Maharaja Ranjit Singh College of

Professional Sciences, Indore

Major Research Project

On

“IMPACT OF FOREIGN INSTITUTIONAL

INVESTMENT INVESTORS ON INDIAN STOCK
MARKET”

Submitted to
DEVI AHILYA VISHWAVIDYALAYA, INDORE
For the fulfillment of degree of
M.B.A (Full Time) IV SEM
(Session 2017-2019)

Supervision & Guided by Submitted by

Dr.H.S.Saluja Dinesh koge

Professor MBA (FT) IV SEM
HR/FINANCE

1
 Maharaja Ranjit Singh College of Professional Sciences,
Indore (MP)

Declaration
I Dinesh koge a student of Maharaja Ranjit Singh College of Professional
Sciences, Indore hereby declare that the work done by me to do the Major
Research Project titled “IMPACT OF FOREIGN INSTITUTIONAL
INVESTMENT INVESTORS ON INDIAN STOCK MARKET”

“IMPACT OF FOREIGN INSTITUTIONAL INVESTMENT INVESTORS ON

INDIAN STOCK MARKET”

Is authenticate as per my knowledge and work outcome of my own research.

This report in any form has not been submitted to any other institute or
university for any degree or similar award.

Date: Dinesh koge

Place: INDORE MBA (FT) IV Sem.
HR/FINANCE

2
 Acknowledgement

I sincerely and religiously devote this folio to all the gem of persons who have
openly or silently left an ineradicable mark on this research so that they may be
brought into consideration and given their share of credit, which they genuinely
and outstandingly deserve.

I am essentially indebted to my guide H.S.saluja for this sweating learning

experience. He overlooked my faults and follies, constantly inspired and
mentored via his proficient direction. It was a privilege to work under his/her
sincere guidance.

I express my thanks to Director, Dr. Ira Bapna, Coordinators & faculty

members for his considerate support whenever and wherever needed. I express
my indebtedness to the management of Maharaja Ranjit Singh College of
Professional Sciences for inspiring me to grab and utilize this opportunity.

With profound sense of gratitude, I would like to truthfully thank a recognizable

number of individuals who I have not mentioned here, but who have visibly or
invisibly facilitated in transforming this research into a success saga.

Above all, I would like to conscientiously thank the Omnipotent, Omnipresent

and Omniscient God for his priceless blessings!

Date: Dinesh koge

Place: INDORE MBA (FT) IVSem.
HR/FINANCE

3
 Certificate from Director & Faculty Guide

This is to certify that Dinesh koge of MBA (Full Time) IV semester in Maharaja
Ranjit Singh College of Professional Sciences, Indore (M.P.) has carried out a
Major Research Project titled “IMPACT OF FOREIGN INSTITUTIONAL
INVESTMENT INVESTORS ON INDIAN STOCK MARKET”

The work done by him is genuine and authentic.

The work carried out by the student was found satisfactory. We wish him all the
success in career.

Director Faculty Guide

Dr. Ira Bapna H.S.saluja
MRSCPS, Indore MRSCPS, Indore

4
 Certificate from Internal & External Examiner

This is to certify that Dinesh koge of MBA (Full Time) IV semester in Maharaja
Ranjit Singh College of Professional Sciences, Indore (M.P.) has carried out a
Major Research Project titled “IMPACT OF FOREIGN INSTITUTIONAL
INVESTMENT INVESTORS ON INDIAN STOCK MARKET”

The work done by him is genuine and authentic.

The work carried out by the student was found satisfactory. We wish him all the
success in career.

Internal Examiner External Examiner

Date:

Place: INDORE

TABLE OF CONTENTS
5
1. Abstract

2. Introduction

- Stock Exchange

- Securities and exchange board of India

- BSE

- BSE SENSEX

- National Stock Exchange

- NIFTY 50

- Foreign Institutional Investors

- FII in India

- Timeline

- Regulations

- Investment opportunities for FIIs

- Investment limit for debt Investments

- Prohibition on Investments

- Taxation of FIIs

3. Literature Review

4. Research Methodology

– Scope of the study

– Data Collection

- Analytical technique

5. Data Analysis

6. Findings of the study

7. Conclusion

8. References

6
 ABSTRACT

The liberalization process was initiated in India in the early 1990s brought radical changes in
the functioning of Indian stock market. Rising globalization, deregulation, and foreign
portfolio investments made the Indian stock exchanges competitive and efficient in their
functioning. The role of investors is the key to success of market guided economic system
and since it is FIIs who pump their savings into the markets, their investments need to be
channelized to the most rewarding sectors of the economy. One of the most dominant
investors groups that have emerged to play a critical role in the overall performance of the
stock market are Foreign Institutional Investors (FIIs).

Being a developing country, India attracts a large sum of FOO every year.

These foreign investments have a great impact on the economy of India. Indian
stock market, which is one of the indicators of the economic status, is also being
affected by the foreign investments made.

This portfolio flows by FIIs bring with them great advantage as they are engines
of growth while lowering the cost of capital in the emerging market. This paper
indicates whether Foreign Institutional investors really have an impact on the
stock market of India.

7
 DEFINITION OF

“IMPACT OF FOREIGN INSTITUTIONAL

INVESTMENT INVESTORS ON INDIAN
STOCK MARKET”

Definition: Foreign institutional investors (FIIs) are those institutional investors which invest
in the assets belonging to a different country other than that where these organizations are
based.

Description: Foreign institutional investors play a very important role in any economy. These
are the big companies such as investment banks, mutual funds etc, who invest considerable
amount of money in the Indian markets. With the buying of securities by these big players,
markets trend to move upward and vice-versa. They exert strong influence on the total
inflows coming into the economy.

Market regulator SEBI has over 1450 foreign institutional investors registered with it. The
FIIs are considered as both a trigger and a catalyst for the market performance by
encouraging investment from all classes of investors which further leads to growth in
financial market trends under a self-organized system.

Also See: Domestic Institutional Investors, SEBI, Mutual Funds, Hedge Funds, Banks,
Insurance Companies, BSE, NSE, Capital Market Segment, Capital Inflows

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
8
OBJECTIVES OF THE STUDY:
Following are the objectives of the study:

• To study the scope and trading mechanism of Foreign Institutional investors in India.

• To find the relationship between the FIIs equity investment pattern and Indian stock
indices.

• To analyze the impact of FIIs equity investment on specific industrial sector (FMCG,
Consumer Durables, Auto, Banking, Real Estate) indices.
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 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.

INTRODUCTION

Foreign Institutional Investors (FII)

Foreign Institutional Investors (FII) are an investment fund or a gathering of investors. Such a
fund is registered in a foreign country, i.e. not in the country it is investing in. Such institutional
investors mostly involve hedge funds, mutual funds, pension funds, insurance bonds, high-value
debentures, investment banks etc.

