International Journal of Marketing, Financial Services & Management Research________________________ ISSN 2277- 3622

Vol.2, No. 6, June (2013)

Online available at www.indianresearchjournals.com

IMPACT OF FOREIGN INSTITUTIONAL INVESTMENTS ON INDIAN

CAPITAL MARKET
DR.K.MALLIKARJUNA RAO*; H.RANJEETA RANI**
* ASSISTANT PROFESSOR OF COMMERCE,
DEPARTMENT OF COMMERCE,
GOVT.DEGREE COLLEGE,
ZAHEERABAD, DIST-MEDAK (AP)
** STUDENT OF MASTER OF BUSINESS ADMINISTRATION,
ICBM-SCHOOL OF BUSINESS EXCELLENCE,
HYDERABAD

_____________________________________________________________________________________

ABSTRACT
The Foreign Institutional Investors (FIIs) have emerged as noteworthy players in the Indian stock
market and their growing contribution adds as an important feature of the development of stock
market in India. To facilitate foreign capital flows, developing countries have been advised to
strengthen their stock market. As a result, the Indian stock markets have reached new heights and
became more volatile making the research work in this dimension of establishing the link
between FIIs and stock market volatility. This paper makes an attempt to develop an
understanding of the dynamics of the trading behaviour of FIIs and effect on the Indian equity
market especially in selected sectors, in addition to comparative analysis of preferred investment
stock of FII.
_____________________________________________________________________________________

INTRODUCTION:
FII is defined as an institution organized outside of India for the purpose of making investments
into the Indian securities market under the regulations prescribed by SEBI. FII include
Overseas pension funds, mutual funds, investment trust, asset management company, nominee
company, bank, institutional portfolio manager, university funds, endowments, foundations,
charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or
established outside India proposing to make proprietary investments or investments on behalf of
a broad-based fund. FIIs can invest their own funds as well as invest on behalf of their overseas
clients registered as such with SEBI. These client accounts that the FII manages are known as
sub-accounts. A domestic portfolio manager can also register itself as an FII to manage the
funds of sub-accounts foreign institutional investor means an entity established or incorporated
outside India which proposes to make investment in India. Positive tidings about the Indian
economy combined with a fast-growing market have made India an attractive destination for
foreign institutional investors. FII is defined as an institution organized outside of India for the
purpose of making investments into the Indian securities market under the regulations prescribed
by SEBI. Entry Options For FII -A foreign company planning to set up business operations in
India has the following options: Incorporated Entity i.e. by incorporating a company under the
Companies Act, 1956, through Joint Ventures; or Wholly Owned Subsidiaries. Foreign equity in
such Indian companies can be up to 100% depending on the requirements of the investor, subject
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Vol.2, No. 6, June (2013)
Online available at www.indianresearchjournals.com

to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI)
policy.
Institutional investors will have a lot of influence in the management of corporations because
they will be entitled to exercise the voting rights in a company. They can actively engage in
corporate governance. Furthermore, because institutional investors have the freedom to buy and
sell shares, they can play a large part in which companies stay solvent, and which go under
influencing the conduct of listed companies, and providing them with capital are all part of the
job of management. One of the most important features of the development of stock market in
India in the last 20 years has been the growing participation of FIIs. Since September, 1992 when
FIIs were allowed to invest in India, the no. of FIIs has grown over a period of time. At endmarch 2012, there were 1765 FIIs registered with SEBI.
REVIEW OF LITERATURE:
In India, the purchase of domestic securities by FIIs first allowed in September 1992 as
part of the liberalisation process that followed the balance of payment crisis in 1990-91. Now
days, a significant portion of Indian corporate sectors securities are held by Foreign Institutional
Investors, such as pension funds, mutual funds and insurance companies. Chakrabarti (2001)
conducted the pair-wise Granger Causality tests between FII inflows and returns on the BSE
National Index. He found that portfolio investment from FIIs was more an effect than a cause of
market returns in India
Stanley Morgan (2002) has examined that FIIs have played a very important role in building up
Indias forex reserves, which have enabled a host of economic reforms. The study notes that FII
strongly influence short term market movements during bear markets. However, the correlation
between returns and flows reduces during bull markets as other market participants raise their
involvement reducing the influences of FIIs. The study shows that the correlation between
foreign inflows and market returns is high during bear and weakens with strengthening equity
prices due to increased participation by other players.
Mukherjee, Bose and Coondoo (2002) studied the cause-and-effect relationship between FII
flows and returns on the Indian equity market. They found that FII flows to and from the Indian
market tend to be caused by returns in the domestic equity market and not the other way round.
Gordon and Gupta, (2003) found causation running from FII inflows to return in BSE. They
observed that FIIs act as market makers and book profits by investing when prices are low and
selling when they are high. Hence, there are contradictory findings by various researchers
regarding the causal relationship between FII net inflows and stock market capitalization and
returns of BSE/ NSE. Therefore, there is a need to investigate whether FIIs are the cause or
effect of stock market fluctuations in India.
Sivakumar S (2003) has analyzed the net flows of foreign institutional investment over the years,
it also briefly analyses the nature of FII flows based on research, explores some determinants of
FII flows and examines if the overall experience has been stabilizing or destabilizing for the
Indian capital market.
The Impact of FII in equity investment behaviour in stock market was examined by Karimullah
(1997-2007). He attempted to find out two way causes between behaviour and performance of
Indian stock market. He researched about the idea, that financial liberalization increases the
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Vol.2, No. 6, June (2013)
Online available at www.indianresearchjournals.com

