1.

Executive Summary

The major impact during the recessionary period was mainly due to the negative flow of
FII in India while the FDI remained moderately unaffected with the global slowdown.

The attractiveness of India for FDI is far from receding and can surely be expected to
sustain over the next decade as well. The single most important parameter that is driving
FDI into the country is the rapid growth of India’s GDP and the huge potential returns for
the foreign investors. Moreover, FDI into India is focused on industries and sectors which
can be considered to be recession- proof. In contrasts, the FDI flows into India were
primarily into the services sector and were used for establishing BPO’s. The businesses
setup with the FDI money in India remained active during and after the recession

The recession had an impact on the total foreign investments in India, as in the year
2007-08:Q4 the net FI was $ 4760 million which fell from $ 16892 million in 2007-
08:Q3.This stagnant growth continued till 2008-09:Q3 where this further fell to $ -5376
million and in 2008-09:Q4 $ 492.However there are signs of recovery as the results of
2009-10:Q1 shows positive growth of $ 15101 million.

According to findings and results, we have concluded that FII did have significant impact
on BSE and NSE turnover but there is less co-relation with Bankex and IT.

1
 2. Introduction

The report of the project “Foreign direct investment (FDI) and foreign institutional
investors (FII) in India” mainly focused on the following areas:

A) FOREIGN DIRECT INVESTMENT (FDI)

FDI is treated as a main engine of economic growth and technological development

which provides ample opportunities in accelerating economic development.Net foreign
direct investment (FDI) flows into India reached 161481 Rs crore in India’s 2008–09
fiscal year, means increase of 2% of the 138276 crore recorded during 2007–08, with the
largest share of FDI flows from Mauritius, followed by the United States and the United
Kingdom. This study examines FDI in India, in the context of the Indian economic and
regulatory environment. This study present FDI trends in India, by country and by sectors
during the post liberalization period that is 1991 to 2010 year, using official government
data from Indian official government internet site like that of RBI, SEBI. To illustrate the
driving forces behind these trends, the study also discusses the investment climate in
India, Indian government incentives to foreign investors, the Indian regulatory
environment as it affects investment, and the effect of India’s global, regional, and
bilateral trade agreements on investment from top 10 FDI investing countries. Finally, the
study examines global FDI in India’s in top 10 sectors of industry.

B) FOREIGN INSTITUTIONAL INVESTORS (FII)

Institutional Investor is any investor or investment fund that is from or registered in a

country outside of the one in which it is currently investing. Institutional investors
include hedge funds, insurance companies, pension funds and mutual funds. The growing
Indian market had attracted the foreign investors, which are called Foreign Institutional
Investors (FII) to Indian equity market, and this study present try to explain the impact
and extent of foreign institutional investors in Indian stock market and examining
whether market movement can be explained by these investors. It is often hear that

2
whenever there is a rise in market, it is explained that it is due to foreign investors' money
and a decline in market is termed as withdrawal of money from FIIs. This study tries to
examine the influence of FII on movement of Indian stock exchange during the post
liberalization period that is 1991 to 2010. Indian economy Portfolio investment mainly
comprising foreign institutional investors’ (FIIs) investments and American depository
receipts (ADRs)/global depository receipts (GDRs) witnessed large net inflows (US $
17.9 billion) in April-September 2009 (net outflows of US $ 5.5 billion in April-
September 2008) due to large purchases by FIIs in the Indian capital market reflecting
revival in growth prospects of the economy and improvement in global investors’
sentiment.

Foreign investment refers to investments made by the residents of a country in the

financial assets and production processes of another country. The effect of foreign
investment, however, varies from country to country. It can affect the factor productivity
of the recipient country and can also affect the balance of payments. Foreign investment
provides a channel through which countries can gain access to foreign capital. It can
come in two forms: foreign direct investment (FDI) and foreign institutional investment
(FII). Foreign direct investment involves in direct production activities and is also of a
medium- to long-term nature. But foreign institutional investment is a short-term
investment, mostly in the financial markets. FII, given its short-term nature, can have
bidirectional causation with the returns of other domestic financial markets such as
money markets, stock markets, and foreign exchange markets. Hence, understanding the
determinants of FII is very important for any emerging economy as FII exerts a larger
impact on the domestic financial markets in the short run and a real impact in the long
run. India, being a capital scarce country, has taken many measures to attract foreign
investment since the beginning of reforms in 1991.

India is the second largest country in the world, with a population of over 1 billion
people. As a developing country, India’s economy is characterized by wage rates that are
significantly lower than those in most developed countries. These two traits combine to
make India a natural destination for foreign direct investment (FDI) and foreign
institutional investment (FII). Until recently, however, India has attracted only a small

3
share of global foreign direct investment (FDI) and foreign institutional investment (FII),
primarily due to government restrictions on foreign involvement in the economy. But
beginning in 1991 and accelerating rapidly since 2000, India has liberalized its
investment regulations and actively encouraged new foreign investment, a sharp reversal
from decades of discouraging economic integration with the global economy.

The world is increasingly becoming interdependent. Goods and services followed by the
financial transaction are moving across the borders. In fact, the world has become a
borderless world. With the globalization of the various markets, international financial
flows have so far been in excess for the goods and services among the trading countries
of the world. Of the different types of financial inflows, the foreign direct investment
(FDI) and foreign institutional investment (FII)) has played an important role in the
process of development of many economies. Further many developing countries consider
foreign direct investment (FDI) and foreign institutional investment (FII) as an important
element in their development strategy among the various forms of foreign assistance.

The Foreign direct investment (FDI) and foreign institutional investment (FII) flows are
usually preferred over the other form of external finance, because they are not debt
creating, nonvolatile in nature and their returns depend upon the projects financed by the
investor. The Foreign direct investment (FDI) and foreign institutional investment (FII)
would also facilitate international trade and transfer of knowledge, skills and technology.

The Foreign direct investment (FDI) and foreign institutional investment (FII) is the
process by which the resident of one country(the source country) acquire the ownership
of assets for the purpose of controlling the production, distribution and other productive
activities of a firm in another country(the host country).

According to the international monetary fund (IMF), foreign direct investment (FDI) and
foreign institutional investment (FII) is defined as “an investment that is made to acquire
a lasting interest in an enterprise operating in an economy other than that of investor”.

4
The government of India(GOI) has also recognized the key role of the foreign direct
investment (FDI) and foreign institutional investment (FII) in its process of economic
development, not only as an addition to its own domestic capital but also as an important
source of technology and other global trade practices. In order to attract the required
amount of foreign direct investment (FDI) and foreign institutional investment (FII), it
has bought about a number of changes in its economic policies and has put in its practice
a liberal and more transparent foreign direct investment (FDI) and foreign institutional
investment (FII) policy with a view to attract more foreign direct investment (FDI) and
foreign institutional investment (FII) inflows into its economy. These changes have
heralded the liberalization era of the foreign direct investment (FDI) and foreign
institutional investment (FII) policy regime into India and have brought about a structural
breakthrough in the volume of foreign direct investment (FDI) and foreign institutional
investment (FII) inflows in the economy. In this context, this report is going to analyze
the trends and patterns of foreign direct investment (FDI) and foreign institutional
investment (FII) flows into India during the post liberalization period that is 1991 to 2010
year.

