'Foreign Institutional Investor

Definition of '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.

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Who are Foreign Institutional Investors (FIIs)?

Foreign Institutional investors (FIIs) are entities established or incorporated outside India and make proposals for investments in India. These investment proposals by the FIIs are made on behalf of sub accounts, which may include foreign corporates, individuals, funds etcetera. In order to act as a banker to the FIIs, the RBI has designated banks that are authorised to deal with them. The biggest source through which FIIs invest is the issuance of Participatory Notes (P-Notes), which are also known as Offshore Derivatives. Can FIIs invest in Indian companies? Yes, FIIs can invest in the stocks and debentures of the Indian companies. In order to invest in the primary and secondary capital markets in India, they have to venture through the portfolio investment scheme (PIS). According to RBI regulations, the ceiling for overall investment for FIIs is 24% of the paid up capital of the Indian company. The limit is 20% of the paid up capital in the case of public sector banks. However, if the board and the general body approves and passes a special resolution, then the ceiling of 24% for FII investment can be raised up to sectoral cap for that particular segment. In fact, recently Sebi allowed FIIs to invest in unlisted exchanges as well, which means both BSE and NSE (the unlisted bourses) can now allot shares to FIIs also. Who all can get registered as FIIs? There is a long list of entities that are eligible to get registered as FIIs such as pension funds, mutual funds, insurance companies, investment trusts, banks, university funds, endowments, foundations, sovereign wealth funds, hedge funds and charitable trusts. In fact, asset management companies, investment managers, advisors or institutional portfolio managers set up and/or owned by NRIs are also eligible to be registered as FIIs. The nodal point for FII registrations is Sebi and hence all FIIs must register themselves with Sebi and should also comply with the exchange control regulations of the central bank. Apart from being allowed to invest in securities in primary and secondary markets, FIIs can also invest in mutual funds, dated government securities, derivatives traded on a recognised stock exchange and commercial papers. Why are FIIs important for Indian mkts? FIIs are among the major sources of liquidity for the Indian markets. If FIIs are investing huge amounts in the Indian stock exchanges then it reflects their high confidence and a healthy investor sentiment for our markets. But with the current global financial turmoil and a liquidity and credit freeze in the international markets, FIIs have become net sellers (on a day to day basis). The entry of FIIs in India has brought mixed consequences for our markets, on one hand they have improved the breadth and depth of Indian

markets and on the other hand they have also become the major sources of speculation in testing times like these

Advantages and disadvantages of FII flows into a country

Advantages Enhanced flows of equity capital FIIs have a greater appetite for equity than debt in their asset structure. The opening up the economy to FIIs has been in line with the accepted preference for non-debt creating foreign inflows over foreign debt. Enhanced flow of equity capital helps improve capital structures and contributes towards building the investment gap. Managing uncertainty and controlling risks. FII inflows help in financial innovation and development of hedging instruments. Also, it not only enhances competition in financial markets, but also improves the alignment of asset prices to fundamentals. Improving capital markets. FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. Equity market development aids economic development. By increasing the availability of riskier long term capital for projec ts, and increasing firms incentives to provide more information about their operations, FIIs can help in the process of economic development. Improved corporate governance. FIIs constitute professional bodies of asset managers and financial analysts, who, by contributing to better understanding of firms operations, improve corporate governance. Bad corporate governance makes equity finance a costly option. Also, institutionalization increases dividend payouts, and enhances productivity growth. Disadvantages Problems of Inflation: Huge amounts 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. Problems for small investor: The FIIs profit from investing in emerging financial stock markets. If the cap on FII is high then they can bring in huge amounts of funds in the countrys 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. This creates problems for the small retail investor, whose fortunes get driven by the actions of the large FIIs. Adverse impact on Exports: FII flows leading to appreciation of the currency may lead to the exports industry becoming uncompetitive due to the appreciation of the rupee. Hot Money: Hot money refers to funds that are controlled by investors who actively seek short -term returns. These investors scan the market for short-term, high interest rate investment opportunities. Hot money can have economic and financial repercussions on countries and banks. When money is injected into a country, the exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the banking institution will experience a shortage of funds.

