IMPACT OF FIIs ON PERFORMANCE OF NIFTY A PROJECT REPORT

IMPACT OF FIIs ON PERFORMANCE OF NIFTY

A PROJECT REPORT
Submitted By
Shuja Shabbir

for the award of the diploma
of
POST GRADUATE DIPLOMA
IN
PORTFOLIO MANAGEMENT


CENTER OF DISTANCE EDUCATION
ALIGARH MUSLIM UNIVERSITY
ALIGARH (INDIA)
2015-16


ACKNOWLEDGEMENT


With a deep sense of gratitude, we wish to express my sincere thanks to my Director, Dr. Mohd. Nafees Ahmad Ansari for giving us the opportunity to work under them on the project.
We truly appreciate and value their esteemed guidance and encouragement from the beginning to end of this project. We are extremely grateful to him.
We want to thank to all my teachers for providing a solid background for our studies and research thereafter. They have been great source of inspiration to us and we thank them from the bottom of my heart.
We also want to thank our parents, who taught us the value of hard work by their own example. We would like to share this moment of happiness with our parents. They rendered us enormous support during the whole tenure of our stay and also thank our department for giving us the opportunity and platform to make our effort a successful one in Centre for Distance Education, A.M.U. Aligarh .Finally; I would like to thank all those who have directly or indirectly helped me complete the project successfully.


SHUJA SHABBIR
(DAA9981)
ROLL NO: 15/7836






CERTIFICATE


This is to certify Mr. SHUJA SHABBBIR student of Post Graduation Diploma in Portfolio Management batch of Centre for Distance Education, A.M.U. Aligarh has satisfactorily completed final project on "Impact of FIIs on Performance of Nifty" Under my supervision & guidance as partial fulfilment of requirement of PGD-PM 2015-2016.





DIRECTOR
Centre for Distance Education







Abstract

Since the beginning of liberalization FII flows to India have steadily grown in importance. As a part of its initiative to liberalize its financial markets, India opened her doors to Foreign Institutional Investors in September 1992. This event represents a landmark event since it resulted in effectively globalizing its financial services industry.
The foreign institutional investors (FIIs) have emerged as important players in the Indian equity market in the recent past. This study makes an attempt to develop an understanding of the dynamics of the trading behaviour of FIIs. Along with this the purpose of study is to find out the impact of FII on Performance of Nifty. FIIs, because of their short-term nature, can have bidirectional causation with the returns of other domestic financial markets such as money markets, stock markets, and foreign exchange markets. Hence, the understanding of determinants of FII is very important for any emerging economy as FII exerts a larger impact on the domestic financial markets in the short run and a real impact in the long run
There may be other factors on which Stock index may depend i.e. Government policies, budgets, bullion market, inflation, economic and political condition of the country, FDI, Rupee/Dollar exchange rates etc. This study uses the concept of correlation, regression to study the relationship between FII and Nifty.









TABLE OF CONTENTS



1. Acknowledgement
2. Certificate
3. Abstract
4. Table of content
5. Introduction
6. List of Symbols, Abbreviations and Nomenclature
7. Chapters
1. NSE and NIFTY: An overview
2. Foreign Institutional Investments (FIIs)
3. FII & Capital Market Analysis
4. Data Analysis and interpretation

8 Conclusion
9. References




Introduction


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.
An FII stands for an institution which is incorporated outside India looking for an investment 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. 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.
The FIIs have huge financial strength and invest for the purpose of income and capital appreciation. They are not interested in taking control of the company. But what are the benefits of having foreign exchange inflow as the funds from the multilateral finance institutions and FDI are insufficient.
It lowers the cost of capital, access to cheap global credit.
It supplements domestic savings and investments.
It leads to higher asset price and in the Indian market.