5
 3. Research Methodology

3.1 Objective of the project

Objective 1: Examines the trends and patterns in the foreign direct investment (FDI)
across different sectors and from different countries in India during 1991-2010 period
means during post liberalization period.
Objective 2: Influence of recession on FII and FDI.

3.2 Hypothesis

H0-The NSE and BSE indexes do not rise with the increase in FIIs investments in India
means FIIs have no influence on Indian stock exchange.
H1-The NSE and BSE indexes results in a rise with the increase in FIIs investment in
India means FIIs have an influence on Indian stock exchange.
H0- FDI has a negative impact on the investments in India
H1- FDI has a positive impact on the investments in India

The data regarding indices of NSE and BSE is taken from “HANDBOOK OF
STATISTICS ON THE INDIAN SECURITIES MARKET 2008-09”.

3.3 Methodology

The lifeblood of business and commerce in the modern world is information. The ability
to gather, analyze, evaluate, present and utilize information is therefore is a vital skill for
the manager of today.

In order to accomplish this project successfully I will take following steps.

6
1) Sampling: The study is limited to a sample of top 10 investing countries e.g.
Mauritius, USA etc. and top 10 sectors e.g. electrical instruments,
telecommunications etc. which had attracted larger inflow of FDI and data of
NSE and BSE stock exchanges will be taken to know the impact of FII.

2) Data Collection:

 The research will be done with the help Secondary data (from internet
site and journals).

 The data is collected mainly from websites, annual reports, World Bank
reports, research reports, already conducted survey analysis, database
available etc.

3) Analysis: Appropriate Statistical tools like correlation and regression has been
used to analyze the data like to analyze the growth and patterns of the FDI and FII
flows in India during the post liberalization period, the liner trend model will be used.
Further the percentage analysis will be used to measure the share of each investing
countries and the share of each sectors in the overall flow of FDI and FII into India.

3.4 Limitations of the study

A) The study has limited itself to a sample of top ten investing countries and
top ten level sectors which have attracted higher inflow of FDI.
B) The data for analysis of impact of FII on stock exchange is limited to
National stock exchange (NSE) and Bombay stock exchange (BSE) only.

7
 4. Foreign Direct Investments

In this section I am going to discuss or describe the main business of the report i.e.
analysis of secondary data. It includes data in an organized form, discussion on its
significance and analyzing the results. For this I had divided this section in further two
subsections i.e. the first subsection fulfill the requirement of first objective which is
pertaining to FDI. The objective for FDI is to examine the trends and patterns in the
foreign direct investment (FDI) across different sectors and from different countries in
India during 1991-2010 period means during post liberalization period. And the second
subsection fulfills the analysis of second objective which is pertaining to FII.

Objective 1: Examine the trends and patterns in the foreign direct investment (FDI)
across different sectors and from different countries in India during 1991-2010
period means during post liberalization period.

4.1 About foreign direct investment:

Is the process whereby residents of one country (the source country) acquire ownership
of assets for the purpose of controlling the production, distribution, and other activities of
a firm in another country (the host country). The international monetary fund’s balance of
payment manual defines FDI as an investment that is made to acquire a lasting interest in
an enterprise operating in an economy other than that of the investor. The investor’s
purpose being to have an effective voice in the management of the enterprise’. The united
nations 1999 world investment report defines FDI as ‘an investment involving a long
term relationship and reflecting a lasting interest and control of a resident entity in one
economy (foreign direct investor or parent enterprise) in an enterprise resident in an
economy other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise
or foreign affiliate).

8
4.2 Foreign direct investment: Indian scenario

Foreign Direct Investment (FDI) is permitted as under the following forms of

investments –

• Through financial collaborations.

• Through joint ventures and technical collaborations.
• Through capital markets via Euro issues.
• Through private placements or preferential allotments.

Forbidden Territories –

FDI is not permitted in the following industrial sectors:

• Arms and ammunition.

• Atomic Energy.
• Railway Transport.
• Coal and lignite.
• Mining of iron, manganese, chrome, gypsum, gold, diamonds, copper, zinc.
• Retail Trading (except single brand product retailing).
• Lottery Business
• Gambling and Betting
• Business of chit fund
• Nidhi Company
• Trading in Transferable Development Rights (TDRs).
• Activity/sector not opened to private sector investment.

Foreign Investment through GDRs (Euro Issues) –

Indian companies are allowed to raise equity capital in the international market through
the issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI and
are designated in dollars and are not subject to any ceilings on investment. An applicant
company seeking Government's approval in this regard should have consistent track
record for good performance (financial or otherwise) for a minimum period of 3 years.

9
This condition would be relaxed for infrastructure projects such as power generation,
telecommunication, petroleum exploration and refining, ports, airports and roads.

1. Clearance from FIPB –

There is no restriction on the number of Euro-issue to be floated by a company or a group

of companies in the financial year. A company engaged in the manufacture of items
covered under Annex-III of the New Industrial Policy whose direct foreign investment
after a proposed Euro issue is likely to exceed 51% or which is implementing a project
not contained in Annex-III, would need to obtain prior FIPB clearance before seeking
final approval from Ministry of Finance.

2. Use of GDRs –

The proceeds of the GDRs can be used for financing capital goods imports, capital
expenditure including domestic purchase/installation of plant, equipment and building
and investment in software development, prepayment or scheduled repayment of earlier
external borrowings, and equity investment in JV/WOSs in India.

3. Restrictions –

However, investment in stock markets and real estate will not be permitted. Companies
may retain the proceeds abroad or may remit funds into India in anticipation of the use of
funds for approved end uses. Any investment from a foreign firm into India requires the
prior approval of the Government of India.

10
4.3 Foreign direct investments in India are approved through two
routes –

1. Automatic approval by RBI –

The Reserve Bank of India accords automatic approval within a period of two weeks
(subject to compliance of norms) to all proposals and permits foreign equity up to 24%;
50%; 51%; 74% and 100% is allowed depending on the category of industries and the
sectoral caps applicable. The lists are comprehensive and cover most industries of interest
to foreign companies. Investments in high-priority industries or for trading companies
primarily engaged in exporting are given almost automatic approval by the RBI.

2. The FIPB Route – Processing of non-automatic approval cases –

FIPB stands for Foreign Investment Promotion Board which approves all other cases
where the parameters of automatic approval are not met. Normal processing time is 4 to 6
weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are
few. It is not necessary for foreign investors to have a local partner, even when the
foreign investor wishes to hold less than the entire equity of the company. The portion of
the equity not proposed to be held by the foreign investor can be offered to the public.

