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REPORT
ON
“IMPACT OF FII’S & FDI’S ON INDIAN STOCK MARKET”
SUBMITTED TO:-
KURUKSHETRA UNIVERSITY, KURUKSHETRA
IN THE PARTIAL FULFILLMENT OF DEGREE OF
“MASTER OF BUSINESS ADMINISTRATION”
2008-2010
SUNIL KUMAR
ACKNOWLEDGEMENT
The satiation and euphonies that accompany the success completion of a task would be
incomplete without a mention of people who made it possible. So, with immense
gratitude, I acknowledge all those, whose guidance and encouragement served as a
beacon light and crowned my effort with success.
I thank Mr. ABHISHEK SIR, Faculty of MAHARAJA AGRESAIN INSTITUTE OF
MANAGEMENT & TECHNOLOGY, JAGADHARI and my project guide for his
valuable guidance and suggestions, and external guide Mr. Sandeep Saini center manager
at reliance money Amballa which were vital inputs towards the completion of the project.
Lastly, I would like to thank all those who have directly or indirectly helped me complete
the project successfully.
SUNIL KUMAR
EXECUTIVE SUMMARY
Management ideas without any action based on them mean nothing. That is why practical
experience is vital for any management studies. Theoretical studies in the class room are
not sufficient to understand the functioning climate and the real problems coming in the
way of management. So, practical exposures are indispensable to such courses. Thus,
practical experience acts as a supplement to the classroom studies. This report
deals with Impact of FII’s And FDI’s On Indian Stock Market. has been completed. I
have learnt a lot of new things which could never been learnt from theory classes. The
next part include whole of research process used for the project. It contains research
methodology, research objective, scope analysis and interpretation of the data, collected
from secondary resources. It also consists limitations of the study.
In this study I have collected data from secondary source. In this study in
used descriptive research design is used. This part includes observations analysis and
discussion on collected data then suggestions are given these are based are on the
usefulness of the study, applicability in the business industry, in decision making, in
system development so far.
CONTENTS
INTRODUCTION
FEATURES OF STOCK MARKET
OPERATIONAL DEFINITIONS
LITERATURE REVIEW
RESERCH METHODOLOGY
OBJECTIVES
RESEARCH DESIGN
DATA COLLECTION
DATA ANALYSIS
SAMPLING PLAN
SAMPLING DESIGN
SCOPE OF STUDY
LIMITATIONS OF THE STUDY
INDUSTRY PROFILE
FOREIGN INSTITUTIONAL INVESTMENT IN INDIA:
MILESTONE
ACTS AND RULE
INVESTMENT OPPORTUNITIES FOR FIIs
BRIEF PROFILE OF IMORTANT INSTITUTIONS
COMPANY PROFILE
FINDINGS AND DATA ANALYSIS
CONCLUSION
SUGGESTIONS & RECOMENDATIONS
BIBLIOGRAPHY
INTRODUCTION
A” STOCK EXCHANGE “is a platform where buyers and sellers of securities issued by
governments, finance institutions, corporate houses etc., meet and where trading of
These corporate securities take place. This is a market of speculation. If speculation of
investors become wrong than the investors loss. Nobody knows what will happen even
after a second.
A Stock Exchange refers to the segments of the capital market where the securities issued
by corporate are trade. It is open auction market where buyers and sellers meet and
involve competitive prices of the securities. It reflects hopes aspiration fair of people
regarding the performance of the economy. I t provides necessary mobility to capital and
direct flow of the capital into possible and successful enterprise.
Since buying and selling of the different of securities take place ion stock exchange. The
prices of particularl securities reflect there demand and supply. In fact, stock exchange is
said to be a barometer of economy and financial health.
The stock exchange is the nerve center of capital market. The stock exchange discharges
three essential functions in the process of capital formation not in raising resources for
the corporate sector.
It provides places for sale and purchase of securities i.e. share, bonds etc. . . .
It [provides linkage between the saving of household sector and investment in corporate
sector of economy.
It provides market quotation for shares debenture and bonds and serves as a role of
barometer, not only of the state of health of individual companies but also of the
economy as a whole.
Therefore, by providing market place quotation of the prices of shares and bonds or sort
of collective judgment. Simultaneously reached by many buyers and sellers in the
market stock exchange serve the role of barometer, not only of the state of health of
individual companies but also of the nation’s economy as a whole.
