IMPACT OF FOREIGN INSTITUTIONAL INVESTMENTS ON INDIAN

STOCK MARKET

Submitted To:

Prepared by:

Dr. Munira Habibullah

Yogita Chauhan (9)

Karishma Khan (23)
MBA SEM-III DIV- A
DBIM, VNSGU

INDEX
1

Sr.No.
1
2
3
4
5
6
7
8
9
10
11
12

Title
Abstract
Review of literature
Need for study
Research problem
Objective of study
Research methodology
Benefits of study
Limitation of study
Introduction
Data analysis
Findings
Conclusion

Pg.No
4
4
6
6
6
9
9
9
10
13
22
23

LIST OF TABLES
Sr.No.
1
2
3

Title
BSE index
Percentage of FII shareholding in total shares in selected infrastructure
companies.
Percentage of FII shareholding in total shares in selected steel
2

Pg.no
15
15
16

4
5
6
7
8

9
10

Companies
Percentage of FII shareholding in total shares in selected IT companies.
Percentage of FII shareholding in total shares in selected FMCG
companies.
Percentage of FII shareholding in total shares in selected FMCG
companies.
FII net investment in India
FII Vs SENSEX
for the year 2007-2013*
Co-Relation between Investment by FIIs and Inflation
Co-Relation between Investment by FIIs and Exchange rates in India.

17
17
17
18

19
20

LIST OF GRAPHS
Sr. No
1
2
3
4

Title
Sectoral investment by FIIs
FII net investment in India
Co-Relation between Investment by FIIs and Inflation
Co-Relation between Investment by FIIs and Exchange rates in India.

Pg.no.
14
18
19
20

ABSTRACT
The Foreign Institutional Investors (FIIs) have emerged as noteworthy players in the Indian stock
market and their growing contribution adds as an important feature of the development of stock
market in India. To facilitate foreign capital flows, developing countries have been advised to
strengthen their stock market. As a result, the Indian stock markets have reached new heights and
became more volatile making the research work in this dimension of establishing the link
between FIIs and stock market volatility. This paper makes an attempt to develop an
understanding of the dynamics of the trading behaviour of FIIs and effect on the Indian equity
3

market especially in selected sectors, in addition to comparative analysis of preferred investment

stock of FII.
INTRODUCTION:
Foreign Institutional Investment & Definition
FIIs can be said to include investors or investment funds that are from or registered in a country
outside of the one in which they are currently investing. Institutional investors include hedge
funds, insurance companies, pension funds and mutual funds. In other words Foreign
Institutional Investor means an entity established or incorporated outside India that proposes to
make investment in India. Positive tidings about the Indian economy combined with a fastgrowing market have made India an attractive destination for foreign institutional investors.
India opened its stock markets to foreign investors in September 1992 and since then;
considerable amount of portfolio investment from foreigners in the form of Foreign Institutional
Investors (FII) investment in equities is coming in India. This has become one of the main
channels of international portfolio investment in India for foreigners. In order to trade in Indian
equity markets, foreign corporations need to register with the Security Exchange Board of India
(SEBI) as Foreign Institutional Investors (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.
FII is defined as an institution organized outside of India for the purpose of making investments
into the Indian securities market under the regulations prescribed by SEBI.FII include
Overseas pension funds, mutual funds, investment trust, asset management 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 investments on behalf of
a broad-based fund. FIIs 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. A domestic portfolio manager can also register itself as an FII to manage the
funds of sub-accounts foreign institutional investor means an entity established or incorporated
outside India which proposes to make investment in India. Positive tidings about the Indian
4

economy combined with a fast-growing market have made India an attractive destination for
foreign institutional investors. FII is defined as an institution organized outside of India for the
purpose of making investments into the Indian securities market under the regulations prescribed
by SEBI. Entry Options For FII -A foreign company planning to set up business operations in
India has the following options: Incorporated Entity i.e. by incorporating a company under the
Companies Act, 1956, through Joint Ventures; or Wholly Owned Subsidiaries. Foreign equity in
such Indian companies can be up to 100% depending on the requirements of the investor, subject
to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI)
policy. Institutional investors will have a lot of influence in the management of corporations
because they will be entitled to exercise the voting rights in a company. They can actively engage
in corporate governance. Furthermore, because institutional investors have the freedom to buy
and sell shares, they can play a large part in which companies stay solvent, and which go under
influencing the conduct of listed companies, and providing them with capital are all part of the
job of management. One of the most important features of the development of stock market in
India in the last 20 years has been the growing participation of FIIs. Since September, 1992 when
FIIs were allowed to invest in India, the no. of FIIs has grown over a period of time. At end
march 2012, there were 1765 FIIs registered with SEBI.
Foreign Institutional Investors (FII) include the following foreign based categories:
Pension Funds
Mutual Funds
Investment Trust
Insurance or reinsurance companies
Investment Trusts
Banks
Endowments
University Funds
Foundations
Charitable Trusts or Charitable Societies
Further, following entities proposing to invest on behalf of broad based funds, are also eligible to
be registered as FIIs:
Asset Management Companies
5

