoing high growth rates. Several technology
based start-ups have received over US$ 2.3 billion in funding since 2010, while
over 70 private equity (PE) and venture capital (VC) funds remain active in the
segment.
Market Size
FII’s net investments in Indian equities and debt have touched record highs in the
past financial year, backed by expectations of an economic recovery, falling
interest rates and improving earnings outlook. FIIs have invested a net of US$ 89.5
billion in 2014-15— expected to be their highest investment in any fiscal year. Of
this, a huge amount—US$ 57.2 billion—was invested in debt and it is their
record investment in the asset class, while equities absorbed US$ 32.3 billion.
India continues to be a preferred market for foreign investors. India- focused
offshore equity funds contributed US$ 0.5 billion, whereas India- focused ETFs
added a much higher US$ 1.2 billion of the total net inflows of about US$ 1.7
billion into the India-focused offshore funds and ETFs during the quarter ended
June 2015.
The total Mergers and Acquisitions (M&A) transaction value for the month of July
2015 was US$ 4.57 billion involving a total of 46 transactions. In the M&A space,
energy and natural resources was the dominant sector amounting to 56 per cent of
the total transaction value.
In Private Equity, a total of 110 deals worth disclosed value of US$ 2.15 billion
were reported in July 2015.

Government Initiatives
Government of India has accepted the recommendation of A.P. Shah Committee to
not impose minimum alternate tax (MAT) on overseas portfolio investors
retrospectively for the years prior to April 01, 2015, thereby providing significant
relief to foreign portfolio investors (FPIs).
The RBI has also allowed a number of foreign investors to invest, on repatriation
basis, in non-convertible/redeemable preference shares or debentures issued by
Indian companies listed on established stock exchanges in India. The investment
should be within the overall limit of US$ 51 billion allocated for corporate debt.
Long-term investors registered with SEBI will also be deemed as eligible investors
After the launch of the reforms in the early 1990s, there was a gradual shift
towards capital account convertibility. From September 14, 1992, with suitable
restrictions, FIIs and Overseas Corporate Bodies (OCBs) were permitted to invest
in financial instruments.

The policy framework for permitting FII investment was provided under the
Government of India guidelines, which enjoined upon FIIs to obtain an initial
registration with SEBI and also RBI’s general permission under FERA. The
Government guidelines of 1992 also provided for eligibility conditions for
registration, such as track record, professional competence, financial soundness
and other relevant criteria, including registration with a regulatory organisation in
the home country. The guidelines were suitably incorporated under the SEBI (FIIs)
Regulations, 1995.With coming into force of the Foreign Exchange Management
Act, (FEMA), 1999 foreign exchange related transactions of FIIs were permitted
by RBI. Right from 1992, FIIs have been allowed to invest in all securities traded
on the primary and secondary markets, including shares, debentures and warrants
issued by companies which were listed or were to be listed on the Stock
Exchanges in India and in schemes floated by domestic mutual funds.

The holding of a single FII, and of all FIIs, NRIs and OCBs together in any
company were initially subject to the limit of 5 per cent and 24 per cent of the
company’s total issued capital, respectively. Furthermore, to ensure a broad base
and prevent such investment acting as a camouflage for individual investment in
the nature of FDI and requiring Government approval, funds invested by FIIs have
to have at least 50 participants

(changed to 20 investors in August, 1999) with no single participant holding more

than 5 per cent (revised to 10 per cent in February, 2000).

However, this was allowed to be increased subject to passing of resolution by the

Board of Directors of the company followed by passing of a special resolution by
the General Body of the company. The ceiling limit under special procedure was
enhanced in stages as follows:

 to 30 per cent from April 4, 1997

 to 40 per cent from March 1, 2000,
 to 49 per cent from March 8, 2001,and
 to sectoral cap/statutory ceiling from September 20,2001.
The Government guidelines for FII of 1992 allowed, inter-alia, entities such as
asset management companies, nominee companies and incorporated/institutional
portfolio managers or their power of attorney holders (providing discretionary and
non discretionary portfolio management services) to be registered as FIIs. While
the guidelines did not have a specific provision regarding clients, in the application
form the details of clients on whose behalf investments were being made were
sought. While granting registration to the FII, permission was also granted for
making investments in the names of such clients. Asset management
companies/portfolio managers are basically in the business of managing funds and
investing them on behalf of their funds/clients. Hence, the intention of the
guidelines was to allow these categories of investors to invest funds in India on
behalf of their ‘clients’. These ‘clients' later came to be known as sub-accounts.
The broad strategy consisted of having a wide variety of clients, including
individuals, intermediated through institutional