4.4 Analysis of sector specific policy for FDI

Table no. 1: Sector-specific policy for FDI

Sr. Sector/Activity FDI Entry/Route
No
1. Hotel & Tourism 100% Automatic
2. NBFC 49% Automatic
3. Insurance 26% Automatic
4. Telecommunication: 49% Automatic
cellular, VAS, ISPs with gateways, radio-paging, Electronic 74% Above 49%
Mail & Voice Mail 100% Gov. license
5. Trading companies: 51% Automatic

11
 primarily export, bulk imports, cash, wholesale trading 100% Automatic
6. Power(other than atomic reactor power plants) 100% Automatic
7. Drugs & Pharmaceuticals 100% Automatic
8. Roads, Highways, Ports and Harbors 100% Automatic
9. Pollution Control and Management 100% Automatic
10 Call Centers 100% Automatic
11. BPO 100% Automatic
12. For NRI's and OCB's:

i. 34 High Priority Industry Groups

100% Automatic
ii. Export Trading Companies
iii. Hotels and Tourism-related Projects
iv. Hospitals, Diagnostic Centers
v. Shipping
vi. Deep Sea Fishing
vii. Oil Exploration
viii. Power
ix. Housing and Real Estate Development
x. Highways, Bridges and Ports
xi. Sick Industrial Units
xii. Industries Requiring Compulsory Licensing

xiii. Industries Reserved for Small Scale Sector

13. Airports: 100% Automatic,FI
Greenfield projects, Existing projects 100% PB over 45%
14 Assets reconstruction company 49% FIPB
15. Cigars and cigarettes 100% FIPB
16. Courier services 100% FIPB
17. Investing companies in infrastructure 49% FIPB
Source: http://dipp.nic.in/fdi_statistics/india_fdi_index.htm

12
4.5 Analysis of share of top ten investing countries FDI equity in flows.

Cumulative amount of FDI inflows (From Aug. 2000 to march 2010): Rs. 486,480
crore and US$ 109,219 million.
Foreign investors have begun to take a more active role in the Indian economy in recent
years. By country, the largest direct investor in India is Mauritius; largely because of the
India-Mauritius double-taxation treaty. Firms based in Mauritius invested 201,694 crores
in India between Aug. 1991 and March 2010, equal to 44 percent of total FDI inflows.
The second largest investor in India is the Singapore, with total capital flows of 41,431
crore during the 1991–2010 periods, followed by the U.S.A, United Kingdom, the
Netherlands, and Japan.

Chart 1: Share of top investing countries FDI equity inflows

Source: Securities and exchange board of India

Mauritius
Mauritius invested Rs 201,894 crore in India up to the November2009, equal to 44% of
total FDI inflows. Many companies based outside of India utilize Mauritian holding
companies to take advantage of the India- Mauritius Double Taxation Avoidance
Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains

13
taxes, and may allow some India-based firms to avoid paying certain taxes through a
process known as “round tripping.”
The extent of round tripping by Indian companies through Mauritius is unknown.
However, the Indian government is concerned enough about this problem to have asked
the government of Mauritius to set up a joint monitoring mechanism to study these
investment flows. The potential loss of tax revenue is of particular concern to the Indian
government. These are the sectors which attracting more FDI from Mauritius Electrical
equipment Gypsum and cement products Telecommunications Services sector that
includes both non- financial and financial Fuels.

Singapore
Singapore continues to be the single largest investor in India amongst the Singapore with
FDI inflows into Rs. 41,431 crores up to August 2009. Sector-wise distribution of FDI
inflows received from Singapore the highest inflows have been in the services sector
(financial and non financial), which accounts for about 9 % of FDI inflows from
Singapore. Petroleum and natural gas occupies the second place followed by computer
software and hardware, mining and construction.

U.S.A.
The United States is the third largest source of FDI in India (8% of the total), valued at
RS 35194 crore in cumulative inflows up to November 2009. According to the Indian
government, the top sectors attracting FDI from the United States to India are fuel,
telecommunications, electrical equipment, food processing, and services. According to
the available M&A data, the two top sectors attracting FDI inflows from the United
States are computer systems design and programming and manufacturing

U.K.
The United Kingdom is the fourth largest source of FDI in India (5 % of the total), valued
at Rs 24679 crores in cumulative inflows up to November2009.Over 17 UK companies
under the aegis of the Nuclear Industry Association of UK have tied up with Ficci to
identify joint venture and FDI possibilities in the civil nuclear energy sector.UK

14
companies and policy makers the focus sectors for joint ventures, partnerships, and trade
are non-conventional energy, IT, precision engineering, medical equipment,
infrastructure equipment, and creative industries.

Netherlands
FDI from Netherlands to India has increased at a very fast pace over the last few years.
Netherlands ranks fifth among all the countries that make investments in India. The total
flow of FDI from Netherlands to India came to Rs. 19,180 crores between 1990 and
2009. The total percentage of FDI from Netherlands to India stood at 4% out of the total
foreign direct investment in the country up to November 2009.

Following Various industries attracting FDI from Netherlands to India are:

• Food processing industries

• Telecommunications that includes services of cellular mobile, basic telephone,
and radio paging
• Horticulture
• Electrical equipment that includes computer software and electronics
• Service sector that includes non- financial and financial services

15
 4.6 Analysis of sectors attracting highest FDI equity inflows

Table no. 2: Sectors attracting highest FDI equity inflows

Cumulative Inflows
(August 1991- March Percentage
2010) Amount in Rs. of total
Ranks Sector Crore (US $ in million) inflows (Rs)
1. SERVICES SECTOR (financial & non-financial) 101,019 (22,687) 22 %
2. COMPUTER SOFTWARE & HARDWARE 42,259 (9,529) 9%
TELECOMMUNICATIONS (radio paging, 39,179 (8,600) 8%
3. cellular mobile, basic telephone services)
4 HOUSING & REAL ESTATE 34,348 (7,701) 7%
CONSTRUCTION ACTIVITIES (including roads 30,557 (6,945) 7%
5. & highways)
6. POWER 20,006 (4,428) 4%
7. AUTOMOBILE INDUSTRY 19,566 (4,322) 4%
8. METALLURGICAL INDUSTRIES 12,990 (3,032) 3%
9. PETROLEUM & NATURAL GAS 11,261 (2,612) 2%
10. CEHMICALS (other than fertilizers) 10,567 (2,343) 2%
TOTAL FDI INFLOWS 2,32,041

The sectors receiving the largest shares of total FDI inflows between August 1991 and
March 2010 were the service sector and the computer software and hardware sector, each
accounting for 22 and 9 percent respectively. These were followed by the
telecommunications, housing, power, and automobile sectors. The top sectors attracting
FDI into India via M&A activity were manufacturing; information; and professional,
scientific, and technical services. These sectors correspond closely with the sectors
identified by the Indian government as attracting the largest shares of FDI inflows
overall.
The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers)
registered maximum growth of 227 per cent during April 2008 – March 2009 as
compared to 11.71 per cent during the last fiscal. The sector attracted USD 749 million
FDI in FY ‘09 as compared to USD 229 million in FY ’08.
During the year 2009 government had raised the FDI limit in telecom sector from 49 per
cent to 74 per, which has contributed to the robust growth of FDI. The telecom sector

16
registered a growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal.
The sector attracted USD 2558 million FDI in FY ‘09 as compared to the USD 1261
million in FY ’08, acquired 9.37 per cent share in total FDI inflow.

India automobile sector has been able to record 70 per cent growth in foreign investment.
The FDI inflow in automobile sector has increased from USD 675 million to 1,152
million in FY ’09 over FY ’08.
The other sectors which registered growth in highest FDI inflow during April – March
2009 were housing & real estate (28.55 per cent), computer software & hardware (18.94
per cent), construction activities including road & highways (16.35 per cent) and power
(1.86 per cent).

