2224. Foreign Institutional Investment [Fii] Impact on Indian Stock Market and Its Investment Behavior [Fin]

8/2/2019 2224. Foreign Institutional Investment [Fii] Impact on Indian Stock Market and Its Investment Behavior [Fin]

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PROJECT REPORT

ON

Foreign InstitutionalInvestment impact on Indian

stock market and itsinvestment behavior

SUBMITTED BY SUBMITTEDTO

A project report submitted in partial fulfillment of the requirements for the degree of PGP of IIL

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ACKNOWLEDGEMENT

Inspiration and hard work always played a key role in the success of any venture. At the Level of

practice, it is often difficult to get knowledge without guidance. Project is like the bridge

between theoretical and practical. With this willing, I joined this project.

There is always a sense of gratitude which one expresses to other for the helpful and needy

services that render during all phases of life. I would like to do so as I readily wish to express my

gratitude towards all those who have been helpful to me in getting this mighty task of training to a

successful end.

I would like to express my deepest gratitude and sincere thanks to my faculty GuideProf. Sapan

jain sir & all my faculty of Gujrati Prof. indore for his valuable suggestions, scholarly guidance,

and constructive criticism encouragement at each and every step of the project.

VINIT JAIN

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Table Of Content

Chapter .

No.

Particulars

Executive summary

Objective of study

Chapter 1

1.3

1.4

1.5

1.6

1.7

Research design for primary Data

Type of research Data source

Research approach and instrument

Sampling plan

Methodology

Limitation

Chapter 2 Research design for secondary Data

Problem definition and Hypothesis Model used

Inferences

Chapter 3 Literature review

Chapter 4

4.2

4.3

4.4

Foreign Institutional Investment

Policy framework

Market design of FIIs in India

Limits of FIIs investment

Registration process

Prohibition of FIIs

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Trend analysis of FIIs

Chapter 5

5.3

5.4

Secondary data analysis and interpretation

Impact of FIIs on Nifty And BSE Indices

Impact Of FIIs On BSE CD and BSE CG indices

Impact of FIIs on BSE IT and BSE FMCG Indices

Chapter no.

6

6.1

6.7

6.11

6.12

Primary data analysis and interpretation

Graphical representation

Reliability testing

Factor analysis

Cross tabulation Weighted average score

Chi- square

Chapter 7 Conclusion and Findings

Chapter 8 Bibliography

Chapter 9 Annexure 1

Annexure 2

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1.0) Executive summary

Foreign investment refers to the investments made by the residents of a country in the financial

assets and production processes of another country. The cause and benefit of foreign investment,

however, varies from country to country. It can persuade the factor productivity of the recipient

country and also shape the balance of payments. In developing countries like India there has been

a felt need for foreign capital, not only to boost the productivity of labour but also to help to

building up the foreign exchange reserves needed to meet our trade deficits. Foreign investments

provide a direction through which developing countries can gain access to foreign capital for their

economic development. It can come in two ways: foreign direct investment (FDI) and foreign

institutional investment (FII). Foreign direct investment involves direct production activities of a

medium to long-term in nature. But foreign institutional investment is a short-term investment

avenue, mostly in the financial markets. FII, given its short-term nature, can have bidirectional

causation with the returns of other domestic financial markets such as money markets, foreign

exchange markets and also stock markets.

Hence, understanding the determinants of FII is very important for any emerging economy

as they wield a larger impact on the domestic financial markets in the short run and a real impact

in the long run. India, being a capital scarce country, opened her doors to foreign institutional

investors in September, 1992 to attract foreign investments. This event symbolized a landmark

experience resulting in successfully globalizing its financial services industry. Originally pension

funds, mutual funds, investment trusts, asset management companies, nominee companies and

incorporated/ institutional portfolio managers were permitted to invest directly in the Indian stock

markets. Beginning 1996- 97, the group was further expanded to incorporate registered university

funds, endowment funds, foundations and charitable trusts. Since then, FII flows form a major part

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of foreign portfolio investments in Indian markets. In the aftermath of 1997 East Asian crisis, FII

flows had actually become the net outflows in 1998-99. But there was a modest recovery in 1999-

2000. FII flows further steadily declined to US$377 million in 2002-03. This witnessed a fall of

BSE Sensex by 161.85 points from January 2003 to May 2003 (India Budget, 2005).

However, the years 2003-04 and 2004- 05, have been remarkably robust years for such

flows. The movement of Sensex during these two years has evidently been driven by the actions of

FIIs. They were responsible for net equity purchases of as much as $6.6 and $8.5 billion during

2003 and 2004 respectively. This indicates the significant contribution made by FIIs in Indian

stock market. This contribution made by foreign investors witnessed a rise in Sensex to 6679 (on

January 3, 2005) from 2924 (on April 5, 2003) (Hindu Business Line, 2005). During 2007 alone

FIIs made a net investment of about $17 billion inIndian stock markets, which is nearly 10 times

higher than the domestic mutual funds net investment (Economic Times). These figures show the

importance of foreign investment in the overall investment programme of Indian equity market.

During last fifteen years, emerging equity markets in the world have continued to grow and have

seen the relaxation of foreign investment restrictions primarily through deregulation of the foreign

investment policy. India, one of the major emerging markets in Asia initiated the financial sector

reforms by way of adopting international practices in its financial market. But the proportion of

foreign investments in the Indian equity market has decreased in the year 2008, compared to

earlier years. Foreign investors have withdrawn over $3.2 billion from Indian equities alone in the

first three months of 2008. FIIs and Indian mutual funds remained net sellers to the tune of $100

million in March 2008 (Hindu Business Line, 2008-4). This shocking investment trend of FII

flows suggest that institutions remained uncertain about the existence of further downside and

hence have moved equity funds into some defensive options like money market funds.

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2.0) OBJECTIVE OF THE STUDY

a) The objective of the present study is to identify whether there exist a causal relationship

between net investment made by FIIs and the equity return in the Indian Stock Market.

b) To determine the behavior and impact of FIIs on Indian stock market through primary

data analysis.

c) To determine what are factors which affect investment decision of FIIs.

d) To determine whether FIIs have impact on other economical factors apart from stock

market.

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3.0) RESEARCH DESIGN FOR PRIMARY DATA ANALYSIS (through questionnaire)

a) Type of research:

Descriptive research, also known as statistical research. The objective of descriptive research is

to describe thing, such as the market potential for a product or attitudes of consumers who buy

the product. It describes data and characteristics about the population or phenomenon being

studied. Descriptive research is to describe something usually market characteristics or

functions. It answers the question who, what, where, when and how. The data description is

factual, accurate and systematic but the research cannot describe what caused a situation. Thus,

descriptive research cannot be used to create a causal relationship, where one variable affects

another.

Descriptive research is conducted for the following reasons:-

To describe the characteristics of relevant groups such as consumers, salespeople,

organisation or market areas.

To estimate the percentage of units in a specified population exhibiting a certain

behaviour.

To determine the perceptions of product characteristics.

To determine the degree to which marketing variables are associated.

To make specific predictions.

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Qualitative research often has the aim of description and the researchers may follow-up

with examinations of why the observations exist and what the implications of the findings are.

