Impact of FIIs on the Integration and Volatility of the Indian Stock Market, Study Guides, Projects, Research of Business Administration

Download Impact of FIIs on the Integration and Volatility of the Indian Stock Market and more Study Guides, Projects, Research Business Administration in PDF only on Docsity! 1 INTRODUCTION OF STOCK EXCHANGE A “STOCK EXCHANGE” is a platform where buyers and sellers of securities issued by government, financial institutions, corporate houses, etc meet and where the trading of these corporate securities takes place. This is a market of speculations. If the speculation of investor becomes wrong then the investor loses. Nobody knows what will happen even after a second. A stock exchange refers to that segment of the capital market where the securities issued by corporate entities are trade. It is an open auction market where buyers and sellers meet and evolve a competitive price for the securities. It reflects hopes, aspirations and fears of people regarding the performance of the economy. It provides necessary mobility to capital and directs the flow of capital into profitable and successful enterprises. Since buying and selling of different types of securities takes place in stock exchange. The prices of particular securities reflect their demand and supply. In fact, stock exchange is said to be a barometer of economic and financial health. The stock exchanges are the nerve center of capital market. The stock exchange discharges three essential functions in the process of capital formation not in raising resources for the corporate sector. It provides place for sale and purchase of securities i.e. shares, bonds etc. Docsity.com 2 It provides linkages between the savings of household sector and investment in corporate sector or economy. It provides market quotation for share, debentures and bonds and serves as a role of barometer, not only of the state of health of individual companies, but also of the economy as a whole. Therefore, by providing market place quotations of the price of shares and bonds or sort of collective judgment. Simultaneously reached by many buyers and sellers in the market, the stock exchanges serve the role of barometer, not only of the state of health of individual companies but also of the nation’s economy as a whole. FEATURES OF STOCK EXCHANGE o It is the place where listed securities are bought and sold. o It is an association of persons known as members. o Trading in securities is allowed under rules and regulations of stock exchange. o Membership is must for transacting business. o Investors and speculators, who want to buy and sell securities, can do so through o members of stock exchanges i.e. brokers. Docsity.com 5 in the post-liberalization period. We conclude that Indian stock market is integrated with mature markets and sensitive to the dynamics in these markets in a long run. In a short run, both US and Japan Granger causes the Indian stock market but not vice versa. In addition, we find that the Indian stock index and the mature stock indices form fractionally cointegrated relationship in the long run with a common fractional, nonstationary component and find that the Johansen method is the best reveal their cointegration relationship. HISTORY OF STOCK EXCHANGE The trading in securities in India was started in the early of 1973. The stock exchange operating in the 19th century was those of Bombay set up in 1875 and Ahmadabad set up in 1894. These were organized as voluntary non-profit making associations of brokers to regulate and protect their interests. Before the control on securities trading becomes a control on securities trading became a central subject under the constitution in 1950. It was a state subject and the Bombay securities contact (control) act, 1925 used to regulate trading in securities. Under this act, Bombay stock exchange was securities in 1927 and Ahmedabad stock exchange in 1927 and Ahmedabad stock exchange in 1937. During the war boom, a number of stock exchanges were organized at Bombay, Ahmedabad and other centers but they were not recognized soon after it became a central subject, central legislation was proposed and a committee headed by sh. A.D. GORWALA went into bill for securities regulation. On the basis securities regulation. On the basis securities contracts (control) at became law in 1956. At present there are 23 recognized stock exchanges in India. Number of Investors is increasing day by day. The stock exchange is a double auction market. Quite distinct from the common market in which only one seller and many buyers in a stock exchange a number of potential buyers and potential sellers co-exist all competing both among themselves and with one another in making bids, counter-bids, offers and counter-offers. Docsity.com 6 WHO BENEFITS FROM STOCK EXCHANGE? o INVESTORS: It provides them liquidity, marketability, safety etc. of Investment. o COMPANIES: It provides them access to market funds, higher rating and public interests. o BROKERS: They receive commission in lien of their services to investors. o ECONOMY AND COUTRY: There is large of saving, better growth moves industries, higher income. LIST OF VARIOUS STOCK EXCHANGES IN INDIA S. No. Name of stock exchange Years of establishment Type of organization 1 Bombay Stock exchange 1875 Voluntary Non-profit organization 2 Ahmedabad Stock exchange 1897 Voluntary Non-profit organization 3 Calcutta Stock exchange 1908 Public limited company 4 M.P. Stock exchange, Indore 1930 Voluntary Non-profit organization 5 Madras Stock exchange 1937 Co. limited by guarantee 6 Hyderabad Stock exchange 1943 Co. limited by guarantee 7 Delhi Stock exchange 1947 Public limited company Docsity.com 7 8 Bangalore Stock exchange 1957 Pvt. converted into public ltd. co. 9 Cochin stock exchange 1978 Public limited company 10 U.P. Stock exchange, Kanpur 1982 Public limited company 11 Pune Stock exchange 1982 Co. limited by guarantee 12 Ludhiana Stock exchange 1983 Public limited company 13 Jaipur Stock exchange 1983 Public limited company 14 Guahati Stock exchange 1984 Public limited company 15 Kannaar Stock exchange 1985 Public limited company 16 Magadh Stock exchange 1986 Co. limited by guarantee 17 Bhuvneshwar Stock exchange 1989 Co. limited by guarantee 18 Saurashtra stock exchange, Kutch. 1989 Co. limited by guarantee 19 Vadora Stock exchange 1990 N.D. 20 Meerut Stock exchange 1991 N.D. 21 O.T.C.I. 1993 Pure demutualised 22 National Stock exchange 1995 Pure demutualised 23 Coimbtoor stock exchange 1996 N.D. 24 Sikkam Stock exchange 1997 N.D. Docsity.com 10 in less time, and there are fewer disclosure requirements. Notices of private placements are published in the financial press. B) THE SECONDARY MARKET The firm is not directly affected by trading in securities after issue, and only receives proceeds from the original issue of the security. As a result, it is sometimes thought that the secondary markets are somewhat irrelevant, a place where investors gamble without any real economic impact. This view is absolutely wrong. The secondary markets provide the liquidity and price discovery that are necessary for the existence of an effective primary market. Liquidity refers to the ability to convert an asset to cash quickly at a price reflecting the fair value. Both conditions must be fulfilled, since any asset could be converted to cash quickly if offered at a low enough price. Liquidity in tum depends on three qualities. Depth is the presence of orders to trade at prices closely surrounding the market price. Breadth requires that the size of these orders be sufficient to prevent wide price swings, given trading volume. Resiliency refers to the speed with which mispricing due to temporary supply and demand imbalances call forth new orders. If these qualities are lacking, the resulting poor liquidity increases the risk of the buyer, since asset prices will fluctuate around fair value and the asset may have to be sold at a price below fair value. Under such conditions, investors are hesitant to invest, will demand a higher rate of retum, and often require extensive safeguards. These conditions are often apparent in the venture capital market, in which firms that do not have access to the primary securities markets seek funding. In short, without secondary market liquidity a primary market for