 Institutional Portfolio Managers

Trustees

Power of Attorney Holders

Financial instruments available for FII investmentsa.

a.Securities in primary and secondary markets including shares, debentures and warrants of
companies, unlisted, listed or to be listed on a recognized stock exchange in India;
b. Units of mutual funds;
c. Dated Government Securities;
d. Derivatives traded on a recognized stock exchange;
e. Commercial papers.
Govt. of India has put investment limits on FIIs . Because capital flows can also affect the
exchange rate of a nation's currency, a quick withdrawal of investment can lead to rapid decline
in the purchasing power of a currency, rapidly rising prices (inflation) and then panic buying to
avoid still higher prices. In short, such quick withdrawals can produce widespread economic
crisis. This was partly the case in the Asian Economic Crisis that began in 1997. Although the
economic turmoil began as a result of some broader shifts in international economic policy and
some serious problems within the banking and financial sectors of the affected East Asian
nations, the capital flight which ensued -- some compared it to the great financial panics which
took place in the United StatesPositive correlations have often been held as evidence of FII
actions determining Indian equity market returns. However, correlation itself does not imply
causality.

REVIEW OF LITERATURE
Kulwantraj N. Bindu (2004),1 in his research paper titled A study on the determinants of
foreign Institutional Investments in India and the role of risk, inflation and return had conducted
an intensive study to find out the determinants responsible for the flow of FIIs and their degree
of impact. With the help of monthly data they found out that FII inflow depends on stock market
returns, inflation rates (both domestic and foreign), and ex-ante risk. In terms of magnitude, the
impact of stock market returns and the ex-ante risk turned out to be the major determinants of FII
inflow. The study has not found any causative link running from FII
6

inflow to stock returns. Raj Chaitanya (2003),2 in his research work titled Foreign Institutional
Investments discussed in length about the FIIs and their impact on the Indian economy.
Analyzing daily flow data, he concludes that the stock market performance has been the sole
driver of FII flows, though monthly data in the pre-Asian crisis period suggests some reverse
causality. Krishna Reddy Chittedi(2009),3 in his research work titled Volatility of Indian Stock
Market and FIIs analyzed the performance of sensex v/s.
The trading behaviour/biases of the
FIIs do not appear to have a destabilizing impact on the equity market. Dhwani Mehta (2009),11
in her research work titled A Study: FII Flows in India The Indian stock markets have been
experiencing humungous amount of FII flows. This has affected small investors thinking that
markets are rigged. For the good news to Indian investors it has been established that out of all
the factors, it is basically the performance of Indian stock markets vis--vis other emerging and
developed markets that probably may cause returns and not the other way round. Mohan, T.T.
(2005)12 concludes that the crossover funds in the emerging markets form only a very small
component of global portfolios and hence they are somewhat a bit less vulnerable to fluctuations
to stock returns arising from changes in fundamental and economic conditions in emerging
markets. Rai, K. and N. Bhanumurthy (2004)13 examined the role of return, risk and inflation
as determinants of foreign institutional investors in the context of India. They found that FII
inflowdepends on stock market returns, inflation rates (both domestic and foreign) and ex-ante
risk. Interms of magnitude, the impact of market returns and the ex-ante risk turned out to be the
majordeterminants of FII inflow. They have also found that there is any causative link running
from FII inflow to stock returns. And in the last, they have suggested that the stabilizing the
stockmarket volatility and minimizing the ex-ante risk would help to attract more FII, an inflow
of which have a positive impact on the real economy. Rajesh Chakraborty(2001)14 in his
researchpaper titled FII Flows to India: Nature and Causes concluded that since the beginning
ofliberalization FII flows to India have steadily grown in importance. The author analysed these
flows and their relationship with other variables Pal, P. (2004)15 found that FIIs are the major
players in the Indian stock market and their impact on the domestic market is increasing. Trading
activities of FIIs and the domestic stock market turnover indicates that FIIs are becoming more
important at the margin as an increasingly higher share of stock market turnover is accounted for
by FII trading in India. Bhupender Singh (2005),16 in his research work titled Inter-Relation
7