Investors and speculators, who want to buy and sell securities, can do so through
members of stock exchange i.e. brokers
OPERATIONAL DEFINITIONS
STOCK MARKET:-
A STOCK EXCHANGE is a platform where buyers and sellers of securities issued by
governments, finance institutions, corporate houses etc., meet and where trading of these
corporate securities take place.
MUTUAL FUNDS: - A Mutual fund is a trust that pools the saving of a number of
investors who share a common financial goal.
BULL MARKET: - A Bull market is a market that is consistently going up. It is a market
where there is optimism of further rise batter, business results and other positive factors.
Bull Market can sometimes continue for years, for investors this is the preferred market
trend. However no bull market can continue for very long.
BEAR MARKET: - Bear Market is a market that is showing a persistent downtrend. A
15-20% downward movement of the market generally termed as a bear market.
PORTFOLIO INVESTMENT – covers the acquisition and disposal of equity and debt
securities that cannot be classified under direct investment or reserve asset transactions.
These securities are tradable in organized financial markets.
FDI FLOWS AND STOCKS – Through direct investment flows the investors builds up a
direct investment stock (position), making part of the investor’s balance sheet. The FDI
stock (position) normally differs from accumulated flows because of revaluation (changes
in prices or exchange rates) and other adjustments like rescheduling or cancellation of
loans, debt forgiveness or debt-equity swaps with different values.
HOST ECONOMY – is the country that receives FDI or FPI from the foreign investor(s).
Bruce A. Blonigen
This paper surveys the recent burgeoning literature that empirically examines the foreign
direct investment (FDI) decisions of multinational enterprises (MNEs) and the resulting
aggregate location of FDI across the world. The contribution of the paper is to evaluate
what we can say with relative confidence about FDI as a profession, given the evidence,
and what we cannot have much confidence in at this point. Suggestions are made for
future research directions.
Hugo Rojas-Romagosa
Foreign Direct Investment (FDI) flows have increased substantially in the past two
decades. These developments have motivated the appearance of a large number of
empirical papers that test the expected benefits that FDI inflows are assumed to bring to
the host countries. We survey the recent theoretical and empirical literature, but restrict
our attention to the productivity changes that are induced by increased FDI inflows. We
review both the aggregate productivity effects, as well as the spillover effects of FDI on
local firms.
Giorgio De Saints
This paper study the dynamics of expected stock return and volatility in emerging
financial market. We find clustering predict ability and persistence in conditional
volatility and others have documented for mature market. However, emerging market
exhibit higher volatility and conditional probability of large price changes then mature
market exposure to high country specific risk does not appear to be rewarded with higher
expected return. We deduct a risk reward relation in Latin America but not in Asia.
Karimullah:
The article examines the impact of foreign institutional investor s FII equity investment
behavior in the Indian stock market. It attempts to find out the two-way causality between
foreign institutional investors (FIIs) behavior and performance of Indian stock market for
the period of January 1997 to June 2007.this article seeks to examine the idea that
financial liberalization induces increased efficiency in the financial market as permission
of FIIs equity investment is an important example of financial liberalization. Return in
the stock market is used as proxy for the efficiency of the stock market in India .granger
causality test has been applied to test the bidirectional causality. Apart from net
investment of FIIs, the purchase and sales behavior of FIIs are analyzed separately. The
results indicate that stock market performance is a major determinant of both the FIIs
purchase and sales behavior. But we did not find strong evidence that the variations in the
stock market indices are determined by FIIs investment behavior.
RESEARCH METHODOLOGY
Research Methodology has many dimensions, it include not only research methods but
also considers the logic behind the methods used in the context of the study and explains
why only a particular method of technique had been used so that research lend
themselves to proper evaluations. Thus in a way it is a written game plan for concluding
research therefore in order to solve research problem it is necessary to design a research
methodology for the problem as the same differ from problem to problem.
Research Design:
The research design is a pattern or an outline of a research project . It is a statement only
the essential of a study those provide the basic guidelines for the detail of the project. The
present study being conducted follows a descriptive research design has the data would
be responses from a simple containing g a large numbers of sources .It is a cross section
of the situation design of the descriptive studies including the nature and the analytical
method.