securities would not function well. Even the venture capital market is aided by the secondary market, since one factor in investing is the likelihood that the firm will grow enough to accomplish a public offering, so that the stock will become liquid. The possibility of a secondary offering also encourages participation in public offerings by large investors. The liquidity provided by an effective secondary market not only supports, but indeed enables, an Docsity.com 11 effective primary market. It is not surprising that developing countries establish securities markets, since this mobilizes capital and facilitates economic growth. Price discovery is the valuation of assets. Through trading, an equilibrium price that represents the consensus of the markets is established. This price is the result of information entering the market, and it is also information in itself. It is a signal both to investors and to the firm's management as to the expected future of the firm. The secondary market affects access to the primary through the signals from price discovery. If a firm's securities are given a low value, signaling low expectations, issue of new securities is difficult if not impossible. Even if a primary issue is possible, the cost of capital for the firm will be high, and the capital budget of the firm will be small, slowing growth. In essence, by deciding which firms will receive capital for new projects, the price discovery function of the secondary markets serves as the capital budgeting process of the economy, setting its goals, priorities, and future. Rather than being irrelevant gambling, secondary markets are a vital mechanism in the economy. c) OVER-THE-COUNTER MARKETS The OTC markets are sometimes defined as any securities trade that does not take place on an organized exchange. The name originates from the time when stock trading was a sideline for merchants and bankers, and securities were literally sold over a counter. Stocks trading OTC tend to be smaller and younger firms, although there are exceptions. The quality of the securities varies widely. As indicated by the plural, the OTC is properly viewed as a group of submarkets sharing certain characteristics. One characteristic is that this market has no central meeting place. It is instead an informal network of brokers trading for clients and dealers who make a market in the securities. There may multiple market makers for a given security, typically between 2 and 20. Brokers and dealers communicate and trade with each other by various means. The price of a trade is set by negotiation, rather than by the auction process of the NYSE. A broker receiving an order will contact the market makers and receive bid and ask quotations, and may choose the best offer or attempt to negotiate a better offer. There is no specialist or specific mechanism to maintain an orderly market, and price fluctuations depend on the Docsity.com 12 breadth, depth, and resiliency of the market for the particular security. Trades executed OTC for stocks not listed on an exchange are referred to as the second market. Stocks listed on an exchange may also be traded OTC, and such trades are sometimes referred to as the third market. One OTC subgroup consists of stocks listed on the Nasdaq exchange. This system provides electronic display of dealer bids and asks, allowing the broker to obtain the best price. Listing on Nasdaq is restricted to about 3,500 of the more widely traded stocks that also meet other listing requirements. As with NYSE listings on the exchanges, Nasdaq stocks are a minority in numbers but a majority in value and trading among OTC stocks. A step down from Nasdaq stocks are the pink-sheet stocks. The pink sheets were printed bid and ask quotations that were distributed daily; the name derives from the color of the paper used. This system has been supplanted by computerized quotation systems. Unlike Nasdaq quotes, these quotes are more in the nature of workout quotes or estimates, rather than firm quotes at which a trade can be executed. FII Investment and it's Impact on Indian Equity markets: It is important to point out that even when foreigners are noisy and irrational, their activity does not necessarily have a destabilizing impact. Domestic investors may be powerful enough and the market as a whole succinctly liquid to accommodate selling or buying pressures from noisy foreigners. As long as domestic investors are not subject to the same imperfections that give rise to noisy trading strategies, foreigners should have no impact on volatility. However, they find no permanent effects of net foreign order imbalances on prices and volatility. Domestic investors quickly accommodate large sales or purchases by foreign Investors. One is that the relationship between volume and volatility is driven by changes in fundamentals. If investors interpret information differently, new information will cause both price changes and trading. This gives rise to a contemporaneous relationship between volatility and trading. Trading is the process through which private information Docsity.com 15 STOCK MARKET PERFORMANCE CHART SINCE 1991 Figure 1 shows that basically all series are moving together in a long run, this suggests there may have a common trend for all the series. The results of the unit root tests in Table 2 do not reject all the four series for the period of January 1, 1991 to December 31, 2003 are I(1) but reject any of the series to be I(2) and hence we conclude that the all the series are I(1). We then study the cointegration relationship between Indian stock market and each market from the developed countries in equations (1) and (2) by examining the residuals in equation (6). The results are in Table Docsity.com 16 OPERATIONAL DEFINITIONS STOCK MARKET:- 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 corporate securities take place. MUTUAL FUNDS: - A Mutual fund is a trust that pools the saving of a number of investors who share a common financial goal. FOREIGN DIRECT MARKET (FDI): - This category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. FOREIGN INSTITUTIONAL INVESTOR (FII):- An investor or investment fund that is from of or registered in a country outside of the one in which it is currently investing. Foreign institutional investors have made a sizable investment in Indian financial markets. There are currently about 1324 FIIs registered in India. FOREIGN PORTFOLIO INVESTMENT (FPI):- FPI is a category of investment instruments that are more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise. These include investments via equity instruments (stocks) or debt (bonds) of a foreign enterprise that does not necessarily represent a long- term interest. BULL MARKET: - A Bull market is a market that is consistently going up. It is a market where there is optimism of further rise batter, business results and other positive factors. Bull Market can sometimes continue for years, for investors this is the preferred market trend. However no bull market can continue for very long. Docsity.com 17 BEAR MARKET: - Bear Market is a market that is showing a persistent downtrend. A 15-20% downward movement of the market generally termed as a bear market. DIVERSIFICATION: - diversification is the technique of investing in unrelated business sectors simultaneous so that risk that affects a particular sector does not affect your overall investment. For example your portfolio of share includes sectors like Information Technology, Real estate capital Goods, Autos etc. Exchange rate of a nation's currency- Currency like other commodities rises or falls in "price" with demand. When investors leave, they sell their holdings in a country's currency and as demand falls, the "price" of that currency will also fall ECONOMIES OF SCALE: - Produces are often able to enjoy considerable production cost savings by buying inputs in bulk, mass-producing or retailing their end product. These lower costs achieved through expanded production are called Economies of Scale. DEBT/EQUITY RATIO-The debt/equity ratio measures the extent to which a firm's capital is provided by lenders (through debt instruments such as fixed-return bonds) or owners (through variable-return stocks). A greater reliance on financing through debt can mean greater profitability for shareholders, but also greater risk