Term Paper of Fii

8/4/2019 Term Paper of Fii

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Term Paper

On

IMPACT OF FII IN INDIAN STOCK MARKET

Submitted To: Prof. Sampada S. Kapse

In Partial Fulfillment of the subject:

Indian Financial System

Of TMS. - 4 - P.G.D.M.

Batch: 2010-12

Submitted By:

Sr. No. Name Roll No.

1. Rahul Faliya 10031

2. Kunjan Gandhi 10033

3. Kanil Hinsu 100374. Daymand Hudani 10038

5. Nishant Joshi 10047

6. Vishal Kanani 10048


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Introduction:

Stock Market:

In the stock market world, you need a way to compare the movement of the market,

up and down, from day to day, and from year to year. An index is just a benchmark

or yardstick expressed as a number that makes it possible to do this comparison.

A stock market or equity market is a public entity (a loose network of economic

transactions, not a physical facility or discrete entity) for the trading of

companystock (shares) and derivatives at an agreed price; these

are securities listed on a stock exchange as well as those only traded privately.

Stock exchanges to some extent play an important role as indicators, reflecting the

performance of the country's economic state of health. Stock market is a place

where securities are bought and sold. It is exposed to a high degree of volatility;

prices fluctuate within minutes and are determined by the demand and supply of

stocks at a given time. Stockbrokers are the ones who buy and sell securities on

behalf of individuals and institutions for some commission.

The Securities and Exchange Board of India (SEBI) is the authorized body, which

regulates the operations of stock exchanges, banks and other financial institutions.

The past performances in the capital markets especially the securities scam by

Harshad Mehta & Ketan Parekh has led to tightening of the operations by SEBI. In

addition the international trading and investment exposure has made it imperative

to better operational efficiency. With the view to improve, discipline and bring

greater transparency in this sector, constant efforts are being made and to a certain

extent improvements have been made.
http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Stock


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As the condition of capital markets are constantly improving, it has started drawing

attention of lot more people than before. On the career related aspects,

professionals have opportunities to choose from for a wide range of jobs available

in a number of organizations in this sector and one can expect to have good times

ahead of him.

Securities market has essentially three categories of participants, namely the issuer

of securities, investor in securities and the intermediaries and two categories of

products, namely the services of the intermediaries, the securities including

derivatives.

The security market has two interdependent and inseparable segments, the new

issues (Primary market) and the stock (secondary market). The primary market

provides the channel for sale of new securities while secondary market deals in

securities previously issued.

There are so many script or stock traded in Indian stock market and all stocks are

distributes in Small cap, Mid cap, SENSEX, Nifty 50, BSE 200, BSE 500 and

BSE 100.

Foreign Institutional Investors:

Foreign Institutional investors (FII) are organizations which pool large sums of

money and invest those sums in securities, real property and other investment

assets. The less well known Foreign Institutional Investors (FIIs) have been a key

part of India's growth story this decade. The term FIIs is most commonly used to

refer the companies that are established or incorporated outside India and are

investing in the financial markets of India by registering themselves with the


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Securities & Exchange Board of India (SEBI). FIIs include overseas pension funds,

mutual funds, investment trusts, asset management companies, nominee

companies, banks, institutional portfolio managers, university funds, endowments,

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

holder incorporated or established outside India proposing to make proprietary

investments on behalf of a broad-based fund (i.e., fund having more than 20

investors with no single investor holding more than 10% of the shares or units of

the fund). Foreign Institutional Investment is basically short-term in nature and

mostly made in the financial markets.

Foreign Institutional Investors (FIIs) are allowed to invest in the primary and

secondary capital markets in India through the Portfolio Investment Scheme (PIS)

administered by the Reserve Bank of India (RBI). Under this scheme, FIIs can

acquire shares/debentures of Indian companies through the stock exchanges in

India. The ceiling for overall investment by FIIs is 24 per cent of the paid up

capital of the Indian company (20 per cent in the case of public sector banks,

including the State Bank of India). The ceiling of 24 per cent for FII investmentcan be raised subject to (i) approval by the companys board and the passing of a

special shareholder resolution to that effect (ii) certain sector caps imposed by RBI

and the Government of India. The RBI monitors the ceilings on FII investments in

Indian companies on a daily basis and publishes a list of companies allowed to

attract investments from FIIs with their respective ceilings.

The FIIs have been playing a significant role in the process of capital formation

and economic growth of the country. There has been a dramatic increase in net FII

flows to India over the period 2003-2007, and especially over the bull rally that

climaxed in January 2008 when the SENSEX reached a lifetime high of 21,206.77

points. FIIs invested US$17 billion in Indian stocks in 2007 only. However, the


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onset of the recent global financial crisis saw FIIs pulling out a record $13 billion

(Rs 67,470) in 2008, the largest outflows since India opened its doors to FIIs 15

years ago. The Economic Times has just reported that FII investment is up, with

the Indian Stock Market taking in $13 billion so far in 2009 from foreign

institutions. This is in stark contrast to the scenario in 2008. FIIs such as pension

managers, investment houses and sovereign wealth funds have been both a growth

driver and a beneficiary of this growth, with stocks now worth more than double

what they were at their March lows.

