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Chapter VII

COMPARATIVE ANALYSIS OF BSE WITH


INTERNATIONAL STOCK MARKETS & ROLE OF FII
INVESTMENT IN INDIAN STOCK MARKET

7.1

Introduction
An important element of globalization trend has now been that exchanges

are crossing national boundaries to extend their service, which has led to cross
border integration; exchanges have begun to offer cross border trading to facilitate
overseas investment options for investment. This has not only increased the
appeal of the exchange for investment, but has also attracted more volume. It is
also seen that international financial markets have changed drastically over the
past several decades. The major driving forces are: liberalization and
deregulation, ground breaking technological and financial innovations and a
growing dedicated investors base. The Indian stock exchanges hold a place of
prominence not only in Asia but also at the global stage. The Bombay Stock
Exchange (BSE) is one of the oldest stock exchange across the world, while the
NSE is among the best, in term of sophistication and advancement of technology.
In this chapter, an attempt has been made to study:

The comparative place of India's stock market in world scenario.

Descriptive statistics for daily market return for various stock market.

Yearwise percentage average return of various stock markets.

Annualize return and volatility for various stock markets.

Correlation coefficient of the daily market returns for various stock


markets.

At this backdrop, the objectives of the present chapter are enumerated as:

To study the movement of Bombay Stock Exchange in comparison


to its international counter parts.

191

To study whether Indian stock market (BSE's) prices and returns are
correlated to the stock market returns and prices of other selected
economy

For the comparative analysis of the BSE and other stock exchanges some
stock exchanges have been selected from developed market i.e. NASDAQ (USA),
NIKKEI (Japan) and from emerging markets HKSE (China) and NIFTY (India). To
study the correlation of India's stock prices (Returns) with other selected
countries stock prices (Returns), Karl Pearson's correlation coefficient method
has been used. Besides, for the comparative analysis of BSE and other stock
exchanges, the period chosen for the study is from 1991 to 2009.
7.2

Internationalization of Stock Exchange


Indian securities market is getting increasingly integrated with the rest of

the world. Indian companies have been permitted to raise resources from abroad
through issue of American Depository Receipts (ADRs), Global Depository
Receipts (GDRs), Foreign Currency Convertible Bonds (FCCBs) and European
Convertible Bonds (ECBs). Further, foreign companies are allowed to tap the
domestic stock markets.
Indian companies are permitted to list their securities on foreign stock
exchanges by sponsoring ADR/GDR issues against block shareholding. NRIs and
OCBs (Overseas Corporate Bodies) are allowed to invest in Indian companies.
FIIs have been permitted to invest in all types of securities, including government
securities. The investments by FIIs enjoy full capital account convertibility. They
can invest in a company under portfolio investment route up to 24% of the paid up
capital of the company. This can be increased up to the sectoral cap/statutory
ceiling, as applicable to the Indian companies concerned, by passing a resolution
through Board of Directors followed by a special resolution to that effect by its
general body. The Indian Stock Exchanges have been permitted to setup trading
terminals abroad. The trading platform of Indian exchanges is now accessed
through the internet from anywhere in the world.1
RBI permitted two-way fungibility for ADRs/GDRs, which meant that the
investors (foreign institutional or domestic) who hold ADRs/ GDRs can cancel
1

Introduction of Financial Markets, Module workbook,NSE (2010), P.73.

192

them with the depository and sell the underlying shares in the market. The
company can then issue fresh ADRs to the extent of the shares cancelled.
Indices
Sr.
Parameters
No.

BSE

Name of the Stock Exchange


Tokyo
NSE
NASDAQ
Stock
Exchange

Hong Kong
Stock
Exchange

Country

India

India

USA

Japan

Hong Kong
(China)

Name of
Indices

SENSEX
BSE-100
BSE-200
BSE-500

NIFTY

NASDAQ

NIKKEI

HKSE

Number of
Companies
Included

SENSEX-30
BSE-100
BSE-200
BSE-500

50

100

225

33

Method of
Calculation
of Indices

Free Float
Market
Weighted Weighted
Capitalization Average Average
Method

Price
Weighted
Average

Weighted
Capitalization
Method

Settlement
Cycle

T+3

T+2

T+2

T+2

T+3

Source : Compiled by Researcher

193

7.3 World Stock Markets:


Table No. 7.1 : World Stock Markets
(as on 2009)

S.
N.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

Country
Australia
France
Germany
Hong Kong
Japan
Singapore
UK
USA
China
India *
Russia
Brazil
Indonesia
Korea
Malaysia
Taiwan
Mexico
Total

Market
Capitalizat % of Turnover
ion (US $ World (US $ Mn)
Mn)
675619
2.48
1013937
1492327
5.47
3257667
1107957
4.06
3093750
468595
1.72
621649
3220485
11.8
5886404
180021
0.66
270909
1851954
6.79
6484292
11737646 43.01 36467431
2793613
10.24 5470529
455478
1.67
1049748
1321833
4.84
562230
589384
2.16
727793
98761
0.36
110678
494631
1.81
1465999
187066
0.69
85214
380923
1.4
944023
232581
0.85
108202
27288874
100
67620455

No. of
% of
Listed
World Compan
ies
1.5
1924
4.82
966
4.58
638
0.92
1017
8.71
3299
0.4
455
9.59
2415
53.93
5603
8.09
1604
1.55
4921
0.83
314
1.08
432
0.16
4921
2.17
1798
0.13
977
1.4
1260
0.16
125
100
32669

% of
World
5.89
2.96
1.95
3.11
10.1
1.39
7.39
17.15
4.91
15.06
0.96
1.32
15.06
5.5
2.99
3.86
0.38
100

Source : Indian Security Market : A Review, Vol. XII, 2009, p. 4


Note : Listed Companies in India pertains to BSE.