investors, who would be registered as FIIs in India. A Working Group for

Streamlining of the Procedures relating to FIIs, constituted in April, 2003, inter
alia, recommended streamlining of SEBI registration procedure, and suggested that
dual approval process of SEBI and RBI be changed to a single approval process of
SEBI. This recommendation was implemented in December 2003.
Under eligibility conditions, the definition of broad based funds was relaxed in
August, 1999 and in February, 2000 and newer entities, such as foreign firms were
allowed to invest as sub-accounts. In order to have a level playing field in
intermediation, domestic portfolio managers were allowed in February, 2000 to
manage the funds of sub-accounts, so as to give end- customers a greater choice
about the identity of their fund manager in India. FIIs were initially allowed to
only invest in listed securities of companies. Gradually, they were allowed to
invest in unlisted securities, rated government securities, commercial paper and
derivatives traded on a recognised stock exchange. From November 1996, any
registered FII willing to make 100 per cent investment in debt securities were
permitted to do so subject to specific approval from SEBI as a separate category
of FIIs or sub-accounts as 100 per cent debt funds In order to increase
transparency, SEBI issued a circular on October 31, 2001 to all FIIs and their
custodians advising the FIIs to report as and when any derivative instruments with
Indian underlying securities are issued/renewed/redeemed by them, either on their
own account or on behalf of sub-accounts registered under them. In 2003 this
circular was further revised to include disclosure of more details about terms,
nature and contracting parties.
The overall cap on investments in Government securities, both through the normal
route and the 100 per cent debt fund route, was revised from US$1 billion to
US$1.75 billion in November, 2004. Moreover, investments were allowed only in
debt securities of companies listed or to be listed in stock exchanges. Investments
were free from maturity limitations. From April 1998, FII investments were also
allowed in dated Government securities. Treasury bills, being money market
instruments, were originally outside the ambit of such investments, but were
included subsequently from May, 1998.In April 2006 there was a rise in the
cumulative debt investment limits from US $1.75 billion to US $2 billion and US
$0.5 billion to US $1.5 billion for FII/Sub Account investments in Government
securities and Corporate Debt, respectively.

400,000

350,000

300,000

250,000

200,000

150,000 Total (iNR crores)

Debt (iNR crores)
100,000
Equity (iNR crores)

50,000

-50,000

-100,000

-150,000

Figure-1 growth of FII

Positive impact: It has been emphasized upon the fact that the capital market
reforms like improved market transparency, automation, dematerialization and
regulations on reporting and disclosure standards were initiated because of the
presence of the FIIs. But FII flows can be considered both as the cause and the
effect of the capital market reforms. The market reforms were initiated because of
the presence of them and this in turn has led to increased flows.

A. Enhanced flows of equity capital: FIIs are well known for a greater appetite
for equity than debt in their asset structure. For example, pension funds in the
United Kingdom and United States had 68 per cent and 64 per cent, respectively,
of their portfolios in equity in 1998. Not only it can help in supplementing the
domestic savings for the purpose of development projects like building economic
and social infrastructure but can also help in growth of rate of investment, it boosts
the production, employment and income of the host country.

B. Managing uncertainty and controlling risks: FIIs promote financial

innovation and development of hedging instruments. These because of their
interest in hedging risks, are known to have contributed to the development of
zero-coupon bonds and index futures. FIIs not only enhance competition in
financial markets, but also improve the alignment of asset prices to fundamentals.
FIIs in particular are known to have good information and low transaction costs.
By aligning asset prices closer to fundamentals, they stabilize markets. In addition,
a variety of FIIs with a variety of risk-return preferences also help in dampening
volatility.

C. Improving capital markets: FIIs as professional bodies of asset managers

and financial analysts enhance competition and efficiency of financial markets. By
increasing the availability of riskier long term capital for projects, and increasing
firms’ incentives to supply more information about them, the FIIs can help in the
process of economic development.

D. Improved corporate governance: Good corporate governance is essential to

overcome the principal-agent problem between share-holders
and management. Information asymmetries and incomplete contracts between
share-holders and management are at the root of the agency costs. Bad corporate
governance makes equity finance a costly option. With boards often captured by
managers or passive, ensuring the rights of shareholders is a problem that needs to
be addressed efficiently in any economy. 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. FIIs constitute professional bodies of asset managers and financial
analysts, who, by contributing to better understanding of firms’ operations,
improve corporate governance. Among the four models of corporate control -
takeover or market control via equity, leveraged control or market control via debt,
direct control via equity, and direct control via debt or relationship banking-the
third model, which is known as corporate governance movement, has institutional
investors at its core. In this third model, 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. And this dependence has to a great extent caused a lot of
trouble for the Indian economy. Some of the factors are:

A. Potential capital outflows: “Hot money” refers to funds that are controlled by
investors who actively seek short-term returns. These investors scan the market for
short-term, high interest rate investment opportunities. “Hot money” can have
economic and financial repercussions on countries and banks. When money is
injected into a country, the
exchange rate for the country gaining the money strengthens, while the exchange
rate for the country losing the money weakens. If money is withdrawn on short
notice, the banking institution will experience a shortage of funds.