Descriptive research assumes that researcher has much prior knowledge about the problem

situation. It is characterized by the prior formulation of specific hypothesis. Thus, the information

needed is clearly defined. As a result, descriptive research is preplanned and structured. It is

typically based on large representative samples. A formal research design specifies the method for

selecting the sources of information and for collecting the data from these sources. A descriptive

design requires a clear specification of the who, what, when, where, why and way (6 Ws) of the

research.

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b) Data Sources:

The primary sources of information necessary for the analysis is collected from the survey which

was carried out by administering questionnaires designed specifically to achieve the objectives

The primary data are collected during the survey with the help of a questionnaire. On the basis of

this primary data the analysis, interpretation and the finding of the study have been concluded and

hence the primary objectives of the study are achieved.

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The secondary data were collected from the different periodicals, books and articles published in

various magazines & journals viz. Business World, Business India, Business Today, Journal of

Advertising, Journal of Marketing, etc.

c) Research Approach: The research approach used in this study was survey research.

d) Research Instruments: Research Instruments consisted of a questionnaire. Questionnaire

prepared mostly consists of closed ended questions with multiple-choice answers.

e) Sampling Plan:

The following are included in the sampling plan for the purpose of present study:

a) Universe of sample: The sample has been taken from the individuals who are

some how related to share market or those who have knowledge about stock market.

b) Sampling unit: The sampling unit consists of different individuals having

some basic level of knowledge about share market. The respondents profiling is done in four broad

categories, age, income, sex and occupation.

c) Sample size: The sample size of the study is seventy respondents. Since people

were not much aware about FIIs impact and its investment behavior, so limited respondents had

to be contacted before getting a successful interview.

d) Sampling procedure and Method: Judgemental sampling has been used for

the study. Questionnaire was used to collect the data.

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Methodology: The information collected from the survey was analysed using different statistical

techniques and data interpretation techniques. The analysis techniques used in the present study

are:

i) Reliability Testing: This test is conducted to see whether all question of questionnaire

is related to each other or not. And if not than which are the factor that are not related.

Selection and reduction of factors is done through factor analysis.

ii) Factor analysis: This test has been applied on the statements which are defining the

impact of several factors on FIIs investment. The main purpose of this test is to reduce

the number of factor to more concrete and significant factor, so we can easily derived

conclusion.

iii) Chi-square test: This test has been applied to study whether the relationship exists

between perception towards FIIs impact on Indian economy and occupation of

respondents.

iv) Weighted Average Score: To study the role of Regulation & Trading efficiency and

dollar weakness against rupee in FIIs investment decision.

v) Cross tabulation: The Cross Tab is used on occupation and most common route of

FIIs to invest. This will gives us picture about the perception of different group of

respondent towards FIIs investment route.

vi) Graphical Presentation: Various other graphical tools like Pie chart, Bar diagram etc.

is used to plot the results.

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Limitation of study

Time constraint: The data is collected from 70 respondents only because of time

constraint. If the data is collected for more person than there is possibility of change in

result.

Financial constraint: because of financial constraint I am not able to visit offices in Delhi

and Mumbai because it is costly to travel for purpose of collection of data.

Lack of ability to contact eligible persons: For my study purpose I collected data from

investor, broker and other employee of reputed firm. I do not able to generate enough

contact from institutional investors and investment trust.

4.0) RESEARCH DESIGN FOR SECONDARY DATA ANALYSIS

Problem: What is the impact of FIIs investment on the Indian capital market?

Null Hypothesis (Ho): The various BSE indices and S&P CNX Nifty index does not rises with

the increase in FIIs investment.

Alternative Hypothesis (H1): The various BSE indices and S&P CNX Nifty index rises with the

increase in FIIs investment.

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What to observe?

For my research purpose I selected six indices of BSE i.e. Sensex, BSE CD, BSE CG, BSE

FMCG, and BSE IT and one index of NSE i.e. S&P CNX Nifty. The sample data of FIIs

investments consists of the monthly average from April 1998 to February 2010 with 143

observations. The sample data of Nifty and Sensex consists of the monthly closing index April

1998 to February 2010 with 143 observations while the past twelve years data has been taken for

other BSE indices with 134 observations in each case.

How to observe?

The data regarding indices of BSE was taken from the site of BSE and BSE yearbook 2008. I got

the data on FIIs investment from SEBI Bulletin of January 2010. The data of NSE Nifty index was

obtained from the site of national stock exchange. Other financial sites, newspapers and magazines

helped me in collecting the required data.

How to record observation?

I have taken the monthly closing index of all the indices. For FIIs I have recorded monthly average

of the net investments made by them in the Indian capital market.

Net Investments = Purchases Sales

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Model: A simple linear relationship has been shown between two variables using correlation and

regression as the data analysis tools. One variable is dependent and the other is independent. I have

taken FII as the independent variable while the stock index has been taken as dependent variable.

The impact of FII has been separately analyzed with each of the index. So, correlation and

regression has been separately run between FII and seven indices taking one index at a time.

Inference: If the hypothesis holds good then we can infer that FIIs have significant impact on the

Indian capital market. This will help the investors to decide on their investments in stocks and

shares. If the hypothesis is rejected, or in other words if the null hypothesis is accepted, then FIIs

will have no significant impact on the Indian market.

5.0) LIETERATURE REVIEW

There are many studies on foreign investment and stock market related topics. This section deals

with the review of such studies. Rao et al. (1999) in their study of foreign institutional investments

and Indian stock market found that the net FII investments influence the stock prices in India. In

the similar line Chakrabarti (2001) concluded in his study that in the pre-Asian crisis period any

change in FII was found to have a positive impact on the equity returns, whereas in the post- Asian

crisis the reverse relationship was noticed. FIIs accounting for a major portion of investments,

their roles in determining share price movements and the movement of various indices is

considerably high. The movement of indices in Indian markets depends on the trade done in

limited number of stocks only. Thus, when FIIs frequently buy and sell stocks in the indices it

leads to volatility of the market (Vijay, 2006). To examine the volume of foreign investment and

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profit booking in Indian market, Trivedi and Nair (2006) in their study suggested that, given the

huge volume of investments, foreign investors can play the role of market makers and book their

profits. They can buy financial assets when the prices are declining and sell when the asset prices

are increasing. Hence there is a possibility of a bi-directional relationship between FII and equity

returns.

In order to study the relationship of FII flow on firm level stock returns in Indian market, Khan et

al. (2005) used a granger causality test to check the direction of causality at the firm level and

GARCH (1,1) for volatility and spillover effect. They considered 36 listed firms during the period

from August 2002 to August 2004. In their research findings they stated that there existed a bi-

directional causality between stock returns and FII flows and vice-versa in 13 firms and

unidirectional causality running from stock returns to FII flows in other 21firms. They concluded

that the role of FIIs becomes important in manipulating equity returns at the firm level, especially

in the government owned companies.