in the event things go sour. INTERNATIONAL MONETARY FUND-The IMF is an international organization of 186 member countries, established in 1947 to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment. INSTITUTIONAL INVESTOR An organization whose primary purpose is to invest its own assets or those held in trust by it for others. Includes pension funds, investment companies, insurance companies, universities and banks. Docsity.com 20 INDIA INFLATION Indian Economy has been experiencing an impressive growth in the recent years. The growth rate in output and employment has put some pressure on the level of inflation. The Whole Sell Prices Index (WPI) in the country as on 6th Jan 2007 has reached at 6.1 Percent. The present level of inflation is considered as a challenge to the growing potentiality of the Indian Economy. Most of the Countries over the world have stepped forward with tightening measures to check the rate of inflation. The Reserve Bank of India being the country’s central bank has come forward with its policies to curb the rate of inflation. The Inflation Rate in India in terms of Whole Sell Price Index is as follows: The Reserve Bank of India in its monetary policy has given top priority for maintaining the price stability and for sustaining the rate of growth of the economy. In the same direction the bank has raised the Cash Reserve Ratio in a continuous manner. The Cash Reserve Ratio of the country over various years is as follows: Docsity.com 21 The above diagram shows a rising Cash Reserve Ratio of Reserve Bank Of India. The Cash Reserve Ratio as on 6th Jan 2007 has reached at 5.50 percent. The rising prices of food products and manufacturing products put a pressure on the rate of inflation. It is rightly stated by the RBI in the quarterly review that money supply has exceeded the "indicative trajectory" reflecting strong demand conditions in the economy. Broad money as on January 06-07 widened by 13.9 per cent against 9.9 per cent in the same period of the previous fiscal. Government borrowings were on the rise by 5.2 per cent while the commercial borrowings grew by 17.9%. Substantial rise in the net foreign exchange assets of banking sector was witnessed; it increased by 15.7 per cent as against the rise of 1.2 per cent in the same period of last year. FOREIGN INSTITUTIONAL INVESTMENT Tables 2.29 & 2.30 present details of investments by FIIs since 1992-93 and the details of monthly investment by FIIs in 1998-99. The analysis of data indicates that there has been substantial divestment by the FIIs during the year 1998-99. The maximum outflow was during the months of May and June 1998 (almost US$430 millions). Docsity.com 22 Yearly Trends in FII Investment Month Gross Purchases Rs. Cr Gross Sales Rs. Cr Net Investment Rs. Cr Net Investment US $Mn at monthly ex rate Cumulative Investment (US $ Mn.)* 1992-93 17.4 4.0 13.4 4.2 4.2 1993-94 5,592.5 466.3 5,126.2 1,634.0 1,638.2 1994-95 7,631.0 2,834.8 4,796.3 1,528.3 3,166.5 1995-96 9,693.5 2,751.6 6,942.0 2,035.7 5,202.2 1996-97 15,553.9 6,979.4 8,574.5 2,431.9 7,634.1 1997-98 18,694.7 12,737.2 5,957.5 1,649.4 9,283.6 1998-99 16,115.1 17,699.4 -1,584.5 -386.6 8,897 Grand Total 73,298.0 43,472.7 29,825.2 8,897 Table2.30 Monthly Trends in FII Investment Month Gross Purchases Rs. Cr Gross Sales Rs. Cr Net Investment Rs. Cr Net Investment US$M at monthly ex rate Cumulative Investment (US $ Mn.)* A 98 1,294 1,392.4 (98.4) (24.8) 9,258.8 Docsity.com 25 almost all the South-east Asian nations was severely damaged by the crises which started in July 1997. As a result, the FIIs were facing heavy redemption pressures from the Emerging Markets Funds. The stock markets in all these countries fell continuously from March 1998 till about September 1998. The integration of the Indian capital markets with the international markets thus spilled over to Indian markets as well. However, the net outflow from the Indian markets was much lower than the other Asian countries. A further indication of the integration of the Indian markets can be seen from the upsurge in the valuations and funds inflows during the first quarter of 1999, when all the other Asian countries have also seen rising trend in stocks indices. The sluggishness in investment in the emerging markets was exacerbated by the fact that throughout 1998-99, US and European markets showed historically high valuations, and the expectations of further rise because of the strong economic indicators there which led to reduced allocations elsewhere. FII Impact in the domestic markets The FIIs are major institutional investors in Indian capital markets. In the year 1998-99, the gross purchases and sales by the FIIs stood at Rs. 16,115 crores and Rs. 17,699 crores, respectively. The gross turnover on BSE and NSE for the same period is Rs. 3.11 lakh crores and Rs. 4.14 lakh crores. Thus as a proportion of total turnover on the exchanges, the FII figures do not appear to be substantial. However, since the FII trades are delivery based, the actual impact on the market is much higher. Docsity.com 26 The Graph below exhibits the Sensex movement and the corresponding FII monthly net investment since 1992. Graph 2.25 (b) : Sensex Movement and corresponding monthly net FII investments India and other emerging markets FIIs perception of the Indian markets India has consistently been viewed as one of the better and safer market as compared to the other Emerging Markets. As mentioned earlier also, the quantum of funds outflow from India has been much lower as compared to the other Asian markets. The following graph indicates the funds allocation for an ideal model portfolio for equity investments in the 30 emerging economies. This portfolio has been designed by one the largest FIIs in Docsity.com 27 the Asia-Pacific and other Emerging Markets. The allocations figures are for March 1999. Graph 2.16 Model portfolio Return Analysis for the Indian Markets Indian market has shown a small negative return during the year 1998-99. The Graph in 2.13 compares the equity return in the top ten emerging markets and the US market. The returns shown in the Graph 2.17 have not been normalized in dollar terms and thus represent the absolute returns in the respective local currencies. Docsity.com 30 REVIEW OF LITERATURE Tripathy N. P. (June 2002) As per this paper Globalization and liberalization have brought dramatic changes in the financial sector of Indian economy. India has emerged as an important destination for global investment. Keeping this in view, the present study examines the dynamic relationship between stock market, market capitalization and net FII investment in India during the period from June 2002 to June 2005 by using Granger Causality Test and Vector Auto Regression Model. The results indicate that there is a unidirectional causal relationship between market capitalization and stock market, net FII investment with stock market. Again the VAR analysis shows that stock return and market capitalization have an impact over net FII investment in the expected direction over a short horizon. Coondoo Dipankor (MARCH 2007) This paper examines the impact of reforms of the foreign institutional investors' (FIIs) investment policy, on FII portfolio flows to the Indian stock markets, an aspect, studies on determinants of FII flows to India so far have not taken into consideration. FIIs have been allowed to invest in the domestic financial market since 1992; the decision to open up the Indian financial market to FII portfolio flows was influenced by several factors such as the disarray in India's external finances in 1991 and a disorder in the country's capital market. It is found that these policies mostly render FII investments more sensitive to the domestic market returns and raise the inertia of the FII flows to the Indian stock market. Chakrabarti Rajesh(JULY 2004)s Since the beginning of liberalization FII flows to India have steadily grown in importance. In this paper we analyze these flows and their relationship with other economic variables and arrive at the following major conclusions: * While the flows are highly correlated with equity returns in India, they are more likely to be the effect than the cause of these returns; Docsity.com 31 * The FIIs do not seem to be at an informational disadvantage in India compared to the local