CHAPTER 1

INTRODUCTION
EXECUTIVE SUMMARY
The Indian stock market though one of the oldest in Asia being in operation since 1875,remained
largely outside the global integration process until the late 1980s In line !ith theglobal trend,
reform of the Indian stock market began !ith the establishment of "ecurities and #$change
%oard of India in 1988 Among the significant measures of integration, portfolio in&estment by
'IIs allo!ed since "eptember 199(, has been the turning point for the Indian stock market As of
no! 'IIs are allo!ed to in&est in all categories of securities traded in the primary and secondary
segments and also in the deri&ati&es segment The process of integration recei&ed a ma)or
impetus !hen the Indian corporate !as allo!ed to go global !ith *+, - A+, issues "tarting
!ith the maiden issue of Infosys in .arch1999, A+, issues has emerged as the star attraction
due to its higher global &isibility Thus, the Indian stock market, !hich !as in isolation until
recently, turns out to ha&e been sensiti&e to de&elopments in the rest of the !orld by the end of
the 1990sThe dissertation !ork aims to study the impact of Institutional In&estors on the /ifty
#&en though there are se&eral institutional in&estors, only the 'II and .' operations are
considered The other institutional in&estors do not participate acti&ely in the stock market
because of &arious restrictions The analysis of the data is done by taking daily net inflo!s of 'II
and .' These inflo!s are compared !ith the daily /ifty closing pricesThe important finding
from this study is that /ifty is influenced by the 'II inflo!s to aconsiderable e$tent The mutual
funds are not acti&ely participating in the inde$ stocks Alarger portion of the e0uity fund
in&estment of mutual fund is seen in the non1inde$ andmidcap sector This means that 'II are
playing in the inde$ and blue chip stocks and mutualfunds in non1inde$ and midcap sectorThe
domestic institutional in&estors ha&e to play an acti&e role in the stock market so as to bring the
stability in the stock market The stability of the stock market is importantindicator of the
economic de&elopment
The financial markets ha&e e$panded and deepened rapidly o&er the last ten years The Indian
capital markets ha&e !itnessed a dramatic increase in institutional acti&ity and more specifically
that of 'II2s This change in market en&ironment has made the market more inno&ati&e and
competiti&e enabling the issuers of securities and intermediaries to gro! In India the
institutionali3ation of the capital markets has increased !ith 'II2s becoming the dominant o!ner
of the free float of most blue chip Indian stocks Institutions often trade large blocks of shares
and institutional order2s can ha&e a ma)or impact on market &olatility In smaller markets,
institutional trades can potentially destabili3e the markets .oreo&er, institutions also ha&e to
design and time their trading strategies carefully so that their trades ha&e ma$imum possible
returns and minimum possible impact costs "ome studies do e$amine the trading strategies and
price impact of foreign institutional trades4 ho!e&er, the scope is often limited to a single
country This study takes a look at the impact of 'II cash flo!s on Inde$ &olatility in India 'IIs
are the largest in&estors in the Indian stock market %ut the common perception that domestic
in&estors lack market1mo&ing influence is not entirely based on fact If one considers the
transactions by domestic mutual funds 5.'s6 in the e0uity market an indicator of domestic
in&estor participation in the stock market, domestic in&estors ha&e been acti&e participants in
recent times
7%8#9TI:#" 7' T;# "T<+=>
The ob)ecti&e of the present study is to identify !hether there e$ist a causal relationship bet!een
net in&estment made by 'II2s and the e0uity return in the Indian "tock .arket
To study the scope and trading mechanism of 'oreign Institutional In&estors in India
To find the relationship bet!een the 'IIs e0uity in&estment pattern and Indian stock
indices
To analy3e the impact of 'IIs e0uity in&estment on specific industrial sector indices
To determine the beha&ior and impact of 'II2s on Indian stock market through primary
data analysis
To determine !hat are factors !hich affect in&estment decision of 'II2s
To determine !hether 'II2s ha&e impact on other economical factors apart from stock
market
"97?# 7' "T<+=>
"cope of the study is &ery broader and co&ers both the stock indices and its comparison !ith
foreign institutional in&estments %ut, study is only going to co&er foreign in&estments in form of
e0uity The time period is limited from 1995 to (009 as it !ill gi&e e$act impact in both the
bullish and bearish trend
/##+ 7' T;# "T<+=>
The study !ill pro&ide a &ery clear picture of the impact of foreign institutional in&estors on
Indian stock indices It !ill also describe the market trends due to 'IIs inflo! and outflo!
The study !ould be helpful for further descripti&e studies on the ideas that !ill be e$plored
.oreo&er, it !ould be beneficial to gain kno!ledge regarding foreign institutional in&estments,
their process of registration and their impact on Indian stock market
,#"#A,9; ?,7%@#.>
'inancial Institutional In&estors are not ne! to Indian corporate sector ;o!e&er the important of
'II recei&ed imputes to!ards the ends of 199( to !hen they !ere allo!ed to in&est directly into
the Indian "tock .arket follo!ing the recommendations of /arasimham committee The entry
of 'II2s seems to ha&e a ma)or impact on Indian stock market during the last 15 years The
general perception !as that there !as a positi&e relation bet!een 'II flo!s and mo&ement of the
"#/"#A The present study aims to e$amine the empirical relationship bet!een 'II flo!s and
mo&ement of %ombay "tock #$change 5%"#6 share price inde$ during 199( to (007
RESEARCH DESIGN>
TYPE OF RESEARCH:
SOURCES OF DATA
The main source of obtaining necessary data for the study !as "econdary +ata Thisstudy is
empirical in nature and hence secondary data is used to conduct the researchThe data !as
collected from the Internet by e$ploring the "econdary sources a&ailableon !ebsites"econdary
+ata> The secondary data constitutes of daily 'II flo!s data !hich !ascollected from .oney
9ontrol and #0uity .aster, the daily returns of "#/"#A and /I'T= from %"# and /"#
!ebsites respecti&ely The trends in 'II flo!s from the,%I !ebsite and information on 'II from
"#%I
PLAN OF ANALYSIS
The data gathered from &arious sources !ere primarily studied and necessary data!as sorted out
se0uentially keeping in mind the procedure of the study The analysishas been made by,
correlating the 'II purchases, sales and net in&estment !ith e0uitymarket returns to identify
!hether a relation e$ists bet!een them 'indings areincluded !hich transmits the important
points, !hich !ere gathered from the study
METHODOLOGY
1 'orm a testable hypothesis
( 9ollect rele&ant data to test hypothesis
B ?erform statistical analysis
C Interpret the results
HYPOTHESIS
/ull ;ypothesis 5;o6> There is no influence of 'IIs on the "tock inde$es
Alternati&e ;ypothesis 5;a6> There is an influence of 'IIs on "tock inde$es
If !e re)ect the ;o, then !e accept the ;a, setting the significance le&el to 5D and1D at +egree
of 'reedom E n1(
LIMITATIONS OF THE STUDY
As the time a&ailable is limited and the sub)ect is &ery &ast the study is mainlyfocused on
identifying !hether there does e$ist a relationship bet!een 'IIs and Indian#0uity "tock .arket
The study is general
It is mainly based on the data a&ailable in &arious !ebsites4
The inferences made are purely from the past year2s performance4
There is no particular format for the study4
"ufficient time is not a&ailable to conduct an in1depth study4
CHAPTER 2
INDUSTRY PROFILE
INDIAN STOCK MARKET
7:#,:I#F 7' I/+IA/ "T79G .A,G#T
The !orking of stock e$changes in India started in 1875 %"# is the oldest stock market in India
The history of Indian stock trading starts !ith B18 persons taking membership in /ati&e "hare
and "tock %rokers Association, !hich !e no! kno! by the name %ombay "tock #$change or
%"# in short In 19H5, %"# got permanent recognition from the *o&ernment of India /ational
"tock #$change comes second to %"# in terms of popularity %"# and /"# represent
themsel&es as synonyms of Indian stock market The history of Indian stock market is almost the
same as the history of %"#
The B0 stock sensiti&e inde$ or "ense$ !as first compiled in 198H The "ense$ is compiled
based on the performance of the stocks of B0 financially sound benchmark companies In 1990
the %"# crossed the 1000 mark for the first time It crossed (000, B000 and C000 figures in 199(
The reason for such huge surge in the stock market !as the liberal financial policies announced
by the then financial minister +r .an .ohan "ingh
The up1beat mood of the market !as suddenly lost !ith ;arshad .ehta scam It came to public
kno!ledge that .r .ehta, also kno!n as the big1bull of Indian stock market di&erted huge
funds from banks through fraudulent means ;e played !ith (70 million shares of about 90
companies .illions of small1scale in&estors became &ictims to the fraud as the "ense$ fell flat
shedding 570 points
To pre&ent such frauds, the *o&ernment formed The "ecurities and #$change %oard of India,
through an Act in 199( "#%I is the statutory body that controls and regulates the functioning of
stock e$changes, brokers, sub1brokers, portfolio managers in&estment ad&isors etc "#%I oblige
se&eral rigid measures to protect the interest of in&estors /o! !ith the inception of online
trading and daily settlements the chances for a fraud is nil, says top officials of "#%I
"ense$ crossed the 5000 mark in 1999 and the H000 mark in (000 The 7000 mark !as crossed
in 8une and the 8000 mark on "eptember 8 in (005 .any foreign institutional in&estors 5'II6 are
in&esting in Indian stock markets on a &ery large scale The liberal economic policies pursued by
successi&e *o&ernments attracted foreign institutional in&estors to a large scale #$perts no!
belie&e the sense$ can soar past 1C000 mark before (010
The unpredictable beha&ior of the market ga&e it a tag I Ja &olatile market2 The factors that
affected the market in the past !ere good monsoon, %haratiya8anatha ?arty2s rise to po!er etc
The result of a cricket match bet!een India and ?akistan also affected the mo&ements in Indian
stock market The /ational +emocratic Alliance led by %8?, during (00C public elections
unsuccessfully tried to ride on the market sentiments to po!er /+A !as &oted out of po!er and
the sense$ recorded the biggest fall in a day amidst fears that the 9ongress19ommunist coalition
!ould stall economic reforms @ater prime minister .an .ohan "ingh2s assurance of Jreforms
!ith a human face2 cast off the fears and market reacted sharply to touch the highest e&er mark
of 8500
India, after <nited "tates hosts the largest number of listed companies *lobal in&estors no!