Data Collection
After the research problem has been defied and the research design has been chalked out,
the task of date collection begins. Data can be collected from other primary or secondary
sources.
The main source of obtaining necessary data for the study was Secondary Data. This
study is empirical in nature and hence secondary data is used to conduct the research. The
data was collected from the Internet by exploring the Secondary sources available on
websites. Secondary Data: The secondary data constitutes of daily FII flows data which
was collected from Money Control and Equity Master, the daily returns of SENSEX and
NIFTY from BSE and NSE websites respectively. The trends in FII flow from the RBI
website and information on FII from SEBI.
INTERNET: -
www.sebi.gov.in
wwwnse.co.in
www.moneycontrol.com
etc.
SAMPLING PLANNING
Sampling is an effective step in collection of primary and secondary data and has a great
influence on the quality of the results. The sampling plan includes population, sample
size and sample design.
DATA ANALYSIS:-
PLAN OF ANALYSIS
The data gathered from various sources were primarily studied and necessary data was
sorted out sequentially keeping in mind the procedure of the study. The analysis has been
made by, correlating the FII purchases, sales and net investment with equity market
returns to identify whether a relation exists between them. Findings are included which
transmits the important points, which were gathered from the study.
The data has been analyzed with the help of various graphs like bar graph etc.
SCOPE OF THE STUDY
The report examines The Impact of Foreign Institutional Investments and Foreign Direct
Investment on Equity Stock Market in India. The scope of the research comprises of
information derived from secondary data from various websites. The various information
and statistics were derived from the websites of BSE, NSE, Money Control, RBI and
SEBI. Sensex and Nifty was a natural choice for inclusion in the study, as it is the most
popular market indices and widely used by market participants for benchmarking.
Success in India
Success in India will depend on the correct estimation of the country's potential;
underestimation of its complexity or overestimation of its possibilities can lead to failure.
While calculating, due consideration should be given to the factor of the inherent
difficulties and uncertainties of functioning in the Indian system. Entering India's
marketplace requires a well-designed plan backed by serious thought and careful
research. For those who take the time and look to India as an opportunity for long-term
growth, not short-term profit- the trip will be well worth the effort.
Market potential
India is the fifth largest economy in the world (ranking above France, Italy, the United
Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It is
also the second largest among emerging nations. (These indicators are based on
purchasing power parity). India is also one of the few markets in the world, which offers
high prospects for growth and earning potential in practically all areas of business.
Despite the practically unlimited possibilities in India for overseas businesses, the world's
most populous democracy has, until fairly recently, failed to get the kind of enthusiastic
attention generated by other emerging economies such as China.
Lack of enthusiasm among investors
The reason being, after independence from Britain 50 years ago, India developed a highly
protected, semi-socialist autarkic economy. Structural and bureaucratic impediments
were vigorously fostered, along with a distrust of foreign business. Even as today the
climate in India has seen a sea change, smashing barriers and actively seeking foreign
investment, many companies still see it as a difficult market. India is rightfully quoted to
be an incomparable country and is both frustrating and challenging at the same time.
Foreign investors should be prepared to take India as it is with all of its difficulties,
contradictions and challenges.
Developing a basic understanding or potential of the Indian market
Envisaging and developing a Market Entry Strategy and implementing these strategies
when actually entering the market are three basic steps to make a successful entry into
India. The Indian middle class is large and growing; wages are low; many workers are
well educated and speak English; investors are optimistic and local stocks are up; despite
political turmoil, the country presses on with economic reforms. But there is still cause
for worries- Infrastructure hassles.
The rapid economic growth of the last few years has put heavy stress on India's
infrastructure facilities. The projections of further expansion in key areas could snap the
already strained lines of transportation unless massive programs of expansion and
modernization are put in place. Problems include power demand shortfall, port traffic
capacity mismatch, poor road conditions (only half of the country's roads are surfaced)
and low telephone penetration.
Indian Bureaucracy
Although the Indian government is well aware of the need for reform and is pushing
ahead in this area, business still has to deal with an inefficient and sometimes still slow-
moving bureaucracy.