Between FII, Inflation and Exchange Rate discussed about as to how the financial sector of an
economy plays a vital role in attracting the Foreign Institutional Investment inflows. The study
tries to examine the extent of effect of significant macroeconomic variables; inflation and
exchange rate on the flows of Foreign Institutional Investment in India.He has tried to analyze
the inter-relation between Foreign Institutional Investment, Exchange Rate and Inflation. Given
the large volume of these flows and their impact on domestic financial markets; understanding
the major determinants of these flows becomes imperative as the economy has now moved
towards full capital account convertibility. Narayan Sethi (2007)17Globalisation, Capital Flows
and Growth in India: Capital flow is of importance, when the magnitude of those flows is steady
and stable. The international capital flow like direct and portfolio flows has great contribution to
impact the economic behavior of the countries in a positive way.

RESEARCH METHEDOLOGY
NEED FOR STUDY
Since the beginning of liberalization FII flows to India have steadily grownin importance.
Foreign capital flows have come to be acknowledged as one of the importantsources of funds for
economies that would like to grow at a rate higher than what their domesticsavings can support.
This resulted in the integration of global financial markets. As a result, capital started flowing
freely across national borders seeking out the highest rate of return. Indiais considered as a good
8

investment option by world investors in spite of political differences andlack of infrastructure

facility etc. Indian market presents vast potential and alluring andencouraging foreign investors
continuously.

Research Problem
An adage says a problem well defined is half solved. The project deals with the Impact of
Foreign Institutional Investments on Indian Stock Market.

OBJECTIVES OF THE STUDY

To find out the relationship between the FIIs investment and Indian stock market (BSE).
To analyze the sector wise investment pattern of FII during 2007-2012
To make a comparative study among companies of different sectors attracting FIIs
To identify some of the factors like GDP, Inflation and Fiscal Benefits that influence
investment decision of FIIs in BSE.

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.
The study carried out is analytical and empirical in nature in which it explores the relationship
between the Inflows of FII and their impact on Indian Capital Market. Further, in order to show
the position of FIIs in different sectors, we selected 10 companies comprising of five major
sectors i.e., Real estate, Banking, IT, FMGC and Iron and Steel.
The research methodology here includes:
Variables
Research design
Sampling design
Sampling technique
Data collection method

Variables:
Inflation
Exchange rates
Hypothesis:
H0: There is association between inflation and investment by foreign institutes.
H0: There is association between FII investment and sensex.
H0: Investments by foreign institutes affects exchange rate.
RESEARCH DESIGN
Exploratory Research
As an exploratory study is conducted with an objective to gain familiarity with the phenomenon
or to achieve new insight into it, this study aims to find the new insights in terms of finding the
relationship between FIIS and Indian Capital market.
SAMPLING DESIGN
Universe
In this study the universe is finite and will take into the consideration related news and events
that have happened in last few year.
Sampling Unit: -As this study revolves around the foreign institutional investment and Indian
Capital market. So the sampling unit is confined to only the Indian Capital market.
SAMPLING TECHNIQUE: Convenient Sampling: Study conducted on the basis of availability of the Data and requirement
of the project. Study requires the events that have impact on the Indian Capital market.
DATA COLLECTION METHOD:Secondary data: For the secondary data various literatures, books, journals, magazines, web links
are used. As there are no possibilities of collecting data personally so no questionnaire is made.
10

RESEARCH ANALYSIS TOOL

Correlation:
This analysis tool and its formulas measure the relationship between two data sets that are scaled
to be independent of the unit of measurement. The population correlation calculation returns the
covariance of two data sets divided by the product of their standard deviations. We can use the
Correlation tool to determine whether two ranges of data move together that is, whether large
values of one set are associated with large values of the other (positive correlation), whether
small values of one set are associated with large values of the other (negative correlation), or
whether values in both sets are unrelated (correlation near zero).