ardently seek India as their preferred location for in&estment 7nce &ie!ed !ith skepticism,
stock market no! appeals to middle class Indians also .any Indians !orking in foreign
countries no! di&ert their sa&ings to stocks This recent phenomenon is the result of opening up
of online trading and diminished interest rates from banks The stockbrokers based in India are
opening offices in different countries mainly to cater the needs of /on ,esident Indians The
time factor also !orks for the /,Is They can buy or sell stock online after returning from their
!ork places
The recent incidents that led to gro!ing interest among Indian middle class are the initial public
offers announced by Tata 9onsultancy "er&ices, .aruti<dyog @imited, 7/*9 and big names
like that *ood monsoons al!ays raise the market sentiments A good monsoon means impro&ed
agricultural produce and more spending capacity among rural folk
The bullish run of the stock market can be associated !ith a steady gro!th of around HD in
*+?, the gro!th of Indian companies to ./9s, large potential of gro!th in the fields of
telecommunication, mass media, education, tourism and IT sectors backed by economic reforms
ensure that Indian stock market continues its bull run
;istory of the Indian "tock .arket 1 The 7rigin
"tock markets refer to a market place !here in&estors can buy and sell stocks The price at !hich
each buying and selling transaction takes is determined by the market forces 5ie demand and
supply for a particular stock
@et us take an e$ample for a better understanding of ho! market forces determine stock prices
A%9 9o @td en)oys high in&estor confidence and there is an anticipation of an up!ard
mo&ement in its stock price .ore and more people !ould !ant to buy this stock 5ie high
demand6 and &ery fe! people !ill !ant to sell this stock at current market price 5ie less supply6
Therefore, buyers !ill ha&e to bid a higher price for this stock to match the ask price from the
seller !hich !ill increase the stock price of A%9 9o @td 7n the contrary, if there are more
sellers than buyers 5ie high supply and lo! demand6 for the stock of A%9 9o @td in the
market, its price !ill fall do!n
In earlier times, buyers and sellers used to assemble at stock e$changes to make a transaction but
no! !ith the da!n of IT, most of the operations are done electronically and the stock markets
ha&e become almost paperless /o! in&estors don2t ha&e to gather at the #$changes, and can
trade freely from their home or office o&er the phone or through Internet
7ne of the oldest stock markets in Asia, the Indian "tock .arkets has a (00 years old history
18th 9entury #ast India 9ompany !as the dominant institution and by end of the century,
busuness in its loan securities gained full momentum
18B0Ks %usiness on corporate stocks and shares in %ank and 9otton presses started in %ombay
Trading list by the end of 18B9 got broader
18C0Ks ,ecognition from banks and merchants to about half a do3en brokers
1850Ks ,apid de&elopment of commercial enterprise sa! brokerage business attracting more
people into the business
18H0Ks The number of brokers increased to H0
18H01H1 The American 9i&il Far broke out !hich caused a stoppage of cotton supply from
<nited "tates of America4 marking the beginning of the L"hare .aniaL in India
18H(1HB The number of brokers increased to about (00 to (50
18H5 A disastrous slump began at the end of the American 9i&il Far 5as an e$ample, %ank of
%ombay "hare !hich had touched ,s (850 could only be sold at ,s 876
BSE SENSEX
"#/"#A is a basket of B0 constituent stocks representing a sample of large, li0uid and
representati&e companies The base year of "#/"#A is 197B179 and the base &alue is 100 the
inde$ is !idely reported in both domestic and international markets through print as !ell as
electronic media The Inde$ !as initially calculated based on the M'ull market 9apitali3ationN
methodology but !as shifted to the free1float methodology !ith effect from september1, (00B
the M'ree1float market 9apitali3ationN methodology of inde$ construction is regarded as in
industry best practice globally All ma)or inde$ pro&iders like ."9I, 'T"#, "T7AA, "O? and
+o! 8ones use the 'ree1float methodology
There is !idespread ackno!ledgement that financial liberali3ation promotes higher economic
gro!th through &arious direct and indirect channels These include encouraging domestic
sa&ings, lo!er cost of capital, transfer of technology and so on In particular financial
liberalisation resulted in 'II in&estment into emerging markets 'rom 1990s emerging economies
are liberalising their stock markets along of the stock markets globally "e&eral studies
concluded that 'II in&estment results stock market integration as !ell as efficiency
The e$pansion of e0uities markets in many less de&eloped countries 5@+9s6 has been truly
impressi&e India is also among those emerging economies follo!ing fast liberalisation and
integration policies The formal integration of the Indian financial markets started after the
implementation of ne! economic reforms initiated in 8uly, 1991 'IIs in&estment in the Indian
stock market started since 199( The logic behind it !as that 'IIs in&estment !ould support the
efficiency and transparency in the operations of the stock market 'or the last fe! years, 'IIs
ha&e been &ie!ing the Indian stock market fa&orably
'inancial liberali3ation of the Indian stock market is reflected in its attempts to catching up !ith
the best international practices This reflected in the initiation of the /ational "tock #$change of
India !ith regards to demateriali3ation of securities, replacement of 9arry 'or!ard "ystem
5%adla6 by the inde$1based and scrip based futures and options, ,olling "ettlement "ystem
5,""6, internet trading and so on 5I".,, (00B6
Among the significant measures of financial liberali3ation and integration !ith the international
markets, portfolio in&estment by the 'IIs has been allo!ed in India since "eptember 199(
;o!e&er, the restrictions on the in&estment by foreign companies !ere the main dra!backs in
the liberali3ation of the stock market in India The introduction of separate rules and regulations
for 'IIs in&estment in 1995 5"#%I2s 'IIs ,egulation Act, 19956 brought about a significant
transformation
Although the 'IIs are in&esting increasingly in the Indian stock market since 1995, the last fi&e
years recorded a historical gro!th in 'IIs in&estment in Indian stock markets The in&estment
trend sho!s that 'lls are increasingly interested in the Indian stock markets "ince its initiation
from 199B, the 'IIs in&estment 5both purchases and sales6, in Indian stock market, has increased
manifold 5see table 16 There !as about continuous gro!th trend in 'IIs2 e0uity purchases and
sales, e$cept for the year of (001 and (00( 5that may be due to stock market scam in (0016
'rom (00B, Indian stock markets, particularly in %ombay "tock #$change 5%"#6 and /ational
"tock #$change 5/"#6 ha&e recorded a historical gro!th
The Indian s!"# $a%#& today is actually comprised of t!o key entities and o&er (0 other
e$changes These ( primary entities are the %ombay "tock #$change @imited and the /"# or the
/ational "tock #$change of India @imited There is an interesting past history regarding !here
the t!o markets originated from +uring the 1850Ks, the first stock e$change in India !as
established !hen the #ast India 9ompany created and de&eloped a LcommunityL of brokers
%y 18H0, there !ere already H0 broker members of the e$change As of 187C and the results of a
rapidly e$panding share trading industry, these brokers gathered regularly 5at a !ell1kno!
location !hich is no! kno!n as +alal "treet6 in order to conduct their business "tockbrokers
began gathering in front of .umbaiKs To!n ;all, conducting there meeting underneath %anyan
trees, and the Indian stock market !as born
Although there are actually o&er (0 different stock e$changes in India today, but the t!o most
po!erful ones are the t!o mentioned abo&e The %ombay "tock #$change @imited oftentimes
referred to as the %"#, !as originally established in 1875 Interestingly enough, it is the oldest
stock market on the entire Asian continent that has been operating since the &ery beginning
Today there are o&er C,700 companies listed on the %"# as !ell as o&er 7,700 stock e$change
scripts
The /ational "tock #$change of India @imited, or /"# as it is called, is an Indian stock market
based in the city of .umbai and !as originally established only 18 years ago in 199( In that
short period of time, it has gro!n to nearly 1,H00 company listings and has a current market
capitali3ation of C7,01,9(B ,upees 5Fikipedia6 It !as predicted that the /"# !ould be the
largest stock e$change in India !here market capitali3ation !as considered !hen (009 ended
<p until the 1980Ks there !as no !ay to measure or scale the ups and do!ns in stock &alues
;o!e&er, in 198H, the %"# implemented "#/"#A, !hich !as a stock inde$ Three years later,
India !itnessed the launch of the %"# /ational Inde$ It !as renamed the %"#1100 Inde$ in
7ctober of 199H because it !as comprised of 100 different stocks listed !ith IndiaKs 5 ma)or
stock e$changes These 5 ma)or markets !ere Ahmedabad, 9alcutta, +elhi, .adras, and
.umbai Additionally, the dollar1linked &ersion of the %"#1100 !as launched in .ay of (00H
/umerous banks, financial intermediaries, insurance companies, and leading financial
institutions mutually o!n the /"# ;o!e&er, the entities of management and o!nership are
completely separate entities Interestingly enough, ( of the /"#Ks foreign in&estors ha&e taken a
serious position in the /"# 1 *oldman "achs and /="# #urone$t
Nai!na' S!"# E(")an*&
In order to lift the Indian stock market trading system on par !ith the international standards
7n the basis of the recommendations of high po!ered ?her!ani 9ommittee, the /ational "tock
#$change !as incorporated in 199( by Industrial +e&elopment %ank of India, Industrial 9redit
and In&estment 9orporation of India, Industrial 'inance 9orporation of India, all Insurance
9orporations, selected commercial banks and others
/"# pro&ides e$posure to in&estors in t!o types of markets, namely>
1 Fholesale debt market
( 9apital market
+)!'&sa'& D&, Ma%#& - "imilar to money market operations, debt market operations in&ol&e
institutional in&estors and corporate bodies entering into transactions of high &alue in financial
instrumets like treasury bills, go&ernment securities, commercial papers etc
T%adin* a NSE
1 'ully automated screen1based trading mechanism
( "trictly follo!s the principle of an order1dri&en market
B Trading members are linked through a communication net!ork
C This net!ork allo!s them to e$ecute trade from their offices
5 The prices at !hich the buyer and seller are !illing to transact !ill appear on the screen
H Fhen the prices match the transaction !ill be completed
7 A confirmation slip !ill be printed at the office of the trading member
Ad.ana*&s !/ %adin* a NSE
1 Integrated net!ork for trading in stock market of India
( 'ully automated screen based system that pro&ides higher degree of transparency
B In&estors can transact from any part of the country at uniform prices
C *reater functional efficiency supported by totally computeri3ed net!ork
Di//&%&n"&s ,&0&&n )& BSE and )& NSE:
The key difference bet!een the %"# and the /"# is that the former is not automated yet,
although progress is being made to achie&e full automation, !hereas the latter is a fully
automated e$change complete !ith the electronic processing of market orders There are o&er
(,000 stocks no! listed !ith the /"# !hile o&er C,700 ha&e been listed !ith the %"#
P!s-Ind&1&nd&n"& S"&na%i!