The study conducted by Gordon and Gupta (2002) on portfolio flows into India and the influence

of domestic fundamental factors, found that there is a strong impact of domestic fundamentals on

the portfolio flows into India. They used the monthly equity flows from September 1992 till

October 2001and applied regression model and unit root test. In their study they concluded that the

portfolio flows to India are small, compared to other emerging markets and also less volatile than

other emerging markets. The combination of domestic, regional and global variables are important

for determining the portfolio flows into India. Correspondingly, the study conducted by David and

Steil (2004) viewed that the macroeconomic factors like current account surplus, accretion in

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foreign exchange reserves, appreciating domestic currency and higher interest rates have been

responsible for an increase in FII inflows to an emerging country. In a similar line a study

conducted by Agarwal (1997) on the impact of foreign portfolio investment (FPI) on the national

economy of six developing economies of Asian countries (including India) show through

regression results that inflation rate, real exchange rate, index of economic activity and the share of

domestic capital market in the world stock market capitalization are the four statistically

significant determinants of foreign portfolio investment flow. Many researchers debate on the

topic, which type of foreign investment flows destabilize the market and have a greater impact on

the stock indices. Sandhya et al. (2005) attempted to relate the kind of foreign capital flow and

stock market volatility. In their research they tested the existence of price pressure and feedback

trading hypothesis to study the correlation between returns and contemporaneous flows of fund

and the evidence of market efficiency. Their major finding was that the unexpected flows have a

greater impact than the expected flows on the stock indices. They did not detect any evidence

regarding momentum or contrarian strategies being employed by FIIs.

There are other fascinating studies conducted over the years linking the economic reform in India

and institutional investments including foreign capital flow. Dash and Singh (2008) made a

research on Indian stock market volatility and economic reform. They applied E-GARCH model

on monthly return series of BSE Sensex and IFCG global index. In their study they found that the

Indian market is more volatile in the reform period and foreign investors occupy a major role in it.

Another study conducted by Kumar (2002) on the role of institutional investors (including the

FIIs) in Indian stock market, found that FIIs and Indian mutual funds combined together are the

most powerful force in driving the Indian market. They used the Granger causality test and found

that the mutual funds in fact led the rise or fall in market and FIIs followed suit.

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One of the outstanding features of globalization in the financial services industry is the increased

access provided to non-local investors in several major stock markets of the world. Increasingly,

stock markets from emerging markets permit institutional investors to trade in their domestic

markets. This opening up of capital markets in emerging market countries has been perceived as

beneficial by some researchers while others are concerned about possible adverse consequences

such as contagion.

Clark and Berko (1997) emphasize the beneficial effects of allowing foreigners to trade in stock

markets and outline the base-broadening hypothesis. The perceived advantages of base-

broadening arise from an increase in the investor base and the consequent reduction in risk

premium due to risk sharing. Other researchers and policy makers are more concerned about the

attendant risks associated with the trading activities of foreign investors.1 They are particularly

concerned about the herding behavior of foreign institutions and the potential destabilization of

emerging stock markets.

In this paper, we address these issues in the context of foreign institutional investors (FII) trading

activities in a big emerging market India. India liberalized its financial markets and allowed FIIs

to participate in their domestic markets in 1992. Ostensibly, this opening up resulted in a number

of positive effects. First, the stock exchanges were forced to improve the quality of their trading

and settlement procedures in accordance with the best practices of the world. Second, the

information environment in India improved with the advent of major international financial

institutional investors in India. On the negative side we need to consider potential destabilization

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as a result of the trading activity of foreign institutional investors. This is especially important in

an emerging country that has embarked upon reforms to open up its market.

See for instance Choe, Kho, and Stulz (1999).

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Foreign Institutional

Investment in India

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6.0) Foreign Institutional Investment in India

The liberalisation and consequent reform measures have drawn the attention of foreign investors

leading to a rise in portfolio investment in the Indian capital market. Over the recent years, India

has emerged as a major recipient of portfolio investment among the emerging market economies.

Apart from such large inflows, reflecting the confidence of cross-border investors on the prospects

of Indian securities market, except for one year, India received positive portfolio inflows in each

year. The stability of portfolio flows towards India is in contrast with large volatility of portfolio

flows in most emerging market economies. The Indian capital market was opened up for foreign

institutional investors (FIIs) in 1992. The FIIs started investing in Indian markets in January 1993.

The Indian corporate sector has been allowed to tap international capital markets through

American Depository Receipts (ADRs), Global Depository Receipts (GDRs), Foreign Currency

Convertible Bonds (FCCBs) and External Commercial Borrowings (ECBs). Similarly, non-

resident Indians (NRIs) have been allowed to invest in Indian companies. FIIs have been permitted

in all types of securities including Government securities and they enjoy full capital convertibility.

Mutual funds have been allowed to open offshore funds to invest in equities abroad. FII

investment in India started in 1993, as FIIs were allowed to invest in the Indian debt and equity

market in line with the recommendations of the High Level Committee on Balance of Payments.

These investment inflows have since then been positive, with the exception of 1998-99, when

capital flows to emerging market economies were affected by contagion from the East Asian crisis.

These investments account for over 10 per cent of the total market capitalisation of the Indian

stock market.

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Since 1990-91, the Government of India embarked on liberalization and economic reforms

with a view of bringing about rapid and substantial economic growth and move towards

globalization of the economy. As a part of the reforms process, the Government under its New

Industrial Policy revamped its foreign investment policy recognizing the growing importance of

foreign direct investment as an instrument of technology transfer, augmentation of foreign

exchange reserves and globalization of the Indian economy. Simultaneously, the Government, for

the first time, permitted portfolio investments from abroad by foreign institutional investors in the

Indian capital market. The entry of FIIs seems to be a follow up of the recommendation of the

Narsimhan Committee Report on Financial System. While recommending their entry, the

Committee, however did not elaborate on the objectives of the suggested policy. The committee

only suggested that the capital market should be gradually opened up to foreign portfolio

investments.

From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all the

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. While

presenting the Budget for 1992-93, the then Finance Minister Dr. Manmohan Singh had

announced a proposal to allow reputed foreign investors, such as Pension Funds etc., to invest in

Indian capital market. To operationalise this policy announcement, it had become necessary to

evolve guidelines for such investments by Foreign Institutional Investors (FIIs).

The policy framework for permitting FII investment was provided under the Government of

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India guidelines vide Press Note date September 14, 1992. The guidelines formulated in this

regard were as follows:

1) Foreign Institutional Investors (FIIs) including institutions such as Pension Funds, Mutual

Funds, Investment Trusts, Asset Management Companies, Nominee Companies and

Incorporated/Institutional Portfolio Managers or their power of attorney holders (providing

discretionary and non-discretionary portfolio management services) would be welcome to make

investments under these guidelines.

2) FIIs would be welcome to invest in all the securities traded on the Primary and Secondary

markets, including the equity and other securities/instruments of companies which are listed/to be

listed on the Stock Exchanges in India including the OTC Exchange of India. These would include

shares, debentures, warrants, and the schemes floated by domestic Mutual Funds. Government

would even like to add further categories of securities later from time to time.

3) FIIs would be required to obtain an initial registration with Securities and Exchange Board of

India (SEBI), the nodal regulatory agency for securities markets, before any investment is made by

them in the Securities of companies listed on the Stock Exchanges in India, in accordance with

these guidelines. Nominee companies, affiliates and subsidiary companies of a FII would be

treated as separate FIIs for registration, and may seek separate registration with SEBI.

4) Since there were foreign exchange controls in force, for various permissions under exchange

control, along with their application for initial registration, FIIs were also supposed to file with

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SEBI another application addressed to RBI for seeking various permissions under FERA, in a

format that would be specified by RBI for the purpose. RBI's general permission would be

obtained by SEBI before granting initial registration and RBI's FERA permission together by

SEBI, under a single window approach.