Diverse Market
The Indian market is widely diverse. The country has 17 official languages, 6 major
religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ
greatly among sections of consumers. Therefore, it is advisable to develop a good
understanding of the Indian market and overall economy before taking the plunge.
MILESTONES
FII registration and investment are mainly governed by SEBI (FII) Regulations, 1995.
The main aims and objectives of the BSE are to provide a market place for the purchase
and sale of security evidencing the ownership of business property or of a public or
business debt. It aims to promote, develop and maintain a well-regulated market for
dealing in securities and to safeguard the interest of members and the investing public
having dealings on the Exchange. It helps industrial development of the country through
efficient resource mobilization. To establish and promote honorable and just practices in
securities transactions
BSE Sensex
The BSE Sensex is a value-weighted index composed of 30 companies with the base
April 1979 = 100. It has grown by more than four times from January 1990 till date. The
set of companies in the index is essentially fixed. These companies account for around
one-fifth of the market capitalization of the BSE.
Reliance Money Limited has been promoted by Reliance Capital Limited a part of Anil
Dhirubhai Ambani Group with the Net-worth – Rs. 4500 cr., amongst the top 3 banking
& financial services companies in the private sector.
BOARD OF DIRECTORS
Shri C. P. Jain
Reliance money is a part of the reliance Anil Dhirubai Ambani Group and is promoted by
Reliance capital, the fastest growing private sector financial services company in India,
ranked amongst the top 3 private sector financial companies in terms of net worth.
Reliance money is a comprehensive financial solution provider that enables you to carry
out trading and investment activities in a secure, cost-effective and convenient manner.
Through reliance money, you can invest in a wide range of asset classes from Equity,
Equity and commodity Derivatives, Mutual Funds, insurance products, IPO’s to availing
services of Money Transfer & Money changing.
Reliance Money offers the convenience of on-line and offline transactions through a
variety of means, including its Portal, Call & Transact, Transaction Kiosks and at it’s
network of affiliates.
Mission statement:
“Our mission is to be a leading and preferred service provider to our customers, and we
aim to achieve this leadership position by building an innovative, enterprising , and
technology driven organization which will set the highest standards of service and
business ethics.”
Reliance Capital has interests in asset management and mutual funds, life and general
insurance, private equity and proprietary investments, stock broking, depository services,
distribution of financial products, consumer finance and other activities in financial
services.
Reliance Mutual Fund is India's no.1 Mutual Fund. Reliance Life Insurance is India's
fastest growing life insurance company and among the top 4 private sector insurers.
Reliance General Insurance is India's fastest growing general insurance company and the
top 3 private sector insurers. Reliance Money is the largest brokerage and distributor of
financial products in India with more than 2.5 million customers and the largest
distribution network. Reliance Consumer finance has a loan book of over Rs. 8,000
crores at the end of June 2008.
Reliance Capital has a net worth of Rs.6,862 crores (US$ 1.6 billion) and total assets of
Rs. 19,940 crores (US$ 4.6 billion) as of June 30, 2008 and over 26,000 employees.
Money has increased its market share among private financial companies to nearly
Convenient & effective – Anytime & anywhere financial transaction capability.
Launched in April 2007. It provides the Flat fees system. It has 2.2 million customers in 1
year of official launch. It has over 5,000 outlets across 700 towns/cities. Average daily
turnover – in excess of Rs 2,000 crores.
Considering the entire life market, including the Rs. 12,890 crores booked by life
insurance Corporation, Reliance life insurance market share works out to around 6.25% .
The life insurance market continuous to be dominated by LIC which has about 67% share
this only a marginal dip from its 73% share in end-July. These comparisons are only for
first year or new business premium.
The gap between Reliance life insurance and the second-in-line private insurer is vast. In
fact, this scenario has led some analysts to wonder if the company is not a trifle too
aggressive. But others say this has more to do with the companies’ customer-centric
focus, its pan-India presence and superior risk management and investment strategies.
Reliance Money is not, however, resting on its laurels.
Company’s customer centric approach will be studied during the training period and the
finding of the research work will definitely focus on the present condition & future
requirement (if any) relating to products of company.
Thus, Reliance Money provides a comprehensive platform, offering an investment
avenue for a wide range of asset classes. Its endeavor is to change the way India transacts
in financial market and avails financial services. Reliance Money offers a single window
facility, enabling you to access amongst others, Equities, Equity and Commodity
derivatives, Offshore Investments, IPO’s, Mutual Funds, Life Insurance and General
Insurance products.
