A STUDY ON IMPACT OF FIIs ON INDIAN STOCK MARKET

HITLAL

MBA FINAL

DEPARTMENT OF MANAGEMENT STUDIES

CENTRAL UNIVERSITY OF HARYANA

Email: hiteshaggarwal0@gmail.com

CONTACT NO. 09541188811

ABSTRACT

Since Indian stock market is vast and attract investors as a hotspot of investment. The major
part of investment in Indian market is attributed to institutional Investors among whom
foreign investors are of primary importance .This paper Examines whether FII influence the
Indian market. Also examine the volatility of BSE Sensex due to FII.Hence; understanding
the determinants of FII is very important for any emerging economy as FII exerts a larger
impact on the domestic financial markets in the short run and a real impact in the long run.
The present paper is an attempt to find out determinants of foreign institutional investment in
India, a country that opened its economy to foreign capital following a foreign exchange
crisis. The objective of the study is to find out whether there exist relationship between FII
and Indian market using correlation and regression test and also show the trends of FII from
1992 to 2013. The data for the study uses the information obtained from the secondary
resources like Journals, website of BSE, www.fii.org, etc.
Key terms FII, BSE SENSEX, Influence of FII on Indian stock market, correlation and
regression method, Trends of FII in India etc.

INTRODUCTION

India, after united state host the largest number of listed companies. Most of the under
developed countries suffer from low level of income and capital accumulation. Though,
despite this shortage of investment, these countries have developed a strong urge for
industrialization and economic development.. With rapid changes in the economy because of
liberal economic policies and fast pace changes due to globalization, Indian market has
become a focus point for foreign investors.
Organizations tend to target for large volume of trade in this era of globalization.
International investment is a powerful source in propelling the world toward closure
economic integration.FII refers to the investment made by resident of one country in the
financial capital and asset of another country. Investment has been a powerful catalyst for
economic growth. In the 1990-1991 India was suffering from the financial crises then India
opened its stock market to foreign investor in September 1992, received portfolio investment
from FII in equities. Market experts attribute the inflow to renewed optimism in the Indian
equities, which is expected to benefit from favourable fiscal and monetary action by
government. Initially there were many terms and conditions which restricted many FII to
invest in India.

FII: The term Foreign Institutional Investor is defined by SEBI as under:

"Means an institution established or incorporated outside India which proposes to make
investment in India in securities. Provided that a domestic asset management company or
domestic portfolio manager who manages funds raised or collected or brought from outside
India for investment in India on behalf of a sub-account, shall be deemed to be a Foreign
Institutional Investor."

Foreign Investment refers to investments made by residents of a country in financial assets

and production process of another country. Entities covered by the term FII include

Pension fund - Mutual fund - Investment Trust - Endowment

University Fund - Foundation - Charitable Trust - Banks

Insurance & Reinsurance

The term is used most commonly in India to refer to outside companies investing in the
financial markets of India. International institutional investors must register with Securities &
Exchange Board of India (SEBI) to participate in the market. One of the major market
regulations pertaining to FII involves placing limits on FII ownership in Indian companies.
They actually evaluate the shares and deposits in a portfolio.FII could have a crowding in
effect on domestic saving and investment mobilization. This is based on assumption that
foreign investment inflow raises the share price up and reduces the cost of capital to the
corporation of host country. An attractive stock picking valuation has encouraged overseas
investor park their fund more confidently in India. Foreign investor faith in Indian market
they pumped massive US $ 10 billion in Indian market Jan Mar 2013 quarter. No. of
registered FII in India stood at 1765 in 2012-2013. Now Germany based software company
GRAEBERT is planning to enter in India to computer aided deigns and Japanese electronics
GIANT PANASONIC has decided to invested 150 crore over 2013-2016 in India. FII is
allowed to enter into our country only through stock exchanges either in the form of equity or
debt. Thus it makes an impact on the rise or fall of SENSEX, since FII is allowed to be
purchased or sold daily. The daily transaction of FII is the reason behind the volatility in the
stock markets and has strong impact on the various macro-economic variables and the
economy as a whole. Thus, the paper attempts to analyses the impact of variation in FII on
Sensex and to study the degree of relationship between them in various FII movement
scenarios.