5) For granting registration to the FII, SEBI should take into account the track record of the FII, its

professional competence, financial soundness, experience and such other criteria that may be

considered by SEBI to be relevant. Besides, FII seeking initial registration with SEBI were be

required to hold a registration from the Securities Commission, or the regulatory organization for

the stock market in the country of domicile/incorporation of the FII.

6) SEBI's initial registration would be valid for five years. RBI's general permission under FERA

to the FII would also hold good for five years. Both would be renewable for similar five year

periods later on.

7) RBI's general permission under FERA would enable the registered FII to buy, sell and realize

capital gains on investments made through initial corpus remitted to India, subscribe/renounce

rights offerings of shares, invest on all recognized stock exchanges through a designated bank

branch, and to appoint a domestic Custodian for custody of investments held.

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8) This General Permission from RBI would also enable the FII to:

a. Open foreign currency denominated accounts in a designated bank. (There could even be more

than one account in the same bank branch each designated in different foreign currencies, if it is so

required by FII for its operational purposes);

b. Open a special non-resident rupee account to which could be credited all receipts from the

capital inflows, sale proceeds of shares, dividends and interests;

c. Transfer sums from the foreign currency accounts to the rupee account and vice versa, at the

market rate of exchange;

d. Make investments in the securities in India out of the balances in the rupee account;

e. Transfer repairable (after tax) proceeds from the rupee account to the foreign currency

account(s);

f. Repatriate the capital, capital gains, dividends, incomes received by way of interest, etc. and any

compensation received towards sale/renouncement of rights offerings of shares subject to the

designated branch of a bank/the custodian being authorized to deduct withholding tax on capital

gains and arranging to pay such tax and remitting the net proceeds at market rates of exchange;

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g. Register FII's holdings without any further clearance under FERA.

9) There would be no restriction on the volume of investment minimum or maximum-for the

purpose of entry of FIIs, in the primary/secondary market. Also, there would be no lock-in period

prescribed for the purposes of such investments made by FIIs. It was expected that the differential

in the rates of taxation of the long term capital gains and short term capital gains would

automatically induce the FIIs to retain their investments as long term investments.

10) Portfolio investments in primary or secondary markets were subject to a ceiling of 30% of

issued share capital for the total holdings of all registered FIIs, in any one company. The ceiling

was made applicable to all holdings taking into account the conversions out of the fully and partly

convertible debentures issued by the company. The holding of a single FII in any company would

also be subject to a ceiling of 10% of total issued capital. For this purpose, the holdings of an FII

group would be counted as holdings of a single FII.

11) The maximum holdings of 24% for all non-resident portfolio investments, including those of

the registered FIIs, were to include NRI corporate and non-corporate investments, but did not

include the following:

a. Foreign investments under financial collaborations (direct foreign investments), which are

permitted up to 51% in all priority areas.

b. Investments by FIIs through the following alternative routes:

i. Offshore single/regional funds;

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ii. Global Depository Receipts;

iii. Euro convertibles.

12) Disinvestment would be allowed only through stock exchange in India, including the OTC

Exchange. In exceptional cases, SEBI may permit sales other than through stock exchanges,

provided the sale price is not significantly different from the stock market quotations, where

available.

13) All secondary market operations would be only through the recognized intermediaries on the

Indian Stock Exchange, including OTC Exchange of India. A registered FII would be expected not

to engage in any short selling in securities and to take delivery of purchased and give delivery of

sold securities.

14)A registered FII can appoint as Custodian an agency approved by SEBI to act as custodian of

Securities and for confirmation of transactions in Securities, settlement of purchase and sale, and

for information reporting. Such custodian should establish separate accounts for detailing on a

daily basis the investment capital utilization and securities held by each FII for which it is acting as

custodian. The custodian was supposing to report to the RBI and SEBI semi-annually as part of its

disclosure and reporting guidelines.

15) The RBI should make available to the designated bank branches a list of companies where no

investment will be allowed on the basis of the upper prescribed ceiling of 30% having been

reached under the portfolio investment scheme.

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16) Reserve Bank of India may at any time request by an order a registered FII to submit

information regarding the records of utilization of the inward remittances of investment capital and

the statement of securities transactions. Reserve Bank of India and/or SEBI may also at any time

conduct a direct inspection of the records and accounting books of a registered FII.

17) FIIs investing under this scheme will benefit from a concessional tax regime of a flat rate tax

of 20% on dividend and interest income and a tax rate of 10% on long term (one year or more)

capital gains.

These guidelines were suitably incorporated under the SEBI (FIIs) Regulations, 1995. These

regulations continue to maintain the link with the government guidelines through an inserted

clause that the investment by FIIs should also be subject to Government guidelines. This linkage

has allowed the Government to indicate various investment limits including in specific sectors.

Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside India which

proposes to make investment in India in securities. A Working Group for Streamlining of the

Procedures relating to FIIs, constituted in April, 2003, inter alia, recommended streamlining of

SEBI registration procedure, and suggested that dual approval process of SEBI and RBI be

changed to a single approval process of SEBI. This recommendation was implemented in

December 2003.

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

i) As FII: Overseas pension funds, mutual funds, investment trust, asset management company,

nominee company, bank, institutional portfolio manager, university funds, endowments,

foundations, charitable trusts, charitable societies, a trustee or power of attorney holder

incorporated or established outside India proposing to make proprietary investments or with no

single investor holding more than 10 per cent of the shares or units of the fund).

(ii) As Sub-accounts: The sub account is generally the underlying fund on whose behalf the FII

invests. The following entities are eligible to be registered as sub-accounts, viz. partnership firms,

private company, public company, pension fund, investment trust, and individuals. FIIs registered

with SEBI fall under the following categories:

a) Regular FIIs- those who are required to invest not less than 70 % of their investment in equity-

related instruments and 30 % in non-equity instruments.

b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset management

companies, nominee companies and incorporated/institutional portfolio managers or their power of

attorney holders (providing discretionary and non-discretionary portfolio management services) to

be registered as FIIs. While the guidelines did not have a specific provision regarding clients, in

the application form the details of clients on whose behalf investments were being made were

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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.

Limits on Foreign Institutional Investors

Each FII (investing on its own) or sub-account cannot hold more than 10 per cent of the

paid-up capital of a company. A sub-account under the 16 foreign corporate/individual

category cannot hold more than 5 per cent of the paid up capital of the company.

The maximum permissible investment in the shares of a company, jointly by all FIIs

together is 24 per cent of the paid-up capital of that company. The limit is 20 per cent of

the paid-up capital in the case of public sector banks. The ceiling of 24 per cent for FII

investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the

board and the general body of the company passing a special resolution to that effect.

A cap of US $1.75 billion is applicable to FII investment in dated Government securities

and treasury bills under 100 per cent and the 70:30 route. Within this ceiling of US $1.75

billion, a sub-ceiling of US $200 million is applicable for the 70:30 route. (FIIs are

required to allocate their investment between equity and debt instruments in the ratio of

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70:30.However, it is also possible for an FII to declare itself a 100 per cent debt FII in

which case it can make its entire investment in debt instruments.)

A cumulative sub-ceiling of US $500 million outstanding has been fixed on FII

investments in corporate debt and this is over and above the subceiling of US $1.75 billion

for Government debt.