9
We use this term FII for foreign players investing funds in the financial market of India. They
play a big role in the development of our economy. The amount of funds they invest is very
considerable. So when such FII’s buy shares and securities the market is bullish and trends
upwards. The opposite may also happen when they withdraw their funds from the markets. So
they have considerable sway over the market.

Advantages of FII’s

 FII’s will enhance the flow of capital into the country

 These investors generally prefer equity over debt. So this will also help maintain and even
improve the capital structures of the companies they are investing in.

 They have a positive effect on the competition in the financial markets

 FII help with the financial innovation of capital markets

 These institutions are professionally managed by asset managers and analysts. They
generally improve the capital markets of the country.

Disadvantages of FII’s

 The demand for the local currency (rupee) increases. This can cause severe inflation in
the economy.

 These FII’s drive the fortune of big companies in which they invest. But their buying and
selling of securities have a huge impact on the stock market. The smaller companies are
taken along for the ride.

 Sometimes these FII’s seek only short-term returns. When they pull their investments
banks can face a shortage of funds.

10
 FDI vs FII

Let us clarify, both FDI and FII are forms of foreign investment in a country. However, they are
starkly different in nature, target, and consequences. Let us study the differences between the
two to understand them better.

Firstly FDI is a direct investment made in one particular business or company. The aim is to get
a controlling interest in the business. FII, on the other hand, are funds which are invested in the
foreign financial market.

There are many regulations and rules with respect to FDI. In fact, there are some industries like
nuclear energy, agriculture etc. where there can be no foreign direct investment. But FII has
fewer barriers for entry or exit from the market.

FDI is not only transfer of funds or capital. There is a transfer of technology, R&D, know-how,
strategies, technical knowledge, and many other such aspects. In the case of FII, only the transfer
of funds is there.

STOCK EXCHANGE

A STOCK EXCHANGE is a platform where buyers and sellers of securities

issued by governments, finance institutions, corporate houses etc., meet and
where trading of these securities takes place. This is a market of speculation.
Stock exchanges may also provide facilities for issue and redemption of
securities and other financial instruments, and capital events including the
payment of income and dividends. Securities traded on a stock exchange include
stock issued by listed companies, unit trusts, derivatives, pooled investment
products and bonds. Stock exchanges often function as "continuous auction"
markets, with buyers and sellers consummating transactions at a central location.
It provides necessary mobility to capital and direct flow of the capital into
possible and successful enterprise. The prices of particular securities reflect the
demand and supply. In fact, stock exchange is said to be a barometer of economy
of economy and financial health.

11
 SECURITES AND EXCHANGE BOARD OF INDIA
(SEBI)
Establishment Of SEBI

The Securities and Exchange Board of India was established on April 12, 1992 in accordance
with the provisions of the Securities and Exchange Board of India Act, 1992.

Securities and exchange Board of India (SEBI) was first established in the year 1988 as a
non-statutory body for regulating the securities market. It became an autonomous body by
The Government of India on 12 May 1992 and given statutory powers in 1992 with SEBI Act
1992 being passed by the Indian Parliament. SEBI has its headquarters at the business district
of Bandra Kurla Complexin Mumbai, and has Northern, Eastern, Southern and Western
Regional Offices in New Delhi, Kolkata, Chennai and Ahmedabadrespectively. It has opened
local offices at Jaipur and Bangalore and is planning to open offices
at Guwahati, Bhubaneshwar, Patna, Kochi and Chandigarh in Financial Year 2013 - 2014.

Controller of Capital Issues was the regulatory authority before SEBI came into existence; it
derived authority from the Capital Issues (Control) Act, 1947.

Initially SEBI was a non statutory body without any statutory power. However, in 1992, the
SEBI was given additional statutory power by the Government of India through an
amendment to the Securities and Exchange Board of India Act, 1992. In April 1988 the SEBI
was constituted as the regulator of capital markets in India under a resolution of the
Government of India. The SEBI is managed by its members, which consists of following:

The chairman who is nominated by Union Government of India.Two members, i.e., Officers
from Union Finance Ministry. One member from the Reserve Bank of India. The remaining
five members are nominated by Union Government of India, out of them at least three shall
be whole-time members.

After amendment of 1999, collective investment scheme brought under SEBI except NIDHI,
chit fund and cooperatives.

The SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) is the

regulator for the securities market in India. It was established in the year 1988
and given statutory powers on 12 April 1992 through the SEBI Act, 1992. The
12
 Preamble of the Securities and Exchange Board of India describes the basic
functions of the Securities and Exchange Board of India as "...to protect the
interests of investors in securities and to promote the development of, and to
regulate the securities market and for matters connected there with or incidental
there to".

SEBI has to be responsive to the needs of three groups, which constitute the
market:

the issuers of securities , the investors and the market intermediaries.

BOMBAY STOCK EXCHANGE

The BOMBAY STOCK EXCHANGE (BSE) is Asia's oldest stock exchange.

Based in Mumbai, India, BSE was established in 1875.The BSE is the world's
11th largest stock exchange with an overall market capitalization of $1.7 trillion
as of January 23, 2015. More than 5500 companies are listed on BSE making it
world's No. 1 exchange in terms of listed members and also the fastest & the
Fastest Stock Exchange in world with a median trade speed of 6 micro seconds.

The Bombay stock exchange was founded by Premchand Roychand.[6] He was one of the
most influential businessmen in 19th-century Bombay. A man who made a fortune in the
stockbroking business and came to be known as the Cotton King, the Bullion King or just the
Big Bull. He was also the founder of the Native Share and Stock Brokers Association, an
institution that is now known as the BSE.[7]

While BSE Ltd is now synonymous with Dalal Street, it was not always so. The first venue of
the earliest stock broker meetings in the 1850s was in rather natural environs - under banyan
trees - in front of the Town Hall, where Horniman Circle is now situated. A decade later, the
brokers moved their venue to another set of foliage, this time under banyan trees at the
junction of Meadows Street and what is now called Mahatma Gandhi Road. As the number of
brokers increased, they had to shift from place to place, but they always overflowed to the
streets. At last, in 1874, the brokers found a permanent place, and one that they could, quite
literally, call their own. The new place was, aptly, called Dalal Street (Brokers' Street).

The Bombay Stock Exchange is the oldest stock exchange in Asia.[8] Its history dates back to
1855, when 22 stockbrokers[9] would gather under banyan trees in front of Mumbai's Town
Hall. The location of these meetings changed many times to accommodate an increasing
13
number of brokers. The group eventually moved to Dalal Street in 1874 and became an
official organization known as "The Native Share & Stock Brokers Association" in 1875.