Literature Survey:-
In India, the purchase of domestic securities by FIIs was first allowed in September 1992 as
part of liberalisation process that followed the balance of payment arises in 1990-1991 Now a
day significant portion of Indian corporate sector securities are held by FII, such as pension
fund, mutual fund, insurance companies. These investors are often viewed as sophisticated
investor as this institutional investor are better informed and better equipped to process
information than individual investor.
In 1990s, several have explored the cause and effect relationship between FII flow and
domestic stock market return but the result have been mixed in nature.
The waves of liberalization result in appreciation in stock price which is followed by inflow
from foreign investor.Saleem Mahammed (2013).He found that relationship between Sensex
vs. Total turnover & Sensex vs.Net investment exists and it is significant, it produces a
positive impact in the Sensex as it starts moving up, but when the case is opposite, Joshi
Vikram (2011), the result of this study is that the foreign investment is determined by stock
market return. But foreign investment is not a major factor for the stock market boom in India
the FII are increasingly dominant in the stock market. Relationship between Sensex vs. Total
turnover & Sensex vs.Net investment exists and it is significant, it produces a positive impact
in the Sensex as it starts moving up, but when the case is opposite, Anand Bansal and J. S.
Pasricha (2009) found correlation between FII and market votality and market return has
been comparatively low. it means vitality in Indian market is not the function of FII
investment flows.S.S.S. Kumar (2006) concluded with use the of reggression analysis that the
combined force of the FIIs mutual fund are a powerful force and in fact their direction can
forecast market direction.Bhupender Singh (2005) he discussed about as to how financial
sector of an economy play a vital role in attractive the FII inflate study to examine the extent
of effect of significant macroeconomic variable, inflation and exchange rate on flow FII in
India. He has tries to analysis inter relation between FII and exchange rate .Batre,A(2004) he
analysis the trading behaviour of and their impact of trading upon stock market votality. It
was found that there is a strong evidence for that FII on daily basis have been positive
relation with stock market. Pal, P. (2004) he analysis that FII are major player in the Indian
stock market and their impact on the domestic market is increasing trading activity of FII and
domestic market turnover indicate that FII are becoming more important at the margin as an
increasing higher share of stock market turnover is accounted by FII trading in
India.Mukharjee (2002) he analysis that FII flow in Indian market tend to be caused by the
return in the domestic equity market. Return in Indian equity market is an important factor
that has impact on FII flow.
There have been a number of valuable studies of Indian market FII correlation all of which
present evidence of either strong, weak or no causality of Indian capital market.

Need of the study- Since the beginning of liberalization FII flows to India have steadily
grown in importance? Foreign capital flows have come to be acknowledged as one of the
important sources of funds for economies that would like to grow at a rate higher than what
their domestic savings 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. India is considered as a good investment option by world investors in
spite of political differences and lack of infrastructure facility etc. Indian market presents vast
potential and alluring and encouraging foreign investors continuously. Foreign investor faith
in Indian market they pumped massive US $ 10 billion in Indian market Jan Mar 2013
quarter. This paper reveals if the FIIs influence the Indian Equity Market. The present study
also focuses on their investment pattern in the Indian stock market. It examines the factors
expected to affect the investment decisions of FIIs. The Foreign Institutional Investors (FIIs)
have emerged as important players in the Indian equity market in the recent past. This paper
makes an attempt to understand whether there exists a relationship between FII and Equity
Market returns in India.

