International Research Journal of Finance and Economics ISSN 1450-2887 Issue 68 (2011) EuroJournals Publishing, Inc. 2011 http://www.eurojournals.com/finance.

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Foreign Institutional Investment in Indian Capital Market: A Study of Last One Decade
Narendra Singh Bohra Assistant Professor, Faculty of Management Graphic Era University Dehradun, Uttarakhand (India) E-mail: thakur_bohra@rediffmail.com, nsbohra7@gmail.com Akash Dutt Student (MBA Finance Group), Faculty of Management Graphic Era University Dehradun, Uttarakhand (India) Abstract Since the beginning of liberalization(1991) FII flows to India have steadily grown in importance, any economy in the world is major affected by the foreign investment and the movement of its capital market, as an indicator of performance of its various companies in a particular industry. The dawn of 21st century has shown the real dynamism of stock market and the various benchmarking of sensitivity index (Sensex) in terms of its highest peaks and sudden falls. This paper attempts to understand the behavioural pattern of FII in India and figure out the reason for indifferent responses of BSE Sensex due to FII inflows. The data for the study uses the information obtained from the secondary resources like website of BSE sensex. The paper consists of two sections; the first section aims at understanding the behavioural pattern of FII by identifying the Decade trend analysis of FII investment in India, the second section attempts to present the correlation between FII turnover and turnover of different individual groups of shares in BSE sensex.

Keywords: FII, BSE, Correlation

Introduction
A well-developed stock market has its impact on the development of economy. It provides investors with an array of assets with varying degree of risk, return and liquidity. This increased choice of assets and the existence of a vibrant stock market provide savers with more liquidity and options, thereby inducing more savings. Increased competition from foreign financial institutions also paves the way for the derivatives market. All this, according to the mainstream belief, encourages more savings in equity related instruments. This, in turn, raises the domestic savings rate and improves capital formation. Above model indicating that portfolio investment is also a stimulus of economic development because, its a main source of fund of corporate. The demand of portfolio investment is created by companies and their routes are decided by government. It is considered as less reliable source of fund for economic development because its fluctuate on some minor trends of economy.

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Link Model: Portfolio Investment and Economic Development

104

FII

Share Price Up

More Players & Efficiency Encouraged. Intermediaries ,Broker and Underwriter Mutual Funds, Insurance Companies and Individuals. Issuers

Liquidity Up

Cost of Issue Down More Supply Liquidity Demand

Local and Foreign Demands Increased

More Equity Issued Cheaper Capital More Stock Issue New Listing

Review of Literature
Many empirical studies have been conducted to examine the relationship between stock prices and buying of equity by FIIs in Indian stock market. Fang and Loo (1994) studied the relationship between the stock return volatility and international trade for four Asian Countries. Radelet and Sachs (1998) attributed the East Asian economic crisis to financial panic due to sudden reversal of portfolio investment. Academicians often argue that foreign investors destabilize stock prices due to various reasons. According to Dornbusch and Park (1995) foreign investors pursue a positive feedback strategy, which makes stocks to overreact to change in fundamentals. Agarwal (2000) based on the correlation of returns during the period 1987-1996 found that emerging markets exhibit a high correlation with one another except for some of the South-East Asian economies, where the overall correlation between the emerging market is low. The study of Thomas J. Flavin, Margaret J. Hurley and Fabrice Rousseau (2001), reveals that a gravity model, frequently used to explain trade patterns,

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is used to explain stock market correlations. They found that geographical variables still matter when examining equity market linkages. In particular, the number of overlapping opening hours and sharing a common border tends to increase cross-country stock market correlation. These results may stem from asymmetrical information and investor sentiment, lending some empirical support for these explanations of the international diversification puzzle. Batra (2003), using both daily and monthly data attempted to understand the trading behavior of FIIs and returns in Indian equity market. He found the strong evidence of FIIs chasing trends and adopting positive feedback and herding trading strategies. Mishra (2004) explored the relationship between stock markets and foreign exchange markets using Granger causality test and the VAR technique. The study found that there exists a unidirectional causality between exchange rate and interest rate and money rate. Badhani (2005) has attempted to examine the long-term and short-term relationship among stock prices, dollar-rupee exchange rate and net FII investment in India, using the monthly data of BSE sensex, dollar-rupee exchange rates and net monthly FII investment flows from April 1993 to March 2004. The study shows that there is co integration between net FII investment flow and stock prices. Research Objective To study the behavioral pattern of FII in India with special reference to 2000 to 2009. To establish a relationship between FII and different groups of shares in BSE India.