Development[edit source | editbeta]

By the end of April 2011, 103 licenced QFII investors had been granted a combined quota of $20.7 billion to invest in China's capital markets under the QFII program. Foreign access to China's yuan-denominated [2] "A" stocks are still limited, with quotas placed under the QFII program amounting to US$30 billion. In April, 2012, the Qualified Foreign investment quota was increased from US$30 billion to US$80 billion. [3] Before the increase, the overall value of approved QFII and RQFII (offshore Renminbi QFII ) funds was only 0.8% of total market capitalization and only US$25 billion of the US$30 billion quota was used. While aspects of the increased quota seem likely to take business from Hong Kong, a pilot program in Wenzhou for domestic investors to invest abroad was considered a possible offset for the financial [4] center. The QFII expansion was also followed quickly by the "approval of new ETF products that will be [5] denominated in offshore yuan (CNH) but will trade on the Hong Kong Stock Exchange". China granted $910 million worth of investment quotas to 11 foreign institutional investors in March 2013 The quotas, under the Qualified Foreign Institutional Investor (QFII) scheme, were awarded to overseas institutions including Generali Fund Management S.A, IDG Capital Management (HK) Ltd and Cutwater Investor Services Corp. y the end of March 2013, China had awarded a combined $41.745 billion of QFII [6] quotas to 197 foreign institutions.

Background[edit source | editbeta]

Regulations of the QFII program were based on "Temporary Regulation on Domestic Securities Investment by Qualified Foreign Institutional Investor" ( ), which was publicized on 5th Nov 2002 and ceased to be in effect on 1st Sep 2006, and "Regulation on Domestic Securities Investment by Qualified Foreign Institutional Investor"(), which is publicized on 24th Aug 2006, and came into effect on 1st Sep 2006.
[7]

Pursuant to "Regulation on Domestic Securities Investment by Qualified Foreign Institutional Investor" to qualify as a QFII, the candidate must:

have stable finance, good credibility, meet the minimum asset scale set by China Securities Regulatory Commission (CSRC); the number of staffs meet the requirement set by the authority in its own country or area; has healthy governing structure and complete internal control system, received no significant punishment in the last 3 years; candidate's home country has complete legal and supervision system, and its home country or home area has signed Memorandum of Understanding(MOU) with CSRC, and maintains effective supervision cooperation; other requirements set by CSRC based on prudence. Custody banks HSBC ICBC BoC

History[edit source | editbeta]

Ancient Rome and medieval Islam[edit source | editbeta]

Inscription honoring Aristoxnos, son of Demophon, probably benefactor of the gymnasium in Athens, late third or second century BC., Muse du Louvre.

Roman law ignored the concept of juristic person, yet at the time the practice of privateevergetism (which dates to, at least, the 4th century BC in Greece) sometimes led to the creation of revenues-producing capital which may be interpreted as an early form of charitable institution. In some African colonies in particular, part of the city's entertainment was financed by the revenue generated by shops and baking[1] ovens originally offered by a wealthy benefactor. In the South of Gaul, aqueducts were sometimes [2] financed in a similar fashion.

The legal principle of juristic person might have appeared with the rise of monasteries in the early centuries of Christianity. The concept then might have been adopted by the emerging Islamic law. The waqf (charitable institution) became a cornerstone of the financing of education, waterworks, welfare [3] [4] and even the construction of monuments. Alongside some Christian monasteries the waqfs created in the 10th century AD are amongst the longest standing charities in the world (see for instance the Imam Reza shrine).

Pre-industrial Europe[edit source | editbeta]

Following the spread of monasteries, almhouses and other hospitals, donating sometimes large sums of money to institutions became a common practice in medieval Western Europe. In the process, over the centuries those institutions acquired sizable estates and large fortunes in bullion. Following the collapse of the agrarian revenues, many of these institution moved away from rural real estate to concentrate on [5] bonds emitted by the local sovereign (the shift dates back to the 15th century for Venice, and the 17th [6] [7] century for France and the Dutch Republic ). The importance of lay and religious institutional ownership in the pre-industrial European economy cannot be overstated, they commonly possessed 10 to 30% of a given region arable land. In the 18th century, private investors pool their resources to pursue lottery tickets and tontine shares allowing them to spread risk and become some of the earliest speculative institutions known in the West.