B. 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. This situation leads to excess liquidity thereby leading to
inflation where too much money chases too few goods.

C. Problem to small investors: 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 the stock market the downward path. This creates
problems for the small retail investor, whose fortunes get driven by the actions of
the large FIIs.

D. 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.

E. Issue related to participatory notes: When Indian-based brokerages 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. Any entity investing in participatory notes is not required to register
with SEBI (Securities and Exchange Board
of India), whereas all FIIs have to compulsorily get registered. 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. The hedge funds borrow money
cheaply from western markets and invest these funds into stocks in emerging
economies. It is also feared that the hedge funds, acting through participatory
notes, will cause economic volatility in Indian exchange and generally these are
blamed for the sudden fall in indices. These unlike FIIs are not directly registered
under SEBI, but they operate through sub accounts with FIIs and according to a
number of studies it has been found that more than 50% of the funds are flowing
through this anonymous route, which can lead to a great loss to the Indian
economy.

Further, FIIs have contributed a lot in making Indian economy one of the fastest
growing economy in the world today. Foreign institutional investment can play a
useful role in development by adding to the savings of low and middle income
developing countries. And India among the world inventors is believed to be a
good investment destination inspite of all the political uncertainty and
infrastructural inefficiencies. After the liberalization of financial policies India has
been able to attract a lot of FII from rest of the world and which in turn has played
its part very well by helping in development of Indian economy from what it was
in early 1990s to a would
Figure1.2 Net investment last 7 year

In above figure 2 we show 2007 to 2016 year net data that show that 2007 and
2008 negative investment means in two years FII are sale their investment that two
years are recession. In 2009 and 2010 are positive investment 24132.1 and 62713.4
respectively. In 2011 are again FII reduce their investment and gone up to -
26873.In 2012 FII investment are 105317.5 and that highest last 10 year. In year
2013 FII investment is 87893.5 its decreases previous year 2012. In 2014 FII
investment are 66522.3 and its decrease to 2012 and 2013 FII investment. In 2015
-16331.3.
 40000

30000

20000

10000
net equity
0
net debt
Dec/06
Apr/06

Aug/07

Aug/09

Aug/11

Aug/13

Aug/15
Dec/08

Dec/10

Dec/12

Dec/14
Apr/08

Apr/10

Apr/12

Apr/14
-10000

-20000

-30000

-40000

Figure-1.3 FII NET EQUITY & DEBT APRIL 2006 TO

DECEMBER 2015
Above figure show that FII net equity and debt data April 2006 to December
2015. In June 2013 to November 2013 is show negative investment in debt.
Financial year 2006 is equity and debt investment show positively. In 2007-08 due
to world recession FII has sale there investment and that show more sale in Indian
market.
DATA ANLAYSIS
 REGISTRATION

As per Regulation 6 of SEBI (FII) Regulations 1995, Foreign Institutional

Investors are required to fulfill the following conditions to qualify for grant
of registration:

• Applicant should have track record, professional competence, financial

soundness, experience, general reputation of fairness and integrity.

• The applicant should be regulated by an appropriate foreign regulatory

authority in the same capacity/category where registration is sought from
SEBI. Registration with authorities, which are responsible for incorporation,
is not adequate to qualify as Foreign Institutional Investor.

• The applicant is required to have the permission under the provisions of the
Foreign Exchange Management Act, 1999 from the Reserve Bank of India
enter into an agreement with the custodian. Besides it also has to appoint a
designated bank to route its
 transactions.

• Payment of registration fee of US $ 5,000.00

"Form A" as prescribed in SEBI (FII) Regulations, 1995 is to be filled before

applying for FII registration.
SUPPORTING DOCUMENTS REQUIRED

Application in Form A duly signed by the authorized signatory of the applicant.

Certified copy of the relevant clauses or articles of the Memorandum and
Articles of Association or the agreement authorizing the applicant to invest on
behalf of its clients.
• Audited financial statements and annual reports for the last one year,
provided that the period covered shall not be less than twelve months.
• A declaration by the applicant with registration number and other
particulars in support of its registration or regulation by a Securities
Commission or Self Regulatory Organization or any other appropriate
regulatory authority with whom the applicant is registered in its
home country.
• A declaration by the applicant that it has entered into a custodian
agreement with a domestic custodian together with particulars of the
domestic custodian.
• A signed declaration statement that appears at the end of the Form.
CHAPTER-3 INTRODUCTION TO INDIAN STOCK MARKRT

Most of the trading in the Indian stock market takes place on its two stock
exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange
(NSE). The BSE has been in existence since 1875. The NSE, on the other hand,
was founded in 1992 and started trading in 1994. However, both exchanges follow
the same trading mechanism, trading hours, settlement process, etc. At the last
count, the BSE had about 4,700 listed firms, whereas the rival NSE had about
1,200. Out of all the listed firms on the BSE, only about 500 firms constitute more
than 90% of its market capitalization; the rest of the crowd consists of highly
illiquid shares.