Registration Process of FIIs

A FII is required to obtain a certificate by SEBI for dealing in securities. SEBI grants the

certificate SEBI by taking into account the following criteria:

i) The applicant's track record, professional competence, financial soundness, experience,

general reputation of fairness and integrity.

ii) Whether the applicant is regulated by an appropriate foreign regulatory authority.

iii) Whether the applicant has been granted permission under the provisions of the Foreign

Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for making

investments in India as a Foreign Institutional Investor.

iv) Whether the applicant is (a) an institution established or incorporated outside India as a

pension fund, mutual fund, investment trust, insurance company or reinsurance

company. (b) An International or Multilateral Organization or an agency thereof or a

Foreign Governmental Agency or a Foreign Central Bank. (c) an asset management

company, investment manager or advisor, nominee company, bank or institutional

portfolio manager, established or incorporated outside India and proposing to make

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investments in India on behalf of broad based funds and its proprietary funds in if any

or (d) university fund, endowments, foundations or charitable trusts or charitable

societies.

v) Whether the grant of certificate to the applicant is in the interest of the development of the

securities market.

vi) Whether the applicant is a fit and proper person.

The SEBIs initial registration is valid for a period of three years from the date of its grant of

renewal.

Investment Conditions and Restrictions for FIIs:

A Foreign Institutional Investor may invest only in the following:-

(a) Securities in the primary and secondary markets including shares, debentures and warrants of

companies, unlisted, listed or to be listed on a recognized stock exchange in India.

(b) units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed

or not listed on a recognized stock exchange.

(c) Dated Government securities.

(d) Derivatives traded on a recognized stock exchange.

(e) Commercial paper.

(f) Security receipts.

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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 Foreign Institutional Investor in India, whether on his own account or on account of his sub-

accounts, should not be less than seventy per cent of the aggregate of all the investments of the

Foreign Institutional Investor in India, made on his own account and on account of his sub-

accounts. However, this is not applicable to any investment of the foreign institutional investor

either on its own account or on behalf of its sub-accounts in debt securities which are unlisted or

listed or to be listed on any stock exchange if the prior approval of the SEBI has been obtained for

such investments. Further, SEBI while granting approval for the investments may impose

conditions as are necessary with respect to the maximum amount which can be invested in the debt

securities by the foreign institutional investor on its own account or through its sub-accounts. A

foreign corporate or individual is not eligible to invest through the hundred percent debt route.

Even investments made by FIIs in security receipts issued by securitization companies or asset

reconstruction companies under the Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002 are not eligible for the investment limits mentioned

above. No foreign institutional should invest in security receipts on behalf of its sub-account.

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Prohibitions on Investments:

FIIs 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:

1) Business of chit fund

2) Nidhi Company

3) Agricultural or plantation activities

4) 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.

5) 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. It can be observed from the table below

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that India is one of the preferred investment destinations for FIIs over the years. As of March

2007, there were 996 FIIs registered with SEBI.

SEBI Registered FIIs in India

Year End of March

1992-93 18

1993-94 158

1994-95 308

1995-96 367

1996-97 439

1997-98 496

1998-99 450

1999-00 506

2000-01 527

2001-02 490

2002-03 502

2003-04 540

2004-05 685

2005-06 882

2006-07 997

2007-08 1319

Countrywise breakdown of FIIs registered in India (Nov 2003)

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Analysis of trends in FII investment

Trends in FII Investment

Year GrossPurchases(a)(Rs.crore)

Gross Sales (b)(Rs.crore)

Net Investment(a-b)

(Rs.crore) %increase

1992-93 17 4 13 -

1993-94 5593 466 5126 39330.769

1994-95 7631 2835 4796 -6.43777

1995-96 9694 2752 6942 44.74562

1996-97 15554 6979 8574 23.50908

1997-98 18695 12737 5957 -30.5225

1998-99 16115 17699 -1584 -126.591

1999-00 56856 46734 10122 -739.015

2000-01 74051 64116 9934 -1.85734

2001-02 49920 41165 8755 -11.86832002-03 47061 44373 2689 -69.2861

2003-04 144858 99094 45765 1601.934

2004-05 216953 171072 45881 0.253469

2005-06 346978 305512 41467 -9.62054

2006-07 520508 489667 30840 -25.6276

2007-08 948020 881842 66179 114.5882

2008-09 614579 660389 -45810 -169.221

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2009-10(apr-dec) 631269 530824 100445 -319.264

During the initial year 1992-93, the FII flows started in September, 1992 which amounted to Rs.

13 crore because at this moment government was framing policy guidelines for FIIs. However,

within a year, the FIIs rose 39338.46% of 1992-93 during 1993-94 because government had

opened door for investment in India. Thereafter, the FII inflows witnessed a dip of 6.45%. The

year 1995-1996 witnessed a turnaround, gliding up the contribution of FII to a massive of Rs. 6942

crore. Investment by FIIs during 1996-1997 rose a little i.e. 23.52% of the preceding year. This

period was ripe enough for FII Investments because at that time where international capital

markets were in the phase of overheating; 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 30.51%. This slack in

investments by FIIs was primarily due to the South-East Asian Crisis and the period of volatility

experienced between November 1997 and February 1998. The net investment flows by FIIs have

always been positive from the year of their entry. Only in the year 1998-99, an outflow to the tune

of Rs. 17699 crore was witnessed for the first time. This was primarily because of the economic

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sanctions imposed on India by the US, Japan and other industrialized economies. These economic

sanctions were the result of the testing of series of nuclear bombs by India in May 1998.

Thereafter, the FII portfolios investments quickly recovered and showed positive net investments

for all the subsequent years.

FIIs investments declined from Rs. 10122 crore during 1999-2000 to Rs. 9935 crore during 2000-

01. FII investment posted a year-on-year decline of 1.8 % in 2000-01, 11.87 % in 2001-02 and

69.29 % 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. However, due to

global developments like meltdown in global commodities markets and equity market during the

three month period between May 2006 to July 2006, fall in Asian Equity markets, tightening of

capital controls in Thailand and its spillover effects, there was a slack in FII investments.

As I had discussed FIIs environment in India like what is FII in India, policy framework for

FIIs, market design in India for foreign institutional investors, registration process in India,

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Trends of Foreign Institutional Investments in India. Now to fulfill the objective of this

project i.e. influence of FII on movement of Indian stock exchange (national stock exchange

of India) during the post liberalization period that is 1998 to 2010, the following research

methodology is designed.

This project, in a way, reveals the influence of FIIs investment on movement of Indian stock

exchange (national stock exchange of India) during the post liberalization period that is 1998 to

2010. I have applied a simple linear model to estimate the effect of FII on the stock index. The

data analysis tools used in the research is correlation and regression.

I have taken six indices to study the impact of FII on Indian bourses. One of these indices is Nifty

while other five are some specific index of BSE. These six indices give the close picture of Indian

stock exchanges. I have taken average monthly data of FIIs and monthly closing index of all the

indices.

There may be many other factors on which a stock index may depend i.e. Government policies,

budgets, bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar

exchange rate etc. But for my study I have selected only one independent variable i.e. FII and

dependent variable is indices of nifty. This study uses the concept of correlation and regression to

study the relationship between FII and stock index. The FII started investing in Indian capital

market from September 1992 when the Indian economy was opened up in the same year. Their

investments include equity only. The sample data of FIIs investments consists of monthly average

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from April 1998 to February 2010 and indices value consist monthly closing value with period of

study and various observations which is given below in table.