Chapter 1NSE and Nifty: An Overview

Chapter 1
NSE and Nifty: An Overview

National Stock Exchange of India Limited (NSE)
The National Stock Exchange of India Limited (NSE) is the leading stock exchange of India, located in Mumbai. NSE was established in 1992 as the first demutualized electronic exchange in the country. NSE was the first exchange in the country to provide a modern, fully automated screen-based electronic trading system which offered easy trading facility to the investors spread across the length and breadth of the country.
NSE has a market capitalization of more than US$1.65 trillion, making it the world's 12th-largest stock exchange as of 23 January 2015. NSE's flagship index, the CNX Nifty, the 50 stock indexes, is used extensively by investors in India and around the world as a barometer of the Indian capital markets.
NSE was set up by a group of leading Indian financial institutions at the behest of the government of India to bring transparency to the Indian capital market. Based on the recommendations laid out by the government committee, NSE has been established with a diversified shareholding comprising domestic and global investors. The key domestic investors include Life Insurance Corporation of India, State Bank of India, IFCI Limited IDFC Limited and Stock Holding Corporation of India Limited. And the key global investors are Gagil FDI Limited, GS Strategic Investments Limited, SAIF II SE Investments Mauritius Limited, Aranda Investments (Mauritius) Pte Limited and PI Opportunities Fund I.
NSE offers trading, clearing and settlement services in equity, equity derivatives, and debt and currency derivatives segments. It is the first exchange in India to introduce electronic trading facility thus connecting together the investor base of the entire country. NSE has 2500 VSATs and 3000 leased lines spread over more than 2000 cities across India.
The exchange was incorporated in 1992 as a tax-paying company and was recognized as a stock exchange in 1993 under the Securities Contracts (Regulation) Act, 1956, when P. V. Narasimha Rao was the Prime Minister of India and Manmohan Singh was the Finance Minister. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The capital market (equities) segment of the NSE commenced operations in November 1994, while operations in the derivatives segment commenced in June 2000.

NIFTY
The NIFTY 50 index is National Stock Exchange of India's benchmark stock market index for Indian equity market. Nifty is owned and managed by India Index Services and Products (IISL), which is a wholly owned subsidiary of the NSE Strategic Investment Corporation Limited. IISL had marketing and licensing agreement with Standard & Poor's for co-branding equity indices until 2013.
NIFTY 50 Index has shaped up as a largest single financial product in India, with an ecosystem comprising: exchange traded funds (onshore and offshore), exchange-traded futures and options (at NSE in India and at SGX and CME abroad), other index funds and OTC derivatives (mostly offshore).NIFTY 50 is the world's most actively traded contract. WFE, IOMA and FIA surveys endorse NSE's leadership position.
The NIFTY 50 covers 22 sectors of the Indian economy and offers investment managers exposure to the Indian market in one portfolio. During 2008-12, NIFTY 50 50 Index share of NSE market capitalisation fell from 65% to 29%[2] due to the rise of sectoral indices like NIFTY Bank, NIFTY IT, NIFTY Next 50, etc. The NIFTY 50 Index gives 29.70% weightage to financial services, 0.73% weightage to industrial manufacturing and nil weightage to agricultural sector.
The NIFTY 50 index is a free float market capitalisation weighted index. The index was initially calculated on full market capitalisation methodology. From June 26, 2009, the computation was changed to free float methodology. The base period for the CNX Nifty index is November 3, 1995, which marked the completion of one year of operations of National Stock Exchange Equity Market Segment. The base value of the index has been set at 1000, and a base capital of Rs 2.06 trillion.







Major Falls Of NIFTY
On the following dates, the NIFTY 50 index suffered major single-day falls (of 150 or more points)

24 Aug 2015 --- 490.95 Points (driven by meltdown in the Chinese stock market)


16 Aug 2013 --- 234.45 Points(because of rupee depreciation)

27 Aug 2013 --- 189.05 Points

03 Sep Aug 2013 --- 209.30 Points


06 May 2015 - NSE Nifty slipped below the 8,200-level by falling 179.25 points or 2.15 per cent to 8145.55. Besides, overnight losses in the US markets on worries about surging oil prices, poor trade data and growing tensions over the Greek debt crisis weighed on sentiments.

In 1991, New Delhi kick-started the economic reforms process owing mainly to the serious balance of payments crisis it was facing.


1997 Asian Financial Crisis - Investors deserted emerging Asian shares, including an overheated Hong Kong stock market. Crashes occur in Thailand, Indonesia, South Korea, Philippines, and elsewhere, reaching a climax in the October 27, 1997 mini-crash.





List of 50 companies that form part of NIFTY 50 Index as on 11 March 2016:

