FDI AND FII IMPACT ON BSE SENSEX: REALITY AND MYTH

Research Scholar: Rajan J. Nandola, Thakur College of Science and Commerce

ABSTRACT One of the outstanding features of globalization in the financial services industry is the increased access provided to non-local investors in several major stock markets of the world. Increasingly, stock markets from emerging markets permit institutional investors to trade in their domestic markets. Indian stock market opened to Foreign Institutional Investors in 14th September 1992, initially with lot of restrictions. The regulation on them are liberalized and minimized now, since 1993 has received a considerable amount of portfolio investment from foreigners in the form if FIIs investment in equities. This has become a turning point of India stock market. The government of India announced the policy of the government to permit the FII investment in India capital market. According to the SEBI modified the regulation on 14-11-1995. In order to make investment in India equity market they wanted to register with Security Exchange Board of India as foreign institutional investors. It is possible for foreigners to trade in India securities without registering as Foreign Institutional investors, but such cases require approval from Reserve Bank of India or the Foreign Institutional Promotion Board. They are generally concentrated in secondary market. Portfolio flows often referred to as hot- money are notoriously volatile capital flows. They have also responsible for spreading financial crisis causing contagion in international market. Evan though, the FIIs have been playing a key role in the financial markets since their entry into this country. The explosive portfolio flow by FII brings with them great advantages as they are engine of growth, lowering cost of capital in many emerging market. This opening up of capital markets in emerging market countries has been perceived as beneficial by some researchers while others are concerned about possible adverse consequences. The past two years have been highly turbulent for the world economy which has been hit hard by a profound financial crisis. It is being apprehended as the worst ever crisis to hit the world economy since the Great Depression of 1930s. Rumors are flying thick and people all around the world are gripped with a sense of fear and panic. The Indian economy has been growing at an impressive rate in the past few years. Growth is being registered at an average of around 9% for the past three years. Along with China, India is emerging as a one of the most attractive destinations for investment for entrepreneurs worldwide. This paper is to study the impact of FDI and FII on BSE Stock exchange over a period of liberalization through regression analysis and using R-software to show whether really the FDI and FII is having a major impact on the Sensex or it is just because of panic situation the downfall occurred. This paper will give you the clear picture of what actually has impacted the Sensex foreign investors or panic?

Preamble

One of the outstanding features of globalization in the financial services industry is the increased access provided to non-local investors in several major stock markets of the world. Increasingly, stock markets from emerging markets permit institutional investors to trade in their domestic markets. Indian stock market opened to Foreign Institutional Investors in 14th September 1992, initially with lot of restrictions. The regulation on them are liberalized and minimized now, since 1993 has received a considerable amount of portfolio investment from foreigners in the form if FIIs investment in equities. This has become a turning point of India stock market. The government of India announced the policy of the government to permit the FII investment in India capital market. According to the SEBI modified the regulation on 14-11-1995. In order to make investment in India equity market they wanted to register with Security Exchange Board of India as foreign institutional investors. It is possible for foreigners to trade in India securities without registering as Foreign Institutional investors, but such cases require approval from Reserve Bank of India or the Foreign Institutional Promotion Board. They are generally concentrated in secondary market. Portfolio flows often referred to as hot- money are notoriously volatile capital flows. They have also responsible for spreading financial crisis causing contagion in international market. Evan though, the FIIs have been plying a key role in the financial markets since their entry into this country. The explosive portfolio flow by FII brings with them great advantages as they are engine of growth, lowering cost of capital in many emerging market. This opening up of capital markets in emerging market countries has been perceived as beneficial by some researchers while others are concerned about possible adverse consequences.
Objectives of the Study

To study the significance of FII and FDI on BSE Sensex.

To study the relationship between the FII and BSE Sensex using regression Model. To examine whether FIIs were a reason for disturbance into the Indian stock market. The R software tool was used to analyze the relationship of FDI and FII on the BSE Sensex. To study whether policy liberalization had an impact on FII. To study the subsequent downfall and revamping policy to protect the market. HYPOTHESES GENERATION

SENSEX = + 1total(di + pi)+ SENSEX= + 2di+ SENSEX= + 3pi+

Null Hypothesis (H0)

1 = 2 = 3 = 4 = 0
Alternative Hypothesis(H)

1 2 3 4 0

Methodology
Sensex Index (Base:1978-79=100) , Direct Investment and Portfolio Investment data were taken for 19 yrs (from 1990-9991 to 2009-10). Data was collected from secondary sources like Reserve Bank of India website ,website of SEBI & Indian Foreign Investment Policy.( Centre Asie Ifri ) Regression analysis was done using R Software.