RESEARCH METHODOLOGY

Models:

Regression Analysis: This analysis tool performs linear regression analysis by using the "least

squares" method to fit a line through a set of observations. We can analyze how a single dependent

variable is affected by the values of one or more independent variables for example, how an

athlete's performance is affected by such factors as age, height, and weight. We can apportion

shares in the performance measure to each of these three factors, based on a set of performance

data, and then use the results to predict the performance of a new, untested athlete.

Correlation: This analysis tool and its formulas measure the relationship between two data sets

that are scaled to be independent of the unit of measurement. The population correlation

calculation returns the covariance of two data sets divided by the product of their standard

deviations. We can use the Correlation tool to determine whether two ranges of data move together

that is, whether large values of one set are associated with large values of the other (positive

correlation), whether small values of one set are associated with large values of the other (negative

correlation), or whether values in both sets are unrelated (correlation near zero).

Data: The sample data consists of 143 observations for FII, Sensex and S&P CNX Nifty starting

from April 1998 to February 2010. The sample for other four indices of BSE consists of 143

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observations starting from January 1999 to February 2010. I have taken the monthly closing index

of all the indices and monthly average of net investments made by FII. The FIIs started investing

in Indian capital market from September 1992. The number of scrips under following index are:

BSE Sensex 30

NSE Nifty 50

BSE Consumer Durables (CD) 22

BSE Capital Goods (CG) 49

BSE Fast Moving Consumer Goods (FMCG) 44

BSE Information Technology (IT) 42

FII was taken as independent variable. Stock indices were taken as dependent variable. The data

was taken from various financial sites.

There may be many other factors on which a stock index may depend i.e. Government policies,

budgets, bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar

exchange rate etc. But for my study I have selected only one independent variable i.e. FII and

dependent variable is indices of nifty. This study uses the concept of correlation and regression to

study the relationship between FII and stock index. The FII started investing in Indian capital

market from September 1992 when the Indian economy was opened up in the same year. Their

investments include equity only. The sample data of FIIs investments consists of monthly average

from April 1998 to February 2010 and indices value consist monthly closing value with period of

study and various observations which is given below in table.

Indices Period of Study Observation

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BSE Sensex 30 Apr 98- 28 Feb 2010 143BSE CD 31 Jan 99- 28 Feb 2010 134BSE CD 31 Jan 99- 28 Feb 2010 134BSE FMCG 31 Jan 99- 28 Feb 2010 134BSE IT 31 Jan 99- 28 Feb 2010 134

S&P CNX NIFTY 30 Apr 98- 28 Feb 2010 143

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Secondary data analysis and

interpretation

Influence of FIIs on Indian stock market

1. Impact of FIIs on NIFTY:

The effect of FIIs on nifty is positive and co-efficient of correlation is .541 this shows that it has

moderate degree of positive correlation; hence the effect is also moderate on nifty. The standard

error is also low, that signifies that relation is true and there is less possibilities of deviation of

result.

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RegressionModel Summary

Model R R SquareAdjusted R

SquareStd. Error ofthe Estimate

1 .541(a) .293 .288 7.09787a Predictors: (Constant), fii

CorrelationsCorrelations

nsenifty fii

nsenifty PearsonCorrelation

1 .541(**)

Sig. (2-tailed) . .000

N 143 143

fii PearsonCorrelation

.541(**) 1

Sig. (2-tailed) .000 .N 143 143

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

2. Impact of FIIs on BSE Sensex:

The coefficient of correlation is .529, it signifies that the fiis has moderate degree of impact on

sensex. Also the relation is positive in nature. Standard error is also low so there is less possibility

of variation.

Correlations Correlations

BSESENSEX FII

BSESENSEX PearsonCorrelation

1 .529(**)

Sig. (2-tailed) . .000

N 143 143

FII PearsonCorrelation

.529(**) 1

Sig. (2-tailed) .000 .

N 143 143

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

Regression

Model Summary



1 .529(a) .280 .275 6.94629

a Predictors: (Constant), FII

3. Impact of FIIs on BSE CD:

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FII has no significant relation with BSE CD, as the value of correlation is 0.066. This does not mean

that there is no relation at all between them. It shows the absence of linear relation between the two

variables but not a lack of relationship altogether. The degree of positive correlation between them is

very low. Again the standard error is comparatively high, but it is acceptable. It is because the standard

error in linear regression is usually high.

Correlations

BSECD FII

BSECD PearsonCorrelation

1 .066

Sig. (2-tailed) . .448N 133 133

FII PearsonCorrelation

.066 1

Sig. (2-tailed) .448 .N 133 133

Model Summary

Regression



1 .066(a) .004 -.003 92.88464


4. Impact of FIIs on BSE CG:

BSE CG is positively correlated with FII for the period of January 1999 to February 2010.The value of

correlation is 0.161. However degree of correlation is low. And standard error is also low. This shows

that FIIs has less impact on consumer goods sector in comparison to other sector.

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Correlations

FII BSECG

FII Pearson Correlation 1 .161Sig. (2-tailed) . .064N 133 133

BSECG Pearson Correlation .161 1

Sig. (2-tailed) .064 .N 133 133

RegressionModel Summary



1 .161(a) .026 .019 11.32273


5. Impact of FIIs on BSE FMCG:

BSE FMCG is inversely related to FII for the period of January 1999 to September 2010. But the value

of R is low so the degree of relation is low. Standard error in this case is 70.55 which is low. We can

also say that FMCG sector has very low degree of negative correlation with FIIs.

Correlations

FII BSEFMCG

FII Pearson Correlation 1 -.001Sig. (2-tailed) . .988N 133 133

BSEFMCG Pearson Correlation -.001 1

Sig. (2-tailed) .988 .N 133 133

Regression Model Summary


SquareStd. Error of the

Estimate

1 .001(a) .000 -.008 70.55811


6. Impact of FIIs on BSE IT:

There is no significant relation between IT sector and FIIs .It doesnt mean there is no relation

between both them, but degree of relation is very low. Also the standard error is low, hence BSE IT

has low degree of positive correlation for the period January 1999 to February 2010.

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Correlations

FII BSEIT

FII Pearson Correlation 1 .009Sig. (2-tailed) . .919N 133 133

BSEIT Pearson Correlation .009 1

Sig. (2-tailed) .919 .N 133 133

Regression Model Summary


SquareStd. Error of the

Estimate

1 .009(a) .000 -.008 14.64555


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Primary Data Analysisand Interpretation

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Data Analysis and Interpretation

A. Graphical representation:

Occupation of respondent: The most of the respondent is Investor and Broker. The reason behind this

they have more exposure to FIIs than any other. Also questionnaire is filled by student most of them

are MBA and some of them are CA. The other type of person includes person doing articleship at some

of most reputed CA firms in India.

13

15

21

13

8

occuaption

business man

broker

investor

student

others

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Governing bodies behind FIIs and limitation of FIIs: Most of the respondent is aware about the

governing bodies behind FIIs and limitation of FIIs. This statics help us to come to conclusion that

respondent are well aware about FIIs, so their response is worthwhile for analysis.

yes no

do you know the governing bodies behinf fii's?

0

10

20

30

40

50

60

Count56

14

yes no

do you know about limitation of fii's?

0

10

20

30

40

50

60

Count 57

13

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B. Reliability testing:

Case Processing Summary

N %

Cases Valid 70 100.0

Excluded(a)

0 .0

Total 70 100.0

a Listwise deletion based on all variables in the procedure.

