Final Report 2

Mega Research Project
On
FII and Stock market

return in India
Prepared By: Guided by:

Punit Patel Prof. Neeraj Yagnik
(1219)
Centre for Management study, Dharmsinh Desai University,

Nadiad
1 INTRODUCTION
1.1 FOREIGN INSTITUTIONAL INVESTORS:
1.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.
2.‘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.
3.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.[1]
[1]
http://ezinearticles.com/?A-Study-on-Capital-Stock-Market-Movement-in-India---Present-Scenario&id=719360
1.2ENTRY OPTIONS FOR FII:
A foreign company planning to set up business operations in India has the following
options:Incorporated Entity
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 to equity caps in respect of the area of activities under the Foreign Direct Investment
(FDI) policy. [2]
1.3 IMPORTANT TERMS TO KNOW ABOUT FIIS:

Sub-account :
Sub-account includes those foreign corporations, foreign individuals, and institutions, funds or
portfolios established or incorporated outside India on whose behalf investments are proposed to be
made in India by a FII.
Designated Bank:
Designated Bank means any bank in India which has been authorized by the Reserve Bank of India to
act as a banker to FII.
Domestic Custodian:
Domestic Custodian means any entity registered with SEBI to carry on the activity of providing
custodial services in respect of securities.
Broad Based Fund:
Broad Based Fund means a fund established or incorporated outside India, which has at least twenty
investors with no single individual investor holding more than 10% shares or units of the fund.
Provided that if the fund has institutional investor(s) it shall not be necessary for the fund to have
twenty investors.
If the fund has an institutional investor holding more than 10% of shares or units in the fund, then the
institutional investor must itself be broad based fund. [3]
[2]
http://news.indiamart.com/news-analysis/fii-s-influence-on-s-2626.html
[3]
http://www.rediff.com/money/2003/oct/06spec2.htm
1.4 FOREIGN INSTITUTIONAL INVESTORS REGISTRATION:

Following entities / funds are eligible to get registered as FII:
• Pension Funds
• Mutual Funds
• Investment Trust
• Insurance or reinsurance companies
• Investment Trusts
• Banks
• Endowments
• University Funds
• Foundations
• Charitable Trusts or Charitable Societies
Further, following entities proposing to invest on behalf of broad based funds, are also eligible
to be registered as FIIs:
• Asset Management Companies
• Institutional Portfolio Managers
• Trustees
• Power of Attorney Holders. [4]
1.5 TREND OF FIIS WITH THE HELP OF ECONOMIC FIGURES:

• In 2004, FII investments crossed $9 billion, the highest in the history of Indian capital markets.
• The total net investment for the year up to December 29 stood at US$9,072 million while foreign
investors pumped in about US$2,113 million in December.
• Korea and Taiwan have always been the biggest recipients of FII money. It was only in 2004 that
India managed to receive the second highest FII inflow at over $8.5bn.
[4]
http://www.rediff.com/money/2003/oct/06spec2.htm
• In 2005 FIIs invested more in Indian equities than in Korean or Taiwanese equities.
• On 9th March 2009, India's exceptional growth story and its booming economy have made the
country a favourite destination with foreign institutional investors (FIIs). It has continued to attract
investment despite the Satyam non-governance issue and the global economic contagion impact on
Indian markets.
• According to Mr Gautam Chand, CEO of Instanex, said FIIs are the largest institutional investors in
India with holdings valued at over US$ 751.14 billion as on December 31, 2008.
• They are also the most successful portfolio investors in India with 102 per cent appreciation since
September 30, 2003.
• As per SEBI, number of registered FIIs stood at 1626 and number of registered sub-accounts stood at
4972 as on March 17, 2009. [5]
Chart 1
FII net flow in india
source: sebi website
[5]
www.ide.go.jp/English/Publish/De/pdf/04_04_02.pdf
chart 2
sources of FII investment in india
source: sebi website