Almost all the significant firms of India are listed on both the exchanges. NSE
enjoys a dominant share in spot trading, with about 70% of the market share, as
of 2009, and almost a complete monopoly in derivatives trading, with
about a 98% share in this market, also as of 2009. Both exchanges compete for the
order flow that leads to reduced costs, market efficiency and
innovation. The presence of arbitrageurs keeps the prices on the two stock
exchanges within a very tight range.

Trading Mechanism
Trading at both the exchanges takes place through an open electronic limit order
book, in which order matching is done by the trading computer. There are no
market makers or specialists and the entire process is order- driven, which means
that market orders placed by investors are
automatically matched with the best limit orders. As a result, buyers and sellers
remain anonymous. The advantage of an order driven market is that it brings more
transparency, by displaying all buy and sell orders in the trading system. However,
in the absence of market makers, there is no guarantee that orders will be executed.

All orders in the trading system need to be placed through brokers, many of which
provide online trading facility to retail customers. Institutional investors can also
take advantage of the direct market access (DMA) option, in which they use
trading terminals provided by brokers for placing orders directly into the stock
market trading system.

Settlement Cycle and Trading Hours

Equity spot markets follow a T+2 rolling settlement. This means that any trade
taking place on Monday, gets settled by Wednesday. All trading on stock
exchanges takes place between 9:55 am and 3:30 pm, Indian Standard Time (+ 5.5
hours GMT), Monday through Friday. Delivery of shares must be made in
dematerialized form, and each exchange has its own clearing house, which
assumes all settlement risk, by serving as a central counterparty.

Market Indexes
The two prominent Indian market indexes are Sensex and Nifty. Sensex is the
oldest market index for equities; it includes shares of 30 firms listed on the BSE,
which represent about 45% of the index's free-float market capitalization. It was
created in 1986 and provides time series data from April 1979, onward. The main
Index of BSE is SENSEX. The other indices
at BSE are: BSE 500, BSE 100, BSE 200, BSE PSU, BSE MIDCAP, BSE
SMLCAP, BSE BANKEX, BSE Teck, BSE Auto, BSE Pharma, BSE Fast
Moving Consumer Goods (FMCG), BSE Consumer Durable (SYMBOL: Cons
Dura), BSE Metal.

Figure-3.1 BSE sensex index

Another index is the S&P CNX Nifty; it includes 50 shares listed on the NSE,
which represent about 62% of its free-float market capitalization. It was created in
1996 and provides time series data from July 1990, onward. NSE main index is
CNX Nifty. NSE also set up as index services firm known as India Index Services
& Products Limited (IISL) and has launched several stock indices, including:
S&P CNX Nifty, CNX Nifty Junior, CNX 100 (= S&P CNX Nifty + CNX
Nifty Junior), S&P CNX 500 (= CNX 100 + 400 major players across 72
industries), CNX
Midcap (introduced on 18 July 2005 replacing CNX Midcap 200), Nifty midcap
50.

Market Regulation
The overall responsibility of development, regulation and supervision of the stock
market rests with the Securities & Exchange Board of India (SEBI), which was
formed in 1992 as an independent authority. Since then, SEBI has consistently
tried to lay down market rules in line with the best market practices. It enjoys vast
powers of imposing penalties on market participants, in case of a breach.

Who Can Invest in India?

India started permitting outside investments only in the 1990s. Foreign
investments are classified into two categories: foreign direct investment (FDI)
and foreign portfolio investment (FPI). All investments, in which an investor takes
part in the day-to-day management and operations of the company, are treated as
FDI, whereas investments in shares without any control over management and
operations are treated as FPI.

For making portfolio investment in India, one should be registered either as a

foreign institutional investor (FII) or as one of the sub-accounts of one of the
registered FIIs. Both registrations are granted by the market regulator, SEBI.
Foreign institutional investors mainly consist of mutual funds, pension funds,
endowments, sovereign wealth funds, insurance companies, banks, asset
management companies etc. At present, India does not allow foreign individuals
to invest directly into its stock market.
However, high-net-worth individuals (those with a net worth of at least
$US50 million) can be registered as sub-accounts of an FII.