4.7 Analysis of FDI inflow and outflow in India

Table no. 3: Total FDI inflows in India
Sr. No. Financial Year Total FDI Total FDI % Growth Over
(Rs crore) Inflows Previous Year
(US mill)
1. 2000-01 18406 4,029 ----
2. 2001-02 29235 6,130 (+) 52
3. 2002-03 24367 5,035 (-) 18
4. 2003-04 19860 4,322 (-) 14
5. 2004-05 27188 6,051 (+) 40
6. 2005-06 39674 8,961 (+) 48
7. 2006-07 103367 22,826 (+) 146
8. 2007-08 138276 34,362 (+) 51
9. 2008-09 161481 35,168 (+) 02

17
 Chart 2: Quarterly FDI inflow and outflow

Source: Handbook of statistics-RBI

Chart 3: Total FDI inflow in India

Source: Securities and exchange board of India

18
In 2006-07 the total FDI inflow in India was US $ 22,826 million while the outflow of
FDI from India was US $ -15046 million resulting in total FDI of US $ 7693 million. The
same trend continued and the total FDI substantially increased to US $ 15401 million in
the year 2007-08 due to an increase in the inflow of US $ 34236 million. During the
global slowdown period the FDI showed a positive trend in 2008-09 with an increase of
FDI to US $ 17496 million.

4.8 Classification of Net FDI in India

Table no. 4: Classification of Net FDI in India
(Amount in US $ million)

2006-07 2007-08 2008-09

Particulars Credit Debit Net Credit Debit Net Credit Debit Net
a)FDI (i + ii) 23590 15897 7693 36838 21437 15401 36258 18762 17496
i) In India 22826 87 22739 34361 125 34236 35148 166 34982
Equity 16481 87 16394 26866 108 26758 27975 166 27809
Reinvested
earnings 5828 0 5828 7168 0 7168 6426 0 6426
Other capital 517 0 517 327 17 310 747 0 747
- -
ii) Abroad 764 15810 15046 2477 21312 18835 1110 18596 -17486
- -
Equity 764 13368 12604 2477 16898 14421 1110 14668 -13558
Reinvested
earnings 0 1076 -1076 0 1084 -1084 0 1084 -1084
Other capital 0 1366 -1366 0 3330 -3330 0 2844 -2844
Source: Handbook of statistics-RBI

India has emerged as the second most attractive destination for FDI after China and ahead
of the US, Russia and Brazil. India has experienced a marked rise in FDI inflows in the
last few years. Not surprisingly India’s growth strategy has depended predominantly on
domestic enterprises and domestic demand as opposed to FDI and export demand.1 For
instance, India’s FDI as a share of GDP in 2007 represented only about 1.7 percent
compared to 2.8 percent in China and even below Pakistan, and its share of gross fixed
investment is 5.2 percent compared to 7.0 in China and 16.7 percent in Pakistan.

19
 5. Foreign Institutional Investments
Objective 2: Influence of FII on movement of Indian stock exchange during
recession.

5.1 Introduction to FII

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

reforms with a view of bringing about rapid and substantial economic growth and move
towards globalization of the economy. As a part of the reforms process, the Government
under its New Industrial Policy revamped its foreign investment policy recognizing the
growing importance of foreign direct investment as an instrument of technology transfer,
augmentation of foreign exchange reserves and globalization of the Indian economy.
Simultaneously, the Government, for the first time, permitted portfolio investments from
abroad by foreign institutional investors in the Indian capital market. The entry of FIIs
seems to be a follow up of the recommendation of the Narsimhan Committee Report on
Financial System. While recommending their entry, the Committee, however did not
elaborate on the objectives of the suggested policy. The committee only suggested that
the capital market should be gradually opened up to foreign portfolio investments.

From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all
the securities traded on the primary and secondary markets, including shares, debentures
and warrants issued by companies which were listed or were to be listed on the Stock
Exchanges in India. While presenting the Budget for 1992-93, the then Finance Minister
Dr. Manmohan Singh had announced a proposal to allow reputed foreign investors, such
as Pension Funds etc., to invest in Indian capital market. To operationalise this policy
announcement, it had become necessary to evolve guidelines for such investments by
Foreign Institutional Investors (FIIs).

The policy framework for permitting FII investment was provided under the
Government of India guidelines vide Press Note date September 14, 1992. The
guidelines formulated in this regard were as follows:

20
1) Foreign Institutional Investors (FIIs) including institutions such as Pension Funds,
Mutual Funds, Investment Trusts, Asset Management Companies, Nominee
Companies and Incorporated/Institutional Portfolio Managers or their power of
attorney holders (providing discretionary and non-discretionary portfolio
management services) would be welcome to make investments under these
guidelines.
2) FIIs would be welcome to invest in all the securities traded on the Primary and
Secondary markets, including the equity and other securities/instruments of
companies which are listed/to be listed on the Stock Exchanges in India including
the OTC Exchange of India. These would include shares, debentures, warrants,
and the schemes floated by domestic Mutual Funds. Government would even like
to add further categories of securities later from time to time.

3) FIIs would be required to obtain an initial registration with Securities and

Exchange Board of India (SEBI), the nodal regulatory agency for securities
markets, before any investment is made by them in the Securities of companies
listed on the Stock Exchanges in India, in accordance with these guidelines.
Nominee companies, affiliates and subsidiary companies of a FII would be treated
as separate FIIs for registration, and may seek separate registration with SEBI.

4) Since there were foreign exchange controls in force, for various permissions
under exchange control, along with their application for initial registration, FIIs
were also supposed to file with SEBI another application addressed to RBI for
seeking various permissions under FERA, in a format that would be specified by
RBI for the purpose. RBI's general permission would be obtained by SEBI before
granting initial registration and RBI's FERA permission together by SEBI, under
a single window approach.
5) For granting registration to the FII, SEBI should take into account the track record
of the FII, its professional competence, financial soundness, experience and such
other criteria that may be considered by SEBI to be relevant. Besides, FII seeking
initial registration with SEBI were be required to hold a registration from the

21
 Securities Commission, or the regulatory organization for the stock market in the
country of domicile/incorporation of the FII.

6) SEBI's initial registration would be valid for five years. RBI's general permission
under FERA to the FII would also hold good for five years. Both would be
renewable for similar five year periods later on.

7) RBI's general permission under FERA would enable the registered FII to buy, sell
and realize capital gains on investments made through initial corpus remitted to
India, subscribe/renounce rights offerings of shares, invest on all recognized stock
exchanges through a designated bank branch, and to appoint a domestic Custodian
for custody of investments held.

8) This General Permission from RBI would also enable the FII to:
• Open foreign currency denominated accounts in a designated bank. (There
could even be more than one account in the same bank branch each designated
in different foreign currencies, if it is so required by FII for its operational
purposes);
• Open a special non-resident rupee account to which could be credited all
receipts from the capital inflows, sale proceeds of shares, dividends and
interests;
• Transfer sums from the foreign currency accounts to the rupee account and vice
versa, at the market rate of exchange;
• Make investments in the securities in India out of the balances in the rupee
account;
• Transfer repairable (after tax) proceeds from the rupee account to the foreign
currency account(s);
• Repatriate the capital, capital gains, dividends, incomes received by way of
interest, etc. and any compensation received towards sale/renouncement of
rights offerings of shares subject to the designated branch of a bank/the
custodian being authorized to deduct withholding tax on capital gains and

22
 arranging to pay such tax and remitting the net proceeds at market rates of
exchange;
• Register FII's holdings without any further clearance under FERA.

