Вы находитесь на странице: 1из 80

IMPACT OF FII ON NIFTY

The Effect Of Foreign Institutional Investment On Indian Stock Market (NIFTY)


A DESSERATION SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF MBA DEGREE OF BANGALORE UNIVERSITY

SUBMITTED BY

MAMTA MALIK
(Reg No.07XQCM6041)

UNDER THE GUIDANCE OF

Prof. S. SANTHANAM
PROFESSOR MPBIM, BANGALORE

M. P. BIRLA INSTITUTE OF MANAGEMENT (ASSOCIATE BHARATIYA VIDYA BHAVAN) #43, Race Course Road, BANGALORE 560001

M.P. BIRLA INSTITUTE OF MANAGEMENT

IMPACT OF FII ON NIFTY

DECLARATION

I hereby declare that, this Dissertation entitled The Effect Of Foreign Institutional Investment On the Indian Stock Market (NIFTY) of project work undertaken by me under the guidance and supervision of Prof. Santhanam, Professor, MPBIM, Bangalore, in partial fulfillment of the requirements for the award of Degree of Master of Business Administration. I further declare that this dissertation has not been submitted to any University/Institute for the award of any degree/diploma or any other similar title.

Place: Bangalore Date:

Mamta Malik

M.P. BIRLA INSTITUTE OF MANAGEMENT

IMPACT OF FII ON NIFTY

GUIDES CERTIFICATE

I hereby certify that the research work embodied in the dissertation entitled The Effect Of Foreign Institutional Investment On the Indian Stock Market (NIFTY) has been undertaken and completed by Mamta Malik. under my guidance and supervision. I also certify that he has fulfilled all the requirements under the covenant governing the submission of dissertation to the Bangalore University for the award of MBA degree.

Place: Bangalore

Prof. S. Santhanam

M.P. BIRLA INSTITUTE OF MANAGEMENT

IMPACT OF FII ON NIFTY

PRINCIPALS CERTIFICATE
This is to certify that Miss Mamta Malik, bearing Registration No. 07XQCM6041 has done a project and has prepared a report on The effect of Foreign Institutional Investment on the Indian Stock Market (NIFTY) under the guidance of Prof. Dr. Nagesh. S. Malavalli, M.P. Birla Institute Of Management, Bangalore. This has not formed a basis for the award of any degree/diploma for any other university.

Place: Bangalore Date:

Prof. Dr. Nagesh S. Malavalli MPBIM Bangalore

M.P. BIRLA INSTITUTE OF MANAGEMENT

IMPACT OF FII ON NIFTY

Acknowledgement

The successful accomplishment of any task is incomplete without acknowledging the contributing personalities who assisted, inspired and lead us to visualize the things that turn them into successful stories for our successors. First, I thank the Almighty God for his grace bestowed on me throughout this project. I would like to express my immense gratitude to Prof. S. Santhanam my project guide, who guided me with the timely advice and expertise and helped me to complete the project. Last, but not the least, I would like to thank my teachers, my parents and all my friends for their wholehearted support and encouragement.

MAMTA MALIK

M.P. BIRLA INSTITUTE OF MANAGEMENT

IMPACT OF FII ON NIFTY

CONTENT

Chapter No. 1

Title
Executive Summary Introduction Indian Stock Market National Stock Exchange Foreign Institutional Investor(FII)

Page No. 1 3

2 3

Literature Survey Research Methodology Problem Statement Objectives of the Study Hypothesis Type Of Research Data Collection Sample Size Method Of Analysis Research Limitation Tools used in testing of Hypothesis

37 46

4 5 6

Data Analysis and Interpretation Major Findings On Research Conclusion Annexure Bibliography

55 63 65 67

M.P. BIRLA INSTITUTE OF MANAGEMENT

IMPACT OF FII ON NIFTY

LIST OF TABLES

Table No. 1 2

Topic Number of Foreign Institutional Investors FII Share in different sectors of companies listed

Page No.
25 27

3 4

Regression Analysis t-Test

60 62

M.P. BIRLA INSTITUTE OF MANAGEMENT

IMPACT OF FII ON NIFTY

List Of Charts
Chart No. 1 2 3 4 5 6 7 8 9 Topic Country wise break up of FII in India Quarterly movement in Net FII investment & closing Price of NSE Companies that saw a drop in FII stakes BSE Sensex & FII Flows S&P CNX Nifty & FII flows Quarterly Movement of closing price of NIFTY Quarterly Movement of FII in India Quarterly Movement of NIFTY & net investment made by FII FIIs Gross Purchase & Gross Sales From 2004-2009 59 57 58 36 42 43 56 Page No. 26 29

Executive Summary

M.P. BIRLA INSTITUTE OF MANAGEMENT

IMPACT OF FII ON NIFTY Finance is the life blood of business. It flows in mostly from scale of goods and services. It flows out for meeting various types of expenditure. The activating element in any business which may be on industrial or commercial undertaking is the finance. Business finance has been defined as those activities which have to do with the provision and management of funds for the satisfactory conduct of a business. Business finance is defined as that business activity which is concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of business enterprise. So we can say business finance is mainly developed around three major objectives. Firstly, to obtain an adequate supply of capital for the needs of the business, Secondly, to conserve and increase the capital through better management, Thirdly, to make profit from the use of funds which is an overall objectives of a business enterprise. In this age of transnational capitalism, significant amounts of capital are flowing from developed world to emerging economies. Positive fundamentals combined with fast growing markets have made India an attractive destination for foreign institutional investors (FIIs).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 study I have tried to investigate the relationship between the net foreign institutional investment (FII) flows in India and NIFTY. To study the relationship the monthly data from April 2004 to March 2009 has been M.P. BIRLA INSTITUTE OF MANAGEMENT
9

IMPACT OF FII ON NIFTY taken and analyzed. The data has been collected from various sites like www.sebi.gov.in, www.nse-india.com, etc. The analysis of data has been done by using Regression & t-test. Regression is used to find the extent of impact of FII on NIFTY and t-test is used to test the hypothesis. Null Hypothesis is the investment made by foreign institutional investors does not affect the closing price of NIFTY. And Alternate Hypothesis is the investment made by foreign institutional investors does affect the closing price of NIFTY.

M.P. BIRLA INSTITUTE OF MANAGEMENT

10

IMPACT OF FII ON NIFTY

CHAPTER 1 INTRODUCTION

M.P. BIRLA INSTITUTE OF MANAGEMENT

11

IMPACT OF FII ON NIFTY

Investment From Abroad is Right or Wrong?

One of the outstanding features of globalization in the financial services industry is the increased access provided to non-local investors in several major stock markets of the world. Increasingly, stock markets from emerging markets permit institutional investors to trade in their domestic markets. Indian stock market opened to Foreign Institutional Investors in 14th September 1992, initially with lot of restrictions. The regulation on them are liberalized and minimized now, since 1993 has received a considerable amount of portfolio investment from foreigners in the form if FIIs investment in equities. This has become a turning point of India stock market. The government of India announced the policy of the government to permit the FII investment in India capital market. According to the SEBI modified the regulation on 14-11-1995. In order to make investment in India equity market they wanted to register with Security Exchange Board of India as foreign institutional investors. It is possible for foreigners to trade in India securities without registering as Foreign Institutional investors, but such cases require approval from Reserve Bank of India or the Foreign Institutional Promotion Board. They are generally concentrated in secondary market. Domestic market alone not able to meet the growing capital requirement of the country and financing from mutilated institution has lost primary in the emerging in the global order .Besides aimed primarily at ensuring non-debt creating capital inflows at a time of extreme balance of payment crisis. It was to tie over the balance of payment crisis in the early 1990s

M.P. BIRLA INSTITUTE OF MANAGEMENT

12

IMPACT OF FII ON NIFTY Portfolio flows often referred to as hot- money are notoriously volatile capital flows. They have also responsible for spreading financial crisis causing contagion in international market. Evan though, the FIIs have been plying a key role in the financial markets since their entry into this country. The explosive portfolio flow by FII brings with them great advantages as they are engine of growth, lowering cost of capital in many emerging market. This opening up of capital markets in emerging market countries has been perceived as beneficial by some researchers while others are concerned about possible adverse consequences. India liberalized its financial markets and allowed FIIs to participate in their domestic markets in 1992. Ostensibly, this opening up resulted in a number of positive effects. First, the stock exchanges were forced to improve the quality of their trading and settlement procedures in accordance with the best practices of the world. Second, the information environment in India improved with the advent of major international financial institutional investors in India. On the negative side we need to consider potential destabilization as a result of the trading activity of foreign institutional investors. This is especially important in an emerging country that has embarked upon reforms to open up its market.