The key aspect of FII investment is that as many as 120 new foreign institutional

investors have registered in India since the global financial crisis broke out in

September 2008. These FIIs come from a diverse set of operational areas, and

includes names like American Airlines, International Finance Corporation,

University of Southern California, Bank of Korea, the Bill & Melinda Gates

Foundation, and Warburg Pincus International. More importantly, the months of

September-November, 2008 have seen registration of 358 new sub-accounts the

highest in any block of three months in 2008. This shows that we are a fairly largeattractor of foreign institutional investment. There are a number of reasons huge

FII investment is being made in India.


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Who can be an FII.?

One who propose to invest their proprietary funds or on behalf of broad based

funds or of foreign corporate and individuals and belong to any of the under given

categories can be registered for FII.

Pension Funds

Mutual Funds

Investment Trust

Insurance or reinsurance companies

Endowment Funds

University Funds

Foundations or Charitable Trusts or Charitable Societies

Asset Management Companies

Nominee Companies

Institutional Portfolio Managers

Trustees

Powerof Attorney Holders

Bank


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The eligibility criteria for applicant seeking FII registration:

As per Regulation 6 of SEBI (FII) Regulations, 1995, Foreign Institutional

Investors are required to fulfill the following conditions to qualify for grant of

registration:

Applicant should have track record, professional competence, financial

soundness, experience, general reputation of fairness and integrity.

The applicant should be regulated by an appropriate foreign regulatory authority

in the same capacity/category where registration is sought from SEBI. Registration

with authorities, which are responsible for incorporation, is not adequate to qualify

as Foreign Institutional Investor.

The applicant is required to have the permission under the provisions of the

Foreign Exchange Management Act, 1999 from the Reserve Bank of India.

Applicant must be legally permitted to invest in securities outside the country or

its in-corporation / establishment.

The applicant must be a "fit and proper" person.

The applicant has to appoint a local custodian and enter into an agreement with

the custodian. Besides it also has to appoint a designated bank to route its

transactions.

Payment of registration fee of US $ 5,000.00 "Form A" as prescribed in SEBI

(FII) Regulations, 1995 is to be filled before applying for FII registration.

Supporting documents required are:

Application in Form A duly signed by the authorized signatory of the applicant.


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Certified copy of the relevant clauses or articles of the Memorandum and Articles

of Association or the agreement authorizing the applicant to invest on behalf of its

clients

Audited financial statements and annual reports for the last one year, provided

that the period covered shall not be less than twelve months.

A declaration by the applicant with registration number and other particulars in

support of its registration or regulation by a Securities Commission or Self

Regulatory Organization or any other appropriate regulatory authority with whom

the applicant is registered in its home country.

A declaration by the applicant that it has entered into a custodian agreement with

a domestic custodian together with particulars of the domestic custodian.

A signed declaration statement that appears at the end of the Form.

Declaration regarding fit & proper entity.


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OBJECTIVES:

The objectives of this study are as follows with respect to our topic

(1)To study the role of FII investment in the Indian stock market2) To understand the relationship between FII & Indian capital market.

3) To understand the FII policy in India.

Methodology:

Data collection:

Secondary Data: Internet, newspapers, journals and books, other reports and

projects, literatures.


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The current list of companies allowed attracting investments from FIIs:

1 Anglo- India Jute Mills Co. Ltd.

2 Arvind Mills, Ahmedabad.

3 Ashima Syntex Ltd, Ahmedabad.

4 Ashoka Viniyoga Ltd.

5 Bharat Nidhi Ltd.

6 BLB Shares & Financial Services Ltd

7 BPL Ltd.

8 Burr Brown (India) Ltd

9 Camac Commercial Company Ltd.

10 Ceenik Exports (India) Ltd.

11 Cifco Finance Ltd., Mumbai.

12 Classic Financial Services & Enterprises Ltd, Calcutta.

13 CPPL Ltd, (Reliance Ind. Infrastructure Ltd) Mumbai.

14 Crest Communication Ltd.

15 CRISIL

16 DCM Ltd.

17 DCM Shriram Consolidated Ltd.

18 Dharani Sugars & Chemicals Ltd

19 Dolphin Offshore Enterprises ( I ) Ltd.

20 Emco Ltd.


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21 Essar Oil Ltd.