The depression !itnessed after the Independance led to closure of a lot of e$changes in the
country @ahore #stock #$change !as closed do!n after the partition of India, and later on
merged !ith the +elhi "tock #$change %nagalore "tock #$change @imited !as registered in
1957 and got recognition only by 19HB .ost of the other #$changes !ere in a miserable state
till 1957 !hen they applied for recognition under "ecurities 9ontracts 5,egulations6 Act, 195H
The #$changes that !ere recogni3ed under the Act !ere>
1 %ombay
( 9alcutta
B .adras
C Ahmedabad
5 +elhi
H ;yderabad
7 %angalore
8 Indore
.any more stock e$changes !ere established during 1980Ks, namely>
1 9ochin "tock #$change 519806
( <ttar ?radesh "tock #$change Association @imited 5at Ganpur, 198(6
B ?une "tock #$change @imited 5198(6
C @udhiana "tock #$change Association @imited 5198B6
5 *auhati "tock #$change @imited 5198C6
H Ganara "tock #$change @imited 5at .angalore, 19856
7 .agadh "tock #$change Association 5at ?atna, 198H6
8 8aipur "tock #$change @imited 519896
9 %hubanes!ar "tock #$change Association @imited 519896
10 "aurashtra Gutch "tock #$change @imited 5at ,a)kot, 19896
11 :adodara "tock #$change @imited 5at %aroda, 19906
1( 9oimbatore "tock #$change
1B .eerut "tock #$change
At present, there are t!enty one recogni3ed stock e$changes in India !hich does not include the
7&er The 9ounter #$change of India @imited 57T9#I6 and the /ational "tock #$change of
India @imited 5/"#I@6
*o&ernment policies during 1980Ks also played a &ital role in the de&elopment of the Indian
"tock .arkets There !as a sharp increase in number of #$changes, listed companies as !ell as
their capital, !hich is &isible from the follo!ing table>
"
/o
As on B1st +ecember 19CH 19H1 1971 1975 1980 1985 1991 1995
1 /o of "tock #$changes 7 7 8 8 9 1C (0 ((
( /o of @isted 9os 11(5 1(0B 1599 155( ((H5 CBCC H((9 859B
B
/o of "tock Issues of @isted
9os
150H (111 (8B8 B(B0 BH97 H17C 89H7 1178C
C 9apital of @isted 9os 59r ,s6 (70 75B 181( (H1C B97B 97(B B(0C1 5958B
5
.arket &alue of 9apital of
@isted 9os 59r ,s6
971 1(9( (H75 B(7B H750 (5B0( 110(79 C781(1
H
9apital per @isted 9os 5C-(6
5@akh ,s6
(C HB 11B 1H8 175 ((C 51C H9B
7
.arket :alue of 9apital per
@isted 9os 5@akh ,s6 55-(6
8H 107 1H7 (11 (98 58( 1770 55HC
8
Appreciated &alue of 9apital per
@isted 9os 5@ak,s6
B58 170 1C8 1(H 170 (H0 BCC 80B
T%adin* Pa&%n !/ )& Indian S!"# Ma%#&
Indian "tock #$changes allo! trading of securities of only those public limited companies that
are listed on the #$change5s6 They are di&ided into t!o categories>
T21&s !/ T%ansa"i!ns
The flo!chart belo! describes the types of transactions that can be carried out on the Indian
stock e$changes>
Indian stock e$change allo!s a member broker to perform follo!ing acti&ities>
1 Act as an agent,
( %uy and sell securities for his clients and charge commission for the same,
B Act as a trader or dealer as a principal,
C %uy and sell securities on his o!n account and risk
O.&% T)& C!3n&% E(")an*& !/ India 4OTCEI5
Traditionally, trading in "tock #$changes in India follo!ed a con&entional style !here people
used to gather at the #$change and bids and offers !ere made by open outcry
This age1old trading mechanism in the Indian stock markets used to create much functional
inefficiency @ack of li0uidity and transparency, long settlement periods and benami transactions
are a fe! e$amples that ad&ersely affected in&estors In order to o&ercome these inefficiencies,
7T9#I !as incorporated in 1990 under the 9ompanies Act 195H 7T9#I is the first screen
based nation!ide stock e$change in India created by <nit Trust of India, Industrial 9redit and
In&estment 9orporation of India, Industrial +e&elopment %ank of India, "%I 9apital .arkets,
Industrial 'inance 9orporation of India, *eneral Insurance 9orporation and its subsidiaries and
9an%ank 'inancial "er&ices
Ad.ana*&s !/ OTCEI
1 *reater li0uidity and lesser risk of intermediary charges due to !idely spread trading
mechanism across India
( The screen1based scrip less trading ensures transparency and accuracy of prices
B 'aster settlement and transfer process as compared to other e$changes
C "horter allotment procedure 5in case of a ne! issue6 than other e$changes
CHAPTER 6
COMPANY PROFILE
CHAPTER 7
THEREOTICAL
FRAME +ORK
In%!d3"i!n:
The liberali3ation polices initiated in India in the early 1990s brought about radical changes in
the conduct of stock market India has been in the forefront of utili3ing technology to enhance its
stock market performance Fe sa! ho! the market re!arded the under&alued shares and ho!
the o&er&alued shares fell do!n to demonstrate the saying Me&erything !hich rise more than
e$pected, has to fall "#/"#A crossed the t!enty thousand mark cheering thousands of
in&estors in the recent %ull ,un "ense$ took a little o&er (0 years to reach the first 10,000 mark,
but )ust a little o&er (0 months to double that score The rise in global market and e$pectations of
increased foreign portfolio in&estment has dri&en traders2 interest in the market It is a broad
based mo&ement and the ma)or gainers are front line stocks 7n that historical date as many as
(9 shares that comprise B0 share inde$ ended higher e$cept the Fipro @imited, !hich
e$perienced a marginal decline of 0(DIn this 10k march, not only the /ifty and the "ense$
stocks the midcaps and small caps ha&e also gained They gained by ((D and (7D respecti&ely
during that peak A buoyant economy pro&ided a firm underpinning to mid1cap companies The
'IIs ha&e broadened their in&estment in more than 750 stocks and in the se&eral mid1cap
companies, they are holding o&er (0 per cent Institutional in&estors and 'IIs ha&e pro&ided a
perfect support to the rising e0uity &alues Today, Indian stock market is largely dominated by
group of 'II2s that are able to mo&e the markets by large B inter&entions Ancedotas e&idences of
prices being manipulated to meet the bonus target of 'II managers are !ide spread in the
financial markets
'7,#I*/ I/"TIT<TI7/A@ I/:#"T7,"
'II is defined as an institution organi3ed outside of India for the purpose of making in&estments
into the Indian securities market under the regulations prescribed by "#%I
J'II2 include M7&erseas pension funds, mutual funds, in&estment trust, asset management
company, nominee company, bank, institutional portfolio manager, uni&ersity funds,
endo!ments, foundations, charitable trusts, charitable societies, a trustee or po!er of attorney
holder incorporated or established outside India proposing to make proprietary in&estments or
in&estments on behalf of a broad1based fund 'IIs can in&est their o!n funds as !ell as in&est on
behalf of their o&erseas clients registered as such !ith "#%I These client accounts that the 'II
manages are kno!n as Jsub1accounts2 A domestic portfolio manager can also register itself as an
'II to manage the funds of sub1accounts
'oreign institutional in&estor means an entity established or incorporated outside India !hich
proposes to make in&estment in India ?ositi&e tidings about the Indian economy combined !ith
a fast1gro!ing market ha&e made India an attracti&e destination for foreign institutional
in&estors 'II is defined as an institution organi3ed outside of India for the purpose of making
in&estments into the Indian securities market under the regulations prescribed by "#%I
#ntry 7ptions 'or 'II
A foreign company planning to set up business operations in India has the follo!ing options>
Incorporated #ntity
'oreign e0uity in such Indian companies can be up to 100D depending on the re0uirements of
the in&estor, sub)ect to e0uity caps in respect of the area of acti&ities under the 'oreign +irect
In&estment 5'+I6 policy
'7,#I*/ I/"TIT<TI7/A@ I/:#"T7," ,#*I"T,ATI7/
'ollo!ing entities - funds are eligible to get registered as 'II>
P ?ension 'unds
P .utual 'unds
P In&estment Trust
P Insurance or reinsurance companies
P In&estment Trusts
P %anks
P #ndo!ments
P <ni&ersity 'unds
P 'oundations
P 9haritable Trusts or 9haritable "ocieties
'urther, follo!ing entities proposing to in&est on behalf of broad based funds, are also eligible to
be registered as 'IIs>
P Asset .anagement 9ompanies
P Institutional ?ortfolio .anagers
P Trustees
P ?o!er of Attorney ;olders
The eligibility criteria for applicant seeking 'II registration
As per ,egulation H of "#%I 5'II6 ,egulations,1995, 'oreign Institutional In&estors are re0uired
to fulfill the follo!ing conditions to 0ualify for grant of registration>
P Applicant should ha&e track record, professional competence, financial soundness, e$perience,
general reputation of fairness and integrity
P The applicant should be regulated by an appropriate foreign regulatory authority in the same
capacity-category !here registration is sought from "#%I ,egistration !ith authorities, !hich
are responsible for incorporation, is not ade0uate to 0ualify as 'oreign Institutional In&estor
P The applicant is re0uired to ha&e the permission under the pro&isions of the 'oreign #$change
.anagement Act, 1999 from the ,eser&e %ank of India
P Applicant must be legally permitted to in&est in securities outside the country or its in1
corporation - establishment
P The applicant must be a Lfit and properL person
P The applicant has to appoint a local custodian and enter into an agreement !ith the custodian
%esides it also has to appoint a designated bank to route its transactions
P ?ayment of registration fee of <" Q 5,00000
L'orm AL as prescribed in "#%I 5'II6 ,egulations, 1995 is to be filled before applying for 'II
registration
The 'II registration application should be sent to>
"ecurities and #$change %oard of India
+i&ision of 'II O 9ustodian
.ittal 9ourt L%L Fing, 'irst 'loor
((C, /ariman ?oint
.umbai C00 0(1
India
?7"T1,#*I"T,ATI7/ ?,79#""#">
If a registered 'II-sub1account undergoes name change, then the 'II need to promptly inform
"#%I about the change It should also mention the reasons for the name change and gi&e an
undertaking that there has been no change in beneficiary o!nership
In case of name change of 'II, the re0uest should be accompanied !ith documents from home
regulator and registrar of the company e&idencing appro&al of name change, and the original 'II
registration certificate issued by "#%I should be sent back for necessary amendment
?rocedure for transferring a sub1account from one 'II to another>
The 'II to !hom the "ub1account is proposed to be transferred has to send a re0uest along !ith a
declaration that it is authori3ed to in&est on behalf of the "ub1account The transferor 'II should
also submit a /o1ob)ection certificate
The 'II should send a re0uest, along !ith no1ob)ection certificate from e$isting domestic
custodian, for change in domestic custodian
The 'II !ould be re0uired to send a re0uest for cancellation of its registration or registration of
its "ub1account-s clearly mentioning the name and registration number of the entity The 'II
should ensure that it - "ub1account has nil cash - securities holdings
?rocedure for change of local custodian>
