FII and FDI

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AProject Report

On The study of Impact of FII and FDI on

Indian Stock Market (From 1st Feb, 2011 to 30th April,2011) A Comprehensive Project submitted in partial Fulfillment of therequirements for the award of the degree of MBA. Submitted By:

Shailesh G Jasani (Enrl:097120592008) Hardip G Matholiya(Enrl:097120592006) M.B.A. (Sem-IV) Under the guidance of: Prof.

Alpesh Gajera Submitted To: EVA INSTITUTE OF MANAGEMENT,SUPEDI (RAJKOT). (2010-2011)


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ACKNOWLEDGEMENT

The satiation and euphonies that accompany the success completion of a task wouldbe incomplete without a mention of people who made it possible. So, with immensegratitude, I acknowledge all those, whose guidance and encouragement served as a

beacon light and crowned my effort with success. We thank Mr. Alpesh Gajera, Facultyof EVA Institute of Management and my project guide for his valuable guidance andsuggestions, which were vital inputs towards the completion of the project. We amindebted to Mr, Rajendra vala, Faculty of EVA institute of Management for his help inanalysing, interpreting the data and for the stimulating discussion which has greatlyadded to the study. Lastly, We would like to thank all those who have directly orindirectly helped me complete the project successfully. Shailesh Jasani HardipMatholiya


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Declaration

We, Shailesh Jasani And Hardip matholiya. student of EVA Instiute of

management,Supedi, Dhoraji here by declare that this project report has beenundertaken as a part of 4th Semester of Master of Business Administration (MBA)syllabus of Gujarat Technological University, Ahemedabad . We declare that this reporthas not been submitted to any other university or institute for any other purposes.

Date:Place:

Shailesh JasaniHardip Matholiya

EVA INSTITUTE OF MANAGEMENT SUPEDI (RAJKOT)CERTIFICATE OF THE FACULTY GUIDE This is to certify that theProject Report entitled A STUDY ON FUNDAMENTAL ANALYSIS OFSCRIPTS UNDER BANKING SECTOR submitted in partial Fulfillment ofthe requirements for the award of the degree of MASTER OF BUSINESS

ADMINISTRATION to GUJARAT TECHNOLOGICAL UNIVERSITY, AHMEDABAD is a record of bonafide research work carried out bySHAILESH G. JASANI & HARDI G. MATHOLIYA under my supervision

and Guidance. Prof. ALPESH GAJERA Mr. RAVIVIKRAM (Project guide) (Principal)

EXECUTIVE SUMMARY


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India has been one of the best performers in the world economy in recent years, butrapidly rising inflation and the complexities of running the world s biggest democracy are proving challenging. India s economy has been one of the stars of global economics in recent years, growing 9.2% in 2007 and 9.6% in 2006. Growth had been

supported by markets reforms, huge inflows of FDI, rising foreign exchange reserves,both an IT and real estate boom, and a flourishing capital market. While the creditrating of India was hit by its nuclear tests in 1998, it has been raised to investment levelin 2007 by S&P and Moody's. In 2003, Goldman Sachs predicted that India's GDP incurrent prices will overtake France and Italy by 2020, Germany, UK and Russia by 2025and Japan by 2035. By 2035, it was projected to be the third largest economy of theworld, behind US and China. This trend has manifested itself in the last twenty years.

Any form of foreign direct investment pumps in a lot of capital knowledge andtechnological resources into the economy of a country. Laura Alfaro, AreendamChanda, Sebnem Kalemli-Ozcan, and Selin Sayek (August 2006), said that theincreases in the share of FDI or the relative productivity of the foreign firm leads to

higher additional growth in financially developed economies compared to thoseobserved in financially under-developed ones. It has also identifies other localconditions such as market structure and human capital are also important for the effectof FDI on economic growth.The study provides a preliminary analysis of FII flows to India and their relationship withseveral relevant variables especially returns in the Indian stock market. A more detailedstudy using daily data for a longer period or, better still, disaggregated data showing thetransactions of individual FIIs at the stock level can help address questions regardingthe extent of herding or return-chasing behavior among FIIs indicators that can help usestimate the probability of sudden Mexico-type reversals of these FII flows which nowaccount for a significant part of the capital account balance in our balance of payments.

The extent to which FII participation in Indian markets has helped lower cost of capitalto Indian industries is also an important issue to investigate. For the present study,main objective is to find the trends of FDI and FII and situation of the foreign fund inIndian and their impact in the field of finance and country s growth. For this study research has used exploratory research design and judgmental sampling for thesampling procedure as well as data collection method. Data collected from past 3 year(2006-2008). From the present study research has found that there is no any influenceof FII on Indian stock market and it is positive in nature for mobilization of fund from theother country. In the other side FDI has positive impact on the Indian economy becausethat the ratio of FDI to GDP growth is positive and it indicates that efficiency of thecountry on the bases of foreign funds. Other things I have found that there is very low or

negligible relationship between FII and Indian stock market (SENSEX and NIFTY).Consequent to the liberalization of registration norms, the number of foreign institutionalinvestors (FIIs) registered with the Securities and Exchange Board of India (SEBI) hasincreased to 1403 as on June 27, 2008 as compared with just 1051 FIIs a year back.

RESEARCH ABSTRACTSince the beginning of liberalization FII & FDI flows to India have steadily grown inimportance. In this paper we analyze these flows and their relationship with Indianequity market. Foreign capital flows have come to be acknowledged as one of the


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ChapterNo,

Particulars PageNo.

OVERVIEW OF CHAPTER SCHEME 9

1 Theoretical Background 11

2 Review Of Literature 16

3 Introduction Foreign Institutional Investment & ForeignDirect Investment

23

4 Introduction of various sector 49

5 Research Design of the study 56

6 Research Methodologies 58

7 Analysis and Interpretation of Data 63

8 Findings 76

9 Recommendations77

10 Conclusion. 78

11 Reference 79

OVERVIEW OF CHAPTER SCHEME

CHAPTER 1 Theoretical Background This chapter deals with the theoretical


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background of the study throwing light on the introduction, forms of Foreign Investment,Differences between Portfolio and Direct Investment, factors influencing ForeignInvestment decisions and a Survey of Literature.

CHAPTER 2-Review Of Literature We are encouraging to prepare a report to

Emerging Trends in FDI flows to Asia, by Dilek Aykut (April 10, 2007) review, How doesForeign Direct Investment Promote Economic Growth? Exploring the Effects ofFinancial Markets on Linkages, by Laura Alfaro, Areendam Chanda, Sebnem Kalemli-Ozcan, and Selin Sayek (August 2006),FII Flows to India: Nature and Causes, byRajesh Chakrabarti,etc and other current news declared by RBI and stock market.

CHAPTER 3- Introduction Foreign Institutional Investment & Foreign DirectInvestment This chapter deal with Definition, Types of FDI based on the motives of theinvesting firm, The General Permission from RBI shall also enable the FII ,Potential forinvestment in India ,Eligibility criteria for applicant seeking FII registration, FIIRegulations, Advantages and Disadvantages of FIIs, etc.

CHAPTER 4- Introduction of various sectorHere we select the main 5 sector likePower, FMCG, Auto, Reality, oil gas to find out FII impact on these stock index

CHAPTER 5-Design of the study This include title of the study statement of theproblem objectives of the study scope of the study research design etc

CHAPTER 6 Research Methodologies The purpose of the methodology to section isto describe the research procedure. This includes the overall research design thesampling procedures, the data collection method and analysis procedures, this sectionis different to write because it is hard to discuss methodology without using technicalterms,

CHAPTER 7- Analysis and Interpretation of Data This chapter deals with analysisand interpretation of the data collected. The purpose of this chapter is to drawinferences, based on the calculations and statistics. Graphs are also included to give aclear view of the data analysed.

CHAPTER 8 Findings, Recommendations and Conclusion. This chapter is theconcluding chapter dealing with findings, recommendations and conclusion which aredrawn after the study on Influence of FIIs in Equity Stock Market.

