Professional Documents
Culture Documents
On
Submitted by
(Enrollment No:-
Under the guidance of
MS SHIVANGI SHARMA
(Batch: 2015-2018)
FACULTY OF UTTARANCHAL INSTITUTE OF MANAGEMENT
UTTARANCHAL UNIVERSITY,DEHRADUN
INTRODUCTION
‘FII’ include “Overseas pension funds, mutual funds, investment trust, asset
management company, nominee company, bank, institutional portfolio manager,
university funds, endowments, foundations, charitable trusts, charitable societies, a
trustee or power of attorney holder incorporated or established outside India proposing to
make proprietary investments or investments on behalf of a broad-based fund. FIIs 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’.
A domestic portfolio manager can also register itself as an FII to manage the funds of
sub-accounts.
Foreign Direct Investment [FDI] involves in the direct production activity and
also of medium to long-term nature. But the Foreign Portfolio Investment[FPI] is a
short-term investment mostly in the financial markets and it consists of Foreign
Institutional Investment (FII). The FII, given its short-term nature, might have bi-
directional causation with the returns of other domestic financial markets like money
market, stock market, foreign exchange market etc. Hence, understanding the
determinants of FII is very important for any emerging economy as it would have larger
impact on the domestic financial markets in the short run and real impact in the long run.
The present study examines the determinants of foreign portfolio investment in the Indian
context as the country after experiencing the foreign exchange crisis opened up the
economy for foreign capital.
India, being a capital scarce country, has taken lot of measures to attract foreign
investment since the beginning of reforms in 1991. Till the end of January 2003 it could
attract a total foreign investment of around US$ 48 billions out of which US$ 23 billions
is in the form of FPI. FII consists of around US$ 12 billions in the total foreign
investments. This shows the importance of FII in the overall foreign investment
programme. As India is in the process of liberalizing the capital account, it would have
significant impact on the foreign investment and particularly on the FII, as this would
affect short-term stability in the financial markets. Hence, there is a need to determine the
push and pull factors behind any change in the FII, so that we can frame our policies to
influence the variables which drive-in foreign investment. Also FII has been subject of
intense discussion, as it is held responsible for intensifying currency crisis in 1990’s
elsewhere.
The present study would examine the determinants of FII in Indian context. Here
we make an attempt to analyze the effect of return, risk and inflation, which are traced to
be major determinants in the literature on FII. The proposed relation (discussed in detail
later) is that inflation and risk in domestic country and return in foreign country would
adversely affect the FII flowing to domestic country, where as inflation and risk in
foreign country and return in domestic country would have favorable affect on the same.
In the next section we would briefly discuss the existing studies. In section 3, we discuss
the theoretical model. Section 4 briefly discusses the trends in FII in India. Database and
methodology adopted in this study are discussed in Section 5. In section 6, we discuss the
estimated results and conclusions are drawn accordingly in the last section.
Entry Option for FII’S
A foreign company planning to set up business operations in India has the following options:
1. Incorporated Entity
• Joint Ventures; or
Sub-account :
Sub-account includes those foreign corporations, foreign individuals, and institutions, funds
or portfolios established or incorporated outside India on whose behalf investments are
proposed to be made in India by a FII.
Designated Bank:
Designated Bank means any bank in India which has been authorized by the Reserve Bank of
India to act as a banker to FII.
Domestic Custodian:
Domestic Custodian means any entity registered with SEBI to carry on the activity of
providing custodial services in respect of securities.
Broad Based Fund means a fund established or incorporated outside India, which has at least
twenty investors with no single individual investor holding more than 10% shares or units of
the fund. Provided that if the fund has institutional investor(s) it shall not be necessary for the
fund to have twenty investors.
If the fund has an institutional investor holding more than 10% of shares or units in the fund,
then the institutional investor must itself be broad based fund.
3. Unincorporated Entity
• Pension Funds
• Mutual Funds
• Investment Trust
• Insurance or reinsurance companies
• Investment Trusts
• Banks
• Endowments
• University Funds
• Foundations
Further, following entities proposing to invest on behalf of broad based funds, are also
eligible to be registered as FIIs:
• Trustees
FIIs can invest in the stocks and debentures of the Indian companies. In order to
invest in the primary and secondary capital markets in India, they have to venture through the
portfolio investment scheme (PIS). According to RBI regulations, the ceiling for overall
investment of FIIs is 24% of the paid up capital of the Indian company. The limit is 20% of
the paid up capital in the case of public sector banks. However, if the board and the general
body approve and pass a special resolutions, then the ceiling of 24% for FII investment can
be raised up to sectoral cap for that particular segment. In fact, recently SEBI allowed FIIs to
invest in unlisted exchanges as well, which means both BSE and NSE (the unlisted bourses)
ow allot shares to FIIs also.