Research Methodology The study describes the behavioral pattern and correlation between FII investments in India with special reference to BSE Sensex and also with groups of shares in BSE Sensex. It is based on secondary data obtained from websites, newspaper and journals. The main objective of the present paper is to determine impact and relationship between the Indian stock market, net foreign institutional investment. To test this, we employ the methodology of correlation (linear dependence) between two variables X and Y, giving a value between +1 and 1 inclusively. This study is divided in to two sections: Section - 01 Exploring the behavioral pattern of FII in India in special reference to BSE sensex. Section - 02 Attempts to establish the correlation between FII and individual groups securities in BSE sensex. Section 01 FII in India (2000 2009) Foreign institutional investors have gained a significant role in Indian capital markets. Availability of foreign capital depends on many firm specific factors other than economic development of the country. In this context this paper examines the contribution of foreign institutional investment particularly among companies included in sensitivity index (Sensex) of Bombay Stock Exchange. Also examined is the relationship between foreign institutional investment and firm specific characteristics in terms of ownership structure, financial performance and stock performance. It is observed that foreign investors invested more in companies with a higher volume of shares owned by the general public. The promoters holdings and the foreign investments are inversely related. Foreign investors choose the companies where family shareholding of promoters is not substantial. Among the financial performance variables the share returns and earnings per share are significant factors influencing their investment decision.

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Foreign portfolio inflows through FIIs, in India, are important from the policy perspective, especially when the country has emerged as one of the most attractive investment destinations in Asia. In this paper an effort has been made to develop an understanding of the investment decisions in different group of shares in BSE, and behavior of the FIIs in the Indian equity market of last ten years. This study show that the FII in India was maximum in 2004 then it starts declining (Table -01), then it faced the challenged of global crisis, in 2007 the net sale of shares by foreign investors is mare then net purchases.
Table 1: FII in India (In Rs Cr)
YEAR 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TOTAL PURCHASES 32913 19325.76 15535.76 32882 59910.12 113960 132933 202468 100077 89069 799073.64 SALES 27028 15859.28 15446.28 24196 47624.19 107480 131548 208968 120491 82866 781506.75 NET 5885 3466.48 89.48 8686 12285.93 6480 1385 -6500 -20414 6204 17567.89

FII and BSE Sensex India Sensex is the commonly used name for the Bombay Stock Exchange Sensitive Index an index Composed of 30 of the largest and most actively traded stocks on the Bombay Stock Exchange (BSE). The term FII is used most commonly in India to refer to outside companies investing in the financial markets of India. FII investment is frequently referred to as hot money for the reason that it can leave the country at the same speed at which it comes in. In country like India; statutory agencies like SEBI have prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs. It has been found by the study (Table-02) that BSE Sensex and foreign institutional investment has followed a closed relationship, when net sensex was moved up than the FII was also increased and when net sensex was down the total FII was goes gown.
Table 2: BSE Sensex and FII (In Rs Cr)
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 NET SENSEX -1448.56 -96.91 -451.46 2509.65 751.97 4674.92 1507.74 3189.07 -5918.12 7625.78 NET FIIs 59941 3466.48 89.48 8686 12285.93 6480 1385 -6500 -20414 6204

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FII and Sense x R elationship
15000 10000 5000 0 1 -5000 -10000 -15000 -20000 -25000 Year 2 3 4 5 6 7 8 9 10