M.P. BIRLA INSTITUTE OF MANAGEMENT

13

IMPACT OF FII ON NIFTY

INDIAN STOCK MARKET


A stock market typically refers to a financial market that handles the buying and selling of company stocks, derivatives and other securities. Stock markets trade company securities that are listed in the stock exchange Investors and security issuers both participate in stock markets. Different sized entities participate in stock market activities, ranging from small investors to the governments, corporations, large hedge fund traders, and banks. Corporations, governments, and companies issue securities on the stock market to collect funds. The stock market acts as a platform for companies to raise money for their business and investors to invest in securities.

Evolution Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meagre and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850.

M.P. BIRLA INSTITUTE OF MANAGEMENT

14

IMPACT OF FII ON NIFTY The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60. In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87). At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as " The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.

Function and purpose The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.

M.P. BIRLA INSTITUTE OF MANAGEMENT

15

IMPACT OF FII ON NIFTY

History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. An economy where the stock market is on the rise is considered to be an up coming economy. In fact, the stock market is often considered the primary indicator of a country's economic strength and development. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction.

The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity.

Functions of stock exchanges: Most important source for companies to raise money Provides liquidity to the investors Acts as clearing house for transactions Provides realistic value of companies M.P. BIRLA INSTITUTE OF MANAGEMENT
16

IMPACT OF FII ON NIFTY

Bombay Stock Exchange (BSE) and National Stock Exchange of India Ltd. (NSE) are the two primary exchanges in India. In addition there are 22 Regional Stock Exchanges. However BSE and NSE have established themselves as the two main exchanges and account for about 80% of the volume traded in Indian equity markets. Approximately NSE and BSE are equal in size in terms of daily volume traded. NSE has about 1500 shares which are traded and has a total market capitalisation of around Rs. 9,21,500 Crores (Rs. 9215-bln). BSE has over 6000 stocks traded and has a total market capitalisation of around Rs. 9,68,000 Crores (Rs.9680-bln). Most key stocks are available on both exchanges and hence the investor could buy them on either exchange. Both exchanges have a different settlement cycles. The primary index of BSE is BSE Sensex, which comprises of 30 Stocks. NSE has its own S& P NSE 50 Index (Nifty) which comprises of fifty stocks. Both these indexes are calculated on the basis of market capitalisation and contain the most highly traded shares from the key sectors. Daily volume on both exchanges is approximately Rs. 4500 Crores each. (Rs. 45-bln.) The key regulator governing Stock Exchanges, Brokers, Depositories, Depository participants, Mutual Funds, FIIs and other participants in Indian secondary and primary market is Securities and Exchange Board of India (SEBI) Ltd.

M.P. BIRLA INSTITUTE OF MANAGEMENT

17

IMPACT OF FII ON NIFTY Classification of financial markets

i) Unorganized Markets In these markets there a number of money lenders, indigenous bankers, traders etc. who lend money to the public.

ii) Organized Market In organized markets, there are standardized rules and regulations governing their financial dealings. There is also a high degree of institutionalization and instrumentalization. These markets are subject to strict supervision and control by the RBI or other regulatory bodies. It can be further divided into capital market and Money market.

Capital market Capital market is a market for financial assets which have a long or definite maturity. Which can be further divided into Industrial Securities Market Government Securities Market Long Term Loans Market

Industrial Securities Market It is a market where industrial concerns raise their capital or debt by issuing appropriate Instruments. It can be subdivided into two. They are:

Primary Market or New Issues Market M.P. BIRLA INSTITUTE OF MANAGEMENT


18

IMPACT OF FII ON NIFTY Primary market is a market for new issues or new financial claims. Hence, it is also called as New Issues Market. The primary market deals with those securities which are issued to the public for the first time. Secondary Market or Stock Exchange Secondary market is a market for secondary sale of securities. In other words, securities which have already passed through the new issues market are traded in this market. Such securities are listed in stock exchange and it provides a continuous and regular market for buying and selling of securities. This market consists of all stock exchanges recognized by the government of India.

M.P. BIRLA INSTITUTE OF MANAGEMENT

19

IMPACT OF FII ON NIFTY

National Stock Exchange of India


The National Stock Exchange of India Limited (NSE) is a Mumbaibased stock exchange. It is the largest stock exchange in India in terms of daily turnover and number of trades, for both equities and derivative trading. Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India and between them are responsible for the vast majority of share transactions. The NSE's key index is the S&P CNX Nifty, known as the Nifty, an index of fifty major stocks weighted by market capitalization. The National Stock Exchange of India was promoted by leading financial institutions at the behest of the Government of India, and was incorporated in November 1992 as a tax-paying company. In April 1993, it was recognized as a stock exchange under the Securities Contracts (Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment of the NSE commenced operations in November 1994, while operations in the Derivatives segment commenced in June 2000. As of July 2007, the total market capitalization of NSE is 42,74,509 Crore INR that makes it the second largest stock market in South Asia in terms of the market capitalization. Trading at NSE can be classified under two broad categories: (a) Wholesale debt market and (b) Capital market.

M.P. BIRLA INSTITUTE OF MANAGEMENT

20

IMPACT OF FII ON NIFTY Wholesale debt market operations are similar to money market operations institutions and corporate bodies enter into high value transactions in financial instruments such as government securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc. There are two kinds of players in NSE: (a) trading members and (b) participants. Recognized members of NSE are called trading members who trade on behalf of themselves and their clients. Participants include trading members and large players like banks who take direct settlement responsibility. Trading at NSE takes place through a fully automated screen-based trading mechanism which adopts the principle of an order-driven market. Trading members can stay at their offices and execute the trading, since they are linked through a communication network. The prices at which the buyer and seller are willing to transact will appear on the screen. When the prices match the transaction will be completed and a confirmation slip will be printed at the office of the trading member. Innovations NSE has remained in the forefront of modernization of India's capital and financial markets, and its pioneering efforts include:

Being the first national, anonymous, electronic limit order book (LOB) exchange to trade securities in India. Since the success of the NSE,

M.P. BIRLA INSTITUTE OF MANAGEMENT

21

IMPACT OF FII ON NIFTY existent market and new market structures have followed the "NSE" model.

Setting up the first clearing corporation "National Securities Clearing Corporation Ltd." in India. NSCCL was a landmark in providing innovation on all spot equity market (and later, derivatives) trades in India. Co-promoting and setting up of National Securities Depository Limited, first depository in India. Setting up of S&P CNX Nifty. NSE pioneered commencement of Internet Trading in February 2000, which led to the wide popularization of the NSE in the broker community. Being the first exchange that, in 1996, proposed exchange traded derivatives, particularly on an equity index, in India. After four years of policy and regulatory debate and formulation, the NSE was permitted to start trading equity derivatives Being the first and the only exchange to trade GOLD ETFs (exchange traded funds) in India. NSE has also launched the NSE-CNBC-TV18 media centre in association with CNBC-TV18,

It is the one of the most important stock exchange in the world.There are a total of 1319 companies listed in NSE index. There are some financial and management requirements that the companies must satisfy in order get enlisted in the NSE index. The industry classification of the companies may be diverse and may include - heavy industry, hi-tech industry, refinery, software industry, public sector units, financial services and infrastructure industry. The NSE lists the company securities in its wholesale debt market segment or in the capital market (equities) segment.

M.P. BIRLA INSTITUTE OF MANAGEMENT

22

IMPACT OF FII ON NIFTY Constituents of nifty1 Reliance Industries 2 ONGC 3 Bharti Airtel 4 Tata Consultancy 5 Infosys tech 6 Reliance Communication 7 Wipro 8 ICICI Bank 9 ACC 10 BHEL 11 SBI 12 Hindalco 13 HLL 14 L&T 15 HDFC 16 Satyam computers 17 Hero Honda 18 Dr Reddys 19 Tata motors 20 Tata steel 21 Bajaj auto 22 GAIL 23 Maruti udyog 24 Sun pharma 25 Grasim industries 26 Gujarat ambuja 27 Cipla 28 Siemens 29 Ranbaxy 30 NTPC 31 ITC 32 VSNL 33 Zee Entertainment 34 MTNL 35 HPCL 36 Dabur 37 IPCL 38 Jet Airways 39 Oriental Bank 40 Glaxo Smith 41 Tata power 42 BPCL 43 Reliance energy 44 Punjab National Bank 45 ABB 46 Hindalco 47 National Alu 48 M&M 49 Seagrams 50 HCL tech

M.P. BIRLA INSTITUTE OF MANAGEMENT

23

IMPACT OF FII ON NIFTY

Foreign Institutional Investor FII

An 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 term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies. India opened its stock market to foreign investors in September 1992, and in 1993, received portfolio investment from foreigners in the form of foreign institutional investment in equities. This has become one of the main channels of FII in India for foreigners. Initially, there were many terms and conditions which restricted many FIIs to invest in India. One who propse to invest their proprietary funds or on behalf of "broad based" funds or of foreign corporates and individuals and belong to any of the undergiven categories can be registered for FII.