A STOCK EXCHANGE is a platform where buyers and sellers of securities issued by
governments, finance institutions, corporate houses etc., meet and where trading of these
corporate securities take place. This is a market of speculation. If speculation of investors
become wrong than the investors loss. Nobody knows what will happen even after a second.
A Stock Exchange refers to the segments of the capital market where the securities issued by
corporate are trade. It is open auction market where buyers and sellers meet and involve
competitive prices of the securities. It reflects hopes aspiration fair of people regarding the
performance of the economy. I t provides necessary mobility to capital and direct flow of the
capital into possible and successful enterprise.
Since buying and selling of the different of securities take place on stock exchange. The
prices of particular securities reflect there demand and supply. In fact, stock exchange is said
to be a barometer of economy and financial health.
The stock market in India, Securities and Exchange Board of India (SEBI) is on the issue of
acceptance of hedge funds into Indian financial market. At the some time world wide trade
shows that hedge funds are important force to the reckoned with us. The impact of hedge
funds activity is new to the Indian financial investors (FII) flows volatility of the stock
market. This is so because hedge funds activity in Indian primary through participatory notes
(PN) and the some is reflected under FII inflows. Large stock operators and investment arms
certain large corporate in India in the period consideration used to use oversees body (OCB)
as a mechanism to take exposure to the India n market. OCB activity in the Indian context is
pretty similar to funds trading historically OCB flows also used to appear under the head of
FII flows traditionally a large chunck of the PN and OCB activity in India use to happen
through the Mauritius route due to taxation benefits. With the latest budget presented by the
Indian government .(will become effective from 1st September 2004 ) reducing long term
capital gains to zero and short term capital gains to 10 % the taxation to Mauritious to exist .
STOCK EXCHANGE
A” STOCK EXCHANGE “is a platform where buyers and sellers of securities issued by
governments, finance institutions, corporate houses etc., meet and where trading of
These corporate securities take place. This is a market of speculation. If speculation of
investors become wrong than the investors loss. Nobody knows what will happen even after a
second.
A Stock Exchange refers to the segments of the capital market where the securities issued by
corporate are trade. It is open auction market where buyers and sellers meet and involve
competitive prices of the securities. It reflects hopes aspiration fair of people regarding the
performance of the economy. I t provides necessary mobility to capital and direct flow of the
capital into possible and successful enterprise.
Since buying and selling of the different of securities take place ion stock exchange. The
prices of particularl securities reflect there demand and supply. In fact, stock exchange is said
to be a barometer of economy and financial health.
The stock exchange is the nerve center of capital market. The stock exchange discharges
three essential functions in the process of capital formation not in raising resources for the
corporate sector.
It provides places for sale and purchase of securities i.e. share, bonds etc. . . .
It [provides linkage between the saving of household sector and investment in corporate
sector of economy.
It provides market quotation for shares debenture and bonds and serves as a role of
barometer, not only of the state of health of individual companies but also of the economy as
a whole.
RATIONALE OF THE STUDY
Rational and entail of research study Indian stock market is regarded on parity with the
developed market as so many developments have taken place in the stock market arena
during the last decade. The important feature of the Indian stock market is growing
dominance of foreign institutional investors. Last one decade, FIIs; foreign institutional
investors investments play vital role to bull and bear circumstances of Indian stock market.