FII & B SE T ur nover

NET S ENS EX

NET FIIs

Section 02 FII and Individual Group Securities in BSE The Bombay Stock Exchange (BSE), Indias leading stock exchange, has classified Equity scripts into categories A, B1, B2, S, T, TS, & Z to provide guidance to the investors. The classification is on the basis of several factors like market capitalization, trading volumes and numbers, track records, profits, dividends, shareholding patterns, and some qualitative aspects. On the basis of the study it has been found that some group of shares attract the attention of FII at larger (Table -03), some at very low and some group of shares are completely unable to attract the attention of foreign investors these groups are negatively co-related with the total FII in India. This study taking forward by studying each group of shares with total FII individually, explaining the reasons of low and high investment by foreign intuitional investors in India.
Table 03: FII in Different Group of Shares (In Rs Cr)
YEAR 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TOTAL Coefficien t of Correlati on with Total FII A GROUP 908947 281969 266651 437851 398861 482429 552460 859286 897682 963736 6049872 B1 GROUP 70951.6 22233.1 43340.7 58641.2 97269.7 237055 312604 551613 NA NA 1393708 B2 GROUP 7323.3 2111.7 3962.9 4568.6 9272.1 35541 33602 96614 158250 NA 351245 S GROUP NA NA NA NA 5597.9 46697 48663 53904 20277 37821 212960 T GROUP NA NA NA 418.65 6335.89 12146.4 7895.96 15723.4 1773.1 6138.06 50431.4 Z GROUP 45.8 17.09 22.59 321.21 1158.92 1934.71 791.23 1480.74 407.18 20.76 6200.23 F GROUP 42.96 82.69 94.9 245.51 220.17 269.71 170.39 235.7 753.13 1588.16 3703.32 G GROUP NA NA 1.45 1.39 0.05 NA NA NA NA NA 2.89 B GROUP NA NA NA NA NA NA NA NA 20931.1 368498 389430 ST GROUP NA NA NA NA NA NA NA NA NA 1006 1006 NET FII's 59941 3466.48 89.48 8686 12285.9 6480 1385 -6500 -20414 6204 17567.9

0.513

0.992

0.679

0.480

0.734

0.657

0.102

-0.721

-0.877

FII & Group-A Shares A Group is a category where there is a facility for carry forward (Badla) to the next settlement cycle. These are companies with fairly good growth record in terms of dividend and capital appreciation. The scrips in this group are classified on the basis of equity capital, market capitalization, number of years

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of listing on the exchange, public share holding, floating stock, trading volume etc. As per the finding of this study (Table - 04), this group of shares in the stock market attract the high interest of foreign institutional investors in India, it has shown the incremental growth year by year after 2000, the FII investment in this group of shares was maximum in year 2004 in the same years the total FII was maxim in last decade.
Table 4:
A GROUP TURNOVER 908946.85 281968.9 266650.7 437851 398860.9 482429.3 552460.2 859285.6 897682.1 963736.3

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

FII TURNOVER 59941 35185.04 30982.04 57078 107534.31 221440 264481 411436 220568 171935

FII and A Gro up Shares

Turnover (FII & A Group Shares)
1 4000 00 1 2000 00 1 0000 00 8000 00 6000 00 4000 00 2000 00 0 1 2 3 4 5 6 7 8 9 10

Yea r A GROUP TURNOVER FII TURN OVER

FII & Group-B1 & B2 B1, B2 Group is a subset of the other listed shares that enjoy higher market Capitalization and liquidity than the rest. It is another group of shares which hold high market capital. As per the study it has been observed that this group of shares attract the attention of investors quiet well till 2007-08 (Table 05 and Table -06), but after the global crisis this group of shares unable to attract the attention of foreign institutional investors.

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Table 5:

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Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

B1 GROUP TURNOVER 70951.62 22233.14 43340.67 58641.2 97269.7 237055.4 312603.5 551612.5

FII TURNOVER 59941 35185.04 30982.04 57078 107534.31 221440 264481 411436 220568 171935

FII a nd B 1 G r o u p S h a re s 6000 00 Turnover (FII & B1 Group Sha res) 5000 00 4000 00 3000 00 2000 00 1000 00 0 1 2 3 4 5 Y e ar B 1 G R O U P TU R NO V ER FII TU RN O V ER 6 7 8 9 10