Pension Funds Mutual Funds Investment Trust Insurance or reinsurance companies Endowment Funds University Funds
24

M.P. BIRLA INSTITUTE OF MANAGEMENT

IMPACT OF FII ON NIFTY

Foundations or Charitable Trusts or Charitable Societies who propose to invest on their own behalf, and Asset Management Companies Nominee Companies Institutional Portfolio Managers Trustees Power of Attorney Holders Bank

FIIs showed huge interest in 2007, pumping in the highest ever net investment of US$ 17.2 billion in the equity markets and were instrumental in the BSE and NSE clocking record index levels of over 20,000 and 6,000 respectively. In fact, during the year, FIIs were net buyers in 10 out of 12 months, turning net sellers in the rest primarily to make up the losses on account of the subprime crisis in the US. Out of the total net inflows, a whopping 70 per cent was invested through the instruments of FCCBs, QIPs and IPOs. The remaining 30 per cent was invested through overseas offers, preferential offers and conversion of warrants. Registration requirement FIIs are required to register themselves with Securities and Exchange Board of India (SEBI) before they invest in the Indian capital. Application for registration should be made by FIIs to SEBI in the prescribed form in duplicate. One copy of the application will be forwarded by SEBI to Reserve Bank. Reserve Bank will grant permission under FERA 1973 to the bank branch designated by the applicant FII to buy/sell equity
25

M.P. BIRLA INSTITUTE OF MANAGEMENT

IMPACT OF FII ON NIFTY shares/debentures/warrants dated Government Securities/Treasury Bills/ units of domestic mutual funds. Reserve Banks permission will be initially valid for five years and will be operative only after obtaining registration form SEBI. This permission can be renewed for a further period of five years on request. Reserve Banks permission would enable the FIIs to buy/sell the securities and remit the income/dividend/sale proceeds after payment of applicable taxes through the designated bank branch. Reserve Banks permission will also cover investment in shares/debentures of Indian companies in primary market i.e. new issues provided the company has reserved certain quota out of its public issue in favour of FIIs. The designated bank branch is required to submit to Reserve Bank a statement in Form LEC on daily basis in respect of purchase/sales or shares/ debentures made for the purpose of monitoring by Reserve Bank the overall ceiling of 24% or 30%, as the case may be. In order to facilitate making of investments in India and repatriation on income/sale proceeds of such investments, Reserve Bank will permit the designated Bank to open a foreign currency denominated account and a special Non-resident rupee account in the name of FII. The designated bank branch will also be permitted (a) to transfer funds from foreign currency account to rupee account and vice versa (b) to make it investments out of the balance in the rupee account, (c) to credit sale proceeds of shares and other investments as also dividend/interest earned on the investments to the rupee account and (d) to transfer the repatriable proceeds (net of taxes) from the rupee account to the foreign currency account. Participatory notes (PNs / P-Notes) are instruments used by investors or hedge funds that are not registered with the SEBI (Securities & Exchange M.P. BIRLA INSTITUTE OF MANAGEMENT
26

IMPACT OF FII ON NIFTY Board of India) to invest in Indian securities. Participatory notes are instruments that derive their value from an underlying financial instrument such as an equity share and, hence, the word, 'derivative instruments'. SEBI permitted FIIs to register and participate in the indian stock market in 1992. Indian based brokerages buy Indian-based securities and then issue PNs to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. Participatory notes are instruments used for making investments in the stock markets. However, they are not used within the country. They are used outside India for making investments in shares listed in that country. That is why they are also called offshore derivative instruments. In the Indian context, foreign institutional investors (FIIs) and their subaccounts mostly use these instruments for facilitating the participation of their overseas clients, who are not interested in participating directly in the Indian stock market. For example, Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. According to an expert group constituted by the finance ministry in India, in August 2004, participatory notes constituted about 46 per cent of the cumulative net investments in equities by FIIs. Any entity investing in participatory notes is not required to register with SEBI (Securities and Exchange Board of India), whereas all FIIs have to compulsorily get registered. Trading through participatory notes is easy because participatory notes are like contract notes transferable by endorsement and delivery. Secondly, some of the entities route their investment through participatory notes to take advantage of the tax laws of M.P. BIRLA INSTITUTE OF MANAGEMENT
27

IMPACT OF FII ON NIFTY certain preferred countries. Thirdly, participatory notes are popular because they provide a high degree of anonymity, which enables large hedge funds to carry out their operations without disclosing their identity. Participatory notes are instruments used by foreign funds which are not registered to trade in domestic Indian Capital Markets. PNs are derivative instruments issued against an underlying security permitting holders to get a share in the income from the security. How does it work? Investors who buy PNs deposit their funds in US or European operations of Foreign Institutional Investors (FII) operating in India. The FII uses its proprietary account to buy stocks. Reason for using PNs is to keep investor name anonymous, some investors have used them to save transaction and overhead costs. Government Initiatives FIIs are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The ceiling for overall investment for FIIs is 24 per cent of the paid-up capital of the Indian company, and limit is 20 per cent of the paid-up capital in the case of public sector banks. The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. To further increase FII participation in the Indian market, the government and SEBI have taken several measures:

M.P. BIRLA INSTITUTE OF MANAGEMENT

28

IMPACT OF FII ON NIFTY

The Government of India has reviewed the External Commercial Borrowing (ECB) policy and has increased the cumulative debt investment limit from US$ 3 billion to US$ 6 billion for FII investments in Corporate Debt. Allowed foreign individuals, corporates and other investors such as hedge funds to register directly as foreign institutional investors. SEBI has FII investment limit in government securities being increased to US$ 5 billion from US$ 3.2 billion. Institutional investorsincluding FIIs and their sub-accountshave been allowed to undertake short-selling, lending and borrowing of Indian securities from February 1, 2008. SEBI has simplified the registration norms for FIIs and sub-accounts. Significantly, it has allowed investment managers, advisors or institutional portfolio managers in the NRI category to be registered as FIIs. In October 2008, SEBI did away with the 70:30 ratio of FII investment in equity and debt, respectively. FIIs can now invest in equity and debt in any ration they seem fit.

Some investment highlights: The Indian growth story has attracted global majors like CLSA, HSBC, Citigroup, Merrill Lynch, Crown Capital, Fidelity, Goldman Sachs, Morgan Stanley, UBS, T Rowe Price International, Capital International and ABN Amro among others to enter the Indian financial market.

M.P. BIRLA INSTITUTE OF MANAGEMENT

29

IMPACT OF FII ON NIFTY Goldman Sachs and Macquarie have acquired a 20 per cent stake each in PTC India Financial services Ltd. Temasek Holdings, Investment Corporation of Dubai, Goldman Sachs, Macquarie, AIF Capital, Citigroup and India Equity Partners (IEP) have picked a combined stake of 10 percent in Bharti Infratel. An entity of Merrill Lynch has picked up 49 per cent stake in seven residential projects of real estate major, DLF. Blackstone has taken up a 26 per cent stake in MTAR Technologies. Citigroup, Morgan Stanley, Goldman Sachs and BSMA have picked up a combined stake of over seven per cent in Gitanjali Gems. Fidelity Investments International has picked up close to seven percent equity in Transport Corporation of India (TCI). FIIs are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company. The limit is 20 per cent of the paid up capital in the case of public sector banks, including the State Bank of India. The ceiling of 24 per cent for FII investment can be raised up to sectorial cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. To further increase FII participation in the Indian market, the Government and Sebi have agreed to allow foreign individuals, corporate and other investors to register directly as foreign institutional investors - a move designed to increase transparency and M.P. BIRLA INSTITUTE OF MANAGEMENT
30

IMPACT OF FII ON NIFTY reduce transaction costs for these investors. Sebi has also hiked the total permissible investment limit in government and corporate debt to US$ 4.1 billion from US$ 3.5 billion. While the limit in corporate debt remains unchanged, FII investment limit in government securities has been increased to US$ 2.6 billion from US$ 2 billion. Also, institutional investors including FIIs and their sub-accounts have been allowed to undertake short selling, lending and borrowing of Indian securities from February 1, 2008.