investors. * The Asian Crisis marked a regime shift in the determinants of FII flows to India with the domestic equity returns becoming the sole driver of these flows since the crisis. Rao Sadhalaxmi Vivek (May 2003) This paper says that Financial markets are the catalysts and engines of growth of any nation. Since its liberalization in 1991, India has initiated several steps to strengthen its financial system. The financial sector reforms undertaken by the Government of India and the Securities and Exchange Board of India (SEBI), over the last few years have augmented the magnitude of FDI and FII inflows. This empirical study endeavors to find the effect of the contemporary changes in the corporate governance structures on the agency costs of the publicly traded companies; primarily to study the effect of FII shareholding on the agency costs of publicly traded companies. The results show that FII's are effective monitors in reducing the agency costs. Sethi Narayan (april 2004) The study attempts to examine the impact of international capital flows on economic growth. The study also examines trends and composition of capital inflows, changing pattern capital flows in view of economic reform, ascertain the impact of domestic financial policy variables on international capital flows and suggest policy implication thereof. By using monthly time series data, we found that Foreign Direct Investment (FDI) is positively affecting the economic growth direct contribution, while Foreign Institutional Investment (FII) is negatively affecting the growth alb its, in a small way and make a preliminary attempt to test whether the international capital flows has positive impact on financial markets and economic growth. The empirical analysis using the time series data between April 1995 to April 2007 shows the FDI plays unambiguous role in contributing to economic growth. Docsity.com 32 Sharma Dipankor(May 2008) As per this paper, The performances of the emerging equity markets vis a vis their matured counterparts in the developed world have shown repeated reversals in recent times; in the pre-Mexican crisis period (1990-1994), most of the emerging markets performed much better compared to the matured markets in terms of both return and associated risk, while the pattern reversed during 1995-2001 (a period affected by the Asian crisis). It is also seen that return from exchange rate variation and fundamentals of the Indian economy may have some influence on FII decisions, but such influence does not seem to be strong, and finally, daily FII flows are highly autocorrelated and this autocorrelation can not be accounted for by all or some of the covariates considered in our study. Raghuvanshi Raghvendra (june 2006), The article endeavor to address the intricacies involved in the business of Non-Banking Financial Companies (hereinafter to be referred as "NBFC"). It shall cover the law governing the NBFCs, with detailed provisions of law and directions issued by different regulators, right from its formation and functions to the regulation of its operation in the market. It shall also deal in detail with the actions available against the NBFCs in non-compliance with the norms prescribed by different regulators and includes judicial approach towards NBFCs with comparison between NBFCs and Foreign Institutional Investors (FII) followed by the conclusion. Garg Paramita liberalization of the Indian capital market its integration with international financial markets has grown. In this paper the author examines the co movement of the Indian stock market with developed markets like US, Japan and other Asian market, using daily data for the period January, 1999 to June, 2004, and tools like pair wise and group wise co integration and Granger-causality tests. This indicates a unique role of India in the degree of linkages of these stock markets during the recent period of more open capital markets, where FII investments play a key role in synthesizing markets across a region. The degree of integration that is found to be not very high implies that the nature of integration with emerging Asian markets does not yet warranty any immediate concern for India regarding possible contagion and also shows Docsity.com 35 (FDI) positively affects economic growth, whereas Foreign Institutional Investment (FII) negatively affects the growth. Ray Hirak This study investigates the relationship among the exchange rates (EX), stock prices (Sensex), and select macroeconomic variables, such as output (IIP), money supply (M3) and capital flows (FII), in the Indian context in the post-reform era. The findings of the study indicate that in the long-run, the exchange rates are positively related to stock prices and money supply, and negatively related to output and foreign institutional investments. The Granger causality test helps detect the 'feedback' relationship between the economy and the exchange market. The innovation analysis confirms the dynamic interaction of exchange rate with itself, its own key macroeconomic variables and stock prices. Ray Subhasis This article aims at finding out the possible determinants of liquidity and subsequently interest rate. Global as well as Indian scenario is fast changing in the finance sector. Oil prices are rising. Fed rate is increasing moderately in the US. FII and FDI funds are flowing to India in abundance. This study is centered on understanding the 'friction' or the 'push', these items may have, on the overall liquidity. It also tries to find an answer to whether they have any effect on interest rate or not. Reddy Krishna , December 2008 The paper analyzed a performance of the sensex vs. FIIs in Indian stock market and some of the most talked about movements of sensex starting with the secondary market summary of each year.FII s investments in BSE sensex reveal that the liquidity as well as volatility were highly influenced by FII flows. FIIs are significant factor determining the liquidity and volatility in the stock market prices. After going through all the analysis regarding the stock market in last 2 years, we can say that stock market touched its peak at 21000 but then crashed badly. Though the sensex is a barometer and after seeing such fluctuations one could be afraid of investing. So even after such downturns, we can be hopeful for a positive market. Docsity.com 36 Sironi Andrea As per this paper the question of whether private investors can discriminate between the risk taken by banks is empirically investigated by testing the risk sensitivity of European banks' subordinated notes and debentures (SND) spreads. A unique dataset of spreads, ratings and accounting measures of bank risk is used for a sample of SND issued during the 1991-2000:Q1 period. Moody's Bank Financial Strength (MBFS) and Fitch IBCA Individual (FII) ratings, which omit the influence of government and other external support on risk borne by investors, are used as bank risk proxies together with accounting variables to explain the variability of spreads. This result can be attributed to the joint effect of the loss of monetary policy by national central banks and the public budget constraints imposed by the European Monetary Union (EMU). Singh Bhupender, The Financial Sector of an economy plays a significant role in attracting the Foreign Institutional Investment inflows. The present study tries to examine the effect of significant Macroeconomic variables; inflation and exchange rate on the inflows of Foreign Institutional Investment in India. The author has tried to develop a theoretical framework to analyze the inter-relation between Foreign Institutional Investment, Inflation and Exchange Rate. Given the huge volume of these flows and their significant impact on domestic financial markets; understanding the determinants of these flows becomes imperative as the economy moves towards full capital account convertibility. Bose Suchmita Given the volatile nature of capital flows to emerging markets seen in the early 1990s, FII investment in India, which began in January 1993, called for special regulatory attention. The promulgation of legislation pertaining to foreign investment in 1995 marked a watershed for FII flows to India, as it led to a significant increase in the level of FII equity inflows. We try to assess the impact on FII flows of