Before 1980[edit source | editbeta]

Following several waves of dissolution (mostly during the Reformation and the Revolutionary period) the weight of the traditional charities in the economy collapsed; by 1800, institutions solely owned 2% of the [8] arable land in England and Wales. New types of institutions emerged (banks, insurance companies), yet despite some success stories, they failed to attract a large share of the public's savings and, for instance, [9] by 1950, they owned only 7% of US equities and certainly even less in other countries.

Overview[edit source | editbeta]

Financial participants market

Collective investment schemes

Credit unions

Insurance companies

Investment banks Pension funds

Prime brokers

Trusts Finance series

Financial market

Participants Corporate finance

Personal finance Public finance

Banks and banking Financial regulation

Because of their sophistication, institutional investors may often participate in private placements of securities, in which certain aspects of the securities laws may be inapplicable. For example, in the United States, a private placement under Rule 506 ofRegulation D may be made to an "accredited investor" without registering the offering of securities with the U.S. Securities and Exchange Commission. In essence institutional investor, an accredited investor is defined in the rule as:

a bank, insurance company, registered investment company (generally speaking, a mutual fund), business development company, or small business investment company; an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million; a charitable organization, corporation, or partnership with assets exceeding $5 million; a director, executive officer, or general partner of the company selling the securities; a business in which all the equity owners are accredited investors; a natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase; a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

Economic theory[edit source | editbeta]

This section does not cite any references or sources. Please help improve this section byadding citations to reliable sources. Unsourced material may be challenged and removed.(September 2011)

By definition, institutional investors are opposed to individual actors on the financial markets. This specificity has majors consequences in the eyes of economic theory.

Institutional investors as financial intermediaries[edit source | editbeta]

Numerous institutional investors act as intermediaries between lenders and borrowers. As such, they have a critical importance in the functioning of the financial markets. Economies of scale imply that they increase returns on investments and diminish the cost of capital for entrepreneurs. Acting as savings pools, they also play a critical role in guaranteeing a sufficient diversification of the investors' portfolios. Their greater ability to monitor corporate behaviour as well to select investors profiles implies that they help diminish agency costs.

Life cycle[edit source | editbeta]

Institutional investors differ among each other but they all have in common the fact of not sharing the same life cycle as human beings. Unlike individuals, they do not have a phase of accumulation (active work life) followed by one of consumption (retirement), and they do not die. Here insurance companies differ from the rest of the institutional investors; as they cannot guess when they will have to repay their clients, they need highly liquid assets which reduces their investment opportunities. Others like pension funds can predict long ahead when they will have to repay their investors allowing them to invest in less liquid assets such as private equities, hedge funds orcommodities. Finally, other institutions have an investment horizon extremely vast allowing them to invest in highly illiquid assets since they are unlikely to be forced to sell them before term. A famous example of this type of investors are US universities endowment funds.

Institutional-investor types[edit source | editbeta]

endowment fund hedge fund insurance companies investment banking investment trust mutual fund pension fund sovereign wealth fund unit trust and unit investment trust

Globalization of financial markets[edssit source | editbeta]

When considered from a strictly local standpoint, institutional investors are sometimes called foreign institutional investors (FIIs). This expression is mostly used in emerging markets such [citation needed] as Malaysia and India. In countries like India, statutory agencies like the Securities and Exchange Board of India have prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs. In 2008, FIIs [10] represented the largest institution investment category, with an estimated US$ 751.14 billion.