Foreign institutional investors and their sub accounts can invest directly into any
of the stocks listed on any of the stock exchanges. Most portfolio investments
consist of investment in securities in the primary and secondary markets,
including shares, debentures and warrants of companies listed or to be listed on a
recognized stock exchange in India. FIIs can also invest in unlisted securities
outside stock exchanges, subject to approval of the price by the Reserve Bank of
India. Finally, they can invest in units of mutual funds and derivatives traded on
any stock exchange.

An FII registered as a debt-only FII can invest 100% of its investment into debt
instruments. Other FIIs must invest a minimum of 70% of their investments in
equity. The balance of 30% can be invested in debt. FIIs must use special non-
resident rupeebank accounts, in order to move money in and out of India. The
balances held in such an account can be fully repatriated. (For related reading, see
Re-evaluating Emerging Markets. )

Restrictions/Investment Ceilings
the government of India prescribes the FDI limit and different ceilings have been
prescribed for different sectors. Over a period of time, the government has been
progressively increasing the ceilings. FDI ceilings mostly fall in the range of 26-
100%.
By default, the maximum limit for portfolio investment in a particular listed firm is
decided by the FDI limit prescribed for the sector to which the firm belongs.
However, there are two additional restrictions on portfolio investment. First, the
aggregate limit of investment by all FIIs, inclusive of their sub-accounts in any
particular firm, has been fixed at 24% of the paid- up capital. However, the same
can be raised up to the sector cap, with the approval of the company's boards and
shareholders.

Secondly, investment by any single FII in any particular firm should not exceed
10% of the paid-up capital of the company. Regulations permit a separate 10%
ceiling on investment for each of the sub-accounts of an FII, in any particular firm.
However, in case of foreign corporations or individuals investing as a sub-account,
the same ceiling is only 5%. Regulations also impose limits for investment in
equity-based derivatives trading on stock exchanges.

Investment Opportunities for Retail Foreign Investors Foreign entities and

individuals can gain exposure to Indian stocks through institutional investors.
Many India-focused mutual funds are becoming popular among retail investors.
Investments could also be made through some of the offshore instruments, like
participatory notes (PNs) and depositary receipts, such as American depositary
receipts (ADRs), global depositary receipts (GDRs), and exchange traded
funds (ETFs) and exchange-traded notes (ETNs).

As per Indian regulations, participatory notes representing underlying Indian

stocks can be issued offshore by FIIs, only to regulated
entities. However, even small investors can invest in American depositary receipts
representing the underlying stocks of some of the well-known Indian firms, listed
on the New York Stock Exchange and Nasdaq. ADRs are denominated in dollars
and subject to the regulations of the
U.S. Securities and Exchange Commission (SEC). Likewise, global depositary
receipts are listed on European stock exchanges. However, many promising Indian
firms are not yet using ADRs or GDRs to access offshore investors.

Retail investors also have the option of investing in ETFs and ETNs, based on
Indian stocks. India ETFs mostly make investments in indexes made up of Indian
stocks. Most of the stocks included in the index are the ones already listed on
NYSE and Nasdaq. As of 2009, the two most prominent ETFs based on Indian
stocks are the Wisdom-Tree India Earnings Fund (NYSE: EPI) and the Power
Shares India Portfolio Fund (NYSE:PIN). The most prominent ETN is the MSCI
India Index Exchange Traded Note (NYSE:INP). Both ETFs and ETNs provide
good investment opportunity for outside investors.
Chapter-4 INTRODUCTION OF STUDY

Literature Review

1 Dr. Kajal Gandhi (May 2015) held that Foreign Institutional Inflows and
Indian Stock Market Volatility. In this context these paper examine the dynamic
linkage between foreign institutional investments and Indian stock market was
examined by applying Grangers causality test. The empirical study shows a causal
relation of foreign institutional investments on Indian stock market. During recent
times since FIIs are playing a dominant role in driving Indian stock market, they
have almost one-third of all the assets under the custody of custodians in any
period of time. But they have a thirst for short term profitability for which they
often mobilize funds. The results are however, are tentative and there is a need to
undertake an in- depth research to address the issue.