Advantages offered by Reliance money over other companies:
Cost Effective
Convenience
Security
Single Window for Multiple Products
3 in 1 Integrated Access
Demat Account with Reliance Capital
PRODUCT OFFERING
Trading Portal (with almost negligible brokerage )
Equity Broking
Commodity Broking
Derivatives ( Futures & Options )
Offshore Investments (Contract For Differences)
D-Mat Account.
Financial Products
Mutual Funds
Life Insurance
ULIP plan
Money Back Plan
General Insurance
Vehicle/Motor Insurance
Health Insurance
House insurance
IPO’s
Value-Added Services
ORGANIZATIONAL STRUCTURE
National Level : National Head
Zonal Level : Zonal Head
Regional Level : Regional head
Divisional level : Cluster Head
Branch Level : Center Manager
Area Level : Business Development Executives & Freelancers
SALES METHODOLOGY
PERFORMANCE OF INDIAN STOCK MARKET
Indices : sensex For the period : from year 1991 To year 2008
A. Direct B. Portfolio
Year Investment Investment Total (A + B)
(US $ million) (US $ million) (US $ million)
1990-91 97 6 103
1991-92 129 4 133
1992-93 315 244 559
1993-94 586 3567 4153
1994-95 1314 3824 5138
1995-96 2144 2748 4892
1996-97 2821 3312 6133
1997-98 3557 1828 5385
1998-99 2462 61 2523
1999-00 2155 3026 5181
2000-01 4029 2760 6789
2001-02 6131 2021 8152
2002-03 4660 979 5639
2003-04 4675 11377 16052
From a net foreign investment inflow of US $ 5.3 billion in 1997-98, such inflows
declined to US $ 2.4 billion in 1998-99. This is because of the lower portfolio inflows, as
a result of which the net investment has dropped. The changes in the investment
conditions in a country or region can lead to dramatic swings in portfolio investment. For
a country on the rise, in other words for developing countries, FPI can bring about rapid
development, helping an emerging economy move quickly to take advantage of economic
opportunity, creating many new jobs and significant wealth. However, when a country's
economic situation takes a downturn, sometimes just by failing to meet the expectations
of international investors, the large flow of money into a country can turn into a stampede
away from it.
CHART: FOREIGN INVESTMENT FLOWS
12000
10000
8000
6000
4000
2000
0
1990-91 1991-92 1992- 1993- 1994-95 1995-96 1996-97 1997-98 1998- 1999- 2000- 2001- 2002- 2003-
93 94 99 00 01 02 03 04
FPI FDI Y EA R
Foreign portfolio investments have been allowed in India on the basis of the
recommendations of the Narasimham committee which stated:
The committee would also suggest that the capital markets should be gradually opened up
to foreign portfolio investments and simultaneously efforts should be initiated to improve
the depth of the market by facilitating the issue of new types of equities and innovative
debt instruments.’ (Narasimham committee report)
Prior to 1992, only non-resident Indians (NRIs) and Overseas corporate bodies (OCBs)
were allowed to undertake portfolio investment in India. Only on September 14, 1992 the
Government of India issued guidelines on FII investments in India which was followed
by a notification by Securities and Exchange Board of India (SEBI) three years later in
November 1995.
TRENDS IN FII INVESTMENT IN INDIA
TABLE: Trends in FII investment
Year FII PURCHASEFII SALES FII NET FII NET CUM FII NET
in crores in crores in crores US$ million US$ million
1993-94 5593 466 5126 1634 1638
1994-95 7631 2835 4796 1528 3167
1995-96 9694 2752 6942 2036 5202
1996-97 15554 6979 8575 2432 7634
1997-98 18695 12737 5958 1649 9284
1998-99 16115 17699 -1584 -386 8898
1999-00 56856 46734 10122 2339 11237
2000-01 74051 64116 9934 2160 13396
2001-02 49920 41165 8755 1846 15242
2002-03 47060 44371 2689 562 15804
2003-04 144858 99094 45765 9949 25754
INFERENCE: The investments by FIIs have been registering a steady growth since the
opening of the Indian capital markets in September 1992. Their investments have always
been net positive, but for 1998-99, when their sales were more than their purchases.