So, this is main objectives of this research study which employed and investigated result by
the researcher. The studies confer a very apparent depiction of the impact of foreign
institutional investors on Indian stock indices. It also describes the market trends due to FIIs
inflow and outflow. Moreover, it would be beneficial to gain knowledge regarding foreign
institutional investments their process of registration and their impact on Indian stock market
and different industrial sectors. Foreign Institutional Investors are said to be the driver of the
market. Those are the one cause behind the rise and fall of SENSEX. FII investment trends
tell us about many effects that the Indian market is experiencing. The companies in which
they investment are getting overvalued. Whenever FII find any trouble they withdraw their
investments. The empirical investigation of the course of causation between FIIs activities
and Indian stock market performance over the time period year 2003 to year 2012 for 10
years has revealed that FIIs activities are caused by rather than causing the Indian stock
indexes. Researcher has used the BSE SENSEX and NIFTY nationalised index for study and
investigated the effect of FIIs investments on volatility of BSE SENSEX and NIFTY for the
year 2003 to year 2012. Moreover, researcher exercised year average of BSE SENSEX and
NIFTY Indian stock index and average FIIs purchase, sales, net investments for 10 years for
direction to accomplish objectives; to study the scope and trading mechanism of Foreign
Institutional investors in India, to find the relationship between the FIIs equity investment
pattern and Indian stock indices, to study the trend of FIIs investments in India stock market
and BSE & NSE Indices, to discover the role of foreign institutional investors in Indian stock
market.
LITERATURE REVIEW
Banerjee and Sarkar (2006) have attempted to forecast stock return volatility using intra-day
data of NSE from June 2000 through January 2004 by employing the GARCH model. The
findings revealed that participation of FIIs in the Indian stock market does not result in
Upadhyay, Saroj (2006) found in their study that FII flows supplements domestic
investment without increasing the foreign debt of our country. It was noticed that when FIIs
purchase and sell the stocks there is a high degree of volatility in the stock market. The
researchers argue that the volatility is due to the fact that the FIIs manipulate the situation of
boom in such a manner that they wait till the index rises up to a certain height and exit at an
appropriate time.
Kumar, SSS (2006) examined the role of institutional investors in Indian stock market from
1993 to 2005. After applying unit root test, OLS regressions were employed and results
indicated that institutional activity has an influence on stock market. Granger causality test
showed that for any market rise or fall the FIIs follow the suit.
regarding the volatility of these flows, its impact on the stock markets and
India.
affects the NIFTY performance and is one of the important driving forces
variables but it was observed that FII is not only one significant factor
affecting NIFTY.
holdings and the foreign investments were inversely related. The foreign
decision. It was found that foreign institutional investors withdrew their money when
Poshakwale, Sunil and Tapa, Chandra (2008) examined the influence of FIIs
in explaining the short and long run relationship of Indian equity markets with global
equity markets. Long term relationship was examined using VAR analysis and VECM
while short term relationship was examined using Granger causality test. The study
information in explaining the short term and long term co-movements of Indian equity
Takeshi, Inoue (2008), in their paper suggested that net FII inflows have
exerted impacts on the movement of Indian stock prices at longer intervals. The study
observed that for a period of five years the net FII inflows have generally trended
upward with the movement of stock prices in India. After the peak in mid-January
2008, however, both significantly reversed this trend; FII inflows have turned into
Bansal, Anand and Pasricha, J S (2009) studied the impact of market opening
to FIIs on Indian stock behaviour. Market index data from January 1991 to March
1994 was used. Event study methodology was adopted with 330 trading days before
and after the event day of FII policy announcement. It was found that there were no
significant changes in Indian stock market average returns; volatility was found to be
significantly reduced after India unlocked its stock market to foreign investors. Hence
it can be concluded that there were other reasons which induces some degree of
SINDEX to measure stock market development. Further, pair wise Granger causality
Test was used to identity existence of cause and effect relationship between FII
investment and indicators of stock market development such as trading volume and
market capitalization. Monthly data from January 1993 to August 2007 was taken and
subjected to ADF test. The study concluded that FIIs were as a causal force of market
foreign investors resulting in increases their purchases. The study also revealed that
purchases and sales of FII in Indian stock market have bidirectional causality with
market capitalization.
investment in public sector and private sector banks. The sample for the study
included 17 private sector banks and 23 public sector banks in India. Two sample t-
tests revealed that average FIIs investment in public sector banks is smaller than
average FIIs investment in private sector banks when FIIs shareholding is measure as
measured as a percentage of free float shares, it was found that there were no
significant difference in FIIs share holding between private sector and public sector
banks.