Company Name
Symbol
ACC Limited
ACC
Adani Ports & SEZ Limited
ADANIPORTS
Ambuja Cements Ltd.
AMBUJACEM
Asian Paints Ltd.
ASIANPAINT
Axis Bank Ltd.
AXISBANK
Bajaj Auto Ltd.
BAJAJ-AUTO
Bank of Baroda
BANKBARODA
Bharat Heavy Electricals Limited
BHEL
Bharat Petroleum Corporation
BPCL
Bharti Airtel Ltd.
BHARTIARTL
Bosch Ltd.
BOSCHLTD
Cairn India Ltd.
CAIRN
Cipla Ltd.
CIPLA
Coal India Ltd.
COALINDIA
Dr. Reddy's Laboratories Ltd.
DRREDDY
GAIL (India) Ltd.
GAIL
Grasim Industries Ltd.
GRASIM
HCL Technologies Ltd.
HCLTECH
HDFC Bank Ltd.
HDFCBANK
Hero MotoCorp Ltd.
HEROMOTOCO
Hindalco Industries Ltd.
HINDALCO
Hindustan Unilever Ltd.
HINDUNILVR
Housing Development Finance Corporation Ltd.
HDFC
ITC Limited
ITC
ICICI Bank Ltd.
ICICIBANK
Idea Cellular Ltd.
IDEA
IndusInd Bank Ltd.
INDUSINDBK
Infosys Ltd.
INFY
Kotak Mahindra Bank Ltd.
KOTAKBANK
Larsen & Toubro Ltd.
LT
Lupin Limited
LUPIN
Mahindra & Mahindra Ltd.
M&M
Maruti Suzuki India Ltd.
MARUTI
NTPC Limited
NTPC
Oil & Natural Gas Corporation Ltd.
ONGC
PowerGrid Corporation of India Ltd.
POWERGRID
Punjab National Bank
PNB
Reliance Industries Ltd.
RELIANCE
State Bank of India
SBIN
Sun Pharmaceutical Industries Ltd.
SUNPHARMA
Tata Consultancy Services Ltd.
TCS
Tata Motors Ltd.
TATAMOTORS
Tata Power Co. Ltd.
TATAPOWER
Tata Steel Ltd.
TATASTEEL
Tech Mahindra Ltd.
TECHM
UltraTech Cement Ltd.
ULTRATECH
Vedanta Ltd.
VEDL
Wipro
WIPRO
Yes Bank Ltd.
YESBANK
Zee Entertainment Enterprises Ltd.
ZEEL




Chapter 2Foreign Institutional Investments (FIIs)

Chapter 2
Foreign Institutional Investments (FIIs)
2.1: 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 firm's 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).
2.2 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.






2.3 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.


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.

2.4 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:
Securities in the primary and secondary market including shares which are unlisted, listed or to be listed on a recognized stock exchange in India.
Units of schemes floated by the Unit Trust of India and other domestic mutual funds, whether listed or not.
Warrants
100% Debt route: In case of Debt Route the FIIs can invest in the following instruments:
Debentures (Non Convertible Debentures, Partly Convertible Debentures etc.)
Bonds
Dated government securities
Treasury Bills
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;
(iii) liberalisation of investment instruments accessible for FIIs
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.
2.5 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.

Address for application
The Division Chief
FII Division
Securities and Exchange Board of India,
224, Mittal Court, 'B' Wing, 1st Floor,
Nariman Point, Mumbai - 400 021.
INDIA.

Supporting documents required are
Application in Form A duly signed by the authorised 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 Organisation 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 particulatrs of the domestic custodian.
A signed declaration statement that appears at the end of the Form.
Declaration regarding fit & proper entity.



The eligibility criteria for applicant seeking FII registration
As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required to fulfil 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

SUB-ACCOUNT REGISTRATION
a) Institution or funds or portfolios established outside India, whether incorporated or not.
b) Proprietary fund of FII.
c) Foreign Corporates
d) Foreign Individuals.
The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account are required to sign the Sub-account application form.
"Annexure B" to "Form A" (FII application form) needs to be filled when applying for sub-account registration. No document is needed to be sent with annexure B. The fee for sub-account registration is US$ 1,000. The fee is to be submitted at the time of submitting the application. The mode of payment is Demand Draft in the name of "Securities and Exchange Board of India" payable at New York. SEBI generally takes three working days in granting FII registration. However, in cases where the information furnished by the applicants is incomplete, three days shall be counted from the days when all necessary information sought, reaches SEBI. The validity of sub-account registration is co-terminus with the FII registration under which it is registered. The process of renewal of sub-account is same as initial registration. Renewal fee in this case is US $ 1,000. OCBs / NRIs are not permitted to get registered as FII/sub-account.

FII Regulations:
Investment by FIIs is regulated under SEBI (FII) Regulations, 1995. Following are some of important regulations by SEBI and RBI:
1. A Foreign Institutional Investor may invest only in the instruments mentioned earlier.
2. The total investments in equity and equity related instruments (including fully convertible debentures, convertible portion of partially convertible debentures and tradable warrants) made by a FII in India, whether on his own account or on account of his sub- accounts, should be at least 70% of the aggregate of all the investments of the FII in India, made on his own account and through his sub-accounts.
3. The cumulative debt investment limit for FII investments in Corporate Debt is US $15 billion. The amount was increased from US $6 billion to USD 15 billion in March 2009.
4. US $8 billion will be allocated to the FIIs and Sub-Accounts through an open bidding platform while the remaining amount is allocated on a 'first come first served' basis subject to a ceiling of Rs.249 cr. per registered entity.
5. The debt investment limit for FIIs in government debt is currently capped at $5 billion and cumulative investments under 2% of the outstanding stock and no single entity can be allocated more than Rs. 1000 crores of the government debt limits.


