Primary Objective:

To study the impact of FII on Indian stock market. To understand the concept of BSE sensitive index.

Secondary Objective:
To understand the concept of FIIs. To understand the relationship between the Sensex and FII. To know the sector which get affected more by activities of FIIs.

ResearchProblem: The project deals with the Impact of Foreign Institutional Investors on Indian Stock Market. This research project studies the relationship between FIIs investment and stock indices. For this purpose Indias two major indices i.e. Sensex and S&P CNX Nifty are selected. These two indices, in a way, represent the picture of Indias stock markets. Five indices of BSE i.e. BSE Auto, BSE Bankex, BSE IT, BSE FMCG, BSE Oil and Gas are also selected so as to further observe the effect of FII in particular industry . So this project reveals the impact of FII on the Indian capital market.

There may be many other factors on which a stock index may depend i.e. Government policies, budgets, bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar exchange rate etc. But for this study I have selected only one independent variable i.e. FII. This study uses the concept of correlation, regression and hypothesis to study the relationship between FII and stock index. The FII started investing in Indian capital market from September 1992when the Indian economy was opened up in the same year. Their investments include equity only. The sample data of FIIs investments consists of daily basis from January 2001 to February 2011.

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RESEARCHDESIGN: Null Hypothesis (Ho): The various BSE indices and S&P CNX Nifty index does not rise with the increase in FIIs investment.

Alternate Hypothesis (Ha): The various BSE indices and S&P CNX Nifty index rises with the increase in FIIs investment.

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Exploratory Research: As an exploratory study is conducted with an objective to gain familiarity with the phenomenon or to achieve new insight into it, this study aims to find the new insights in terms of finding the relationship between FIIS and Indian Stock Indices. SAMPLING DESIGN: Universe In this study the universe is finite and will take into the consideration related news and events that have happened in last few year. Sampling Unit: As this study revolves around the foreign institutional investment and Indian stock market. So for the sampling unit is confined to only the Indian stock market.

Data collection Method: Secondary data: For the secondary data various literatures, books, journals, magazines, web links are used. As there are not possibilities of collecting data personally so no questionnaire is made.

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RESEARCH ANALYSIS TOOLS: Regression analysis and Correlation analysis: Regression Analysis: We can analyze how a single dependent variable is affected by the values of one or more independent variables for example, how an athlete's performance is affected by such factors as age, height, and weight.

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

1. INTRODUCTION: Financial markets are the catalysts and engines of growth for any nation. Indias financial market began its transformation path in the early 1990s. The banking sector witnessed sweeping changes, including the elimination of interest rate controls, reductions in reserve and liquidity requirements and an overhaul in priority sector lending. Persistent efforts by the Reserve Bank of India (RBI) to put in place effective supervision and prudential norms since then have lifted the country closer to global standards. Around the same time, Indias capital markets also began to stage extensive changes. The Securities and Exchange Board of India (SEBI) was established in 1992 with a mandate to protect investors and usher improvements into the microstructure of capital markets, while the repeal of the Controller of Capital Issues (CCI) in the same year removed the administrative controls over the pricing of new equity issues. Indias financial markets also began to embrace technology. Competition in the markets increased with the establishment of the National Stock Exchange (NSE) in 1994, leading to a significant rise in the

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volume of transactions and to the emergence of new important instruments in financial intermediation. Indian investors have been able to invest through mutual funds since 1964, when UTI was established. Indian mutual funds have been organized through the Indian Trust Acts, under which they have enjoyed certain tax benefits. Between 1987 and 1992, public sector banks and insurance companies set up mutual funds. Since 1993, private sector mutual funds have been allowed, which brought competition to the mutual fund industry. This has resulted in the introduction of new products and improvement of services. The notification of the SEBI (Mutual Fund) Regulations of 1993 brought about a restructuring of the mutual fund industry. An arms length relationship is required between the fund sponsor, trustees, custodian, and asset Management Company. This is in contrast to the previous practice where all three functions, namely trusteeship, custodianship, and asset management, were often performed by one body, Usually the fund sponsor or its subsidiary. The regulations prescribed disclosure and advertisement norms for mutual funds, and, for the first time, permitted the entry of private sector mutual funds. FIIs registered with SEBI may invest in domestic mutual funds, whether listed or unlisted. The 1993 Regulations have been revised on the basis of the recommendations of the Mutual Funds 2000 Report prepared by SEBI. The revised regulations strongly emphasize the governance of mutual funds and increase the responsibility of the trustees in overseeing the functions of the asset management company. Mutual funds are now required to obtain the consent of investors for any change in the fundamental attributes of a scheme, on the basis of which unit holders have invested. The revised regulations require disclosures in terms of portfolio composition, transactions by schemes of mutual funds with sponsors or affiliates of sponsors, with the asset Management Company and trustees, and also with respect to personal transactions of key personnel of asset management companies and of trustees. India opened its stock markets to foreign investors in September 1992 and has, since 1993, received considerable amount of portfolio investment from foreigners in the form of Foreign Institutional Investors (FII) investment in equities. This has become one of the main channels of portfolio investment in India for foreigners. In order to trade in Indian equity markets, foreign corporations need to register with the SEBI as Foreign Institutional Investor (FII). SEBIs
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definition

of

FIIs

presently

includes

foreign

pension

funds,

mutual

funds,

charitable/endowment/university funds etc. as well as asset management companies and other money managers operating on their behalf The sources of these FII flows are varied .The FIIs registered with SEBI come from as many as 28 countries(including money management companies operating in India on behalf of foreign investors).US based institutions accounted for slightly over 41% those from the U.K constitute about 20% with other Western European countries hosting another 17% of the FIIs. Portfolio investment flows from industrial countries have become increasingly important for developing countries in recent years. The Indian situation has been no different. A significant part of these portfolio flows to India comes in the form of FIIs investments, mostly in equities. Ever since the opening of the Indian equity markets to foreigners, FII investments have steadily grow from about Rs.2600 crores in 1993 to over Rs.272165 crores till the end of Feb 2008. While it is generally held that portfolio flows benefit the economies of recipient countries, policy makers worldwide have been more than a little uneasy about such investments. Portfolio flows often referred as hot money-are notoriously volatile compared to other types of capital inflows. Investors are known to pull back portfolio investments at the slightest hint of trouble in the host country often leading to disastrous consequences to its economy. They have been blamed for exacerbating small economic problems in a country by making large and concerted withdrawals at the first sign of economic weakness. They have also been responsible for spreading financial crisis causing contagion in international financial markets. International capital flows and capital controls have emerged as an important policy issues in the Indian context as well. The danger of abrupt and sudden outflows inherent with FII flows and their destabilizing effect on equity and foreign exchange markets have been stressed. The financial market in India have expanded and deepened rapidly over the last ten years. The Indian capital markets have witnessed a dramatic increase in institutional activity and more specifically that of FIIs. This change in market environment has made the market more innovative and competitive enabling the issuers of securities and intermediaries to grow. In India the institutionalization of the capital markets has increased with FIIs becoming the dominant owner of the free float of most blue chip Indian stocks. Institutions often trade large blocks of shares
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and institutional orders can have a major impact on market volatility. In smaller markets, institutional trades can potentially destabilize the markets. Moreover, institutions also have to design and time their trading strategies carefully so that their trades have maximum possible returns and minimum possible impact costs.

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