several policy revisions related to FII investment during the period January 1999 to January 2004, through a multivariate GARCH regression model. Using techniques of time series intervention analyses we incorporate the effect of each individual policy intervention in a Docsity.com 37 model that includes the two mostimportant covariates of FII flows to India, namely stock market (BSE) returns and past FII flows. Chakrbharti Rajesh Since the beginning of liberalization FII flows to India have steadily grown inimportance. In this paper we analyze these flows and their relationship with other economic variables and arrive at the following major conclusions:  While the flows are highly correlated with equity returns in India, they are more likely to be the effect than the cause of these returns  The FIIs do not seem to be at an informational disadvantage in India compared to the local investors;  The Asian Crisis marked a regime shift in the determinants of FII flows to India with the domestic equity returns becoming the sole driver of these flows since the crisis. Modi Ashish K Financial markets are the catalysts and engines of growth of any nation. Since its liberalization in 1991, India has initiated several steps to strengthen its financial system. The financial sector reforms undertaken by the Government of India and the Securities and Exchange Board of India (SEBI) 3, over the last few years have augmented the magnitude of FDI and FII inflows. SEBI has undertaken important policy reforms to attract new investments into the country. This empirical study endeavors to find the effect of the contemporary changes in the corporate governance structures on the agency costs of the publicly traded companies; primarily to study the effect of FII shareholding on theagency costs of publicly traded companies. The results show that FII’s are effective monitors in reducing the agency costs. Sethi Narayan Capital flows are most helpful when the magnitude of those flows is steady and stable. The international capital flow such as direct and portfolio flows has huge contribution to influence the economic behavior of the countries positively. Countries with well developed financial markets gain significantly from Foreign Direct Investment (FDI). The huge volume of capital flows and their influence on the domestic Docsity.com 40 RESEARCH METHODOLOGY Meaning of Research Research simply means ‘search for knowledge’. Research comprises of defining and redefining problems, formulating hypothesis or suggested solutions, collecting, organizing and evaluating data making deductions and reaching conclusions. OBJECTIVES OF STUDY The first step in the research process is to define the problem. It is rightly said that a problem well defined is half solved. Careful attention to problem definition allows a research to set the proper research objectives. Problem Definition: “How FII impacts the Indian Stock Market and what is the basic concept of FII”. MAIN OBJECTIVE: 1.) To study the performance of Indian stock market. 2.) To study the impact of FIIs on Indian stock market. SUB OBJECTIVE: 1. To analyze the role and relationship between FII and Indian stock market. 2. To study the concept of foreign institutional investors. Docsity.com 41 Research Design Research Design is the conceptual blueprint for collection, measurement and analysis of data. Research Design stands for advance planning of the methods to the adopted for collecting the relevant data and the techniques to be used in their analysis keeping in view the objectives of the research and the availability of staff, time and money. Two broad classes of research design are identified as:  Research design in case of exploratory research studies.  Research design in case of descriptive in case of research studies. There are three types of research: (1) Exploratory research (2) Descriptive research (3) Causal research Research Design Opted in this study: This study is based on an exploratory research design. In this study various aspects regarding the contribution of FII on Indian stock market has been explored, in order to find out the actual impact. METHOD OF DATA COLLECTION Since the report required studying the theoretical as well as practical aspects of Project Finance, the books have provided in the theoretical aspects of the study. To get the latest information, Internet and broachers will also be used as a medium at various stages. The data for the project report has been collected from the following sources:  Secondary data SECONDARY DATA  Searching the internet for the purpose.  Secondary data includes data obtained from books, magazines, journals, news papers etc. Docsity.com 42 SOURCES OF DATA: GENERAL SOURCES:  POLITICAL /ECONOMIC WEEKLY  ECONOMIC SURVEY REPORT  FINANCE INDIA SPECIFIC SOURSE  www.sebi.co.in  www.centrum.co.in  www.moneycontrol.com Docsity.com 45 INDUSTRY PROFILE INVESTMENT IN INDIAN MARKET India is believed to be a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructure deficiencies. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. No company, of any size, aspiring to be a global player can, for long ignore this country, which is expected to become one of the top three emerging economies. Success in India Success in India will depend on the correct estimation of the country's potential; underestimation of its complexity or overestimation of its possibilities can lead to failure. While calculating, due consideration should be given to the factor of the inherent difficulties and uncertainties of functioning in the Indian system. Entering India's marketplace requires a well-designed plan backed by serious thought and careful research. For those who take the time and look to India as an opportunity for long-term growth, not short-term profit- the trip will be well worth the effort. Market potential India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It is also the second largest among emerging nations. (These indicators are based on purchasing power parity). India is also one of the few markets in the world, which offers high prospects for growth and earning potential in practically all areas of business. Despite the practically unlimited possibilities in India for overseas businesses, the world's most populous democracy has, until fairly recently, failed to get the kind of enthusiastic attention generated by other emerging economies such as China. Docsity.com 46 Lack of enthusiasm among investors The reason being, after independence from Britain 50 years ago, India developed a highly protected, semi-socialist autarkic economy. Structural and bureaucratic mpediments were vigorously fostered, along with a distrust of foreign business. Even as today the climate in India has seen a sea change, smashing barriers and actively seeking foreign investment, many companies still see it as a difficult market. India is rightfully quoted to be an incomparable country and is both frustrating and challenging at the same time. Foreign investors should be prepared to take India as it is with all of its difficulties, contradictions and challenges. Developing a basic understanding or potential of the Indian market Envisaging and developing a Market Entry Strategy and implementing these strategies when actually entering the market are three basic steps to make a successful entry into India. The Indian middle class is large and growing; wages are low; many workers are well educated and speak English; investors are optimistic and local stocks are up; despite political turmoil, the country presses on with economic reforms. But there is still cause for worries- Infrastructure hassles. The rapid economic growth of the last few years has put heavy stress on India's infrastructure facilities. The projections of further expansion in key areas could snap the already strained lines of transportation unless massive programs of expansion and modernization are put in place. Problems include power demand shortfall, port traffic capacity mismatch, poor road conditions (only half of the country's roads are surfaced) and low telephone penetration. Indian Bureaucracy Although the Indian government is well aware of the need for reform and is pushing ahead in this area, business still has to deal with an inefficient and sometimes still slow moving bureaucracy. Docsity.com 47 Diverse Market The