Table no. 7.1 gives the snapshot of market capitalization, turnover and
number of listed companies and their percentage to the total of stock market in the
world. It can be observed that as on 2009, USA is the 1st in the world ranking of
market capitalization and turnover, while India is 5th in the world ranking of market
capitalization and turnover.
Listing in stock exchange refers to the admission of securities of the
company for dealing in recognized stock exchange. The security may be any
public limited company or state government, quasi government and other financial
institutions/corporations, municipalities etc. It is seen from the table no. 7.1 that
India has a second place (next to USA) about number of companies listed and of
15.06% of total world's listing. Thus, after USA, India has the highest number of
companies listed on stock exchanges. At domestic level about 72% companies

194

are listed with Bombay Stock Exchange only.2 As compared to Asian stock
market, India's share in market capitalization is only 1.67%, which is lesser than
China (10.25%). About turnover also, China's share in total world is 8.09% while
India accounted only 1.55%.3
It is also seen that as on 2009, Singapore stock market accounted only
0.66% of world's market capitalization and only 0.4% of world's total turnover,
which is lowest in the world stock market scenario.
7.4

Descriptive Statistics Market Returns


Table No. 7.2 : Descriptive Statistics for Daily Market
Returns for Various Stock Markets (1991-2009)
0.001

BSE
100
0.001

BSE
200
0.001

BSE
500
0.001

0.000

NASDAQ
0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.001

0.001

0.001

0.002

0.001

0.001

-9.762

0.001

0.018

0.018

0.018

0.018

0.018

0.016

0.016

0.017

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

5.376

6.297

6.065

-0.057

-0.105

-0.153

Range

0.297

0.282

0.253

0.294

Minimum

-0.137

-0.127

-0.121

-0.131

Maximum
Sum
Count
Largest(1)

0.160
2.861
4541
0.160

0.155
2.902
4541
0.155

0.132
-0.825
4671
0.132

0.163
1.482
3729
0.163

Smallest(1)

-0.137

-0.127

5.791
0.049
0.234
0.102
0.133
1.808
4789
0.133
0.102

5.008

-0.041

5.392
0.484
0.271
0.124
0.146
1.612
2594
0.146
0.124

8.622

Skewness

7.005
0.134
0.290
0.134
0.156
2.811
4540
0.156
0.134

-0.121

-0.131

Confidence
Level
(95.0%)

0.001

0.001

0.001

0.001

0.000

0.001

Particulars SENSEX
Mean
Standard
Error
Median
Standard
Deviation
Sample
Variance
Kurtosis

HKSE

-0.004
0.320
-0.147
0.172
1.976
4493
0.172
-0.147
0.001

0.000

NIKKEI

NIFTY

0.000

0.000

Note : values are calculated from the data

Indian Securities Market A Review, Vol. XII, 2009, p. 4.

Mukherjee Debjban (2007): Comparative Analysis of Indian Stock Market with International
Market, Great Lakes Herald, April , Vol. 1, by Great Lakes Institute of Management, Chennai, pp.
40-67.

195

Table no. 7.2 depicts the descriptive statistics for daily market returns of
BSE, NSE, NASDAQ, NIKKEI and HKSE for the period 1991 to 2009. The daily
data had about 4000 observations of different stock exchanges (except NSE) and
closing prices of respective indices are used to represent the market.
The mean of daily market returns of all exchange is observed to be
between 0.00037% to 0.00063% of all stock exchanges.
The median of daily market returns of all markets observed to be near to
zero and it remains between 0.0010% to 0.0090%.
Volatility is measured by standard deviation and its square. All the indices
shows similar volatility in the range of 0.0002% to 0.0003%. The minimum
volatility among the indices is observe in NIKKEI and whereas maximum is
observed in BSE-SENSEX.
Kurtosis measures the peak endness of the distribution. The Kurtosis of all
the indices are away from three therefore the weekly return are away from their
respective means.
A minimum return was lowest in NASDAQ i.e.-0.10%. The maximum return
was highest in HKSE i.e. 0.16% during the study period 1991 to 2009.