2 Krishna Prasanna & Bharat Bansal (May 25, 2014) held that Foreign
Institutional Investments and Liquidity of Stock Markets: Evidence from India. In
these context these paper examine empirical assessment of this claim using
alternative liquidity measures. FIIs and the portfolio flows have certainly
contributed to the growth of stock market activity in India. Market capitalization,
volume and value traded grew significantly along with FII flows. The results
indicate that the foreign institutional trading significantly influences the market
liquidity in a negative direction. An increase in the Gross Sales leads to an increase
in the spread and the Illiquidity as measured by the Amihud illiquidity ratio and
hence a decrease in future market liquidity. Similarly, an increase in Gross
Purchases significantly reduces the future market liquidity.
3 Bikramaditya Ghosh, Dr. Padma Srinivasan (august 2014) held that An
Analytical Study to Identify the Dependence of BSE 100 on FII & DII Activity. In
these context these paper examine Conventional wisdom confirms that FIIs & DIIs
are the principal movers & shakers in the Indian equity market. They are seen as
the cardinal constituents of the entire investment domain in the union of India.
This study is carried out to measure their impact in a mathematical way, and to
figure out whether they are the true market movers or not.BSE 100 is a large Cap
broad- based Index & FII, DII data is from Sept 2007 to October 2013 for the said
Index. This study is intended to measure the impact of FII, DII trading activit y
from September 2007 to October 2013 on BSE 100.Adjusted R Square is most
important in such a multivariate analysis, here it is found to be quite feeble
(0.02838). A relative high value of R Square increases the predictability of the
model, such a low value doesn’t help the cause at all.74 observation points are in
consideration over a little more than 6 years. Degree of Freedom (DF) suggests the
number of variables, here there are two (namely FII Activity/DII Activity. It is
tested that BSE 100 does depend upon the DIIs (period Sept 2007 to Oct 2013).
Now the next question is, what the impact of DIIs in BSE 100 is; is it strong or
feeble. The difference between the observed value of the dependent variable (y)
and the predicted value (ŷ) is called the residual (e). So, each data point has one
residual.

4 Dr. Rakesh Kumar Miss Sarita Gautam (Octomber-2014) held that An

Empirical Study on impact of FII and other stock exchanges volatility on BSE
stock exchange volatility . In these context these paper examine the
impact of various factors through Multivariate Regression Analysis. This analysis
defined the degree as well as relationships among the factors. Volatility of Stock
market changed very rapidly, so except these others factors should also consider
for research work. FII and Nikkei have an inverse relation whereas NASDAQ and
FTSE have positive relations with the BSE SENSEX. When investors are trading
in secondary capital market in this case they should consider these studied factors
for the minimization of risk and increase the return.
5 Anubha Shrivastav (2013) held that A Study of Influence of FII Flows on
Indian Stock Market. In these context these paper examine that investments by
FIIs and the movements of Sensex are quite closely correlated in India and FIIs
wield significant influence on the movement of sensex. There is little doubt that
FII inflows have significantly grown in importance over the last few years
According to findings and results, I concluded that FII did have high significant
impact on the Indian capital market. Therefore, the alternate hypothesis is
accepted. FII’S have positive impact on BSE Sensex and Nifty. However there are
other major factors that influence the bourses in the stock market, but FII is
definitely one of the factors. This signifies that market rise with increase in FII’s
and collapse when FII’s are withdrawn from the market. Also BSE CG, BSE CD,
and BSE IT showed positive correlation but BSE FMCG showed negative
correlation with FII. The degree of relation was low in all the case. It shows low
degree of linear relation between FII and other stock index. This implies that their
impact on the stock prices varies from sector to sector which is further influenced
by the industry to which it belongs to and the sectoral performance.
6Sanjana Juneja (December-2013) Understanding the Relation between FII and
Stock Market. In these context these paper examine Compared to security markets
in developed economies, Indian markets being narrower and shallower, allows
foreign investors with access to significant funds, to become the dominant player
in determining the course of markets. Because of their over sensitive investment
behavior and herding nature, FIIs are capable of causing severe capital out flight
abruptly, tumbling share prices in no time and making stock markets unstable and
unpredictable. In the process, more often than not, the domestic individual
investors are on the receiving end, losing their precious savings in such outrageous
speculative trading. India as an emerging economic power cannot afford to be
intimidated down by the FIIs every now and then. We need formidable Domestic
Investors which can pump in liquidity even during cash crunch circumstances
thereby fuelling the development. With savings to the tune of roughly 35% of
GDP, India can use this to its strength by formulating policies which ensure that
domestic funds like Pension Funds, Provident Funds & other Large Corpus Funds
have a greater exposure to the equity market. The foreign investment in India
should be encouraged, but only from a strategic long term perspective.
 Background of Study

FII inflows and control have emerged as important policy issue in India. Among
the Indian policymakers, FIIs flows are believed to have a positive impact on the
country‘s development. FII flows supplement and augment domestic savings and
domestic investment without increasing the foreign debt of country. Added to this,
FII inflows to the equity market increase stock prices, lower cost of equity capital
and encourage the investment by Indian firms and lead to improvements in
securities market design and corporate governance. The foreign institutional
investment inflows have the potential of influencing the process of economic
development of India through the positive impacts on macro-economic
fundamentals of the country. Therefore, the outlook is that the policy makers of
India should provide the FIIs with more opportunities and reasons to invest in
Indian markets by suggesting and implementing prudential norms. The FII
manipulate the situation of boom in such a manner that they wait till the index
rises up to a certain height and exit at an appropriate time. This tendency increases
the volatility further. But, volatility is too good for the market as it helps in
keeping the economy cycle moving and it will again help the values of the stocks
at a fair price for investments to again keep flowing and so will the FIIs too.