efficiency of financial market and permission of FIIs equity investment are an important example
of financial liberalization. Apart from net investment of FII's the purchase and sale behaviour of
FIIs were also analyzed in the study.
Agarwal, Chakrabarti et al (2003) have found in their research that the equity return has a
significant and positive impact on the FII. 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. Hence, there is a possibility of bi-directional relationship between FII and
the equity return.
Mazumdar Tanushree (2004) examined two consequences i.e. liquidity (positives) and volatility
(negative) in the past decade on the Indian stock market. The results showed that FII flow have
enhanced liquidity of the Indian stock market. FII investments improve liquidity in the stock
markets for two reasons; they invest a large quantum of funds in the stock market and FII are
known to be active traders.
Dey Subarna & Mishra Bishnupriya (2004) in their study examined the casual relationship
between net FII investment & the Indian stock market represented by market capitalization of
BSE & NSE. The study also inferred that whenever market capitalization was high, FIIs were
more attracted for investing. They gave importance to the policy makers as the Indian stock
market was susceptible to changing investment patterns of foreign portfolio investors.
Roy (2007) explored the basic motives behind foreign portfolio capital flows into India. He
found that they are primarily driven by capital gains, and in the Indian case, by the change in
stock prices. The study further revealed that stock prices are causing net foreign portfolio inflows
and not vice-versa. Further, he found bi-directional causality between the exchange rate and net
foreign portfolio inflows.
Verma and Prakash (2011) found that the interest rate sensitivity of FII flows is not statistically
significant and concluded that the BSE Sensex is a major pull factor for these flows into the
domestic financial markets.
Gupta Ambuj (2011) have studied the role of FII in volatility of the market and stock prices of
individual securities, he found a high degree of relationship between the factors.
OBJECTIVES OF THE STUDY

To find out the relationship between the FIIs investment and Indian stock market

To analyse the sector wise investment pattern of FII during 2007-2012

To make a comparative study among companies of different sectors attracting FIIs

Research Methodology
The study carried out is analytical and empirical in nature in which it explores the relationship
between the Inflows of FII and their impact on Indian Capital Market. Further, in order to show
the position of FIIs in different sectors, we selected 10 companies comprising of five major
sectors i.e., Real estate, Banking, IT, FMGC and Iron and Steel.
Data Collection
Data for the study is collected from Secondary sources. For this various literatures, books,
journals, magazines, websites likes www.nseindia.com, www.sebi.gov.in were used.
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Vol.2, No. 6, June (2013)
Online available at www.indianresearchjournals.com

Empirical analysis
The table 1 shows the number of Foreign Institutional Investors (FIIs) registered with SEBI. It is
clearly observed that there was a tremendous increase in the number (322) of FIIs registered with
SEBI in the year 2007-08. Where as in the year 2009-10 there was decline in the number of FIIs
registered with SEBI. This was due to the fact that the impact of international recession had
started affecting the FIIs registration.
The table also reveals that there were 1.765 FIIs registered with SEBI in the year 2011-12
as compared to 1722 a year ago, showing an increase of 2.5 per cent during the year.
Table 1: FIIs REGISTEREDWITH SEBI
YEAR
FII at the end of March

