ROLE OF FINANCIAL

INSTITUTIONAL INVESTORS
IN CAPITAL MARKET
Satyajit Dasgupta Mba-
IN INDIA iv
Objectives
.Impact of Foreign/Domestic
institutional investors on Capital
market in India

.Study of major volatility episodes and

impact of institutional investor on this
episode

.Quantification of relation between FII

flows and their relationship with
economic variable and with Nifty
Who are institutional investors?

Any financially sophisticated and

large investment companies(banks,
insurance companies, retirement
fund, mutual fund, hedge fund) and
have very large portfolio of
investment
 TYPES OF DOMESTIC
INSTITUTIONAL INVESTORS

IFCI, ICICI, LIC, GIC UTI

FIs IDBI
 Foreign Institutional Investors
They are mostly of the form of institution, which invests money in
the financial market of a country different from the one where the
institution or entity was originally incorporated.

FII investment to as hot money for the reason it can leave the
country at the same speed at which it comes in.

In India, SEBI prescribed norms to register FII and also to

regulate such investment flowing through FII as :

.Pension funds .Mutual funds

.Investment Trusts .Insurance companies
.University funds .Nomination companies
FII SOURCES IN INDIA
 Indian Capital Market
In 1875, Bombay Stock Exchange (BSE),oldest in Asia started formal
trading. And with advance technology and online based transaction there
has been a rapid change in primary as well as in secondary market

UTI had a monopoly till 1987 in selling mutual funds, when bank was
allowed to enter into the business. Mutual funds opened to private sectors
from 1992

Before 1992 many factors obstruct equity trading as:

.Fresh capital issues controlled through Capital issue Act
.Trading policies were not transparent
.Large amount of insider trading
 INDIAN CAPITAL MARKET (continued)
In 1992, Securities and Exchange Board Of India (SEBI) introduced as an
apex regulatory body and imposed a series of reforms as:
.improves investors protection
.automation of stock trading
.efficiency in capital market

Transaction through electronic open order book was started with the
introduction of National Stock Exchange (NSE),1994
In 1995, BSE shifted from open outcry to limit order book market
 INDIAN CAPITAL MARKET (CHALLENGES)
Challenges for efficient allocation and mobilisation of capital in the
economy are :
.Market infrastructure has to be improved

.Trading system has to be more transparent

.Payment system has to be improved

.India need further integration of national capital market

MAJOR INSTITUTIONAL INVESTORS IN INDIA
 MAJOR VOLATILITY EPISODES
Asian major episodes of volatility express volatility induced by foreign
investments, as two most common examples of such destabalisation
caused by portfolio investments are :
.ERM Crisis (1992)
.ASIAN Crisis (1997)

The stock market scam which shook Capital market in India, the FII was
also one of the major factor

As FII outflow as much as a billion dollars in a month which corresponds

to an average of Rs.170 crores per day has never been observed.
Though it is small as compared to equity turnover market in India which
is Rs.88 lakh crores contains Rs.5 lakh crores, causes a major impact
Post 2004 Volatility episodes
In Jan.2008, sensex was already moving down due to weak global cues
and US recession, similarly FII investment fell drastically during this
period. BSE sensex was majorly due to FII went on a selling spree which
lead to fall in the market.

The fall of 769 points by sensex on Dec.2007, was attributed to the

main fact due to the sub-prime crisis.

As sub-prime crisis losses mainly hit the US economy and the majority of
FII participating in the Indian Capital market are from US.

To cover the losses in US, they started selling in India, which lead to fall
in sensex. The reason being given for the crash are the sale of Rs. 7,300
crores (Rs.73 billion) shares by FII’s in the past one week
 DATA OF SENSEX. NIFTY, FII, AND MUTUAL NET
DATE SENSEX
INVESTMENT
FII IN CRORES MUTUAL FUNDS NIFTY
IN CRORES

1-JAN-2001 3955.08 332.9 1.5 1254.3

2-JAN-2001 4018.88 74.8 -15.2 1271.8
29-JAN-2001 4234.57 356.3 -20.2 1379.7
30-JAN-2001 4372.04 -35.4 -105.1 1371.7
14-JAN-2002 3407.84 -34 17.7 1088.55
15-JAN-2002 3352.52 48.9 -48.6 1109.8
6-JAN-2003 3334.89 -22.1 1.1 1089.6
7-JAN-2003 3330.5 1.4 -25.6 1084.35
31-JAN-2006 9919.89 -200.1 6.7 3001.1
1-FEB-2006 9859.26 217.4 -25.4 2971.55
29-MAR-2007 12979.66 520.2 91.8 3875.9
30-MAR-2007 13072.1 -359 -168.2 3861.05
16-JAN-2008 19868.11 225.8 -551.4 6206.8
17-JAN-2008 19700.82 -2279.6 -519.5 6074.25
 Conclusions:
.After analysing the nature of FII in past, it would be safe enough to say
that foreign funds is certainly one of the most important cause of
volatility in Indian stock market

.But there are lots of other factors beyond the scope of the study that
effect risk and returns

.Although there has been a positive relation between stock market

returns and FII inflows, Govt. has to be determined, that to what extent
India should allow Foreign investments
 Recommendations:

It would be safe enough to say that foreign funds are of the most
volatile instruments floating in the market and need to be handled
continuously and govt. should encourage foreign institutional funds but
should keep a check on the volatility factor

Long term funds should be given priority and encouraged some of the
actions as:
.Strengthening domestic institutional investors
.Broad basing of eligible entities
.Operational flexibility to impart stability to the market
.Knowledge activities and research programmes
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