In case of change of the local custodian of the 'II - sub1account, the change should be intimated
to "#%I by the 'II 7n receipt of no ob)ection from the e$isting custodian and acceptance from
the proposed custodian, the change of custodian !ould be appro&ed 1 by "#%I
?rocedure for registration as 'II-sub account under 100D debt route>
The procedure for registration of 'II-sub account under 100D debt route is similar to that of
normal funds besides a clear statement by the applicant that it !ishes to be registered as 'II-sub
account under 100D debt route ;o!e&er, *o&ernment of India allocates the o&erall in&estment
limit for 100D debt funds annually The grant of in&estment limit for indi&idual 100D debt funds
is !ithin this o&erall limit The funds ha&e to seek further in&estment limit in case the limit
allotted to them is e$hausted and they !ish to in&est further
A 'oreign Institutional In&estor ha&ing an account !ith one custodian can open accounts !ith
different custodians for its different sub1accounts ;o!e&er, one sub1account cannot be custodial
!ith more than one custodian
?rocedure if an e$isting sub1account !ants to get registered as a 'oreign Institutional In&estor>
In case if a registered sub1account !ishes to get itself registered as a 'oreign Institutional
In&estor, then it !ill ha&e to apply in 'orm A to "#%I for the same and has to satisfy all the
eligibility criteria norms mentioned in "#%I 5'oreign Institutional In&estor6 ,egulations, 1995 It
should also submit a letter from the old 'II indicating its K/o1ob)ectionK to such registration
?rocedure for rene!al of 'II-"ub1Account registration>
They ha&e to apply before B months of the e$piry of registration in 'orm A 9ircular /o
'ITT9-9<"T-09-(000 dated "eptember (1, (000 may be referred
If the 'II does not rene! its-sub1account2s registration>
The registration of the 'II - "ub1account !ould get e$pired at due date and it !ould not be
allo!ed to trade in Indian securities markets If it is not interested in rene!al but has certain
residual assets, it can apply for disin&estment in terms of 9ircular /o 'ITT9-9<"T-1(-(001
dated 8une 0C, (001 and abides by the guidelines specified in this regard
"cope of In&estments under the ?ortfolio In&estment "cheme
'IIs, under the ?ortfolio In&estment "cheme, are permitted to make both primary and secondary
in&estments in the India capital markets <nlike an in&estor !hich relies solely on '+I
regulations, a foreign in&estor !hich registers as a 'II !ould be allo!ed to buy and sell
securities o&er Indian stock e$changes In addition, 'IIs are entitled to effect transactions in a
broader category of securities than an in&estor relying on '+I regulations alone 'IIs are
permitted to purchase e0uity securities 5both listed and unlisted6, units of schemes floated by the
<nit Trust of India and other domestic municipal funds, !arrants, debentures, bonds,
go&ernmental securities and deri&ati&e instruments !hich are traded on a recogni3ed stock
e$change There is no limit on the amount that 'IIs may in&est in the Indian market, and no lock1
up periods apply to in&estments made by 'IIs
#$change 9ontrols
'IIs are re0uired to open up one or more bank accounts !ith certain designated banks and must
also appoint a domestic custodian for custody of in&estment made by the 'II Through the
designated accounts, 'IIs are authori3ed to freely transfer funds from foreign currency accounts
to ,upee accounts and &ice &ersa4 make ,upee denominated in&estments in Indian companies4
freely transfer after1ta$ proceeds from ,upee accounts to foreign currency accounts, and
repatriate capital, capital gain, di&idends interest income and other gains, sub)ect to deduction for
applicable !ithholding ta$es "o long as 'IIs e$ecute purchases and sales on a recogni3ed Indian
stock e$change, they are not re0uired to obtain transaction specific appro&al from the ,eser&e
%ank 'IIs are also entitled to effect transactions using their o!n proprietary funds, or the funds
of their sub accounts
In&estment ,estrictions
9ertain limitations apply to in&estments by 'IIs into India 'irst, 'IIs2 and their sub1 accounts2
in&estment in an Indian company can not e$ceed ten percent 510D6 of the total issued share
capital of the Indian company 5fi&e percent if the subaccount is a foreign corporation or
indi&idual6 In addition, the aggregate in&estment of all 'IIs in an Indian company may not
e$ceed t!enty four percent 5(CD6 of its total issued share capital, !ithout the e$press appro&al
of its board of directors and shareholders #&en !ith board of director and shareholder appro&al,
the same sectoral limits !hich apply to foreign direct in&estment !ould continue to apply 'IIs
may register !ith "#%I as a debt fund or an e0uity fund 'IIs !hich are registered as e0uity
funds, are re0uired to in&est at least se&enty percent 570D6 of their funds in e0uity and e0uity1
related securities A 'II registered as a debt fund, on the other hand, must in&est one hundred
percent 5100D6 of its funds in debt instruments 'oreign corporations and indi&iduals are not
eligible subaccounts of a 'II that is registered as a debt fund 'IIs are not permitted to engage in
short selling, other than in respect of deri&ati&e securities traded o&er a recogni3ed e$change, and
must effect transactions through a registered stock broker "ector in&estment prohibitions and
caps !hich apply to foreign direct in&estment also apply to in&estments by 'IIs, and 'II
in&estments must also comply !ith the pricing re0uirements applicable to foreign direct
in&estment In addition, 'IIs are not permitted to in&est in print media
India, among the !orld in&estors, is belie&ed to be a good in&estment destination in spite of
political uncertainty, bureaucratic hassles, shortages of po!er supply and infrastructural
deficiencies +espite the Asian financial turmoil, India has impro&ed its position among the most
attracti&e foreign in&estment destinations in the !orld India presents a &ast potentialB for
o&erseas in&estment and is acti&ely encouraging the entrance of foreign players into the market
/o company, of any si3e, aspiring to be a global player can no longer ignore this country, !hich
is e$pected to become one of the top emerging economies 5%ardhan, (00046 India, !hich is the
second fastest gro!ing economy after 9hina, has lately been a ma)or recipient of foreign
institutional in&estor 5'II6 funds dri&en by the strong fundamentals and gro!th opportunities
5%ana)i, 19986 'IIs ha&e recogni3ed the fact and unlike other countries !here '+I has gained
predominanceC, India has seen significant gro!th in 'II in&estment 59hakrabarti, (0014 Ghanna,
(00(6 "ince the beginning of liberali3ation in 1990s, 'II flo!s to India ha&e steadily gro!n in
importance %ut, India2s attracti&eness as a destination for foreign in&estment is a relati&ely
recent phenomenon, barely a fe! years old After their flight last year, foreign institutional
in&estors flocked back to bet on the India gro!th story by pouring in a record o&er ,s 80,500
crore in domestic e0uities in (009 According to analysts, the late re&i&al of monsoon, up!ard
re&ision of economic gro!th from 58 per cent to H1 per cent, better1than1e$pected performance
of companies in the 0uarter ending 8une B0, (009, the ne! direct ta$es code, leading to sa&ings
in the ta$ payer2s money, the trade policy !ith an ambitious target of <"Q (00 billion e$ports for
(010111 ha&e all re&i&ed the confidence of 'IIs in&estors in India %oth consumption and
in&estment led industries linked to domestic demand, such as auto, banking, capital goods,
infrastructure, retail, etc are likely to continue attracting 'II funds 5,ao, (0086 'IIs ha&e made
net in&estments of <"Q 10 billion in the first si$ months 5April to "eptember6 of (009110, ma)or
portion of these in&estments ha&e come through the primary market, more than through
secondary markets The combination of gradual remo&al of structural barriers and an impro&ing
economic en&ironment is likely to lead to a significant amount of &alue being unlocked Added
to this, since the beginning of year (000, policy of go&ernment of India has been 0uite
encouraging and in the recent year, the go&ernment has been making strong efforts to increase
'II flo!s in India
FIIS INVESTMENT POLICY OF INDIA
India embarked on a gradual shift to!ards capital account con&ertibility !ith the launch of the
reforms in the early 1990s 5%ose and +ipankar, (00C6 #&er since "eptember 1C, 199(, !hen
'IIs !ere first allo!ed to in&est in all the securities traded on the primary and secondary
markets, including shares, debentures and !arrants issued by companies !hich !ere listed or
!ere to be listed on the "tock #$changes in India and in the schemes floated by domestic mutual
funds The holding of a single 'II and of all 'IIs, /,Is and 79%s5 in any company !ere sub)ect
to the limit of 5 per cent and (C per cent of the company2s total issued capital, respecti&ely
5@ahiriet al, (00C6 Initially, ?ension 'unds, .utual 'unds, In&estment Trusts, Assets
.anagement 9ompanies nominee companies and incorporated institutional portfolio managers
!ere permitted to in&est directly in the Indian stock market In 1995, "ecurity #$change %oard
of India 5"#%IH6 empo!ered by the "ecurities and #$change %oard of India Act, 199(
institutionali3ed the 'II regulations, kno!n as the "ecurities and #$change %oard of India
5'oreign Institutional In&estors6 ,egulations, /o&ember 1C, 19957 These regulations allo!ed an
institution established or incorporated outside India as a ?ension 'unds, .utual 'unds,
In&estment Trusts, insurance company or re1insurance company4 any Asset .anagement
9ompany or /ominee 9ompany, %ank or Institutional ?ortfolio .anager, established or
incorporated outside India and proposing to make in&estments in India on behalf of broad based
funds4 any Trustee or ?o!er of Attorney holder, incorporated or established outside India, and
proposing to make in&estments in India on behalf of broad based funds to apply for 'II status to
carry out trading in e0uities and debentures listed on the Indian stock e$changes %eginning
199H197, the group !as e$panded to include registered <ni&ersity 'unds, #ndo!ment,
'oundations, 9haritable Trusts and 9haritable 'urthermore, funds in&ested by 'IIs had to ha&e
at least 50 participants !ith no one holding more than 5 per cent to ensure a broad base and
pre&enting such in&estment acting as a camouflage for indi&idual in&estment in the nature of '+I
and re0uiring *o&ernment appro&al In 'ebruary (000, the 'II regulations !ere amended to
permit foreign firms and high net1!orth indi&iduals to in&est in sub1accounts of "#%I1registered
'IIs 'IIs !ere also permitted to seek "#%I registration in respect of sub1accounts for their
clients under the regulations 'II ceiling under special procedure !as enhanced to C9 per cent in
.arch (001 The ob)ecti&e !as to increase 'IIs participation In "eptember (001, 'II ceiling