Net Additions in
FIIs in During the Year

1993-94

1994-95

156

153

1995-96

353

197

1996-97

439

86

1997-98

496

57

1998-99

450

-46

1999-00

506

56

2000-01

527

21

2001-02

490

-37

2002-03

502

12

2003-04

540

38

2004-05

685

145

2005-06

882

197

2006-07

997

115

2007-08

1,319

322

2008-09

1,635

316

2009-10

1713

78

2010-11

1722

2011-12

1765

43

Source: SEBI annual reports

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International Journal of Marketing, Financial Services & Management Research________________________ ISSN 2277- 3622
Vol.2, No. 6, June (2013)
Online available at www.indianresearchjournals.com

Table 2
FII INVESTMENTS IN INDIA
YEAR
Gross
Gross Sales
Purchase
(Rs.Crore)
(Rs.Crores)
1
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

2
18
5,593
7,631
9,694
15,554
18,695
16.116
56.857
74,051
50,071
47,062
1,44,855
2,16,951
3.46,976
5,20,506
9,48,018
6.14,576
8,46,438
9,92,599

2011-12
9,21,285
Source: SEBI annual reports

Net
Investments
(USD mm)

Cumulative
Net
Investment

3
4
467
2,835
2,752
6,980
12,737
17,699
46.735
64,118
41,308
44,372
99,091
1,71,071
3,05,509
4,89,665
8,81,839
6,60,386
7.03.780
8,46,161

Net
Investments
(Rs.in
Crores)
4
13
5,127
4,796
6,942
8,575
5,958
-1,584
10,122
9,933
8,763
2,689
45,764
45,880
41,467
30,841
66,179
-45,811
1,42,658
1,46,438

5
4
1,634
1,528
2,036
2,432
1,650
-386
2,474
2,160
1,839
566
10,005
10,352
9,363
6,821
16,442
-9,837
30,253
32,226

6
4
1,638
3,167
5,202
7,635
9,285
8,899
11,373
13,532
15,372
15,937
25,943
36,294
45,657
52,478
68,919
59,082
89,335
1,21,559

8,27,562

93,725

18,923

1,40,482

From the above table 2 it is observed that the FIIs showed huge investments in the gross
purchases of Debt and Equity by 82.13 per cent to Rs. 9,48,018 crores in 2007-08 from 5,20,506
crores in 2006-07. The combined gross sales by FIIs increased by 80 per cent to 8,81,839 crore
from 4,89,665. FIIs turned towards net selling in equity and debt for profit booking and seeing
the massive sell out of shares in global markets including India during the period 2008-09. The
analysis of the above table depicts a negative view of the FIIs investment in India during 199899 and 2008-09. The active reason could be tremendous selling in these two years. It is also clear
from the table that the gross purchase of debt and equity by FIIs declined by 7.2 per cent to Rs.
9,21,285 crores in 2011-12 from 9,92,559 crores in 2010-11. The combined gross sales by FIIs
declined by 2.2 per cent to 8,27,562 crore from 8,46,161 crores during the same period.

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International Journal of Marketing, Financial Services & Management Research________________________ ISSN 2277- 3622
Vol.2, No. 6, June (2013)
Online available at www.indianresearchjournals.com