On August 31, 1957, the BSE became the first stock exchange to be recognized by the Indian
Government under the Securities Contracts Regulation Act. In 1980, the exchange moved to
the Phiroze Jeejeebhoy Towers at Dalal Street, Fort area. In 1986, it developed the S&P BSE
SENSEX index, giving the BSE a means to measure the overall performance of the exchange.
In 2000, the BSE used this index to open its derivatives market, trading S&P BSE SENSEX
futures contracts. The development of S&P BSE SENSEX options along with equity
derivatives followed in 2001 and 2002, expanding the BSE's trading platform.

Historically an open outcry floor trading exchange, the Bombay Stock Exchange switched to
an electronic trading system developed by CMC Ltd. in 1995. It took the exchange only 50
days to make this transition. This automated, screen-based trading platform called BSE On-
Line Trading (BOLT) had a capacity of 8 million orders per day. The BSE has also
introduced a centralized exchange-based internet trading system, BSEWEBx.co.in to enable
investors anywhere in the world to trade on the BSE platform. Now BSE has raised capital by
issuing shares and as on 3 May 2017 the BSE share which is traded in NSE only closed with
Rs.999 .[10]

The BSE is also a Partner Exchange of the United Nations Sustainable Stock Exchange
initiative, joining in September 2012.[11]
BSE established India INX on 30 December 2016. India INX is the first international
exchange of India.[12]
BSE launches commodity derivatives contract in gold, silver.[13]

BSE SENSEX

The S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also
called the BSE 30 or simply the SENSEX, is a free-float market weighted stock
market index of 30 well-established and financially sound companies listed on
Bombay Stock Exchange. The 30 component companies

which are some of the largest and most actively traded stocks are representative
of various industrial sectors of the Indian economy. It is traded internationally on
the EUREX as well as leading exchanges of the BRCS nations (Brazil, Russia,
China and South Africa).

14
 SENSEX:Stock Exchange Sensitive Index

SENSEX stands for Stock Exchange Sensitive Index. It is the oldest stock exchange in India
which is also known as BSE-30. It is a free floating stock market index which uses free
floating market capitalization method to reflect the position of companies in the stock market.
It does not consider the outstanding stock of a company. Its calculation is based on the total
number of tradable shares of a company at the time of calculation.

SUNSEX was introduced on January 1, 1986, by Bombay Stock Exchange. There are
thousands of companies listed on BSE but to calculate SUNSEX only thirty companies are
considered; the companies which are well-established, economically strong and involved in
major business sectors. So, basically, SUNSEX consists of the stocks of thirty companies.

SUNSEX touched the four-digit figure on 25 July 1990 and the five-digit figure on 7
February 2006, for the first time. On 4 March 2015, it crossed the 30,000 points mark.

History of Sensex

S&P BSE SENSEX, first compiled in 1986, was calculated on a 'Market Capitalization-
Weighted' methodology of 30 component stocks representing large, well-established and
financially sound companies across key sectors. The base year of S&P BSE SENSEX was
taken as 1978-79. S&P BSE SENSEX today is widely reported in both domestic and
international markets through print as well as electronic media. It is scientifically designed
and is based on globally accepted construction and review methodology. Since September 1,
2003, S&P BSE SENSEX is being calculated on a free-float market capitalization
methodology. The 'free-float market capitalization-weighted' methodology is a widely
followed index construction methodology on which majority of global equity indices are
based; all major index providers like MSCI, FTSE, STOXX, and Dow Jones use the free-
float methodology.

The growth of the equity market in India has been phenomenal in the present decade. Right
from early nineties, the stock market witnessed heightened activity in terms of various bull
and bear runs. In the late nineties, the Indian market witnessed a huge frenzy in the 'TMT'
sectors. More recently, real estate caught the fancy of the investors. S&P BSE SENSEX has
captured all these happenings in the most judicious manner. One can identify the booms and
busts of the Indian equity market through S&P BSE SENSEX. As the oldest index in the
15
country, it provides the time series data over a fairly long period of time (from 1979
onwards). Small wonder, the S&P BSE SENSEX has become one of the most prominent
brands in the country

16
 NATIONAL STOCK EXCHANGE

The NATIONAL STOCK EXCHANGE (NSE) is a stock exchange in India.

Set up in November 1992, NSE is India's first fully automated electronic
exchange with a nationwide presence. The exchange is the result of the
recommendations of a high-powered group set up to study the establishment of
new stock exchanges, which would operate on a pan-India basis. Its
shareholders consist of 20 financial institutions including state owned banks
and insurance companies. NSE has a market capitalization of more than
US$1.65 trillion, making it the world’s 12th-largest stock exchange as of 23
January 2015.

The National Stock Exchange (NSE) is a stock exchange in India. ... It allows
for new listings, initial public offers (IPOs), debt issuances and Indian
Depository Receipts (IDRs) by overseas companies raising capital in India.
S&P CNX Nifty is the benchmark index introduced by NSE.

The National Stock Exchange of India Limited (NSE) is the leading stock exchange of
India, located in Mumbai. The NSE was established in 1992 as the first demutualized
electronic exchange in the country. NSE was the first exchange in the country to provide a
modern, fully automated screen-based electronic trading system which offered easy trading
facility to the investors spread across the length and breadth of the country. Vikram Limaye is
Managing Director & Chief Executive Officer of NSE.

National Stock Exchange has a total market capitalization of more than US$2.27 trillion,
making it the world's 11th-largest stock exchange as of April 2018.[1] NSE's flagship index,
the NIFTY 50, the 50 stock index is used extensively by investors in India and around the
world as a barometer of the Indian capital markets. Nifty 50 index was launched in 1996 by
the NSE.[2] However, Vaidyanathan (2016) estimates that only about 4% of the Indian
economy / GDP is actually derived from the stock exchanges in India.

Unlike countries like the United States where nearly 70% of the GDP is derived from larger
companies and the corporate sector, the corporate sector in India accounts for only 12-14% of
the national GDP (as of October 2016). Of these only 7,800 companies are listed of which
only 4000 trade on the stock exchanges at BSE and NSE. Hence the stocks trading at

17
the BSE and NSE account for only around 4% of the Indian economy, which derives most of
its income related activity from the so-called unorganized sector and households.
Economic Times estimated that as of April 2018, 60 million (6 crore) retail investors had
invested their savings in stocks in India, either through direct purchases of equities or through
mutual funds.[4] Earlier, the Bimal Jalan Committee report estimated that barely 1.3% of
India's population invested in the stock market, as compared to 27% in USA and 10% in
China.