9) There would be no restriction on the volume of investment minimum or

maximum-for the purpose of entry of FIIs, in the primary/secondary market. Also,
there would be no lock-in period prescribed for the purposes of such investments
made by FIIs. It was expected that the differential in the rates of taxation of the
long term capital gains and short term capital gains would automatically induce
the FIIs to retain their investments as long term investments.

10) Portfolio investments in primary or secondary markets were subject to a ceiling of

30% of issued share capital for the total holdings of all registered FIIs, in any one
company. The ceiling was made applicable to all holdings taking into account the
conversions out of the fully and partly convertible debentures issued by the
company. The holding of a single FII in any company would also be subject to a
ceiling of 10% of total issued capital. For this purpose, the holdings of an FII
group would be counted as holdings of a single FII.

11) The maximum holdings of 24% for all non-resident portfolio investments,
including those of the registered FIIs, were to include NRI corporate and non-
corporate investments, but did not include the following:
• Foreign investments under financial collaborations (direct foreign investments),
which are permitted up to 51% in all priority areas.
• Investments by FIIs through the following alternative routes:
i. Offshore single/regional funds;
ii. Global Depository Receipts;
iii. Euro convertibles.

23
12) Disinvestment would be allowed only through stock exchange in India, including
the OTC Exchange. In exceptional cases, SEBI may permit sales other than
through stock exchanges, provided the sale price is not significantly different
from the stock market quotations, where available.

13) All secondary market operations would be only through the recognized
intermediaries on the Indian Stock Exchange, including OTC Exchange of India.
A registered FII would be expected not to engage in any short selling in securities
and to take delivery of purchased and give delivery of sold securities.

14) A registered FII can appoint as Custodian an agency approved by SEBI to act as
custodian of Securities and for confirmation of transactions in Securities,
settlement of purchase and sale, and for information reporting. Such custodian
should establish separate accounts for detailing on a daily basis the investment
capital utilization and securities held by each FII for which it is acting as
custodian. The custodian was supposing to report to the RBI and SEBI semi-
annually as part of its disclosure and reporting guidelines.

15) The RBI should make available to the designated bank branches a list of
companies where no investment will be allowed on the basis of the upper
prescribed ceiling of 30% having been reached under the portfolio investment
scheme.

16) Reserve Bank of India may at any time request by an order a registered FII to
submit information regarding the records of utilization of the inward remittances
of investment capital and the statement of securities transactions. Reserve Bank of
India and/or SEBI may also at any time conduct a direct inspection of the records
and accounting books of a registered FII.

24
 17) FIIs investing under this scheme will benefit from a concessional tax regime of a
flat rate tax of 20% on dividend and interest income and a tax rate of 10% on long
term (one year or more) capital gains.

These guidelines were suitably incorporated under the SEBI (FIIs) Regulations, 1995.
These regulations continue to maintain the link with the government guidelines through
an inserted clause that the investment by FIIs should also be subject to Government
guidelines. This linkage has allowed the Government to indicate various investment
limits including in specific sectors.

5.2 Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside

India which proposes to make investment in India in securities. A Working Group for
Streamlining of the Procedures relating to FIIs, constituted in April, 2003, inter alia,
recommended streamlining of SEBI registration procedure, and suggested that dual
approval process of SEBI and RBI be changed to a single approval process of SEBI. This
recommendation was implemented in December 2003.

Currently, entities eligible to invest under the FII route are as follows:

i) As FII: Overseas pension funds, mutual funds, investment trust, asset

management company, nominee company, bank, institutional portfolio manager,
university funds, endowments, foundations, charitable trusts, charitable societies, a
trustee or power of attorney holder incorporated or established outside India proposing to
make proprietary investments or with no single investor holding more than 10 per cent of
the shares or units of the fund.

(ii) As Sub-accounts: The sub account is generally the underlying fund on whose
behalf the FII invests. The following entities are eligible to be registered as sub-accounts,
viz. partnership firms, private company, public company, pension fund, investment trust,
and individuals.

25
FIIs registered with SEBI fall under the following categories:
a) Regular FIIs- those who are required to invest not less than 70 % of their
investment in equity-related instruments and 30 % in non-equity instruments.
b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset
management companies, nominee companies and incorporated/institutional portfolio
managers or their power of attorney holders (providing discretionary and non-
discretionary portfolio management services) to be registered as FIIs. While the
guidelines did not have a specific provision regarding clients, in the application form the
details of clients on whose behalf investments were being made were sought. While
granting registration to the FII, permission was also granted for making investments in
the names of such clients. Asset management companies/portfolio managers are basically
in the business of managing funds and investing them on behalf of their funds/clients.
Hence, the intention of the guidelines was to allow these categories of investors to invest
funds in India on behalf of their 'clients'. These 'clients' later came to be known as sub-
accounts. The broad strategy consisted of having a wide variety of clients, including
individuals, intermediated through institutional investors, who would be registered as FIIs
in India. FIIs are eligible to purchase shares and convertible debentures issued by Indian
companies under the Portfolio Investment Scheme.

5.3 Registration Process of FIIs

A FII is required to obtain a certificate by SEBI for dealing in securities. SEBI grants the
certificate SEBI by taking into account the following criteria:

i) The applicant's track record, professional competence, financial

soundness, experience, general reputation of fairness and integrity.
ii) Whether the applicant is regulated by an appropriate foreign regulatory
authority.
iii) Whether the applicant has been granted permission under the provisions of
the Foreign Exchange Regulation Act, 1973 (46 of 1973) by the Reserve

26
 Bank of India for making investments in India as a Foreign Institutional
Investor.

iv) Whether the applicant is a) an institution established or incorporated

outside India as a pension fund, mutual fund, investment trust, insurance
company or reinsurance company. b) an International or Multilateral
Organization or an agency thereof or a Foreign Governmental Agency or a
Foreign Central Bank. c) an asset management company, investment
manager or advisor, nominee company, bank or institutional portfolio
manager, established or incorporated outside India and proposing to make
investments in India on behalf of broad based funds and its proprietary
funds in if any or d) university fund, endowments, foundations or
charitable trusts or charitable societies.
v) Whether the grant of certificate to the applicant is in the interest of the
development of the securities market.
vi) Whether the applicant is a fit and proper person.

The SEBIs initial registration is valid for a period of three years from the date of its grant
of renewal.

Investment Conditions and Restrictions for FIIs:

A Foreign Institutional Investor may invest only in the following:-
• Securities in the primary and secondary markets including shares, debentures and
warrants of companies, unlisted, listed or to be listed on a recognized stock
exchange in India.
• units of schemes floated by domestic mutual funds including Unit Trust of India,
whether listed or not listed on a recognized stock exchange.
• Dated Government securities.
• Derivatives traded on a recognized stock exchange.
• Commercial paper.
• Security receipts.

27
The total investments in equity and equity related instruments (including fully convertible
debentures, convertible portion of partially convertible debentures and tradable warrants)
made by a Foreign Institutional Investor in India, whether on his own account or on
account of his sub- accounts, should not be less than seventy per cent of the aggregate of
all the investments of the Foreign Institutional Investor in India, made on his own
account and on account of his sub-accounts. However, this is not applicable to any
investment of the foreign institutional investor either on its own account or on behalf of
its sub-accounts in debt securities which are unlisted or listed or to be listed on any stock
exchange if the prior approval of the SEBI has been obtained for such investments.
Further, SEBI while granting approval for the investments may impose conditions as are
necessary with respect to the maximum amount which can be invested in the debt
securities by the foreign institutional investor on its own account or through its sub-
accounts. A foreign corporate or individual is not eligible to invest through the hundred
percent debt route.

