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International Research Journal of Finance and EconomicsISSN 1450-2887 Issue 68 (2011) EuroJournals Publishing, Inc. 2011http://www.eurojournals.com/finance.htm

Foreign Institutional Investment in Indian CapitalMarket: A Study of Last One Decade

Narendra Singh Bohra Assistant Professor, Faculty of Management Graphic Era University

Dehradun, Uttarakhand (India)E-mail: [email protected], [email protected]

Akash DuttStudent (MBA Finance Group), Faculty of Management Graphic Era University

Dehradun, Uttarakhand (India)

Abstract

Since the beginning of liberalization(1991) FII flows to India have steadily grown inimportance, any economy in the world is major affected by the foreign investment and themovement of its capital market, as an indicator of performance of its various companies ina particular industry. The dawn of 21 st century has shown the real dynamism of stock market and the various benchmarking of sensitivity index (Sensex) in terms of its highestpeaks and sudden falls. This paper attempts to understand the behavioural pattern of FII inIndia and figure out the reason for indifferent responses of BSE Sensex due to FII inflows.The data for the study uses the information obtained from the secondary resources likewebsite of BSE sensex. The paper consists of two sections; the first section aims atunderstanding the behavioural pattern of FII by identifying the Decade trend analysis of FIIinvestment in India, the second section attempts to present the correlation between FIIturnover and turnover of different individual groups of shares in BSE sensex .

Keywords: FII, BSE, Correlation

IntroductionA well-developed stock market has its impact on the development of economy. It provides investorswith an array of assets with varying degree of risk, return and liquidity. This increased choice of assetsand the existence of a vibrant stock market provide savers with more liquidity and options, therebyinducing more savings. Increased competition from foreign financial institutions also paves the way forthe derivatives market. All this, according to the mainstream belief, encourages more savings in equityrelated instruments. This, in turn, raises the domestic savings rate and improves capital formation.

Above model indicating that portfolio investment is also a stimulus of economic developmentbecause, its a main source of fund of corporate. The demand of portfolio investment is created bycompanies and their routes are decided by government. It is considered as less reliable source of fundfor economic development because its fluctuate on some minor trends of economy.


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International Research Journal of Finance and Economics - Issue 68 (2011) 104

Link Model: Portfolio Investment and Economic Development

FIIShare Price Up

Cheaper Capital

More Stock Issue

New Listing

Cost of Issue Down

Liquidity Up

More Equity Issued

More SupplyLiquidity

Demand

Local and

Foreign

Demands

Increased

More Players &Efficiency Encouraged .

Intermediaries

,Broker and

Underwriter

Mutual Funds,

Insurance

Companies and

Individuals.

Issuers

Review of LiteratureMany empirical studies have been conducted to examine the relationship between stock prices andbuying of equity by FIIs in Indian stock market. Fang and Loo (1994) studied the relationshipbetween the stock return volatility and international trade for four Asian Countries. Radelet and Sachs(1998) attributed the East Asian economic crisis to financial panic due to sudden reversal of portfolioinvestment. Academicians often argue that foreign investors destabilize stock prices due to variousreasons. According to Dornbusch and Park (1995) foreign investors pursue a positive feedback strategy, which makes stocks to overreact to change in fundamentals. Agarwal (2000) based on thecorrelation of returns during the period 1987-1996 found that emerging markets exhibit a highcorrelation with one another except for some of the South-East Asian economies, where the overallcorrelation between the emerging market is low. The study of Thomas J. Flavin, Margaret J. Hurleyand Fabrice Rousseau (2001) , reveals that a gravity model, frequently used to explain trade patterns,


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105 International Research Journal of Finance and Economics - Issue 68 (2011)

is used to explain stock market correlations. They found that geographical variables still matter whenexamining equity market linkages. In particular, the number of overlapping opening hours and sharinga common border tends to increase cross-country stock market correlation. These results may stemfrom asymmetrical information and investor sentiment, lending some empirical support for theseexplanations of the international diversification puzzle. Batra (2003), using both daily and monthlydata attempted to understand the trading behavior of FIIs and returns in Indian equity market. He foundthe strong evidence of FIIs chasing trends and adopting positive feedback and herding trading

strategies. Mishra (2004) explored the relationship between stock markets and foreign exchangemarkets using Granger causality test and the VAR technique. The study found that there exists aunidirectional causality between exchange rate and interest rate and money rate. Badhani (2005) hasattempted to examine the long-term and short-term relationship among stock prices, dollar-rupeeexchange rate and net FII investment in India, using the monthly data of BSE sensex, dollar-rupeeexchange rates and net monthly FII investment flows from April 1993 to March 2004. The study showsthat there is co integration between net FII investment flow and stock prices.