CNX NIFTY
The NIFTY 50 index is National Stock Exchange of India's benchmark stock
market index for Indian equity market. It covers 22 sectors of the Indian
economy and offers investment managers exposure to the Indian market in one
portfolio. NIFTY 50 Index has shaped up as a largest single financial product in
India.

It comprises of 50 stocks in its Index. Computation of Nifty: The base year

of Nifty is taken as 1978-79 and the base value is 100. Nifty is calculated by
“Free-float market capitalization” methodology and market capitalization
is calculated by multiplying the market price of share with number of
outstanding shares.

FOREIGN PORTFOLIO INVESTMENT

(FII)

FOREIGN PORTFOLIO INVESTMENT is the entry of funds into a country

where foreigners deposit money in a country's bank or make purchases in the
country’s stock and bond markets, sometimes for speculation.

International portfolio flows refer to capital flows made by individuals or

investors seeking to create an internationally diversified portfolio rather than to
18
 acquire management control over foreign companies. Diversifying portfolio
internationally has been known as a way to reduce the overall portfolio risk and
earn even higher returns. Investors in developed countries can strengthen their
portfolio by buying stocks in developing countries where stock markets have
relatively low correlations with those in developed countries.

The amount of FII is determined by the performance of the stocks of the

countries where the investors wants to invest his money relative to world
markets. With the opening of stock markets in various emerging economies to
foreign investors, investors in industrial countries have increasingly sought to
realize the potential for portfolio diversification that these markets represent.

A foreign portfolio investment is a grouping of assets such as stocks, bonds, and cash
equivalents. Portfolio investments are held directly by an investor or managed by financial
professionals. In economics, foreign portfolio investment is the entry of funds into a
country where foreigners deposit money in a country's bank or make purchases in the
country’s stock and bond markets, sometimes for speculation.

Most foreign portfolio investments consist of securities and other foreign financial assets that
are passively held by the foreign investor. This does not provide the foreign investor with
direct ownership of the financial assets and can be relatively liquid depending on the
volatility of the market that the investment takes place in. Foreign portfolio investments can
be made by individuals, companies, or even governments in international countries. This type
of investment is a way for investors to diversify their portfolio with an international
advantage.

Foreign portfolio investment shows up in a country's capital account. It is also part of the
balance of payments which measures the amount of money flowing in and out of a country
over a given time period.

Foreign portfolio investment is similar, but differs from foreign direct investment. In foreign
portfolio investment the investor purchases stocks, securities and other financial assets but
does not actively manage the investments or the companies that are issuing the assets. So, in
FPI the investor does not have direct control over the securities or businesses. This means
that FPI tends to be more liquid and less risky than FDI. The relatively high liquidity of FPI's
makes them much easier to sell than FDI's. Foreign portfolio investments also tend to have a
shorter time frame for returns than foreign direct investments.

Some benefits that come to investors from utilizing foreign portfolio investments include:

19
 Portfolio diversification: FPI gives investors a fairly simple way to diversify their
portfolio internationally.

 International Credit: FPI gives investors a larger credit base because they are able to
access credit in the foreign countries that they have large amounts of investment in.

 Benefits from the Exchange rates: If an investor has an FPI in a foreign country with a
stronger currency than their own country the difference in exchange rates between the
two countries can benefit the investor

 Access to a larger market: Often times markets may be larger and less competitive
outside of ones home country. For example, the market is much more competitive in the
United States of America than in other less developed economies. Investors can take
advantage of the less competitive markets internationally by using these Foreign portfolio
investments.

Portfolio investments typically involve transactions in securities that are highly liquid, i.e.
they can be bought and sold very quickly. A portfolio investment is an investment made by
an investor who is not involved in the management of a company. This is in contrast to direct
investment, which allows an investor to exercise a certain degree of managerial control over a
company. Equity investments where the owner holds less than 10% of a company's shares are
classified as portfolio investment.[5] These transactions are also referred to as "portfolio
flows" and are recorded in the financial account of a country's balance of payments.
Portfolio flows arise through the transfer of ownership of securities from one country to
another.[6] Foreign portfolio investment is positively influenced by high rates of return and
reduction of risk through geographic diversification. The return on foreign portfolio
investment is normally in the form of interest payments or non-voting dividends.

20
 FOREIGN PORTFOLIO INVESTMENT
IN INDIA

Since 1990-91, the Government of India embarked on liberalization and

economic reforms with a view to bring about rapid and substantial economic
growth and move towards globalization of the economy. As a part of the
reforms process, the government under its New Industrial Policy revamped its
foreign investment policy, recognizing the growing importance of foreign
investment as an instrument of technology transfer, augmentation of foreign
exchange reserves and globalization of the Indian economy.

Simultaneously, the Government, for the first time, permitted portfolio

investments from abroad by foreign portfolio investors in the Indian capital
market. The entry of FIIs seems to be a follow up of the recommendation of the
Narsimhan Committee Report on Financial System.. The committee only
suggested that the capital market should be gradually opened up to foreign
portfolio investments.

From September 14, 1992 with suitable restrictions, Foreign portfolio Investors
were permitted to invest in all the securities traded on the primary and secondary
markets, including shares, debentures and warrants issued by companies which
were listed or were to be listed on the Stock Exchanges in India. While
presenting the Budget for 1992-93, the then Finance Minister Dr. Manmohan
Singh had announced a proposal to allow reputed foreign investors, such as
Pension Funds etc., to invest in Indian capital market. After a notification passed
by SEBI January 2014, the Foreign Institutional investors were classified under
FII(Foreign portfolio investors).