CHAPTER 1 THEORETICAL BACKGROUND Introduction


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The economic landscape of India underwent a paradigm change when the economywas liberalized in 1991. It also laid the foundation for a strong regulatorynetwork .India witnessed stellar economic performance through the period 2003-09.Thiswasmanifested through an average 8.5 - 9 percent GDP growth rates, rising

domestic savings and investment levels and the amount of foreign capital flowing intothe country. Foreign investments can any of the three forms: Portfolio investments in Indian companies Foreign Institutional Investor (FII) route - essentially entailingtransactions executed on stock exchanges in India; Direct investment into Indian companies Foreign Direct Investment - (FDI) route; Private Equity investments - Foreign Venture Capital Investor (FVCI) route Foreign Institutional Investors havebeen a major source of funds into the Indian Capital Markets in the past few years.Foreign Institutional Investors are defined under SEBI Regulations as an institutionthat is a legal entity established or incorporated outside India proposing to makeinvestments in India only in securities. Foreign institutional investors also includedomestic asset management companies or domestic portfolio managers who manage

funds raised or collected or bought from outside India for the purpose of makinginvestment in India on behalf of foreign corporate or foreign individuals. Theseinvestments are governed by the Securities and Exchange Board of India (ForeignInstitutional Investors) Regulations, 1995. Potential investors also have to get approvalfrom the Reserve Bank of India to operate foreign currency accounts to bring in andtake out funds and rupee bank accounts to pay for transactions.

ABOUT INDIAN ECONOMY India has been one of the best performers in theworld economy in recent years, but rapidly rising inflation and the complexities ofrunning the world s biggest democracy are proving challenging. India s economy has been one of the stars of global economics in recent years, growing 9.2% in 2007 and

9.6% in 2006. Growth had been supported by markets reforms, huge inflows of FDI,rising foreign exchange reserves, both an IT and real estate boom, and a flourishingcapital market. Like most of the world, however, India is facing testing economic timesin 2008. The Reserve Bank of India had set an inflation target of 4%, but by the middleof the year it was running at 11%, the highest level seen for a decade. The rising costsof oil, food and the resources needed for India s construction boom are all playing a part. India has to compete ever harder in the energy market place in particular and hasnot been as adept at securing new fossil fuel sources as the Chinese. The IndianGovernment is looking at alternatives, and has signed a wide-ranging nuclear treatywith the US, in part to gain access to nuclear power plant technology that can reduce itsoil thirst. This has proved contentious though, leading to leftist members of the ruling

coalition pulling out of the government. As part of the fight against inflation a tightermonetary policy is expected, but this will help slow the growth of the Indian economystill further, as domestic demand will be dampened. External demand is also slowing,further adding to the downside risks. The Indian stock market has fallen more than 40%in six months from its January 2008 high. $6b of foreign funds have flowed out of thecountry in that period, reacting both to slowing economic growth and perceptions thatthe market was over-valued. It is not all doom and gloom, however. A growing numberof investors feel that the market may now be undervalued and are seeing this as a


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buying opportunity. If their optimism about the long term health of the Indian economy iscorrect, then this will be a needed correction rather than a downtrend.The Indian government certainly hopes that is the case. It views investment in thecreaking infrastructure of the country as being a key requirement, and has ear-marked23.8 trillion rupees, approximately $559 billion, for infrastructure upgrades during the

11th five year plan. It expects to fund 70% of project costs, with the other 30% beingsupplied by the private sector. Ports, airports, roads and railways are all seen as vital forthe Indian Economy and have been targeted for investment. Further hope comes fromthe confidence of India s home bred companies. As well as taking over the domestic reins, where they now account for most of the economic activity, they are alsoincreasingly expanding abroad. India has contributed more new members to the ForbesGlobal 2000 than any other country in the last four years.

Recent Growth Trends in Indian Economy

India s Economy has grown by more than 9% for three years running, and has seen a decade of 7%+ growth. This has reduced poverty by 10%, but with 60% of India s 1.1

billion population living off agriculture and with droughts and floods increasing, povertyalleviation is still a major challenge. The structural transformation that has beenadopted by the national government in recent times has reduced growth constraints andcontributed greatly to the overall growth and prosperity of the country. However thereare still major issues around federal vs state bureaucracy, corruption and tariffs thatrequire addressing. India s public debt is 58% of GDP according to the CIA World Fact book, and this represents another challenge. During this period of stable growth, theperformance of the Indian service sector has been particularly significant. The growthrate of the service sector was 11.18% in 2007 and now contributes 53% of GDP. Theindustrial sector grew 10.63% in the same period and is now 29% of GDP. Agriculture is17% of the Indian economy.

Growth in the manufacturing sector has also complemented the country s excellent growth momentum. The growth rate of the manufacturing sector rose steadily from8.98% in 2005, to 12% in 2006. The storage and communication sector also registereda significant growth rate of 16.64% in the same year. Additional factors that havecontributed to this robust environment are sustained in investment and high savingsrates. As far as the percentage of gross capital formation in GDP is concerned, therehas been a significant rise from 22.8% in the fiscal year 2001, to 35.9% in the fiscal year2006. Further, the gross rate of savings as a proportion to GDP registered solid growthfrom 23.5% to 34.8% for the same period.

After 1991 Major improvements in educational standards across India have helped its

economic rise. Shown here is the Indian School of Business at Hyderabad, rankednumber 15 in global MBA rankings by the Financial Times of London in 2009. In the late80s, the government led by Rajiv Gandhi eased restrictions on capacity expansion forincumbents, removed price controls and reduced corporate taxes. While this increasedthe rate of growth, it also led to high fiscal deficits and a worsening current account. Thecollapse of the Soviet Union, which was India's major trading partner, and the first GulfWar, which caused a spike in oil prices, caused a major balance-of-payments crisis forIndia, which found itself facing the prospect of defaulting on its loans. India asked for a


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$1.8 billion bailout loan from IMF, which in return demanded reforms. In response,Prime Minister Narasimha Rao along with his finance minister Manmohan Singhinitiated the economic liberalisation of 1991. The reforms did away with the Licence Raj(investment, industrial and import licensing) and ended many public monopolies,allowing automatic approval of foreign direct investment in many sectors. Since then,

the overall direction of liberalisation has remained the same, irrespective of the rulingparty, although no party has tried to take on powerful lobbies such as the trade unionsand farmers, or contentious issues such as reforming labour laws and reducingagricultural subsidies. Since 1990 India has emerged as one of the fastest-growingeconomies in the developing world; during this period, the economy has grownconstantly, but with a few major setbacks. This has been accompanied by increases inlife expectancy, literacy rates and food security. While the credit rating of India was hitby its nuclear tests in 1998, it has been raised to investment level in 2007 by S&P andMoody's. In 2003, Goldman Sachs predicted that India's GDP in current prices willovertake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by2035. By 2035, it was projected to be the third largest economy of the world, behind US

and China.

CHAPTER 2 REVIEW OF LITERATUREForeign direct investment (FDI) inflows into the country will continue to show the


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robustness seen in the past couple of years despite the global financial crisis that manyfeel will impact economies across the world. Many results concerning spillovers fromFDI suggest that spillover effects are not automatic. They are affected by variouseconomic and technological factors. The economic literature indicates an existence ofsome factors that determine an ability of domestic firms to benefit from FDI. FII and

MNCs entry has increased a lot in the post liberalized era. This is a sole sign ofglobalization. Developing countries like India has no option than generating moremoney to increase the economic growth. An investment from the source of savings ofthe people has never been enough compare to the large requirement. This deficit isbridged by Foreign Investment. The capital Inflow increased the production andultimately strengthens the Indian economy, which leads to increase the confidence ofthe foreign investors in Indian economy and Investment flow from then is increasing dayby day. This is the linkage between growth and FII. Foreign help ultimately increasesthe inflation which s not the case in FII, which is a sign of good capital market. We allknow because of liquidity of American market, the outflow from Indian market hasincreased, with in two months it has reached $11bn, alternatively Indian share market is

seeing downward fall market is facing the uncertainty we can see the long queuesoutside the bank for withdraws. Foreign Investor started converting the withdrawal intodollar and Rupee value is declining day to day because of it.Emerging Trends in FDI flows to Asia, by Dilek Aykut (April 10, 2007) highlights theemerging FDI trends and tries to understand how much they apply to Asian developingeconomies which are major FDI recipients accounting for almost 50 percent of FDI flowto all developing countries. Reflecting the diversity among the Asian countries in termsof the market size, economic development, and FDI policies, the level of participation tothese trends vary significantly. Almost all Asian economies have become home for largeEMNCs, there are significant differences in terms of drivers, internalization patterns andownership structures among them. Investigation of composition of FDI in Asianeconomies during the financial crisis indicates that the resilience of FDI can be traced tothe equity component, and in contrast inter-company loans and reinvested earningswere used as a means to adjust FDI exposure. The changing pattern of foreigntrade specialization in Indian manufacturing, by Michele Alessandrini, BassamFattouh, and Pasquale Scaramozzino, examines the pattern of international tradespecialization in Indian manufacturing since the mid-1980 by using data on trade flows.Low-technology sectors still dominate the categories for which India exhibits the largestdegree of trade specialization. By contrast, high-technology sectors are prevalentamong the categories for which India is import-dependent. Significantly, India hasexperienced an improvement in the degree of specialization in some of the mostdynamic sectors of world trade. They find that India did experience an improvement inthe degree of specialization in some of the most dynamic sectors of world trade. Indianindex of specialization has increased, on average, for the sectors that have grown thefastest since the mid 1980s. Thus, the impact of the relationship between India s trade potential and growth needs cautious examination. The technological content of India s best-performing sectors remains dominated by traditional activities. The few butsignificant exceptions, such as medicinal and pharmaceutical products , could signal for a shift towards a more widespread adoption of advanced technologies. This will beespecially true if India succeeds in realizing its potential for original innovation, already