under the special procedure !as raised to sectoral cap In +ecember (00B 'II dual appro&al
process of "#%I and ,%I !as changed to single appro&al process of "#%I The ob)ecti&e of this
!as to streamline the registration process and reduce the time taken for registration In
/o&ember (00C, cumulati&e sub1ceiling of <"Q 05 billion outstanding has been fi$ed for 'II
in&estments in corporate debt The ob)ecti&e !as to limit short1term debt flo!s The outstanding
corporate debt limit !as also increased to <"Q 15 billion in April (00H The limit on in&estment
in *o&ernment securities !as enhanced to <"Q ( billion in the %udget of (00H107, 'II limit
capped at (B percent in infrastructure companies in the securities market &i3 stock e$changes,
depositories and clearing corporations 'IIs registered !ith "#%I !ere allo!ed to in&est in
go&ernment securities up to <" Q B( billion
"ecurities and #$change %oard of India 5"#%I6 amended "#%I 5'oreign Institutional In&estors6
,egulations, 1995 5popularly kno!n as 'II ,egulations6 by /otification dated (( .ay (0088
The 'II ,egulations of 1995 ha&e been one of the most debated pieces of "#%I regulations, as
uncertainty has shrouded many of its pro&isions !hether these !ere related to eligibility norms
for registration, Gno! =our 9lient 5G=996 re0uirements or issuance of 7+Is In an attempt to
clear this ambiguity, "#%I made a substanti&e amendment in the form of "#%I 5'IIs1
Amendment6 ,egulations (008 Fhile on the one hand this amendment sees the earlier policy
measures on 7+Is 5?articipatory /otes6 and the eligibility criterion modifications of 7ctober
(007 being incorporated in the regulations, it also sees fresh and significant modifications to the
eligibility definitions for 'II and sub accounts, measures that are intended to o&erall smoothen
the registration process 5.ehta, (0086 In another significant inclusion, /,Is are no! eligible to
be registered as 'IIs 5but not as sub accounts6 Institutional in&estors1including 'IIs and their
sub1accounts1ha&e been allo!ed to undertake short selling, lending and borro!ing of Indian
securities from 'ebruary 1, (008 In 7ctober (008, "#%I lifted the curbs, !ith the pace of
slo!ing economic gro!th, companies facing a credit crunch and foreign in&estors fleeing the
stock market Interestingly, in the period from 7ctober to +ecember (008, !hen the "ense$
dropped to the year2s lo!est, at least 100 ne! 'IIs registered !ith "#%I In 8une (008, !hile
re&ie!ing the #$ternal 9ommercial %orro!ing policy, the *o&ernment increased the cumulati&e
debt in&estment limits from <" QB( billion to <" Q5 billion and <" Q15 billion to <" QB billion
for 'II in&estments in *o&ernment "ecurities and 9orporate +ebt, respecti&ely In order to gi&e a
boost to the corporate bond market, the 'II in&estment limit in rupee1denominated corporate
bonds has been increased from QH billion to Q15 billion in 8anuary (009 'IIs can no! in&est in
interest rate futures that !ere launched at the /ational "tock #$change 5/"#6 on B1st August
(000 As a result of encouraging policy measures by go&ernment of India, 'oreign institutional
in&estors ha&e registered a remarkable gro!th in India
GRO+TH OF FOREIGN INSTITUTIONAL INVESTORS IN INDIA
9onse0uent to the liberali3ation of registration norms, the number of foreign institutional
in&estors 5'IIs6 registered !ith the "ecurities and #$change %oard of India 5"#%I6 has increased
to 1,51C 5'igure 16 !hich includes ?ension 'unds, .utual 'unds, In&estment Trust, Insurance
and ,einsurance 9ompanies, #ndo!ment 'unds, <ni&ersity 'unds, 'oundation or 9haritable
Trusts or 9haritable "ocieties !ho propose to in&est on their o!n behalf, Assets .anagement
9ompanies10 5A.9s6, /ominee 9ompanies, Institutional ?ortfolio .anagers, Trustees, ?o!er
of Attorney ;olders and %anks In (001, there !ere C8( foreign in&estors registered !ith "#%I
5"ecurities and #$change %oard of India6 The number increased to C89 in (00( and to 517 and
HB7 in (00B and (00C respecti&ely Fith the increase in the number of 'IIs, the number of sub1
accounts registered !ith 'IIs has also hit an all1time high The number of 'II sub1accounts11 has
reached 5,B(5 as on +ecember (009
#ntry 7ptions 'or 'II
A foreign company planning to set up business operations in India has the follo!ing options>
Incorporated #ntity
'oreign e0uity in such Indian companies can be up to 100D depending on the re0uirements of
the in&estor, sub)ect to e0uity caps in respect of the area of acti&ities under the 'oreign +irect
In&estment 5'+I6 policy
'7,#I*/ I/"TIT<TI7/A@ I/:#"T7," ,#*I"T,ATI7/
'ollo!ing entities - funds are eligible to get registered as 'II>
P ?ension 'unds
P .utual 'unds
P In&estment Trust
P Insurance or reinsurance companies
P In&estment Trusts
P %anks
P #ndo!ments
P <ni&ersity 'unds
P 'oundations
P 9haritable Trusts or 9haritable "ocieties
'urther, follo!ing entities proposing to in&est on behalf of broad based funds, are also eligible to
be registered as 'IIs>
P Asset .anagement 9ompanies
P Institutional ?ortfolio .anagers
P Trustees
P ?o!er of Attorney ;olders
The eligibility criteria for applicant seeking 'II registration
As per ,egulation H of "#%I 5'II6 ,egulations,1995, 'oreign Institutional In&estors are re0uired
to fulfill the follo!ing conditions to 0ualify for grant of registration>
P Applicant should ha&e track record, professional competence, financial soundness, e$perience,
general reputation of fairness and integrity
P The applicant should be regulated by an appropriate foreign regulatory authority in the same
capacity-category !here registration is sought from "#%I ,egistration !ith authorities, !hich
are responsible for incorporation, is not ade0uate to 0ualify as 'oreign Institutional In&estor
P The applicant is re0uired to ha&e the permission under the pro&isions of the 'oreign #$change
.anagement Act, 1999 from the ,eser&e %ank of India
P Applicant must be legally permitted to in&est in securities outside the country or its in1
corporation - establishment
P The applicant must be a Lfit and properL person
P The applicant has to appoint a local custodian and enter into an agreement !ith the custodian
%esides it also has to appoint a designated bank to route its transactions
P ?ayment of registration fee of <" Q 5,00000
L'orm AL as prescribed in "#%I 5'II6 ,egulations, 1995 is to be filled before applying for 'II
registration
The 'II registration application should be sent to>
"ecurities and #$change %oard of India
+i&ision of 'II O 9ustodian
.ittal 9ourt L%L Fing, 'irst 'loor
((C, /ariman ?oint
.umbai C00 0(1
India
?7"T1,#*I"T,ATI7/ ?,79#""#">
If a registered 'II-sub1account undergoes name change, then the 'II need to promptly inform
"#%I about the change It should also mention the reasons for the name change and gi&e an
undertaking that there has been no change in beneficiary o!nership
In case of name change of 'II, the re0uest should be accompanied !ith documents from home
regulator and registrar of the company e&idencing appro&al of name change, and the original 'II
registration certificate issued by "#%I should be sent back for necessary amendment
?rocedure for transferring a sub1account from one 'II to another>
The 'II to !hom the "ub1account is proposed to be transferred has to send a re0uest along !ith a
declaration that it is authori3ed to in&est on behalf of the "ub1account The transferor 'II should
also submit a /o1ob)ection certificate
The 'II should send a re0uest, along !ith no1ob)ection certificate from e$isting domestic
custodian, for change in domestic custodian
The 'II !ould be re0uired to send a re0uest for cancellation of its registration or registration of
its "ub1account-s clearly mentioning the name and registration number of the entity The 'II
should ensure that it - "ub1account has nil cash - securities holdings
?rocedure for change of local custodian>
In case of change of the local custodian of the 'II - sub1account, the change should be intimated
to "#%I by the 'II 7n receipt of no ob)ection from the e$isting custodian and acceptance from
the proposed custodian, the change of custodian !ould be appro&ed 1 by "#%I
?rocedure for registration as 'II-sub account under 100D debt route>
The procedure for registration of 'II-sub account under 100D debt route is similar to that of
normal funds besides a clear statement by the applicant that it !ishes to be registered as 'II-sub
account under 100D debt route ;o!e&er, *o&ernment of India allocates the o&erall in&estment
limit for 100D debt funds annually The grant of in&estment limit for indi&idual 100D debt funds
is !ithin this o&erall limit The funds ha&e to seek further in&estment limit in case the limit
allotted to them is e$hausted and they !ish to in&est further
A 'oreign Institutional In&estor ha&ing an account !ith one custodian can open accounts !ith
different custodians for its different sub1accounts ;o!e&er, one sub1account cannot be custodial
!ith more than one custodian
?rocedure if an e$isting sub1account !ants to get registered as a 'oreign Institutional In&estor>
In case if a registered sub1account !ishes to get itself registered as a 'oreign Institutional
In&estor, then it !ill ha&e to apply in 'orm A to "#%I for the same and has to satisfy all the
eligibility criteria norms mentioned in "#%I 5'oreign Institutional In&estor6 ,egulations, 1995 It
should also submit a letter from the old 'II indicating its K/o1ob)ectionK to such registration
?rocedure for rene!al of 'II-"ub1Account registration>
They ha&e to apply before B months of the e$piry of registration in 'orm A 9ircular /o
'ITT9-9<"T-09-(000 dated "eptember (1, (000 may be referred
If the 'II does not rene! its-sub1account2s registration>
The registration of the 'II - "ub1account !ould get e$pired at due date and it !ould not be
allo!ed to trade in Indian securities markets If it is not interested in rene!al but has certain
residual assets, it can apply for disin&estment in terms of 9ircular /o 'ITT9-9<"T-1(-(001
dated 8une 0C, (001 and abides by the guidelines specified in this regard
"cope of In&estments under the ?ortfolio In&estment "cheme
'IIs, under the ?ortfolio In&estment "cheme, are permitted to make both primary and secondary
in&estments in the India capital markets <nlike an in&estor !hich relies solely on '+I
regulations, a foreign in&estor !hich registers as a 'II !ould be allo!ed to buy and sell
securities o&er Indian stock e$changes In addition, 'IIs are entitled to effect transactions in a
broader category of securities than an in&estor relying on '+I regulations alone 'IIs are
permitted to purchase e0uity securities 5both listed and unlisted6, units of schemes floated by the
<nit Trust of India and other domestic municipal funds, !arrants, debentures, bonds,
go&ernmental securities and deri&ati&e instruments !hich are traded on a recogni3ed stock
e$change There is no limit on the amount that 'IIs may in&est in the Indian market, and no lock1
up periods apply to in&estments made by 'IIs
#$change 9ontrols