TIMELINE:
21
 On September 14, 1992, the FIIs were allowed to invest in all the
securities traded on the primary and secondary markets, including shares,
debentures and warrants issued by companies which were listed or were
to be listed in the stock exchange in India and in the schemes floated by
domestic mutual funds, an important milestone in the emergence of a
rapidly developing India.
 Initially, the holding of a single FII and all of FIIs in any company were
subject to a limit of 5% and 24% of the company's total issued capital
respectively.
 A condition was placed that funds invested by FIIs had to have at least 50
participants with no one holding more than 5%. This was done to
broaden the base of FII investment.
 The FIIs were allowed to invest 100% in debt securities subject to
approval by SEBI from November 1996. The total investment had to be
within an overall ceiling of US$ 1.5 billion.
 In 1997, the aggregate limit on investment by all FIIs was allowed to be
raised from 24% to 30% by the board of directors of individual
companies by passing a resolution in their meeting and by special
resolution to that effect in the company's general body meeting.
 From the year 1998, the FIIs were also allowed to invest in the dated
government securities, treasury bills and money market instruments.
 In 2000, the foreign corporate and high net worth individuals were also
allowed to invest as sub-accounts (underlying fund on whose behalf FII
invests) of SEBI registered FIIs. This was done to include the domestic
portfolio managers or domestic asset management companies.
 In March 2000, 40% became the ceiling on the aggregate FII portfolio
investment. This was subsequently raised to 49% on March 8, 2001 and
to specific sectoral cap in 2001. In a recent circular dated 30th march it
notified about raising the total investment in government securities to Rs.
1, 40,000 crore from April 5, 2016 which will further be raised by 4,000
crore from July 5, 2016.
 A committee was set up on March 13, 2002 for identification of the
sectors in which FII portfolio investment will not be subject to sectoral
limits for FDI.
 The increase in investment ceiling for FIIs in debt funds from US$ 1
billion to US$ 1.75 billion was notified in 2004.
 SEBI also reduced the turnaround time for processing of FII applications
for registrations from 13 working days to 7 working days except in the
case of banks and subsidies.
 In addition, limit for investment by FIIs in state development loans will
be enhanced to Rs. 10,500 crore on April 4 and Rs. 14,000 crore on July
5, respectively. Presently the existing limit is Rs. 7,000 crore.

22
  The limit for overseas investors in securities was hiked to Rs. 1, 29,000
crore from October 12 last year, and it was further increased to Rs.
1, 35,000 crore from January 1, 2016.

REGULATIONS

Government/Regulatory Initiatives

 A report filed by a panel appointed by the Securities and Exchange Board of India
(SEBI) on December 04, 2018 has proposed direct overseas listing of Indian
companies and other regulatory changes.
 In September 2018, the Securities and Exchange Board of India (Sebi) relaxed the
Know-Your-Client (KYC) requirement for Foreign Portfolio Investors (FPIs).
 In September 2018, SEBI allowed Bombay Stock Exchange (BSE) and National
Stock Exchange (NSE) to start commodity derivate segments.
 SEBI has also allowed foreign entities to participate in the commodity derivatives
segment of Indian stock exchanges, to help them hedge their exposures. It has also
proposed to allow Non Resident Indians (NRIs) to invest through FPI route after
meeting specific KYC norms.
 In August 2018, SEBI reduced the timeline for public issue of debt securities from 12
days to six days.
 Foreign Portfolio Investors are also allowed to invest up to 25 per cent in Category III
Alternative Investment Funds (AIF) in India. Different types of funds such as hedge
funds, Private Investment in Public Equity (PIPE) funds, etc. are operating in India as
Category III AIFs.
 Investments by FPIs have also been allowed in Real Estate Investment Trusts (REITs)
and Infrastructure Investment Trust (InvITs).

FII registration and investment are mainly governed by SEBI (FII) regulations,
1995.

Following entities / funds are eligible to get registered as FII:

23
 1. Pension Funds

2. Mutual Funds

3. Insurance Companies

4. Investment Trusts

5. Banks

6. University Funds

7. Endowments

8. Foundations

9. Charitable Trusts / Charitable Societies

Further, following entities proposing to invest on behalf of broad based

funds, are also eligible to be registered as FIIs:

1. Asset Management Companies

2. Institutional Portfolio Managers

3. Trustees

4. Power of Attorney Holders

FIIs registered with SEBI fall under the following categories:

1. Regular FIIs-those who are required to invest not less than 70% of their
investment in equity-related instruments and 30% in non-equity
investments.

2. 100% debt fund FIIs-those who are permitted to invest only in debt
instruments.

24
INVESTMENT OPPORTUNITIES FOR FIIs

The following instruments are available for FII investments.

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.

Investment limit on equity investments -

a) FII, on its own behalf, shall not invest in equity more than 10% of
total issued capital of an Indian company.

b) Investment on behalf of each sub-account shall not exceed 10% of

total issued capital of an India company.

c) For the sub-account registered under Foreign

Companies/Individual category, the investment limit is fixed at 5% of
issued capital.

These limits are within overall limit of 24% / 49 % / or the sectoral caps a
prescribed by Government of India / Reserve Bank of India.

25
 INVESTMENT LIMIT ON DEBT
INVESTMENTS

The FII investments in debt securities are governed by the policy of the
government of India. Currently following limits are in the effect:

• For FII investments in government debt, currently following limits are

applicable:

100 % Debt Route US $ 1.55 billion

70 : 30 Route US $ 200 million
Total Limit US $ 1.75 billion

• For corporate debt the investment limit is fixed at the US$ 500 million.

PROHIBITION ON INVESTMENTS

FIIs are not permitted to invest in equity issued by an Asset Reconstruction

Company. They are also not allowed to invest in any company which is engaged
or proposes to engage in the following activities:

1) Business of chit fund

2) Nidhi Company
3) Agricultural or plantation activities
4) Real estate business or construction of farm houses (real estate business does
not include development of townships, construction of residential/commercial
premises, roads or bridges). 5) Trading in Transferable Development Rights
(TDRs).

26
 TAXATION OF FIIs

FIIs will also be liable to tax on long-term capital gains on Shares. ... As in the case of
domestic investors, the FIIs will also be liable to tax on such long term capital gains only in
respect of amount of such gains exceeding one lakh rupees. The provisions of section 115AD
are proposed to be amended accordingly.

The taxation norms available to FIIs are shown in the table below:

Nature of Income Tax rate

Long-term capital gains 10%
Short-term capital gains 30%
Dividend income Nil
Interest income 20%
Dividend Nil

LITERATURE REVIEW

While looking at literatures available it was found that most of the developing
counties opened up their economies by dismantling capital controls with a view
to attracting foreign capital, supplementing it with domestic capital in the early
1990's.

Gordon and Gupta, (2003) found causation running from FII inflows to return in
BSE. They observed that FIIs act as market makers and book profits by investing
27
when prices are low and selling when they are high. Hence, there are
contradictory findings by various researchers regarding the causal relationship
between FII net inflows and stock market capitalization and returns of BSE/
NSE. Therefore, there is a need to investigate whether FIIs are the cause or effect
of stock market fluctuations in India.

Rajesh Chakraborty (2001) in his research paper titled 'FII Flows to India:
Nature and Causes' concluded that since the beginning of liberalization FII flows
to India have steadily grown in importance. The author analysed these flows and
their relationship with other variables Pal, P. (2004) 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 FII‟s are becoming more important at the margin as an
increasingly higher share of stock market turnover is accounted for by FII
trading in India.