196

7.5 Market returns Analysis of various Stock Indices

Table No. 7.3 : Year wise Average Return for Various Stock Markets
(Percentage)
Year

BSESENSEX

BSE
100

BSE200

BSE500

NASDAQ

HKSE

NIKKEI

NIFTY

1991

0.316

0.277

0.283

0.180

0.141

-0.019

1992

0.167

0.142

0.158

0.057

0.100

-0.124

1993

0.115

0.163

0.121

0.054

0.309

0.012

1994

0.069

0.036

-0.013

-0.150

0.050

1995

-0.101

-0.149

0.133

0.084

0.003

-0.112

1996

-0.003

-0.011

0.081

0.116

-0.010

-0.004

1997

0.069

0.060

0.077

-0.093

-0.097

0.075

1998

-0.074

-0.050

0.132

-0.026

-0.040

-0.080

1999

0.199

0.256

0.245

0.212

0.128

0.203

2000

-0.093

-0.122

-0.127

-0.198

-0.047

-0.128

-0.063

2001

-0.079

-0.100

-0.105

-0.095

-0.126

-0.158

-0.071

2002

0.014

0.049
0.116
0.017
0.062
0.063
0.265
0.102
0.107
0.027

0.057

0.063

-0.150

-0.090

-0.084

0.013

2003

0.216

0.243

0.263

0.276

0.161

0.134

0.089

0.213

2004

0.048

0.060

0.057

0.063

0.033

0.057

0.030

0.040

2005

0.141

0.129

0.116

0.124

0.005

0.020

0.138

0.123

2006

0.153

0.137

0.133

0.131

0.036

0.131

0.027

0.134

2007

0.155

0.190

0.196

0.037

0.138

-0.048

0.175

2008

-0.302

-0.338

-0.354

-0.205

-0.292

-0.224

-0.297

2009

0.244

0.188
0.327
0.253

0.261

0.265

0.144

0.178

0.072

0.232

Note : Values are calculated from the data

Table No. 7.3 reveals the year wise average daily return for various indices
selected for study. It can be seen that for each indices separately the percentage
daily average return of BSE Sensex was in the range of 0.003% to 0.31%, BSE100 ranges from-0.01% to 0.27%, BSE-200 ranges between -0.011% to 0.28%
and BSE-500 indices ranging from 0.10% to 0.26%, while NASDAQ recorded
from 0.01% to 0.18%, HKSE recorded percentage average returns between
197

0.04% to 0.14%, NIKKEI percentage average daily return ranges between


0.01% to 0.15% whereas NIFTY accounted 0.00417% to 0.23% during study
period of 1991 to 2009.
It can be also seen that, among all the individual observations the highest
average daily return was earned by the BSE-Sensex in the year 1991. All
ordinaries earned negative income in the years 2000, 2001, 2008 and the
negative return was very high in BSE i.e. -0.35% in 2008 and it was very low i.e.
0.0129% in the year 1999 in NASDAQ.
NASDAQ, HKSE, NIKKEI had negative returns for the three consecutive
i.e. in the year 2000, 2001, 2002, &in 2008.
It is also seen that average daily return of BSE and NSE moved in tandem
with little difference.
7.6 Correlation among BSE and International Stock Markets
Table No. 7.4 : Correlation Coefficients of the Daily Market Returns for
Various Stock Markets (1995-2009)
Indices

SENSEX BSE-100 BSE-200

BSESENSEX
BSE 100
BSE 200
BSE 500
HKSE
NASDAQ
NIKKEI
NIFTY

BSE500

HKSE NASDAQ NIKKEI NIFTY

1*
0.998*
0.997*
0.997*
0.879*
0.438*
-0.278*
0.999*

1*
0.999*
0.998*
0.878*
0.446*
-0.291*
0.999*

1*
1.000*
0.864*
0.426*
-0.292*
0.998*

1*
0.894*
0.096*
0.253*
0.997*

1*
0.716*
0.896*
0.896*

1*
-0.136*
0.303*

1*
-0.136*

1*

Note : Coefficient are calculated from the data. *significant at 5% level

Table no. 7.4 depicts the correlation matrix of BSE indices with other stock
exchanges. It is found that, there exists a positive correlation among all indices of
BSE and NASDAQ and HKSE during study the period of 1991 to 2009. NIKKEI is
negatively correlated with BSE-Sensex, BSE-100 and BSE-200, but there exists a
positive correlation between NIKKEI and BSE-500 during the same period. Nifty is
positively correlated with all indices selected for study except NIKKEI.
It is concluded that, there is a significant correlation between all the indices
selected for study & BSE. Therefore, present study accepts the hypothesis that
198

prices & returns of Bombay stock exchange are significantly correlated to the
prices &returns of other selected stock exchanges.

7.7 Returns & Volatility of Stock Exchanges


Table No. 7.5 : Year wise Average returns and Volatility of Different
Stock Exchanges
NASDAQ

HKSE

NIKKI

NIFTY

SENSEX

Annua
lized
Return
(%)

Annual
ized
Volatili
ty (%)

Annu
alized
Retur
n (%)

Annua
lized
Volatili
ty (%)

Annua
lized
Return
(%)

Annua
lized
Volatil
ity (%)

Annual
ized
Return
(%)

Annua
lized
Volatil
ity (%)

Annuali
zed
Return
(%)

Annu
alized
Volatil
ity (%)