BENEFITS OF STUDY
The followings are the benefits of the study:

We can study the factors that influence investment decision of FIIs

We can know which sector is most preferred for investment in India.

We can get knowledge about how FIIs affect Indian capital market

LIMITATIONS OF STUDY
The followings are the limitations of the Study:

Analysis is based on limited knowledge about technical tools.

Data are based on secondary source so they might not be up-to-dateor limited availability
of data might be there.

11

DATA ANALYSIS
The number of scrips under following index are:
BSE Sensex 30
BSE Consumer Durables (CD) 22
BSE Capital Goods (CG) 49
BSE Fast Moving Consumer Goods (FMCG) 44
BSE Information Technology (IT) 42

12

From the above table it is observed that the FIIs showed huge investments in the gross purchases
of Debt and Equity by 82.13 per cent to Rs. 9,48,018 crores in 2007-08 from 5,20,506
crores in 2006-07. The combined gross sales by FIIs increased by 80 per cent to 8,81,839 crore
from 4,89,665. FIIs turned towards net selling in equity and debt for profit booking and seeing
the massive sell out of shares in global markets including India during the period 2008-09. The
analysis of the above table depicts a negative view of the FIIs investment in India during 199899 and 2008-09. The active reason could be tremendous selling in these two years. It is also clear
from the table that the gross purchase of debt and equity by FIIs declined by 7.2 per cent to Rs.
9,21,285 crores in 2011-12 from 9,92,559 crores in 2010-11. The combined gross sales by FIIs
declined by 2.2 per cent to 8,27,562 crore from 8,46,161 crores during the same period.

SECTORAL INVESTMENT BY FIIs IN INDIA

13

It can be seen from the diagram above that the major proportion of FII investments is into
consumer goods and then followed by investments in the IT and the banking sector. It can be
observed from the table below that India is one of the preferred investment destinations for FIIs
over the years. The total number of FIIs in India has almost grown 99 times since the beginning
they were allowed to enter the Indian equity markets.

Percentage of FII shareholding in total shares in selected infrastructure

companies.

14

The table shows the comparative figures in DLF and JAI PRAKASH. It is evident from the table
that FIIs share holdings in DLF drastically increased that is 7. 17 percent in the year 2007-08 to
15.46 percent in the year 2011-12. While in Jai Prakash associates the share holdings of FIIs
decreased over the years i.e., from 2007-12 with 26.12 percent to 18.93 percent.

Percentage of FII shareholding in total shares in selected steel

companies

The table shown above reveals a detailed account of the quarterly FII inflows during the last five
years. It is evident from the table that during the study period Jindal Steel has outperformed
TATA Steel in FII inflows. Another significant observation from the table is that the FIIs share
in TATA Steel is lowest during the 2011-12. While in the Jindal Steel it is lowest during the year
2008-09.

The table clearly show the comparative study of the largest public (SBI) and private (ICICI)
15

sector banks of India. The one significant observation from the table is that the ICICI bank has
attracted more FII inflow than the public sector bank (SBI). FIIs are showing interest in private
sector banks as they are secular growth stores and are relatively better investment options as
compared with public sector banks in an environment where asset quality is the reason for stress
on banking.
Percentage of FII shareholding in total shares in selected IT companies.

The table given above presents a comparative study of the largest IT companies in attracting
FII investments. The table makes it evident that of the selected two companies, FIIs have
invested more funds into equity shares of Infosys than TCS. Further, it is also quite evident that
the two companies Infosys and TCS have faced the global showdown of 2008-09.

Percentage of FII shareholding in total shares in selected FMCG

companies.

16

The table above presents a comparative analysis between the two FMGC companies of India. It
is evident from the table that there has not been any difference in both the companies, attracting
FII investment. But Hindustan Unilever has outperformed than ITC during the study period.

FII net investment in India

17

YEAR
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-2013

FII NET INVESTMENT

39566.77
62340.65
41923.21
142923.11
144453.43
96662.56
163944.33

FII NET INVESTMENT

180000
160000
140000
120000
100000

FII NET INVESTMENT

80000
60000
40000
20000
0

From the above graph it is seen that FIIs net investment in India have shown fluctuating trend. It
has grown in the year 2008 then a decline in 2009. In 2010 it has shown a tremendous increase
compared to 2009 and maintained its position in 2011. But in 2012 it had a decline thereafter
again it has grown in the year 2013.

FII Vs SENSEX
for the year 2007-2013*
18

Co-Relation between Investment by FIIs and sensex.