Future Prospects of Foreign Institutional Investments:
•Sustaining the growth momentum and achieving an annual average growth of 9-10 % in the next
five years.
•Simplifying procedures and relaxing entry barriers for business activities and providing investor
friendly laws and tax system.
•Checking the growth of population; India is the second highest populated country in the world
after China. However in terms of density India exceeds China, as India's land area is almost half of
China's total land. Due to a high population growth, GNI per capita remains very poor. It was only
$ 2880 in 2003 (World Bank figures).
•Boosting agricultural growth through diversification and development of agro processing.
•Expanding industry fast, by at least 10% per year to integrate not only the surplus labour in
agriculture but also the unprecedented number of women and teenagers joining the labour force
every year.
•Developing world-class infrastructure for sustaining growth in all the sectors of the economy
•Allowing foreign investment in more areas.
•Effecting fiscal consolidation and eliminating the revenue deficit through revenue enhancement
and expenditure management.
•Global corporations are responsible for global warming, the depletion of natural resources, and the
production of harmful chemicals and the destruction of organic agriculture.
•The government should reduce its budget deficit through proper pricing mechanisms and better
direction of subsidies. It should develop infrastructure with what Finance Minister P Chidambaram
International Research Journal of Finance and Economics - Issue 5 (2006) 171 of India called
“ruthless efficiency” and reduce bureaucracy by streamlining government procedures to make them
more transparent and effective.
•Empowering the population through universal education and health care, India must maximize the
benefits of its youthful demographics and turn itself into the knowledge hub of the world through
the application of information and communications technology (ICT) in all aspects of Indian life
although, the government is committed to furthering economic reforms and developing basic
infrastructure to improve lives of the rural poor and boost economic performance. Government had
reduced its controls on foreign trade and investment in some areas and has indicated more
liberalization in civil aviation, telecom and insurance sector in the future. [6]
[6]
2 REVIEW OF LITERATURE
Global perspective:
Author Frequency Flows’ Period Finding (relation)

Destination
Bohn & tesar Quaterly 17 developed & 1989-1996 Positive
(1996) 5 E.M.
Clark & Berko Monthly Mexico 1980-1996 No
(1997)
Clark & Berko Monthly Mexico 1996-1997 Positive
(1997)
Choe, kho, Daily Korea 1996-1997 Positive
stultz (1999)
Grinblattt & Monthly Finland 1994-1998 Positive
Keloharju
(2000)
Karolyi (2002) Weekly Japan 1995-1998 Positive
Tabak (2003) Monthly Brazil 1990-1998 No
Pavabutor & Daily Indonesia 1995-2002 No
Yan (2003)
Bowe Daily Indonesia 1997-1999 No
&domotu
(2004)
Adabag& Monthly Turke 1998-2004 Negative
Ornedas
(2005)
(Source : foreign trade review, vol. 2)
4.Richard W.Sias (1996) has found that a trader-intensified transactions database is employed to
investigate: (1) the relation between order-flow imbalance closed-end funds share prices and discounts
(2) the role of institutional investors in closed-end funds. Empirical results are consistent with the
hypothesis that buyers (sellers) of closed-end funds face upward (downward) sloping supply (demand)
curves. The results also demonstrate that ownership statistics fail to accurately reflect institutional
investors’ importance in closed-end funds market. The results failed to provide the evidence that
institutional investors offset the position of individual investors or that institutional investors face
systematic “noise trader risk”.
5. Arshanapalli Bala et al (1997) has examined the nature and extent of linkage between the U.S. and
the Indian stock markets. The study uses the theory of co-integration to study interdependence between
the BSE, NYSE and NASDAQ. The sample data consisted of daily closing prices for the three indices
from January 1991 to December 1998 with 2338 observations. The results were in support of the
intuitive hypothesis that the Indian stock market was not interrelated to the US stock markets for the
entire sample period. It should be noted that stock markets of many countries became increasingly
interdependent with the US stock markets during the same time period. India was late in effecting the
liberalization policy and when it implanted these policies it did so in a careful and slow manner.
However, as the effect of economic liberalizations started to take place, the BSE became more
integrated with the NASDAQ and the NYSE, particularly after 1998. It must be noted that though BSE
stock market is integrated with US stock markets, it does not influence the NASDAQ and NYSE
markets.
6.Michael Mosebach et al (2000) have examined the long run equilibrium relation between the net
flow of funds into equity MF and the S&P 500 index. Applying the Engel and Granger correction
methodology followed by a state space procedure, we find that the levels of the stock market are
influenced by the net flow of funds into equity MFs. Their findings indicate that the US equity market
appears to be rationally adjusting to a structural change in the behaviour of the US investing public.
7.Kwangsoo Ko et al (2004) have examined the characteristics of institutional and foreign investor
stock ownership, and the stock price performance according to their ownership for two major Asian
markets, Japan and Korea. The differences in abnormal returns are more evident for foreign ownership
portfolios than for institutional ownership portfolios, especially in Korea. If we consider either
institutional or foreign investors, the differences in abnormal returns remain still significant in Korea,
but not in Japan. Both institutional investors’ incentive for stock holding and the extent of stock market
efficiency would be the possible explanations for the different results between Japan and Korea.
Indian perspective:
Author Frequency Flows’ Period Finding (relation)