It can be observed from the above table that the portfolio investment inflows have always
been on the increase. But the years 2001-02 and 2002-03 saw some reversal in the trend.
From a net inflow of US $ 2.1 billion in 2000-01, such inflows declined to US $ 1.8
billion in 2001-02, and further dropped to US $ 0.562 billion in 2002-03. The decline is
because of the lower portfolio inflows, as a result of which the net investment has
dropped in these years. However, this decline witnessed a sharp reversal in the year 2003-
04. FIIs have made a net investment of Rs. 45,764 crores during this year registering a
growth of 1602% over the previous year, creating a record in the history of FII
investment in India. Gross purchases in this year amounted to Rs.144,857 crores, a
growth rate of 208% compared to the year before. This trend continued in April 2004,
only to suffer reversal again during May and June 2004, when the net investment became
negative. Fortunately, the year from July 2004 has been seeing a net positive portfolio
flows by FIIs. As of September 2004, the net FII portfolio investment stands at US $
27,637 million. If it is so, then increasing the FII investment cap per se will not be
helpful. The country has to work on specific measures to encourage more FII
investments. The analysis of data indicates that there has been substantial divestment by
the FIIs during the year 1998-99. The maximum outflow was during the months of May
and June 1998 (almost US$430 millions).
TABLE: Monthly Trends of FIIs for the Year 1998-99
A major factor which led to continuous outflow of funds during the middle and end of the
year 1998 was the worsening outlook on the emerging markets. Credit worthiness of
almost all the South-east Asian nations was severely damaged by the crises which started
in July 1997. As a result, the FIIs were facing heavy redemption pressures from the
Emerging Markets Funds. The stock markets in all these countries fell continuously from
March 1998 till about September 1998. The integration of the Indian capital markets with
the international markets thus spilled over to Indian markets as well. However, the net
outflow from the Indian markets was much lower than the other Asian countries. A
further indication of the integration of the Indian markets can be seen from the upsurge in
the valuations and funds inflows during the first quarter of 1999, when all the other Asian
countries have also seen rising trend in stocks indices.
The sluggishness in investment in the emerging markets was exacerbated by the fact that
hroughout 1998-99, US and European markets showed historically high valuations, and
the expectations of further rise because of the strong economic indicators there which led
to reduced allocations elsewhere.
CHART : GROWTH OF FII INVESTMENTS IN INDIA
INFERENCE: The trickle of FII flows to India that began in January 1993 has gradually
expanded to an average monthly inflow of close to Rs. 1900 crores during the first six
months of 2001. By June 2001, over 500 FIIs were registered with SEBI. The total
amount of FII investment in India had accumulated to a formidable sum of over
Rs.50,000 crores during this time. In terms of market capitalization too, the share of FIIs
has steadily climbed to about 9% of the total market capitalization of BSE (which, in
turn, accounts for over 90% of the total market capitalization in India).
The behaviour of the foreign portfolio investors matched the behaviour of Sensex during
this period. Net FII investment in the Indian capital markets started fluctuating sharply
during April and it turned negative. Net FII investment in the Indian stock market was
positive from May to July. During this period, the Sensex and net FII investment showed
very high degree of correlation. For the month of June showed a correlation as high as
0.60. The months of September, October, November and December shows a declining
trend, the FII investment reversed from that day. On the whole, there exists a relationship
between FIIs and Sensex since 7 out of 12 months show positive correlation in the case
of Gross Purchases and 8 out of 12 months indicate a positive correlation in the case of
Net FII Investment and Sensex.