Research Objective

To study the behavioral pattern of FII in India with special reference to 2000 to 2009.

To establish a relationship between FII and different groups of shares in BSE India.Research Methodology

The study describes the behavioral pattern and correlation between FII investments in India withspecial reference to BSE Sensex and also with groups of shares in BSE Sensex. It is based onsecondary data obtained from websites, newspaper and journals. The main objective of the presentpaper is to determine impact and relationship between the Indian stock market, net foreign institutionalinvestment. To test this, we employ the methodology of correlation (linear dependence) between twovariables X and Y , giving a value between +1 and 1 inclusively. This study is divided in to twosections:

Section - 01 Exploring the behavioral pattern of FII in India in special reference to BSE sensex.

Section - 02 Attempts to establish the correlation between FII and individual groups securities in BSE

sensex.

Section 01FII in India (2000 2009)Foreign institutional investors have gained a significant role in Indian capital markets. Availability of foreign capital depends on many firm specific factors other than economic development of the country.In this context this paper examines the contribution of foreign institutional investment particularlyamong companies included in sensitivity index (Sensex) of Bombay Stock Exchange. Also examined isthe relationship between foreign institutional investment and firm specific characteristics in terms of ownership structure, financial performance and stock performance. It is observed that foreign investorsinvested more in companies with a higher volume of shares owned by the general public. Thepromoters holdings and the foreign investments are inversely related. Foreign investors choose thecompanies where family shareholding of promoters is not substantial. Among the financialperformance variables the share returns and earnings per share are significant factors influencing theirinvestment decision.


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Foreign portfolio inflows through FIIs, in India, are important from the policy perspective,especially when the country has emerged as one of the most attractive investment destinations in Asia.In this paper an effort has been made to develop an understanding of the investment decisions indifferent group of shares in BSE, and behavior of the FIIs in the Indian equity market of last ten years.This study show that the FII in India was maximum in 2004 then it starts declining (Table -01), then itfaced the challenged of global crisis, in 2007 the net sale of shares by foreign investors is mare then netpurchases.

Table 1: FII in India (In Rs Cr)

YEAR PURCHASES SALES NET2000 32913 27028 58852001 19325.76 15859.28 3466.482002 15535.76 15446.28 89.482003 32882 24196 86862004 59910.12 47624.19 12285.932005 113960 107480 64802006 132933 131548 13852007 202468 208968 -65002008 100077 120491 -204142009 89069 82866 6204

TOTAL 799073.64 781506.75 17567.89

FII and BSE Sensex IndiaSensex is the commonly used name for the Bombay Stock Exchange Sensitive Index an indexComposed of 30 of the largest and most actively traded stocks on the Bombay Stock Exchange (BSE).The term FII is used most commonly in India to refer to outside companies investing in the financialmarkets of India. FII investment is frequently referred to as hot money for the reason that it can leavethe country at the same speed at which it comes in. In country like India; statutory agencies like SEBIhave prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs. Ithas been found by the study (Table-02) that BSE Sensex and foreign institutional investment has

followed a closed relationship, when net sensex was moved up than the FII was also increased andwhen net sensex was down the total FII was goes gown.

Table 2: BSE Sensex and FII (In Rs Cr)

Year NET SENSEX NET FIIs2000 -1448.56 599412001 -96.91 3466.482002 -451.46 89.482003 2509.65 86862004 751.97 12285.932005 4674.92 64802006 1507.74 13852007 3189.07 -65002008 -5918.12 -204142009 7625.78 6204


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FII and Sense x R elationship

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

1 2 3 4 5 6 7 8 9 10

Year

F I I &

B S E T u r n o v e

NET S ENS EX NET FIIs

Section 02FII and Individual Group Securities in BSEThe Bombay Stock Exchange (BSE), Indias leading stock exchange, has classified Equity scripts intocategories A, B1, B2, S, T, TS, & Z to provide guidance to the investors. The classification is on thebasis of several factors like market capitalization, trading volumes and numbers, track records, profits,dividends, shareholding patterns, and some qualitative aspects. On the basis of the study it has beenfound that some group of shares attract the attention of FII at larger (Table -03), some at very low andsome group of shares are completely unable to attract the attention of foreign investors these groups arenegatively co-related with the total FII in India. This study taking forward by studying each group of shares with total FII individually, explaining the reasons of low and high investment by foreign

intuitional investors in India.