Even investments made by FIIs in security receipts issued by securitization companies or

asset reconstruction companies under the Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 are not eligible for the investment
limits mentioned above. No foreign institutional should invest in security receipts on
behalf of its sub-account.

5.4 Prohibitions on Investments

FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company.
They are also not allowed to invest in any company which is engaged or proposes to
engage in the following activities:

1) Business of chit fund

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

28
5) Trading in Transferable Development Rights (TDRs).

29
5.5 Number of FII registered in India

Chart 4: Number of FII registered in India

Source: Securities and Exchange board of India

With the beginning of FII in India in 1992-93 the number of registrations with SEBI has
been increasing ever since. In the year 1995-96 353 FII were registered, this increased to
527 in 2000-01.During 2007-08 1279 registrations have been made which increased to
1609 in 2008-09

According to analysts, the upward revision of economic growth from 5.8 per cent to 6.1
per cent, better-than-expected performance of companies in the quarter ended-June 30,
the proposed new direct taxes code that might lead to savings in the tax payer’s money,
and the trade policy with an ambitious target of US$ 200 billion exports for 2010-11 have
all revived the confidence of FIIs investing in India. FIIs have made net investments of
US$ 10 billion in the first six months (April to September) of 2009-10. A major portion
of these investments have come through the primary market, than through buying via
secondary markets. (Source: India Brand Equity Foundation) FII inflows into Indian

30
equities have been steady ever since the markets were opened up to FIIs in 1993. With
the exception of FY99 and FY09, net flows have been positive. FIIs own a dominant 16%
of Indian equities (worth US$147bn) and account for 10-15% of the equity volumes.
Although FIIs pulled out US$ 9.77 billion of the Indian equity markets during FY09, they
have been quick to return in FY10 and within just the first four months they have nearly
made up for the exit, reinvesting US$ 8.50 billion or 87% of the amount that they had
pulled out in FY09. (Source: CLSA Asia-Pacific Markets) India is well placed to attract
FII flows over the long term. With FIIs holding 16 per cent of equity of India's biggest
500 companies (Source: India Brand Equity Foundation) and as growth in the Indian
economy accelerates, FII sentiment is expected to remain positive towards India.Data
released by the market regulator, Securities and Exchange Board of India (SEBI), shows
that the cumulative FII net inflow in equity market has reached $75.12 billion (Rs
325,216 crore) on March 11, from $72.62 billion (Rs 313,838 crore) at the beginning of
current calendar year 2010.

31
5.6 Analysis of trends in FII investment

Portfolio investments in India include investments in American Depository Receipts

(ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and
investments in offshore funds. Before 1992, only Non-Resident Indians (NRIs) and
Overseas Corporate Bodies were allowed to undertake portfolio investments in India.
Thereafter, the Indian stock markets were opened up for direct participation by FIIs. They
were allowed to invest in all the securities traded on the primary and the secondary
market including the equity and other securities/instruments of companies listed/to be
listed on stock exchanges in India. It can be observed from the table below that India is
one of the preferred investment destinations for FIIs over the years. As of March 2010,
there were 996 FIIs registered with SEBI.

India, the second fastest growing economy after China, has recently seen positive foreign
institutional investor (FII) inflows driven by the sound fundamentals and growth
opportunities.

Since 1992-93, when FIIs were allowed entry into Indian financial markets, foreign
institutional investment had increased over the years. In tandem with the boom in stock
markets and sound global scenario, investments by FIIs into India were quite high in last
few years, particularly since 2003-04. However, 2008-09 saw the highest FII outflow in
any financial year since inception. This could be attributed to the global financial
meltdown and the home bias of FIIs in the crisis.

32
Table no. 5: Net investments of FPI in India-Gross Purchase, Sales
(Amount in Rs crore)
Year Gross Purchase (a) Gross Sales (b) Net Investment (a-b) Percentage
1992-93 18 4 13 -
1993-94 5,593 467 5,127 39338%
1994-95 7,631 2,835 4,796 -6%
1995-96 9,694 2,752 6,942 45%
1996-97 15,554 6,980 8,575 24%
1997-98 18,695 12,737 5,958 -31%
1998-99 16,116 17,699 -1,584 -127%
1999-00 56,857 46,735 10,122 -739%
2000-01 74,051 64,118 9,933 -2%
2001-02 50,071 41,308 8,763 -12%
2002-03 47,062 44,372 2,689 -69%
2003-04 1,44,855 99,091 45,764 1602%
2004-05 2,16,951 1,71,071 45,880 0%
2005-06 3,46,976 3,05,509 41,467 -10%
2006-07 5,20,506 4,89,665 30,841 -26%
2007-08 9,48,018 8,81,839 66,179 115%
2008-09 6,14,576 6,60,386 -45,811 -169%

The gross purchases of debt and equity by FIIs declined by 35.2 per cent to Rs.6,14,576
crore in 2008-09 from Rs.9,48,018 crore in 2007-08. The combined gross sales by FIIs
also declined by 25.1 per cent to Rs.6,60,386 crore from Rs.8,81,839 crore during the
same period. The total net outflow of FII was Rs.45,811 crore in 2008-09 as against a net
inflow of Rs.66,179 crore in 2007-08. This was the highest net outflow for any financial
year so far. There was a negative 169% decrease in the net outflow in 2008-09 as
compared to 2007-08.

Chart 5: FPI investments in India

33
Source: Securities and exchange board of India (Annual report)

During 2008-09, there was an outflow from the equity segment amounting to Rs.47,706
crore (Table 2.49). The debt segment, however, witnessed a positive net inflow of
Rs.1,895 crore. Month-wise, the net FII outflow was the highest in equity segment in
October 2008 (Rs.15,347 crore) and June 2008 (Rs.10,096 crore). In the equity segment,
FII investment was negative in nine months of the financial year. In the debt segment,
outflow was the highest in March 2009 (Rs.6,420 crore) and October 2008 (Rs.1,858
crore) .

34
Table no. 6: Net investments of FPI in India-Equity and Debt

Year/Month Net Investments by FII

Equity Debt Total
2006-07 25,236 5,605 30,841
2007-08 53,404 12,775 66,179
2008-09 -47,706 1,895 -45,811
8-Apr 1,075 -1,702 -627
8-May -5,012 -163 -5,174
8-Jun -10,096 -999 -11,095
8-Jul -1,837 3,619 1,782
8-Aug -1,212 1,258 46
8-Sep -8,278 3,204 -5,074
8-Oct -15,347 -1,858 -17,205
8-Nov -2,598 4,215 1,617
8-Dec 1,750 627 2,377
9-Jan -4,245 802 -3,443
9-Feb -2,437 -688 -3,124
9-Mar 530 -6,420 -5,890
Source: Securities and exchange board of India

The FIIs were permitted to trade in the derivatives market since February 2002. The
cumulative FII trading in derivatives was Rs.2,45,653 crore as on March 31, 2009.
Reversing the existing trend, open interest position of FIIs in index options was the
highest at Rs.19,603 crore by end-March 2009, followed by stock futures (Rs.12,751
crore), index futures (Rs.8,837 crore) and stock options (Rs.602 crore) .