TABLE: COEFFECIENT OF DETERMINATION OF FII WITH NIFTY
Top 10 countries have accounted for more than a half of India’s FDI approvals during
1991-95, while is share increased to about 70% over 2004-05. this able shows ranking of
cumulative investment approved during the period 1991 to January 2006 reveals that
USA was the largest investor in India with an investment of Rs. 59394crores Netherlands
, France and Singapore follows in that order . but the share of USA has been declining ,
whereas the shares of Mauritius has been increasing from past few years . it has b
increased by more than 80% in2004-05 compared to 2003-04 , mainly due to FDI being
routed through Mauritius , as it has a double Taxation avoidance treaty with India . in
terms of FDI inflow into the country , Mauritius topped the list with90% share of total
FDI inflows , whereas USA holds the 2nd position with 15.48% of total FDI inflows in
India . thus in terms of FDI inflows Mauritius is way ahead from UK ,Japan Netherlands
Germany , Singapore ,France South Korea and Switzerland follows in that order .South
Korea who holds2.23%share Australia who holds 8th positioning FDI approvals with
2.65% share ,does not figure in top 10 countries in FDI inflows . O the other hand ,
Switzerland , which does not come in FDI approvals holds holds 10th position in FDI
inflows with 1.94% share .Above table shows that FDI inflows from all countries have
been increased in 2004-05
Total FDI and FDI in ICT Sector
Under consideration , it has been observed that there are some fluctuations in the growth
rate both in positive rates. From 1991-92 to 1997-98 , there has been a steady growth in
FDI inflow but it drastically fall is again noticed in 2002-03 and 2003-04.The most
probable reasons behind these alarming downfalls is the result of various asian crise and
sanctions amposed on India as a cosequence of nuclear explosion test by government of
India that cast a shadow on FDI inflows to India during the period 1998-2000. further
there seems a declining trend in FDI in the period 2001-4 . This trend was felt across the
world ( 108 countries according to world investment report 2003 ) as the world was
experiencing an economic slowdown . Reduction in M&As( merger and acquisitions )
was the major reason and also the war in Iraq and SARS had a negative impact on global
capital flows in 2003. In 2004 , global FDI inflows began to recover after the stock of
previous year .
The statistical description in terms of mean, standard deviation , minimum ,
maximum and coefficient of variance shows:
The CV% is almost equal as seen in above tables ,which represents that the variability in
the FDI inflows and FDI in ICT sector is approximately similar . This depicts that
whenever there is a change in the FDI inflows , the FDI in ICT as also affected.
Year Wise FDI inflows into Infrastructure sector during April 2000 to December
2007
Year amt.
2000-01 292.37
2001-02 1902.26
2002-03 347.33
2003-04 388.37
2004-05 456.00
2005-06 914.04
2006-07 2179.39
Total 10575.56
FINDINGS:
It is an accepted fact now that FIIs have significant influence on the movements of the
stock market indexes in India. If one looks at the total FII trade in equity in India and its
relationship with the stock market major indexes like Sensex and Nifty, it shows a
steadily growing influence of FIIs in the domestic stock market.
FIIs and the movements of Sensex are quite closely correlated in India and FIIs wield
significant influence on the movement of Sensex. NSE also observes that in the Indian
stock markets FIIs have a disproportionately high level of influence on the market
sentiments and price trends. This is so because other market participants perceive the FIIs
to be infallible in their assessment of the market and tend to follow the decisions taken by
FIIs. This ‘herd instinct’ displayed by other market participants amplifies the importance
of FIIs in the domestic stock market in India.
Results of this study show that not only the FIIs are the major players in the domestic
stock market in India, but their influence on the domestic markets is also growing. Data
on trading activity of FIIs and domestic stock market turnover suggest that FII’s are
becoming more important at the margin as an increasingly higher share of stock market
turnover is accounted for by FII trading. Moreover, the findings of this study also indicate
that Foreign Institutional Investors have 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 (Sensex) and NSE Nifty, their level of control is
very high. Dominant position of FIIs in the Sensex companies, it is not surprising that
FIIs are in a position to influence the movement of Sensex and Nifty in a significant way.
Since FIIs are dominating the Indian Market, individual investors are forced to accept the
dictates of major FIIs and hence join the group by entering the Mutual Fund group. Many
Mutual Funds floated specific funds for the sectors favoured by the FIIs. An implication
of MFs gaining strength in the Indian stock market could be that unlike individual
investors, whose monies they manage, MFs can create market trends whereas the small
individual investors can only follow the trends. The situation becomes quite difficult if
the funds gain a vested interest in certain sectors by floating sector specific funds. One
can even venture to say that the behavior of MFs in India has turned the very logic that
mutual funds invest wisely on the basis of well-researched strategies and individual
investors do not have the time and resources to study and monitor corporate performance,
upside down. Thus, the entry of FIIs has not resulted in greater depth in Indian stock
market; instead it led to focussing on only a few sectors. Ultimately to provide a level
playing field, even the domestic investors had to be offered lower rates of capital gains
tax.