Table 03: FII in Different Group of Shares (In Rs Cr)

YEARA

GROUPB1

GROUPB2

GROUPS

GROUPT

GROUPZ

GROUPF

GROUPG

GROUPB

GROUPST

GROUPNETFII's

2000 908947 70951.6 7323.3 NA NA 45.8 42.96 NA NA NA599412001 281969 22233.1 2111.7 NA NA17.09 82.69 NA NA NA3466.482002 266651 43340.7 3962.9 NA NA22.59 94.9 1.45 NA NA89.482003 437851 58641.2 4568.6 NA 418.65 321.21 245.51 1.39 NA NA 86862004 398861 97269.7 9272.1 5597.9 6335.89 1158.92 220.17 0.05 NA NA12285.92005 482429 237055 35541 46697 12146.4 1934.71 269.71 NA NA NA 64802006 552460 312604 33602 48663 7895.96 791.23 170.39 NA NA NA 13852007 859286 551613 96614 53904 15723.4 1480.74 235.7 NA NA NA-65002008 897682 NA 158250 20277 1773.1 407.18 753.13 NA 20931.1 NA -20414

2009 963736 NA NA37821 6138.06 20.76 1588.16 NA 368498 1006 6204TOTAL 6049872 1393708 351245 212960 50431.4 6200.23 3703.32 2.89 389430 1006 17567.9Coefficient of Correlation withTotal FII

0.513 0.992 0.679 0.480 0.734 0.657 0.102 -0.721 -0.877

FII & Group-A SharesA Group is a category where there is a facility for carry forward (Badla) to the next settlement cycle.These are companies with fairly good growth record in terms of dividend and capital appreciation. Thescrips in this group are classified on the basis of equity capital, market capitalization, number of years


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of listing on the exchange, public share holding, floating stock, trading volume etc. As per the findingof this study (Table - 04), this group of shares in the stock market attract the high interest of foreigninstitutional investors in India, it has shown the incremental growth year by year after 2000, the FIIinvestment in this group of shares was maximum in year 2004 in the same years the total FII wasmaxim in last decade.

Table 4:

YearA GROUP

TURNOVER FII TURNOVER2000 908946.85 599412001 281968.9 35185.042002 266650.7 30982.042003 437851 570782004 398860.9 107534.312005 482429.3 2214402006 552460.2 2644812007 859285.6 4114362008 897682.1 2205682009 963736.3 171935

FII and A Group Shares

0

200000

400000

600000

800000

1000000

1200000

1400000

1 2 3 4 5 6 7 8 9 10

Year

T u r n o v e r

( F I I &

A G r o u p

S h a r e s

A GROUP TURNOVER FII TURN OVER

FII & Group-B1 & B2B1, B2 Group is a subset of the other listed shares that enjoy higher market Capitalization andliquidity than the rest. It is another group of shares which hold high market capital. As per the study it

has been observed that this group of shares attract the attention of investors quiet well till 2007-08(Table 05 and Table -06) , but after the global crisis this group of shares unable to attract theattention of foreign institutional investors.


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Table 5:

YearB1 GROUP

TURNOVER FII TURNOVER2000 70951.62 599412001 22233.14 35185.042002 43340.67 30982.042003 58641.2 57078

2004 97269.7 107534.312005 237055.4 2214402006 312603.5 2644812007 551612.5 4114362008 2205682009 171935

FI I a n d B 1 G r o u p S h a re s

0

1000 00

2000 00

3000 00

4000 00

5000 00

6000 00

1 2 3 4 5 6 7 8 9 10

Ye a r

T u r n o v e r

( F I I & B 1 G r o u p

S h a r e s )

B 1 G R O U P TU R NO V ER FII TU RN O V ER

Table 6:

YearB2 GROUP

TURNOVER FII TURNOVER2000 7323.26 599412001 2111.74 35185.042002 3962.93 30982.042003 4568.6 570782004 9272.13 107534.312005 35541.04 2214402006 33601.51 2644812007 96614.14 4114362008 158250.1 2205682009 171935


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F I I a n d B 2 G ro u p S h a r e s

0

1 0 0 0 0 0

2 0 0 0 0 0

3 0 0 0 0 0

4 0 0 0 0 0

5 0 0 0 0 0

6 0 0 0 0 0

1 2 3 4 5 6 7 8 9 1 0

Y e a r

T u r n o v e r

( F I I & B 2 S h a r e s )

B 2 G R O U P TU R N O V E R F I I TU R N O V ER

FII & Group-SS Group represents scrips forming part of the BSE-Indonext segment. The Exchange has introduceda new segment named BSE Indonext w.e.f. January 7, 2005. The S Group represents scripts

forming part of the BSE-Indonext segment. S group consists of scripts from B1 & B2 groupon BSE and companies exclusively listed on regional stock exchanges having capital of 3 crores to 30crores. All trades in this segment are done through BOLT system under S group. As per the study it hasbeen found that (Table - 07) this group of shares attract the highest attention of investors in 2007 afterthat it has been decreased substantially , as far as the correlation of total FII and S Group share isconcern it has shown substantially correlated.