Indian market is widely diverse. The country has 17 official languages, 6 major religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ greatly among sections of consumers. Therefore, it is advisable to develop a good understanding of the Indian market and overall economy before taking the plunge. INTERNATIONAL PORTFOLIO FLOWS: International portfolio flows, as opposed to foreign direct investment (FDI) flows, refer to capital flows made by individuals or investors seeking to create an internationally diversified portfolio rather than to acquire management control over foreign companies. Diversifying internationally has long been known as a way to reduce the overall portfolio risk and even earn higher returns. Investors in developed countries can effectively enhance their portfolio performance by adding foreign stocks particularly those from emerging market countries where stock markets have relatively low correlations with those in developed countries. International portfolio flows are largely determined by the performance of the stock markets of the host countries 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 present. It is likely that for quite a few years to come, FII flows would increase with global integration. The main question is whether capital flew in to these countries primarily as a result of changes in global (largely US) factors or in response to events and indicators in the recipient countries like its credit rating and domestic stock market return. The answer is mixed – both global and country-specific factors seem to matter, with the latter being particularly important in the case of Asian countries and for debt flows rather than equity flows. Docsity.com 50 allowing FII inflows was exclusive of the FDI limit. The suggested measure will be in conformity with this original stipulation.' The committee also has recommended that the special procedure for raising FII investments beyond 24 per cent up to the FDI limit in a company may be dispensed with by amending the relevant regulations.  Meanwhile, the increase in investment ceiling for FIIs in debt funds from US $ 1billion to US $ 1.75 billion has been notified in 2004. The SEBI also has reduced the turnaround time for processing of FII applications for registrations from 13working days to 7 working days except in the case of banks and subsidiaries.  All these are indications for the country's continuous efforts to mobilize more foreign investment through portfolio investment by FIIs. The FII portfolio flows have also been on the rise since September 1992. Their investments have always been net positive, but for 1998-99, when their sales were more than their purchase. ACTS AND RULES FII registration and investment are mainly governed by SEBI (FII) Regulations, 1995. ELIGIBILITY FOR REGISTRATION AS FII: Following entities / funds are eligible to get registered as FII: 1. Pension Funds 2. Mutual Funds 3. Insurance Companies 4. Investment Trusts 5. Banks 6. University Fund s 7. Endowments Docsity.com 51 8. Foundations 9. Charitable Trusts / Charitable Societies Further, following entities proposing to invest on behalf of broad based funds(a fund established or incorporated outside India, which has at least twenty investors with no single individual investor holding more than 10% shares or units of the fund) , are also eligible to be registered as FIIs: 1. Asset Management Companies 2. Institutional Portfolio Managers 3. Trustees 4. Power of Attorney Holders INVESTMENT OPPORTUNITIES FOR FIIs The following financial 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 limits 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. Docsity.com 52 Investment limits on debt investments The FII investments in debt securities are governed by the policy if the Government of India. Currently following limits are in effect: For FII investments in Government debt, currently following limits are applicable: For corporate debt the investment limit is fixed at US $ 500 million. BRIEF PROFILE OF IMPORTANT INSTITUTIONS: A brief profile of important institutions included in the study is given below. RESERVE BANK OF INDIA India's Central Bank - the RBI - was established on 1 April 1935 and was nationalized on 1 January 1949. Some of its main objectives are regulating the issue of bank notes, managing India's foreign exchange reserves, operating India's currency and credit system with a view to securing monetary stability and developing India's financial structure in line with national socio-economic objectives and policies. The RBI acts as a banker to Central/State governments, commercial banks, state cooperative banks and some financial institutions. It formulates and administers monetary policy with a view to promoting stability of prices while encouraging higher production through appropriate deployment of credit. The RBI plays an important role in maintaining the exchange value of the Rupee and acts as an agent of the government in respect of India's membership of IMF. The RBI also performs a variety of developmental and promotional functions. The first concern of a central bank is the maintenance of a soundly based commercial banking structure. While this concern has grown to comprehend the operations of all financial institutions, including the several groups of non-bank financial intermediaries, Docsity.com 55 The main aims and objectives of the BSE are to provide a market place for the purchase and sale of security evidencing the ownership of business property or of a public or business debt. It aims to promote, develop and maintain a well-regulated market for dealing in securities and to safeguard the interest of members and the investing public having dealings on the Exchange. It helps industrial development of the country through efficient resource mobilization. To establish and promote honorable and just practices in securities transactions. 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. Docsity.com 56 S&P CNX Nifty S&P CNX Nifty is a well-diversified 50 stock index accounting for 23 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL. IISL is India's first specialized company focused upon the index as a core product. IISL have a consulting and licensing agreement with Standard & Poor's (S&P), who are world leaders in index services. The average total traded value for the last six months of all Nifty stocks is approximately 58% of the traded value of all stocks on the NSE Nifty stocks represent about 60% of the total market capitalization as on March 31, 2005. Impact cost of the S&P CNX Nifty for a portfolio size of Rs.5 million is 0.07% S&P CNX Nifty is professionally maintained and is ideal for derivatives trading. Docsity.com 57 OBJECTIVE 1 PERFORMANCE OF INDIAN STOCK MARKE Indices: Sensex For the period: From year 1991 to year 2000 Date Open High Low Close Price/Earnings Price/Bookvalue Dividend Yield Year 1991 1,027.38 1,955.29 947.14 1,908.85 22.30 3.58 1.24 Year 1992 1,957.33 4,546.58 1,945.48 2,615.37 36.19 6.35 0.80 Year 1993 2,617.78 3,459.07 1,980.06 3,346.06 31.78 4.81 0.98 Year 1994 3,436.87 4,643.31 3,405.88 3,926.90 45.45 6.07 0.68 Year 1995 3,910.16 3,943.66 2,891.45 3,110.49 23.63 3.81 1.13 Year 1996 3,114.08 4,131.22 2,713.12 3,085.20 16.07 3.02 1.50 Year 1997 3,096.65 4,605.41 3,096.65 3,658.98 14.45 2.80 1.53 Year 1998 3,658.34 4,322.00 2,741.22 3,055.41 13.00 2.25 1.80 Year 1999 3,064.95 5,150.99 3,042.25 5,005.82 17.35 3.07 1.38 Year 2000 5,209.54 6,150.69 3,491.55 3,972.12 24.48 3.81 1.14 Year 2001 3,990.65 4,462.11 2,594.87 3,262.33 17.60 2.51 1.83 Interpretation : This table shows the performance of sensex of Indian stock market. In this there is given a data of period 1991 to 2001. In this there is open points is 1027 and in 2001there is 3262close points. In this table they show fluctuations in every year. So by this sensex table the investor invest or sell the securities. Docsity.com 60 PERFORMANCE OF BANKING SECTOR:- Indices: BANKEX For the period: From year 2000 to year 2008 Date Open High Low Close Price/Earnings Price/Bookvalue Dividend Yield Year 2002 1,000.00 1,356.41 0.00 1,342.76 0.00 0.00 0.00 Year 2003 1,336.62 2,860.62 0.00 2,799.04 0.00 0.00 0.00 Year 2004 2,817.54 3,729.32 2,153.55 3,721.97 0.00 0.00 0.00 Year 2005 3,729.64 5,192.49 3,299.22 5,081.71 0.00 0.00 0.00 Year 2006 5,124.09 7,353.38 3,934.12 