Further, in 2008 amendments were made to attract more foreign investors to register with SEBI, these amendments are:
1. The definition of "broad based fund" under the regulations was substantially widened allowing several more sub accounts and FIIs to register with SEBI.
2. Several new categories of registration viz. sovereign wealth funds, foreign individual, foreign corporate etc. were introduced,
3. Registration once granted to foreign investors was made permanent without a need to apply for renewal from time to time thereby substantially reducing the administrative burden,
4. Also the application fee for foreign investors applying for registration has recently been reduced by 50% for FIIs and sub accounts
5. Also, institutional investors including FIIs and their sub-accounts have been allowed to undertake short-selling, lending and borrowing of Indian securities from February 1, 2008.
6. 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 have 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) cannot 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.


2.6 REVIEW OF LITERATURE

Shrikanth, M. and Kishore B. (2012), in their paper investigated a cause and effect relationship between FII and Indian capital market. They observed that FIIs carried the institutional flavor in terms of market expertise and fund management by way of pooling small savings from retail investors. The main objective of FIIs is maximizing returns and minimizing risk while keeping liquidity of the investments intact. They concluded that net FII inflows had a positive impact on the Indian stock market and foreign exchange reserves.
Loomba, J. (2012), attempted to testify the behavior of FII trading and its effect on Indian stock market. He observed that in the course of capital market liberalization, foreign capital has become increasingly significant source of finance and institutional investors are growing their influence in developing markets. He concluded that the Indian stock markets have come in age where there were significant developments in the last 15 years make the markets at par with the developed markets.
Bohra, N. Singh and Dutt, Akash. (2011), studied the behavioral pattern of FII in India and figure out the reasons for indifferent responses of BSE Sensex due to FII inflows. They found the correlation between FII investment and turnover of different individual groups at BSE sensex. They concluded that there is a positive correlation between FII investment and stock market but in year 2005 and 2008, it was also observed that positive or negative movement of FII's investment leads to a major shift in the sentiments of domestic or related investors in market.
Shukla, K. Rajeev et al (2011), investigated the impact of foreign institutional investors on Indian stock indices. He revealed that India, after United States hosts the largest number of listed companies and Global investors now enthusiastically seek India as their preferred destination for investment. Many Indians working in foreign countries now divert their savings to stocks. They concluded that FIIs have significant impact on the share prices of the Midcap & Small-cap companies but small and a periodic shift in their behavior leads to market volatility.

Kaur, Manjinder and Dhillon, S. Sharanjit (2010), focused on the determinants of Foreign Institutional investment in India. Market capitalization and stock market turnover of India have significant positive influence only in short-run but Stock market risk has negative influence on FIIs inflows to India. Among macroeconomic determinants, economic growth of India has positive impact on FIIs investment in both long run and short run but all other macroeconomic factors have significant influence only in long run like inflation. They concluded that host country stock market returns (returns on Sensex) have positive and significant impact whereas home country returns (returns on S&P 500 Index) have negative but insignificant influence on FIIs investment inflows in long-run as well as in short-run.
Saha, Malayendu. (2009), investigated the participation of foreign institutional investors and the other financial institutions in India and the performance of the Indian stock markets and she concluded that Indian stock market is regarded at par with the developed markets Moreover, it had a very unique economic model and is based on strong economic growth with huge liquidity and it is not depended on the US economy for its GDP growth.
Singh, Sumanjeet. (2009), revealed that the size of net capital inflows to India increased from US $ 7.1 billion in 1990-91 to US $ 108.0 billion in 2007-08. India has one of the highest net capital inflows among the EMEs of Asia. Capital inflows, however, not an unmitigated blessing, the main danger posed by large and volatile capital inflows is that they may destabilize macroeconomic management. He concluded that the intensified pressures due to large and volatile capital flows in India in the recent period in an atmosphere of global uncertainties
Sethi, Narayan and Sucharita, Sanhita. (2009), attempted to explain the effects of private foreign capital inflows (FINV) on some macroeconomic variables in India using the time series data between April 1995 to Dec 2007. They found that Foreign Direct Investment (FDI) is positively affecting the economic growth, while Foreign Institutional Investment (FII) is negatively affecting the economic growth.

