Term Paper On IMPACT OF FII IN INDIAN STOCK MARKET

Submitted To: Prof. Sampada S. Kapse

In Partial Fulfillment of the subject: Indian Financial System Of TMS. - 4 - P.G.D.M. Batch: 2010-12

Submitted By: Sr. No.

1. 2. 3. 4. 5. 6.

Name
Rahul Faliya Kunjan Gandhi Kanil Hinsu Daymand Hudani Nishant Joshi Vishal Kanani

Roll No.
10031 10033 10037 10038 10047 10048

Introduction:
Stock Market:
In the stock market world, you need a way to compare the movement of the market, up and down, from day to day, and from year to year. An index is just a benchmark or yardstick expressed as a number that makes it possible to do this comparison. A stock market or equity market is a public entity (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these

are securities listed on a stock exchange as well as those only traded privately. Stock exchanges to some extent play an important role as indicators, reflecting the performance of the country's economic state of health. Stock market is a place where securities are bought and sold. It is exposed to a high degree of volatility; prices fluctuate within minutes and are determined by the demand and supply of stocks at a given time. Stockbrokers are the ones who buy and sell securities on behalf of individuals and institutions for some commission. The Securities and Exchange Board of India (SEBI) is the authorized body, which regulates the operations of stock exchanges, banks and other financial institutions. The past performances in the capital markets especially the securities scam by Harshad Mehta & Ketan Parekh has led to tightening of the operations by SEBI. In addition the international trading and investment exposure has made it imperative to better operational efficiency. With the view to improve, discipline and bring greater transparency in this sector, constant efforts are being made and to a certain extent improvements have been made.

As the condition of capital markets are constantly improving, it has started drawing attention of lot more people than before. On the career related aspects, professionals have opportunities to choose from for a wide range of jobs available in a number of organizations in this sector and one can expect to have good times ahead of him. Securities market has essentially three categories of participants, namely the issuer of securities, investor in securities and the intermediaries and two categories of products, namely the services of the intermediaries, the securities including derivatives. The security market has two interdependent and inseparable segments, the new issues (Primary market) and the stock (secondary market). The primary market provides the channel for sale of new securities while secondary market deals in securities previously issued. There are so many script or stock traded in Indian stock market and all stocks are distributes in Small cap, Mid cap, SENSEX, Nifty 50, BSE 200, BSE 500 and BSE 100.

Foreign Institutional Investors:

Foreign Institutional investors (FII) are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. The less well known Foreign Institutional Investors (FIIs) have been a key part of India's growth story this decade. The term FIIs is most commonly used to refer the companies that are established or incorporated outside India and are investing in the financial markets of India by registering themselves with the

Securities & Exchange Board of India (SEBI). FIIs include overseas pension funds, mutual funds, investment trusts, asset management companies, nominee companies, banks, institutional portfolio managers, 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 on behalf of a broad-based fund (i.e., fund having more than 20 investors with no single investor holding more than 10% of the shares or units of the fund). Foreign Institutional Investment is basically short-term in nature and mostly made in the financial markets. Foreign Institutional Investors (FIIs) are allowed to invest in the primary and secondary capital markets in India through the Portfolio Investment Scheme (PIS) administered by the Reserve Bank of India (RBI). Under this scheme, FIIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The ceiling for overall investment by FIIs is 24 per cent of the paid up capital of the Indian company (20 per cent in the case of public sector banks, including the State Bank of India). The ceiling of 24 per cent for FII investment can be raised subject to (i) approval by the companys board and the passing of a special shareholder resolution to that effect (ii) certain sector caps imposed by RBI and the Government of India. The RBI monitors the ceilings on FII investments in Indian companies on a daily basis and publishes a list of companies allowed to attract investments from FIIs with their respective ceilings. The FIIs have been playing a significant role in the process of capital formation and economic growth of the country. There has been a dramatic increase in net FII flows to India over the period 2003-2007, and especially over the bull rally that climaxed in January 2008 when the SENSEX reached a lifetime high of 21,206.77 points. FIIs invested US$17 billion in Indian stocks in 2007 only. However, the

onset of the recent global financial crisis saw FIIs pulling out a record $13 billion (Rs 67,470) in 2008, the largest outflows since India opened its doors to FIIs 15 years ago. The Economic Times has just reported that FII investment is up, with the Indian Stock Market taking in $13 billion so far in 2009 from foreign institutions. This is in stark contrast to the scenario in 2008. FIIs such as pension managers, investment houses and sovereign wealth funds have been both a growth driver and a beneficiary of this growth, with stocks now worth more than double what they were at their March lows. The key aspect of FII investment is that as many as 120 new foreign institutional investors have registered in India since the global financial crisis broke out in September 2008. These FIIs come from a diverse set of operational areas, and includes names like American Airlines, International Finance Corporation, University of Southern California, Bank of Korea, the Bill & Melinda Gates Foundation, and Warburg Pincus International. More importantly, the months of September-November, 2008 have seen registration of 358 new sub-accounts the highest in any block of three months in 2008. This shows that we are a fairly large attractor of foreign institutional investment. There are a number of reasons huge FII investment is being made in India.