'IIs are re0uired to open up one or more bank accounts !ith certain designated banks and must
also appoint a domestic custodian for custody of in&estment made by the 'II Through the
designated accounts, 'IIs are authori3ed to freely transfer funds from foreign currency accounts
to ,upee accounts and &ice &ersa4 make ,upee denominated in&estments in Indian companies4
freely transfer after1ta$ proceeds from ,upee accounts to foreign currency accounts, and
repatriate capital, capital gain, di&idends interest income and other gains, sub)ect to deduction for
applicable !ithholding ta$es "o long as 'IIs e$ecute purchases and sales on a recogni3ed Indian
stock e$change, they are not re0uired to obtain transaction specific appro&al from the ,eser&e
%ank 'IIs are also entitled to effect transactions using their o!n proprietary funds, or the funds
of their sub accounts
In&estment ,estrictions
9ertain limitations apply to in&estments by 'IIs into India 'irst, 'IIs2 and their sub1 accounts2
in&estment in an Indian company can not e$ceed ten percent 510D6 of the total issued share
capital of the Indian company 5fi&e percent if the subaccount is a foreign corporation or
indi&idual6 In addition, the aggregate in&estment of all 'IIs in an Indian company may not
e$ceed t!enty four percent 5(CD6 of its total issued share capital, !ithout the e$press appro&al
of its board of directors and shareholders #&en !ith board of director and shareholder appro&al,
the same sectoral limits !hich apply to foreign direct in&estment !ould continue to apply 'IIs
may register !ith "#%I as a debt fund or an e0uity fund 'IIs !hich are registered as e0uity
funds, are re0uired to in&est at least se&enty percent 570D6 of their funds in e0uity and e0uity1
related securities A 'II registered as a debt fund, on the other hand, must in&est one hundred
percent 5100D6 of its funds in debt instruments 'oreign corporations and indi&iduals are not
eligible subaccounts of a 'II that is registered as a debt fund 'IIs are not permitted to engage in
short selling, other than in respect of deri&ati&e securities traded o&er a recogni3ed e$change, and
must effect transactions through a registered stock broker "ector in&estment prohibitions and
caps !hich apply to foreign direct in&estment also apply to in&estments by 'IIs, and 'II
in&estments must also comply !ith the pricing re0uirements applicable to foreign direct
in&estment In addition, 'IIs are not permitted to in&est in print media
India, among the !orld in&estors, is belie&ed to be a good in&estment destination in spite of
political uncertainty, bureaucratic hassles, shortages of po!er supply and infrastructural
deficiencies +espite the Asian financial turmoil, India has impro&ed its position among the most
attracti&e foreign in&estment destinations in the !orld India presents a &ast potentialB for
o&erseas in&estment and is acti&ely encouraging the entrance of foreign players into the market
/o company, of any si3e, aspiring to be a global player can no longer ignore this country, !hich
is e$pected to become one of the top emerging economies 5%ardhan, (00046 India, !hich is the
second fastest gro!ing economy after 9hina, has lately been a ma)or recipient of foreign
institutional in&estor 5'II6 funds dri&en by the strong fundamentals and gro!th opportunities
5%ana)i, 19986 'IIs ha&e recogni3ed the fact and unlike other countries !here '+I has gained
predominanceC, India has seen significant gro!th in 'II in&estment 59hakrabarti, (0014 Ghanna,
(00(6 "ince the beginning of liberali3ation in 1990s, 'II flo!s to India ha&e steadily gro!n in
importance %ut, India2s attracti&eness as a destination for foreign in&estment is a relati&ely
recent phenomenon, barely a fe! years old After their flight last year, foreign institutional
in&estors flocked back to bet on the India gro!th story by pouring in a record o&er ,s 80,500
crore in domestic e0uities in (009 According to analysts, the late re&i&al of monsoon, up!ard
re&ision of economic gro!th from 58 per cent to H1 per cent, better1than1e$pected performance
of companies in the 0uarter ending 8une B0, (009, the ne! direct ta$es code, leading to sa&ings
in the ta$ payer2s money, the trade policy !ith an ambitious target of <"Q (00 billion e$ports for
(010111 ha&e all re&i&ed the confidence of 'IIs in&estors in India %oth consumption and
in&estment led industries linked to domestic demand, such as auto, banking, capital goods,
infrastructure, retail, etc are likely to continue attracting 'II funds 5,ao, (0086 'IIs ha&e made
net in&estments of <"Q 10 billion in the first si$ months 5April to "eptember6 of (009110, ma)or
portion of these in&estments ha&e come through the primary market, more than through
secondary markets The combination of gradual remo&al of structural barriers and an impro&ing
economic en&ironment is likely to lead to a significant amount of &alue being unlocked Added
to this, since the beginning of year (000, policy of go&ernment of India has been 0uite
encouraging and in the recent year, the go&ernment has been making strong efforts to increase
'II flo!s in India
FIIS INVESTMENT POLICY OF INDIA
India embarked on a gradual shift to!ards capital account con&ertibility !ith the launch of the
reforms in the early 1990s 5%ose and +ipankar, (00C6 #&er since "eptember 1C, 199(, !hen
'IIs !ere first allo!ed to in&est in all the securities traded on the primary and secondary
markets, including shares, debentures and !arrants issued by companies !hich !ere listed or
!ere to be listed on the "tock #$changes in India and in the schemes floated by domestic mutual
funds The holding of a single 'II and of all 'IIs, /,Is and 79%s5 in any company !ere sub)ect
to the limit of 5 per cent and (C per cent of the company2s total issued capital, respecti&ely
5@ahiriet al, (00C6 Initially, ?ension 'unds, .utual 'unds, In&estment Trusts, Assets
.anagement 9ompanies nominee companies and incorporated institutional portfolio managers
!ere permitted to in&est directly in the Indian stock market In 1995, "ecurity #$change %oard
of India 5"#%IH6 empo!ered by the "ecurities and #$change %oard of India Act, 199(
institutionali3ed the 'II regulations, kno!n as the "ecurities and #$change %oard of India
5'oreign Institutional In&estors6 ,egulations, /o&ember 1C, 19957 These regulations allo!ed an
institution established or incorporated outside India as a ?ension 'unds, .utual 'unds,
In&estment Trusts, insurance company or re1insurance company4 any Asset .anagement
9ompany or /ominee 9ompany, %ank or Institutional ?ortfolio .anager, established or
incorporated outside India and proposing to make in&estments in India on behalf of broad based
funds4 any Trustee or ?o!er of Attorney holder, incorporated or established outside India, and
proposing to make in&estments in India on behalf of broad based funds to apply for 'II status to
carry out trading in e0uities and debentures listed on the Indian stock e$changes %eginning
199H197, the group !as e$panded to include registered <ni&ersity 'unds, #ndo!ment,
'oundations, 9haritable Trusts and 9haritable 'urthermore, funds in&ested by 'IIs had to ha&e
at least 50 participants !ith no one holding more than 5 per cent to ensure a broad base and
pre&enting such in&estment acting as a camouflage for indi&idual in&estment in the nature of '+I
and re0uiring *o&ernment appro&al In 'ebruary (000, the 'II regulations !ere amended to
permit foreign firms and high net1!orth indi&iduals to in&est in sub1accounts of "#%I1registered
'IIs 'IIs !ere also permitted to seek "#%I registration in respect of sub1accounts for their
clients under the regulations 'II ceiling under special procedure !as enhanced to C9 per cent in
.arch (001 The ob)ecti&e !as to increase 'IIs participation In "eptember (001, 'II ceiling
under the special procedure !as raised to sectoral cap In +ecember (00B 'II dual appro&al
process of "#%I and ,%I !as changed to single appro&al process of "#%I The ob)ecti&e of this
!as to streamline the registration process and reduce the time taken for registration In
/o&ember (00C, cumulati&e sub1ceiling of <"Q 05 billion outstanding has been fi$ed for 'II
in&estments in corporate debt The ob)ecti&e !as to limit short1term debt flo!s The outstanding
corporate debt limit !as also increased to <"Q 15 billion in April (00H The limit on in&estment
in *o&ernment securities !as enhanced to <"Q ( billion in the %udget of (00H107, 'II limit
capped at (B percent in infrastructure companies in the securities market &i3 stock e$changes,
depositories and clearing corporations 'IIs registered !ith "#%I !ere allo!ed to in&est in
go&ernment securities up to <" Q B( billion
"ecurities and #$change %oard of India 5"#%I6 amended "#%I 5'oreign Institutional In&estors6
,egulations, 1995 5popularly kno!n as 'II ,egulations6 by /otification dated (( .ay (0088
The 'II ,egulations of 1995 ha&e been one of the most debated pieces of "#%I regulations, as
uncertainty has shrouded many of its pro&isions !hether these !ere related to eligibility norms
for registration, Gno! =our 9lient 5G=996 re0uirements or issuance of 7+Is In an attempt to
clear this ambiguity, "#%I made a substanti&e amendment in the form of "#%I 5'IIs1
Amendment6 ,egulations (008 Fhile on the one hand this amendment sees the earlier policy
measures on 7+Is 5?articipatory /otes6 and the eligibility criterion modifications of 7ctober
(007 being incorporated in the regulations, it also sees fresh and significant modifications to the
eligibility definitions for 'II and sub accounts, measures that are intended to o&erall smoothen
the registration process 5.ehta, (0086 In another significant inclusion, /,Is are no! eligible to
be registered as 'IIs 5but not as sub accounts6 Institutional in&estors1including 'IIs and their
sub1accounts1ha&e been allo!ed to undertake short selling, lending and borro!ing of Indian
securities from 'ebruary 1, (008 In 7ctober (008, "#%I lifted the curbs, !ith the pace of
slo!ing economic gro!th, companies facing a credit crunch and foreign in&estors fleeing the
stock market Interestingly, in the period from 7ctober to +ecember (008, !hen the "ense$
dropped to the year2s lo!est, at least 100 ne! 'IIs registered !ith "#%I In 8une (008, !hile
re&ie!ing the #$ternal 9ommercial %orro!ing policy, the *o&ernment increased the cumulati&e
debt in&estment limits from <" QB( billion to <" Q5 billion and <" Q15 billion to <" QB billion
for 'II in&estments in *o&ernment "ecurities and 9orporate +ebt, respecti&ely In order to gi&e a
boost to the corporate bond market, the 'II in&estment limit in rupee1denominated corporate
bonds has been increased from QH billion to Q15 billion in 8anuary (009 'IIs can no! in&est in
interest rate futures that !ere launched at the /ational "tock #$change 5/"#6 on B1st August
(000 As a result of encouraging policy measures by go&ernment of India, 'oreign institutional
in&estors ha&e registered a remarkable gro!th in India
GRO+TH OF FOREIGN INSTITUTIONAL INVESTORS IN INDIA