Ray, KK (2009) analysed the relationship between FII and stock returns in
India (BSE) with aid of daily data from January 2006 to June 2008. The study has
been conducted using ADF, PP test and Granger Causality test. These tests considered
two hypotheses which accounted for bidirectional relationship between FII investment
and Sensex returns. The results indicate unidirectional relationship i.e. Sensex returns
cause FII investments but FII flows do not cause equity returns in Indian stock
market.
of different investor groups, particularly FIIs and their impact on the performance of
Indian stock markets. In this article the author has provided various descriptive
statistics to indicate the sharp surge in FII inflows to India. He has identified few
Indian markets, mandatory corporate governance etc as facilitators for FII inflows.
Garg, Ashish and Chhabra, Sangeeta (2010) tried to establish link the trading
patterns of FIIs and Mutual Funds (MFs) across the days of week. Data of daily
purchases, sales and net investment from January 1999 to January 2009 was obtained.
One way ANOVA was used to test whether mean of variables vary significantly
across the days of the week. Independent t-test was used to examine whether the mean
of variable for a particular week day is significantly different from mean of rest of the
week. ADF and PP test were used to stationary of data. Auto regressive model (AR)
was applied to study the investment pattern by eliminating the impact of previous
days. The findings of the study show that the net investment made by FIIs follow
Friday effect, while investments made by MFs were equally distributed among
various days of the week. Also stock market returns were correlated with investment
pattern of FII.
Sensex and FII series to test the relationship between them. The co integration and
between institutional investment and market return in Indian stock market. Daily
investment data of FIIs and MFs from January 2000 to December 2009 was used for
Schmidt-Shin (KPSS) test was applied to test stationarity of times series data. Granger
causality test was used to test direction of causality between institutional investment
and stock returns (BSE). Bi-directional causality has been found between FIIs
investment and market return whereas in case of MFs only market return causes the
return is more lasting on institutional investment than other way around. Sub-period
analysis confirmed relationship between FII flows and market return did not change
investment in Indian economy. Jarque Berra test indicated that both Nifty and FII
were not normally distributed. Nifty was found to be non-stationary and FII to be
stationary at level by ADF test. Correlation test indicated that Nifty is positively
correlated to FII which is higher in bear phase as compared to bull phase as in bull
phase. The correlation was further verified for the direction of influence by using the
Granger causality test between Nifty and FII. It was found that Nifty Granger causes
FII in all the four phases whereas reverse causality doesn’t hold true. In order to find
the short term causal relationship between the two time series, they next applied the
Variance Decomposition and Impulse Response tests. It yielded the same result as in
the Granger-Causality Test that Nifty causes FII in all the four phases.
institutional investor’s portfolio investment for a sample of 1192 Indian firms listed
on NSE. The firm specific characteristics studied were promoters share holding, firm
size, systematic risk, price to book ratio, return on equity and dividend yield.
Promoters share holdings was found to be inversely related to level of FPI in a firm.
FIIs prefer large firms with less concentration of promoters share holdings.
Paliwal, Minakshi and Vashishtha, S.D (2011) tested the link between FII
flows contemporaneous stock market returns from January 1992 to December 2012.
Jarque Berra test revealed that the variables were not normally distributed.
Stationarity of data was tested using ADF and PP test. Moderate correlation was
noticed between FII flows and BSE Sensex. Results of Granger causality test indicate
bi-directional relationship between FII and Sensex. Short term causality between the
variables was tested using variance decomposition and impulse response functions
Saxena, Swami P (2011) analyzed daily data series of FII inflows and S&P
CNX Nifty from April 2003 to March 2010. Unit root test, Granger Causality test and
VAR analysis was performed to explore causal links between FII inflows and stock
market volatility. Results indicated that only stock market returns cause FII inflows
Walia, Karan et al (2012) attempted to examine the trends of FII during the
period of 2001 to 2010 and examine volatility of BSE Sensex due to FII. Pearson
Sensex increases where there were positive inflows of FIIs and vice versa.
flows of mutual funds and foreign institutional investors. The study reported a strong
negative relationship between the net investments by these two classes of institutional
investors. Domestic mutual funds were found to determine their investment flows on
the basis of their own previous investments, FII investments as well as market returns.
The analysis concluded that that the effect of stock market returns were overshadowed
spillover in Indian stock market (NSE) due to FII. Study period ranged from January
1992 to March 2011. After testing for stationarity of data series, Johansen co
integration analysis was used to confirm long run equilibrium relationship between
stock market and FII short term dynamics in the series were examined using VECM.