Prasanna, P.K. (2008), discussed role of FII in Indian Capital market and examined the contribution of foreign institutional investment particularly among companies included in sensitivity index (Sensex) of Bombay Stock Exchange. She found that Higher Sensex indices and high price earnings ratio are the country level factors attracting more foreign investment in India and the foreign investment is more in the companies with higher volume of publically held shares. The promoter's holdings and the foreign investments are inversely related.
Chittedi, Krishna Reddy. (2008), analyzed a performance of the sensex Vs FIIs in the Indian stock market. She revealed that the liquidity as well as the volatility were highly influenced by FII inflows in BSE sensex so the Foreign institutional investment is the significant factor for determining the liquidity and volatility in the stock market prices. She concluded that the FIIs who have been so bullish in India for the last so many years might start looking at other cheaper emerging markets for better returns. So, it is very tough to predict that whether the sensex will sustain the momentum in future or not.
Sethi, Narayan. (2008), evaluated the impact of international capital flow on economic growth, trends and composition and suggested the policy implication thereof. He observed that the foreign institutional investors (FIIs) have negative impact on growth, but it is very negligible. He concluded that India should move to influence both the size and composition of capital flows, strengthened their banking system rather than promoting financial market, banks can provide the surest vehicle for promoting long term growth and industrialization







FII ACTIVITY IN INDIA

1992-1997
In a major step towards globalization of our markets, the government allowed Foreign Institutional Investors such as Mutual funds, Pension funds, Investment trusts, Asset management companies to invest in tradable securities in the primary and secondary's market under the guidelines issued by government in September 1992. In 1993 FIIs investing in India were affected by a severe shortage of custodial capacity. In order to ease this bottleneck, institutional investors were allowed to use jumbo transfer deeds. Investments had slowed down from their peaks in January 1994. Though in 1995 there had been a notable upsurge in FII investment signifying the attractiveness of the Indian market relative to other emerging markets which was depicted by cumulative investment of Rs. 16877.66 Crore in 1996. In 1997 several changes were made to the SEBI regulations to diversify the foreign institutional investor base and to further facilitate inflow of foreign portfolio investment. The changes had also aimed at facilitating investment in debt securities through FII route. The impact of these changes was felt as several endowment funds, proprietary funds and 100% debt funds obtained registrations.
Table- FII Investments from 1992-1997
Year
Gross Purchases (Rs. Crore)
Gross Sales (Rs. Crore)
Net Investment (Rs. Crore)
Net Investment at monthly ex rate (US$)
1992-1993
17.4
4
13.4
4.2
1993-1994
5592.5
466.3
5126.2
1634
1994-1995
7630.9
2834.7
4796.2
1528.3
1995-1996
9693.5
2751.6
6941.9
2035.7
1996-1997
15,382.9
6960.4
8422.4
2389.7
Source- Annual Reports SEBI different years
1998-2002
During 1998-1999 SEBI registered a total of 60 FIIs taking the total registered FIIs to 450. A major factor that led to continuous outflow of funds during the year 1998 was the worsening outlook of emerging markets. Credit worthiness of almost all South-east Asian nations was severely damaged by the crisis which started in July 1997. A further indication of the integration of the Indian markets could be seen from the upsurge in the valuations and funds inflows during the first quarter of 1999. As regard transaction activities of FIIs, they made gross purchases of Rs. 74.050.6 Crore during 2000-01 as compared to Rs. 56855.5 crore in 1999-2000. Recording an increase of 30.2 %. In spite of very large increase in gross purchases, net investment declined during the year under review because of heavy sales of FIIs during the year 2000. Net FIIs was positive for almost all the months during 2002 except in September due to the sudden increase in sales which exceeded purchases by about 16% following the terrorist attacks on the USA. Another development in the transactions of FIIs was their total turnover declined during 2001-2002 by 35.85%.
Table- FII Investments from 1998- 2002
Year
Gross Purchases (Rs. Crore)
Gross Sales (Rs. Crore)
Net Investment (Rs. Crore)
Net Investment at monthly ex rate (US$)
1997-1998
18694.7
12737.2
5957.5
1650.1
1998-1999
16115
17699.4
-1584.4
-386.1
1999-2000
56855.5
46733.5
10122
2339.1
2000-2001
74050.7
64116.4
9934.3
2158.8
2001-2002
59920
41165
8755.2
2159.7
Source- Annual Reports SEBI different years
2003-2007
Several factors are responsible for increasing confidence of FIIs in the Indian stock market which include, inter alia, strong macro-economic fundamentals of the economy, transparent regulatory system, abolition of long-term capital gains tax and encouraging corporate results. Reflecting the congenial investment climate, the total number of FIIs registered with SEBI increased to 882 as on March 31, 2006 compared to 685 a year ago, an increase of 197 over the year. The diversity of FIIs has been increasing with the number of registered FIIs in India steadily rising over the years. 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. These developments have helped improve the diversity of the set of FIIs operating in India. 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
Table- FII Investments from 2002- 2007
Year
Gross Purchases (Rs. Crore)
Gross Sales (Rs. Crore)
Net Investment (Rs. Crore)
Net Investment at monthly ex rate (US$)
2002-2003
47061
44373
2689
562
2003-2004
144858
99094
45765
10172
2004-2005
216953
171072
45881
10172
2005-2006
346978
305512
41467
9332
2006-2007
520508
489667
30840
6708
Source- Annual Reports SEBI different years