Stanley Morgan (2002) has examined that FIIs have played a very important
role in building up India’s forex reserves, which have enabled a host of
economic reforms. Secondly, FIIs are now important investors in the country’s
economic growth despite sluggish domestic sentiment. The Morgan Stanley
report notes that FII strongly influence short-term market movements during
bear markets. However, the correlation between returns and flows reduces
during bull markets as other market participants raise their involvement
reducing the influence of FIIs. Research by Morgan Stanley shows that the
correlation between foreign inflows and market returns is high during bear and
weakens with strengthening equity prices due to increased participation by
other players.

Anand Bansal and J.S. Pasricha (2009) studied the impact of market opening to
FIIs on Indian stock market behaviour. They empirically analyze the change of
market return and volatility after the entry of FIIs to Indian capital market and
found that while there is no significant change in the Indian stock market
average returns; volatility is significantly reduced after India unlocked its stock
market to foreign investors. In the next section we are discussing the data
sources and methodology of the study.

28
Karimullah: The article examines the impact of foreign institutional investors FII
equity investment behavior in the Indian stock market. It attempts to find out the
two-way causality between foreign institutional investors (FIIs) behavior and
performance of Indian stock market for the period of January 1997 to June 2007.
This article seeks to examine

the idea that financial liberalization induces increased efficiency in the

financial market as permission of FIIs equity investment is an important
example of financial liberalization.

RESEARCH METHODOLOGY

Research Methodology has many dimensions, it includes not only research

methods but also considers the logic behind the methods used in the context of
the study and explains why only a particular method of technique has been used
so that research lend themselves to proper evaluations.

The Considerable literature reviews existing regarding FIIs investments and

performance of Indian stock market. This Review of existing literature examines
recent and historically studies investigate regarding influence of FII investments
on stock market. The literature review may also guidance to prepared valuable
research methodology for study. Research is most of the driven by the need to
find solutions to problems. This is best done in an orderly fashion with the focus
on building a strong foundation to a theoretical framework upon which
subsequent work can be built, so spotless and focused research methodology is
the root of any research process. This chapter is used to discuss fundamentals
research methodology and different statistical tools and techniques of the
research study. Researcher has framed hypothesis for study objectives and
identify dependent variables and independent variables for research work.
Moreover, this chapter assists to justify the research methodologies employed for
29
the present study and shows how sample design, data collection and analysis,
hypothesis are apply to fulfill the research objectives draw round. Therefore,
methodologies applied in this research study to investigates the main objectives
that is cause of volatility in Indian stock indexes; i.e. BSE SENSEX and NIFTY
on account of outcome of FIIs investments in Indian stock market. There is a
fitting result initiate with proper methodologies employed in this research study
Researcher has used a following research methodology for his study entitled

"Role Of Foreign Institutional Investors (FIIs) In Indian Stock Market" which is

as follow: 3.2Review Of The Existing Literature There are number of literatures
existing in respect of the study FII investment and performance of stock market.
This Review of existing literature examines recent and historically research
studies on influence of FII investments on stock market. The literature review
may also explain the need for the proposed work to appraise the shortcomings
and gaps in research study. This analysis may go beyond scrutinizing the
availability or conclusion of the past studies and their data, to examining the
accuracy of secondary sources, the credibility of these sources and
appropriateness of past studies.

SCOPE OF THE STUDY

The paper is done to study the relation between the stock index movement of the
Indian stock market and the FII flow into Indian markets. The study takes 20
years into consideration from 1996-2005. The period has been selected so that
the impact on Indian stock market can be ascertained from the initial period FII
investment was permitted in India. BSE SENSEX and NIFTY 50, the two
biggest indices, have been selected for the study.

OBJECTIVES OF THE STUDY

• To get the knowledge of stock market.

• To analyse graphically, Net purchases and sales by FIIs in the sampling period.

• To analyse the trend in FII investment in India during the sample period

• To analyse the relationship between Nifty and FIIs

30
• To know the volatility of BSE SENSEX due to FIIS

• To study the behavioural pattern of FIIs during the period 2002 to 2012.

SCOPE AND NEED OF 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
2002 to 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.

DATA COLLECTION

The study is descriptive in nature and is based on secondary data. The data has
been collected from internet by exploring the secondary sources available on the
websites. The data related to FII flows has been collected from the SEBI website
while the data related to Monthly closing value of SENSEX and NIFTY have
been taken from the BSE and NSE website respectively. Yearly closing index
values are taken so that they represent the real economic conditions of that
period. Individual BSE SENSEX and NIFTY data and FII investment act as
sample elements.

Average closing values for each day of both the indices, SENSEX & NIFTY,
for the period under study were expressed in MS excel and the average closing
values of the indices have been calculated for further analysis.

31
 ANALYTICAL TECHNIQUE

In order to analyze the collected data statistical tools such as correlation and
regression have been used. Various line graphs have been used to show proper
pictorial representation of the data for easy understanding. Correlation
coefficient is a statistical measure that determines the degree which two
variable's movements are associated. Its value ranges from -1 to 1. The analysis
has been made by correlating the FII purchases and the closing value of the
indices for that particular year to identify whether a relationship exists between
them. 'Pearson correlation' has been used as data sets are real and it gives an
accurate statement of the strength of linear association between the two
variables. The regression analysis is used to evaluate the effects of independent
variables on a single dependent variable. In the current paper an effort has been
made to study the impact of FII on Indian stock exchange.