Foreign Institutional Investments- Equity and Debt FIIs were allowed to invest in the Indian Capital Market securities from September 1992, however investment by them were first made in January 1993. Till December 1998, investments were related to equity only as the Indian gilts market was opened up for FII investment in April 1998. Investments in debt were made from January 1999. Foreign Institutional Investors (FIIs) continued to invest large funds in the Indian securities market. For two consecutive years in 2004-05 and 2005-06, net investment in equity showed year-on-year increase of 10%. Highest net investment in equity by FIIs was seen in 2007-08 of Rs. 534,038 million (US $ 13,361 million) an increase of 112% over the 2006-07 net investment figure of Rs 252,370 million (US $ 5,790 million) During the first quarter of the fiscal 2008-09, FIIs have been net sellers in the equity market. They have sold equity worth Rs. 140,325 million (US $ 3,267 million). According to the data given by the Securities and Exchange Board of India (SEBI), the FII investments in equities as on March 17, 2009 stood at US$ 50950.20 million and in debts, equalled US$ 6541.50 million at exchange rate of 1 USD = 40.34 INR. As per SEBI, number of registered FIIs stood at 1626 M.P. BIRLA INSTITUTE OF MANAGEMENT
31

IMPACT OF FII ON NIFTY and number of registered sub-accounts stood at 4972 as on March 17, 2009. As many as 330 FIIs have registered with SEBI since January 31, 2008, taking the total number of FIIs in India to 1,609 as on January 31 this year. Even the FII sub-accounts have gone up over 30 per cent to 4,938 compared with 3,795 in January last year. In fact, this year, 45 new FIIs have registered with SEBI, according to data given by the regulator

M.P. BIRLA INSTITUTE OF MANAGEMENT

32

IMPACT OF FII ON NIFTY

Number of Foreign Institutional Investors (FIIs) As of March 2008, there were 1,319 FIIs registered with SEBI, as against 997 in March 2007.

SEBI Registered FIIs in India Years 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Till March 2009 End of March 0 3 156 353 439 496 450 506 527 490 502 540 685 882 997 1319 1618

M.P. BIRLA INSTITUTE OF MANAGEMENT

33

IMPACT OF FII ON NIFTY

COUNTRY-WISE BREAKUP OF FII IN INDIA

No. Of FIIs Registered in 2008

US 3% 3% 4% 16% 33% UK Mauritius Hong Kong Singapore Australia 4% 5% 5% 5% 15% Luxemburg Ireland Cayman Islands Canada Others 7%

Source- Securities and Exchange Board Of India

M.P. BIRLA INSTITUTE OF MANAGEMENT

34

IMPACT OF FII ON NIFTY Share of FIIs in NSE Listed Companies The FII ownership of shares in various sectors of NSE listed companies is presented below. At the end of March 2008 FIIs held the highest stake of 19.15 % in the Banking sector followed by Finance and Information Technology of 17.44 % and 16.00 % respectively. The total percentage of shares held by FIIs across different sectors was 10.62 % of the total shares of the companies listed on NSE as at end March 2008 and 9.94 % at the end of June 2008. FII Share in different sectors of companies listed on NSE Percentage Share of Foreign Institutional Investors Sectors Banks Engineering Finance FMCG Infrastructure Manufacturing Petrochemicals Pharmaceuticals Services Telecommunication Miscellaneous Total Stake Of FIIs End of March 2007 18.41 11.45 18.18 11.91 7.15 9.57 5.83 11.17 13.09 11.17 8.19 10.78 End of March 2008 19.15 10.63 17.44 14.07 16.00 8.86 9.46 11.71 4.73 10.69 10.70 9.12 9.30 10.62 End of June 2008 17.10 9.24 15.83 13.46 16.30 8.16 8.51 11.08 5.38 10.30 10.89 9.18 9.94 9.94
35

InformationTechnology 14.53

Media & Entertainment 15.20

M.P. BIRLA INSTITUTE OF MANAGEMENT

IMPACT OF FII ON NIFTY

The FII ownership of shares in various sectors of NSE listed companies is presented in. At the end of March 2008 FIIs held the highest stake of 19.15 % in the Banking sector followed by Finance and Information Technology of 17.44 % and 16.00 % respectively. The total percentage of shares held by FIIs across different sectors was 10.62 % of the total shares of the companies listed on NSE as at end March 2008 and 9.94 % at the end of June 2008. The most commonly used indicator of stock market development is the size of the market, measured by Market Capitalisation ratio. Market Capitalisation ratio is the value of listed shares on the countrys exchanges divided by GDP of the country. In the year 2007-08, market capitalisation ratio of the FIIs (Market capitalisation of FII holdings / GDP) on NSE was 15.08 %. The share of FIIs market capitalisation to the total market capitalization of NSE at end March 2008 was 14.66 %.

2006-07 Market Capitalization Ratio 13.41%

2007-08 15.08% 7,121,181 14.66%

Market Capitalization of FII holdings (Rs. Million) 5,421,606 GDP (Rs. Million) Market Capitalization of FIIs holding to Total 16.10% Market Capitalization of NSE Market Capitalization- FII holding (Rs.Million) Million) 5,421,606

41,257,250 47,234,000

7,121,181

Market Capitalization- Total of NSE (in Rs. 33,673,500 48,581,217

M.P. BIRLA INSTITUTE OF MANAGEMENT

36

IMPACT OF FII ON NIFTY

Quarterly Movements in Net FII Investments and Closing Price Of NSE: 2004-2009

15000 10000 5000 0 -5000

-10000 -15000 Closing Price/y(dependent) FII/x(independent)

The above graph shows the quarterly movement of net investment made by FII and the closing price of NSE.

FII affecting Exchange Rates, Stock Markets, Inflation and Exports FIIs In Stock Markets: The FIIs profit from investing in emerging financial stock markets, say the Indian stock Exchange. If the cap on FII is high then they can bring in lot of funds in the countries stock markets and thus have great influence on the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their selling shows the stock market the downward path. So this

M.P. BIRLA INSTITUTE OF MANAGEMENT

20 04 s e ju pt ne em de be ce r m be m r ar ch s e ju pt ne em de be ce r m be m r ar ch s e ju pt ne e de mbe ce r m be m r ar ch se jun pt e em de be ce r m be m r ar ch se jun pt e e de mbe ce r m be m r ar ch

37

IMPACT OF FII ON NIFTY is how influencing FII can be, as is seen in the present downtrend of the stock markets in India courtesy heavy FII selling. FII affecting the Exchange Rates: As pointed out in the first paragraph, FII need to maintain an account with the RBI for all the transactions. To understand the implications of FII on the exchange rates we have to understand how the value of one currency goes up (appreciates) or goes down against the other currency. The simple way of understanding is through Demand and Supply. If say US imports from India it is creating a demand for Rupee thus the Indian rupee appreciates w.r.t the dollar. If India imports then the dollar appreciates w.r.t the Indian rupee. FII and Inflation: The huge amount of FII fund inflow into the country creates a lot of demand for rupee, and the RBI pumps the amount of Rupee in the market as a result of demand created by the FIIs. This situation could lead to excess liquidity (amount of excess cash floating in the market) thereby leading to Inflation, where too much money chases too few goods (perfect example of demandpull inflation). Thus there should be a limit to the FII inflow in the country. FII and Local companies: FII bring lot of funds to the country markets leading to free availability of funds for the local companies in need of funds to carry on expansion in their production capacities or starting new ventures. FII and Exports:

M.P. BIRLA INSTITUTE OF MANAGEMENT

38

IMPACT OF FII ON NIFTY However because the FII lead to appreciation of the currency, they lead to the exports industry becoming uncompetitive due to the appreciation of the rupee. For e.g. if 1 USD = Rs.40 and a soap costs 1 USD. Now when the rupee appreciates 1 USD = Rs. 20, I will have to sell the same soap to the US for 2 US Dollars in order to sustain the same income that I have been making i.e. Rs.40. Thus excess FII fund inflow in the country can also make a negative impact on the economy of the country. Thus the FII bring in a lot of funds to the country which could be used by the companies to achieve rapid growth but there should also be a mechanism to keep them in check so that they do not affect the economy of the country negatively. FII are always compared with FDI (Foreign Direct Investment). It is believed that large FII inflows reflect the openness and Reliability of country markets. Thus it has to be seen which model perfectly suits a country growth. On October 16, 2007, SEBI (Securities & Exchange Board of India) proposed curbs on participatory notes which accounted for roughly 50% of FII investment in 2007. SEBI was not happy with P-notes because it was not possible to know who owned the underlying securities, and hedge funds acting through P-notes might therefore cause volatility in the Indian markets. However the proposals of SEBI were not clear and this led to a knee-jerk crash when the markets opened on the following day (October 17, 2007). Within a minute of opening trade, the Sensex crashed by 1744 points or about 9% of its value - the biggest intra-day fall in Indian stock markets in absolute terms till then. This led to automatic suspension of trade for 1 hour.