FII Investment - Financial Year INR crores Financial Year 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 2008-09 2009-10 2010-11 2011-12 2012-13* Total Equity 13 5,127 4,796 6,942 8,546 5,267 -717 9,670 10,207 8,072 2,527 39,960 44,123 48,801 25,236 53,404 -47,706 110,221 110,121 43,738 Debt 0 0 0 0 29 691 -867 453 -273 690 162 5,805 1,759 -7,334 5,605 12,775 1,895 32,438 36,317 49,988 Total 13 5,127 4,796 6,942 8,575 5,958 -1,584 10,122 9,933 8,763 2,689 45,765 45,881 41,467 30,840 66,179 -45,811 142,658 146,438 93,726

140,033
628,377

28,334
168,467

168,367
796,844

* As on March 31, 2013

BIDDING DETAILS FEBRUARY 20, 2013 Particulars Total Available Limit (INR Cr.) Total amount bid for (INR Cr.) Govt Old 1,919 2,232 Debt Govt Debt LT Corp Debt Old 33,959 36,667 33,959 0 100% 49 50 2 0.0281 16,447,010 3,866 4,294 3,866 0 100% 21 22 2.1 0.2 5,845,398 Corp Debt TOTAL LT 26,925 66,669 34,984 26,925 0 100% 43 49 2 0.38 23,283,655 47,955,173 122 131 78,177 66,669

Total amount allocated (INR 1,919 Cr.) Amount left after auction (INR 0 Cr.) Percentage allocated 100% Total no. of successful bids Total no. of bids Highest bid in bps Lowest successful bid in bps Fee Amount (INR) 9 10 1.5 1 2,379,110

The first category will consist of government securities of USD 25 billion which merges USD 10 billion for investment limit in short-term government papers, including Treasury Bills, and USD 15 billion for longterm government papers. The second category is for the corporate debt with a limit of USD 51 billion, including a sub-limit of USD 25 billion each for bonds of infrastructure sector and non-infrastructure sector, and USD 1 billion for QFIs (Qualified Foreign Investors) in non-infrastructure sector. "The above changes will come into effect from April 1, 2013," it said. Hit by high gold and petrol imports and slowdown in exports, current account deficit-- the difference between inflow and outflow of foreign currency-- touched a record high of 6.7 per cent in OctoberDecember period of 2012-13. The Current Account Deficit (CAD) can be financed only through foreign inflows, Finance Minister P Chidambaram had said. The eligible investors for these two categories are FIIs, QFIs and Long terms investors registered with SEBI-Sovereign Wealth Funds (SWFs), multilateral agencies, pension and insurance and central banks of other countries. In case of investment in G-secs category, eligible investors may invest in treasury bills only up to USD 5.5 billion within the limit of USD 25 billion. In the other category, investors may invest in commercial papers only upto USD 3.5 billion within the limit of USD 51 billion.

However, it said, the Non-Resident Indians are not subject to any limit for investment in Government Securities as well as corporate debt. They will continue to be regulated as per existing guidelines. The Finance Ministry said in a separate statement that these sub-limits have been carved out based on the current holdings of such short term instruments by FIIs and have been provided so that existing investments are not adversely affected. Because of the room created by unifying categories, the current SEBI auction mechanism allocating debt limits for corporate bonds will be replaced by the 'on tap system' currently in place for infrastructure bonds, it said. In order to allow large investors to plan their investments, it said the government will review the foreign investor limit in corporate bonds when 80 per cent of the current limit is taken up. Further, it will enhance the limit on government bonds as and when needed, based on utilisation levels, demand from foreign investors, macro-economic requirements and a prudent off-shore and on-shore balance.

Monthly FII Net Investment INR crores Month Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Total - 2012* Equity 10357.7 25212.1 8381.1 -1109.1 -347.1 -501.3 10272.7 10803.9 19261.5 11364 9577.2 24463.5 127736.2 Debt 15971.2 10015.8 -6588.6 -3787.5 3569.1 1681.8 3391.7 265.2 622.5 7851.7 292.1 1704.4 34989.4 Total 26328.9 35227.9 1792.5 -4896.6 3222 1180.5 13664.4 11069.1 19884 19215.9 9869.3 26792.2 163350.1

ABSTRACT Foreign institutional investors have gained a significant role in Indian stock markets. 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. In this context present paper examines the contribution of foreign institutional investment in sensitivity index (Sensex). Also attempts to understand the behavioral pattern of FII during the period of 2001 to 2010 and examine the volatility of BSE Sensex due to FII. The data for the study uses the information obtained from the secondary resources like website of BSE sensex. We attempted to explain the impact of foreign institutional investment on stock market and Indian economy. Also attempts to present the correlation between FII and BSE sensex by the Karl Pearson Coefficient of correlation test.