9onse0uent to the liberali3ation of registration norms, the number of foreign institutional
in&estors 5'IIs6 registered !ith the "ecurities and #$change %oard of India 5"#%I6 has increased
to 1,51C 5'igure 16 !hich includes ?ension 'unds, .utual 'unds, In&estment Trust, Insurance
and ,einsurance 9ompanies, #ndo!ment 'unds, <ni&ersity 'unds, 'oundation or 9haritable
Trusts or 9haritable "ocieties !ho propose to in&est on their o!n behalf, Assets .anagement
9ompanies10 5A.9s6, /ominee 9ompanies, Institutional ?ortfolio .anagers, Trustees, ?o!er
of Attorney ;olders and %anks In (001, there !ere C8( foreign in&estors registered !ith "#%I
5"ecurities and #$change %oard of India6 The number increased to C89 in (00( and to 517 and
HB7 in (00B and (00C respecti&ely Fith the increase in the number of 'IIs, the number of sub1
accounts registered !ith 'IIs has also hit an all1time high The number of 'II sub1accounts11 has
reached 5,B(5 as on +ecember (009
FOREIGN INSTITUTIONAL INVESTMENT IN INDIA: MILESTONES
India embarked on a programme of economic reforms in the early 1990s to tie o&er its
balance of payment crisis and also as a step to!ards globalisation
An important milestone in the history of Indian economic reforms happened on
"eptember 1C, 199(, !hen the 'IIs 5'oreign Institutional In&estors6 !ere allo!ed to
in&est in all the securities traded on the primary and secondary markets, including shares,
debentures and !arrants issued by companies !hich !ere listed or !ere to be listed the
stock e$changes in India and in the schemes floated by domestic mutual funds
Initially, the holding of a single 'II and of all 'IIs, /,Is 5/on1,esident Indians6and
79%s 57&erseas 9orporate %odies6 in any company !ere sub)ect to a limit of 5Dand
(CD of the companyKs total issued capital respecti&ely
In order to broad base the 'II in&estment and to ensure that such an in&estment !ould not
become a camouflage for indi&idual in&estment in the nature of '+I5'oreign +irect
In&estment6, a condition !as laid do!n that the funds in&ested by 'IIs had to ha&e at
least 50 participants !ith no one holding more than 5D #&er since this day, the
regulations on 'II in&estment ha&e gone through enormous changes and ha&e become
more liberal o&er time
'rom /o&ember 199H, 'IIs !ere allo!ed to make 100D in&estment in debt securities
sub)ect to specific appro&al from "#%I as a separate category of 'IIs or sub1accounts as
100D debt funds "uch in&estments !ere, of course, sub)ected to the fund1specific ceiling
prescribed by "#%I and had to be !ithin an o&erall ceiling of <"Q 15 billion The
in&estments !ere, ho!e&er, restricted to the debt instruments of companies listed or to be
listed on the stock e$changesR In 1997, the aggregate limit on in&estment by all 'IIs !as
allo!ed to be raised from(CD to B0D by the %oard of +irectors of indi&idual companies
by passing are solution in their meeting and by a special resolution to that effect in the
companyKs *eneral %ody meeting
'rom the year 1998, the 'II in&estments !ere also allo!ed in the dated go&ernment
securities, treasury bills and money market instruments
In (000, the foreign corporate and high net !orth indi&iduals !ere also allo!ed to in&est
as sub1accounts of "#%I1registered 'IIs 'IIs !ere also permitted to seek "#%I
registration in respect of sub1accounts This !as made more liberal to include the
domestic portfolio managers or domestic asset management companiesC0D became the
ceiling on aggregate 'II portfolio in&estment in .arch (000
This !as subse0uently raised to C9D on .arch 8, (001 and to the specific sectoral cap in
"eptember (001
As a mo&e to!ards further liberali3ation a committee !as set up on .arch 1B,(00( to
identify the sectors in !hich 'IIs portfolio in&estments !ill not be sub)ect to the sectoral
limits for '+I
@ater, on +ecember (7, (00( the committee !as reconstituted and came out !ith
recommendations in 8une (00C The committee had proposed that, KIn general, 'II
in&estment ceilings, if any, may be reckoned o&er and abo&e prescribed '+I sectoral
caps The (C per cent limit on 'II in&estment imposed in 199( !hen allo!ing 'II inflo!s
!as e$clusi&e of the '+I limit The suggested measure !ill be in conformity !ith this
original stipulationK The committee also has recommended that the special procedure for
raising 'II in&estments beyond (C per cent up to the '+I limit in a company may be
dispensed !ith by amending the rele&ant regulations
.ean!hile, the increase in in&estment ceiling for 'IIs in debt funds from <" Q 1 billion
to <" Q 175 billion has been notified in (00C The "#%I also has reduced the turnaround
time for processing of 'II applications for registrations from 1B !orking days to 7
!orking days e$cept in the case of banks and subsidiaries All these are indications for
the countryKs continuous efforts to mobili3e more foreign in&estment through portfolio
in&estment by 'IIs The 'II portfolio flo!s ha&e also been on the rise since "eptember
199( Their in&estments ha&e al!ays been net positi&e, but for 1998199, !hen their sales
!ere more than their purchase
CHAPTER 8
DATA ANALYSIS AND
INTERPRETATION
To in&estigate and determine the hypothesi3ed positi&e relationship bet!een 'II flo!s and
sense$, the pre&ent study utili3es the linear regression and correlation techni0ues Time series
data on 'II flo!s and "ense$ !ill be collected for the period 19951(009 and the "ense$ !ill be
regressed an 'II flo!s and based on the &alue of the intercept and its statistical significance the
hypothesis !ill be tested , "0uare:alue is being utili3ed to infer the correlation bet!een 'II
flo!s and "ense$
The research methodology here includes>
P ,esearch design
P "ampling design
P "ampling techni0ue
P +ata collection method
,#"#A,9; +#"I*/
N3'' H21!)&sis> There is a positi&e relationship bet!een the 'II and "T79G .A,G#T
A'&%nai.& H21!)&sis> there is no positi&e relationship bet!een 'II and "T79G .A,G#T
#$ploratory ,esearch
As an e$ploratory study is conducted !ith an ob)ecti&e to gain familiarity !ith the phenomenon
or to achie&e ne! insight into it, this study aims to find the ne! insights in terms of finding the
relationship bet!een 'II2" and Indian "tock Indices
"A.?@I/* +#"I*/
P <ni&erse>1
In this study the uni&erse is finite and !ill take into the consideration related ne!s and e&ents
that ha&e happened in last fe! year
P "ampling <nit>1
As this study re&ol&es around the foreign institutional in&estment and Indian stock market "o
for the sampling unit is confined to only the Indian stock market
"A.?@I/* T#9;/IS<#> 1
9on&enient "ampling> "tudy conducted on the basis of a&ailability of the +ata and re0uirement
of the pro)ect "tudy re0uires the e&ents that ha&e impact on the Indian stock market
+ata collection .ethod
"econdary data> 'or the secondary data &arious literatures, books, )ournals, maga3ines, !eb links
are used As there are not possibilities of collecting data personally so no 0uestionnaire is made
,#"#A,9; A/A@="I" T77@"
,egression analysis and 9orrelation analysis>
,egression Analysis> Fe can analy3e ho! a single dependent &ariable is affected by the &alues
of one or more independent &ariables Fe can apportion shares in the performance measure to
each of these three factors, based on a set of performance data, and then use the results to predict
the performance of a ne!, untested athlete
I/+#AETUV'II
9orrelation> This analysis tool and its formulas measure the relationship bet!een t!o data sets
that are scaled to be independent of the unit of measurement The population correlation
calculation returns the co&ariance of t!o data sets di&ided by the product of their standard
de&iations Fe can use the 9orrelation tool to determine !hether t!o ranges of data mo&e
together W that is, !hether large &alues of one set are associated !ith large &alues of the other
5positi&e correlation6, !hether small &alues of one set are associated !ith large &alues of
theother 5negati&e correlation6, or !hether &alues in both sets are unrelated 5correlation near
3ero6
EMPIRICAL ANALYSIS
M!d&' 1
=ear 19951(009 I 57&erall regression analysis and correlation bet!een 'II and I/+IA/
"T79G .A,G#T6>
Regression Analysis: INDEX=+FII (1995-2009
Da!a o" INDEX an# FII "ro$ 1995-2009
MONTH ENDED
FII MONTHLY
INVESTMENT
SENSEX
MONTLY
INDEX
8an 1 1995 (,0(( B,H19
'eb 11995 1,8(7 B,C(1
.ar11995 1,8HC B,(H1
Apr 1 1995 (,1(0 B,1BB
.ay11995 B,H7C B,B51
8un 1 1995 H,578 B,(C7
8ul 1 1995 5,H18 B,C5B
Aug 1 1995 C,0HC B,BC7
"ep 1 1995 B,((7 B,C9B
7ct 1 1995 1,H89 B,C(B
/o& 1 1995 C,(08 (,99C
+ec 1 1995 9,97C B,110
8an 1 199H 15,HH5 (,909
'eb 1 199H 10,7B9 B,B9(
.ar 1 199H 1C,8CH B,BH7
Apr 1 199H 10,B01 B,8(B
.ay 1 199H 1(,(7( B,7(5
8un 1 199H 10,9B5 B,81B
8ul 1 199H (,88C B,5B7
Aug 1 199H C,B8B B,515
"ep 1 199H 8,B1C B,(B9
7ct 1 199H C,0H5 B,1HC
/o& 1 199H B,H57 (,899
+ec 1 199H B,815 B,085
8an 1 1997 B,18( B,B8(
'eb 1 1997 H,800 B,H5(
.ar 1 1997 5,017 B,BH1
Apr 1 1997 7,15( B,8C1
.ay 1 1997 1B,19B B,755
8un 1 1997 9,799 C,(5H
8ul 1 1997 5,0BC C,B0H
Aug 1 1997 H,B10 B,87H
"ep 1 1997 H,BB5 B,90(
7ct 1 1997 1C,119 B,80B
/o& 1 1997 15,(H( B,5H0
+ec 1 1997 1B,018 B,H59
8an 1 1998 7,B9H B,((C
'eb 1 1998 C,5BH B,H((
.ar 1 1998 1BB5 B,89B
Apr 1 1998 15,0B1 C,007
.ay 1 1998 18,HH( B,H8H
8un 1 1998 9CC B,(51
8ul 1 1998 1B,851 B,(11
Aug 1 1998 1,9(B (,9BC
"ep 1 1998 15,095 B,10(
7ct 1 1998 5CH (,81(
/o& 1 1998 B,B(B (,811
+ec 1 1998 C,5(9 B,055
8an 1 1999 B,(CH B,B1H
'eb 1 1999 (,7H9 B,B17
.ar 1 1999 9,5B5 B,H8B
Apr 1 1999 17,19B B,CCC
.ay 1 1999 88H B,9HC
8un 1 1999 15,0B7 C,1C1
8ul 1 1999 11,((0 C,598
Aug 1 1999 17,C0C C,898
"ep 1 1999 1H,070 C,7BB
7ct 1 1999 1(,(90 C,CCC
/o& 1 1999 1H,17H C,H((
+ec 1 1999 1,9HH 5,00H
8an 1 (000 B0,8C1 5,(05
'eb 1 (000 11,988 5,CCH
.ar 1 (000 (5,8H7 5,018
Apr 1 (000 (,5(7 C,H58
.ay 1 (000 19,BC8 C,578
8un 1 (000 11C,018 C,7C9
8ul 1 (000 1(,589 C,(80
Aug 1 (000 (,18B C,C77
"ep 1 (000 11,7C7 C,090
7ct 1 (000 1(7B B,711
/o& 1 (000 10,B1B B,998
+ec 1 (000 1C,1BH B,97(
8an 1 (001 B7,170 C,B(7
'eb 1 (001 1C,B07 C,(C7
.ar 1 (001 ((,BB9 B,H0C
Apr 1 (001 15,8H7 B,519
.ay 1 (001 10,18( B,HB(
8un 1 (001 8,C8H B,C57
8ul 1 (001 7,BH( B,B(9
Aug 1 (001 (,59( B,(C5
"ep 1 (001 1(,H1( (,81(
7ct 1 (001 5,(1( (,989
/o& 1 (001 1,C78 B,(88
+ec 1 (001 (,B58 B,(H(
8an 1 (00( B,BC7 B,B11
'eb 1 (00( 17,801 B,70H
.ar 1 (00( C,BC1 B,C59
Apr 1 (00( 11,015 B,BB8
.ay 1 (00( 119( B,1(H
8un 1 (00( 11,7(0 B,(C5
8ul 1 (00( (,859 (,988
Aug 1 (00( (,(1( B,181
"ep 1 (00( B,H8( (,991
7ct 1 (00( 15,99H (,9C9
/o& 1 (00( C,H9C B,((9
+ec 1 (00( H,5(5 B,B75
8an 1 (00B (0,50B B,(50
'eb 1 (00B C,1C0 B,(8C
.ar 1 (00B 5,H99 B,0C9
Apr 1 (00B 5,C99 (,9H0
.ay 1 (00B 18,0HC B,178
8un 1 (00B (H,117 B,H07
8ul 1 (00B (B,5(( B,79B
Aug 1 (00B (0,(HH C,(C5
"ep 1 (00B C1,HB7 C,C5B
7ct 1 (00B H8,H(H C,907
/o& 1 (00B B(,8CB 5,0CC
+ec 1 (00B 8B,9(1 5,8B9
8an 1 (00C (C,B5H 5,H9H
'eb 1 (00C B1,591 5,HH8
.ar 1 (00C 87,H88 5,591
Apr 1 (00C C1,7B0 5,H55
.ay 1 (00C 1B(,505 C,7H0
8un 1 (00C B,10H C,795
8ul 1 (00C 11,9H5 5,170
Aug 1 (00C (8,11( 5,19(