7,085.73 0.00 0.00 0.00 Year 2007 7,092.59 11,826.47 6,047.43 11,418.00 4.75 0.72 0.17 Year 2008 11,440.69 12,678.98 7,316.58 8,580.72 19.82 3.20 0.84 As per this table the performance of banking sector is rises in every year. In 2002 there is the price of Rs. 1000 and in the 2008 the rises to 8580.72. This shows the how quickly the banking sector has grow there sector. In 2007 the prices touches the Rs. 11418 and on next year 2008 the price down to 8580 this can be happen due recession in Indian economy. Docsity.com 61 PERFORMANCE OF CONSUMER DURABLE SECTOR Indices: BSECD For the period: From year 1999 to year 2008 Date Open High Low Close Year 1999 1,000.00 1,784.37 0.00 1,427.72 Year 2000 1,438.13 1,815.86 799.68 888.18 Year 2001 892.56 966.34 413.61 616.08 Year 2002 617.46 953.02 586.46 731.89 Year 2003 731.46 1,515.44 587.63 1,411.46 Year 2004 1,416.04 1,536.10 812.88 1,524.96 Year 2005 1,526.73 3,399.53 1,347.09 3,271.19 Year 2006 3,284.12 3,753.75 2,339.78 3,574.32 Year 2007 3,576.75 6,998.80 3,312.84 6,956.79 Year 2008 7,052.28 7,119.69 3,420.35 4,356.38 This table shows the performance of consumer durable. There is data given from 1999 to 2008. As we see in 1999 there price should open of Rs.1000 and in 2008 the prices are rises up to Rs.4356. In 2007 there should maximum prices touches up to Rs.7000(appox). In 2008 there is fall in price due o recession. Docsity.com 62 PERFORMANCE OF FMCG SECTOR Indices: BSEFMCG For the period:From year 1999 to year 2008 Date Open High Low Close Year 1999 1,000.00 1,368.23 0.00 1,099.42 Year 2000 1,117.76 1,405.20 868.24 1,037.27 Year 2001 1,040.85 1,076.92 791.15 927.73 Year 2002 925.42 1,049.71 738.74 819.66 Year 2003 819.78 1,137.48 705.66 1,109.80 Year 2004 1,114.06 1,178.15 762.53 1,058.97 Year 2005 1,058.85 1,655.42 1,007.95 1,647.47 Year 2006 1,649.91 2,383.36 1,563.37 1,934.17 Year 2007 1,946.56 2,327.41 1,598.70 2,319.92 Year 2008 2,323.24 2,569.72 1,904.68 2,366.13 This table shows the performance of FMCG sector. This table shows the data from 1999 up to 2008. In 1999 the prices are open for Rs. 1000 and there is continuous increase in the prices. In this sector there is no effect of recession as this table show that there is a continous increase in the value from 2003-2008 Docsity.com 65 PERFORMANCE OF METAL Indices: METAL For the period:From year 1999 to year 2008 Date Open High Low Close Year 1999 0.00 0.00 0.00 1,713.59 Year 2000 0.00 0.00 0.00 1,286.99 Year 2001 0.00 0.00 0.00 1,073.03 Year 2002 0.00 0.00 0.00 1,740.20 Year 2003 0.00 0.00 0.00 5,428.43 Year 2004 -- 6,320.81 0.00 6,210.37 Year 2005 6,270.28 7,227.48 5,271.32 6,485.19 Year 2006 6,544.13 11,402.40 6,351.04 9,039.63 Year 2007 9,063.25 20,228.90 7,696.15 20,020.22 Year 2008 20,107.94 20,494.62 12,184.33 15,214.69 Interpretation-from the above table we can see that that performance of metal industry has improved but there is impact of recession over it. As we can see that its value decreased 4816 at the time of recession Docsity.com 66 PERFORMANCE OF OIL GAS Indices: OILGAS For the period:From year 1999 to year 2008 Date Open High Low Close Year 1999 0.00 0.00 0.00 1,418.08 Year 2000 0.00 0.00 0.00 938.40 Year 2001 0.00 0.00 0.00 807.95 Year 2002 0.00 0.00 0.00 1,390.70 Year 2003 0.00 0.00 0.00 3,161.20 Year 2004 -- 3,198.01 0.00 3,147.38 Year 2005 3,167.78 4,446.42 2,877.28 4,410.64 Year 2006 4,420.82 6,450.94 4,243.21 6,179.60 Year 2007 6,197.26 13,400.17 5,892.58 13,301.60 Year 2008 13,433.31 14,268.89 8,935.46 11,516.98 Interpretation-From the above table we can see that that performance of oil sector is also affected by the recession there is continuous increase in the value from 2004 to 2007 but its value decrease in 2008 and that is 2000(appox) Docsity.com 67 PERFORMANCE OF POWER Indices: POWER For the period:From year 1999 to year 2008 Date Open High Low Close Price/Earnings Price/Bookvalue Dividend Yield Year 2005 -- 0.00 0.00 1,457.91 0.00 0.00 0.00 Year 2006 -- 0.00 0.00 2,048.43 0.00 0.00 0.00 Year 2007 4,395.76 4,729.00 4,023.09 4,548.85 6.35 1.08 0.10 Year 2008 4,584.38 4,929.34 2,896.47 3,281.29 34.40 5.90 0.73 Interpretation -From the above table we can see that in power sector also there is decrease in the prices that is 1000(appox). While before recession that is from period 2005 to 2007 there is increase in the value . Docsity.com 70 recipient country and can also affect the balance of payments. Foreign investment provides a channel through which developing countries can gain access to foreign capital. It can be in two terms: 1. FOREIGN DIRECT INVESTMENT (FDI) 2. PORTFOLIO INVESTMENT (PI) There are mainly two routes of portfolio investment in India. 1) Foreign institutional investors (FIIs) 2) through GDRs, ADRs & FCCBs What is an ADR / GDR? ADR stands for American Depository Receipt. Similarly, GDR stands for Global Depository Receipt. Let’s understand these better. Every publicly traded company issues shares – and these shares are listed and traded on various stock exchanges. Thus, companies in India issue shares which are traded on Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE (National Stock Exchange), etc. These shares are sometimes also listed and traded on foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation). But to list on a foreign stock exchange, the company has to comply with the policies of those stock exchanges. Many times, the policies of these exchanges in US or Europe are much more stringent than the policies of the exchanges in India. This deters these companies from listing on foreign stock exchanges directly. Docsity.com 71 Company ADR GDR Bajaj Auto No Yes Dr. Reddys Yes Yes HDFC Bank Yes Yes Hindalco No Yes ICICI Bank Yes Yes Infosys Technologies Yes Yes ITC No Yes L&T No Yes MTNL Yes Yes Patni Computers Yes No Ranbaxy Laboratories No Yes Tata Motors Yes No State Bank of India No Yes VSNL Yes Yes WIPRO Yes Yes Docsity.com 72 FIIs inflows from 1993 - 2008 0 2000 4000 6000 8000 10000 12000 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 FII Inflow($ millions) As this table shows the inflows of FIIs from 1993 – 2008. In 1993 the inflows are appox $1500 million and in 2008 the inflows are raise to $10000million. In 1999 there is very less inflows $800 millions (appox). In 2005 there is very high inflows over $10000millions. Docsity.com 75 1998-1999 729.11 1999-2000 9765.13 2000-2001 9682.52 2001-2002 8272.90 2002-2003 2668.90 2003-2004 44000.03 2004-2005 41416.45 Interpretation-This table shows in which year how much investment is done by FIIs. As we see that the data of 1992-2005 are given in which we shows that in 1992-1993 the investment is made by FIIs of Rs 4.27 crore and in 2004-2005 the investment is 41416.45 crore. It shows that the huge investment is done by FIIs. . Objective 4 CONCEPT OF FIIS (FOREIGN INSTITUTIONAL INVESTORS) In the financial liberalization program, the foreign investment regime was liberalized to a great extent. It is often argued that the influx of foreign funds with the entry of foreign investors has transformed the style of functioning of the stock market in India. In the financial liberalization measures, the Indian stock market was also opened up to foreign investors with the hope that their participation could lead to the all round development of the stock market and economic development of India. All the stock market indicators that financial economists generally favor to measure the activities of the market started behaving unpredictably well with the regime shift. One of the most significant developments in the global economy in the 1990 has been the spectacular surge in international capital flows. These flows emanated from a greater financial liberalization, improvement in information technology, emergence and proliferation of institutional investors such as mutual and pension funds, and a spate of Docsity.com 76 financial innovation. With the increase in capital flows and participation of foreign investors and institutions in the financial markets of developing countries, the capital account has been the enlarged capital flows to developing countries, the capital account has been the focus of attention since the late 1980. A striking feature of the enlarged capital flows to developing countries in the recent period is that private (debt and equity ) flows, as opposed to official flows, have become a