WHY FIIS REQUIRED? FIIs contribute to the foreign exchange inflow as the funds from multilateral finance institutions and FDI (Foreign direct investment) are insufficient. Following are the some advantages of FIIs.
It lowers cost of capital, access to cheap global credit. It supplements domestic savings and investments. It leads to higher asset prices in the Indian market. And has also led to considerable amount of reforms in

capital market and financial sector.

INVESTMENTS BY FIIS There are generally two ways to invest for FIIs.
EQUITY

INVESTMENT

100% investments could be in equity related instruments or up to 30% could be invested in debt instruments i.e.70 (Equity Instruments): 30 (Debt Instruments)
100%

DEB

100% investment has to be made in debt securities only

B. Units of schemes floated by the Unit Trust of India and other domestic mutual funds, whether listed or not. C. Warrants 100% DEBT ROUTE: In case of Debt Route the FIIs can invest in the following instruments: A. Debentures (Non Convertible Debentures, Partly Convertible Debentures etc.) B. Bonds C. Dated government securities D. Treasury Bills E. Other Debt Market Instruments It should be noted that foreign companies and individuals are not be eligible to invest through the 100% debt route. HISTORY OF FII 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 terms and conditions which restricted many FIIs to invest in India. But in the course of time, in order to attract more investors, SEBI has simplified many terms such as: The ceiling for overall investment of FII was increased 24% of the paid up capital of Indian company. Allowed foreign individuals and hedge funds to directly register as FII. Investment in government securities was increased to US$5 billion. Simplified registration norms. PROCEDURE FOR REGISTRATION: The Procedure for registration of FII has been given by SEBI regulations. It states- no person shall buy, sell or otherwise deal in securities as a Foreign Institutional Investor unless he holds a certificate granted by the Board under these regulations. An application for grant of registration has to be made in Form A, the format of which is provided in the SEBI (FII) Regulations, 1995. THE ELIGIBILITY CRITERIA FOR APPLICANT SEEKING FII REGISTRATION IS AS FOLLOWS: Good track record, professional competence and financial soundness.

 Regulated by appropriate foreign regulatory authority in the same capacity/cat egory where registration is sought from SEBI. Permission under the provisions of the Foreign Exchange Management Act, 1999 (FEMA) from the RBI. Legally permitted to invest in securities outside country or its incorporation/establishment. The applicant must be a fit and proper person. Local custodian and designated bank to route its transactions. ELIGIBLE SECURITIES A FII can make investments only in the following types of securities: Securities in the primary and secondary markets including shares, debentures and warrants of unlisted, to- be-listed companies or companies listed on a recognized stock exchange. Units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed on a recognized stock exchange or not, and units of scheme floated by a Collective Investment Scheme. Government Securities Derivatives traded on a recognized stock exchange like futures and options. FIIs can now invest in interest rate futures that were launched at the National Stock Exchange (NSE) on 31st August, 2009. Commercial paper. Security receipts REGULATION RELATING TO FII OPERATION Investment by FIIs is regulated under SEBI (FII) Regulations, 1995 and Regulation 5(2) of FEMA Notification No.20 dated May 3, 2000. SEBI acts as the nodal point in the entire process of FII registration. FIIs are required to apply to SEBI in a common application form in duplicate. A copy of the application form is sent by SEBI to RBI along with their 'No Objection' so as to enable RBI to grant necessary permission under FEMA. RBI approval under FEMA enables a FII to buy/sell securities on stock exchanges and open foreign currency and Indian Rupee accounts with a designated bank branch.

 FIIs are required to allocate their investment between equity and debt instruments in the ratio of 70:30. However, it is also possible for an FII to declare itself a 100% debt FII in which case it can make its entire investment in debt instruments. All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. Indian Companies can raise the above mentioned 24% ceiling to the Sectoral Cap / Statutory Ceiling as applicable by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by its General Body. Further, in 2008 amendments were made to attract more foreign investors to register with SEBI, these amendments are: The definition of broad based fund under the regulations was substantially widened allowing several more sub accounts and FIIs to register with SEBI. Several new categories of registration viz. sovereign wealth funds, foreign individual, foreign corporate etc. were introduced, Registration once granted to foreign investors was made permanent without a need to apply for renewal from to time thereby substantially reducing the administrative burden, Also the application fee for foreign investors applying for registration has recently been reduced by 50% for FIIs and sub accounts 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.