22 Essar Shipping Ltd., Blore

23 Essar Steel Ltd. etc.

Market design in India for foreign institutional investors:

Foreign Institutional Investors means an institution established or incorporated

outside India which proposes to make investment in India in securities. A Working

Group for Streamlining of the Procedures relating to FIIs, constituted in April,

2003, inter alia, recommended streamlining of SEBI registration procedure, and

suggested that dual approval process of SEBI and RBI be changed to a single

approval process of SEBI. This recommendation was implemented in December

2003.

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

i) As FII: Overseas pension funds, mutual funds, investment trust, assetmanagement company, nominee company, bank, institutional portfolio

manager, university funds, endowments, foundations, charitable trusts,charitable societies, a trustee or power of attorney holder incorporated or

established outside India proposing to make proprietary investments or

with no single investor holding more than 10 per cent of the shares or

units of the fund.


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consisted of having a wide variety of clients, including individuals, intermediated

through institutional investors, who would be registered as FIIs in India. FIIs are

eligible to purchase shares and convertible debentures issued by Indian companies

under the Portfolio Investment Scheme.

Regulation on FII:

Investment by FII was jointly regulated by Securities and Exchange Board of India

(SEBI) through the SEBI (Foreign Institutional Investors) Regulations, 1995 and

by the Reserve Bank of India through Regulation 5(2) of the Foreign Exchange

Management Act (FEMA), 1999. The promulgation of legislation pertaining to

foreign investment by SEBI in 1995 market a watershed for FII flows to India; this

led to a significant increase in the level of FII equity inflows in the pre-Asian crisis

period. The SEBI FII Regulations and RBI policies are amended and modified

from time to time in response to the gradual maturing of the Indian financial

market and changes taking place in the global economic scenario.

In order to trade in India equity market, foreign corporation need to register with

SEBI as Foreign Institutional Investors. Without registration they can invest, but

cases require the approval from RBI. They are generally concentrated in secondary

market. FII are allowed to invest in

a) Securities in primary and secondary market including shares, debentures and

warrant of companies, unlisted, listed or to be the listed in India.

b) Units of mutual funds


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c) Dated government securities

d) Derivative traded in a recognized stock market and

e) Commercial papers

FII can invest their own funds as well as invest on behalf of their overseas clients

registered as such with SEBI. These client accounts that the FII manages are

known as sub accounts. FII sub accounts include those foreign corporate, foreign

individual, institution funds or portfolio established or incorporated outside India.

FII may issue deal in or hold off share derivative instrument such as participatory

notes (PN). The entities that can subscribe to the PN are

a) Any entity incorporated in a jurisdiction that requires filing of constitutional or

other documents with a registrar of companies or comparable regulatory agency or

body under the applicable companies legislation in that jurisdiction

b) Any entity that is regulated authorized or supervised by a central bank, such as

the Bank of England, or any other similar body provided that the entity must not

only be authorized but also be regulated by the aforesaid regulatory bodies

c) Any entity that is regulated, authorized or supervised by a securities or futures

commission, such as the Financial Services Authority or other securities or futures

authority or commission in any country, state or territory

d) Any entity that is a member of securities or futures exchanges such as the New

York Stock Exchange or other self-regulatory securities or futures authority orcommission within any country, state or territory provided that the aforesaid

mentioned organizations which are in the nature of self- regulatory organizations

are ultimately accountable to the respective securities financial market regulators.


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Impact of FIIs on Indian Markets:

FIIs are companies registered outside India. In the past four years there has been

more than $41 trillion worth of FII funds invested in India. This has been one of

the major reasons on the bull market witnessing unprecedented growth with the

BSE Sensex rising 221% in absolute terms in this span. The present downfall of

the market too is influenced as these FIIs are taking out some of their invested

money. Though there is a lot of value in this market and fundamentally there is a

lot of upside in it. For long-term value investors, theres little because for worry

but short term traders are adversely getting affected by the role of FIIs are playing

at the present. Investors should not panic and should remain invested in sectors

where underlying earnings growth has little to do with financial markets or global

economy.

It is always good to keep an eye on what the big movers are doing and plan

individual strategy accordingly. There are several reasons on FIIs selling, but there

are three predominant factors that are cited as being largely responsible.

1. The swings in the market forced several FIIs to withdraw from India and invest

their dollars in other emerging markets. Some of the other markets include

Uruguay, Russia, the Ukraine, and several other former Soviet countries. Though

there have been swings in the past too but FII response this time was different

because of margin pressures back home as even they have to provide regular

returns to their investors.

2. The Indian markets are not seen as a good short-term bet any more. India is seen

as a good investment for the medium to long term. FIIs seem to fear the pace of

growth and the fundamentals of the markets.


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3. Most FIIs are looking at corporate governance and execution abilities, which

could be significant drivers in creating a strong portfolio of Indian stocks. Recent

action taken by the market regulator indicates that the Indian government would

like to moderate the inflow of FII money.