Reliability Statistics

Cronbach'sAlpha(a)

Cronbach'sAlpha Based

onStandardized

Items(a) N of Items

-.173 -.169 30a The value is negative due to a negative average covariance among items. This violates reliability modelassumptions. You may want to check item codings.

Interpretation:

Cronbach's alpha determines the internal consistency or average correlation of items in a survey

instrument to gauge its reliability. Here our alpha is coming negative, it means items are less correlated

with each other; hence reliability testing is not successful. And if the scale shows poor reliability, then

individual items within the scale must be re-examined and modified or completely changed as needed.

One good method of screening for efficient items is to run an exploratory factor analysis on all the

items contained in the survey to weed out those variables that failed to show high correlation. So, to

eliminate items which shows negative correlation we perform factor analysis. In factor analysis, we

select 12 items, which later reduces into 6 factors.

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C. Factor Analysis

Communalities

Initial Extraction

long term capital gain 1.000 .691

ruppee appreciation 1.000 .442

economicg rowth 1.000 .694

interest rate 1.000 .539

inflation rate 1.000 .751

infrastucture 1.000 .559

echange rate 1.000 .612

risk 1.000 .619

strengthning corporategovernance 1.000 .748

regulation and tradingefficiency 1.000 .551

dollar weakness againstrupee 1.000 .622

Extraction Method: Principal Component Analysis.

Total Variance Explained

Component

Initial Eigenvalues Extraction Sums of Squared Loadings

Total % of Variance Cumulative % Total % of Variance Cumulative %1 1.712 15.565 15.565 1.712 15.565 15.565

2 1.664 15.129 30.694 1.664 15.129 30.694

3 1.340 12.186 42.881 1.340 12.186 42.881

4 1.086 9.870 52.750 1.086 9.870 52.750

5 1.024 9.311 62.062 1.024 9.311 62.062

6 .962 8.747 70.808

7 .851 7.741 78.549

8 .671 6.103 84.651

9 .622 5.652 90.303

10 .584 5.311 95.615

11 .482 4.385 100.000

Extraction Method: Principal Component Analysis.

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Component Matrix(a)

Component

1 2 3 4 5

long term capital gain -.558 -.122 .403 -.016 .448

ruppee appreciation -.042 .391 .131 -.503 -.129economicg rowth -.441 .128 .348 .600 -.050

interest rate .524 -.047 .337 .353 -.153

inflation rate .453 .378 -.107 .254 .572

infrastucture .070 -.563 -.416 -.040 -.251

echange rate .604 .426 .172 .099 -.164

risk -.033 .689 -.366 -.078 -.048

strengthning corporategovernance .408 -.285 .314 -.440 .457

regulation and tradingefficiency -.362 .504 .293 -.236 -.156

dollar weakness against

rupee -.235 .164 -.627 .133 .359

Extraction Method: Principal Component Analysis.a 5 components extracted.

Factor analysis is a technique that is used to reduce a large number of variables into fewer

numbers of factors. Factor analysis extracts maximum common variance from all variables and

puts them into a common score

Eigen values: An Eigen value is also called characteristic roots. Eigen values shows varianceexplained by that particular factor out of the total variance. From the commonality column, we can

know how much variance is explained by the first factor out of the total variance. For example, if

our first factor explains 68% variance out of the total, this means that 32% variance will be

explained by the other factor.

Interpretation:

In factor analysis we taken 11 factor that impact FIIs investment decision. They are interest rate,

inflation rate, exchange rate, long term capital appreciation, economic growth, risk, trading

efficiency and regulation, rupee appreciation, corporate governance, infrastructure. But all this

factor doesn,t have impact or same level of impact. So to identify most important factor, we used

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factor analysis. In factor analysis our 11 factors are reduces in 5. We have taken factor which have

variance above 1 into consideration and neglect rest.

Five factors which have most impact on FIIs investment decision are:

Economic growth: FIIs make investment decision on the basis of growth of economy of

that country. As growth rate is high that signifies that FIIs have better chance to grow their

money.

Interest rate: If the interest rate prevailing in their countries is less as compare to other

countries, than they will make investment in other countries. Hence, they compare interest

of various countries before making investment decision.

Regulation and trading efficiency: they also look into the rules and regulation imposed

by government of those countries in which they are investing and how efficiently trading is

made in that country.

Risk: Risk is one of the important factor that FIIs considered before making investment

decision. Risk can be of political, social, economical, legal and environmental.

Inflation rate: inflation rate of counties is also taken into consideration to get true picture

of returns.

D. Cross tabulation

Common route for FIIs investment:

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i) occuaption * mutual fund Crosstabulation

Count

mutual fund

Totalmost common

+2 +1 0

occuaption business man 3 7 3 13broker 1 5 9 15

investor 3 8 10 21

student 0 5 8 13

others 2 3 3 8

Total 9 28 33 70

Mutual fund is not considered as most common routes but it doesnt mean that it is not at all

common. Mutual funds are common route for FIIs investment according to most of respondent.

ii) occuaption * hedge fund Crosstabulation

Count

hedge fund

Total+1 0 -1least

common -2

occuaption business man 0 5 6 2 13

broker 1 5 9 0 15

investor 1 6 11 3 21

student 1 7 5 0 13

others 1 2 5 0 8Total 4 25 36 5 70

The hedge fund is not yet popular in India. Our 70% of respondent come to conclusion that hedge

fund is not a common route for FIIs investment. The scale taken is most common +2 to least

common -2.

iii) occuaption * reinsurance Crosstabulation

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Count

reinsurance

Totalmost common

+2 +1 0 -1least

common -2

occuaption business man0 1 3 7 2 13broker 0 0 4 6 5 15

investor 1 5 7 6 2 21

student 0 1 6 4 2 13

others 0 1 2 4 1 8

Total 1 8 22 27 12 70

iv) occuaption * investment trust Crosstabulation

Count

investment trust

Totalmost common

+2 +1 0

occuaption business man 0 2 11 13broker 0 8 7 15

investor 3 12 6 21

student 2 5 6 13

others 0 5 3 8

Total 5 32 33 70

Investment funds are common route but not so popular route for FIIs investment.

v) occuaption * instituional portfolio manager Crosstabulation

Count

instituional portfolio manager

Totalmost common

+2 +1 0 -1

occuaption business man 1 7 3 2 13

broker 3 5 5 2 15

investor 4 6 8 3 21

student 0 7 4 2 13

others 1 2 5 0 8

Total 9 27 25 9 70

Institutional portfolio manager is also pouplar route among respondent.