The results of Granger causality test show bi directional Granger lead relationships
between the sample series. The variance decomposition and impulse responses results
reconfirmed the dominant role of Nifty in information flow for these series E-Garch
Arya, Rachna and Purohit, Ashok (2012) assessed impact of FII on stock
techniques like GARCH and ARCH model were employed. The paper concluded that
increase in volume of FII inflows has led to stock market volatility. Reddy, M.
Anuradha and Shivakumar, K (2012) explored FIIs investment behaviour and its
relationship with Sensex movement data series from 2000 to 2011 was taken for the
study. Pearson correlation values between FII and Sensex movement. The psychology
Johri, Amar et al (2012) in a study analyzed the trends and investments made
by FII in Indian stock markets from 2000 to 2010. T-test was used to find out whether
the Nifty and non Nifty companies have any differences in their investments by FIIs.
The study concluded that there is no significant difference between Nifty and non
Nifty companies in their FII investment. The study concluded that FII inflows or
from 2006 to 2011. Although the number of registered FIIs in India has shown a
significant increase, net investments did not increase proportionately. Even though
India has a well regulated and matured capital market, global financial crisis has
resulted in a negative inflows of FIIs. FII purchases indicate that many FIIs prefer to
take back their investments to their home countries due to global economic meltdown.
FIIs investment in Indian securities market has shown fluctuating trend year after
year.
behaviour of FIIs and effect on the Indian equity market. The study was conducted
using daily data on BSE Sensex and FII activity from January 2001 to December
2011. Using correlation analysis, BSE Sensex was found to be significantly related to
FII activity in Indian Capital market. Jain, Mamta et al (2012) examined the
contribution of FII to Sensex from 2001 to 2010. Pearson’s correlation values indicate
that Sensex increases with positive inflows of FIIs and decreases with negative FII
inflows.
Joshi, Mrunal (2012) conducted a study to identify major factors
affecting Indian stock market. Data was collected from brokers and sub
brokers using snowball sampling. The research evidenced that FII, political
stability, macro economic factors and global factors affect Indian stock
Sensex and foreign investments were used for the study for the period 2001-
2002. Using correlation and regression techniques, it was found that foreign
to FPI, FDI has a very strong positive link with stock market valuations.
OBJECTIVES OF THE STUDY
RESEARCH METHODOLOGY
Research Methodology has many dimensions, it include not only research methods but also
considers the logic behind the methods used in the context of the study and explains why only a
particular method of technique had been used so that research lend themselves to proper
evaluations. Thus in a way it is a written game plan for concluding research therefore in order to
solve research problem it is necessary to design a research methodology for the problem as the
same differ from problem to problem.
Research Design:
The research design is a pattern or an outline of a research project . It is a statement only the
essential of a study those provide the basic guidelines for the detail of the project. The present
study being conducted follows a descriptive research design has the data would be responses
from a simple containing g a large numbers of sources .It is a cross section of the situation
design of the descriptive studies including the nature and the analytical method.
Data Collection
After the research problem has been defied and the research design has been chalked out, the
task of date collection begins. Data can be collected from other primary or secondary sources.
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 data was
collected from the Internet by exploring the Secondary sources available on websites. Secondary
Data: The secondary data constitutes of daily FII flows data which was collected from Money
Control and Equity Master, the daily returns of SENSEX and NIFTY from BSE and NSE
websites respectively. The trends in FII flow from the RBI website and information on FII from
SEBI.
INTERNET: -
www.sebi.gov.in
wwwnse.co.in
www.moneycontrol.com
etc.
SAMPLING PLANNING
Sampling is an effective step in collection of primary and secondary data and has a great
influence on the quality of the results. The sampling plan includes population, sample size and
sample design.
CHAPTERIZATION
Chapter 1: INTRODUCTION
- Objective of Study
Research Design
Data Collection Method
Chapter: References
BIBLIOGRAPHY
BOOKS:-
Business environment (Suresh Bedi)
The Journal of Amity Management Analyst (Jan. June 2007)
The Journal of Business ,vol.59,no.3, 383-403.
The Journal of Finance India
Apeejay journal of management and technology.(Jan 2009)
JIMS 8M April June 2007
INTERNET:-
www.nse.india.com
www.sebi.co.in
www.centrum.co.in
www.bse.co.in
www.indianinfoline.com
www.onlinestockholding
www.moneycontrol.com
www.mastercapitalindia.com
www.financialexpress.com/news
www.en.wikipedia.org.wiki/stock_market