Background
Y V Reddy: Indian economy - current status and select issues: it is well recognized that giving better incentives to foreign investors over domestic investors results in scope for round-tripping and inefficiencies. Similarly, if avenues for portfolio flows or equity-transfers from domestic to foreign investors are easily available and attractive, the flows under FDI defined in terms of adding to domestic production-capacities will tend to be smaller. Attention to these may simultaneously address micro or institutional issues relating to corporates, volatility issues relating to capital flows and financial markets, and above all ensure high-quality inflows of foreign savings which is more important to our country at this stage of development, to provide a healthy supplement to the domestic savings. Consolidated Fdi Policy (Effective From April 1, 2010) Government of India,Ministry of Commerce & Industry,Department of Industrial Policy & Promotion,(FC Section) A non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy. A citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India under the FDI Policy, only under the Government route. NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels. OCBs have been derecognized as a class of Investors in India with effect from September 16,2003. Erstwhile OCBs which are incorporated outside India and are not under the adverse notice of RBI can make fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of Government of India if the investment is through Government route; and with the prior approval of RBI if the investment is through Automatic route. Dr. Ashok K. Lahiri, Report Of The Committee On Liberalisation Of Foreign Institutional Investment Government Of India ,Ministry Of Finance, Department Of Economic Affairs,June 2004. Following the Budget 2002-2003 announcement by the Finance Minister regarding relaxation of investment limits for Foreign Institutional Investors (FIIs) from the sectoral limits on foreign direct investment, a committee was set up to examine the issues. The committee, which was reconstituted twice, has made certain recommendations after due consultations with the administrative Ministries, FICCI, CII and SEBI.

Scope of Study
One of the outstanding features of globalization in the financial services industry is the increased access provided to non-local investors in several major stock markets of the world. Increasingly, stock markets from emerging markets permit institutional investors to trade in their domestic markets. Indian stock market opened to Foreign Institutional Investors in 14th September 1992, initially with lot of restrictions. The regulation on them are liberalized and minimized now, since 1993 has received a considerable amount of portfolio investment from foreigners in the form if FIIs investment in equities. This has become a turning point of India stock market. The government of India announced the policy of the government to permit the FII investment in India capital market. According to the SEBI modified the regulation on 14-11-1995. In order to make investment in India equity market they wanted to register with Security Exchange Board of India as foreign institutional investors. It is possible for foreigners to trade in India securities without registering as Foreign Institutional investors, but such cases require approval from Reserve Bank of India or the Foreign Institutional Promotion Board. They are generally concentrated in secondary market. Domestic market alone not able to meet the growing capital requirement of the country and financing from mutilated institution has lost primary in the emerging in the global order .Besides aimed primarily at ensuring non-debt creating capital inflows at a time of extreme balance of payment crisis. It was to tie over the balance of payment crisis in the early 1990s Portfolio flows often referred to as hotmoney are notoriously volatile capital flows. They have also responsible for spreading financial crisis causing contagion in international market. Even though, the FIIs have been playing a key role in the financial markets since their entry into this country. The explosive portfolio flow by FII brings with them great advantages as they are engine of growth, lowering cost of capital in many emerging market. This opening up of capital markets in emerging market countries has been perceived as beneficial by some researchers while others are concerned about possible adverse consequences. The relationship between the Sensex and Direct Investment as well Portfolio Investment can be seen by developing regression model using R-software to have correct picture over it. The sample data is used from Handbook of Statistics on Indian Economy taken from RBI.

Hypotheses
Null Hypotheses are premised on the following (1) There is no relation between the movement of Direct Investment (di) and Portfolio Investment (pi) and stock market index (BSE Sensitive Index). Test of Hypotheses on Movement of Stock Prices and Direct Investment (di) and Portfolio Investment (pi). H0 (Null Hypotheses) = There is no relation between movement of the Direct Investment (di) and Portfolio Investment (pi) and the movement of Stock Prices. H (Alternative Hypothesis) =There is a relation between movement of the Direct Investment (di) and Portfolio Investment (pi) and the movement of Stock Prices.

Trends in the FII and FDI and Sensex

Year 199091 199192 199293 199394 199495 199596 199697 199798 199899 199900 200001 200102 200203 200304 200405 200506 200607 200708 200809 200910

di 174 316 965 1838 4126 7172 10015 13220 10358 9338 18406 29235 23367 19860 27188 39674 10336 7 13827 6 16148 1 17630 4

pi

total sensex 11 185 1049.5 3 10 326 1879.5 1 748 1713 2895.6 7 11188 13026 2898.6 9 12007 16133 3974.9 1 9192 16364 3288.6 8 11758 21773 3469.2 4 6794 20014 3812.8 6 -257 10101 3294.7 8 13112 22450 4658.6 3 12609 31015 4269.6 9 9639 38874 3331.9 5 4738 28105 3206.2 9 52279 72139 4492.1 9 41854 69042 5740.5 2 55307 94981 8278.5 5 31713 13508 12277. 0 33 10974 24801 16568. 1 7 89 - 97863 12365. 63618 55 15351 32981 15585. 1 5 21

Source: RBI (Handbook of Statistics on Indian Economy)

Usefulness of Study
The year 1991 marked a key transition in Indias foreign investment policy.