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confirmed by the number of patents that are earned by the Indian subsidiaries ofmultinational firms.Recent Trends in FDI Flows and Prospects for India, by Raghbendra Jha, however,identifies the quality of FDI as more important than its quantity. Recent work has arguedthat high Chinese FDI might well be concealing difficulties. His study, argued that

raising investment is more important than just raising investment is more important thanjust raising the FDI component of such investment. He identifies measures to raise suchFDI and improve its effectiveness by way of technological spillover, export performance,etc The Study emphasizes the view that an enlightened FDI policy is to be seen aspart of a general policy of enhancing investment in this economy under condition ofsustained production efficiency with effectiveness. FDI, Growth and the Role ofGovernance: Changing the Rules of the Game, by Constantina Kottaridi synthesis s theoretical predictions on economic globalization with the Internal Business andEconomics disciplines in order to provide new insights on the link between ForeignDirect Investment (FDI) and growth. They empirically investigate the impact of foreigninvestment on recipient EU economies for the last two decades, based on the

correspondence principle between organizational hierarchical pyramids and thehierarchical structure o the global economy. Our results are supportive of a bi-polar EUwhere the higher value-added activities are concentrated in core countries. They claimthat there is a need for re-evaluating existing governance so that peripheral economiescan improve their domestic characteristics, e.g. by enlarging their human capital basis,and be able to attract and maintain FDI.The expansion of Multinational Corporation (MNCs) can be seen as the most markedindication of the globalization process. The International Business (IB) literature hasextensively discussed the determinants of the MNCs expansion while recent work onendogenous growth, transition and economic development has recognized theimportance of territorial characteristics and their direct relevance to economicconvergence. Hymer s laws of increasing firm size and uneven development fit in the recent debate on convergence, especially within the context of the enlargedEuropean Union (EU).Governance infrastructure thus becomes a central issue as it aids in creating favorableconditions for sustainable economic growth (Globerman and Shapiro, 2002). The studyundertake an analysis of the above issues by attempting a synthesis of existingtheoretical predictions on MNCs internationalization and the corresponding economic implications. Their empirical work is focused on the link between foreign directinvestment (FDI) and growth, i.e., they investigate the growth impact of foreigninvestment on recipient EU economies over the past two decades. The study focusedon the implications of regional integration in economic growth. Their analysis attemptedto synthesis the theoretical predictions MNCs, internationalization and economicconvergence. They tried to bring together the IB and economic strands of the literature,in order to provide more plausible explanations of the role of MNCs across and withinnations and regions. They examined the empirical link between FDI and growth andthey investigated the growth impact of foreign investment on recipient EU economiesover the past two decades. Their analysis was based on models estimated for twodifferent groups within the EU, the so-called core countries and the countries in thesouthern periphery. Their results suggest the distinct role and differential influence that


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FDI (corresponding MNCs) and other economic variables have on economic growth,and carry with them a number of policy suggestions. They summarize their empiricalfindings as follows:

FDI, human capital and trade volume are found to be growth-enhancing factors for a group of EU core countries, this not being the case for peripheral economies;

On the contrary, domestic investment and employment levels are found to be

fuelling growth in the peripheral economies;Macro economic conditions (here measured by growth persistence and interest

rates) are found to be significant growth factors for all economies.

These results lend support to their earlier argument and discussion about the dangersof a bi-polar EU where the higher value-added activities are concentrated in corecountries. Astudy merely scratches the surface of the uneasiness of policy agents and scholarswritings on uneven growth paths in the enlarged EU. How does Foreign DirectInvestment Promote Economic Growth? Exploring the Effects of Financial

Markets on Linkages, by Laura Alfaro, Areendam Chanda, Sebnem Kalemli-Ozcan, and Selin Sayek (August 2006) the empirical literature finds mixed evidenceon the existence of positive productivity externalities in the host country generated byforeign multinational companies. They propose a mechanism that emphasizes the roleof local financial markets in enabling foreign direct investment (FDI) to promote growththrough backward linkages, shedding light on this empirical ambiguity. In a small openeconomy, final goods production is carried out by foreign and domestic firms, whichcompete for skilled labor, unskilled labor, and intermediate products. To operate a firmin the intermediate goods sector, entrepreneur must develop a new variety ofintermediate good, a task that requires upfront capital investments. The more developedthe local financial markets, the easier it is for credit constrained entrepreneur to starttheir own firms. The increase in the number of varieties of intermediate goods leads topositive spillovers to the final goods sector. As a result financial markets allow thebackward linkages between foreign and domestic firms to turn into FDI spillovers. Theircalibration exercise indicate that a holding the extent of foreign presence constant,financially well-developed economies experience growth rates that are almost twicethose of economies with poor financial markets. The study also introduce the increasesin the share of FDI or the relative productivity of the foreign firm leads to higheradditional growth in financially developed economies compared to those observed infinancially under-developed ones. It has also identifies other local conditions such asmarket structure and human capital are also important for the effect of FDI on economicgrowth.In this study, they try to bridge gap between the theoretical and the empirical literatures.The model rests on a mechanism that emphasizes the role of local financial markets inenabling FDI to promote growth through the creation of backward linkages.When financial markets are developed enough, the host country benefits from thebackward linkages between the foreign and domestic firms with positive spillovers to therest of the economy. Their calibration exercise shows that an increase in FDI leads tohigher growth rates in financially developed countries compared to those observed infinancially poorly-developed ones. Moreover, the calibration section highlights the


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importance of local conditions for the effect of FDI on economic growth. They find largergrowth effect when goods produced by domestic firms and MNEs are substitutes ratherthan complements. They have focused on only one kind of spillover. There are likely tobe additional spillovers and technology transfers. Besides, their results are based on amodel that takes FDI. Since the beginning of liberalization FII flows to the India have

steadily grown in importance. FII Flows to India: Nature and Causes, by RajeshChakrabarti, the paper analyze these flows and their relationship with other economicvariables and arrive at the following major conclusion:

While the flows are highly correlated with equity returns in India, they are more likely to be the effect than the cause of these return;

The FII do not seem to be at an informational disadvantage in India compared to the local investors;

The Asian Crisis marked a regime shift in the determinants of FII flows to India with the domestic equity return becoming the sole driver of these flows since the crisis.

The broad objective of the study was to gain a better understanding of the nature and

determinants of FII flows. Towards this end they first take a look at the FII investmentflows data to bring out the key feature of these flows. Next they study the relationshipbetween FII flows and the stock market returns in India with a close look at the issue ofcausality. Finally they study the impact of other factors identified in the portfolio flowsliterature on the FII flows to India. In all these investigations they make a distinctionbetween the pre-Asian crisis period and the post-Asian crisis period to check if therewas a regime shift in the relationships owning to the Asian crisis. The study provides apreliminary analysis of FII flows to India and their relationship with several relevantvariables especially returns in the Indian stock market. A more detailed study using dailydata for a longer period or, better still, disaggregated data showing the transactions ofindividual FIIs at the stock level can help address questions regarding the extent ofherding or return-chasing behavior among FIIs indicators that can help us estimate theprobability of sudden Mexico-type reversals of these FII flows which now account for asignificant part of the capital account balance in our balance of payments. The extent towhich FII participation in Indian markets has helped lower cost of capital to Indianindustries is also an important issue to investigate. Broader and more long-term issuesinvolving foreign portfolio investment in India and their economy-wide implications havenot been addressed in this paper. Such issues would invariably require an estimation ofthe societal costs of the volatility and uncertainty associated with FII flows. A detailedunderstanding of the nature and determinants of FII flows to India would help usaddress such questions in a more informed manner and allow us to better evaluate therisk and benefits of foreign portfolio investment in India.

