Analytical Study of Impact of FII on Indian Stock Market with Special Reference to BSE SENSEX

-Vikram K. Joshi & Miss Richa Saxena

Scope of the Study:

The article on Analytical Study of Impact of FII on Indian Stock Market with Special Reference to BSE SENSEX focusses on the impact of variation in FII on SENSEX and how FIIs are allowed to enter in India only through stock exchanges either in the form of equity or debt which makes an impact on the rise or fall of SENSEX as FIIs are allowed to be purchased or sold daily. The volatility in the stock markets are caused mainly by the daily transactions of FIIs and also has a strong impact on the various macro- economic variables and the economy as a whole. Despite a shortage of investments in under developed countries because of low level of income and capital accumulation there has been a drastic improvement in industrialization and economic development. Shortage of domestic demand and other reasons lead to increase in foreign capital inflows. FII inflows plays a prominent role in the improvement of liquidity of stock prices of both NSE and BSE. A strong correlation exists between FIIs investments and market capitalization, FIIs investments and BSE & NSE indices. High level of FII inflows are influences by volatility and liquidity which we were mainly determined or capital market prices by FII investments. The investment limit of registered FIIs or sub-accounts in primary or secondary markets under portfolio investment scheme(PIS) is subject to a ceiling of 24% of issued share capital of a company. The limit can be extended to 49% per sectoral cap if the general body of the company approves it. The need for the foreign capital/ foreign investments arises due to the following reasons: Development of basic infrastructure, Rapid industrialization To undertake the initial risk

Global imperatives Competitive advantage To remove the technological gap Foreign investors are initiated in Indian Capital markets from 1991 and under the new industrial policy of the government there has been measures to attract foreign capital. The no. of registered FIIs are increasing every year from 2006 and in the past four years there has been more than $41 trillion worth of FII funds invested in India and the increased by more than 100%. FIIs have earmarked their presence irrespective of the situation in Indian Stock markets but also there has been a decline in FIIs inflows recently i.e., during 2010-11 because of the economic position such as increasing inflation, rupee depreciation etc.,

Source: www.sebi.gov.in

Bombay Stock Exchange (BSE):

The Bombay Stock Exchange Ltd. (BSE) was originally established in 1875 and is the oldest exchange in Asia and in the year 1986 it came up with an index known as SENSEX .

Approximately more than 4500 companies are traded in the index and is one of the largest exchange in the world.

Bombay Stock Exchange Sensitive Index:

A value - weighted stock market index, which tracks the performance of the 30 largest stocks on the Bombay Stock Exchange and the index comprises of one-fifth of the market capitalization of the entire stock exchange.

BSE is a de-mutualized and was registered as a corporate entity under the provisions of the Companies Act, 1956.

Data collection:
The data is collected for values of Sensex, FII in terms of total investment( Equity+Debt) & FII in terms of total turnover( Purchase & sales of equity& debt)

Statistical tools used:

Hypothesis t-test f-test Regression

Data analysis:
The regression equation indicates that as FII increases by 1 unit, Sensex decreases by 0.1707 units. Sensex is an index measured in hundreds, the co-efficient of Sensex implies that Sensex decreases by 100 for every Rs.17.07 FII turnover increase. The t-test statistics indicates there is a relationship between Sensex & FII and f-test statistics indicates that the variation between FII & Sensex is significant.

Findings:
The relationship between Sensex and FII total turnover is tested and there exists a relationship between the two. Reason for such trend in Sensex due to FII is that on account of high purchase and sales figures of FII. The relationship between Sensex and FII net investment is tested and the net investment was very low causing the SENSEX to remain relatively stable and the variation between FII and SENSEX was not very significant.

Conclusion:
FII turnover is relatively a weak measure of Sensex as it explains 32% influence on the fluctuation in the Sensex and is unable to determine 68% influence of the other extraneous variables. The short and long term investors were not very optimistic about the macroeconomic conditions of India when there was a comparison between SENSEX vs. Total turnover & SENSEX vs.Net investment. European countries invested huge amount of money in the form of FII and also withdrew in almost the same proportion immediately from the Indian capital market. This resulted into the strong impact of total turnover on SENSEX.

Impact of FIIs on Stock Market Instability

Source: shodhganga.inflibnet.ac.in
Objective:
The main objective of the article is to measure the impact of foreign investors portfolio investments on volatility of Indian stock market.

Background:
Domestic, external economic conditions and short run expectations also known as market sentiment motivate the FIIs investments and speculation, high mobility can increase the volatility of stock return in emerging markets. The Price or return indices in equity markets are frequently subject to extended deviations from fundamental values with subsequent reversals and that these swings are in large part due to the influence of highly mobile foreign capital. Volatility has adverse implications to the effective allocation of resources and investment and make investors averse to hold stock because of uncertainty in turn demand higher premium. A high risk premium implies a high cost of capital, low physical investment and great volatility increases the option to wait which results in delaying investment.