2008-2014
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 deftly 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 Rs 1,881 crore. In January, a correction bought the most at Rs 7,702 crore followed by Rs 3,179 crore in June.
Table- FII Investments from 2008- 2014
Year
Gross Purchases (Rs. Crore)
Gross Sales (Rs. Crore)
Net Investment (Rs. Crore)
Net Investment at monthly ex rate (US$)
2008-2009
614576
660386
-45811
-9837
2009-2010
846438
703780
142658
30251
2010-2011
992599
846161
146438
32226
2011-2012
921285
827562
93725
18923
2012-2013
904845
736481
168367
31047
2013-2014
1021010
969361
51649
8876
Source- Annual Reports SEBI different years





CHAPTER 3FII & CAPITAL MARKET ANALYSIS

CHAPTER 3
FII & CAPITAL MARKET ANALYSIS

FII & CAPITAL MARKET ANALYSIS

Since economic liberalization FII flows to India have steadily grown its importance. Foreign capital inflows have been acknowledged as one of the important sources of funds for developing economies that would grow at a rate higher than what domestic savings can support. This resulted in the integration of global financial markets. As a result, capital started flowing freely across national borders seeking out the highest rate of return.
India is considered as one of the best investment destination for foreign institutional investors in spite of political differences and lack of infrastructure facility etc. Foreign portfolio inflows through FIIs, in India, are important from the policy perspective, especially when the country has emerged as one of the most attractive investment destinations in Asia. The present study focuses on FII investment pattern in the Indian capital market. It examines the factors expected to affect the investment decisions of FIIs.
The Foreign Institutional Investors (FIIs) have emerged as important players in the Indian equity market in the recent past. This Report makes an attempt to understand whether there exists a relationship between FII and Equity Market.

OBJECTIVE OF THE STUDY
To find out the impact of FII on Nifty.
To determine the behavior and trend of FII's on Nifty.
To determine the factors that influence investment decision of FII's.
To examine whether FIIs have any influence on CNX Nifty.

RESEARCH METHODOLOGY
The paper examines The Impact of Foreign Institutional Investors (FII) on Indian capital market. The scope of the research comprises of information derived from secondary data from Nifty and FII investment was a natural choice for inclusion in the study, as it is the most popular market indicies and widely used by market participants for benchmarking.
The study period covered under this is for the years 2000-2011. The main source of obtaining necessary data for the study was Secondary Data.
This study is empirical in nature and hence secondary data is used to conduct the research. The secondary data constitutes of daily net FII inflows and the daily NIFTY from SEBI and NSE websites respectively.
Findings are included which transmits the important points, which were gathered from the study. Regression and correlation techniques have been used for analysis purpose. The sample data consists of 2931 observations for FII, S&P CNX Nifty starting from Jan 2000 to December 2011.

HYPOTHESIS OF THE STUDY
Null Hypothesis (Ho): There is no significant impact of Foreign institutional investors (FIIs) on Nifty.
Alternative Hypothesis (Ha): There is significant impact of foreign institutional investors (FIIs) on Nifty.

LIMITATION OF THE STUDY
Since the subject is very vast the study is mainly focused on identifying whether there exist a relationship between FIIs and Nifty. It is mainly based on the data available in various websites. The impact made on purely from the past eleven year's performance.

FIIs Trends in India
Table 1: FII Investment in Indian Capital Market (Rs in Crore)
YEAR
FIIs Investment
Change in FIIs Investment
% Change
1991-92
0


1992-93
13


1993-94
5126
5113

1994-95
4796
-330
-6.43777
1995-96
6942
2146
44.74562
1996-97
8575
1633
23.52348
1997-98
5998
-2577
-30.0525
1998-99
-1584
-7582
-126.409
1999-00
10122
11706
-739.015
2000-01
9933
-189
-1.86722
2001-02
8763
-1170
-11.7789
2002-03
2689
-6074
-69.3142
2003-04
45764
43075
1601.897
2004-05
45880
116
0.253474
2005-06
41467
-4413
-9.61857
2006-07
30841
-10626
-25.6252
2007-08
66179
35338
114.5812
2008-09
-45811
-111990
-169.223
2009-10
142658
188469
-411.406
2010-11
146438
3780
2.649694
2011-12
93725
-52713
-35.9968
Source: Various Issues of SEBI Handbook