This project, in a way, reveals the influence of FIIs investment on movement of Indian
stock exchange (national stock exchange of India) during the post liberalization period
that is 1991 to 2010. I have applied a simple linear model to estimate the effect of FII on
the stock index. The data analysis tools used in the research is correlation and regression.

5.7 Classification of Total FPI investment

Table no. 7: Classification of FII in India

(Amount in US $ million)

35
 2006-07 2007-08 2008-09

Particulars Credit Debit Net Credit Debit Net Credit Debit Net
Portfolio 10962 10256 2955 12865 14268
investments 0 0 7060 235924 206368 6 1 5 -14034
10953 10253 2939 12851 14236
i) In India 4 0 7004 235688 206294 4 1 6 -13855
of which: 10575 10253 2032 12734 14236
FIIs 6 0 3226 226621 206294 7 9 6 -15017

GDRs/ADRs 3776 0 3776 8769 0 8769 1162 0 1162

ii) Abroad 86 30 56 236 74 162 140 319 -179

Source: Handbook of statistics-RBI

The total FPI in the year 2006-07 was US $ 7060 million this comprised of mainly inlow
of FII unto US $ 3226 million and ADR/GDR US$ 3776 million with only US$ 56 millin
outflow abroad from India. The total FPI increased to US $ 29556 million pre recession
in the global economy. During recession the FPI reduced to greatly to US $ -14034
million mainly to the plow back of money made by developed from India which fell to
US $ -13855 in the year 2008-09.

36
5.8 Impact of FII investment on NSE turnover

Source: Handbook of statistics on Indian Economy-RBI, NSE

5.8 Impact of FII investment on BSE turnover

Source: Handbook of statistics on Indian Economy-RBI

37
The recent Sensex crash on January 2008 swept with it a large number of small scale
investors while registering a record dip of 2062 points in a day. The major cause of this
crash was attributed to the recession in the global economies, especially with the US
dollar losing its strength to the Indian rupee. A large amount of equity in the form of
shares was floated in the Indian economy as an impact of Foreign Institutional Investors
(FII’s) withdrawing their money from the Indian markets. In 1000 points rally from
20,000 to 21,000 FIIs infused Rs. 2403 cr in the equity markets in duration of 49 trading
days. The Foreign institutional investors were Net Investors during the 1,000 point rally
except for November 2007 where in they were net sellers to the tune of Rs. 5849.90 cr on
account of weak global sentiments and crude prices touching new highs. Foreign
institutional investors had pumped Rs. 1929.70 cr into Indian stocks this calendar year till
07thJanurary ’08. According to the Securities and Exchange Board of India FIIs hold
total investments to the tune of Rs. 285398.10 cr in Indian equity market. The number of
Registered FII's as on 07th January’08 was recorded at 1235.

The year 2010 has started off on a positive note for Indian equities, especially in terms
of attracting inflows from overseas investors. In the first 15 days of the year, foreign
institutional investors (FII) have net purchased Indian equities worth Rs 8,191.6 crore
or $1.8 billion, close to the average monthly inflow of Rs 9,852.18 crore witnessed in
the past six months. During 2009, FIIs had net purchased equities worth Rs 83,400
crore, the highest so far in a single calendar year.

However, it has been seen that many of the overseas investors are heading towards
small-and mid-cap stocks rather than large-cap stocks. During the first two weeks of
January, the BSE small-cap and mid-cap indices have clearly managed to outperform
the 30-share Sensex. The small-cap index had generated a return of 7.33%, while the
BSE mid-cap index climbed 4.95%, compared with Bombay Stock Exchange Sensex’s
marginal gain of 0.51%

Foreign institutional investors (FIIs) were gross buyers of shares worth Rs 13,738.80
crore, while they sold equities worth Rs 10,000 crore, resulting in a net investment of

38
Rs 3,738.70 crore, as per the data available with capital market regulator Securities &
Exchange Board of India (Sebi).
FIIs poured in a record Rs 83,400 crore in the domestic equities in 2009. FIIs were the
net investor of Rs 4,417.90 crore in debt instruments, according to the Sebi data.
Interestingly, Sensex grew by 0.43% to close at 17,540.29 points during the period
under review. Sensex registered an impressive gain of over 81% last year.
FIIs investment of Rs 83,400 crore in 2009 was the highest inflow in the country in
rupee terms in a single year and came a year after overseas investors pulled out over
Rs 50,000 crore

Portfolio investors have pumped in a net $1.6 billion into Indian equities within six
trading sessions in the new calendar, raising hopes that many overseas fund
managers may increase their allocations to India in 2010

Revival in capital inflows gathers momentum

• The revival in capital flows, which started in financial year 2009-10 and gathered
momentum in the second quarter, has remained buoyant even in the third quarter,
according to the second-quarter macroeconomic and monetary development report
released by the Reserve Bank of India (RBI).
• Net inward Foreign Direct Investment (FDI) continued to remain upbeat during
the second quarter of 2009-10, reflecting relatively better growth prospects for the
economy.
• In the April-November period, FDI value increased marginally to $25 billion (Rs
1,13,750 crore) from $23.3 billion (Rs 1,06,015 crore) in the corresponding period
last year.
• Portfolio investments, too, continued their upward trend, mainly due to the revival
in Foreign Institutional Investment (FII) inflows since the first quarter of 2009-10.
• In the period from April 2009 to January 15, 2010, net FII inflows increased to
$24.7 billion (Rs 1,12,385 crore) compared to an outflow of $12.1 billion (Rs 55,055
crore) in the same period last financial year.
• Inflows under portfolio investment were led by large purchases of equities by FIIs
in the Indian stock market and revival in net inflows under American Depository

39
Receipts (ADRs) and Global Depository Receipts (GDRs) due to resurgence in stock
prices of Indian companies
• The value of ADRs and GDRs nearly tripled to $3.1 billion in April-November
2009 compared to $1.1 billion in the corresponding period last year.
• “The better than expected macroeconomic performance of India during 2009-10
and positive sentiments of global investors about India’s growth prospects are the
factors primarily responsible for sustained capital inflows during the year so far,” the
report said.
• During the first half of 2009-10, net capital flows were high, mainly driven by
foreign investment inflows, particularly reflecting the turnaround in FII inflows. In
banking capital, net inflows under NRI deposits remained high

40
 6. Foreign Investments – FDI and FII

Chart 6: Total Foreign investments in India-FDI and FII

Source: Reserve bank of India

The total foreign investments during the year 2005-06 was Rs 15528 crore with FDI
contributing Rs 5915 crore and FPI contributing 12494 crore. There was a substantial
increase in the total foreign investments in 2007-08 which was Rs 44957 crore this was
due to a fall in the FPI to Rs -3736 crore resulting in the foreign investments to reduce to
Rs 4760 crore in 2007-08:Q4.Substantially there was a decline in the total investments
due to a constant reduction in FPI in the subsequent years. In 2008-09 the total FPI was
Rs -14035 crore due to which the total foreign investments came down to Rs 3463 crore
even though the FDI was at Rs 278080 crore.

41
 7. KEY FINDING

For objective 1

a) Net FDI in India was valued at $ 7693 million in the 2006–07 Indian fiscal year,
and nearly doubled, to $ 15401 million, in the 2007–08 fiscal year. Almost 35 %
of the FDI is invested in the Mumbai followed by 19% in New Delhi.

b) By country, the largest investors in India are Mauritius, the United States, and the
United Kingdom. Investors based in many countries have taken advantage of the
India-Mauritius bilateral tax treaty to set up holding companies in Mauritius
which subsequently invest in India, thus reducing their tax obligations.

c) By industry, the largest destinations for FDI are electrical equipment (including
computer software and electronics), services, telecommunications, and
transportation.