dominant soured of financing large current account imbalances. Private capital flows appear, however, to be concentrated in a few key emerging market economies and India is one of them . India had a closed capital account before 1991, restricting capital mobility through administrative controls and outright prohibition . However, with the liberalization of the financial sector, Indian stock market has joined the integration process of global stock markets. International portfolio capital inflows in India has taken Global Depository Receipts, American Depository Receipts and Foreign Currency Convertible Bonds issued by; the Indian corporate, Foreign Institutional Investors investment and offshore funds. The capital market is used as a main vehicle to mobilize funds for economic growth of a country. It performs crucial functions like the conversion of savings of households and institutions into different investments creation n of financial assets and development and use of asset related products. The Indian capital market witnessed unprecedented euphoria in the early nineties and it won critical appreciation from various quarters. The Indian companies mainly raise funds through capital market .In the globalization era, every country encourages investment. In order to encourage investment necessary changes in the existing regulation/ new laws are made and India is no exception to this. Investment by individuals and institutions are encouraged in India. Today, FIIs are permitted to invest in all securities listed or to be listed on the stock exchange. Over the years, different types of FIIs have been allowed to operate in Indian stock Markets. FIIs may invest in India through two routes: Equity investment route and debt route. Against this background, this paper discusses the current trend of equity investment by FIIs in the Indian Capital Market. Docsity.com 77 As investor or investment fund that is from or registered in a country outside of the one in which it is currently investing institutional investor include hedge funds, insurance companies. The term used in most commonly in India to refer to outside companies investing in the financial market of India. International institutional investor must register with the securities and exchange board of India to participate in the market one of the major market regulation pertaining to FII involves placing limit on FII ownership in Indian Co’s. One who propose to invest their proprietary funds or o behalf of “broad based” funds or of foreign corporate and individuals and belong to any of the underline categories can be registered for FII. Pension fund, Mutual fund, Investor trust, Insurance or reinsurance Co’s , Endowment funds, University funds foundation of charitable trusts or charitable societies who propose to invest on their own behalf , Asset management companies, Institutional portfolio managers trustees, Power attorney holders bank. Not all institutional investor have a serious interest in emerging markets, the IMF (2004) provide detailed account of the variation across major classes of investor Large pension funds in the US do not invest in emerging market bonds. Their allocation to emerging markets equities is around 1% of assets. Exposure of UK pension funds to emerging markets in slightly higher 2-3% of assets, Japan’s government pension fund limit its exposure to mature markets. Pension funds small exposure to emerging market is not the result of government regulation except in a few countries such as Germany and Italy. By and such and large such funds shy away from emerging markets because they diverse to the risk involved in markets that are perceived as prone to crisis some pension funds only invest in market that satisfy ‘socially responsible’ investment condition, such as volatility , regulation, Docsity.com 80 Objective-3 Role and relationship between FII and Indian stock market As per the third objective says that 1. The foreign capital is free and unpredictable and is always on the look out of profits. Flls frequently move investments, and those swings can be expected to bring severe price fluctuations resulting in increasing volatility. 2. Increased investment from overseas may shift control of domestic firms to foreign hands. This showed us how the Indian market is interdependent on global markets like U.S., Europe and other Asian markets. As on 31st March 2005 there were 685 (ISMR 2004-05 NSE, Mumbai) registered foreign institutional investors in the Indian stock market. 3. The data of 1992-2005 are given in which we shows that in 1992-1993 the investment is made by FIIs of Rs 4.27 crore and in 2004-2005 the investment is 41416.45 crore. Objective-4 concept of FII As per the fourth objective is that in which 1. The Indian stock market was also opened up to foreign investors with the hope that their participation could lead to the all round development of the stock market and economic development of India. 2. It performs crucial functions like the conversion of savings of households and institutions into different investments creation n of financial assets and development and use of asset related products. 3. FIIs may invest in India through two routes: Equity investment route and debt route. of FIIs worth mentioning is hedge funds about whose capacity of mischief there was much talk during East Asian crisis. Docsity.com 81 Conclusion The entry of FIIs in the Indian capital market demands the active and growing role of capital market and evolution of the institutions and financial structure to support it. FIIs are mainly concerned about macro-economic policy in India. They expect privatization programmed to create an appropriate climate for portfolio investment. However there is no certainty about how long FIIs will hold on to their investment. I.e. when they will sell for profit and repatriate the earning in foreign currency. It is a known fact from past experience that world-wide FIIs are branded as notoriously fickle investors. The recent east-Asian crisis also reinforced these doubts With the integration of the Indian stock market with their global counterparts, a rational expectation would be that foreign private capital inflows would increase, perhaps even to match levels reached by other emerging markets. Following liberalization and structural adjustment since 1991, India has embarked on a policy of encouraging capital flows in a cautious manner. With the influx of the foreign institutional investment the size and liquidity of the Indian stock market increased manifold. But at the same time, influenced by the FIIs, the excessive speculation in share prices and volatility in the share price movements in the stock market have also increased. Higher volatility exhibited by smaller capitalization companies without a corresponding higher return portends higher risks for the risk adverse investors. Such speculation and volatility settled for the second best approach of financial liberalization. Though the foreign capital flow has transformed the style of functioning of the Indian stock market , their role in the development of stock market in India is still of functioning of the Indian stock market, their role in the development of stock market in India is still questionable. Docsity.com 82 SUGGESTIONS 1.Joint venture between foreign companies and groups along with Indian companies should be promoted to increase FIIs investment. 2.Guidelines issued by the Security and Exchange Board of Indian should be liberalized so that more and more FIIs investment can be made by institutional investors. 3.Reserve Bank of India should make a proper check on the FIIs investment through their surveillance so that they cannot affect the foreign exchange of India easily. 4. Stringent norms should be made for FIIs so that in case of bear phase they cannot affect the prices of the stock market prices. 5.India should try to improve infrastructure so the more FIIs can come to invest in Indian companies. 6.Growth rate and economic condition should be improved so that more institutional investors can be motivated to invest in Indian companies. 7.Restriction by the SEBI should be minimized to increase invest by FII without financial hesitation. 8.FIIs investment should be motivated with him help of economic growth which will augment the foreign exchange reserve. Docsity.com