Source: Table1

Figure 1: Year Wise FIIs Investment

FIIs were allowed to invest in capital market securities since September 1992. However, these have invested from January, 1993 only. The net inflow has risen from Rs. 5126 crores in 1993-94 to Rs.146438 crores in 2010-11 with relative
ups and downs during the period as per the above table. During the period of 19 years there has been increase in eight years while decline in the rest years It may be concluded that there are significant variations in the yearly inflow of FIIs into the Indian capital market during 1993-94 to 2011-12. During the initial year 1992-93, the FII flows started in September 1992, which amounted to Rs. 13 crores because at this moment government was framing policy guidelines for FIIs. However, within a year, the FIIs rose to 5126 i.e. 99.76% of 1992-93 during 1993-94 because government had opened door for investment in India. Thereafter, the FII inflows witnessed a dip of 6.44%. However, the year 1995-1996 witnessed a turnaround, gliding up the contribution by FII to enormous amount of Rs. 6942 crores. Investments made by FIIs during 1996-1997 rose a little i.e. 23.52% of that of the preceding year.
This period was ripe enough for FII Investments as that time the Indian economy posted strong fundamentals, stable exchange rate expectations and offered investment incentives and congenial climate for investment of these funds in India. During 1997-98, FII inflows posted a fall of 30.05 %. This slack in investments by FIIs was primarily because of the S-East Asian Crisis and the months of volatility experienced during November 1997 and February 1998.
The net investment flows by FIIs have always been positive from the year of their entry. However, only in theyear1998-99, an outflow nearly of Rs. 17699 crores was witnessed for the first time. This was primarily due to the economic sanctions imposed on India by Japan, US and other industrialized economies. These economic sanctions were the result of the testing of series of nuclear bombs by India in May 1998. FII investment posted a year-on-year decline of
1.86 % in 2000-01, 11.78 % in 2001-02 and 69.31 % in 2002-03. Investments by FII posted a fall of 80 % in 2002-03 as compared with investments in the period of 1999-00. Investments by FIIs rebounded from depressed levels from the year 2003-04 and witnessed an unprecedented surge. FIIs flows were recycled to India following readjustment of global portfolios of institutional investors, triggered by robust growth in Indian economy and attractive valuations in the Indian equity market as compared with other emerging market economies in Asia.
The slowdown in 2004-05 was on account of global uncertainties caused by hardening of crude oil prices and the upturn in the interest rate cycle. The resumption in the net FII inflows to India from August 2004 continued till end
2004-05. The inflows of FIIs during the year 2004-05 was Rs. 45881 crore. During 2006-07 the foreign institutional investors continued to invest large funds in Indian securities market. Strong FII flows had been a key characteristic of the period prior to December 2007. However, 2008-09 saw the highest FII outflow in any financial year since inception.
This could be attributed to the global financial meltdown and the home bias of FIIs in the crisis. The gross purchases of debt and equity by FIIs declined by 35.2 per cent to Rs.6, 14, 576 crore in 2008-09 from Rs. 9, 48, 018 crore in 2007-08.
The combined gross sales by FIIs also declined by 25.1 per cent to Rs.6, 60, 386 crore from Rs.8, 81, 839 crore during the same period. The total net outflow of FII was Rs.45, 811 crore in 2008-09 as against a net inflow of Rs.66, 179 crore in 2007-08. This was the highest net outflow for any financial year so far. FIIs made a record investment in the Indian equity market in 2009, surpassing the 2007 inflows. The total net inflow of FII was Rs.1, 42, 658 crore as against an outflow of FII was Rs.45, 811 crore in 2008-09.
This was the highest net inflow for any financial year so far. FIIs made a record investment in the Indian equity market in 2010-11, surpassing the 2009-10 inflows. The total net investment of FII was Rs 1, 46, 438 crore as compared to of Rs.1, 42, 658 crore in 2009-10. This was the highest net FII investments into Indian securities market in any financial year so far. Cumulative investment by FIIs at acquisition cost, which was US$ 89,335 million at the end of March, 2010, increased to US$ 1, 21, 561 million at the end of March, 2011. The total net inflow of FII was ` 93,725 crore in 2011-12 compared to 1, 46, 438 crore in 2010-11 decreased by 36%. The cumulative investment by FIIs at acquisition cost, which was USD 121.6 billion at the end of March 2011, increased to USD 140.5 billion at the end of March 2012.
No. of registered foreign institutional investors increases from the year to year when they are allowed to invest in Indian capital market Year wise registration of FIIs is given by the following table 2.