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vi) occuaption * banks Crosstabulation

Count

banks

Totalmost common

+2 +1 0 -1least

common -2

occuaption business man 4 8 1 0 0 13broker 3 4 5 2 1 15

investor 4 10 4 2 1 21

student 3 5 2 1 2 13

others 1 2 5 0 0 8

Total 15 29 17 5 4 70

The investment through bank is most common and popular route for FIIs investment according torespondent.

vii) occuaption * individual invsestor Crosstabulation

Count

individual invsestor

Totalmost common

+2 +1 0 -1least

common -2

occuaption business man 2 4 5 2 0 13

broker 1 9 2 1 2 15

investor 4 4 6 5 2 21

student 5 4 1 1 2 13

others 0 3 4 1 0 8

Total 12 24 18 10 6 70

E. Weighted average score

a) occuaption * regulation and trading efficiency

Count

regulation and trading efficiency TotalWASLow impact

-2 -10 +1 high impact

+2

occuaption

businessman

0 0 2 8 3 13 1.07

broker 0 0 3 9 3 15 1

investor 0 0 4 8 9 21 1.23

student 0 0 1 8 4 13 1.23

others 0 0 3 1 4 8 1.125

Total 0 0 13 34 23 70

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Investor and student think that regulation and trading efficiency has high impact on FIIs

investment decision. The weighted score for them is 1.23 which is followed by 1.12 of others and

1.07 of business man. The weighted mean score of the entire respondent is either 1 or above one,

its clearly shows that regulation and trading efficiency have high impact on FIIs investment

decision.

b) occuaption * dollar weakness against rupee

dollar weakness against rupee Total WAS

-2 -1 0 +1

high impact+2

occuaption

business man 0 0 1 8 4 13 1.23

broker 0 0 5 7 3 15 0.86

investor 0 0 1 16 4 21 1.14

student 0 0 1 7 5 13 1.30

others 0 0 1 6 1 8 1

Total 0 0 9 44 17 70

The student has WAS as 1.30 followed by 1.23 of business man and 1.14 of investor. This shows

that dollar weakness against rupee as high impact on FIIs investment behavior. Where as investor

has WAS of 1.14 which show that dollar weakness has impact on FIIs investment decision but

degree of impact of comparatively low than other factors.

F. Chi square test

Null hypothesis: FIIs doesnt affect Indian economy and factors like stock market, exports,

market efficiency, and many more.

Alternative Hypothesis: FIIs have impact on Indian economy and following factors.

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Case Processing Summary

Cases

Valid Missing Total

N Percent N Percent N Percentappreciation of currency *occupation

70 100.0% 0 .0% 70 100.0%

exports * occupation 70 100.0% 0 .0% 70 100.0%stock market * occupation 70 100.0% 0 .0% 70 100.0%local companies *occupation

70 100.0% 0 .0% 70 100.0%

capital formation *occupation

70 100.0% 0 .0% 70 100.0%

improve market efficiency *occupation

70 100.0% 0 .0% 70 100.0%

strengthening corporategovernance * occupation

70 100.0% 0 .0% 70 100.0%

regulation and tradingefficiency * occupation

70 100.0% 0 .0% 70 100.0%

Appreciation of currency * occupationCrosstab

occupation

Tobusiness

man broker investor student others

appreciationof currency

very high Count 3 5 10 3 2

ExpectedCount

4.3 4.9 6.9 4.3 2.6

high Count 8 9 11 9 6

ExpectedCount

8.0 9.2 12.9 8.0 4.9

low Count 2 1 0 1 0ExpectedCount

.7 .9 1.2 .7 .5

Total Count 13 15 21 13 8

ExpectedCount

13.0 15.0 21.0 13.0 8.0

Chi-Square Tests

Value df Asymp. Sig.

(2-sided)

Pearson Chi-Square 6.852(a) 8 .553

Likelihood Ratio 7.744 8 .459Linear-by-Linear

Association .305 1 .581N of Valid Cases

70

a 10 cells (66.7%) have expected count less than 5. The minimum expected count is .46.

Exports

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Crosstab

occupation

Totalbusiness


exports very high Count 0 0 0 1 0 1ExpectedCount .2 .2 .3 .2 .1 1.0

high Count 2 1 3 2 1 9ExpectedCount

1.7 1.9 2.7 1.7 1.0 9.0

low Count 9 12 14 9 4 48ExpectedCount

8.9 10.3 14.4 8.9 5.5 48.0

very low Count 2 2 4 1 3 12ExpectedCount

2.2 2.6 3.6 2.2 1.4 12.0

Total Count 13 15 21 13 8 70ExpectedCount

13.0 15.0 21.0 13.0 8.0 70.0

Chi-Square Tests


(2-sided)



Association.001 1 .978

N of Valid Cases70


Local companies

Crosstab

occupation To

business


localcomapnies

high Count2 1 4 0 0

ExpectedCount

1.3 1.5 2.1 1.3 .8

low Count 9 7 10 11 4

ExpectedCount 7.6 8.8 12.3 7.6 4.7

very low Count 2 7 7 2 4

ExpectedCount

4.1 4.7 6.6 4.1 2.5


ExpectedCount

13.0 15.0 21.0 13.0 8.0

Chi-Square Tests

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(2-sided)



Association1.051 1 .305

N of Valid Cases70


Strengthening Corporate governanceCrosstab

occupation T

business


strengtheningcorporategovernance

very high Count5 2 6 0 1

Expected Count 2.6 3.0 4.2 2.6 1.6

high Count 8 8 10 12 6

Expected Count 8.2 9.4 13.2 8.2 5.0

low Count 0 5 5 1 1

Expected Count 2.2 2.6 3.6 2.2 1.4


Expected Count 13.0 15.0 21.0 13.0 8.0

Chi-Square Tests


(2-sided)



Association.403 1 .525

N of Valid Cases70

a 10 cells (66.7%) have expected count less than 5. The minimum expected count is 1.49.

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Interpretation of Chi- square

The Chi square is used to test the statically significance of the observe association in a cross

tabulation. It assists us in determining whether a systematic association exists between the two

variables. The chi- distribution is a skewed distribution whose shape depends solely on the numberof degrees of freedom. As the number of degree of freedom increases the chi- square distribution

become more symmetrical. In the above cases we take level of significance is .05. In case of

strengthening cooperate governance, local companies and appreciation of currency the degree of

freedom is 8. When we look into table of chi-square for df 8 at .05 level of significance the value

comes is 15.507. And in each of above cases chi square value calculated is low, so we cannot

reject null hypothesis. That signifies that FIIs has no impact on following factors. The reason for

such result is less no. of responses, due which there is possibility of change in result.

In case of exports the degree of freedom is 12 and level of significance is .05, tabular value for

exports is 21.026 which is higher that calculated value 8.502. In this case, again we cant reject

null hypothesis.

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CONCLUSION AND

FINDINGS

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Findings:

1. BSE sensex and nifty has moderate degree of positive correlation with FIIs investment.

Hence both indices move in direction of FIIs investment. If FIIs increase both indices

increases and vice versa.

2. BSE CD and BSE CG has low degree of positive correlation. It signifies that consumer

durable and consumer goods sector are less dependent on FIIs.

3. BSE IT has low degree of negative correlation. It means that it doesnt rise with rise in

FIIs.

4. After using hypothesis testing we came to conclusion that Exports and local companies has

very less impact or no impact of FIIs in India.

5. Similarly, appreciation of rupee and corporate governace also has very less impact of FIIs.

6. FIIs has impact on improvement of market efficieny. As due to increasing investment of

FIIs, SEBI and other regulatory bodies have to improve market trading efficiency in order

to sustain FIIs investment and also to attract more investment.

7. Economic growth, inflation and interest rate are the key parameters on which FIIs invest

in any countries. Also FIIs investment lead to economic growth of country.

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C onclusion

1. According to findings and results, I concluded that FII did have high significant impact on

the Indian capital market. Therefore, the alternate hypothesis is accepted. FIIS have high

impact on BSE Sensex and Nifty. This signifies that

Documents

2224. Foreign Institutional Investment [Fii] Impact on Indian Stock Market and Its Investment Behavior [Fin]