DATA ANALYSIS

Month Open High Low Close

Apr-14 22455.23 22939.31 22197.51 22417.8
May14 22493.59 25375.63 22277.04 24217.34
Jun-14 24368.96 25725.12 24270.2 25413.78
Jul-14 25469.94 26300.17 24892 25894.97
Aug-14 25753.92 26674.38 25232.82 26638.11
Sep-14 26733.18 27354.99 26220.49 26630.51
32
Oct-14 26681.47 27894.32 25910.77 27865.83
Nov-14 27943.04 28822.37 27739.56 28693.99
Dec-14 28748.22 28809.64 26469.42 27499.42
Jan-15 27485.77 29844.16 26776.12 29182.95
Feb-15 29143.63 29560.32 28044.49 29361.5
Mar-15 29533.42 30024.74 27248.45 27957.49
Apr-15 27954.86 29094.61 26897.54 27011.31
May-
15 27204.63 28071.16 26423.99 27828.44
Jun-15 27770.79 27968.75 26307.07 27780.83
Jul-15 27823.65 28578.33 27416.39 28114.56
Aug-15 28089.09 28417.59 25298.42 26283.09
Sep-15 26127.04 26471.82 24833.54 26154.83
Oct-15 26344.19 27618.14 26168.71 26656.83
Nov-15 26641.69 26824.3 25451.42 26145.67
Dec-15 26201.27 26256.42 24867.73 26117.54
Jan-16 26101.5 26197.27 23839.76 24870.69
Feb-16 24982.22 25002.32 22494.61 23002
Mar-16 23153.32 25479.62 23133.18 25341.86
Apr-16 25301.7 26100.54 24523.2 25606.62
May-
16 25565.44 26837.2 25057.93 26667.96
Jun-16 26684.46 27105.41 25911.33 26999.72
Jul-16 27064.33 28240.2 27034.14 28051.86
Aug-16 28083.08 28532.25 27627.97 28452.17
Sep-16 28459.09 29077.28 27716.78 27865.96
Oct-16 27997.29 28477.65 27488.3 27930.21
Nov-16 27966.18 28029.8 25717.93 26652.81
Dec-16 26756.66 26803.76 25753.74 26626.46
Jan-17 26711.15 27980.39 26447.06 27655.96
Feb-17 27669.08 29065.31 27590.1 28743.32
Mar-17 28849.04 29824.62 28716.21 29620.5
Apr-17 29737.73 30184.22 29241.48 29918.4
May-
17 30021.49 31255.28 29804.12 31145.8
Jun-17 31117.09 31522.87 30680.66 30921.61
Jul-17 31156.04 32672.66 31017.11 32514.94
Aug-17 32579.8 32686.48 31128.02 31730.49
Sep-17 31769.34 32524.11 31081.83 31283.72
Oct-17 31537.81 33340.17 31440.48 33213.13
Nov-17 33344.23 33865.95 32683.59 33149.35
Dec-17 33247.66 34137.97 32565.16 34056.83
Jan-18 34059.99 36443.98 33703.37 35965.02
Feb-18 36048.99 36256.83 33482.81 34184.04
Mar-18 34141.22 34278.63 32483.84 32968.68
33
Apr-18 33030.87 35213.3 32972.56 35160.36
May-
18 35328.91 35993.53 34302.89 35322.38
Jun-18 35373.98 35877.41 34784.68 35423.48
Jul-18 35545.22 37644.59 35106.57 37606.58
Aug-18 37643.87 38989.65 37128.99 38645.07
Sep-18 38915.91 38934.35 35985.63 36227.14
Oct-18 36274.25 36616.64 33291.58 34442.05
Nov-18 34650.63 36389.22 34303.38 36194.3
Dec-18 36396.69 36554.99 34426.29 36068.33
Jan-19 36161.8 36701.03 35375.51 36256.69
Feb-19 36311.74 37172.18 35287.16 35867.44
Mar-19 36018.49 38748.54 35926.94 38672.91
Apr-19 38858.88 39487.45 38460.25 39031.55
May-
19 39036.51 39189.95 37743.07 37789.13

34
The following table gives the net purchases by FII in the Indian stock market
from the year 1996-2015.

Year Net FII(Cr.)

1996 10,803.6

1997 6,207.3
1998 -1,479.9

1999 6,697.3

2000 6,510.9
2001 12,494.8

2002 3,677.9

2003 35,153.8
2004 42,049.1

2005 41,663.5

2006 40,589.2
2007 80,914.8

2008 -41,215.5

2009 87,987.6
2010 1,79,674.6

2011 35,392.80

2012 1,63,350.1
2013 62,287.90

2014 2,56,211.85

2015 63,662.21
TABLE 1: Flow of FII
CHART 1: FOREIGN INVESTMENT FLOWS

35
From the above table and graph it can be concluded that Net flow of FII has
considerably increased from year 1996 to year 2015 with certain declining
values in the years 1998 and 2008 on account of sudden increases in sales which
exceeded purchases. In year 2008 total FII flow slumped to negative 41,215.5
due to the Housing market crash in 2008 in the USA. Several reforms were
introduced by SEBI in the financial 2002-03. Trading, clearing and settlement in
equity shares were contracted to T+3 which further contracted to T+2. In order to
make the markets more efficient and provide more opportunities to the investors,
trading in government securities in stock exchanges were permitted. Since then
FII investment has continued to increase coupled with macroeconomic
conditions and one of the fastest growth rates amongst the developing countries.

The following table gives average value of closing value of BSE SENSEX from
1996 to 2015.

TABLE 2: BSE SENSEX CLOSING VALUES

Year AVERAGE CLOSINGVALUE

1996 3388.70

36
 1997 3801.587
1998 3568.71

1999 3753.86

2000 4167.02
2001 4605.91

2002 3486.99

2003 3872.96
2004 5563.08

2005 7392.89

2006 11440.04
2007 15563.59
2008 14492.67

2009 13700.82
2010 18206.91
2011 17777.76

2012 17617.03
2013 19722.42
2014 24638.95

2015 27352.17
BSE SENSEX has grown considerably from 1996 to 2015 showing a 700%
increase.

CHART 2: AVERAGE CLOSING VALUES OF BSE SENSEX

37
From the above graph it can be ascertained that the value of BSE SENSEX has
continued to increase driven by strong economic growth experienced by the
country during this period.

The following table gives the average closing value of NSE NIFTY from year
1996 to year 2015.

TABLE 3: NSE NIFTY CLOSING VALUES

YEAR AVERAGE CLOSING
VALUE
1996 990.53
38
 1997 1080.87

1998 966.71

1999 1211.34

2000 1417.61

2001 1121.55

2002 1056.02

2003 1233.70

2004 1754.58

2005 2268.91

2006 3357.09

2007 4571.29

2008 4344.74

2009 4113.96

2010 5461.12

2011 5335.91

2012 5341.52

2013 5915.90

2014 7360.30

2015 8285.91
NSE NIFTY has grown from 990.53 to 8285.91 showing an increase of a little
over 700 %.

CHART 3: AVERAGE CLOSING VALUE OF NSE NIFTY

39
From the above graph, it can be concluded that NSE NIFTY has shown similar
trends which were exhibited by BSE SENSEX as well. Also, in 2008 the graph
shows a little slump which can be attributed to the outflows by FII due to
housing bubble crash in USA.

Regression analysis between FII and SENSEX

40
 Regression has been used to determine the dependency between FII and BSE
SENSEX. Here, Independent variable is FII investment and dependent variable
is NIFTY.

TABLE 11:
Variables Entered/Removeda
Mod Variables Variables Metho d
el Entered Removed

1 FIIb . Enter

a. Dependent Variable: NIFTY

b. All requested variables entered.

TABLE 12:
Model Summary
Std. Error of a.
the
Mod Adjusted R Estimate
el R R Square Square
1 1823.0660
.658a .433 .402 3

Predictors: (Constant), FII

TABLE 13: ANOVAa

Sum of Mean
Squares Square
Model Df F Sig.
1 Regressi 45760363. 45760363.
on 252 1 252 13.768 .002b

41
 Residual 59824255. 3323569.7 32
167 18
Total
10558461
8.420 19

a. Dependent Variable: NIFTY

b. Predictors: (Constant), FII

TABLE 14:
Coefficientsa
Standardiz ed
Coefficient s

Unstandardized
Coefficients

Model B Std. Error Beta t Sig.