Investments by FIIS:
There are generally two ways to invest for FIIs.
 Equity Investment: 100% investments could be in equity related instruments or up to
30% could be invested in debt instruments i.e.70 (Equity Instruments): 30 (Debt
Instruments)
100% DEBT 100% investment has to be made in debt securities only

The Eligibility Criteria for Applicant Seeking FII Registration is as Follows:

Regulated by appropriate foreign regulatory authority in the same capacity where
registration is sought from SEBI.
Permission under the provisions of the Foreign Exchange Management Act, 1999 (FEMA)
from the RBI.
legally permitted to invest in securities outside country or its incorporation/establishment.
the applicant must be a fit and proper person.
Local custodian and designated bank to route its transactions.
Entry Options for FII:
Incorporated Entity By incorporating a company under the Companies Act, 1956 through
Joint Ventures; or
Wholly Owned Subsidiaries

Bombay Stocks Exchange:

BSE have 23 stock exchanges in the country, Mumbais (earlier known as Bombay), Bombay
Stock Exchange is the largest, with over 6,000 stocks listed. The BSE accounts for over two
thirds of the total trading volume in the country. Established in 1875, the exchange is also the
oldest in Asia. Among the twenty-three Stock Exchanges recognized by the Government of
India under the Securities Contracts (Regulation) Act, 1956..
BSE Sensex:

The BSE Sensex is a value-weighted index composed of 30 companies with the base April
1979 = 100. It has grown by more than four times from January 1990 till date. The set of
companies in the index is essentially fixed. These companies account for around one-fifth of
the market capitalization of the BSE.
National Stock Exchange of India:
The National Stock Exchange of India Limited has genesis in the report of the High Powered
Study Group on Establishment of New Stock Exchanges, which recommended promotion of
a National Stock Exchange by financial institutions (FIs) to provide access to investors from
all across the country on an equal footing. Based on the recommendations, NSE was
promoted by leading Financial Institutions at the behest of the Government of India and was
incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the
country. On its recognition as a stock exchange under the Securities Contracts (Regulation)
Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM)
segment in June 1994. The Capital Market (Equities) segment commenced operations in
November 1994 and operations in Derivatives segment commenced in June 2000.
.Objective of the study- Following are the objective of the study
To find out the relationship between FII and Indian Stock Market.

To determine the behaviour and trend of FIIs on Indian stock market

To determine the factors that influence investment decision of FIIs.

Research methodology- The report examines The Influence of Foreign Institutional

Investments on Equity Stock Market in India. The scope of the research comprises of
information derived from secondary data from various sources. The various information and
statistics were derived from the different sources e.g. websites journals, books etc. Bse
Sensex was a natural choice for inclusion in the study, as it is the most popular market indices
and widely used by Market participants for benchmarking. The study period covered under
this is for the years 2010- 2013.The secondary data constitutes of monthly FII flows data and
the daily returns of SENSEX from BSE websites. The analysis has been made by, correlating
the FII net investment with equity market returns to identify whether a relation exists between
them.

EMPRICAL STUDY:-

FII INVESTMENT 1992-1993 TO 2012-13 (IN INR CRORES)

Financial Year Equity Debt Net FIIs

Investment
1992-1993 13 0 13
1993-1994 5127 0 5127
1994-1995 4796 0 4796
1995-1996 6942 0 6942
1996-1997 8546 29 8575
1997-1998 5267 691 5958
1998-1999 -717 -867 -1584
1999-2000 9670 453 10122
 2000-2001 10207 -273 9933
2001-2002 8072 690 8763
2002-2003 2527 162 2689
2003-2004 39960 5805 45765
2004-2005 44123 1759 45881
2005-2006 48801 -7334 41467
2006-2007 25236 5605 30840
2007-2008 53404 12775 66179
2008-2009 -47706 1895 -45811
2009-2010 110221 32438 142658
2010-2011 110121 36317 146438
2011-2012 43738 49988 93726
2012-2013 140033 28334 168367
* The data presented above is collect from SEBI website.
200000