Table 2: Year Wise Registration of FIIs Registered with SEBI
Year
No Of FIIs registered
Trend %
1990-91


1992-93
18

1993-94
158
777.77
1994-95
308
94.93
1995-96
367
19.17
1996-97
439
19.61
1997-98
496
12.98
1998-99
450
-9.27
1999-00
506
12.44
2000-01
527
4.15
2001-02
490
-7.02
2002-03
502
2.44
2003-04
540
7.56
2004-05
685
26.85
2005-06
882
28.75
2006-07
997
13.03
2007-08
1319
32.29
2008-09
1635
23.95
2009-10
1713
4.77
2010-11
1722
0.52
2011-12
1765
2.49
Source: Compiled from Various Issues of SEBI Handbook




Source: Table 2
Figure 2: No. of FIIs Registered

From the table and figure 2 it is revealed that India is the important destination for foreign investment therefore the number of FIIs is going on increasing year to year. The number of FIIs in 1992-93 was only 18 which are increased to
1765 in 2011-12; maximum number of FIIs registered 322 in 2007-08 subsequently 316 in 2008-09. No. of FIIs registration was decreased in 1998-99 due to Asian financial crises in 1997 and subsequently in 2001-02 due to early 2000s recession in USA. Major increase in the trend of registration of FIIs in 1993-94 and 1993-94 i.e. 777.77 % and 94.93 %.






DATA ANALYSIS AND INTERPRETATION

CNX Nifty and FIIs

In running the regression analysis, daily CNX Nifty has been taken as the dependent variable and the daily FII investment is considered as the independent variable. To test the above-mentioned hypothesis, linear regression model fitted with the econometric technique of ordinary least square (OLS) has been done. Regression equation looking at relationship between CNX Nifty of NSE and FII flows is as follows:

Y(CNX Nifty) = α + β (FII) + €

Y (CNX Nifty)
is dependent variable, FII investment is independent variable, α is the intercept and € is white-noice (Random shock)

Table 6: Model Summary
Model
R
(CORRELATION)
R SQUARE
ADJUST R SQUARE
STD. ERROR OF THE ESTIMATE
CHANGE STATISTICS





R SQUARE CHANGE
F CHANGE
DF1
DF2
SIG. F CHANGE
1
.139*
.019
.019
1690.319
.019
57.673
1
2923
.000
*Predictors: (Constant), FII
Table 7: Coefficients*
MODEL
Unstandardized Coefficients
STANDARDIZED COEFFICIENTS
T
Sig

B
STD.ERROR
BETA


1
(CONSTANT)
2927.416
31.936

91.665
.000

FII
.352
.046
.139
7.594
.000
*Dependent Variable: NSE




CHAPTER 4DATA ANALYSIS AND INTERPRETATION

CHAPTER 4
DATA ANALYSIS AND INTERPRETATION


Interpretation

From the above table, it is found that the correlation between daily FII investment and daily CNX Nifty is 0.139 which shows a very low degree of relationship between daily FII investment and daily CNX Nifty. The positive
Correlation between the two reveals the fact that the daily FII investment is an important factor in enhancing the daily CNX Nifty of National stock exchange consequently have a positive impact on Indian capital market. But the extent of the enhancement in daily CNX Nifty by daily FII flows can be examined by running the regression analysis.

It can be observed from the above table that all explanatory variables, taken together establish a relationship nearly 1.9 % because the coefficient of determination r2 is 0.019 of the total variables in the daily CNX Nifty of NSE. This means that whatever changes have taken place, in the daily CNX Nifty of NSE, the FII investments is responsible up to 1.9 % only. This implies that there are many other macro economic factors have indirectly affected the daily CNX Nifty of NSE.
The regression equation Y (CNX Nifty) = α + β (FII) + € shows that for every unit change in β (that is FII) there is 0.352 unit change in Y (that is CNX Nifty). The value of α (Alpha) is 2927.416 which show that the other factors are more responsible for this relationship. The t value is 7.594 and significant value is 0.000 which is less than 0.05, therefore the alternative hypothesis is accepted and null hypothesis is rejected. So we can say that there is significant impact of foreign institutional investment (FII) on CNX Nifty.



















CONCLUSIONS

The study conducted observed that investments by FIIs and the movements of CNX nifty are quite closely correlated. According to findings and results, foreign institutional investors (FIIs) have significant impact on the movement of Indian capital market. Therefore, the alternate hypothesis is accepted. FII'S have positive impact on Nifty. However there are other macroeconomic factors also 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. In the absence of any other substantial form of capital inflows, the potential ill effects of decrease in the FII flows into the Indian economy can be severe which was evident at the time of U.S subprime lending crisis. The findings of this study also indicate that Foreign Institutional Investors have emerged as the most dominant investor group in the domestic capital market particularly, in the companies that constitute in CNX Nifty.



























REFERENCES

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