Unexpected flows (FII) have a greater impact than expected flows and further
some researchers claim that foreigners‘ do not destabilize the market Thus, there
are many different opinions related to the impact of FII flows on Indian capital
market and that is why for the same reason we have done a research.
 PROBLEM STATEMENT AND IMPORTANCE OF THE STUDY
The issue of whether FII flows affects stock market returns or the other way round
is a matter of some controversy. It has been perceived in some quarters that FII
flows are the major drivers of stock markets in India and hence a sudden reversal
of such flows may harm the stability of its markets. Contrary to this belief, it is
viewed by others that FII flows react to the existing crisis in the stock market,
possibly exacerbating it rather than causing it. An analysis of the direction of
causality to understand the possible devastating Impact of FII flows on the Indian
economy is important from the viewpoint of Indian policy makers especially
when such flows have recorded a sharp rise over the last decade. But, as very few
studies have been done so far in this regard, the present empirical study has been
undertaken to throw some light on the cause and effect relationship between FII
flows and Indian stock market returns.
 Objectives
 The objective of this study is to identify whether there exist a causal
relationship between net investment made by FIIs and the stock market
indices in the Indian Stock Market.
 We analyze the relationship between foreign institutional investment and
stock indices in India (CNX NIFTY ,CNX 500 AND S&P BSE SENSEX)
 The aid of yearly data from April 2006 to December 2015 through
correlation coefficient, Regression.

Null Hypotheses
H01:- there is no significant impact of FII on CNX NIFTY.
H02:- there is no significant impact of FII on CNX 500.
H03:- there is no significant impact of FII on BSE SENSEX.

The CNX Nifty is a well diversified 50 stock index accounting for 13 sectors of
the economy. It is used for a variety of purposes such as benchmarking fund
portfolios, index based derivatives and index funds.CNX Nifty is owned and
managed by India Index Services and Products Ltd. (IISL).

The CNX 500 is India’s first broad-based stock market index of the Indian stock
market. The CNX 500 represents about 96% of total market capitalization and
about 93% of the total turnover on the National Stock
The S&P CNX 500 companies are disaggregated into 72 industry indices, the S&P
CNX Industry Indices. Industry weights in the index reflect the industry weights in
the market. The CNX 500 Index represents about 95.77% of the free float market
capitalization of the stocks listed on NSE as on March 31, 2015.

The S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also-
called the BSE 30 or simply the SENSEX, is a free-float market-weighted stock
market index of 30 well-established and financially sound companies listed on
Bombay Stock Exchange. The 30 component companies which are some of the
largest and most actively traded stocks, are representative of various industrial
sectors of the Indian economy.
Chapter-5 RESEARCH METHODOLOGY

Research Design

It is a descriptive research between FII and Indian stock market.

Sources of Data

NSE, SEBI, MONEY CONTROL

Data Collection Method

Secondary

Population

NSE, BSE (April 2006 to December 2015)

Sampling size

CNX NIFTY, CNX 500, S&P BSE SENSEX

positive. The coefficient of destermination is 2.76%.This means that close to 3%
of the variation in the dependent variable is explained by the independent variable.
Since p-value of F-static is 0.073330613 which is greater than 0.05 at 5% level of
significance, so we accept the null hypotheses and conclude that there is no
significant relationship between FII and CNX 500.

FII AND BSE SENSEX

Table no. 6.3

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.182489207
R Square 0.033302311
Adjusted R Square 0.024896244
Standard Error 4926.736573
Observations 117

ANOVA
Df SS MS F Significance F
Regression 1 96161274.66 96161274.66 3.961699477 0.048918778
Residual 115 2791364325 24272733.26
Total 116 2887525599

From the above table 6.3of Regression analysis of FII and SENSEX ratio shows
that multiple correlation coefficient are0.182489207. This indicates that the
correlation among independent and depended variable is positive. The coefficient
of determination is 3.33%.This means that close to 3% of the variation in the
dependent variable is explained by the independent variable. Since p-value of F-
static is 0.048918778 which is less than 0.05 at 5% level of significance, so we
reject the null
hypotheses and conclude that there is significant relationship between FII and
SENSEX.

