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Impact of FIIs and FDIs on Indian Stock Exchange

Synopsis Submitted for Major Research Project in Partial Fulfillment for the Degree of Master of Business Administration (2009-2011) From Devi Ahilya Vishwavidyalaya

Supervisor : Mr. Rahul Kaushal (Faculty, Dept. of Mgmt.)

Submitted By: Kritesh Rathore MBA IV Sem (2009-2011)

1. Title 2. Introduction 3. Review of Related Literature 4. Rationale 5. Objectives 6. Methodology 7. Bibliography 8. Webliography


Impact of FIIs and FDIs on Indian Stock Exchange

India is the second largest populated country in the world after China and is at the second stage of development. Indias economy is the twelfth largest economy in the world by nominal value and the fourth largest by purchasing power. Indias per capita income is $ 1032 and is ranked 139th in the world. Previously a closed economy, India's trade has grown fast. Capital market is one of the most important segments of the Indian financial system. It is the market available to the companies for meeting their requirements of long term funds. It refers to all the facilities and institutional arrangements for borrowing and lending funds. In other words, it is concerned with the raising of money capital for purposes of making long term investments. The market consists of a number of individuals and financial institutions to canalize the demand for and supply of long term capital and claims on it. The demand for long term capital comes predominantly from private sector manufacturing industries, agriculture sector, trade and the Government agencies. While, the supply of funds for the capital market comes largely from individual and corporate savings, banks, insurance companies, specialized financing agencies and the surplus of Governments. The Indian capital market is broadly divided into: Gilt-edged market: Gilt edged securities refer to the market for Government and semiGovernment securities, backed by the RBI. Industrial securities market. The industrial securities market refers to the market which deals in equities and debentures of the corporates. It is further divided into primary market and secondary market.

Foreign Investment in India: Foreign investment refers to investments made by the residents of a country in the financial assets and production processes of another country. After the opening up of the borders for capital movement, these investments have grown in leaps and bounds. The effect of foreign investment, however, varies from country to country. It can affect the productivity of the recipient country and can also affect the balance of payments. In developing countries there has been a great need for foreign capital, not only to increase the productivity of labor but also because foreign capital helps to build up the foreign exchange reserves needed to meet trade deficits. Foreign investment provides a channel through which developing countries can gain access to foreign capital. It can come in two forms: Foreign Direct Investment (FDI): it involves in direct production activities and is also of a medium- to long-term nature. Foreign Institutional Investment (FII): foreign institutional investment is a short-term investment, mostly in the financial markets. Entities covered by the term 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.

FII can be of two types: Normal: investing in equity and non-equity instruments Debt FII: investing 100% in debt securities

India, being a capital scarce country, has taken many measures to attract foreign investment since the beginning of reforms in 1991. Up to the end of December, 2009, India succeeded in attracting a total foreign investment of around U.S. $17.46 billion. These figures show the importance of FII in the overall foreign investment program. India is in the process of liberalizing its capital account, and this has a significant impact on foreign investment and particularly on FII, which affects short-term stability in the financial markets. Hence, there is a need to determine the push and pull factors behind any change in the FII, so that we can frame our policies to influence the variables that attract foreign investment. Also, FII has been the subject of intense discussion, as it is held to be responsible for having intensified the currency crises of the 1990s in East Asia and elsewhere in the world. The FIIs, though being a major source of liquidity in the Indian capital market, are basically speculators. Otherwise why would they repatriate their money from an economy which is fundamentally sound - a $1 trillion economy with a steady-state growth of 6.5% (when others were striving hard to show a positive figure). The Sensex is too narrow an index to reflect the actual impact. Also, the regulatory framework should ensure that the FIIs stay invested for long-term. The FIIs comprise only about 20% of the total combined turnover of NSE and BSE, yet they are powerful enough to influence the retail investors and dance them to their tunes. There is another concept called foreign portfolio investments (FPI), which is a broader one compared to FII. Foreign portfolio investments include FII and other components like GDR (Global Depositary Receipts), ADR (American Depositary Receipts), and off-shore funds and others.
Besides FII, Foreign direct investment or FDI is also an important form of foreign investment in India and has always played a major role in the economic development of developing nations like India after playing the leading source of external financing in 1990s. India has now become the third most favored destination for Foreign Direct Investment (FDI), behind China and the USA with an increase of 18.6 per cent from U.S. $ 2,696 million in 1996-97 to U.S. $ 3,197 million in 1997- 98. With this, FDI inflow in the country rose nearly three-fold to $15 billion in 2006-07 as the world's second-fastest growing economy attracting investors from across the world. The rise in FDI volume has changed the composition of market resulting investment happening in the form of acquisition of existing assets (mergers and acquisitions) growing much more rapidly than investment in new assets particularly in countries undertaking extensive privatization of public enterprises. According to the Global Development Finance report, the net private capital flows to developing countries reached a record $647 billion in 2006 a 17 percent increase from the year before. However, only about 8 percent of that capital flowed to the poorest 51 countries showing India as the most important of the other growth markets in Asia. The country has achieved steady economic growth, with an increase of 7 per cent in 2005 alone after starting the gradual economic liberalization process in 1991. Now the country has a liberal and transparent FDI policy. Still the government needs to focus on the real barriers to its foreign investment goals namely inflexible labor laws and poor roads and other infrastructure. Also there is a need for higher foreign investment, in the form of FDI and FII. This type of investment initiates technology spillovers, assists human capital formation, contributes to international trade integration and particularly exports, helps create a more competitive business environment,