Destination
Chakrabati Monthly India 1993-1999 No
(2002)
Batra (2003) Daily India 2000-2002 Positive
Anathanarayan Monthly India 1993-2003 No
a et al (2005)
(Source : foreign trade review, vol. 2)
5. Ilangovan Prof. D. et al (1997) held that Steps are taken to gain extra mileage as regards the level
of foreign investment receipts is concerned. Foreign direct investment is proven to have well-known
positive effect through technology spillovers and stable investments tied to plant and equipment, but
portfolio capital is associated more closely with volatility and its capacity to be triggered by both
domestic as well as exogenous factors, making it extremely difficult to manage and control.
6. Chakrabarti (2001) has examined in his research that following the Asian crisis and the bust of
info-tech bubble internationally in 1998-99 the net FII has declined by US$ 61 million. But there was
not much effect on the equity returns. This negative investment would possibly disturb the long-term
relationship between FII and the other variables like equity returns, inflation, etc. has marked a regime
shift in the determinants of FII after Asian crisis. The study found that in the pre-Asian crisis period
any change in FII found to have a positive impact on the equity returns. But in the post-Asian crisis
period it was found the reverse relation that change in FII is mainly due to change in equity returns.
Hence, any empirical exercise on FII has to take care of this fact.
7. Richard A.Ajayi et al (2001) have studied recent advances in the time-series analysis to examine
the inter-temporal relation between stock indices and exchange rates for a sample of eight advanced
economies. An error correction model (ECM) of two variables employed to simultaneously estimate
short-run and long-run dynamics of variables. The ECM result revealed significant short-run and long-
run relationship between two financial markets. Specifically, the results show that increase in aggregate
stock prices has negative short-run effect on domestic currency value. In the long-run, however, stock
prices have positive effect on domestic currency value. On the other hand currency depreciation has
negative short-run and long-run effects on stock market.
8. Stanley Morgan (2002) has examined that FIIs have played a very important role in building up
India’s forex reserves, which have enabled a host of economic reforms. Secondly, FIIs are now
important investors in the country’s economic growth despite sluggish domestic sentiment. The Morgan
Stanley report 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 influence of FIIs. Research by Morgan Stanley 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.
9. Sivakumar S (2003) has analysed 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 stabilising or destabilising for the Indian capital
market.
10. Rai Kulwant et al (2003) heldf that the present study tries to examine the determinants of Foreign
Institutional Investments in India, which have crossed almost US$ 12 billions by the end of 2002.
Given the huge volume of these flows and its impact on the other domestic financial markets
understanding the behavior of these flows becomes very important at the time of liberalizing capital
account. In this study, by using monthly data, we found that FII inflow depends on stock market
returns, inflation rate (both domestic and foreign) and ex-ante risk. In terms of magnitude, the impact
of stock market returns and the ex-ante risk turned out to be major determinants of FII inflow. This
study did not find any causation running from FII inflow to stock returns as it was found by some
studies. Stabilizing the stock market volatility and minimizing the ex-ante risk would help in attracting
more FII inflow that has positive impact on the real economy.
11. 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 returns.
12. Raju M.T, Ghosh Anirban (2004) held that volatility estimation is important for several reasons
and for different people in the market. Pricing of securities is supposed to be dependent on volatility of
each asset. In this paper we not only extend the study period of the earlier paper but also expand
coverage in terms of number of countries and statistical techniques. Mature markets / Developed
markets continue to provide over long period of time high return with low volatility. Amongst emerging
markets except India and China, all other countries exhibited low returns (sometimes negative returns
with high volatility). India with long history and China with short history, both provide as high a return
as the US and the UK market could provide but the volatility in both countries is higher. The third and
fourth order moments exhibit large asymmetry in some of the developed markets. Comparatively,
Indian market show less of skewness and Kurtosis. Indian markets have started becoming
informationaly more efficient. Contrary to the popular perception in the recent past, volatility has not
gone up. Intra day volatility is also very much under control and has came down compared to past
years.
13. Sandhya Ananthanarayanan (2004) held that as part of its initiative to liberalize its financial