TABLE: 3
Share of FII in different sectors of Companies listed on NSE
Sector
Mar-07
Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Banks
18.41
19.15
14.27
16.02
17.62
15.9
Engineering
11.45
10.63
7.34
8.28
9.36
5.1
Finance
18.18
17.44
13.01
16.53
23.35
8.4
FMCG
11.91
14.07
12.72
14.09
16.34
9.4
IT
14.53
16.00
12.44
11.68
21.16
7.3
Infrastructure
7.15
8.86
7.31
8.90
7.87
5.9
Manufacturing
9.57
9.46
7.28
8.79
9.41
4.8
Media & Entertainment
15.20
11.71
11.42
7.06
10.97
5.8
Petrochemicals
5.83
4.73
4.77
6.08
6.52
4.5
Pharmaceuticals
11.17
10.69
7.88
8.78
10.19
6.2
Services
13.09
10.70
8.39
8.05
7.41
5.4
Telecommunication
11.17
9.12
6.85
8.64
8.44
5.7
Miscellaneous
8.19
9.30
8.39
8.10
13.65
6.1
Total stake of FIIs in the sectors 10.78
10.62
8.40
9.58
10.32
6.0
Source: www. nseindia.com
Table 3 reveals that share of FII in different sectors of companies listed on NSE, at the end of
March, 2007 the FII held the five highest stake of banks (18.41 per cent), followed by Finance
(18.18 per cent ), Media & Entertainment (15.20 per cent ), Information Technology ( 14.53 per
cent ) and Service sector (13.09 percent). The total percentage of share held by FII across
different sectors was 10.78 percent of the total shares of the companies listed on the NSE at the
end of March, 2007.
At the end of March, 2008, the FII held the highest stake in banking sector 19.15 per cent
followed by finance, Information Technology, Media & Entertainment and service sector 17.44
percent, 16.00 per cent, 11.71 percent and 10.70 percent respectively.
In the year 2009, FII held the highest in banking sector 14.27 percent. The total
percentage of share held by FII across different sectors was 8.40 percent of the total shares of the
companies listed on the NSE at the of March, 2009. In the year March, 2010 invested highest in
the Finance sector (16.53 percent) and lowest in petrochemicals (6.08 percent). It could be
observed from the table 4 that FII investments are highest in finance sector (20.35 percent)
followed by Information Technology (21.16 percent) and banking (17.62 percent) at end of
March, 2011.
However in the year 2012 majority of the investments of FII were in banking sector
(15.09 percent) and lowest in petrochemicals (4.5 percent). On the whole, FII investments in
petrochemicals were lowest during the year 2007 to 2012.
Sector wise analysis
In order to find out the impact of FIIs on Indian Stock Market, five major sectors have been
selected for the detailed study namely; Real Estate, Iron & Steel, Banking, Information
Technology and FMCG.
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Vol.2, No. 6, June (2013)
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The 4 shows the comparative figures in DLF and JAI PRAKASH. It is evident from the
table that FIIs share holdings in DLF drastically increased that is 7. 17 percent in the year 200708 to 15.46 percent in the year 2011-12. While in Jai Prakash associates the share holdings of
FIIs decreased over the years i.e., from 2007-12 with 26.12 percent to 18.93 percent.
Table 4: Percentage of FII shareholding in total shares in selected infrastructure
companies.
DLF

JAIPRAKESH ASSOCIATES

June
Sept
December
March
Avg.

2007-08

2008-09

2009-10

2010-11

2011-12

5.92
7.3
7.9
7.56
7.17

6.55
6.78
6.85
6.24
6.61

15.4
15.55
15.23
14.7
15.22

15.05
15.78
15.86
15.74
15.61

14.92
15.53
15.93
15.47
15.46

June
Sept
December
March
Avg.

2007-08

2008-09

2009-10

2010-11

2011-12

25.9
26.96
26.11
25.5
26.12

24.44
21.66
22.3
23.84
23.06

23.55
26.54
26.48
25.99
25.64

23.76
24.07
23.36
20.74
22.98

19.32
18.59
18.07
19.73
18.93

www. nseindia.com
The 5 given below reveals a detailed account of the quarterly FII inflows during the last five
years. It is evident from the table that during the study period Jindal Steel has outperformed
TATA Steel in FII inflows. Another significant observation from the table is that the FIIs share
in TATA Steel is lowest during the 2011-12. While in the Jindal Steel it is lowest during the year
2008-09.
Table 5: Percentage of FII shareholding in total shares in selected steel
companies
TATA STELL
2007-08

JINDAL STEEL
2008-09

June
22.65 19.8
Sept
21.35 17.65
December 20.55 12.98
March
19.48 13.2
Avg.
21.01 15.91
www. nseindia.com

2009-10

2010-11

2011-12

14.54
16.34
16.87
19.5
16.81

15.5
15.77
16
17.36
16.16

17.06
14.61
12.87
14.36
14.73

June
Sept
December
March
Avg.

2007-08

2008-09

2009-10

2010-11

2011-12

23.31
23.76
23.64
22.85
23.39

22.71
21.68
18.13
18.6
20.28

20.53
21.53
22.8
23.46
22.08

22.71
23.72
23.77
23.44
23.41

23.03
21.48
21.3
22.14
21.99

The table 6 clearly show the comparative study of the largest public (SBI) and private (ICICI)
sector banks of India. The one significant observation from the table is that the ICICI bank has
attracted more FII inflow than the public sector bank (SBI). FIIs are showing interest in private
sector banks as they are secular growth stores and are relatively better investment options as
compared with public sector banks in an environment where asset quality is the reason for stress
on banking.