Chapter-7 RESULTS AND FINDING

 Correlation of coefficient is0.182709439 that indicate positive correlation of

FII and CNX NIFTY.
 P-value of F-static is 0.048642002 which is less than 0.05 at 5% level of
significance, so we reject the null hypotheses and conclude that there is
significant relationship between FII and CNX NIFTY.
 Correlation of coefficient is 0.16618754 so that indicate positive correlation
of FII and CNX 500.
 P-value of F-static is 0.073330613 which is greater than 0.05 at 5% level of
significance, so we accept the null hypotheses and conclude that there is no
significant relationship between FII and CNX 500.
 Coefficient of correlation is 0.182489207 so that indicate positive
correlation of FII and SENSEX.
 P-value of F-static is 0.048918778 which is less than 0.05 at 5% level of
significance, so we reject the null hypotheses and conclude that there is
significant relationship between FII and SENSEX.
FINDINGS

 Financial Year 2000-01 to 2007-08 FII increase their investment

 Financial year 2008-09 FII is withdraw their investment because of world
market recession.
 Financial Year 2008-09 to 2012-13 FII increase their investment in debt
market.

Chapter-8 LIMITATION OF THE STUDY

 Here data size are not huge so it’s not show proper impact of FII and Indian
stock market
 Here we take just three indices in Indian stock market so we not take a
whole Indian market
 Here we apply regression and correlation not apply any other test so its
limitation of study.
 Chapter-9 CONCLUSION

From all the above discussions and data analysis, we conclude that FIIs have major
impact on Indian stock market. Particularly, the decline on October 17, 2007, in
which just a speculation about government‘s 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. Therefore, if FIIs are confident in Indian markets, there is a
general perception that market is on a song.

But there is a note of caution too. The source of investment behind these FIIs
should be crystal clear. Otherwise this can cause a negative impact on stock market
as was the cause of fall on 17th October 2007. Further money launders and even
terrorists can use this facility to pump money to Indian market and their sudden
withdrawal can cause volatility in markets. Even during the current year also, the
major fall in SENSEX has been caused amidst selling of FIIs due to reasons like
increased net selling by foreign funds during January or fear of interest Rate hike
by RBI or depreciation in the value of Rupee in comparison to dollars.

From above discussion it is clear that major falls in stock market were after effects
of withdrawal of money by FIIs. So there is a direct relation between the FII's
money flow and the movement of SENSEX. The biggest fall in stock markets
occurred in 2007 and 2008. This means that the volatility of market was 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.

Correlation Test has been carried out to find the degree of association between the
FII Gross Purchases and Sensex and FII Gross sales and sensex. First of all
correlation between sensex and FII gross purchase and FII gross sale and sensex is
carried out to verify relation between them Sensex of Bombay Stock Exchange is
considered as the barometer of Indian Capital Market. This inference is further
supported by high degree of correlation coefficient obtained between two variables
in the Table-1, 2 & 3. This high degree of correlation further suggests that there is
direct correlation between the Midcap & Smallcap Indices and FIIs investments.
So this analysis indicates the impact of FIIs on Indices. An FII driven market can
impact the real economy indirectly, when their behavior in the market exerts
pressure on policy makers. Secondly, the wealth effect' where capital gains are
translated into increased consumption and investment, can act as a more direct link
between equity and physical markets. FIIs are always considered to increase the
volatility of market. Volatility is often viewed as a negative in that it represents
uncertainty and risk. However, volatility can be good in that if one shorts on the
peaks, and buys on the lows one can make money, with greater money coming
with greater volatility. The possibility for money to be made via volatile markets is
how short term
market players like day traders hope to make money, and is in contrast to the long
term investment view of buy and hold. Foreign institutional investment is certainly
volatile in nature and its volatility has certainly posed some threats to the Indian
stock market considering its influence on the market. Increase in investment by
FIIs cause sharp price increase. It would provide additional incentives for FII
investment and this encourages further investment so that there is a tendency for
any correction of price and when the correction begins it would have to lead by an
FII pullout and can take the form of extremely sharp decline in the share prices
Indices because only FIIs are not responsible for the fluctuations instead there are
other factors like company specific factors, speculative trading, interest rate
prevailing in the market, political factors, government policies related to specific
sectors etc. which cause a significant change in the price.
BIBLIOGRAPHY

 http://www.moneycontrol.com/india/stockmarket/foreigninstituti

onal investors/10/55/activity/FII

http://www.bseindia.com/histdata/hindices.asp

http://www.nseindia.com/content/equities/eq_fii_nsebse.htm

 www.finance.indiamart.com

www.mydigitalfc.com/news/fii

http://www.sebi.gov.in/Index.jsp?contentDisp=Database

www.capitalvia.com

 www.trak.in/Tags/Business/fii/

www.triplecrisis.com www.ftalphaville.ft.com

http://www.reuters.com/finance www.indianexpress.com

www.scribd.com

 http://www.craytheon.com/charts/fii_dii_nse_bse_trading_chart
_graph.php
 http://www.moneycontrol.com/stocks/hist_index_result.php?ind
ian_indices=7
 http://www.moneycontrol.com/india/stockmarket/foreigninstituti
onalinvestors/15/42/activity/FII/200604201512