CHAPTER-3 FOREIGN INSTITUTIONAL INVESTMENT Aninvestment in strong companies means that the threat of capital flight and volatility offlows is smaller than what would have been the case if the investments were in weakeropportunities. Foreign Investment refers to investments made by residents of a countryin financial assets and production process of another country. After the opening up ofthe borders for capital movement these investments have grown in leaps and bounds.But it had varied effects across the countries. Post 1991, our country has succeeded instriking the right chord with foreign investors, though the pace of such development was


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slow. FII money flowing into the Indian stock markets is definitely not a newphenomenon, and much is written about this issue in the media as well as academia.Positive tidings about the Indian economy combined with a fast-growing market havemade India an attractive destination for foreign institutional investors (FIIs). Thoughvaluations are very attractive on a selective basis, but stock picking has to be done

based on evaluation of business fundamentals. As India is in the process of liberalizingthe capital account, it would have significant impact on the foreign investments andparticularly 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 theFII, so that we can frame our policies to influence the variables which drive-in foreigninvestment. FIIs showed huge interest in 2007, pumping in the highest ever netinvestment of US$ 17.2 billion in the equity markets and were instrumental in theBombay Stock Exchange (BSE) and National Stock Exchange (NSE) clocking recordindex levels of over 20,000 and 6,000, respectively. In fact, during the year, FIIs werenet buyers in 10 out of 12 months, turning net sellers in the rest, primarily to make upthe losses on account of the sub-prime crisis in the US.

Foreign Institutional Investors (FIIs.) including institutions such as Pension Funds,Mutual Funds, Investment Trusts, Asset Management or their power of attorney holders(providing discretionary and non-discretionary portfolio management services) areinvited 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 belisted on the stock exchanges in India including the OTC Exchange of India. TheGeneral Permission from RBI shall also enable the FII to:1. Open foreign currency denominated account(s) in a designated bank. (These caneven be more than one account in the same bank branch each designated in differenceforeign currencies, if it is so required by FII for its operational purposes);2. Open a special non-resident rupee account to which could be credited all receiptsfrom the capital inflows, sale proceeds of shares, dividends and interests;3. Transfer sums from the foreign currency accounts to the rupee account and vice-versa, at the market rates of exchange;4. Make investments in the securities in India out of the balances in the rupee account;

5. Transfer repatriatable (after tax) proceeds from the rupee account to the foreigncurrency accounts);6. Repatriate the capital, capital gains, dividends, incomes received by way of interest,etc. and any compensation received towards sale/renouncement of rights offerings ofshares subject to the designated branch of a bank/the custodian being authorized todeduct withholding tax on capital gains and arranging to pay such tax and remitting thenet proceeds at market rates of exchange;7. Register FII's holdings without any further clearance under FERA.

There is no restriction on the volume of investment minimum or maximum for thepurpose of entry of FIIs, in the primary/secondary market. Also, there is no lock inperiod for the purpose of such investments made by FIIs. Portfolio investments inprimary or secondary markets will be subject to a ceiling of 24% of issued share capitalfor the total holdings of all registered FIIs, in any one company. The ceiling would apply


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to all holdings taking into account the conversions out of the fully and partly convertibledebentures issued by the company. The holding of a single FII in any company wouldalso be subject to a ceiling of 5% of total issued capital. For this purpose, the holdingsof a FII ground will be counted as holdings of a single FII. The maximum holding of 24%for all non-resident portfolio investments, including those of the registered FIIs, will also

include NRI corporate and non-corporate investments, but will not include the following:1. Foreign investments under financial collaborations (direct foreign investments), whichare permitted upto 51% in all priority areas.2. Investments by FIIs through the following alternative routes :

Offshore single/regional Funds;Global Depository Receipts;Euro-convertibles.

These would include shares, debentures, warrants, and the schemes floated bydomestic Mutual Funds. To be eligible to do so, the FIIs would be required to obtainregistration with Securities and Exchange Board of India (SEBI). FIIs are also required

to file with SEBI another application addressed to RBI for seeking various permissionsunder FERA. Disinvestment will be allowed only through stock exchanges in India,including the OTC Exchange. In exceptional cases, SEBI may permit sales other thanthrough stock exchanges, provided the sale price is not significantly different from thestock market quotations, where available. All secondary market operations would beonly through the recognised intermediaries on the Indian Stock Exchange, includingOTC Exchange of India. A registered FII will not engage in any short selling in securitiesand to take delivery of purchased and give delivery of sold securities. Figure: FII inflowsfrom year 2000 to 2010.

Year Inflow in stock market(Buy)

Outflow in stockmarket(Sell)

2000

74,791.50 68,421.60

2001

51,866.60 38,572.80

2002

46,320.31 42,673.54

2003

94,816.50 64,024.10

2004

183,883.70 145,185.50

2005

278,186.10 232,378.50

2006 435,804.30 404,523.22

2007 805,167.57 734,227.52

2008 720,757.80 773,809.50

2009

626,004.50 540,636.90
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The ceiling for overall investment for FIIs is 24 per cent of the paid-up capital of theIndian company, and limit is 20 per cent of the paid-up capital in the case of publicsector banks. The ceiling of 24 per cent for FII investment can be raised up to sectoralcap/statutory ceiling, subject to the approval of the board and the general body of thecompany passing a special resolution to that effect.

Continuous liberalization in foreign investment policy and simplification of proceduresare contributing immensely to attracting increased foreign investment into India. Thefact that the Government is now annually conducting a review of the Foreign InvestmentPolicy & Procedures has given an added confidence to the foreign investors that theirconcerns are addressed on a continuous basis. Globalization eventually has a positiveimpact as no country that is fully protected can grow. Individuals and countries flourishonly when there is competition. No country can afford to remain isolated. The FIIinvestments have been the corner stone in the phenomenal rise of the Indian stockmarkets. According to a study by Citigroup Research, the holding of FIIs in Indiancompanies exceeds that of domestic financial institutions, including mutual funds andinsurance companies, retail and high-net worth-investors (HNIs) all put together.

Consequent to the liberalisation of registration norms, the number of foreign institutionalinvestors (FIIs) registered with the Securities and Exchange Board of India (SEBI) hasincreased to 1403 as on June 27, 2008 as compared with just 1051 FIIs a year back.In a significant step towards market reforms, the Securities and Exchange Board ofIndia is considering sweeping changes in the norms governing the participation offoreign institutional investors in the securities market. FIIs are allowed to invest in theprimary and secondary capital markets in India through the portfolio investment scheme(PIS). Under this scheme, FIIs can acquire shares/debentures of Indian companiesthrough the stock exchanges in India. The ceiling for overall investment for FIIs is 24per cent of the paid-up capital of the Indian company, and limit is 20 per cent of thepaid-up capital in the case of public sector banks. The ceiling of 24 per cent for FIIinvestment can be raised up to sectoral cap/statutory ceiling, subject to the approval ofthe board and the general body of the company passing a special resolution to thateffect.Continuous liberalization in foreign investment policy and simplification of proceduresare contributing immensely to attracting increased foreign investment into India. Thefact that the Government is now annually conducting a review of the Foreign InvestmentPolicy & Procedures has given an added confidence to the foreign investors that theirconcerns are addressed on a continuous basis. Globalization eventually has a positiveimpact as no country that is fully protected can grow. Individuals and countries flourishonly when there is competition. No country can afford to remain isolated. The FIIinvestments have been the corner stone in the phenomenal rise of the Indian stockmarkets. According to a study by Citigroup Research, the holding of FIIs in Indiancompanies exceeds that of domestic financial institutions, including mutual funds andinsurance companies, retail and high-net worth-investors (HNIs) all put together. Thetotal investment of FIIs in Indian stocks was almost ten times that of the net investmentof the domestic mutual funds. Total net investments of FIIs amounted to about US$ 17.2billion at the end of 26 December, 2007 as against about US$ 1.7 billion by thedomestic mutual funds. In fact, as of 31 March, 2008 FIIs owned about 15 per cent ofthe BSE-500 basket, reflecting the magnitude of interest shown by this class of
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investors in the Indian financial market. There is little doubt that FII inflows havesignificantly grown in importance over the last few years. In the absence of any othersubstantial form of capital inflows, the potential ill effects of a reduction in the FII flowsinto the Indian economy can be severe. Thus, while I do not indicate that FII inflows areper-se bad, there is possibly a need to gear up macro-economic policies to target other

form of foreign investments into the economy and reduce the over-reliance of theeconomy on portfolio flows.