1991

0.47

0.15

0.35

0.18

-0.05

0.21

--

--

0.32

1.91

1992

0.14

0.13

0.25

0.23

-0.31

0.30

--

--

0.17

3.36

1993

0.14

0.12

0.77

0.22

0.06

0.20

--

--

0.12

1.85

1994

-0.04

0.12

-0.37

0.30

0.09

0.18

--

--

0.07

1.44

1995

0.35

0.13

0.21

0.20

0.06

0.23

-0.26

0.19

-0.10

1.26

1996

0.19

0.16

0.29

0.17

-0.13

0.16

-0.01

0.24

0.00

1.52

1997

0.21

0.19

-0.22

0.40

-0.19

0.27

0.18

0.28

0.07

1.64

1998

0.33

0.27

-0.06

0.44

-0.10

0.27

-0.20

0.28

-0.07

1.90

1999

0.63

0.27

0.52

0.26

0.30

0.20

0.51

0.29

0.20

1.82

2000

-0.59

0.49

-0.12

0.31

-0.30

0.23

-0.16

0.32

-0.09

2.20

2001

-0.15

0.42

-0.28

0.28

-0.23

0.29

-0.18

0.26

-0.08

1.71

2002

-0.36

0.35

-0.20

0.19

-0.23

0.25

0.03

0.17

0.01

1.10

2003

0.37

0.22

0.30

0.17

0.26

0.23

0.54

0.20

0.22

1.18

2004

0.07

0.17

0.12

0.16

0.05

0.18

0.10

0.28

0.05

1.61

2005

0.04

0.13

0.04

0.11

0.35

0.14

0.31

0.18

0.14

1.08

2006

0.08

0.14

0.29

0.15

0.03

0.20

0.34

0.26

0.15

1.63

2007

0.07

0.17

0.32

0.25

-0.18

0.19

0.44

0.25

0.16

1.54

2008

-0.47

0.41

-0.65

0.50

-0.52

0.46

-0.73

0.44

-0.30

2.85

2009

0.33

0.28
0.42
0.34
0.23
0.27
Note: Values are calculated from the data

0.56

0.33

0.24

2.19

Year

Table No. 7.5 exhibits annualized returns and volatility of different indices
selected for study. It is seen that, from the return prospective, NASDAQ yielded
negative returns in 1994, 2000, 2001, 2002 and 2008. During 1991 to 2009 its
annual returns were ranging from 0.04% to 0.47%. From the volatility
prospective NASDAQ shows highest annual volatility in 2000 i.e. 0.49% whereas
lowest volatility in 1993 i.e. 0.12%. Thus, the annual returns and volatility of
NASDAQ ranged from 0.03% to 0.46% and 0.11% to 0.49% respectively.
199

HKSE's annual returns recorded negative in 1994, 1997, 1998, 2000, 2001,
2002 and in 2008. It yielded highest annualized returns i.e. 0.42% in 2009 and
lowest annualized returns i.e. 0.11% in 2000. From volatility prospective the
annualized volatility ranging from 0.11% to 0.50% during the study period.
NIKKEI recorded negative returns in 1991, 1992, 1996, 1997, 1998 (except
1999), thereafter from 2000-2002, &in 2007& 2008. It recorded highest returns i.e.
0.26% in 2003 whereas lowest returns i.e. 0.05% in 1991. The annualized
volatility of NIKKEI ranging from 0.15% to 0.46% during the study period.
It is seen that the annualized return of NIFTY was negative in 1995, 1996,
1998 & thereafter in 2008. The annualized average return of NIFTY ranging from
0.01% to 0.56% whereas annualized volatility of NIFTY ranging between 0.19%
to 0.44% during study period.
The Sensex recorded negative returns in 1995, 1998, 2000, 2001 and
2008. The annual average returns of BSE-Sensex ranging from 0.01 % to

0.32

% whereas annualized volatility of Sensex ranged between 1.08% to 3.36%


during the same study period.
It is concluded that range of annualized returns and volatility does not
remain same in all indices selected for study. It is also seen that in the year 2001,
2002 and in 2008 all selected indices yielded negative returns.
It is observed that, the USA is 1st in the world ranking of market
capitalization and turnover while India is 5th in the world ranking of market
capitalization and turnover. USA has the highest number of companies listed on
stock exchanges. After USA, India has the highest number of companies listed on
stock exchanges.
Conclusion :
It is seen that yearwise average daily return of BSE indices is higher than
NASDAQ, HKSE and NIKKEI. Whereas average daily return of BSE indices and
NSE/Nifty moved in tandem with little difference.
There exists a positive correlation among all the indices of BSE and
NASDAQ and HKSE. It is observed that NIKKEI is negatively correlated with BSESensex but there is positive correlation between NIKKEI and BSE-500. Nifty is
positively correlated with all indices selected for study.
200

Annualized Returns and Volatility does not remain same in all indices
selected for study. It is also seen that in the year 2001, 2002 and 2008, all
selected indices yielded negative returns.
7.08

FII Investment and Indian Stock Market


The era of foreign institutional investors (FIIs) in India originated in 1993 as

a consequence of the major policy initiatives towards globalization of economy by