Who can be an FII.?

One who propose to invest their proprietary funds or on behalf of broad based funds or of foreign corporate and individuals and belong to any of the under given categories can be registered for FII. Pension Funds Mutual Funds Investment Trust Insurance or reinsurance companies Endowment Funds University Funds Foundations or Charitable Trusts or Charitable Societies Asset Management Companies Nominee Companies Institutional Portfolio Managers Trustees Power of Attorney Holders Bank

The eligibility criteria for applicant seeking FII 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. Applicant must be legally permitted to invest in securities outside the country or its in-corporation / establishment. The applicant must be a "fit and proper" person. The applicant has to appoint a local custodian and 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 are:

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. Declaration regarding fit & proper entity.

OBJECTIVES:
The objectives of this study are as follows with respect to our topic (1) To study the role of FII investment in the Indian stock market 2) To understand the relationship between FII & Indian capital market. 3) To understand the FII policy in India.

Methodology:

Data collection: Secondary Data: Internet, newspapers, journals and books, other reports and projects, literatures.

The current list of companies allowed attracting investments from FIIs: 1 Anglo- India Jute Mills Co. Ltd. 2 Arvind Mills, Ahmedabad. 3 Ashima Syntex Ltd, Ahmedabad. 4 Ashoka Viniyoga Ltd. 5 Bharat Nidhi Ltd. 6 BLB Shares & Financial Services Ltd 7 BPL Ltd. 8 Burr Brown (India) Ltd 9 Camac Commercial Company Ltd. 10 Ceenik Exports (India) Ltd. 11 Cifco Finance Ltd., Mumbai. 12 Classic Financial Services & Enterprises Ltd, Calcutta. 13 CPPL Ltd, (Reliance Ind. Infrastructure Ltd) Mumbai. 14 Crest Communication Ltd. 15 CRISIL 16 DCM Ltd. 17 DCM Shriram Consolidated Ltd. 18 Dharani Sugars & Chemicals Ltd 19 Dolphin Offshore Enterprises ( I ) Ltd. 20 Emco Ltd.

21 Essar Oil Ltd. 22 Essar Shipping Ltd., Blore 23 Essar Steel Ltd. etc.

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 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.

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

ii)

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:

a) 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.

b) 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 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. FIIs are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme.

Regulation on FII:
Investment by FII was jointly regulated by Securities and Exchange Board of India (SEBI) through the SEBI (Foreign Institutional Investors) Regulations, 1995 and by the Reserve Bank of India through Regulation 5(2) of the Foreign Exchange Management Act (FEMA), 1999. The promulgation of legislation pertaining to foreign investment by SEBI in 1995 market a watershed for FII flows to India; this led to a significant increase in the level of FII equity inflows in the pre-Asian crisis period. The SEBI FII Regulations and RBI policies are amended and modified from time to time in response to the gradual maturing of the Indian financial market and changes taking place in the global economic scenario. In order to trade in India equity market, foreign corporation need to register with SEBI as Foreign Institutional Investors. Without registration they can invest, but cases require the approval from RBI. They are generally concentrated in secondary market. FII are allowed to invest in a) Securities in primary and secondary market including shares, debentures and warrant of companies, unlisted, listed or to be the listed in India. b) Units of mutual funds

c) Dated government securities d) Derivative traded in a recognized stock market and e) Commercial papers FII 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. FII sub accounts include those foreign corporate, foreign individual, institution funds or portfolio established or incorporated outside India. FII may issue deal in or hold off share derivative instrument such as participatory notes (PN). The entities that can subscribe to the PN are a) Any entity incorporated in a jurisdiction that requires filing of constitutional or other documents with a registrar of companies or comparable regulatory agency or body under the applicable companies legislation in that jurisdiction b) Any entity that is regulated authorized or supervised by a central bank, such as the Bank of England, or any other similar body provided that the entity must not only be authorized but also be regulated by the aforesaid regulatory bodies c) Any entity that is regulated, authorized or supervised by a securities or futures commission, such as the Financial Services Authority or other securities or futures authority or commission in any country, state or territory d) Any entity that is a member of securities or futures exchanges such as the New York Stock Exchange or other self-regulatory securities or futures authority or commission within any country, state or territory provided that the aforesaid mentioned organizations which are in the nature of self- regulatory organizations are ultimately accountable to the respective securities financial market regulators.

Impact of FIIs on Indian Markets:

FIIs are companies registered outside India. In the past four years there has been more than $41 trillion worth of FII funds invested in India. This has been one of the major reasons on the bull market witnessing unprecedented growth with the BSE Sensex rising 221% in absolute terms in this span. The present downfall of the market too is influenced as these FIIs are taking out some of their invested money. Though there is a lot of value in this market and fundamentally there is a lot of upside in it. For long-term value investors, theres little because for worry but short term traders are adversely getting affected by the role of FIIs are playing at the present. Investors should not panic and should remain invested in sectors where underlying earnings growth has little to do with financial markets or global economy. 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. 1. 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 swings 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. 2. 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.