Table 6:
B2 GROUP TURNOVER 7323.26 2111.74 3962.93 4568.6 9272.13 35541.04 33601.51 96614.14 158250.1

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

FII TURNOVER 59941 35185.04 30982.04 57078 107534.31 221440 264481 411436 220568 171935

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FII a n d B 2 G ro u p S h a r e s 6000 00 5000 00 4000 00 3000 00 2000 00 1000 00 0 1 2 3 4 5 Y e ar B 2 G R O U P TU R N O V E R F I I TU R N O V ER 6 7 8 9 10

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FII & Group-S S Group represents scrips forming part of the BSE-Indonext segment. The Exchange has introduced a new segment named BSE Indonext w.e.f. January 7, 2005. The S Group represents scripts forming part of the BSE-Indonext segment. S group consists of scripts from B1 & B2 group on BSE and companies exclusively listed on regional stock exchanges having capital of 3 crores to 30 crores. All trades in this segment are done through BOLT system under S group. As per the study it has been found that (Table - 07) this group of shares attract the highest attention of investors in 2007 after that it has been decreased substantially, as far as the correlation of total FII and S Group share is concern it has shown substantially correlated.
Table 7:
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 S Group FII Turnover 59941 35185.04 30982.04 57078 107534.31 221440 264481 411436 220568 171935

Turnover(FII & B2 Sha res)

5597.87 46697.48 48662.72 53904.08 20276.97 37821.28

F II a n d S G rou p S h are s 5000 00 4500 00 Turnover(FII & S Sha res) 4000 00 3500 00 3000 00 2500 00 2000 00 1500 00 1000 00 500 00 0 1 2 3 4 5 Ye ar S G ro u p FII Tu rn o ve r 6 7 8 9 10

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FII & T Group Shares T Also termed as the trade to trade group this category comprises of shares which have to be settled in delivery for all buys and sells and square off of bought and sold positions during the day is not permitted. This is a part of the surveillance from the BSE to counter any backward unwarranted movements in such scrip. In 2007 there is maximum FII in T Group shares (Table - 08) and lowest in 2008, year 2008 was the year when Indian economy faced impact of global crises and FII was directly by correlated, but one interesting fact has been found that, in 2008 the total FII in India Rs 220568 crore and Rs 1773.1 crore that is minimum after 2005.
Table 8:
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 T Group NA NA NA 418.65 6335.89 12146.37 7895.96 15723.35 1773.1 6138.06 FII Turnover 59941 35185.04 30982.04 57078 107534.31 221440 264481 411436 220568 171935

FII an d T Gro u p S h ar e s 4500 00 4000 00 Turnover(FII & T Shares) 3500 00 3000 00 2500 00 2000 00 1500 00 1000 00 500 00 0 1 2 3 4 5 Ye ar T G ro u p FII Tu rn o ve r 6 7 8 9 10

GROUP-Z: Z Group category comprises of shares of the companies which does not comply with the rules and regulations of the Stock Exchange and are at times suspended from trading. As per the study (Table - 09), this group of shares does not shown any co relation with the total FII in India but it has attract the small attention of foreign portfolio invest.
Table 9:
Year 2000 2001 2002 2003 2004 Z Group 45.8 17.09 22.59 321.21 1158.92 FII Turnover 59941 35185.04 30982.04 57078 107534.31

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Table 9: - continued
2005 2006 2007 2008 2009 1934.71 791.23 1480.74 407.18 20.76 221440 264481 411436 220568 171935

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FII and Z G roup Share s 450000 400000 Turnover(FII & Z Shares) 350000 300000 250000 200000 150000 100000 50000 0 1 2 3 4 5 6 7 8 9 10

Year Z G ro up FII Turno ver

GROUP-F: F Group represents the debt market segment or represents the Fixed Income Securities. FII are always interested in high return that is the main reasons behind the slow attention of FII in this group of shares.
Table 10:
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 F Group 42.96 82.69 94.9 245.51 220.17 269.71 170.39 235.7 753.13 1588.16 FII Turnover 59941 35185.04 30982.04 57078 107534.31 221440 264481 411436 220568 171935