Potential for investment in India According to Investment Commission of India, investment opportunity of US $ 500billion would emerge in India in the next 5 years in major economic sectors, of which US$ 250 billion investment opportunities exist in the infrastructure sector alone.

The Infrastructure sector including roads, power, railways, aviation require an enormous amount of $320-350 billion by 2012 to raise rate of investment in key areas atpar with economic growth and 20 per cent of which will have to be chipped in by theprivate sector. Huge private sector funding is required since public investment in the

area is constrained by limitations on the government-borrowing programme imposed bythe FRBM Act and demand for investment by other growing sectors of the economy.

Huge investment potential exists in the Indian retail industry. According to the estimates by the consultancy firm KSA Technopak around $25 billion will flow into theretail sector in the next five years taking the organized portion of the business from ameasly 3 percent to 14 percent.

The Indian real estate industry is poised to emerge as one of the most preferred investment destinations for global realty and investment firms. The industry is poised toexperience a landscape change and the key trends that will shape the business in thenext three to five years are enlargement of project size with focus on productdifferentiation and quality, expansion in geographical coverage from metros to smaller

cities, shift from regional developers to national developers, movement of constructiongiants up the value chain and the emergence of strong real estate capital market. Thedomestic real estate sector may emerge a US$ 50 billion industry by 2010 and proveone of the most attractive sectors for foreign investments.

Eligibility criteria for applicant seeking FII registration

As per Regulation 6 of SEBI (FII) Regulations, 1995, Foreign Institutional Investors arerequired to fulfil the following conditions to qualify for grant of registration:

The applicant should have track record, professional competence, financial soundness, experience, general reputation of fairness and integrity;

The applicant should be regulated by an appropriate foreign regulatory authority in the same capacity/category where registration is sought from SEBI. Registrationwith authorities, which are responsible for incorporation, is not adequate to qualify asForeign Institutional Investor.

The applicant is required to have the permission under the provisions of the Foreign Exchange Management Act, 1999 from the Reserve Bank of India.

The Applicant must be legally permitted to invest in securities outside the country or its in-corporation / establishment.


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The applicant must be a "fit and proper" person.The applicant has to appoint a local custodian and enter into an agreement with the

custodian. Besides it also has to appoint a designated bank to route its transactions.Payment of registration fee of US $ 5,000.00

Sub account A Sub-account is the underlying fund on whose behalf the FII invests. Sub- Accounts can include those foreign corporate, foreign individuals, andinstitutions, funds or portfolios established or incorporated outside India on whosebehalf investments are proposed to be made in India by a FII. It is possible for aregistered sub-account to transfer from one FII to another. In such a case, the FII towhom it is proposed to be transferred has to request SEBI with the followingdocumentation.

A declaration that it is authorized to invest on behalf of the sub-account.A no-objection letter for the transfer of the sub-account from the transferor FII.

Investment by FII is restricted to 24% of paid-up capital of the company which can be

extended up to 49% per sectoral cap by board resolution followed by special resolution.Single FII investment can t exceed 10% of paid-up capital of the company and single subaccount investment can t exceed 5% of the paid-up capital.

Eligible Securities

A FII can make investments only in the following types of securitiesSecurities in the primary and secondary markets including shares, debentures and

warrants of unlisted , tobe-listed companies or companies listed on a recognized stockexchange

Units of schemes floated by domestic mutual funds including Unit Trust of India,

whether listed on a recognized stock exchange or not, and units of scheme floated by aCollective Investment Scheme.

Government SecuritiesDerivatives traded on a recognized stock exchange - like futures and options. FIIs

can now invest in interest rate futures that were launched at the National StockExchange (NSE) on 31st August, 2009.

Commercial paperSecurity receipts

FII Regulations

Investment by FIIs is regulated under SEBI (FII) Regulations, 1995. Following are someof important regulations by SEBI and RBI:

A Foreign Institutional Investor may invest only in the instruments mentioned earlier.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


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own account or on account of his sub- accounts, should be at least seventy per cent ofthe aggregate of all the investments of the Foreign Institutional Investor in India, madeon his own account and through his sub-accounts.

The cumulative debt investment limit for FII investments in Corporate Debt is USD15 billion. The amount was increased from USD 6 billion to USD 15 billion in March

2009.USD 8 billion will be allocated to the FIIs and Sub-Accounts through an open bidding platform while the remaining amount is allocated on a first come first served basis subject to a ceiling of Rs.249 cr. per registered entity.

The debt investment limit for FIIs in government debt in G-secs currently capped at $5 billion and cumulative investments under 2% of the outstanding stock of G-secs andno single entity can be allocated more than Rs. 1000 cr of the government debt limits.

With regard to investments in the secondary market SEBI statesthat: The Foreign Institutional Investor is allowed to transact business only on the basis of

taking and giving deliveries of securities bought and soldShort selling in securities is not allowed. However, in December 2007, abroadRegulatory framework enabling short selling by FIIs was put in place. Which

stipulated that naked short selling was not permitted and settlement of securities soldshort would be through a mechanism for borrowing of securities

FIIs are not permitted to short sell equity shares which are in the caution list of RBI;Equity shares can be borrowed by FIIs only for the purpose of delivery into short

sale.

No transactions on the stock exchange can be carried forwardTransaction of business in securities can be carried out only through stock brokers

who has been granted a certificate by the BoardA Foreign institutional Investor or a sub-account having an aggregate of securities

worth rupees ten crore or more, as on the latest balance sheet date, can settle their onlythrough dematerialized securities.

Securities have to be registered in the name of the Foreign Institutional Investor, if he ismaking investments on his own behalf or in his name on account of his sub-account, orin the name of the sub-account, in case he is investing on behalf of the sub-account.The purchase of equity shares of each company by a Foreign Institutional Investorinvesting on his own account can not exceed ten percent of the total issued capital ofthat company. Investment by individual FIIs cannot exceed 10% of paid up capital.

Investment by foreign registered as sub accounts of FII cannot exceed 5% of paid upcapital. All FIIs and their subaccounts taken together cannot acquire more than 24% ofthe paid up capital of an Indian Company. An Indian Company can raise the 24% ceilingto the Sectoral Cap / Statutory Ceiling by passing a resolution by its Board of Directorsfollowed by passing a Special Resolution to that effect by their General Body. For FIIsinvesting in the equity shares of a company on behalf of his sub-accounts, theinvestment on behalf of each such sub-account can not exceed ten percent of the totalissued capital of that company. SEBI has also placed the position limits in derivatives


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contracts :

The FII position limits in a derivative contracts (Individual Stocks)

The FII position limits in a derivative contract on a particular underlying stock i.e. stock

option contracts and single stock futures contracts are:For stocks in which the market wide position limit is less than or equal to Rs. 250 Cr,

the FII position limit in such stock is 20% of the market wide limit. For stocks in whichthe market wide position limit is greater than Rs. 250 Cr, the FII position limit in suchstock is Rs. 50 Cr.

FII Position limits in Index options contracts

FII position limit in all index options contracts on a particular underlying index is Rs. 250Crore or 15 % of the total open interest of the market in index options, whichever is

higher, per exchange. This limit is applicable on open positions in all option contracts on anyunderlyring index.

FII Position limits in Index futures contracts

i. FII position limit in all index futures contracts on a particular underlying index is Rs. 250 Croreor 15 % of the total open interest of the market in index futures, whichever is higher, perexchange. ii. This limit is applicable on open positions in all futures contracts on a particularunderlying index. In addition to the above, FIIs can take exposure in equity index derivativessubject to the conditions that : iii. Short positions in index derivatives (short futures, short callsand long puts) cannot exceed (in notional value) the FII s holding of stocks. iv. Long positions in index derivatives (long futures, long calls and short puts) can not exceed (in notional value)the FII s holding of cash, government securities, T- Bills and similar instruments.