M.P. BIRLA INSTITUTE OF MANAGEMENT

39

IMPACT OF FII ON NIFTY Finance Minister P. Chidambaram issued clarifications, in the meantime, that the government was not against FIIs and was not immediately banning P Notes. After the market opened at 10:55 AM, the index staged a comeback and ended the day at 18715.82, down 336.04 from the last day's close. This was, however not the end of the volatility. The next day (October 18, 2007), the Sensex tumbled by 717.43 points 3.83 per cent to 17998.39. The slide continued the next day when the Sensex fell 438.41 points to settle at 17559.98 at the end of the week, after touching the lowest level of that week at 17226.18 during the day. After detailed clarifications from the SEBI chief M. Damodaran regarding the new rules, the market made a 879-point gain on October 23, thus signaling the end of the PN crisis.

M.P. BIRLA INSTITUTE OF MANAGEMENT

40

IMPACT OF FII ON NIFTY

Present Condition Of FII in Indian Stock Market


The recent rally in the equity markets seems to have been fuelled more by local investors than foreign institutional investors (FIIs)the prime drivers of the Indian stock markets till early 2008. FIIs have in the three months from January 2009 to 31 March 2009 reduced their exposure to nearly seven of 10 Indian stocks among the top 500 companies by market capitalization on the Bombay Stock Exchange (BSE). The 30-stock Sensex, Indias most widely tracked index rose 0.63% in this period, after falling by 7.83% in the first two months of the year. Among the BSE-500 firms, which account for at least 93% of Indias market capitalization, 348 had announced their latest shareholding pattern. Among the BSE-500 firms, which account for at least 93% of Indias market capitalization, 348 had announced their latest shareholding pattern. Of this, 255, or around 68%, saw a sharp drop in FII holdings. All listed companies are required by law to furnish their shareholding pattern on a quarterly basis to the stock exchanges. The trend among the stocks that constitute the Sensex and the broad-based 50-stock Nifty index on the National Stock Exchange is no different. Forty-eight Nifty companies have so far disclosed their latest shareholding pattern; FII stakes have declined in at least 30. Similarly, 19 out of the 30 Sensex firms that have announced their shareholding pattern have seen a drop in FII holdings. Except for Jaiprakash Associates Ltd, all Sensex firms are part of the Nifty. M.P. BIRLA INSTITUTE OF MANAGEMENT
41

IMPACT OF FII ON NIFTY FIIs sold at least $13 billion (Rs65,260 crore today) worth of Indian stocks in 2008, after investing $17 billion in 2007. In 2009 so far, FIIs have sold another $849.2 million worth of Indian stocks. FII stakes have declined in at least 30 of the 48 declared Nifty stocks and 19 out of the 30 Sensex firms. However, some positive news such as improved auto sales and an upswing in equity markets across the world has seen the Sensex gain 15.42% in 2009. Given FII bashfulness, analysts credit the upswing to retail buyers. Institutions have bought more stock than over the past 12 months, wrote Ridham Desai and Sheela Rathi of Morgan Stanley India Services Pvt. Ltd in a 21 April 2009 report. However, retail speculators have remained the key drivers as evidenced by the high and rising share of intra-day trading in total volumes. Analysts and fund mangers also say that any fresh FII inflows will largely be restricted to large-cap stocks. They (FIIs) have realized that anything other than large-cap stocks is not going to be of much help to them, was said by Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership Llp, a global fund registered as an FII in India. Whatever new money is going to come will be concentrated in the top 50 stocks. Of the 48 Nifty firms that have declared their shareholding pattern so far, FIIs have in the past four quarters pared their holdings in at least 10, some of which are large-cap firms. These firms are Bharti Airtel Ltd, Mahindra and Mahindra Ltd, Oil and Natural Gas Corp. Ltd, Ranbaxy Laboratories Ltd, State Bank of India, Tata Motors Ltd, Punjab National Bank, Axis Bank Ltd, Cipla Ltd and Siemens Ltd. The first six are also Sensex constituents.

M.P. BIRLA INSTITUTE OF MANAGEMENT

42

IMPACT OF FII ON NIFTY The biggest drop in FII holding among large stocks was in Suzlon Energy Ltd, which saw foreign investment go from 13.07% in the quarter ended 31 December to 8.66% in the quarter ended 31 March. Next in line was Reliance Capital Ltd, from 24.06% to 20.43%, Punjab National Bank, from 18.3% to 14.86%, and State Bank of India, from 10.42% to 7.97%. Engineering firm Larsen and Toubro Ltd and auto maker Tata Motors Ltd also saw a drop of 1.79 percentage points each in FII holdings during the period. On the other hand, Maruti Suzuki India Ltd saw a rise of close to 5 percentage points in FII holding, while Grasim Industries Ltd, Hero Honda Motors Ltd and Unitech Ltd saw a rise of around 2 percentage points. In fact, foreign institutional investors (FIIs) have also started pumping money into the market. Interestingly, FIIs are more confident of equity than debt. Since the beginning of March 2009, these investors have invested Rs 7,038 crore till April 2009 in equities, though they sold assts worth Rs 3,930 crore in the debt segment. Equities may not be the only resort for investors, Real estate can also attract some amount ot this money.

M.P. BIRLA INSTITUTE OF MANAGEMENT

43

IMPACT OF FII ON NIFTY

M.P. BIRLA INSTITUTE OF MANAGEMENT

44

IMPACT OF FII ON NIFTY

CHAPTER 2 Literature Survey

M.P. BIRLA INSTITUTE OF MANAGEMENT

45

IMPACT OF FII ON NIFTY

Literature Survey

Purpose of Literature Review: The literature review section examines recent research studies, company data, or industry reports that act as a bass for the proposed study. Related literature and secondary data gives comprehensive perspective. Earlier references will be helpful if the problem has a historical background. Always the literature survey reference should be to the original source. The literature applies to the study you are proposing. The literature review may also explain the need for the proposed work to appraise the shortcomings and informational gaps in secondary data sources.

Reviews: Gayathri Devi .R in 2003, she conducted study on Causal Relationship between FIIs and Stock Market: A critical study. It revealed that there was long run relationship between net FII investment and sensex, FII investment did not respond the short-run changes or technical-position of the market and they were more driven by fundamentals, and FII investments did granger cause India stock market. Selen Serisoy Guerin in 2006, conducted study on The Role of Geography in Financial and Economic Integration: A comparative Analysis of foreign direct investment, Trade and Portfolio M.P. BIRLA INSTITUTE OF MANAGEMENT
46

IMPACT OF FII ON NIFTY Investment Flows. It found support for the argument that most FDI among Industrial countries were horizontal, whereas most FDI investment in developing countries was vertical and our results indicated that portfolio investment flows compared to FDI, were highly sensitive to change in GDP per capita, this implied that if there was a negative output stock, portfolio investment flows would be more volatile than FDI. A.Julia Priya, D. Lazar and Joseph Jeyapual in 2005, they conducted study on Role of Foreign Institutional Investors on stock market development in India, Results revealed that sensex, market capitalization of NSE, Turnover of BSE and NIFTY without market capitalizations were influenced by Foreign Institutional InvestorsSuchismita Bose and Dipankor coondoo in 2004, they conducted study on The Impact of FII Regulation in India,. These results strongly suggested The liberalization policies had the desired expansionary effect and had either increased the mean level of FII inflows and/or the sensitivity of these flows to a change in BSE returns and /or the Parthapratim pal in 2004 conducted study entitled as Recent volatility in stock markets in India and foreign institutional investors. Findings of this study indicated that Foreign institutional investors had emerged as the most dominant investor group in the domestic stock market in India. Particularly, in the companies that constitute the Bombay stock market sensitivity index, their level of control was very highinertia of these flows. Sandhya Ananthanaryanan, Chandrasekhar krishnamurthi and Nilajan Sen in 2003 conducted study as Foreign institutional Investors and Security Returns: Evidence from Indian Stock Exchanges, It found strong evidence consistent with the base-broadening hypothesis.It did not find compelling

M.P. BIRLA INSTITUTE OF MANAGEMENT

47

IMPACT OF FII ON NIFTY confirmation regarding momentum or contrarian strategies being employed by FIIs.It supported price pressure hypothesis. It did not find any substantiation to the claim that foreigner destabilize the market. J.S. Pasricha and Umesh.C.Singh in 2001, tried to analyze the impact of FIIs investment on Indian capital market. Their study revealed that FII are here to stay and have become the integral part of Indian capital market. Their entry has led to greater institutionalization of the market. They have brought transparency in the market operations.S.S.S. Kumar in 2001, attempted in his study to find the effect of FIIs on the Indian stock market. The inference analysis of the paper suggests that FII investments are more driven by market fundamentals rather than by short term changers or technical position of the market. As per K. Seethapathi and V. Subbulakshmi study entitled Foreign investment: Need for focus, They concluded that, the flows have to pick up. The political will is to be demonstrated by the government. In addition, the regulators have to identify the reasons for failure in converting approvals into actual investments and those issues are to be addressed immediately. E. Han Kim and Vijay Singal in 1997, they conducted study entitled Are open market Good for Foreign Investors and Emerging Nations?, Conclusion revealed as. Integrating the emerging stock markets into world markets has had benefits, and will continue to have benefits for both global investor and host countries. The end result of integrated markets a better allocation of resources, improved productivity of capital, and a higher standard of living. Very few studies have been carried out in India empirically to see the impact of FIIs investments on Indian stock market. According to Dornbusch and Park (1995), foreign investors pursue positive feedback strategies, which make stocks to overreact to change in fundamentals. Early studies by Samal (1997) M.P. BIRLA INSTITUTE OF MANAGEMENT
48