150000

100000
Equity
50000 Debt
Net Investment
0

-50000

-100000

FIIs were allowed to invest in capital market securities since September 1992. However,
these have invested from January, 1993 only. The net inflow has risen from Rs. 13 inr crores
in 1993 to Rs. 168368 crores in 2013 with relative ups and downs during the period as per the
above table. It may be concluded that there are significant variations in the yearly inflow of
FIIs into the Indian capital market during 1993-2013. During 1997-98, FII inflows posted a
fall of 30.51%. This slack in investments by FIIs was primarily because of the S-East Asian
Crisis and the months of volatility experienced during November 1997 and February 1998.
The above trend show that debts have very low volatility but in equity and net FIIs have high
volatility. IN 2008-09 equity and net FIIs go down to negative because death of LEHMAN
BANK after recession period India provide change in FII regulation then FIIs come in India
at rapid speed in equity instead of debt. IN 2012-13, FIIs in equity is positive but debt going
down due to various scam happened in India.
 Sectoral Investmemnt By FIIs

consumer Goods Cement

22%1% Bank Auto
2% Metals Petrolium
1% Telecommunication Power
7% 49% Pharma I.T.
1%
2% ENGG
3% 11% 1%

It can be seen from the above diagram that major proportion of FIIs investment in the
consumer goods and after followed by I.T. sector and Banking sector. India is the one
preferred investment destination for FIIs over the year. Total number of FIIs in India has
almost grown 99 times since beginning they were allowed to enter in Indian stock market.
Because In 1992-1993, 18 FIIs were registered in India but in 2012-2013, 1765 FIIs has
registered.

HYPOTHESIS

Null Hypothesis (Ho): There is no influence of FIIs on the Stock indexes.

Alternative Hypothesis (Ha): There is an influence of FIIs on Stock indexes.

If we reject the Ho, then we accept the Ha, setting the significance level to 5%.

SUMMARY OF CORRELATION

return return FII

BSE NSE Return
return BSE 1
0.99660
return NSE 4 1
 0.34634 0.37311
FII Return 8 9 1
Correlation between BSE and NSE is very high because someone invest their money on BSE
also invest on NSE.Correlation between BSE and FIIs have positive moderate that means if
any change in FIIs then also change in BSE SENSEX. Correlation between NSE and FIIs
have also moderate positive that means FIIs also effect on NSE.

SUMARRY OF BSE AND FIIs

SUMMARY OUTPUT
Coefficien Standard
Regression Statistics ts Error t Stat P-value
0.34561 Interce 0.8167505 4.24247181 0.80979
Multiple R 3 pt 0.198039 71 4 1
0.11944 7.55877E- 2.20985604
R Square 8 slope 0.0002 05 8 0.03356
Adjusted R 0.09498
Square 9
Standard 4.97238
Error 8
Observations 38

As seen in the above table, the slope equation of the above regression equation indicates that
as FII increases by 1 unit, Sensex increase by 0.0002 units. Secondly, value of Adjusted R2
comes to 0.09 and R2 comes to be 0.11 which is comparatively weak. Thus we can conclude
that, the explanatory variable (FII Turnover) is relatively a weak measure of Sensex as it
explains 11% influence on the fluctuation in the Sensex and is unable to determine 89%
influence of the other extraneous variables. Standard errors show that there have 4.9% chance
to be error in calculated value. This relationship is tested with the help of t statistic. The t
statistics is calculated and it comes out to be 4.242472. The tabulated value of t for 36
degrees of freedom at 5% level is 2.0281. Thus, t calculated > t tabulated for 36 d.f. and 5 % .
So we reject H0 and accept H1. Thus, we conclude that there exists a relationship between
Sensex & FIIs.