Table 7:

Year S Group FII Turnover2000 599412001 35185.042002 30982.042003 570782004 5597.87 107534.312005 46697.48 2214402006 48662.72 2644812007 53904.08 4114362008 20276.97 2205682009 37821.28 171935

F I I and S G roup S har es

0

50000

1000 00

1500 00

2000 00

2500 00

3000 00

3500 00

4000 00

4500 00

5000 00

1 2 3 4 5 6 7 8 9 10

Ye a r

T u r n o v e r

( F I I & S S h a r e s )

S G ro up FII Tu rn o ve r


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FII & T Group SharesT Also termed as the trade to trade group this category comprises of shares which have to be settledin delivery for all buys and sells and square off of bought and sold positions during the day is notpermitted. This is a part of the surveillance from the BSE to counter any backward unwarrantedmovements in such scrip. In 2007 there is maximum FII in T Group shares ( Table - 08) and lowestin 2008, year 2008 was the year when Indian economy faced impact of global crises and FII wasdirectly by correlated, but one interesting fact has been found that, in 2008 the total FII in India Rs

220568 crore and Rs 1773.1 crore that is minimum after 2005.

Table 8:

Year T Group FII Turnover2000 NA 599412001 NA 35185.042002 NA 30982.042003 418.65 570782004 6335.89 107534.312005 12146.37 2214402006 7895.96 2644812007 15723.35 4114362008 1773.1 2205682009 6138.06 171935

FII and T Grou p Sh are s

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

1 2 3 4 5 6 7 8 9 10

Year

T u r n o v e r

( F I I & T S h a r e s

)

T G ro up FII Tu rn o ve r

GROUP-Z: Z Group category comprises of shares of the companies which does not complywith the rules and regulations of the Stock Exchange and are at times suspended from trading. As perthe study (Table - 09 ), this group of shares does not shown any co relation with the total FII in Indiabut it has attract the small attention of foreign portfolio invest.

Table 9:

Year Z Group FII Turnover2000 45.8 599412001 17.09 35185.042002 22.59 30982.042003 321.21 570782004 1158.92 107534.31


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Table 9: - continued

2005 1934.71 2214402006 791.23 2644812007 1480.74 4114362008 407.18 2205682009 20.76 171935

FII and Z Group S hare s

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

1 2 3 4 5 6 7 8 9 10

Year

T u r n o v e r (

F I I & Z S h a r e s

)

Z Gro up FII Turno ver

GROUP-F: F Group represents the debt market segment or represents the Fixed IncomeSecurities. FII are always interested in high return that is the main reasons behind the slow attention of FII in this group of shares.

Table 10:

Year F Group FII Turnover2000 42.96 599412001 82.69 35185.042002 94.9 30982.042003 245.51 570782004 220.17 107534.312005 269.71 2214402006 170.39 2644812007 235.7 4114362008 753.13 2205682009 1588.16 171935


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FII an d F Gro up Shar es

0

500 00

1000 00

1500 00

2000 00

2500 00

3000 00

3500 00

4000 00

4500 00

1 2 3 4 5 6 7 8 9 10

Year

T u r n o v e r

( F I I & F S h a r e s )

F G ro up FII Tu rn o ve r

Group-G"G " group consist Trading in Govt. Securities for retail investors. As per the study this group of sharesunable to attract the attention of foreign institutional investors. Because the investment in governmentsecurity is tighten by strong regulations in India.

Table 11:

Year G Group FII Turnover2000 599412001 35185.042002 1.45 30982.042003 1.39 570782004 0.05 107534.312005 0 2214402006 0 2644812007 0 4114362008 0 2205682009 0 171935

FI I a n d G G r o u p S h a re s

0

50 000

100000

150000

200000

250000

300000

350000

400000

450000

1 2 3 4 5 6 7 8 9 10

Ye a r

T u r n o v e r (

F I I & G S h a r e s )

G G r o u p F II Tu rn o v e r


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GROUP-B: B Group is a subset of the other listed shares that enjoy higher marketcapitalization and liquidity than the rest. In this study one interesting fact has been found that thisgroup of shares was unable to find the attention of foreign investors till 2007. In 2008 this group of shares has attract the attention of FII in India.