For objective 2

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 my study I have selected only one
independent variable i.e. FII and dependent variable is indices of nifty.

Table no. 8: Co – relation of FII with Indices

Indices Co-relation with FII

Sensex 0.80
Bankex 0.18
Power 0.33
IT 0.13
Capital Goods 0.44

42
 From the above table we can say that FII has a positive impact on all the indices which
means that if FIIs come in India then it is goods for the Indian economy. FIIs have more
co-relation with Sensex so we can say that they are mostly invest in big and reputed
companies which are included in Sensex. According to findings and results, we have
concluded that FII did have significant impact on Sensex but there is less co-relation with
Bankex and IT results (may be). Also FII is not the only factor affecting the stock indices.
There are other major factors that influence the bourses in the stock market.

Table no. 9: Correlation and Regression matrix

Correlation with FII Multiple R R2 Standard Error observation

S&P CNX NIFTY 0.651 0.651 0.423 575.658 180
BANK NIFTY 0.634 0.634 0.402 1229.644 87
CNX 100 -0.159 0.159 0.025 898.820 51
CNX IT -0.191 0.191 0.036 12896.703 135
CNX NIFTY JUNIOR 0.656 0.656 0.431 1319.629 138
S&P CNX 500 0.540 0.540 0.292 670.583 94

1. Impact of FII on S&P CNX Nifty: The effect of FII on Nifty is positive and the co-
efficient of correlation is high so the effect is also high. The standard error comes out to
be 575.658 which are high. This does not mean the relation is false but we can say that
the error in linear relation is high.

2. Impact of FII on Bank Nifty: The effect of FII on Bank Nifty is positive. So, FII is
directly related to Bank Nifty. But the co-efficient of correlation is high so the effect is
also high. The standard error comes out to be 1229.644 which are very high. This means
that the deviation from the mean value is high. This does not mean the relation is false
but we can say that the error in linear relation is high. The value of multiple-R is also
high. We can say that FII have significant impact on Bank Nifty during the period of 31-
January-2000 to 30-March-09.

43
3. Impact of FII on CNX 100: CNX 100 is inversely related to FII for the period of 31-
January-03- 30-March-2009. But the extent of impact is low as co-efficient of correlation
is -0.159.

4. Impact of FII on CNX IT: FII has inversely little significant relation with CNX IT, as
the value of correlation is -0.191. This does not mean that there is no relation at all
between them. It shows the absence of linear relation between the two variables but not a
lack of relationship altogether.

5. Impact of FII on CNX NIFTY JUNIOR: CNX NIFTY JUNIOR directly related to
FII for the period of 31-Oct-1995- 30-March-2009. But the value of R is high so the
degree of relation is also high low. Standard error in this case is 1319.6 which is high
compared to other standard errors between FII and other stock indices.

6. Impact of FII on S&P CNX 500: S&P CNX 500 is also highly correlated with FII. In
this case again the degree of relation is high.

One of the reasons for high degree of any linear relation can also be due to the sample
data. The data was taken on monthly basis. The data on daily basis can give more positive
Monthly average turnover of all the indices has been taken. For FIIs monthly average of
the net investments made by them in the Indian capital market is taken.
Net Investments = gross purchases – gross sales (fig. is in Rs crore)

Use of Model: A simple linear relationship has been shown between two variables using
correlation and regression as the data analysis tools. One variable is dependent and the
other is independent. I have taken FII as the independent variable while the stock index
has been taken as dependent variable. The impact of FII has been separately analyzed
with each of the index. So, correlation and regression has been separately run between FII
and six indices taking one index at a time with help of Microsoft excel.

Inference: If the hypothesis holds good then we can infer that FIIs have significant impact
on the Indian capital market. This will help the investors to decide on their investments in

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stocks and shares. If the hypothesis is rejected, or in other words if the null hypothesis is
accepted, then FIIs will have no significant impact on the Indian bourses.

Regression Analysis: This analysis tool performs linear regression analysis by using the
"least squares" method to fit a line through a set of observations. I 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. The population
correlation calculation returns the covariance of two data sets divided by the product of
their standard deviations. I 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).

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 8. CONCLUSION

For objective 1:

The process of economic reforms which was initiated in July 1991 to liberalize and
globalize the economy had gradually opened up many sectors of its economy for the
foreign investors. A large number of changes that were introduced in the country’s
regulatory economic policies heralded the liberalization era of the FDI policy regime in
India and brought about a structural breakthrough in the volume of the FDI inflows into
the economy maintained a fluctuating and unsteady trend during the study period. It
might be of interest to note that more than 50% of the total FDI inflows received by India
during the period from 1991-2010 came from Mauritius and the USA. The main reason
for higher levels of investment from Mauritius was that the fact that India entered into a
double taxation avoidance agreement (DTAA) with Mauritius were protected from
taxation in India. Among the different sectors, the electrical and equipment had received
the larger proportion followed by service sector and telecommunication sector.

For objective 2:

According to findings and results, I concluded that FII did have high significant impact
on the Indian capital market. Therefore, the alternate hypothesis is accepted. S&P CNX
NIFTY, BANK NIFTY, CNX NIFTY JUNIOR, S&P CNX 500 showed positive
correlation but CNX 100, CNX IT showed negative correlation with FII. Also the degree
of relation was high in all the case. It shows high degree of linear relation between FII
and stock index. This shows that there is relationship between them.

One of the reasons for high degree of any linear relation can also be due to the sample
data. The data was taken on monthly basis. The data on daily basis can give more positive
results (may be). Also FII is not the only factor affecting the stock indices. There are
other major factors that influence the bourses in the stock market. I also analyzed that FII
had significant impact on the stock index for the period starting from January 1991 to
March 2007. The sample data available for other indices like BANK NIFTY, CNX 100,

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S&P CNX 500 was low with just 51, 87 and 94 respectively observations that have also
hampered the results.

According to findings and results, we have concluded that FII did have significant impact
on Sensex but there is less co-relation with Bankex and IT.

One of the reasons for high degree of any linear relation can also be due to the sample
data. The data was taken on monthly basis. The data on daily basis can give more positive
results (may be). Also FII is not the only factor affecting the stock indices. There are
other major factors that influence the bourses in the stock market.

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 9. REFERENCES

9.1 Internet sites:

a) www.rbi.org.in
b) www.google.com
c) www.fdimagazine.com
d) www.members.aol.com/RTMadaan1/sectors
e) http://dipp.nic.in/fdi_statistics/india_fdi_index.htm
f) www.nseindia.com
g) www.sebi.gov.in
h) www.bseindia.com
i) www.financeexpress.com
j) www.sebi.gov.in

9.2 Journals:

a) ICFAI Journal: E.g. the ICFAI journal of public finance, issue- February, vol.
VI.
b) Handbook of statistics on the Indian securities market 2009.

9.3 Books:

a) Foreign direct investment in India by Lata Chakravarthy.

b) FDI (issues in emerging economies) by K. Seethe Pathi.
c) Foreign institutional investors by G Gopal Krishna Murthy.

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