 The transformation was induced by the governments decision to encourage stable nondebt creating long-term capital flows as a major source of funds for supplementing domestic savings. This was a significant departure from the over reliance on debt-creating flows during the 1970s and 1980s. Entry of foreign investment was streamlined in two distinct channels. Apart from the automatic route, an empowered Board was set up for negotiating with investors and approving investments in select areas. This board the Foreign Investment Promotion Board (FIPB) administers the government channel of foreign investments. Subsequent developments in FDI policy have focused on altering the scale and scope of foreign investment between these two routes. A major policy revamp occurred in February 2000. The automatic route was significantly expanded to make FDI in all items/activities eligible for the route except a well-defined negative list. Foreign institutional investors (FIIs) were net sellers from November 1997 through January 1998. The outflow, prompted by the economic and currency crisis in Asia and some volatility in the Indian rupee. Large outflows began again in May 1998, following India's nuclear tests and volatility in the rupee/dollar exchange rate. In an effort to avoid further heavy outflows, the RBI announced in June that FIIs would be allowed to hedge their incremental investments in Indian markets after June11, 1998. Mumbai, March 21 Equity investments by Foreign Institutional Investors stood at $80 billion as on September-end 2008, down by $18.6 billion in the first six months of the current financial year, according to the latest figures released by Reserve Bank of India. During this period, relentless selling by FIIs saw the BSE Sensex slide by 2,766 points. Foreign institutional investors pulled out close to Rs 50,000 crore (Rs 500 billion) at the domestic stock market in 2008-09, almost equaling the inflow in the previous Fiscal. FIIs' net outflows have been Rs 47,706.2 crore (Rs 477.06 billion) till March 30 in the

financial year 2008-09 as against huge inflows of Rs 53,000 crore (Rs 530 billion) in the previous fiscal, according to latest information on the Securities and Exchange Board of India website. The above points shows that the FII has a huge impact on the Sensex but in reality what is the actual position is to be found with the regression analysis and has to be seen that Is really the FII has so impact?

Results

SENSEX= + 2di+ i.e. Sensex=2788 + 0.07749di + T-value is more than the critical value so it is significant P-Value is less than the significant Value 0.05

SENSEX= + 3pi+ Sensex = 4429 + 0.06089pi + T-value is more than the critical value so it is significant P-Value is less than the significant Value 0.05

SENSEX= + 1total+ Sensex = 2753 + 0.04916 total + T-value is more than the critical value so it is significant P-Value is less than the significant Value 0.05

The log calculated for Sensex and di shows that 1% changes in di changes the Sensex by 0.32940. T-value is more than the critical value so it is significant P-Value is less than the significant Value 0.05

The log calculated for Sensex and pi shows that 1% changes in total pi changes the Sensex by 0.21495. T-value is more than the critical value so it is significant

P-Value is less than the significant Value 0.05

The log calculated for Sensex and total shows that 1% changes in total (pi + di) changes the Sensex by 0.32020. T-value is more than the critical value so it is significant P-Value is less than the significant Value 0.05

The regression model shows that Sensex=2788 + 0.07749di + ; Sensex = 4429 + 0.06089pi + ; Sensex = 2753 + 0.04916 total + . This mean overall the Sensex depends on total foreign investment. When the regression found separately it can be seen that the Sensex depends more on direct investment and less on portfolio investment but definitely it is related to both so the null hypothesis is rejected and alternative hypothesis is accepted. But after taking a log of both there is more clarity that though the Sensex depends on both di and pi but the changes is more due to di and not pi. But the Sensex is still more sensitive to the portfolio investment which was observed during the global recession period so now the question is whether the panic situation has played a role or the speculators played on Sensex this is to be found in the further research.

Limitation of the study

The study does not include the month wise data of the direct investment and portfolio investment which may give more clarity about the relationship between the portfolio investment and direct investment and also it doesnt include the month wise data for recession period which may give impact of pi and di on Sensex during that period.

Conclusion
The study concludes that there is relation between the pi and di on Sensex but it is not so that the fall in this could really sensitize the Sensex to a greater extent. This proves that the Sensex is affected but the panic situation more works in the market rather than the actual change in the pi and di. This is also seen in the current scenario the people are still cautious about the foreign investment and also to invest in the BSE Sensex.

Bibliography

Santosh C. Panda ,Delhi School Of Economics, Indias Growth Story: Challenges And Prospects, Volume 4, 2009, Article 1, The International Journal Of Economic Policy Studies. 2009-10, RBI, Handbook of Statistics on Indian Economy. http://savingmoneysaver.com/blog/investing-money/investment-from-abroad. International Review of Business and Finance ,ISSN 0976-5891 ,Volume 2 Number 1 (2010), pp. 127, Research India Publications ,http://www.ripublication.com/irbf.html.

Smitha Francis, Foreign Direct Investment Concepts: Implications for investment negotiations. See OECD (2008), Benchmark Definition of Foreign Direct Investment, Fourth Edition. DIPP (2010), Draft Press Note No. (2010) FDI Regulatory Framework, Ministry of Commerce and Industry, http://dipp.nic.in/FDI_MANUALS/FDIREGULATORY_FRAMEWORK_24DECEMBER2 009.PDF