Government of India. For a country, that embraced free market model after having
remained closed to the outside world for long, foreign capital whether in the form
of foreign direct investment (FDI) or portfolio investment by FII is being considered
imperative to rebuild India. Domestic markets are no longer able to meet the
growing capital requirement of the industry, therefore foreign capital is a sine que
non whether it comes in the form of FDI or portfolio investment (FIIs : Foreign
Institutional Investors). FII or the Foreign Institutional Investors are basically
referred to investors who are organised in the form of an institution or entity and
indulge in investing funds in the financial market of a foreign country, i.e. different
from where the entity was originally registered or incorporated.4
Earlier, FIIs could invest in Indian securities only through the purchase of
GDR Foreign Convertible Bonds (FCBs) and foreign currency bonds issued by
Indian issuers. FIIs commenced their operations in the Indian stock market with a
token investment of Rs. 0.6 crores in January 1993. They have become active
investors since August 1993. FII such as mutual funds, pension funds, country
funds and so on are operating in the Indian capital market. Thus, foreign
investment may invest in a particular share issue of an Indian company under
either FDI scheme or the portfolio investment schemes (i.e. FII, GDRs/ADRs,
offshore investment and other).
In this chapter, an attempt has been made to study the role of foreign
institutional investment in Indian stock market.
7.8.1

FII Investment Restrictions


An FII can invest only in the following:

Khan A. Q. & Sana Ikram (2010): Testing Semi-Strong Form of EMH in Relation to the Impact of
FII, International Journal of Trade, Economics and Finance, Vol. No. 1, No. 4, December, p. 273.

201

i)

Securities in the primary and secondary markets including shares,


debentures and warrants of companies unlisted, listed, to be listed
on recognised stock exchanges in India.

ii)

Units of schemes floated by domestic mutual funds including UTI,


whether listed or non-listed on a recognised stock exchange

iii)

Derivatives traded on recognised stock exchanges.

iv)

Commercial papers and securities receipts.

v)

Indian Depository Receipts.

Foreign Investment in India

Investment in
Listed/Unlisted
Companies
(Except the rout
of Stock
Exchange)

Institutional
Investment in
Listed
Companies
through Stock
Exchange

American
Depository
Receipts (ADR)
and Global
Depository
Receipts (GDR)

Investment by
NRIs/Persons of
Indian Origin

FIIs

FDI

Private
Equity/
Foreign
Venture
Capital
Investors
(FVCI)

7.8.2 FII Investment in Secondary Markets


SEBI regulations provides that a foreign institutional investor or a subaccount can transact in the Indian securities market only on the basis of taking
and giving delivery of securities purchased or sale. However, this does not apply
to any transactions in derivatives on a recognized stock exchange. Further, SEBI
has in December 2007 permitted FIIs and sub-accounts to enter into short selling
transactions only in accordance with framework specified by SEBI in this regards.
No transactions in securities would be only through stockbrokers who have been
granted a certificate by SEBI. Foreign institutional investors can issue, or
otherwise deal in offshore derivatives investments, directly or indirectly wherein
the offshore derivative instruments are used only to persons who are regulated by
202

an appropriate foreign regulators authority and the ODIs (Overseas Derivatives


Instruments) are issued after compliance of 'Know Your Client' (KYC) norms.
7.8.3 Investment by FIIs under Portfolio Investment Scheme
RBI has given general permission to SEBI registered FIIs/Sub-accounts to
invest under the portfolio investment scheme (PIS).
Total holding of each FII/Sub-account under this scheme should not
exceed 10% of the total paid up capital or 10% of the paid up value of each series
of convertible debentures issued by the Indian company.5
Total holding of all the FIIs/Sub-accounts put together should not exceed
24% of the paid up capital or paid up value of each series of convertible
debentures. This limit of 24% can be increased to the sectoral capital/statutory
limit as applicable to the Indian company concerned by passing a resolution of its
Board of Directors followed by a special resolution to that effect by its General
Body.
7.8.4 Role of FIIs in Development of Capital Market
"The FII investment has always been the subject of debate in term of
desirability. This is because FII money is known to be 'hot money' that would flee
at the first sign of trouble."6
FIIs have become integral part of Indian capital market. Their entry has led
to greater institutionalization of the market and their activities have provided depth
to it. Institutionalization has also helped in lending better price discovery
mechanism in the capital market.
It has been observed that the companies that have been generally
preferred by FIIs are those that are professionally managed and focus on creating
wealth for shareholders. When FIIs acquire stake in a company, its valuation goes
up in the market. To that extent, the FII tag makes it easier for the companies to
tap the capital market. Therefore, companies with global ambition would do well to
catch the attraction of FIIs at home before venturing out to tap financial markets
abroad.
5

ISMR, Vol. XII, 2009, p.193.

Pasricha J. S., U Singh mesh C. (2001): FIIs and Stock Market Volatility, The Indian Journal of
Commerce, Vol. 54, No. 3, July-Sept, p. 29.