SUMMARY OF NSE AND FIIs

SUMMARY OUTPUT
Standard
Regression Statistics Coefficients Error t Stat P-value
0.37259 0.14458517 0.86313
Multiple R 3 Intercept 4 0.83277 4.17362 7
0.13882 0.00018566 2.40902 0.02123
R Square 6 slope 4 7.71E-05 2 7
Adjusted R 0.11490
Square 4
Standard 5.06991
 Error 6
Observations 38

As seen in the above table, the slope equation of the above regression equation indicates that
as FII increases by 1 unit, Sensex increase by 0.0001 units. Secondly, value of Adjusted R2
comes to 0.11 and R2 comes to be 0.13 which is comparatively weak. Thus we can conclude
that, the explanatory variable (FII Turnover) is relatively a weak measure of Sensex as it
explains 13% influence on the fluctuation in the Sensex and is unable to determine 87%
influence of the other extraneous variables. Standard errors show that there have 5% chance
to be error in calculated value. This relationship is tested with the help of t statistic. The t
statistics is calculated and it comes out to be 0.17. The tabulated value of t for 36 degrees of
freedom at 5% level is 2.0281. Thus, t calculated > t tabulated for 36 d.f. and 5 % . So we
reject H0 and accept H1. Thus, we conclude that there exists a relationship between Sensex &
FII

Determinants of FII Flow in India

1.) Risk-Whenever risk in home market increases, the foreign investors would start to pull out
of their home country thereby creating a deficiency of funds in domestic market, hence so as
to attract investment domestic interest rate would increase thereby to ensure that the above
equality is restored.

2.) Inflation-At the time of high inflation, the real return on fixed income securities like
bonds and fixed deposits declines. Thus a bond which gives say around 7.5% interest rate
actually gives a real return of just 1% if the inflation is 6.5%. If the inflation increases further,
the real return would decline more.

3) Interest rates -For the business, cost of borrowing rises this has a negative result on their
profit margins. As a result they might even delay any investment activity which may be
funded by borrowing to some later period when the interest rates are lower so as to reduce
their investment costs. As it can be seen from the above table, over the past year RBI has
increased the repo rate reverse repo rate, CRR and SLR. This has led to an increase in the
Prime Lending Rate (PLR) and hence the general interest rate in the economy.

4) Good news /bad news -If say there is some bad news in the nation, which affects that is
decreases the asset price, which in turn decreases the return and hence FII would with draw
from the market. However on the other hand, if there is good news, asset prices would
increase; thereby increasing return and hence FII would be attracted. But the sensitivity with
which investors withdraw is greater than with which they invest.
5.) Equity Returns-The results show that, the equity return in India (RBSE) is the main
driving force for foreign institutional investment, which is significant at all levels. That is
increase in the returns in US stock market adversely affects the portfolio investment flowing
to India. Predictable risk in foreign market (SDSRF) adversely affects FII flow to India and is
highly significant in the model.

6)-GDP of India -Both have more or less direct relationship. The reason is change in capital
account. When interest rates were high India was attracting lot of investments so the credit
balance was high for that period. It kept on increasing form 2003-04 to 2007-08 and interest
rates also kept on increasing from 2003-04 to 2007-08.besides there are various other factors
like rules and regulation , taxation , govt. policies etc.

FINDING:-

BSE Sensex and nifty has a moderate degree of positive correlation with FII
investment as a result their inflow on Indian stock cant be ignored.

FII has impact on improvement on market efficiency as due to increase investment of

FII, SEBI and other regulatory bodies have to improve the market trading efficiency
in order to sustain FII investment and also attract more investment.

With the trend of FII, it can be seen that they are investment more in construction and
banking sector.

CONCLUSION:- It is observed that the FIIs investment has shown significant improvement
in the liquidity of stock prices of both BSE and NSE. However, it is believed that there exists
a moderate degree of positive correlation between FIIs investment and market capitalization,
FIIs investment and BSE & NSE indices, revealing that the liquidity and volatility was
influenced by FIIs flows. In this study I tried to find out the impact of FDIs and FIIs on
Indian Stock Market .The important result of this study is that the foreign investment is
determined by stock market return. But foreign investment is not a major factor for the stock
market boom in India the FII are increasingly dominant in the stock market. The domestic
investors and domestic companies remain not so dominant.

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