FII Position Limits in Interest rate derivative contracts

i. At the level of the FII - The notional value of gross open position of a FII in exchangetraded interest rate derivative contracts is US $ 100 million.ii. In addition to the above, FIIs cany take exposure in exchange traded in interest ratederivative contracts to the extent of the book value of their cash market exposure inGovernment Securities. iii. At the level of the sub-account - The position limits for aSub-account in near month exchange traded interest rate derivative contracts is the

higher of: Rs. 100 Cr Or 15% of total open interest in the market in exchange tradedinterest rate derivative contracts. Investments by the Foreign Institutional Investor arealso be subject to Government of India Guidelines. A foreign Institutional Investor orsub-account may lend securities through an approved intermediary in accordance withthe stock lending scheme of the Board. Regulations for Portfolio Investments by NRIs/PIOsinclude: Non Resident Indian (NRIs) and Persons of Indian Origin (PIOs) can purchase/sellshares/convertible debentures of Indian companies on Stock Exchanges under


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Portfolio Investment Scheme. For this purpose, the NRI/PIO has to apply to a designated branch of a bank, which deals in Portfolio Investment. All sale/purchasetransactions are to be routed through the designated branch.

An NRI or a PIO can purchase shares up to 5% of the paid up capital of an Indian company. All NRIs/PIOs taken together cannot purchase more than 10% of the paid up

value of the company. (This limit can be increased by the Indian company to 24% bypassing a General Body resolution).The sale proceeds of the repatriable investments can be credited to the NRE/NRO

etc. accounts of the NRI/PIO whereas the sale proceeds of non-repatriable investmentcan be credited only to NRO accounts.

The sale of shares is subject to payment of applicable taxes.For ascertaining the track record in case of a newly established fund, the track record

of the investment manager of the fund who has promoted it will be considered. Suchinvestment manager has to furnish the details in respect of disciplinary action, if any,taken against it. University Funds, Endowments, Foundations, Charitable Trusts and

Charitable Societies may be considered for registration even if they are not regulated bya foreign regulatory authority. An asset management company, investment manager oradvisor or an institutional portfolio manager set up and / or owned by Non ResidentIndians are eligible to be registered as FII. However, they shall not invest theirproprietary funds.

Additional restrictions for FII/sub-account registration Nominee Company and a Power of Attorney holder are not eligible to be registeredas FII. Where the applicant for FII or sub-account registration is a University fund,Endowments, Foundations or Charitable trusts or charitable societies, SEBI will alsoconsider whether the applicant has been serving public interest. Applicants for

registration as sub-account in category of foreign corporate and foreign individual willhave to meet the specified requirements. These are as under:

In case of a Foreign Corporate means a body corporate incorporated outside India and fulfils the following conditions:

Its securities are listed on a stock exchange outside India;It has asset base of not less than US $ 2 billion;It had an average net profit of not less than US $ 50 million during the 3 financial

years preceding the date of the application.In case of a Foreign Individual means a foreigner who fulfills the following

conditions:Has a net worth of not less than US $ 50 million;

Holds the passport of a foreign country for a period of at least 5 years preceding the date of application;

Holds a certificate of good standing from a bank;The client of the FII or any other entity which belongs to the same group as the FII,

for a period of at least 3 years preceding the date of the application.

Conditions for issuance of offshore derivative instruments


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Offshore derivative instruments are issued only to personsWho are regulated by an appropriate foreign regulatory authority;

After compliance with the stated know your client norms

Advantages and Disadvantages of FIIs

FII flows into a country are associated with several advantages and disadvantages.The advantages of FII flows into the country include:

Advantages Enhanced flows of equity capital

FIIs have a greater appetite for equity than debt in their asset structure. The opening up the economy to FIIs has been in line with the accepted preference for non-debtcreating foreign inflows over foreign debt. Enhanced flow of equity capital helps improve

capital structures and contributes towards building the investment gap. Managinguncertainty and controlling risksFII inflows help in financial innovation and development of hedging instruments.

Also, it not only enhances competition in financial markets, but also improves thealignment of asset prices to fundamentals.

Improving capital marketsFIIs as professional bodies of asset managers and financial analysts enhance

competition and efficiency of financial markets.Equity market development aids economic development.By increasing the availability of riskier long term capital for projects, and increasing

firms incentives to provide more information about their operations,

FIIs can help in the process of economic development.Improved corporate governanceFIIs constitute professional bodies of asset managers and financial analysts, who, by

contributing to better understanding of firms operations, improve corporate governance. Bad corporate governance makes equity finance a costly option. Also,institutionalization increases dividend payouts, and enhances productivity growth.

Disadvantages Problems of Inflation: Huge amounts of FII fund inflow into the country creates a lotof demand for rupee, and the RBI pumps the amount of Rupee in the market as a result

of demand createdProblems for small investor: The FIIs profit from investing in emerging financial stock

markets. If the cap on FII is high then they can bring in huge amounts of funds in thecountry s stock markets and thus have great influence on the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their sellingshows the stock market the downward path. This creates problems for the small retailinvestor, whose fortunes get driven by the actions of the large FIIs.

Adverse impact on Exports: FII flows leading to appreciation of the currency may


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lead to the exports industry becoming uncompetitive due to the appreciation of therupee.

Hot Money: "Hot money" refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the market for short-term, high interestrate investment opportunities. "Hot money" can have economic and financial

repercussions on countries and banks. When money is injected into a country, theexchange rate for the country gaining the money strengthens, while the exchange ratefor the country losing the money weakens.

FOREIGN INSTITUTIONAL INVESTMENT IN INDIA: MILESTONES

India embarked on a programme of economic reforms in the early 1990s to tie over

its balance of payment crisis and also as a step towards globalisation. An importantmilestone in the history of Indian economic reforms happened on September 14, 1992,when the FIIs (Foreign Institutional Investors) were allowed to invest in all the securitiestraded on the primary and secondary markets, including shares, debentures and

warrants issued by companies which were listed or were to be listed the stockexchanges in India and in the schemes floated by domestic mutual funds. Initially,the holding of a single FII and of all FIIs, NRIs (Non-Resident Indians) and OCBs(Overseas Corporate Bodies) in any company were subject to a limit of 5% and 24% of

the company's total issued capital respectively. In order to broad base the FIIinvestment and to ensure that such an investment would not become a camouflage forindividual investment in the nature of FDI (Foreign Direct Investment), a condition waslaid down that the funds invested by FIIs had to have at least 50 participants with noone holding more than 5%. Ever since this day, the regulations on FII investment have

gone through enormous changes and have become more liberal over time. From

November 1996, FIIs were allowed to make 100% investment in debt securities subjectto specific approval from SEBI as a separate category of FIIs or sub-accounts as 100%debt funds. Such investments were, of course, subjected to the fund-specific ceilingprescribed by SEBI and had to be within an overall ceiling of US $ 1.5 billion. Theinvestments were, however, restricted to the debt instruments of companies listed or tobe listed on the stock exchanges. * In 1997, the aggregate limit on investment by allFIIs was allowed to be raised from 24% to 30% by the Board of Directors of individualcompanies by passing a resolution in their meeting and by a special resolution to thateffect in the company's General Body meeting.

From the year 1998, the FII investments were also allowed in the dated government

securities, treasury bills and money market instruments. In 2000, the foreign

corporate and high net worth individuals were also allowed to invest as sub-accounts ofSEBI-registered FIIs. FIIs were also permitted to seek SEBI registration in respect ofsub-accounts. This was made more liberal to include the domestic portfolio managers or

domestic asset management companies. 40% became the ceiling on aggregate FII

portfolio investment in March 2000. This was subsequently raised to 49% on March

8, 2001 and to the specific sectoral cap in September 2001. As a move towardsfurther liberalization a committee was set up on March 13, 2002 to identify the sectors in


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which FIIs portfolio investments will not be subject to the sectoral limits for FDI. Later, on December 27, 2002 the committee was reconstituted and came out withrecommendations in June 2004. The committee had proposed that, 'In general, FIIinvestment ceilings, if any, may be reckoned over and above prescribed FDI sectoralcaps. The 24 per cent limit on FII investment imposed in 1992 when allowing FII inflows

was exclusive of the FDI limit. The suggested measure will be in conformity with thisoriginal stipulation.' The committee also has recommended that the special procedurefor raising FII investments beyond 24 per cent up to the FDI limit in a company may be

dispensed with by amending the relevant regulations. Meanwhile, the increase ininvestment ceiling for FIIs in debt funds from US $ 1 billion to US $ 1.75 billion has beennotified in 2004. The SEBI also has reduced the turnaround time for processing of FIIapplications for registrations from 13 working days to 7 working days except in the caseof banks and subsidiaries.