203

FIIs have also played a catalytic role in nurturing nascent venture capital
culture in India. A new entrepreneurial class has been created in the country who
have created a lot of wealth in the market. These are the sort of industries in
which traditional lending would have been difficult or would have less forthcoming.
These companies have blossomed and prospered on account of equity support
from new class of investors, which include inter-alia FIIs.
In policy circles, FII flows are considered to increase the domestic
investment without increase in foreign debt. FII flows can raise prices, lower cost
of equity and stimulate investment by Indian firms and lead to improvement in
securities market design and corporate governance. Thus, FIIs increase the depth
and breadth of the market; expand securities business and their policy of focusing
on fundamentals of the shares cause efficient pricing of shares. However, FIIs are
known to rush out at the slightest hit trouble in the host country leaving an
economic crisis, like Mexico in 1994 and India in 2008.7
7.9 Trends in FIIs investment in India
Table No. 7.6 : Yearly Trends in FIIs Investment in Capital Market
Gross
Gross
Net
Cumulative
Purchases(Rs.Cr)
Sales(Rs.Cr)
Investment(Rs.Cr) Investment(Rs.Cr)
1992-93
17
4
13
13
1993-94
5593
467
5126(39338)
5139
1994-95
7631
2835
4796(-6.4)
9935
1995-96
9694
2752
69424(44.7)
16877
1996-97
15554
6980
85742(23.5)
25451
1997-98
18695
12737
5958(30.5)
31409
1998-99
16116
17699
-1583(-126.5)
29826
1999-00
56857
46735
10122(739.01)
39948
2000-01
74051
64118
9933(1.84)
49881
2001-02
50071
41308
8763(-11.87)
58644
2002-03
47062
44372
2690(-69.29)
61334
2003-04
144855
90091
54764(1602)
116098
2004-05
216951
171071
45880(0.25)
161978
2005-06
346976
305509
41467(-9.6)
203445
2006-07
520506
489665
30841(-25.6)
234286
2007-08
948016
881839
66177(69.2)
300463
2008-09
614576
660386
-45810(-30.7)
254653
Source : Annual Reports of SEBI ,SEBI :Handbook of Statistics on Securities Market in India, 2009
Note: Figures in bracket shows %change
Year

Table no. 7.6 presents trends in net investment and cumulative investment
by FIIs in Indian stock market. It is observed that, cumulative net FII investment
has gone upto Rs. 254653 crores by the end of financial year 2008-09.
7

Mishra, P. K., Das K. B., Pradhan B. B. (2009): Role of FIIs in Indian Capital Market, The
Research Network, Vol.4, No.2, India.

204

During the initial year 1992-93, FIIs flow started and amounted to Rs. 13
crore because in this period government was framing policy guidelines for FIIs.
However, within a year, the net FII rose to 39338% of previous year, during 199394, because government had opened the door for foreign investment in India.
Thereafter, the FII inflow witnessed a dip of 6.45%. The year 1995-96 witnessed
gliding up the contribution of FII to a massive of Rs. 69424 crores. FII investment
during 1996-97 rose a little i.e. 23.52% of preceding year, this period ripe enough
for FII investment because at that time where international capital market
witnessed the phase of overheating and at the same time, the Indian economy
and its strong fundamentals, stable exchange rate expectations and incentives
climate for foreign investment.
During 1997-98, FII inflow posted of 30.5%, it was due to south east Asian
crisis and period of volatility experienced between November 1997 and February
1998. The net inflow by FIIs have always positive from the year 1992-93, only in
the year 1998-99 an outflow of Rs.1583 crores was witnessed for the first time.
This was primarily because of economic sanctions imposed on Indian by the US,
Japan and other industrialized economy. These economic sanctions were result of
testing of series of nuclear bomb in 1998. Therefore, the FII portfolio investment
quickly recovered and showed positive net investment for all subsequent years.
FII investment posted a year declining of -1.8% in 2000-01, -11.87% in
2001-02 and -69.29% in 2002-03. The major reasons for the decline in their
investment were the dismal performance of

the Indian stock market,

unsatisfactory returns on their investment and the slow pace of reforms.


Investment by FIIs rebounded from depressed levels from the year 2003-04 and
witnessed massive surge. The slowdown in 2004-05 was on account of global
uncertainty caused by hardening of crude oil prices and the upturn in the interest
rate. Strong macro economic fundamentals of the Indian economy coupled with
other positive factors like good corporate results, low inflation, abolition of long
term capital gain tax, transparent regulatory system etc. were the major factors
which influenced the FII investment in India during 2004-05.
The net investment by FIIs in 2005-06 declined by -9.6% to Rs 41467
crores in 2005-06 mainly due to large net outflow from debt segment. The net
investment by FIIs in 2006-07 declined by -25.6% to Rs.30841 crores, mainly due
205

to large net outflow from the equity segment. This was because of fall in Asian
market, tightening of capital control in Thailand. But the cumulative net investment
by FIIs in India was stood at Rs. 234286 crores.
The net investment by FIIs was Rs.66177 crores in 2007-08, which was
more than double from Rs.30841 crores in 2006-07. The cumulative investment
by FIIs was increased to Rs.291465 crores during the same year. The year 200809 saw the highest FII outflow in any financial year since inception. This would be
attributed to the global financial meltdown and the home bias in of FIIs in the
crisis.
Thus, there has been notable surge in FII investment since 1993-94,
signifying the attractiveness of the Indian markets and it is an expression of
confidence on the part of international investment community in the regulatory
framework for the securities market.
The net FII investment during 2007-08 stood at Rs.66177 crores.