Year
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-2013

Sensex
20286.99
9647.31
17464.81
20509.09
15454.92
19426.71
18737.75

FII Investment(Rs Crore)

71486.30
-52987.40
83424.20
133266.30
-2714.20
103272.71
99734.42

150000

100000

50000
Sensex
FII Investment(Rs Crore)
0

-50000

-100000

SEN
SEX
SENSE
X
FII
INVEST
MENT

FII
INVEST
MENT

1
0.92
5021

To analyze the relationship of Indian stock market and FII investments, we have calculated correlation
between the indices and FII data for 7 year period. The correlation between FII and Sensex comes out
at about 0.925 which is significantly positive. That means each one rupee investment by FII would move
up Sensex by about 0.92.

Co-Relation between Investment by FIIs and Inflation

19

YEAR
Jan 2012-13
Feb 2012-13
March 2012-13
April2012-13
May 2012-13
June 2012-13
July 2012-13

NET FII INVESTMENT

25006.3
28440.5
14919.4
8546.88
9414.34
12323.09
10788.45

INFLATION
11.62%
12.06%
11.44%
10.24%
10.68%
11.06%
10.85%

INFLATION
12.50%
12.00%
11.50%
11.00%
10.50%
10.00%
9.50%
9.00%

INFLATION

FII
FII
INVEST
MENT
INFLATI
ON

1
0.90
1931

INFLA
TION

As correlation between FII and inflation is 0.901931 we can say that there is perfect correlation
between inflation and FII Investments. Which means FII investment increases with higher
inflation rate.

20

Co-Relation between Investment by FIIs and Exchange rates in India.

YEAR

EXCHANGE RATES
43.24
48.36
42.60
45.48
47.84
54.34

2006-07
2007-08
2008-09
2009-10
2010-11
2011-12

FII INVESTMENT
71486.30
-52987.40
83424.20
133266.30
-2714.20
103272.71

FII INVESTMENT
140000
120000
100000
80000

FII INVESTMENT

60000
40000
20000
0
-20000

43.24

48.36

42.6

45.48

-40000
-60000

Exch
ange
rate
Excha
nge
rate
FII
invest
ment

1
0.097
68

FII
invest
ment

21

As correlation between FII investment and exchange rate is -0.09768, we can say that there is
perfect negative correlation between exchange rates and FII Investments. Which means FII
investments are not affected by exchange rate fluctuations.
FINDINGS
FIIs has impact on improvement of market efficiency. As due to increasing investment of
FIIs, SEBI and other regulatory bodies have to improve market trading efficiency in
order to sustain FIIs investment and also to attract more investment.
Economic growth (IIP and GDP), inflation and interest rate are the key parameters on
which FIIs invest in any countries. Also FIIs investments lead to economic growth of
country since they bring in the much needed capital.
With the help of trend analysis of FIIs it can be seen that they are now investing more in
construction and banking sector. Also now they are moving more towards PSU sector.
FIIs investment is now no-more concentrated on the top few companys but they are
now increasingly investing in medium share and low share companies also.

22

CONCLUSION
FII is a vital component which helps in the development of financial market and the overall
financial development thereby allowing the capital flows available in a country to pursue its
trajectory of economic growth. Form all the above discussions and data analysis of the study it is
inferred that there has been growing presence of the FII inflows in the Indian stock markets
which is evident through the net cumulative investments and at times of recession there has been
a decline in the inflows. It is also clear from the study that there is an increase in the number of
FII registered with SEBI.
The study conducted observed that investments by FIIs and the movements of Sensex are quite
closely correlated in India and FIIs wield significant influence on the movement of sensex. There
is little doubt that FII inflows have significantly grown in importance over the last few years
According to findings and results, I concluded that FII did have high significant impact on the
Indian capital market. Thus FIIS have positive impact on BSE Sensex. However there are
other major factors that influence the bourses in the stock market, but FII is definitely one of the
factors. This signifies that market rise with increase in FIIs and collapse when FIIs are
withdrawn from the market. Moreover, the findings of this study also indicate that Foreign
Institutional Investors have emerged as the most dominant investor group in the domestic stock
market in India. Data on shareholding pattern show that the FIIs are currently the most
dominant non-promoter shareholder in most of the Sensex companies and they also control
more tradable shares of Sensex companies than any other investor groups.

23

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