INTRODUCTION

Financial markets are the catalysts and engines of growth for any nation. Indias financial market began its transformation path in the early 1990s. The banking sector witnessed sweeping changes, including the elimination of interest rate controls, reductions in reserve and liquidity requirements and an overhaul in priority sector lending. Persistent efforts by the Reserve Bank of India (RBI) to put in place effective supervision and prudential norms since then have lifted the country closer to global standards. Around the same time, Indias capital markets also began to stage extensive changes. The Securities and Exchange Board of India (SEBI) was established in 1992 with a mandate to protect investors and usher improvements into the microstructure of capital markets, while the repeal of the Controller of Capital Issues (CCI) in the same year removed the administrative controls over the pricing of new equity issues. Indias financial markets also began to embrace technology. Competition in the markets increased with the establishment of the National Stock Exchange (NSE) in 1994, leading to a significant rise in the volume of transactions and to the emergence of new important instruments in financial intermediation. Indian investors have been able to invest through mutual funds since 1964, when UTI was established. Indian mutual funds have been organized through the Indian Trust Acts, under which they have enjoyed certain tax benefits. Between 1987 and 1992, public sector banks and insurance companies set up mutual funds. Since 1993, private sector mutual funds have been allowed, which brought competition to the mutual fund industry. This has resulted in the introduction of new products and improvement of services. The notification of the SEBI (Mutual Fund) Regulations of 1993 brought about a restructuring of the mutual fund industry. An arms length relationship is required between the fund sponsor, trustees, custodian, and asset Management Company. This is in contrast to the previous practice where all three functions, namely trusteeship, custodianship, and asset management, were often performed by one body, Usually the fund sponsor or its subsidiary. The regulations prescribed disclosure and advertisement norms for mutual funds, and, for the first time, permitted the entry of private sector mutual funds. FIIs registered with SEBI may invest in domestic mutual

funds, whether listed or unlisted. The 1993 Regulations have been revised on the basis of the recommendations of the Mutual Funds 2000 Report prepared by SEBI. The revised regulations strongly emphasize the governance of mutual funds and increase the responsibility of the trustees in overseeing the functions of the asset management company. Mutual funds are now required to obtain the consent of investors for any change in the fundamental attributes of a scheme, on the basis of which unit holders have invested. The revised regulations require disclosures in terms of portfolio composition, transactions by schemes of mutual funds with sponsors or affiliates of sponsors, with the asset Management Company and trustees, and also with respect to personal transactions of key personnel of asset management companies and of trustees. India opened its stock markets to foreign investors in September 1992 and has, since 1993, received considerable amount of portfolio investment from foreigners in the form of Foreign Institutional Investors (FII) investment in equities. This has become one of the main channels of portfolio investment in India for foreigners. In order to trade in Indian equity markets, foreign corporations need to register with the SEBI as Foreign Institutional Investor (FII). SEBIs definition of FIIs presently includes foreign pension funds, mutual funds, charitable/endowment/university funds etc. as well as asset management companies and other money managers operating on their behalf The sources of these FII flows are varied .The FIIs registered with SEBI come from as many as 28 countries(including money management companies operating in India on behalf of foreign investors).US based institutions accounted for slightly over 41% those from the U.K constitute about 20% with other Western European countries hosting another 17% of the FIIs. Portfolio investment flows from industrial countries have become increasingly important for developing countries in recent years. The Indian situation has been no different. A significant part of these portfolio flows to India comes in the form of FIIs investments, mostly in equities. Ever since the opening of the Indian equity markets to foreigners, FII investments have steadily grow from about Rs.2600 crores in 1993 to over Rs.272165 crores till the end of Feb 2008. While it is generally held that portfolio flows benefit the economies of recipient countries, policy makers worldwide have been more than a little uneasy about such

investments. Portfolio flows often referred as hot money-are notoriously volatile compared to other types of capital inflows. Investors are known to pull back portfolio investments at the slightest hint of trouble in the host country often leading to disastrous consequences to its economy. They have been blamed for exacerbating small economic problems in a country by making large and concerted withdrawals at the first sign of economic weakness. They have also been responsible for spreading financial crisis causing contagion in international financial markets. International capital flows and capital controls have emerged as an important policy issues in the Indian context as well. The danger of abrupt and sudden outflows inherent with FII flows and their destabilizing effect on equity and foreign exchange markets have been stressed. The financial market in India have expanded and deepened rapidly over the last ten years. The Indian capital markets have witnessed a dramatic increase in institutional activity and more specifically that of FIIs. This change in market environment has made the market more innovative and competitive enabling the issuers of securities and intermediaries to grow. In India the institutionalization of the capital markets has increased with FIIs becoming the dominant owner of the free float of most blue chip Indian stocks. Institutions often trade large blocks of shares and institutional orders can have a major impact on market volatility. In smaller markets, institutional trades can potentially destabilize the markets. Moreover, institutions also have to design and time their trading strategies carefully so that their trades have maximum possible returns and minimum possible impact costs. FII (FOREIGN INSTITUTIONAL INVESTORS) India opened its door to foreign institutional investors in September 1992 in order to liberalize the financial market. Foreign investment refers to investments made by the residents of a country in the financial assets and the production processes of other country. FII flows form a part of foreign portfolio investment has a greater importance in India and this resulted in effective globalisation in financial service industries.