Trends in FIIs

In1993, when investments in FII s were introduced, Pictet Umbrella TrustEmerging Markets Fund, an institutional investor from Switzerland, was the only FII to enter the Indian market. While in 1994, no new registrations were reported, between1995 and 2003,an average of 51 new FIIs began operations in the country each year.The graph below clearly indicates the steep increase in number of FIIs since the year2003. (The data in the chart refer to the number of registered FII s at the end of each calendar year). Currently, there are 1,695 registered FIIs and 5264 registered sub-account(As on 11 September 2009) Since 1993 when FII s were first allowed to enter India, there has always been a preference towards investing in equity than debt. Thefollowing graph shows the debt and equity FII flow from

Trends in Equity

There has been a steep rise in FIIs in Equity beginning 2003. Except for2008, since1993,only once have foreign investors turned net sellers. This has primarily been onaccount of rise in global liquidity conditions primarily driven by low interest rates in USthat was affected to counter recessionary condition post the dot-com bubble, arising aversion towards US, for its huge current account deficit and growth of theemerging economies like China, India etc. FIIs have been progressively raising their investments in Indian market since 2003, the year that saw the beginning of the bull-runin the Sensex. This continued until2008, when the recession hit. Liquidity dried up. Sodid the risk-aversion of investors towards emerging markets. The year 2009 has seen anet inflow of USD 8748.2 million in equities so far. The cumulative investments in equitystand at USD 63902 million or Rs. 272772.70 crores. The graph below shows the trendin FII sales and purchases over the 1999- 2009 period. As evident from below, the FIIactivity has undertaken a beating in 2009 with lower purchases and higher net sales.

New sources of FII funds

The Securities and Exchange Board of India is in talks with the Cayman Islands


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Monetary Authority (Cima), over allowing funds based in the Caribbean into the country.Cayman Islands is one of the world s largest tax havens and a lot of global hedge funds are based out of Cayman Islands Sebi has received numerous applications fromCayman-based funds since June when Cima was admitted as a full member of theinternational body of securities market regulators, the International Organisation of

Securities Commissions (Iosco), Iosco's constituents regulate more than ninety percentof the world's securities markets. Funds from Cayman Islands were usually not favouredby SEBI owning to lack of transparency and difficulty in establishing the owner base.Consequently, these investments were viewed unfavourably and any Cayman fundseeking to invest in India had to be carefully examined. Post Cayman s admission to Iosco, Sebi is now determining which grades of investment funds can be admittedexpeditiously and which should be examined more carefully. Presently, there are 19registered foreign institutional investors from Cayman Islands, taking the total to 19. Thetwo recent additions have been Fir Tree Capital Opportunity Master Fund and Fir TreeValue Master Fund. The fund base of Cayman Islands is huge. There are about 9870funds based there. Indian markets can expect more inflow from Cayman Island if SEBI

agrees to let them come in.

FDI (FOREIGN DIRECT INVESTMENT) Foreign direct investment(FDI) inflows in India is a defining feature of free market, liberalization and globalization.The important aspect is that how and through what channels impact of FDI inflowsaffect the performance of companies in developing countries. One major channelthrough which inflows of foreign capital, of foreign direct investment (FDI) in particular,affect labor markets in developing countries is economic growth. If capital inflowsenable the recipient developing countries to increase the investment rate beyond whatthey could sustain with their domestic savings, they should achieve acceleratedeconomic growth with favorable consequences for employment, wages and laborproductivity. Emerging markets possess a lot of potential for foreign direct investment(FDI). FDI in India is on the increase but the country has not experienced a rapid growthof FDI inflow. Theories of FDI suggest that firm size, profitability, trade, interest rates,economy and inflation wield significant influence in attracting FDI. This studyexplores the factors that contribute to the explanation of FDI in India and tests whetherthe variables do really influence the flow of FDI into India.

FDI and Regulatory Framework

Foreign Direct Investment in India is subject to policy guidelines framed by the

Government of India from time to time in accordance with its Industrial Policy. The year1991 saw a major liberalization in the policy by way of the Automatic Route in terms ofwhich cases concerning foreign collaboration in respect of certain priority industries andinvolving not more than 51 per cent of foreign equity were allowed by the RBI without areference to the Government of India. After 1991, certain more areas of foreigninvestments were opened up such as issuance of global depository receipts (GDRs)and investment by foreign institutional investors (FIIs). FDI comes through a) Automaticroute and b) Govt approval route. In terms of the guidelines issued in February 2000


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and subsequent amendments, except in certain circumstances, foreign investment byway of issue of shares/convertible debentures by Indian companies can be made inIndia under the Automatic Route without any approval from the Government of Indiaor theReserve Bank of India (RBI). In the circumstances where the Automatic Route is not

applicable, the foreign investor or the Indian company seeking foreign investment wouldrequire the approval of the Foreign Investment Promotion Board (FIPB).

Automatic Route

Under the RBI s Automatic Route, the Indian companies can issue shares up to prescribed percentage to persons resident outside India without obtaining priorpermission either of the Government or RBI. These companies must be engaged in thepermissible activities under the FEMA. Companies engaged in manufacture of itemsreserved for SSI sector or those manufacturing items requiring industrial license orengaged in areas such as, defence, atomic energy or aerospace will not be able to avail

of the Automatic Route.

FDI and Economic Development

Foreign Direct Investment (FDI) has been one of the most fascinating and intriguingtopics among researchers in international business. It is one of the significant forms ofrapid international expansion to increase ownership of assets, derive location-specificadvantages and acquire additional knowledge. Many scholars have followed either oftwo schools of thought in explaining FDI. The microeconomic approach [Hymer 1976;Caves 1974; Kindleberger 1969] attempts to explain why firms of one country aresuccessful in penetrating into other markets while the macroeconomic approach [Aliber1970; Buckley and Casson 1976; Grosse and Trevino 1995] tries to examine why firmsseek international expansion. Our study follows the latter approach, focuses on theimpact of macroeconomic variables on FDI and seeks to explain the recent increase ofinflow of FDI into India.Foreign direct investment (FDI) is considered to be the lifeblood and an importantvehicle for economic development as far as the developing nations are concerned. Theimportant effect of FDI is its contribution to the growth of the economy. FDI has animpact on country's trade balance, increasing labor standards and skills, transfer of newtechnology and innovative ideas, improving infrastructure, skills and the generalbusinessclimate. FDI also provides opportunity for technological transfer and up gradation,access to global managerial skills and practices, optimal utilization of human capabilitiesand natural resources, making industry internationally competitive, opening up exportmarkets, providing backward and forward linkages and access to international qualitygoods and services and augmenting employment opportunities. In 1991, when Indialiberalized its policy towards foreign investment, there was a positive response fromcapital exporting countries. The reliance on FDI is rising heavily due to its all roundcontributions to the economy. The important effect of FDI is its contributions to the


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growth of the economy. FDI to developing countries since the 1990s is the leadingsource of external financing. The rise in FDI volume is accompanied by a markedchange in its composition.

CHAPTER 4 INTRODUCTION OF VARIOUS SECTOR POWER

The Indian Power industry has been in the news with a flurry of not so power packedIPO's. The power industry has also been one of the major focus of the Government ofIndia. The Ministry of Power has set an optimistic target of "Power for All by 2012". Thisreally sounds good as long as we don't look deeper into reality. Best Stocks to buy forlong term investment in Power Sector: Power has always been a scarce commodityin India. We all suffer from power cuts on a daily basis and even industries suffer thepower cuts. Whats more, the demand for power is always on the rise. With expectationsof India growing at 8 to 9% will only create more and more demand for electricity. Thisscenario presents a unique opportunity for large corporates to invest in power

generation businesses and to the investors to invest and reap long term profits fromthese investments. The government has targeted electricity for all by 2012 by the end of11th Five Year Plan. The demand of electricity is growing exponentially. And, hereinlays the opportunities for investors to plough their money in public and private sectorcompanies both. At present, coal based thermal power plants accounts for almost two-thirds of the energy needs of the country. However, the government is increasinglybecoming aware about the benefits of generating power through cleaner nuclear powerplants. More recently, during the Budget 2010 announcement, the government has alsolaid emphasis on the development of non-conventional energy resources such as Solarand Wind Energy. Rural electrification is also a significant initiative by the government toallow access to electricity in remote regions in India.