1 (Consta
nt) 2172.225 518.223 4.192 .001
FII
.022 .006 .658 3.711 .002
a. Dependent Variable: NIFTY

Interpretation:

It can be observed from table 12 that all explanatory variables, taken together
establish a relationship nearly 43.3 percent (R2=0.433) of total variables in the
BSE SENSEX of Indian stock market in each year. This means whatever
changes in the market capitalization of BSE for period under study the FII
investments are responsible upto 43.3%. From this it can be deduced that there
are other factors which have indirectly affected the BSE.

Also, it can be observed table 7 that the value of t statistics is 3.711 which is
significant at 5% level of significance and hence thus shows that there is
significant impact of FIIs on the BSE SENSEX thereby accepting that FII
investment has the positive impact on Indian stock market.
42
Thus, it can be concluded that the behaviour of FIIs matched the behaviour of
NIFTY during this period.

FINDINGS OF THE STUDY

• FII flows in terms of net purchases have shown increasing trend from the
year 1996 to 2015.

• BSE SENSEX and NIFTY have increased over a period of 20 years from
year 1996 to year 2015.

• FII is able to explain 43% variation on both the dependent variables

SENSEX and NIFTY.

• R-square is also found to be very low means other factors might be

contributing toward volatility of Indian stock market like interest rate,
political situation in the country, reform policies etc.

43
 • It is found that the major indices of the Indian stock market (NIFTY and
SENSEX) which are also known as the barometer of Indian stock market
are positively correlated with the FIIs investment. This shows that FIIs
are among the major players behind the volatility of the Indian stock
indices. The degree of correlation is very strong which explains the effect
of foreign investment on them.

• R-square is also found to be moderate in both the indices which means

other factors might be contributing toward volatility of Indian stock
market like interest rate, political situation in the country, reform policies
etc.

CONCLUSION
A number of developments have taken place in the Indian capital market with
launching of financial reforms since summer 1991. With the advent of
liberalization, Indian capital market has gone under tremendous changes. Today,
it is one of the most attractive markets for the foreign institutional investors
(FIIs). Since then the country has been receiving large amounts of portfolio
investment. With the ongoing globalization the role of institutional investors in
foreign capital flows has increased to a great extent. They are being regarded as
key player of financial globalization.

It can be observed that during the past 10 years there has been a gradual increase
in the FII investment. This reflects an increase in the confidence of the FIIs. It
can be stated that FIIs have significant influence on the movements of the stock
market indexes in India. There is a steadily growing influence of FIIs in the
domestic stock market if one looks at the total FII trade in equity.

FIIs and the movements of SENSEX are quite closely related in India and FIIs
wield significant influence on the market sentiments and price trends. This is
because other market participants perceive the FII flawless in their assessment of
the market and tend to follow the decisions taken by FIIs.

44
Results not only show that the FIIs are the major players in the domestic stock
market in India but also that their influence on the domestic market is growing.
Data on trading activity of FIIs and domestic stock market suggests that FIIs are
becoming more important at the margin as an increasingly higher share of stock
market turnover is accounted for FII trading. FIIs are playing the role of movers
and shaker in the Indian stock market as they injected the money in the market
and encourage the other investors to make investment. When the prices of
indices go up they pull the money and shake the market. Particularly, in the
companies that constitute the BSE Sensitivity Index (SENSEX) and NIFTY,
their level of control is very high.

FII investments constitute a large share of the equity capital of a financial entity,
an FII pullout, even if driven by development outside the country can have
significant implications for the financial health of the index.

The year 2008 created history for the Indian stock market as it was the worst
year in terms of the performance. At the time of global financial crisis in 2008,
the bubbling in the market forced several FIIs to step-down from India and
stepped in other emerging markets. Huge withdrawals by the FII from the Indian
stock markets were mainly due to the crash of financial markets in European
markets that has been attributed to events like anticipation of a hike in the
interest rate in US, fall in the prices in the stock market across the globe and
technical correction in respect of overvalued stocks in the Indian stock market.
Notwithstanding the crash in the Indian market, FIIs continue to be interested in
investing in India-mostly due to the reforms that had been undertaken to ease the
policies relating to foreign investments.

The steady increase in the size of FII inflow in the recent years has attracted
unwarranted attention as to whether the capital account of India is gradually
coming to be dominated by ‘Hot Money’ – a phrase that is commonly used to
describe the FII flows, though the usage might not be completely correct.

FII investments seem to have influenced the Indian stock market to a

considerable extent. Analysis suggested a strong influence of FII investment on
the SENSEX.

However, there may be other factors on which stock exchange may depend i.e.
Government policies, budgets, bullion market, inflation, economic and political
condition of the country, exchange rate etc.

45
 REFERENCES

• Chakrabarti, R. (2001). “FII Flows to India: Nature and Causes”,

Money and Finance, Vol. 2, No. 7.

• Aggarwal, R., Klapper, L. & Wysocki, P. D. (2005). “Portfolio

preferences of foreign institutional investors”, Journal of Banking
and Finance, Vol. 29, No. 12, pp. 2919-2946.

• http://www.bseindia.com/static/FII/RegulatoryFrameworkandFI
INorms.aspx?expandable=1

• http://www.bseindia.com/indices/IndexArchiveData.aspx

• http://www.business-standard.com/article/markets/goodbyefii-
hello-FII-114060201103_1.html

• http://shodhganga.inflibnet.ac.in/bitstream/10603/4121/13/13
_chapter%205.pdf

• http://shodhganga.inflibnet.ac.in/bitstream/10603/13010/13/1
3_chapter%206.pdf

• http://indiainbusiness.nic.in/newdesign/index.php?param=
advantage/173

• https://www.FII.nsdl.co.in/Reports/RegisteredFIISAFII.aspx

• http://madaan.com/fii.html

• https://www.cdslindia.com/publications/FIIFIIYrWiseInvstmntDt
l s.aspx

46
 • http://www.ijccr.com/September2012/4.pdf

• http://www.inflibnet.ac.in/ojs/index.php/MI/article/view/927/8 38
• NSE Website: www.nseindia.com

• BSE Website: www.bseindia.com

• NYSE Website: www.nyse.com

• NASDAQ Website: www.nasdaq.com

• LSE Website: www.londonstockexchange.com

• TSE Website: http://www.tse.or.jp/english

• JPX Website: http://www.jpx.co.jp

View publication stats

47