AJRBF
Asian Journal of Research in Banking and Finance Vol.2 Issue 4, April 2012, ISSN 2249 7323

Journal of Asian Research Consortium 35 http://www.aijsh.org FIIs are required to apply to SEBI in a common application form in duplicate. A copy of the application form is sent by SEBI to RBI along with their 'No Objection' so as to enable RBI to grant necessary permission under FEMA. RBI approval under FEMA enables a FII to buy/sell securities on stock exchanges and open foreign currency and Indian Rupee accounts with a designated bank branch. FIIs are required to allocate their investment between equity and debt instruments in the ratio of 70:30. However, it is also possible for an FII to declare itself a 100% debt FII in which case it can make its entire investment in debt instruments. All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. Indian Companies can raise the above mentioned 24% ceiling to the Sectoral Cap / Statutory Ceiling as applicable by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by its General Body. Further, in 2008 amendments were made to attract more foreign investors to register with

SEBI, these amendments are: The definition of broad based fund under the regulations was substantially widened allowing several more sub accounts and FIIs to register with SEBI. Several new categories of registration viz. sovereign wealth funds, foreign individual, foreign corporate etc. were introduced, Registration once granted to foreign investors was made permanent without a need to apply for renewal from time to time thereby substantially reducing the administrative burden, Also the application fee for foreign investors applying for registration has recently been reduced by 50% for FIIs and sub accounts 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. OBJECTIVES To get the knowledge of stock market. To find out the relationship between the FIIs investment and stock market. To know the volatility of BSE Sensex due to FIIs. To study the behavioral pattern of FII in India during 2000 to 2010. HYPOTHESIS There is close correlation between BSE Sensex volatility and FIIs.

List of companies List of companies which have raised the ceiling from 10% in respect of NRIs investments under PIS (w.e.f. November 29, 2010) Upto 24% 1 Alembic Chemical Works Co. Ltd. 2 Amar Investments Ltd., Calcutta. 3 Anglo- India Jute Mills Co. Ltd. 4 Arvind Mills, Ahmedabad. 5 Ashima Syntex Ltd, Ahmedabad. 6 Ashoka Viniyoga Ltd. 7 Bharat Nidhi Ltd. 8 BLB Shares & Financial Services Ltd 9 BPL Ltd. 10 Burr Brown (India) Ltd 11 Camac Commercial Company Ltd. 12 Ceenik Exports (India) Ltd. 13 Cifco Finance Ltd., Mumbai. 14 Classic Financial Services & Enterprises Ltd, Calcutta. 15 CPPL Ltd, (Reliance Ind. Infrastructure Ltd) Mumbai. 16 Crest Communication Ltd.

17 CRISIL 18 DCM Ltd. 19 DCM Shriram Consolidated Ltd. 20 Dharani Sugars & Chemicals Ltd

These impacts made the Indian stock market more attractive to FII & also domestic investors. The impact of FII is so high that whenever FII tend to withdraw the money from market, the domestic investors fearful and they also withdraw from market. C. IMPROVING CAPITAL MARKETS: FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. By increasing the