IMPACT OF FII ON NIFTY and Pal (1998) found co movement between FIIs flows and Bombay Stock Exchange (BSE) index to be high. Chalapati Rao(1999) analyzed the investment exposure of five US-based India specific funds, which suggested a close resemblance between FIIs investment profile and trading pattern at the BSE. 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. However, Batra did not find FIIs having any destabilizing impact on the equity market. Chakrabarti (2002), made an empirical investigation to see the interrelationship between FIIs flows and equity returns in India using monthly data. He came with the evidence that the FIIs flows are highly correlated with equity returns in India. He also found that FIIs flows are more likely to be the effect than the cause of these returns, which contradicted the view that the FIIs determine market returns in general. 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. More often, according to Dornbusch and Park (1995) foreign investors pursue positive feedback strategies, which makes stocks to overreact to change in fundamentals.

M.P. BIRLA INSTITUTE OF MANAGEMENT

49

IMPACT OF FII ON NIFTY

Very few studies have been carried out in India empirically to see the impact of FIIs investments on Indian stock market. Early studies by Samal (1997) and Pal (1998) found co movement between FIIs flows and Bombay Stock Exchange (BSE) index to be high Chalapati Rao and et al. (1999) analyzed the investment exposure of five US-based India specific funds, which suggested a close resemblance between FIIs investment profile and trading pattern at the BSE. However, they did not study the causality between FIIs flows and BSE. 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.

M.P. BIRLA INSTITUTE OF MANAGEMENT

50

IMPACT OF FII ON NIFTY

However, Batra did not find FIIs having any destabilizing impact on the equity market. Chakrabarti (2002), made an empirical investigation to see the interrelationship between FIIs flows and equity returns in India using monthly data. He came with the evidence that the FIIs flows are highly correlated with equity returns in India. He also found that FIIs flows are more likely to be the effect than the cause of these returns, which contradicted the view that the FIIs determine market returns in general.

M.P. BIRLA INSTITUTE OF MANAGEMENT

51

IMPACT OF FII ON NIFTY All the existing studies found that the equity return has a significant and positive impact on the FII (Agarwal, 1997; Chakrabarti, 2001; and Trivedi & Nair, 2003). But given the huge volume of investments, foreign investors could play a role of market makers and book their profits, i.e., they can buy financial assets when the prices are declining thereby jacking-up the asset prices and sell when the asset prices are increasing (Gordon & Gupta, 2003). Hence, there is a possibility of bi-directional relationship between FII and the equity returns. Ahmad et al (2005) make a firm level analysis of FII.s role in the Indian equity market. At the aggregate level FII investments and NSE Nifty seem to have a strong bi-directional causality. At the firm level FIIs are influencing equity returns especially in the government owned companies. On the issue of market stability Mazumdar (2004) finds that FII flows have enhanced liquidity in the Indian stock market but not much evidence is there to support the hypothesis that FII flows have generated volatility in the returns. Ahmed et al (2005) also confirms that there has been very little destabilizing effect of FII flows on individual equity returns of the firms during their period of study. Kumar (2001) inferred that FII flows do not respond to short-term changes or technical position of the market and they are more driven by fundamentals. The study finds that there is causality from FII to Sensex. This is in contradiction to Rai and Bhanumurthy (2003) results using similar data but for a larger period. A study by Panda (2005) also shows FII investments do not affect BSE Sensex. No clear causality is found between FII and NSE Nifty. FIIs are found to follow positive feedback strategy and to have return clustering tendency. There also prevails optimistic outlook which puts forward that FIIs are not .villains.. In most of the market crashes the FIIs were net buyers (e.g.stock M.P. BIRLA INSTITUTE OF MANAGEMENT
52

IMPACT OF FII ON NIFTY market crash of 2001, market collapse of 1998). Even in the 17 May 2004 Black Monday episode FIIs were not the culprits. Though there was a net outgo there was also a come back in the next month June as a net inflow. Further, improved risk management system was also seen to withstand volatility of .8. sigma against the normal built in capacity of .3-6. sigma variations internationally. It is further argued that FIIs tend to support stock market purely to ensure stability and safety of their own investments. All these reflect much concern on issue of FII, Stock prices and exchange rate interlinkage and this itself justifies our study done in terms of Efficient Market Hypothesis (EMH).

M.P. BIRLA INSTITUTE OF MANAGEMENT

53

IMPACT OF FII ON NIFTY

CHAPTER 3

RESEARCH METHODOLOGY

M.P. BIRLA INSTITUTE OF MANAGEMENT

54

IMPACT OF FII ON NIFTY

Problem Statement
Statement Of The Problem There are various studies which have been done to study the relationship between the stock price and net investment made by foreign institutional investors. This study explores the evidence of relationship between net investment made by foreign institutional investor and closing price of NSE.

Need and Importance of the study It is important to study the relationship between the stock price and inflow of foreign institutional investment made by foreign investors to know how foreign investment affects the Indian Stock Market. The purpose of doing this dissertation is also to find out the statistical relationship between the closing price of NIFTY and net investment made by foreign institutional investors in India. Since last few years India is becoming a place of attraction for the global investors for investment in emerging markets. But the nature of such investments is highly fluctuating and hence it affects the respective economies. Such investments have the capability to destabilize the domestic economy of the recipient economy, even though it is sound. Hence, the analysis of volatility of such flows is very important from the viewpoint of the policy makers of a country like India where international investment in securities is increasingly assuming importance as external finance.

M.P. BIRLA INSTITUTE OF MANAGEMENT

55

IMPACT OF FII ON NIFTY

Objectives of the Study


1. To find the impact of net investment made by foreign institutional investors on the closing price of NIFTY. 2. To find the extent of the the effect made by the investment on the closing price of NIFTY. 3. To find the trend of foreign institutional investment.

Hypothesis: Null Hypothesis (Ho): The investment made by foreign institutional investors does not affect the closing price of NIFTY. Alternate Hypothesis (H1): The investment made by foreign institutional investors affects the closing price of NIFTY.

Type Of Research: The study type is causal, quantitative and historical. Causal Research explores the effect of one thing on another and more specifically, the effect of one variable on another. If the objective is to determine which variable might be causing certain behaviour, i.e. whether there is a cause and effect relationship between variables, causal research must be undertaken. Quantitative because the objective of quantitative research is to develop and employ mathematical models, theories and/or hypotheses pertaining to natural phenomena. And also historical as the data used for analysis and interpretation is historical in nature.

M.P. BIRLA INSTITUTE OF MANAGEMENT

56

IMPACT OF FII ON NIFTY Data Collection: The data taken for the study is secondary in nature because it has been collected from NSE and SEBI site (www.nse-india.com, www.sebi.gov.in). Closing price of NIFTY is taken from NSE site and net investment made by foreign institutional investor is taken from SEBI site. The data collected is monthly.

Sample Size: The data has been collected from April 2004 to March 2009 ie the data taken for the study consists of consecutive five years starting from 2004.

Method Of Analysis: The method used for studying the impact of investment made by foreign institutional investor on the closing price of NIFTY is Regression and ttest.

Research Limitations: 1. The project has been prepared in 2 months, so due to time limitation depth analysis of such a wide concept may contain some lacuna. In this report impact of FII on the stock market has been analyzed considering NIFTY. But NIFTY is the barometer of Indian Stock Market consisting of 5o companies, so it may not depict exact picture of the entire stock market. 2. The project is based on assumption of cetris peribus, that is all other factors having impact on stock market and NIFTY are constant.