"ep 1 (00C (7,8CB 5,58C
7ct 1 (00C C0,C(C 5,H7(
/o& 1 (00C HC,((C H,(BC
+ec 1 (00C H8,5B8 H,H0B
8an 1 (005 1B,5(B H,55H
'eb 1 (005 80,79H H,71C
.ar 1 (005 7C,50C H,C9B
Apr 1 (005 19,C71 H,15C
.ay 1 (005 1H,9H1 H,715
8un 1 (005 57,H(1 7,19C
8ul 1 (005 87,H85 7,HB5
Aug 1 (005 CC,1(H 7,805
"ep 1 (005 C(,B80 8,HBC
7ct 1 (005 1(8,5(H 7,89(
/o& 1 (005 C0,HC1 8,789
+ec 1 (005 9H,005 9,B98
8an 1 (00H B7,98B 9,9(0
'eb 1 (00H 75,7(0 10,B70
.ar 1 (00H 59,778 11,(80
Apr 1 (00H B9,771 1(,0CB
.ay 1 (00H 18(,C7B 10,B99
8un 1 (00H 9,09C 10,H09
8ul 1 (00H 1(,7HC 10,7CC
Aug 1 (00H C7,7B9 11,H99
"ep 1 (00H 59,(8( 1(,C5C
7ct 1 (00H H5,995 1(,9H(
/o& 1 (00H 9B,1C( 1B,H17
+ec 1 (00H 1B5,9BH 1B,787
8an 1 (007 1C1,7H1 1C,(8B
'eb 1 (007 55,95C 1(,9B8
.ar 1 (007 1C,0BB 1B,07(
Apr 1 (007 59,987 1B,87(
.ay 1 (007 C0,9H8 1C,5CC
8un 1 (007 71,H9C 1C,H51
8ul 1 (007 189,95B 15,551
Aug 1 (007 1C1,91B 15,B19
"ep 1 (007 189,C85 17,(91
7ct 1 (007 17B,HB1 19,8B8
/o& 1 (007 1C5,97C 19,BHB
+ec 1 (007 B7,558 (0,(87
8an 1 (008 117(,(H9 17,HC9
'eb 1 (008 C8,8(7 17,579
.ar 1 (008 1,(CC 15,HCC
Apr 1 (008 5,080 17,(87
.ay 1 (008 1CH,7(( 1H,C1H
8un 1 (008 1105,777 1B,CH(
8ul 1 (008 1,758 1C,B5H
Aug 1 (008 1B5,979 1C,5H5
"ep 1 (008 1H5,99H 1(,8H0
7ct 1 (008 11C(,C8H 9,788
/o& 1 (008 1B5,0B7 9,09B
+ec 1 (008 1C,(H0 9,HC7
8an 1 (009 1C(,50( 9,C(C
'eb 1 (009 1(H,905 8,89(
.ar 1 (009 (,H90 9,709
Apr 1 (009 7B,8C( 11,C0B
.ay 1 (009 (0H,0H9 1C,H(5
8un 1 (009 B(,(C9 1C,C9C
8ul 1 (009 11H,(5B 15,H70
Aug 1 (009 C0,(87 15,HH7
"ep 1 (009 199,B95 17,1(7
7ct 1 (009 8B,0C( 15,89H
/o& 1 (009 5C,H9( 1H,9(H
+ec 1 (009 10B,51C 17,CH5
S3$$a%2 O313:
M!d&' 1> 7@", using obser&ations 1995>011(009>1( 5T E 1806
+ependent &ariable> I/+#A
R&*%&ssi!n Ana'2sis:
Coefficient Std. Error t-ratio p-value
9onst H(91H5 B5989B 17C8(0 X000001 RRR
'II 00(8(875 000718905 B9BC8 00001( RRR
.ean dependent &ar H78B(B9 "+ dependent &ar C7078BC
"um s0uared residua BH5eU09 "# of regression C5(8(10
,1s0uared 00800(1 Ad)usted ,1s0uared 007C85B
'51, 1786 15C8(HH ?1&alue5'6 0000119
Inde$ E H(91H5 U00(8'II
5B59896RRRU 500076 RRR
/ote> RRR indicates significance at 1D le&el
DATA INTERPRETATION:
There is a strong correlation bet!een the 'II2s and "T79G I/+I9#" that
states there is a positi&e relation in bet!een the 'II2s and "T79G #A9;A/*# As the "T79G
#$change is in a bullish trend !hich leads to attract 'II to in&est in Indian "tock .arket As the
'II2s are in an increasing manner leads to the de&elopment of an economy
M!d&' 2
=ear 19951(00( I 57&erall regression analysis and correlation bet!een 'II and I/+IA/
"T79G .A,G#T6>
Regression Analysis: INDEX=+FII (1995-2002
M!d&' 2> 7@", using obser&ations 1995>011(00(>1( 5T E 9H6
+ependent &ariable> I/+#A
R&*%&ssi!n Ana'2sis:
Coefficient Std. Error t-ratio p-value
9onst B5758H 70B(C8 508C79 X000001 RRR
'II 001C1C05 0007BH91 19189 00580B R
.ean dependent &ar BHC8B1B "+ dependent &ar 589CH5B
"um s0uared resid B17H5(9( "# of regression 581B1HB
,1s0uared 00B7H95 Ad)usted ,1s0uared 00(7C58
'51, 9C6 BH8(1B9 ?1&alue5'6 00580B(
Inde$ E B5758H U001C'II
570B(6RRRU 500076 R
/ote> RRR indicates significance at 1D le&el
DATA INTERPRETATION:
There is a strong correlation bet!een the 'II2s and "T79G I/+I9#" that
states there is a positi&e relation in bet!een the 'II2s and "T79G #A9;A/*#As the "T79G
#$change is in a bullish trend !hich leads to attract 'II to in&est in Indian "tock .arket As the
'II2s are in an increasing manner leads to the de&elopment of an economy
M!d&' 6
=ear (00B1(009 I 57&erall regression analysis and correlation bet!een 'II and I/+IA/
"T79G .A,G#T6>
Regression Analysis: INDEX=+FII (200%-2009
M!d&' 6> 7@", using obser&ations (00B>011(009>1( 5T E 8C6
+ependent &ariable> I/+#A
R&*%&ssi!n Ana'2sis:
Coefficient Std. Error t-ratio p-value
9onst 1008C 5799H7 17B87( X000001 RRR
'II 000898H51 000799198 11(CC 0(HC11
.ean dependent &ar 10BHH01 "+ dependent &ar C800B(8
"um s0uared resid 188eU09 "# of regression C79(701
,1s0uared 0015185 Ad)usted ,1s0uared 000B175
'51, 8(6 1(HCBH9 ?1&alue5'6 0(HC107
Inde$ E 1008C U0008'II
55799H76RRRU 500076
/ote> RRR indicates significance at 1D le&el
DATA INTERPRETATION:
There is a strong correlation bet!een the 'II2s and "T79G I/+I9#" that
states there is a positi&e relation in bet!een the 'II2s and "T79G #A9;A/*#As the "T79G
#$change is in a bullish trend !hich leads to attract 'II to in&est in Indian "tock .arket As the
'II2s are in an increasing manner leads to the de&elopment of an economy
CHAPTER 8
FINDINGS
SUGGESTIONS
CONCLUSION
AND
RECCOMENDATION
FINDINGS
After the analysis follo!ing are the findings of the study>
'IIs ha&e less impact on Indian stock indices and other une$plained &ariables are also
influencing the Indices
In bearish trend of (007 the &olatility in Indian "tock indices due to 'IIs is more than in
bullish trend of (008 /o doubt 'II inflo! is more in (008
The regression coefficient is gi&ing a clear picture that the !ithdra!al by 'IIs is resulting
a fall in indices and so 'IIs are playing good role during this time
Impact of 'IIs on "ense$> In (007, the correlation coefficient is more than in (008 !hich
interprets that the relationship bet!een these t!o &ariables is more in the period !hen
there is bearish trend
The "ense$ companies ha&e an e$ternal image that they are the best performers in the
country
S3**&si!ns
1 "implifying procedures and rela$ing entry barriers for business acti&ities and pro&iding
in&estor friendly la!s and ta$ system for foreign in&estors
(6 Allo!ing foreign in&estment in more areas In different industries indices the 'IIs
should be encouraged through different patterns like futures, options, etc
B6 "ome!here, a restriction related to the track record of "ub1 Accounts is also to be
made on the in&estors !ho !ithdra! money out of the Indian stock market !ho ha&e
in&ested !ith the help of participatory notes
C6 Fe ha&e to moderni3e and also ha&e to sa&e our culture "imilarly the la!s should be
such that it protect domestic in&estors and also promote trade in country through 'IIs
56 #ncourage industries to gro! to make 'IIs an attracti&e )unction to in&est
CONCLUSION
In de&eloping countries like India foreign capital helps in increasing the producti&ity of
labor and to build up foreign e$change reser&es to meet the current account deficit 'oreign
In&estment pro&ides a channel through !hich country can ha&e access to foreigncapital
According to +ata analysis and findings, it can be concluded that 'II do ha&e any significant
impact on the Indian "tock .arket but there are other factors like go&ernment policies, budgets,
bullion market, inflation, economical and political condition, etc do also ha&e an impact on the
Indian stock market There is a positi&e correlation bet!een stock indices and 'IIs but 'IIs didn2t
ha&e any significant impact on Indian "tock .arket The null hypothesis is re)ected %"# 9+
and /ifty sho!ed some positi&e correlation !ith 'II in (007 and (008 but rest of the indices
sho!ed &ery less positi&e correlation !ith 'II Also the coefficient of determination is less in all
the case It sho!s the absence of linear relation bet!een 'II and stock inde$ This does not mean
that there is no relation bet!een them
7ne of the reasons for absence of any linear relation can also be due to the sample data The data
!as taken on monthly basis The data on daily basis can gi&e more positi&e results 5maybe6 Also
'II is not the only factor affecting the stock indices There are other ma)or factors that influence
the bourses in the stock market
RECOMMENDATIONS:
"ome of the steps that can be taken to help influence the choices made by foreign
institutional in&estors include>
The *o&ernment should cut its fiscal deficits, !hich !ould result in strengthening the
economy as a !hole
9reating infrastructure and other facilities to attract foreign in&estment
As described earlier, an array of ser&ices can help promote foreign institutional
in&estment in India, ranging from basic ser&ices such as the pro&ision of electricity and
clean !ater, to fair and effecti&e dispute resolution systems
The ability of go&ernments to pre&ent or reduce financial crises also has a great impact
on the gro!th of capital flo!s "teps to address these crises include strengthening
banking super&ision, re0uiring more transparency in international financial transactions
and ensuring ade0uate super&ision and regulation of financial markets
An attempt should be made to bring do!n the inflation le&el to attract more foreign
institutional in&estments into India
The %anking system needs to be strengthened !hich could be achie&ed by reducing the
number of /on ?erforming Asse!s&
The 'IIs in&estments, though sho!n an increasing trend o&er time, are still far belo! the
permissible limits
The fact is that de&eloping country like India has its o!n compulsions arising out of the
&ery state of their social, political and economic de&elopment To attract portfolio
in&estments and retain their confidence, the host countries ha&e to follo! stable macro1
economic policies,
The pro&ision for clear procedures must be follo!ed in the e&ent of disputes bet!een
in&estors and host go&ernments, to ensure that rules are adhered to and that arbitration
may be established by mutual consent
9ountries may impose these kinds of measures like e$propriation, domestic content
re0uirements, restrictions on capital outflo!s of short term in&estments, etc !ith the
intention of protecting domestic industries from international competition and promoting
their economic de&elopment, but this usually leads to misallocation of resources a!ay
from the natural economic capabilities of nations
There has been a significant shift in the character of global capital flo!s to the
de&eloping countries in recent years in that the predominance of pri&ate account capital
transfer and especially portfolio in&estments 5'?I6 increased considerably In order to
attract portfolio in&estments !hich prefer li0uidity, it has been ad&ocated to de&elop
stock markets
The general perception about the foreign portfolio in&estments is that, not only do they
e$pand the demand base of the stock market, but they can also stabilise the market
through in&estor di&ersification 7bstacles to in&estment pre&ent countries from making
optimal use of their o!n and other countriesK resources 9ountless billions of dollars of
potential !ealth 1 for in&estors in the form of profits, for !orkers in the form of !ages,
and for consumerism the form of lo!er prices 1 are lost e&ery year due to barriers to trade
and in&estment 9ertain policy decisions of potential target countries of in&estment
recei&e close scrutiny from international in&estors 9onse0uently, a number of
international agreements ha&e been !ritten to specifically address those concerns
CHAPTER 9
REFERENCES
REFERENCES
http>--!!!e0uitymastercom-
http>--!!!sebigo&in-!orkingpaper-stockpdf
http>--!!!sharetipsinfocom-'ii1/e!sstockmarkethtml
http>--!!!rediffcom-money-(00B-oct-0Hspec(htm
!!!bseindiacom
!!!sebiorg
!!!rbiorg
!!!moneycontrolcom