3. 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. Though valuations are very attractive on a selective basis, but stock picking has to be done based on evaluation of business fundamentals. The subprime issue and problems in the credit markets have raised concerns about potential growth slowdown in the US and Europe. The fear of a slowdown will likely continue to weigh on markets average FII redemptions in India have been lower than in other Asian economics. FIIs do get affected by it. India is among the economies less sensitive to a deceleration in US growth and one should not be perturbed by FII flows in either direction. One need not worry much about the volatility of the market as it is influenced by temporary factors but the Indian story is still strong. Markets cannot go in one direction all the times (upwards) which it was going. 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.

Trends of FII 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. It can be observed from the table below that India is one of the preferred investment destinations for FIIs over the years. As of March 2009, there were 1609 FIIs registered with SEBI.
SEBI Registered FIIs in India Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 End of March 0 3 156 353 439 496 450 506 527 490 502 540 685 882 996 1279 1609 1718 1730

FII trend in India:

Year

Gross Purchases (a) (Rs. crore)

Gross Sales (b) (Rs.crore)

Net

% increase in

Investment (a- FII inflow b) (Rs. crore)

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

17 5593 7631 9694 15554 18695 16115 56856 74051 49920 47061 144858 16953 346978 520508 896686 548876 626428

4 466 2835 2752 6979 12737 17699 46734 64116 41165 44373 99094 171072 305512 489667 844504 594608 542158

3 5127 4796 6942 8575 5958 1584 10122 9935 8755 2688 45764 45881 41466 30841 52182 -45732 84270

170800 -6.45 44.75 23.52 -30.52 126.59 739.02 -1.85 -11.88 69.30 1602.53 0.26 -9.62 -25.62 69.20 187.64 284.27

1000000

FII INFLOW

800000

600000

400000

Gross Purchases (a) (Rs. crore) Gross Sales (b) (Rs.crore)

200000

Net Investment (a-b) (Rs. crore)

0 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 -200000

There may be many other factors on which a stock index may depend i.e. Government policies, budgets, bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar exchange rate etc. But for our study we have selected only one independent variable i.e. FII and dependent variable is indices of nifty.

Correlations:
year Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Jan-08 Mar-09 Mar-10 FII 43107 57209 65239 67673 111238 149960 200454 226537 280772 231825 342878 394059 NIFTY 1549.5 1148.2 1129.55 978.2 1771.9 2035.65 3402.55 3821.55 6144.35 4734.5 3020.95 5262.45 SENSEX 5041.08 3604.38 3469.35 3048.72 5590.6 6492.82 11279.96 13072.1 15644.44 20873.33 9708.5 17590.17

Correlations:

Correlations:
fii Fii Pearson Correlation Sig. (2-tailed) N Sensex Pearson Correlation Sig. (2-tailed) N 12 .798** .002 12 12 1 Sensex .798** .002 12 1

Analysis:Relationship between FII and SENSEX was investigated using Pearson product moment correlation coefficient. Preliminary analyses were performed to ensure no violation of the assumptions or normality, linearity. There was Positive correlation between two variable(R=-0.798, N=12) with high level of FII and SENSEX.

Correlations fii Fii Pearson Correlation Sig. (2-tailed) N Nifty Pearson Correlation Sig. (2-tailed) N 12 .839** .001 12 12 1 Nifty .839** .001 12 1

**. Correlation is significant at the 0.01 level (2-tailed).

Analysis:Relationship between FII and Nifty was investigated using Pearson product moment correlation coefficient. Preliminary analyses were performed to ensure no violation of the assumptions or normality, linearity. There was Positive correlation between two variable(R=-0.839, N=12) with high level of FII and Nifty.

CONCLUSION:
In developing countries like India foreign capital helps in increasing the productivity of labor and to build up foreign exchange reserves to meet the current account deficit. Foreign Investment provides a channel through which country can have access to foreign capital.

According to Data analysis and findings, it can be concluded that FII do have any significant impact on the Indian Stock Market but there are other factors like government policies, budgets, bullion market, inflation, economical and political condition, etc. do also have an impact on the Indian stock market. There is a positive correlation between stock indices and FIIs but FIIs didnt have any significant impact on Indian Stock Market. We can conclude from the data analysis that changes in the level of FII may also changes in the SENSEX and NIFTY. There is positive correlation between FII and NIFTY and FII and SENSEX.

REFERENCES:
http://stockstalks.com/stocktalksforums/index.php?PHPSESSID=1c9e4a95fb8533 0dc5c1d0bd081d10fe&topic=6.0 http://www.sebi.gov.in/workingpaper/stock.pdf www.bseindia.com www.nseindia.com www.rbi.org www.moneycontrol.com