In

the

year 2008-09, a net FII investment dipped to Rs.-45810 crores while net
cumulative FII investment dropped and stood at Rs. 244653 crores.
7.9.1 Distribution of FIIs Investment
Table No. 7.7 : Distribution of FIIs Investment in Equity and Debt
Year
1991-92
1992-93
1993-94
1994-95
1995-96
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

FII Net Investment in Crore


Equity
Debt
5,267.0
691.1
-717.2
-867.0
9,669.5
452.6
10,206.7
-273.3
8,072.2
690.4
2,527.2
162.1
39,959.7
5,805.0
44,122.7
1,758.6
48,800.5
-7,333.8
25,235.7
5,604.7
53,403.8
12,775.3
-47,706.2
1,895.2

Total(Rs.Cr)
13.4
5,126.5
4,796.3
6,942.0
8,574.5
5,957.2
-1,584.0
10,122.1
9,933.4
8,762.6
2,689.3
45,764.7
45,881.3
41,466.7
30,840.4
66,179.1
-45,811.0

Source : CMIE Report on Capital Market 2007, ISMR Report 2009, p. 196

206

FII were allowed to invest in the Indian capital market from September
1992; however, investment by them was first made in January 1993. The Indian
gilts market was opened up for FII investment in April 1998. Till December 1998,
investments were related to equity only as investments in debt were made from
January 1999.
It is clear from table no 7.7 that in the year 1997-98 FII's net investment in
equity segment stood at Rs. 5267 crores. It registered an outflow of Rs. -717
crores in 1998-99. Thereafter it rose continuously till 2005-06. It was stood at
Rs.488005.5 crores, which decreased to Rs.25235.7 Crores in 2006-07, it
increase to Rs 534038 crores in 2007-08. However, it declined in 2008-09 to Rs. 47706.3 crores.
The net investment in debt segment do not hold particular pattern. In the
year 1997-98, it was Rs. 691.1 crores. In the year1998-99, 2000-2001 & 2005-06
it recorded outflow of Rs.-867 crores, Rs.-273.3 crores and Rs.-7333.8 crores
respectively. It was stood at Rs 1895.2 crores in 2008-09.
Total net FII investment was Rs.13.4 crores in 1991-92. It increase
significantly and stood at Rs.66179.1 crores in 2007-08. In the year 2008-09 total
investment declined to Rs.-45811.0 crores.
It is observed that the share of equity investment to the total investment of
FII is greater than debt investment. In the year 2008-09, FII investment declined in
equity segment while it remained positive in debt segment of Indian stock market.

207

7.10 Yearly Trends in FII Investment in Secondary Market of BSE


Table No. 7.8 : Yearly Trends in FII Investment in Secondary Market of BSE

Year

Net FII
Investment

1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

4796
6942
8575
5958
-1585
10122
9933
8763
2689
45764
45880
41467
30841
66179
-45811

Net FII
Investment in
Secondary
Market of BSE
1742
5672
3048.86
2453.57
-117
6067
5885
3467
1088
8686
12286
6480
1380
-6500
-20414
AVERAGE

% to Total Net
Investment
36.322
81.706
35.555
41.181
7.382
59.939
59.247
39.564
40.461
18.980
26.779
15.627
4.475
-9.822
44.561
33.81

Source : Data compiled from SEBI :Handbook of Statistics on Indian Securities Market,
2009 and Various Annual Reports of BSE

The relevant data of FII investment in secondary market of BSE is


summarized in table no. 7.8 taking the entire period of 1994-95 to 2008-09. Our
data warrants the following generalizations.
Percentages of net investment of FII on secondary market of BSE do not
hold any particular pattern. It is ranging from 4% to 82% during the study period.
In the year 1995-96, the percentage of FII investment on secondary market
of BSE was highest i.e. 81.706% whereas in the year 2006-07, it recorded lowest
share i.e. 4.47%.
Thus, during the study period, the percentage average share of net FII
investment in secondary market of BSE is around 33.18% to the total net FII
investment in Indian stock market.

208

7.10.1Total FII Trade as Percentage of Total Turnover in Bombay Stock


Exchange
Total FII trade includes FIIs gross purchase in plus gross sale secondary
market of BSE. The total FII trade in segment of BSE and its relationship with the
Bombay Stock Exchange's turnover is presented in the following table no. 7.9.
Table No. 7.9 : Total FII Trade as Percentage of Total Turnover in
Bombay Stock Exchange
Year

FII Trade
(Rs. In crore)

1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

5514
6838
10556
12859
15705
46043
59941
35185
31980
57078
107534
221440
264480
411436
220568

Total Turnover
of BSE
(Rs. In crores)
67748
49418
124189
207112
310749
685028.21
1000031.54
307292.36
314073.19
502618.41
518715.67
816074.02
956185.41
1578856.09
1100073.63
AVERAGE

% share of FII
in BSE's
Turnover
8.13
13.83
8.49
6.20
5.05
6.72
5.99
11.45
10.18
11.35
20.73
27.13
27.65
26.05
20.05
14.0%

Source : Data compiled from BSEs Annual Reports

It is clear from Table No. 7.9 that, there is growing influence of FII in BSE's
turnover during study period. The percentage share of FIIs trade in total turnover
in BSE's was recorded highest in the year 2006-07 i.e. 27.65% whereas it was
lowest in the year 1998-99 i.e. 5.05%. During the last five years, the average
share of FIIs trade in total turnover of BSE was around 25.0% whereas the
average share of FIIs trade in total turnover of BSE during entire study period was
about 14.0%.
It is also concluded that, there is a steady growing influence of FIIs in the
Indian stock market.