availability of riskier long term capital for projects, and increasing firms incentives to supply more information about them, the FIIs can help in the process of economic development. D. IMPROVED CORPORATE GOVERNANCE: Good corporate governance is essential to overcome the principal-agent problem between share-holders and management. Information asymmetries and incomplete contracts between share-holders and management are at the root of the agency costs. Bad corporate governance makes equity finance a costly option. With boards often captured by managers or passive, ensuring the rights of shareholders is a problem that needs to be addressed efficiently in any economy. Incentives for shareholders to monitor firms and enforce their legal rights are limited and individuals with small share-holdings often do not address the issue since others can free-ride on their endeavor. FIIs constitute professional bodies of asset managers and financial analysts, who, by contributing to better understanding of firms operations, improve corporate governance. Among the four models of corporate control takeover or market control via equity, leveraged control or market control via debt, direct control via equity, and direct control via debt or relationship banking-the third model, which is known as corporate governance movement, has institutional investors at its core. In this third model, board representation is supplemented by direct contacts by institutional investors. NEGATIVE IMPACT: If we see the market trends of past few recent years it is quite evident that Indian equity markets have become slaves of FIIs inflow and are dancing to their tune. And this dependence has to a great extent caused a lot of trouble for the Indian economy. Some of the factors are: A. POTENTIAL CAPITAL OUTFLOWS: Hot money refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the market for short-term, high interest rate investment opportunities. Hot money can have economic and financial repercussions on countries and banks. When money is injected into a country, the exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the banking institution will experience a shortage of funds. B. INFLATION: Huge amounts 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. This situation leads to excess liquidity thereby leading to inflation where too much money chases too few goods. C. PROBLEM TO SMALL INVESTORS: The FIIs profit from investing in emerging financial stock markets. If the cap on FII is high then they can bring in huge amounts of funds in the countrys 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. This creates problems for the small retail investor, whose fortunes get driven by the actions of the large FIIs. D. ADVERSE IMPACT ON EXPORTS: FII flows leading to appreciation of the currency may lead to the exports industry becoming uncompetitive due to the appreciation of the rupee. BSE SENSEX AND FII INVESTMENT CORRELATION 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. (TABLE 02) BSE SENSEX AND FII (IN RS CR.) Years Sensex Value (points) Net Investment of FII 2000 3,972 6,510.9 2001 3,262 12,494.8 2002 3,377 3,677.9 2003 5,838 35,153.8 2004 6,602 42,049.1 2005 9,397 41,663.5 2006 13,786 40,589.2 2007 20,286 80,914.8 2008 9,647 -41,215.5 2009 17,464 87,987.6 2010 20,509 179,674.6 This table shows the relationship between Sensex value and FII investment.
Asian Journ Vol.2 Issue

]50,00 50,00 100,00 150,00 200,00 250,00

nal of Research i 4, April 2012, IS

00 0 00 00 00 00 00 2000 200
n Banking and F SSN 2249 7323

01 2002 2003

FII inv
FII inv
Finance

2004 2005 2

vestment an
vestment (in Rs 2006 2007 200

nd Sensex R
s cr.) 08 2009 2010

Relationship
Sensex Val

p
ue (points)

( TABLE 03) FII & BSE SENSEX CORRELATION Years Sensex value(X) Deviation(dx) 11016.8 Standard Deviation FII investment(Y) Deviation(dy) 48298.98 Standard Deviation dxdy 2001 3,262 -7,755 60136923.04 12,494.80 35,804.18 1281939305 277654255.1 2002 3,377 7,640 58366544.04 3,677.90 44,621.08 1991040780 340896127 2003 5,838 5,179 26819969.44 35,153.80 13,145.18 172795757.2 68076258.18 2004 6,602 4,415 19490459.04 42,049.10 6,249.88 39061000.01 27591970.22 2005 9,397 1,620 2623752.04 41,663.50 6,635.48 44029594.83 10748150.5 2006 13,786 2,769 7668468.64 40,589.20 7,709.78 59440707.65 21349922.78 2007 20,286 9,269 85918068.64 80,914.80 32,615.82 1063791714 302322558.7 2008 9,647 1,370 1876352.04 41,215.50 89,514.48 8012842130 122616934.7 2009 17,464 6,447 41566387.84 87,987.60 39,688.62 1575186558 255880470.9 2010 20,509 9,492 90101860.84 179,674.60 131,375.62 17259553530 1247043660 Total 110,168 0 394568785.6 482,989.80

0.00 31499681077 2631480463 X N 11016.8 d x N 394568785.6 10 = 6281.471051 Y fyN 482,989.80 10 = 48298.98 d y N 31499681077 10 = 56124.57668 Karl Pearson coefficient of Correlation r N N . N . =0.746424196 It has been founded by the study ( Table: 3) that BSE sensex and foreign institutional investment has followed a close relationship. The Pearson correlation values indicate positive correlation between the foreign institutional investments and the movement of sensex ( pearson correlation value is ( 0.746424196 ).