While it can be expected that foreign affiliated mutual funds would follow the investment
pattern of FIIs, it is important to note that many domestic ones also followed FIIs. The
sectors favoured by FIIs account for a substantial portion of the net assets under control
of many Mutual Funds. The Mutual funds are gaining prominence in the Indian Stock
market and that the share of foreign affiliated MFs is growing, a number of Indian funds
are following the investment strategies of the foreign ones.
On the other hand if FII investments constitute a large share of the equity capital of a
financial entity, an FII pullout, even if driven by development outside the country can
have significant implications for the financial health of what is an important institution in
the financial sector of this country.
Similarly, if any set of developments encourages an unusually high outflow of FII capital
from the market, it can impact adversely on the value of the rupee and set of speculation
in the currency that can in special circumstances result in a currency crisis. There are now
too many instances of such effects worldwide for it be dismissed on the ground that
India's reserves are adequate to manage the situation.
FII investments, seem to have influenced the Indian stock market to a considerable
extent. FIIs are interested in the Indian stock market increases its vulnerability to
fluctuations. Analysis suggested a strong influence of FII investment on the Sensex and
Nifty index. This finding takes quite further the general understanding that net FII
investments influences stock prices in India as it traces the relationship
CONCLUSION
In this study I tried to find out the impact of FDIs and FIIs on Indian Stock Market .the
important result of this study is that the foreign investment is determined by stock market
return. But foreign investment is not a major factor for the stock market boom in India
the FII are increasingly dominant in the stock market. The domestic investors and
domestic companies remain not so dominant. There is therefore the fear of sudden
outflows of the foreign capital and this may be a trigger a third stock market scam as
most regulatory changes re being made only as a follow up of an adverse event.
SUGGESTIONS AND RECOMENDATIONS
Some of the steps that can be taken to help influence the choices made by foreign
institutional investors include:
The Government should cut its fiscal deficits, which would result in strengthening the
economy as a whole.
Creating infrastructure and other facilities to attract foreign investment. As described
earlier, an array of services can help promote foreign institutional investment in India,
ranging from basic services such as the provision of electricity and clean water, to fair
and effective dispute resolution systems.
The ability of governments to prevent or reduce financial crises also has a great
impact on the growth of capital flows. Steps to address these crises include strengthening
banking supervision, requiring more transparency in international financial transactions
and ensuring adequate supervision and regulation of financial markets.
An attempt should be made to bring down the inflation level to attract more foreign
institutional investments into India.
The Banking system needs to be strengthened which could be achieved by reducing
the number of Non Performing Assets.
The FIIs investments, though shown an increasing trend over time, are still far below
the permissible limits. One such measure in this line could be the newly announced
INDONEXT, the platform for trading the small and mid-cap companies, which might
bring some focus on these companies and hopefully add some liquidity and volume to
their trading, which may attract some further investments in them by FIIs.
The fact is that developing country like India has its own compulsions arising out of
the very state of their social, political and economic development. To attract portfolio
investments and retain their confidence, the host countries have to follow stable macro-
economic policies,
The provision for clear procedures must be followed in the event of disputes between
investors and host governments, to ensure that rules are adhered to and that arbitration
may be established by mutual consent.
Countries may impose these kinds of measures like expropriation, domestic content
requirements, restrictions on capital outflows of short term investments, etc with the
intention of protecting domestic industries from international competition and promoting
their economic development, but this usually leads to misallocation of resources away
from the natural economic capabilities of nations.
There has been a significant shift in the character of global capital flows to the
developing countries in recent years in that the predominance of private account capital
transfer and especially portfolio investments (FPI) increased considerably. In order to
attract portfolio investments which prefer liquidity, it has been advocated to develop
stock markets.
BIBLIOGRAPHY
BOOKS:-
Business environment (Suresh Bedi)
The Journal of Amity Management Analyst (Jan. June 2007)
The Journal of Business ,vol.59,no.3, 383-403.
The Journal of Finance India
Apeejay journal of management and technology.(Jan 2009)
JIMS 8M April June 2007
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