M.P. BIRLA INSTITUTE OF MANAGEMENT

57

IMPACT OF FII ON NIFTY

Tools used for testing the Hypothesis


The tools used for testing the hypothesis are 1. Regression 2. T-test

Regression Regression analysis is the statistical technique that identifies the relationship between two or more quantitative variables: a dependent variable, whose value is to be predicted, and an independent or explanatory variable (or variables), about which knowledge is available. The technique is used to find the equation that represents the relationship between the variables. A simple regression analysis can show that the relation between an independent variable X and a dependent variable Y is linear. A linear regression equation can be written as Yp= mX + b where Yp is the predicted value of the dependent variable, m is the slope of the regression line, and b is the Y-intercept of the regression line. It is convenient to assume an environment in which an experiment is performed: the dependent variable is then outcome of a measurement. The simplest form of a regression model contains a dependent variable, also called the "Y-variable" and a single independent variable, also called the "Xvariable".

Advantages / Limitations of Linear Regression Model:

M.P. BIRLA INSTITUTE OF MANAGEMENT

58

IMPACT OF FII ON NIFTY

Linear regression implements a statistical model that, when relationships between the independent variables and the dependent variable are almost linear, shows optimal results. Linear regression is often inappropriately used to model non-linear relationships. Linear regression is limited to predicting numeric output. A lack of explanation about what has been learned can be a problem.

Usage of Regression Analysis, Benefits Regression Analysis can predict the outcome of a given key business indicator (dependent variable) based on the interactions of other related business drivers (exploratory variables). For example it allows you to predict sales volume, using the amount spent on advertising and the number of sales people that you employ. Data modeling can be used without there being any knowledge about the underlying processes that have generated the data, in this case the model is an empirical model. Moreover, in modelling knowledge of the probability distribution of the errors is not required. Regression analysis requires assumptions to be made regarding probability distribution of the errors. Statistical tests are made on the basis of these assumptions. In regression analysis the term "model" embraces both the function used to model the data and the assumptions concerning probability distributions. Regression can be used for prediction (including forecasting of time-series data), inference, hypothesis testing, and modeling of causal relationships. These uses of regression rely heavily on the underlying assumptions being satisfied.
59

M.P. BIRLA INSTITUTE OF MANAGEMENT

IMPACT OF FII ON NIFTY Regression analysis has been criticized as being misused for these purposes in many cases where the appropriate assumptions cannot be verified to hold. One factor contributing to the misuse of regression is that it can take considerably more skill to critique a model than to fit a model Underlying Assumptions Classical assumptions for regression analysis include:

The sample must be representative of the population for the inference prediction. The error is assumed to be a random variable with a mean of zero conditional on the explanatory variables. The independent variables are error-free. If this is not so, modeling may be done using errors-in-variables model techniques. The predictors must be linearly independent, i.e. it must not be possible to express any predictor as a linear combination of the others. The errors are uncorrelated, that is, the variance-covariance matrix of the errors is diagonal and each non-zero element is the variance of the error. The variance of the error is constant across observations. If not, weighted least squares or other methods might be used.

These are sufficient (but not all necessary) conditions for the least-squares estimator to possess desirable properties; in particular, these assumptions imply that the parameter estimates will be unbiased, consistent, and efficient in the class of linear unbiased estimators. Many of these assumptions may be relaxed in more advanced treatments.

M.P. BIRLA INSTITUTE OF MANAGEMENT

60

IMPACT OF FII ON NIFTY

T-test
A t-test is any statistical hypothesis test in which the test statistic has a Student's t distribution if the null hypothesis is true. It is applied when sample sizes are small enough that using an assumption of normality and the associated z-test leads to incorrect inference.

Calculations

Independent one-sample t-test This equation is used to compare one sample mean to a specific value 0.

Where s is the grand standard deviation of the sample. n is the sample size. The degrees of freedom used in this test is n 1.

Independent two-sample t-test

Equal sample sizes This equation is only used when the two sample sizes (that is, the n or number of participants of each group) are equal.

M.P. BIRLA INSTITUTE OF MANAGEMENT

61

IMPACT OF FII ON NIFTY

Where s is the grand standard deviation (or pooled standard deviation), 1 = group one, 2 = group two. The denominator is the standard error of the difference between two means. For significance testing, the degrees of freedom for this test is 2n 2 where n = # of participants in each group.

PAIRED T- TEST This function gives a paired Student t test, confidence intervals for the difference between a pair of means and, optionally, limits of agreement for a pair of samples. The paired t test provides an hypothesis test of the difference between population means for a pair of random samples whose differences are approximately normally distributed. Please note that a pair of samples, each of which are not from normal a distribution, often yields differences that are normally distributed. The test statistic is calculated as:

Where d bar is the mean difference, s is the sample variance, n is the sample size and t is a Student t quantile with n-1 degrees of freedom. Power is calculated as the power achieved with the given sample size and variance for detecting the observed mean difference with a two-sided type I error probability of (100-CI %) %.

M.P. BIRLA INSTITUTE OF MANAGEMENT

62

IMPACT OF FII ON NIFTY

CHAPTER 4 Data Analysis and Interpretation

M.P. BIRLA INSTITUTE OF MANAGEMENT

63

IMPACT OF FII ON NIFTY

Data Analysis and Interpretation


1. Quarterly movement of the closing price of NIFTY from April 2004 to January 2009.

NSE 7000 6000 5000 4000 NSE 3000 2000 1000 0 october october october october october april april april april april july july july july january january january january july january

Interpretation: Form the above graph we can clearly see that till the market was good till December 2007 as we can see the graph moving upwards but after that year we can see the change in the trend of the line the line has started coming down gradually. This had happened because of the recession which had hit the US market during that period due to which the whole world got affected and also the Indian market.

M.P. BIRLA INSTITUTE OF MANAGEMENT

64

IMPACT OF FII ON NIFTY

2. Quarterly movement of investment made by foreign institutional investors in India from April 2004 to March 2009.

FII 25000 20000 15000 10000 5000 0 -5000 -10000 -15000 april october april october april october april october april october FII

Interpretation: The chart clearly depicts that there is sudden change in the inflow of FIIs in the year 2007 and after that in the year 2008 the net investment made by FIIs became negative. That means the foreign institutional investors started taking out their money by more concentrating on the selling part. This had happened because of the recession during that period.

M.P. BIRLA INSTITUTE OF MANAGEMENT

65

IMPACT OF FII ON NIFTY

3. Quarterly movement of NIFTY and net investment made by foreign institutional investors in India is shown in the following chart. The data shown in the chart is from April 2004 to January 2009.

25000 20000 15000 10000 5000 0 april april april april january january january january april july july july july july october october october october -5000 -10000 -15000 october january NSE fii

Interpretation:

From the above graph we can infer that when the inflow of FII changes the values of NSE also changes accordingly. There was a steep increase in the year 2007-08. This was the best period in Indian stock market where stock prices were increased and the market was in good mood.

M.P. BIRLA INSTITUTE OF MANAGEMENT

66

IMPACT OF FII ON NIFTY FIIs gross purchase and sales from 2004 to 2009. Year 2004-05 2005-06 2006-07 2007-08 2008-09 Gross Purchases 167486.9 270056.1 401190 705305.7 449236.5 Gross Sales 127334.7 227827.1 386245.8 669781.9 484848.6

800000 700000 600000 500000 400000 300000 200000 100000 0 2004-05 2005-06 2006-07 2007-08 2008-09 Gross Purchases Gross Sales

Interpretation: Now this graph shows the relation between gross purchases and gross sales. We can see from the graph that gross purchases have increased from 2004-05 to 2007-08 and gross sales are lower than gross purchases. But when we look at the year of 2008-09 we see that the involvement of FII has reduced, and we can also find in this year the gross sales is higher than gross purchases. This analysis also indicates the impact of FII on the market. M.P. BIRLA INSTITUTE OF MANAGEMENT
67

IMPACT OF FII ON NIFTY Regression Analysis:

SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 0.63662125 0.43680911 -0.00567729 1205.63521 60

ANOVA Regression Residual Total df 1 58 59 SS MS F Significance F 969421.7636 969421.8 0.666931 0.0417465389 84306263.62 1453556 85275685.38

Intercept X Variable 1

Standard Error Coefficients t Stat P-value Lower 95% 3337.70395 161.3667191 20.68397 1.89E-28 3014.693366 -0.02145801 0.026275382 -0.81666 0.417465 -0.07405390

Lower Upper 95.0% 95.0% Upper 95% 3660.714527 3014.693366 3660.714527 0.031137878 -0.07405390 0.031137878

M.P. BIRLA INSTITUTE OF MANAGEMENT

68

IMPACT OF FII ON NIFTY Interpretation: Multiple R: this value shows the co-efficient of correlation between the closing price of NSE and the net investment of FII. The correlation between them can be considered as good because correlation is 64%. R-Square: The coefficient of determination is equal to the regression sum of the squared divided by the total sum of squares. The co-efficient of determination measures the proportion of variation in NIFTY that is explained by the independent variable FII in the regression model. Therefore, 43% of variation in the dependent variable that is, closing price of NSE will explained by the independent variable that is FII. Standard Error: The standard error or the estimate represents a measure of variation around the regression line. Regression: The regression sum of squares is equal to the sum of squared differences between the predicted amount of net investment of FII and actual investment made by FIIs. From the above data we can analyze that the closing price of NSE and net investment made by foreign institutional investors is significant for the period April 2004 to March 2009. The R-square is 43%, which means the effect of FII inflows over the closing price of NSE is to the extent of 43%. The significance F is 0.04174 which is less than 0.05, that means the relation between FII Inflows and NSE is significant.