Foreign institutional investor is an investor mostly of the form of an institution or entity, which invests in the financial markets of a country different from the one where in the institution or entity was originally incorporated. FII investment is usually referred to as HOT MONEY because it can leave the country at the same speed at which it comes in. Kishore C. Samal (1997)1 opined that in recent years, particularly in developing countries like India, there had been increased liberalisation of domestic financial and capital markets, and an opening up of the market to foreign institutional investors. The main emerging feature of India's equity market was its steady combination with the global market and its subsequent problems due to the hot money movement by Foreign Institutional Investors (FIIs). Therefore, policy measures to 'develop' equity market should aim to persuade small domestic investors to participate in it and oppose the tendency of the FIIs to destabilise the promising equity market. Portfolio investments in India include investments in American Depository Receipts (ADRs), Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds. Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India. Thereafter, the Indian stock markets were opened up for direct participation by FIIs. They were allowed to invest in all the securities traded on the primary and the secondary market including the equity and other securities/instruments of companies listed to be listed on stock exchanges in India. NEED FOR THE STUDY It is influence of the FIIs which changed the face of the Indian stock markets. Screen based trading and depository are realities today largely because of FIIs. Equity research was something unheard of in the Indian market a decade ago. It was FII which based the pressure on the rupee from the balance of payments position and lowered the cost of capital to Indian business. It is due to the FIIs that a concept like corporate governance is being increasingly adopted by Indian companies; this is benefiting domestic investors also.

FIIs are the trendsetters in any market. They were the first ones to identify the potential of Indian technology stocks. When the rest of the investors invested in these scrips, they exited the scrips and booked profits. Before the arrival of FIIs, the activity in stocks used to be evenly attributed with little differences between volumes in specified and cash groups. However since FIIs concentrate on the top 200 companies against the 6,000 listed companies on BSE, the stock trading activity has concentrated to these liquid scrips making them less liquid scrips totally illiquid. Thus, FIIs have become the driving force behind the movements of the stock indices on the Indian stock markets. So, in this situation there is need to study the impact of FII on Indian Stock Market. OBJECTIVES OF THE STUDY: Following are the objectives of the study: 1. To study the scope and trading mechanism of Foreign Instititutional investors in India.
2. To find the relationship between the FIIs equity investment pattern and Indian

stock indices.
3. To analyze the impact of FIIs equity investment on specific industrial sector. 4. To study the impact of FII on Indian stock market. 5. To understand the concept of BSE sensitive index. 6. To understand the concept of FIIs. 7. To understand the relationship between the Sensex and FII. 8. To know the sector which get affected more by activities of FIIs.

SCOPE OF THE STUDY: Scope of the study is very broader and covers both the stock indices and its comparison with foreign institutional investments. But, study is only going to cover foreign investments in form of equity. The time period is limited from January 2012 to December 2012 as it will give exact impact in both the bullish and bearish trend.

The study will provide a very clear picture of the impact of foreign institutional investors on Indian stock indices. It will also describe the market trends due to FIIs inflow and outflow. The study would be helpful for further descriptive studies on the ideas that will be explored. Moreover, it would be beneficial to gain knowledge regarding foreign institutional investments, their process of registration and their impact on Indian stock market. RESEARCH METHODOLOGY Research methodology is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. Research methodology is the conceptual structure within which research is conducted. It constitutes the blueprint for the collection measurement and analysis of the data. An adage says a problem well defined is half solved. The project deals with the Impact of Foreign Institutional Investors on Indian Stock Market. This research project studies the relationship between FIIs investment and stock indices. For this purpose Indias two major indices i.e. Sensex and S&P CNX Nifty are selected. These two indices, in a way, represent the picture of Indias stock markets. Research Problem The project deals with the Impact of Foreign Institutional Investors on Indian Stock Market. This research project studies the relationship between FIIs investment and stock indices. For this purpose Indias two major indices i.e. Sensex and S&P CNX Nifty are selected. These two indices, in a way, represent the picture of Indias stock markets. Five indices of BSE i.e. BSE Auto, BSE Bankex, BSE IT, BSE FMCG, BSE Oil and Gas are also selected so as to further observe the effect of FII in particular industry . So this project reveals the impact of FII on the Indian capital market. 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 this study I have selected only one

independent variable i.e. FII. This study uses the concept of correlation, regression and hypothesis to study the relationship between FII and stock index. The FII started investing in Indian capital market from September 1992when the Indian economy was opened up in the same year. Their investments include equity only. The sample data of FIIs investments consists of daily basis from January 2001 to February 2011. DATA SOURCES The proposed study is carried with the help of both primary and secondary sources of data. PRIMARY DATA Relevant primary data would be collected with the help of the interview method. SECONDARY DATA All the secondary data used for the study would be extracted from the annual reports, manuals, websites and other published materials of the company. LIMITATIONS OF STUDY

Detailed study of the topic was not possible due to limited size of the project. There was a constraint with regard to time allocation for the research study i.e. for a period of 45 days. Suggestions and conclusions are based on the limited data.