209

7.10.2 FII and BSE Sensex

Year
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

Table No. 7.10 : FII and BSE Sensex


Net Sensex
Net FII's on BSE
120
1742
-500
5672
-6
3048.86
532
2453.57
-153
-117
1261
6067
--1397
5885
-135
3467
-420
188
2542
8686
902
12286
4787
6480
1792
1384
2572
-6500
5935
20414

Source : Values are Calculated from the data

It is found by the study (Table No. 7.10) that BSE Sensex and FII has
followed a close relationship, when net Sensex moved up the FII also increased
and when net Sensex was down, the total FII was went down.

210

7.11

Returns of BSE Indices and its Correlation with FII


Table No. 7.11 : Returns of BSE indices & its Correlation with FII

Year

1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

BSE-30
Coefficient
Correlation

0.669
0.450
0.045
0.196
0.855
0.404
0.390
0.125
0.028
0.635
0.674
0.101
0.798
0.478
0.574

Indices
BSE-100
BSE-200
Coefficient
Coefficient
Correlation
Correlation

0.634
0.474
0.019
0.194
0.575
0.500
0.281
0.048
0.007
0.527
0.707
0.097
0.792
0.391
0.610

0.673
0.431
0.002
0.260
0.865
0.408
0.231
0.045
0.041
0.480
0.718
0.121
0.802
0.361
0.622

BSE-500
Coefficient
Correlation

NA
NA
NA
NA
NA
0.879
0.250
0.021
0.031
-0.051
0.715
0.120
0.795
0.329
0.636

Note: Values are Calculated from the data

According to results depicted in Table No. 7.11, during the year 1994 to
2009, it is found that the correlation between the BSE-30 (Sensex) and FII is
positive, and ranging between 0.02 to 0.85. There is high degree of correlation
between the Sensex and FII investment i.e. 0.85 in 1998-99 whereas low degree
of correlation found between Sensex and FII investment in 2002-2003 i.e. 0.02.
It is seen that a positive correlation between monthly returns of BSE-100
and FII investment for the entire period of study from 1994-95 to 2008-09. The
correlation between monthly returns of BSE-100 and FII investment is ranging
between 0.007 to 0.79. The table further examines the relation between the BSE200 and FII that gives the positive degree of correlation, ranging from 0.002 to
0.86. In the year 1996-97, there was low degree of positive correlation (0.002)
whereas high degree of positive correlation (0.86) found in the year 1998-99.
It is observed that there is positive degree of correlation coefficient (r)
between BSE-500 and FII investment during study period, except in the year
2003-04, it recorded negative correlation co-efficient i.e. 0.05. The low and high
degree of positive correlation between BSE-500 and FII investment is of 0.02 and
0.87 respectively.
211

7.12 Correlation between FII Investment and Monthly Turnover of BSE


Table no. 7.12 : Correlation between FII Investment and
Monthly Turnover of BSE
Year
Coefficient Correlation
1994-95
-0.169
1995-96
0.675
1996-97
0.627
1997-98
0.391
1998-99
0.506
1999-2000
0.200
2000-01
-0.119
2001-02
0.837
2002-03
-0.116
2003-04
0.945
2004-05
0.080
2005-06
0.140
2006-07
-0.056
2007-08
0.028
2008-09
-0.505
Source: Values are calculated from the data

Table no. 7.12 highlights the correlation between monthly turnover of BSE
and FII investment in secondary market of BSE during 1994-95 to 2008-2009. It is
seen that there is negative correlation in the year 1994-95, 2000-2001,2002-03,
2006-07 and 2008-09 i.e. 0.16, -0.11,-0.116, -0.05 and 0.50 respectively,
whereas rest of years, there is a positive degree of correlation between FII and
monthly turnover of BSE.
It is also seen, that there is high degree of correlation between BSE
turnover and FII investment i.e. 0.83 in 2001-2002, whereas low degree of
correlation found in the year 2007-2008 i.e. 0.02. Thus, the correlation between
FII investment and monthly turnover ranging between 0.02 to 0.83 degree.
Indices

Coefficient of Correlation

A) Net FII & Net Sensex

-0.513*

B) FII Investment & Monthly Returns


of BSE
BSE-30
BSE-100

0.067NS
0.963NS

C)FII Investment & Monthly Turnover


of BSE

-0.147NS

t value Significant at 5% Level, NS: Non Significant


Note: Calculated & Compiled by Researcher

212

Conclusion:
The FII investment has always been the subject of debate in term of
desirability. This is because of FII money is known to be hot money that would flee
at the first sign of trouble. At present, total holding of each FII/Sub account under
the portfolio scheme should not exceeded 10% of the total paid up capital and
holding of all FII/Sub accounts put together should not exceed 24% of the paid up
capital. There has been a notable surge in FII investment since 1993-94 signifying
the attractiveness of the Indian stock market and is an expression of confidence
on the part of international investment community in the regularatory framework
for the securities market.
It is seen that during study period, the share of equity investment to the
total investment of FII is greater than Debt investment. It is also seen that average
share of net FII investment in secondary market of BSE is around 33.18% to the
total net FII investment. The percentage average share of FII trade in total
turnover of BSE is 14.0% during the study period.
The correlation analysis shows that there is a significant correlation
between FII investments with BSE Sensex. There is no significant

correlation

between Return and FII investment. It is also found that, there is no significant
correlation between FII investment and monthly turnover of BSE during the study
period.

213