M.P. BIRLA INSTITUTE OF MANAGEMENT

69

IMPACT OF FII ON NIFTY T-Test:

t-Test: Paired Two Sample for Means Variable 1 3302.928 1445351 60 -0.10662 0 59 2.095752 0.020202 1.671093 0.040404 2.000995 Variable 2 1620.628 35684677 60

Mean Variance Observations Pearson Correlation Hypothesized Mean Difference Df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail

Interpretation: Since the value of t Stat (2.095752) is greater than t Critical Value (1.671093) alternate hypothesis is accepted, which states that Alternate Hypothesis (H1): The investment made by foreign institutional investors affects the closing price of NIFTY. Hence we can say that the FII inflow and values of NIFTY are correlated.

M.P. BIRLA INSTITUTE OF MANAGEMENT

70

IMPACT OF FII ON NIFTY

CHAPTER 5

MAJOR FINDINGS OF RESEARCH

M.P. BIRLA INSTITUTE OF MANAGEMENT

71

IMPACT OF FII ON NIFTY

Research Findings 1. From the data interpretation and analysis we can come to the
conclusion that the correlation between the net investment made by foreign institutional investors and the values of NSE is high that is 64% and hence the inflow made by FII affects the NSE. The data collected is from April 2004 to March 2009. 2. R-square statistics shows that the value of NIFTY is dependent on FII to the extent of 43% and for the remaining 57% depends on other factors such as inflation, exchange rates, etc. 3. The regression equation is Y= 3337.704 0.02146 X This equation is significant hence can be used for predictions. 4. The t-test determines that during April 2004 to March 2009 the NIFTY and net investment made by foreign institutional investors shows direct relationship that means t stat is greater than t critical value. Thus there exists a significant relationship between the inflows of FII and the NSE value. When FIIs are more attracted in investing they buy heavily and reverse happens that is they sell heavily when market capitalization is low. When FIIs are net buyers, prices and trading volume both go up thereby increasing the market capitalization.

M.P. BIRLA INSTITUTE OF MANAGEMENT

72

IMPACT OF FII ON NIFTY

CHAPTER 6

CONCLUSION

M.P. BIRLA INSTITUTE OF MANAGEMENT

73

IMPACT OF FII ON NIFTY

CONCLUSION
The main objective of this study was to determine impact and relationship between the Indian Stock Market and net foreign institutional investment. To test this, we have employed the methodology of regression and t-test. Regression was used to find the extent of impact of FII over the Stock market. And t-test was done to find which hypothesis should be accepted. In this study, the results state that there is direct relationship between FII and the NIFTY values. That means whenever the FIIs pour money into the market the values of the Indian Stock Market goes up & whenever they withdraw their money the market goes down. Therefore the FIIs play an 333important role in the market capitalization. There is a significant rise in the number of FIIs registering with SEBI from March 2008 to March 2009. In the year 2007-2008 the number of FIIs registering with SEBI were 1319 and till March 2009 the number changed to 1618. So we can say that the foreign institutional investors are attracted towards the Indian Stock Market. It has also been found while doing the dissertation that the major players of FII in India are from US that consists of 33% and second comes UK which consists of 15%.

M.P. BIRLA INSTITUTE OF MANAGEMENT

74

IMPACT OF FII ON NIFTY

ANNEXURE

M.P. BIRLA INSTITUTE OF MANAGEMENT

75

IMPACT OF FII ON NIFTY

Monthly data Of NSE (2004-2009)

Months April 2004 May 2004 June 2004 July 2004 August 2004 September 2004 October 2004 November 2004 December 2004 January 2005 February 2005 March 2005 April 2005 May 2005 June 2005 July 2005 August 2005 September 2005 October 2005 November 2005 December 2005 January 2006 February 2006 March 2006 April 2006 May 2006 June 2006 July 2006 August 2006 September 2006 October 2006 November 2006 December 2006 January 2007 February 2007

NSE 1848.445 1640.2 1506.116 1568.084 1615.3 1691.957 1794.98 1873.935 2021.943 1977.829 2067.388 2096.23 1987.095 2002.277 2134.287 2236.703 2357.561 2511.705 2486.778 2574.66 2772.611 2892.683 3019.321 3236.368 3494.061 3437.411 2914.913 3092.11 3305.582 3492.131 3649.428 3868.611 3910.18 4037.065 4083.737
76

M.P. BIRLA INSTITUTE OF MANAGEMENT

IMPACT OF FII ON NIFTY March 2007 April 2007 May 2007 June 2007 July 2007 August 2007 September 2007 October 2007 November 2007 December 2007 January 2008 February 2008 March 2008 April 2008 May 2008 June 2008 July 2008 August 2008 September 2008 October 2008 November 2008 December 2008 January 2009 February 2009 March 2009 3731.129 3947.278 4184.39 4222.174 4474.182 4301.357 4659.92 5456.618 5748.575 5963.574 5756.354 5201.564 4769.497 4901.905 5028.663 4463.788 4124.604 4417.118 4206.686 3210.223 2834.786 2895.798 2854.363 2819.205 2802.273

M.P. BIRLA INSTITUTE OF MANAGEMENT

77

IMPACT OF FII ON NIFTY

Monthly Flow OF FII (2004-2009)

FII Flows Equity Month Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Gross Purchase 15776.5 12331.6 9159.9 8230.2 9089.8 10119.9 10726.1 15805.3 18130.8 13178.3 21434.7 23503.8 11978 10327.4 20126.3 19289 25230.3 19542.9 18968.9 19800.5 28235.2 23594.2 32061.2 40902.2 28171.5 43597.5 32032.7 Gross Sale 8245.2 15415.7 8708.5 7765.3 6472.8 8094 8447.6 10092.5 12214.6 13270.2 13522.9 15085.4 12414.4 10889 16342.6 13702.1 20563.3 14972.6 20467.3 16213.8 19499.6 21034.2 25859.1 35869.1 29743.1 50608.8 31103 Net Investment 7531.3 -3084.4 451 464.9 2616.9 2026 2278.5 5713 5916.3 -91.9 7912.2 8418.3 -436.4 -561.1 3783.9 5586.9 4666.9 4570.8 -1498.3 3586.7 8735.6 2559.7 6202.2 5033 -1571.8 -7011.3 929.6
78

M.P. BIRLA INSTITUTE OF MANAGEMENT

IMPACT OF FII ON NIFTY Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 18152.8 22733.2 23689.5 29550.5 42698.9 36783.8 41268.5 44491.1 38020 31992.4 40487.5 37479 58791.1 44529.1 43062.8 118392.1 69184.1 64769.9 90385.6 58580.2 47651.9 52488.8 44506.3 44213.5 54135.2 37855.3 60389.4 42658.9 25603 29286 21834.5 17483.5 18782.1 18046.5 18907.4 19457.4 23690 34320.9 38888.6 40917.4 40540.8 40021.9 27621.5 37165.4 35200.3 37340 53424.9 34126.4 98288.7 73639.5 63347.6 101680.5 57084 50863.1 52189.2 45730.3 51691.4 54092.4 38964.8 68450.8 54742.4 26940.6 27390.5 25796.1 18664.2 20195.9 106.5 3826.1 4231.7 5860.3 8378.2 -2104.7 351.1 3950.2 -2002.2 4371 3322.3 2279 21451.1 -8895.8 8936.3 20103.6 -4455.4 1422.1 -11294.9 1496.1 -3211 299.4 -1224.1 -7477.8 43 -1109.5 -8061 -12083.5 -1338 1895.3 -3961.8 -1180.7 -1413.7

M.P. BIRLA INSTITUTE OF MANAGEMENT

79

IMPACT OF FII ON NIFTY

BIBLIOGRAPHY
Books: 1. Business Research Methods Donald R Cooper & Pamela S Schindler (Ninth Edition) 2. Fundamentals of Statistics S.C. Gupta (Sixth Revised & Enlarged Edition 2006) 3. Causal Relationship between FII and Indian Stock Market Subarnadey and Bishnupriya Mishra

Websites: www.nse-india.com www.sebi.gov.in www.moneycontrol.com www.financeofworld.com www.google.com

M.P. BIRLA INSTITUTE OF MANAGEMENT

80