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Vol.2, No. 6, June (2013)
Online available at www.indianresearchjournals.com

Table 6: Percentage of FII shareholding in total shares in selected BANKING companies

SBI
June
Sept
December
March
Avg.

ICICI BANK
2007-08

2008-09

2009-10

2010-11

2011-12

11.9
11.99
12.35
12.82
12.27

12.67
12.04
10.42
7.97
10.78

8.99
9.87
11.37
10.11
10.09

11.47
13.99
13.36
11.8
12.66

10.88
8.65
7.88
8.7
9.03

June
Sept
December
March
Avg.

2007-08

2008-09

2009-10

2010-11

2011-12

45.82
41.04
39.97
40.3
41.78

38.85
36.44
36.6
35.47
36.84

36.18
35.26
36.23
37.02
36.17

37.7
39.27
39.23
38.62
38.71

38.61
38.17
34.74
35.79
36.83

www.nseindia.com
The table 7 given below presents a comparative study of the largest IT companies in attracting
FII investments. The table makes it evident that of the selected two companies, FIIs have
invested more funds into equity shares of Infosys than TCS. Further, it is also quite evident that
the two companies Infosys and TCS have faced the global showdown of 2008-09.
Table 7: Percentage of FII shareholding in total shares in selected IT companies.
INFOSYS
June
Sept
December
March
Avg.

TCS
2007-08

2008-09

2009-10

2010-11

2011-12

31.82
32.78
33.25
33.36
32.80

33.57
32.54
32.99
34.86
33.49

35.66
36.05
36.52
36.36
36.15

35.84
35.78
36.6
36.12
36.09

36.88
36.66
37.36
39.02
37.48

June
Sept
December
March
Avg.

2007-08

2008-09

2009-10

201011

2011-12

7.78
8.11
10.65
10.79
9.33

11.16
11.06
10.49
10
10.68

11.2
11.87
12.33
12.43
11.96

12.15
12.44
12.79
12.64
12.51

12.8
12.81
13.41
14.02
13.26

www.nseindia.com
The table 8 below presents a comparative analysis between the two FMGC companies of India. It
is evident from the table that there has not been any difference in both the companies, attracting
FII investment. But Hindustan Unilever has outperformed than ITC during the study period.
Table8: Percentage of FII shareholding in total shares in selected FMCG
companies.
ITC
2007- 200808
09
June
12.9
13.54
Sept
13.66 13.6
December 14.06 13.97
March
12.12 13.64
Avg.
13.19 13.69
www. nseindia.com

200910
13.74
13.07
12.75
13.4
13.24

201011
13.48
14.15
14.1
14.04
13.94

201112
14.56
15.26
16.31
17.4
15.88

HINDUSTAN UNILEVER
2007- 200808
09
June
12.32 14.37
Sept
13.16 13.93
December 14.29 14.85
March
15.15 14.35
Avg.
13.73 14.38

200910
14.34
14.66
15.04
14.48
14.63

201011
16.67
17.19
17.47
17.26
17.15

201112
18.35
17.68
18.66
19.43
18.53
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Vol.2, No. 6, June (2013)
Online available at www.indianresearchjournals.com

Conclusion:
FII is a vital component which helps in the development of financial market and the overall
financial development thereby allowing the capital flows available in a country to pursue its
trajectory of economic growth. Form all the above discussions and data analysis of the study it is
inferred that there has been growing presence of the FII inflows in the Indian stock markets
which is evident through the net cumulative investments and at times of recession there has been
a decline in the inflows. It is also clear from the study that there is an increase in the number of
FII registered with SEBI.
Further the study shows the share of FII in different sectors of companies listed on NSE
from 2007 to 2012. FII held the five highest stake of banks, followed by finance, Media &
Entertainment, Information Technology and service sector. However, the FII share in Petro
chemicals showed the least during 2007-2012.
From all the discussions of the study, it is also visible that there has been no decline in
FII inflows in IT & FMCG sector even during global recession of 2008 whereas as in all the
other selected sectors, impact of recessions is quite visible.
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102