Top Stock Picks in Power Sector:NTPC (Power Generation)Power Grid Corporation (Power Transmission)Tata Power (Power Generation)Rural Electrification (Power Sector NBFC)BHEL (Power Equipments)

FMCG

The Indian markets have underperformed global indices for the past two months bycorrecting about 10% from its Nov 10 top. It is not a huge fall for a bull market that rosefrom 8000 in Mar 09 to 21000 in Nov 10. But investors are already showing signs offear and panic. Corrections are part and parcel of investing in the stock market. If youlose sleep every time the market corrects, be overweight in the FMCG sector. TheIndian FMCG sector is the fourth largest in the economy and has a market size ofUS$13.1 billion. Well-established distribution networks, as well as intense competition


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between the organized and unorganized segments are the characteristics of this sector.FMCG in India has a strong and competitive MNC presence across the entire valuechain. It has been predicted that the FMCG market will reach to US$ 33.4 billion in 2015from US $ billion 11.6 in 2003. The middle class and the rural segments of the Indianpopulation are the most promising market for FMCG, and give brand makers the

opportunity to convert them to branded products. Most of the product categories likejams, toothpaste, skin care, shampoos, etc, in India, have low per capita consumptionas well as low penetration level, but the potential for growth is huge. The IndianEconomy is surging ahead by leaps and bounds, keeping pace with rapid urbanization,increased literacy levels, and rising per capita income.The big firms are growing bigger and small-time companies are catching up as well.

According to the study conducted by AC Nielsen, 62 of the top 100 brands are ownedby MNCs, and the balance by Indian companies. Fifteen companies own these 62brands, and 27 of these are owned by Hindustan Lever. Pepsi is at number threefollowed by Thums Up. Britannia takes the fifth place, followed by Colgate (6), Nirma(7), Coca-Cola (8) and Parle (9). These are figures the soft drink and cigarette

companies have always shied away from revealing. Personal care, cigarettes, and softdrinks are the three biggest categories in FMCG. Between them, they account for 35 ofthe top 100 brands.

METAL

The Indian metal sector staged a smart recovery in the three months to March-end onaccount of a revival in demand from the automobile, rural infrastructure and housingsectors, at a time when the world s major steel-producing countries are facing a steep fall in output. Steel production and consumption grew at 1.2% and 3.8%, respectively, inthe January-March quarter over the same period last year, after turning in dismal figures

in the previous quarter when production and consumption slipped 7.8% and 13.6%,respectively. The recovery in steel production has been aided by the improved salesperformance of steel companies. The fourth quarter saw most of the large steelcompanies such as SAIL, Tata Steel, Essar and JSW operating at full capacity. Lowersteel production in the quarter to December-end was attributed to lower demand andoutput cuts. JSW Steel has posted a net profit of Rs. 49.20 crore for the quarter endedMarch 31st 2009 as compared to net loss of Rs. 127.50 crore for the quarter endedDecember 31st 2008. JSW reported an 11% increase in production during Q4 of FY09.The company s sales grew 19.50% in the January-March quarter. The company has put off the 10-million tone expansion project at Vijaynagar works, along withbeneficiation plant and power plant by six months, and it will now be commissioned in

March 2011.

AUTO

The auto sector is doing well over the last few quarters , backed by tremendous volumegrowth due to the rise in disposable incomes of the middle income group, and launch ofnew models in the market. Analysts believe the volume growth is expected to remainstrong in the coming quarters and auto stocks are expected to do well in the medium


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term. The Indian Automobile sector consists of four segments viz. Passenger Vehicles,Commercial Vehicles, Two-wheeler, and Three-wheeler. It is one of the largest and thefastest-growing sectors in the world. From the 15th position in 2000, India automobilemarket has emerged as the 7th largest market in the world in 2010. In 2010, Indiamanufactured around 140 lakh vehicles of which around 122 lakh vehicles were sold in

the domestic market & 18 lakh were exported. The automobile industry in India happensto be the ninth largest in the world. Following Japan, South Korea and Thailand, in2009, India emerged as the fourth largest exporter of automobiles. Several Indianautomobile manufacturers have spread their operations globally as well, asking for moreinvestments in the Indian automobile sector by the MNCs.

Realty Sector

Indian government as well as Indian real estate provides special NRI Real Estate quotato NRI population for various land sales to lure more and more foreign investment. NRIdealing services are taken separately by leading banks and financial institutions which

include NRE, NRO bank accounts, housing loans and other home loan related products.If you want to find out further details about the NRI investment procedures and availablehelp then please refers websites of banks. The real estate bubble is blooming with hugeinvestments from all sides, but NRI investment plays key role for that.Following are the factors which are responsible for the attraction of NRI investments in

realty sector of India: - Sale of land for commercial, residential & industrial development.- Infrastructure support for global realty development. - Strong support of NRIinvestments and FDI. - Clear policies for real estate transactions. - Liberal rules by GOIand RBI for NRI property and NRI homes investment. - No limits for acquiring maximumnumber of properties. - Easy availability of finance. - Simpler repayment processes. E.g.normal inward remittances or debit in their NRE or NRO bank account. The above

listed factors have given the sturdy point to Indian real estate market in current marketplace and they will also provide a potential of touching USD 30 million in the next fiveyears. The returns from the real estate investments have outperformed otherinvestments. However, easy home loan availability by financial institutions in India, NRIremittances & repatriation procedures and last but not least easy operability of NRE,NRO & NRCS bank accounts has materialized as the best of all the available prospectsfor the NRI's looking forward to returning to India.

OIL GAS

India Brand Equity Foundation (IBEF) in knowledge partnership withPricewaterhouseCoopers released a paper titled Business Opportunities in Oil & Gasduring the World Economic Forum in Davos, Switzerland. The paper was a result of astudy undertaken by PwC India Oil & Gas desk for IBEF focusing on businessopportunities across the Oil & Gas value chain and an overview of the value chain viz.current developments and future scenarios for demand of oil and gas. The report seekstostrengthen investors confidence while looking at investment opportunities in Oil & Gas


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sector in India through success stories, key policy initiatives and the emerging scenarioMost of the large companies were building new capacities before the breakout of therecession. This new capacities led to excess supply and falling demand at a time whenthe demand was hit on account of slowdown and crisis. This led to plunge in theoperating margins of the refiners who were stuck with excess supplies of crude

products. However, with the recent advent of a recovery on the horizon, there is agradual pick-up in the global demand for oil and gas, as economies are back to pumpmoney for higher capacity utilization of their resources in order to meet increasingdemand of goods and products. Demand for petro products is expected to improve overnext one year.

Top Stock Picks in Oil & Gas sector:Reliance IndustriesGAILEssar OilCairn India

CHAPTER 5 DESIGN OF THE STUDY TITLE OF THE STUDY


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The study of Impact of FII and on Indian Stock Market

STATEMENT OF THE PROBLEM

In this research an effort has been made to develop an understanding of the influenceof the FIIs in the Indian equity market. The Foreign Institutional Investors (FIIs) haveemerged as important players in the Indian equity market in the recent past. This papermakes an attempt to understand whether there exists a relationship between FII andEquity Market returns in India.

OBJECTIVES OF THE STUDY Analyse the trends of and Foreign Institutional Inflows. and Foreign Direct

Analyse the Yearly trends of FII purchases, FII sales and Net Investment.Analyse the reason for the major Net Investment in the year 2007-11.

Examine whether FIIs have any influence on Equity Stock Market.

Examine FDI impact on GDP of India.

SCOPE OF THE STUDYThe report examines The Influence of Foreign Institutional Investments on Equity StockMarket in India. The scope of the research comprises of information derived fromsecondary data from various websites. The various information and statistics werederived from the websites of BSE, NSE, Money Control, RBI and SEBI. Sensex andNifty was a natural choice for inclusion in the study, as it is the most popular marketindices and widely used by market participants for benchmarking.

REFERENCE PERIOD

The study period covered under this is for the financial year : 1 st April 2010 to 31st March2011.

RESEARCH DESIGN: TYPE OF RESEARCH:

Historical Research Design - The purpose is to collect, verify, synthesize evidence

to establish facts that defend or refute your hypothesis. It uses primary sources,secondary sources, and lots of qualitative data sources such as logs, diaries, officialrecords, reports, etc. The limitation is that the sou

Documents

FII and FDI