Table 12:

Year B Group FII Turnover2000 599412001 35185.042002 30982.042003 570782004 107534.312005 2214402006 2644812007 4114362008 20931.12 2205682009 368498.4 171935

FII and B G roup Share s

0

100000

200000

300000

400000

500000

600000

1 2 3 4 5 6 7 8 9 10

Year

T u r n o v e r (

F I I & B S h a r e s )

B Group FII Turnover

Findings This study found that the behavior of FIII in last decade was opportunistic; profit accumulation

was prime objective behind the portfolio investments in India. Year 2007 08 is the witness the world global crises and its impact in India, inflow of foreign

capital (FDI/FIII) decreased/ stopped in this year. A good co relation was found in the total FII turnovers and A group shares turnover, as ell as

this has been attracted the highest attention of portfolio investors in India. There were certain groups of shares like G-group, B-group, ST-group, which do not find the

substantial place in the investment basket of portfolio investors in India.


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The lack of proper regulation has been found in the stock market for guiding the movement of foreign portfolio investors in India

ConclusionThe result shown a positive correlation between stock market and investment of FIIs in a relation thatsensex follows the investment behavior of FIIs, but there are some exception seen in year 2005 and2008.The net foreign institutional investment, thus implying that the market informational efficiencyhypothesis can be rejected for BSE Sensitive Index with respect to the FII. It also shows that positiveor negative movement of FIIs leads to a major change/shift in the sentiments of domestic or relatedinvestors in market. It suggests the policy implication that the authorities can focus on domesticeconomic policies to stabilize the stock market. Where as in the case of individual group securitiesFIIs had shown a positive correlation in less regulated and high capitalized securities in the market toearn high equity yield. Investors can therefore apply profitable trading rules to earn supernormalprofits. Under the circumstances, the Indian stock market seems to be bearing the underlying strain notcurrently visible at the surface. The implementation of profitable trading strategy may at any point of time generate over-enthused investment and this, if coupled with market overreaction, may result in adestabilized system. A point also to be noted here is the heavy investment and selling attitude of FIIscausing a major hurdle in stabilization of market sentiments.

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[1] Ahluwalia, Montek S., 2002a, Economic reforms in India since 1991: Has GradualismWorked?, Journal of Economic perspectives 16(3), 67-88.

[2] Ahluwalia, Montek S., Indias Economic Reforms: An Appraisal, in Jeffrey Sachs andNirupam Bajpas (eds.), India in the Era of Economic Reform, Oxford University Press, NewDelhi, 2000.

[3] Sigma. "World Insurance in 1999." No. 9/2000. Published by SwissRe. Available atwww.swissre.com[4] Waldkirch, Andreas. 2003. The New Regionalism and Foreign Direct Investment: The Case

of Mexico. Journal of International Trade and Economic Development 12 (2): 151-184.[5] P K Mishra, Wiil their dominance in the Indian market continue Financial Express

(September 15, 2006).[6] Singh, Narendra & Shailendra K FII and Capital Market Development in India: A Study after

Liberalization international journal of business management, economics and informationtechnology vol. 02 no.01 Jan Jun 2010, 103 108

[7] Bansal Anand, Pasricha. J.S. foreign institutional investors impact on stock prices in India journal of academic research in economics.

[8] Kim, E. H. and Singal, V. (2000). Stock market openings: Experience of emerging economies. Journal of Business , University of Chicago Press, Vol. 73, No.1, 25-66.[9] Coondoo, Dipankar and Paramita Mukherjee (2004): Volatility of FII in India, Money and

Finance , October-March.[10] Gordon, James and Poonam Gupta (2003): Portfolio Flows into India: Do Domestic

Fundamentals Matter?, IMF working paper No 03/20.[11] De Santis, G. and Imrohoroglu, S. (1997). Stock returns and volatility in emerging financial

markets. Journal of International Money and Finance , Elsevier, Vol. 16, No.4, 561-579.[12] Chukwuogor, Chiaku (2007). An econometric analysis of African Stock Market: Annual

returns analysis, day-of-the-week effect and volatility of returns African Journal of Accounting , Economics, Finance and Banking Research , Vol. 1, No. 1, 26-43.


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Websites

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Acquisition.pdf. http://www.bseindia.com/mktlive/circuit_filter/upper_cf/groupwise.asp http://www.sebi.gov.in/Index.jsp?contentDisp=Database http://www.rbi.org.in/scripts/PublicationsView.aspx?id=12882 http://www.rbi.org.in/scripts/PublicationsView.aspx?id=12883 http://www.oppapers.com/essays/Impact-Of-Fii-On-Indian-Economy/623367.

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