Scope of the study:

The scope of the study focusses on attraction for FIIs in recent years where the emerging markets of many developing countries have been attracting large private capital inflows in recent years. There has been an increasing importance of foreign portfolio investments(FPI) which is a buying and selling of stocks on a daily basis. Post economic reforms there has been a significant improvement relating to the flow of foreign capital. A major change in capital flows especially in Foreign institutional investors(FIIs) investments took place after the changes in trade and industrial policy.

Statistical tools used:

ARCH and GARCH models,

Fisher F-test

Data Analysis
ARCH and GARCH models were used for the time varying nature of the volatility. Return and volatility increase much better compared to pre-liberalization period and the volatility has declined in indian stock market after year 2000 as the second generation reforms brought much better things in the capital markets as risk has decreased but stock return has went up during the period. The variation in Indian stock market returns reduced considerably after introduction of foreign institutional investors.

There has been a positive and significant impact on the share market volatility through coefficient of GARCH whereas its impact is higher in comparison to ARCH which implies that the past volatility affect is more on the future volatility. The impact of the dummy variable, which is net investment by foreign institutional investors is negative. The total of ARCH and GARCH model in coefficient is less than 1 which shows it is perfect.

Impact of FIIs on stock market instability:

A correlation exists between the FIIs inflows and stock returns. And recent years the foreign financial inflows have been increasing and along with this the other parameters of the economy lead SENSEX crosses 20000- mark in Dec 2007. The profits of the firm lead to the high return on investment including other factors such as favourable tax laws and relaxation on the caps of various kinds of investments.

There were many developments like compulsory rolling settlement, dematerialization of securities, emphasis on free trading practices and strict corporate governance practices adopted by the SEBI etc. took place in the market leading to bringing efficiency and reduction in the volatility in the market. The reduction in the volatility of the market is linked to introduction of FIIs is really ambiguous. FII investments behavior during some events affect the investments of foreign institutional investors for short term. For example East Asian Crisis, Stock market scam 2001, Black Monday 2004 FIIs were net sellers and there was a decline in BSE Sensex, there was a net outgo of capital but there used to be a positive inflow during the following months.

Conclusion:
FIIs tend to support stock market purely to ensure stability and safety of their own investments and supports the broad base hypotheses which also suggests that FIIs should add liquidity to the local market and reduce volatility.

GAAR and its Implications

Article from CARE Ratings on May 12th 2012, review by vinod Kumar (b5-32)

Background:
Mauritius has been used as a holding company jurisdiction for making investments in India, with the investors in the holding companies being tax residents of other countries. Because of Article 13 of the Indo-Mauritian tax treaty, which provides for attribution of taxation rights among the two countries for capital gains? Article 13 (4) provides that gains derived by a resident of a contracting State shall be taxable only in that State and for other DTAA countries. This has made Mauritius an attractive route for the purpose of investment in India. A Foreign enterprise can set up a subsidiary in Mauritius, and use it to derive capital gains from acquisition and sale of shares. Although India follows the source rule for taxation of nonresidents, which makes this transaction taxable under the Income Tax Act, 1961, Article 13(4) of the DTAA gives Mauritius the right to tax this transaction. Since such gains are exempt from tax in Mauritius, the transaction becomes completely tax exempt, resulting in double non-taxation. As a result, much of the Mauritian investment into India is actually round tripping by Indian companies setting up a Mauritian entity to avoid capital gains tax in India. Mauritius mostly depend on import of capital so when India tried to renegotiate and on DTAA, not able to achieve that. So, more than 30 countries have introduced GAAR provisions in their respective tax codes to check evasion. GAAR has been in force in Australia (1981), Canada (1988), Singapore (1988), South Africa (2006) and China (2008) according to a study compiled by Deloitte. UK is considering it in 2013 while USA is also working towards it. The Budget sought to make an amendment to section 90 and Section 90A of the income tax law, a clause which says that just by submission of a tax Residency Certificate containing prescribed particulars a firm or an individual which carries on some real business in a tax haven cannot claim the benefits of a tax avoidance treaty signed with that country. Net FIIs have been illustrating an inflow since December, 2011. Net FII inflows peaked to $7 bn in February, 2012. However, foreign institutional investments have declined post the announcement of GAAR on 16th March, 2012. March saw a net inflow of mere $0.4 bn while April registered an outflow of $8 bn. This clearly indicates that the adoption of GAAR by India was not found to be favorable by foreign investors. GAAR will now be applicable from April 1st , 2013. The rupee should be driven more by fundamentals of which FII inflows are an integral part. In FY11, FIIs were around 72% of the current account deficit and 56% of net capital inflows. In the first 9 months of FY12, however, as the current account deficit widened and the FII flows slowed down, the coverage level was just

11%. Also FIIs contributed to just 12.5% of net capital flows. Therefore, any reduction in these inflows could impact the fundamentals. Since government have clarified over may issues on GAAR implementation, FII are seemed to be coming back. Economic activities are expected to pick up with the Indian economy seen to grow at around 7-7.2% during 2012-13. Inflation is also believed to moderate and hover around 6% by the end of March 2013. Therefore, it can be deduced by March 2013 when the GAAR is likely to be re-implemented the investor sentiment and confidence in the Indian economy would have improved.