enhances enterprise development, increases total factor productivity and, more generally, improves the efficiency of resource use

3. Review of Related Literature:

Giorgio De Saints (1999) This paper study the dynamics of expected stock return and volatility in emerging financial market. We find clustering predict ability and persistence in conditional volatility and others have documented for mature market. However, emerging market exhibit higher volatility and conditional probability of large price changes then mature market exposure to high country specific risk does not appear to be rewarded with higher expected return. We deduct a risk reward relation in Latin America but not in Asia Karimullah: (2004) The article examines the impact of foreign institutional investor s FII equity investment behavior in the Indian stock market. It attempts to find out the two-way causality between foreign institutional investors (FIIs) behavior and performance of Indian stock market for the period of January 1997 to June 2007.this article seeks to examine the idea that financial liberalization induces increased efficiency in the financial market as permission of FIIs equity investment is an important example of financial liberalization. Return in the stock market is used as proxy for the efficiency of the stock market in India .granger causality test has been applied to test the bidirectional causality. Apart from net investment of FIIs, the purchase and sales behavior of FIIs are analyzed separately Bruce A. Blonigen (2005) This paper surveys the recent burgeoning literature that empirically examines the foreign direct investment (FDI) decisions of multinational enterprises (MNEs) and the resulting aggregate location of FDI across the world. The contribution of the paper is to evaluate what we can say with relative confidence about FDI as a profession, given the evidence, and what we cannot have much confidence in at this point. Suggestions are made for future research directions Hugo Rojas-Romagosa (2006) Foreign Direct Investment (FDI) flows have increased substantially in the past two decades. These developments have motivated the appearance of a large number of empirical papers that test the expected benefits that FDI inflows are assumed to bring to the host countries. We survey the recent theoretical and empirical literature, but restrict our attention to the productivity changes that are induced by increased FDI inflows. We review both the aggregate productivity effects, as well as the spillover effects of FDI on local firms

4. Rationale
As we know that the Foreign Institutional Investment and Foreign Direct Investment influence the stock market by lending and borrowing funds from it. So this project will help to collect the information related FII and FDI and the factors which affect the stock market as well as economy of India. This project will help to individual to know about the factors influencing stock market so that they can do study and then do investment so that they can get more returns from their investment.

5. Objectives:
5.1 To study the performance of Indian stock market. 5.2 To study the impact of FIIs on Indian stock market. 5.3 To study the impact of FDIs on Indian stock market.

6. Methodology:
The data will be collected from the Internet by exploring the Secondary sources available on websites. The secondary data constitutes of daily FII flows info which will be collected from Money Control and Equity Master, the daily returns of SENSEX and NIFTY from BSE and NSE websites respectively. The data gathered from various sources will be primarily studied and necessary data will be sorted out sequentially keeping in mind the procedure of the study. The analysis will be made by, correlating the FII purchases, sales and net investment with equity market returns to identify whether a relation exists between them. The research comprises of information derived from secondary data from various websites. The various information and statistics were derived from the websites of BSE, NSE, Money Control, RBI and SEBI.

7. Bibliography
G.Jayachandran and A.Seiln A Causal Relationship between Trade, Foreign Direct Investmentand Economic Growth for India Singh Sumanjeet and Minakshi Paliwal Liberalization of Foreign Institutional Investments (FIIs) in India: Magnitude, Impact Assessment, Policy Initiatives and Issuers Bedi Suresh Business environment The Journal of Amity Management Analyst (Jan. June 2007) The Journal of Business ,vol.59,no.3, 383-403. The Journal of Finance India

8. Webliography www.onlinestockholding