Though valuations are very attractive on a selective basis, but stock picking has to

be done based on evaluation of business fundamentals. The subprime issue and

problems in the credit markets have raised concerns about potential growth

slowdown in the US and Europe. The fear of a slowdown will likely continue to

weigh on markets average FII redemptions in India have been lower than in other

Asian economics. FIIs do get affected by it. India is among the economies less

sensitive to a deceleration in US growth and one should not be perturbed by FII

flows in either direction. One need not worry much about the volatility of the

market as it is influenced by temporary factors but the Indian story is still strong.

Markets cannot go in one direction all the times (upwards) which it was going.

Volatility is too good for the market as it helps in keeping the economy cycle

moving and it will again help the values of the stocks at a fair price for investmentsto again keep flowing and so will the FIIs too.

Trends of FII in India:

Portfolio investments in India include investments in American DepositoryReceipts (ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional

Investments and investments in offshore funds. Before 1992, only Non-Resident

Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake

portfolio investments in India. Thereafter, the Indian stock markets were opened up


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for direct participation by FIIs. They were allowed to invest in all the securities

traded on the primary and the secondary market including the equity and other

securities/instruments of companies listed/to be listed on stock exchanges in India.

It can be observed from the table below that India is one of the preferred

investment destinations for FIIs over the years. As of March 2009, there were 1609

FIIs registered with SEBI.

SEBI Registered FIIs in India

Year End of March

1992-93 0

1993-94 3

1994-95 156

1995-96 353

1996-97 439

1997-98 496

1998-99 450

1999-00 506

2000-01 527

2001-02 490

2002-03 502

2003-04 540

2004-05 685

2005-06 882

2006-07 996

2007-08 12792008-09 1609

2009-10 1718

2010-11 1730


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FII trend in India:

Year Gross

Purchases

(a) (Rs. crore)

Gross Sales (b)

(Rs.crore)

Net

Investment (a-

b)

(Rs. crore)

% increase in

FII inflow

1992-93 17 4 3 -

1993-94 5593 466 5127 170800

1994-95 7631 2835 4796 -6.45

1995-96 9694 2752 6942 44.75

1996-97 15554 6979 8575 23.52

1997-98 18695 12737 5958 -30.52

1998-99 16115 17699 1584 126.59

1999-00 56856 46734 10122 739.02

2000-01 74051 64116 9935 -1.85

2001-02 49920 41165 8755 -11.88

2002-03 47061 44373 2688 69.30

2003-04 144858 99094 45764 1602.53

2004-05 16953 171072 45881 0.26

2005-06 346978 305512 41466 -9.62

2006-07 520508 489667 30841 -25.62

2007-08 896686 844504 52182 69.20

2008-09 548876 594608 -45732 187.64

2009-10 626428 542158 84270 284.27


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

Government policies, budgets, bullion market, inflation, economic and political

condition of the country, FDI, Re./Dollar exchange rate etc. But for our study wehave selected only one independent variable i.e. FII and dependent variable is

indices of nifty.

-200000

0

200000

400000

600000

800000

1000000

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Gross Purchases (a) (Rs.

crore)

Gross Sales (b) (Rs.crore)

Net Investment (a-b) (Rs.

crore)

FII INFLOW


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Correlations:

year FII NIFTY SENSEX

Mar-00 43107 1549.5 5041.08

Mar-01 57209 1148.2 3604.38

Mar-02 65239 1129.55 3469.35

Mar-03 67673 978.2 3048.72

Mar-04 111238 1771.9 5590.6

Mar-05 149960 2035.65 6492.82Mar-06 200454 3402.55 11279.96

Mar-07 226537 3821.55 13072.1

Mar-08 280772 6144.35 15644.44

Jan-08 231825 4734.5 20873.33

Mar-09 342878 3020.95 9708.5

Mar-10 394059 5262.45 17590.17

Correlations:


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Correlations

fii Nifty

Fii Pearson

Correlation 1 .839**

Sig. (2-tailed) .001

N 12 12

Nifty Pearson

Correlation.839** 1

Sig. (2-tailed) .001

N 12 12

**. Correlation is significant at the 0.01

level (2-tailed).

Analysis:-

Relationship between FII and Nifty was investigated using Pearson product

moment correlation coefficient. Preliminary analyses were performed to ensure no

violation of the assumptions or normality, linearity. There was Positive correlation

between two variable(R=-0.839, N=12) with high level of FII and Nifty.


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REFERENCES:

http://stockstalks.com/stocktalksforums/index.php?PHPSESSID=1c9e4a95fb8533

0dc5c1d0bd081d10fe&topic=6.0

http://www.sebi.gov.in/workingpaper/stock.pdf

www.bseindia.com

www.nseindia.com

www.rbi.org

www.moneycontrol.com
http://www.sebi.gov.in/workingpaper/stock.pdfhttp://www.sebi.gov.in/workingpaper/stock.pdf

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Term Paper of Fii