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F II an d F Gro u p S h ar e s 4500 00 4000 00 Turnover(FII & F Shares) 3500 00 3000 00 2500 00 2000 00 1500 00 1000 00 500 00 0 1 2 3 4 5 Ye ar F G ro u p FII Tu rn o ve r 6 7 8 9 10

Group-G" G" group consist Trading in Govt. Securities for retail investors. As per the study this group of shares unable to attract the attention of foreign institutional investors. Because the investment in government security is tighten by strong regulations in India.
Table 11:
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 G Group FII Turnover 59941 35185.04 30982.04 57078 107534.31 221440 264481 411436 220568 171935

1.45 1.39 0.05 0 0 0 0 0

FII a n d G G r o u p S h a re s 4500 00 4000 00 Turnover(FII & G Shares) 3500 00 3000 00 2500 00 2000 00 1500 00 1000 00 500 00 0 1 2 3 4 5 Ye ar G G r ou p F II Tu rn o v e r 6 7 8 9 10

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GROUP-B: B Group is a subset of the other listed shares that enjoy higher market capitalization and liquidity than the rest. In this study one interesting fact has been found that this group of shares was unable to find the attention of foreign investors till 2007. In 2008 this group of shares has attract the attention of FII in India.
Table 12:
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 B Group FII Turnover 59941 35185.04 30982.04 57078 107534.31 221440 264481 411436 220568 171935

20931.12 368498.4

FII and B Group Share s 600000 500000 Turnover(FII & B Shares) 400000 300000 200000 100000 0 1 2 3 4 5 6 7 8 9 10

Year B Group FII Turnover

Findings
This study found that the behavior of FIII in last decade was opportunistic; profit accumulation was prime objective behind the portfolio investments in India. Year 2007 08 is the witness the world global crises and its impact in India, inflow of foreign capital (FDI/FIII) decreased/ stopped in this year. A good co relation was found in the total FII turnovers and A group shares turnover, as ell as this has been attracted the highest attention of portfolio investors in India. There were certain groups of shares like G-group, B-group, ST-group, which do not find the substantial place in the investment basket of portfolio investors in India.

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International Research Journal of Finance and Economics - Issue 68 (2011) The lack of proper regulation has been found in the stock market for guiding the movement of foreign portfolio investors in India

Conclusion
The result shown a positive correlation between stock market and investment of FIIs in a relation that sensex follows the investment behavior of FIIs, but there are some exception seen in year 2005 and 2008.The net foreign institutional investment, thus implying that the market informational efficiency hypothesis can be rejected for BSE Sensitive Index with respect to the FII. It also shows that positive or negative movement of FIIs leads to a major change/shift in the sentiments of domestic or related investors in market. It suggests the policy implication that the authorities can focus on domestic economic policies to stabilize the stock market. Where as in the case of individual group securities FIIs had shown a positive correlation in less regulated and high capitalized securities in the market to earn high equity yield. Investors can therefore apply profitable trading rules to earn supernormal profits. Under the circumstances, the Indian stock market seems to be bearing the underlying strain not currently visible at the surface. The implementation of profitable trading strategy may at any point of time generate over-enthused investment and this, if coupled with market overreaction, may result in a destabilized system. A point also to be noted here is the heavy investment and selling attitude of FIIs causing a major hurdle in stabilization of market sentiments.

Reference
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International Research Journal of Finance and Economics - Issue 68 (2011) Websites http://dipp.nic.in/implrepo/implrepo1.pdf http://dipp.nic.in/dipp_manuals/CabinetDecisionsImplementation_Status.pdf http://www.cci.in/upload%5CArticle%5Cfile%5CFileLXTIVVICross-Boder-MergerAcquisition.pdf. http://www.bseindia.com/mktlive/circuit_filter/upper_cf/groupwise.asp http://www.sebi.gov.in/Index.jsp?contentDisp=Database http://www.rbi.org.in/scripts/PublicationsView.aspx?id=12882 http://www.rbi.org.in/scripts/PublicationsView.aspx?id=12883 http://www.oppapers.com/essays/Impact-Of-Fii-On-Indian-Economy/623367.

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