markets, India opened her doors to foreign institutional investors in September, 1992. This event
represents a landmark event since it resulted in effectively globalizing its financial services industry.
We study the impact of trading of Foreign Institutional Investors on the major stock indices of India.
Our major findings are as follows. First, we find that unexpected flows have a greater impact than
expected flows on stock indices. Second, we find strong evidence consistent with the base broadening
hypothesis. Third, we do not detect any evidence regarding momentum or contrarian strategies being
employed by foreign institutional investors. Fourth, our findings support the price pressure hypothesis.
Finally, we do not find any substantiation to the claim that foreigners’ destabilize the market.
14. David A. Carpenter et al (2005) has examined that the Indian government has established a
regulatory framework for three separate investment avenues: foreign direct investment; investment by
foreign institutional investors; and investment by foreign venture capital investors. While these
investment alternatives have created clear avenues for foreign investment in India, they remain subject
to many conditions and restrictions which continue to hamper foreign investment in India.
15. Bose Suchismita et al (2005) has examined the impact of reforms of the foreign institutional
investors' (FIIs) investment policy, on FII portfolio flows to the Indian stock markets, an aspect, studies
on determinants of FII flows to India so far have not taken into consideration. FIIs have been allowed
to invest in the domestic financial market since 1992; the decision to open up the Indian financial
market to FII portfolio flows was influenced by several factors such as the disarray in India's external
finances in 1991 and a disorder in the country's capital market. Aimed primarily at ensuring non-debt
creating capital inflows at a time of an extreme balance of payment crisis and at developing and
disciplining the nascent capital market, foreign investment funds were welcomed to the country.
Analysis also helps to evaluate the impact of liberalization policies as well as measures for
strengthening of policy framework for FII flows, in the post-Asian crisis period
16. Samy Dr. P. Chella et al (2006) held that Investors can pick up stocks at these levels for a growth
story for long term i.e. for equities a 5 years holding period is reasonable to give a very above average
return. Caution may be exercised to buy only good, well established market movers and never, to buy
on margins or play intraday or dabble in derivatives market, which is high risk.
17. Sikdar Soumyen (2006) held that the surge in inflows has not been matched by a corresponding
growth in the absorptive capacity of the Indian economy. The major reason is the persistent slowdown
of industrial activity since 1997. At the same time, the Reserve Bank of India (RBI) has been reluctant
to let the rupee find its market-clearing level under the circumstances. This has resulted in steady
accretion to our foreign exchange reserves (FER) over the last few years. Problems of Foreign Capital
are widening of current account deficit, monetization, appreciation of real exchange, etc.
18. Andy Lin Chih-Yuan Chen (2006) has explored the relationship between qualified foreign
institutional investors (QFIIs) and Taiwan’s stock market and evaluates the effect of QFIIs’ investment
transactions on Taiwan’s stock market. By taking the date of easing regulatory restrictions on
foreigners’ stock investment holdings as a cutoff point, the research uses the highest and lowest 10
stocks of QFII holdings in three industry sectors as sample portfolios to study the prior- and post-event
returns.
19. Dhamija Nidhi (2007) held that the increase in the volume of foreign institutional investment (FII)
inflows in recent years has led to concerns regarding the volatility of these flows, threat of capital
flight, its impact on the stock markets and influence of changes in regulatory regimes. The
determinants and destinations of these flows and how are they influencing economic development in
the country have also been debated. This paper examines the role of various factors relating to
individual firm-level characteristics and macroeconomic-level conditions influencing FII investment.
The regulatory environment of the host country has an important impact on FII inflows. As the pace of
foreign investment began to accelerate, regulatory policies have changed to keep up with changed
domestic scenarios. The paper also provides a review of these changes.
20. P. Krishna Prasanna (2008) has examined the contribution of foreign institutional investment
particularly among companies included in sensitivity index (Sensex) of Bombay Stock Exchange. Also
examined is the relationship between foreign institutional investment and firm specific characteristics
in terms of ownership structure, financial performance and stock performance. It is observed that
foreign investors invested more in companies with a higher volume of shares owned by the general
public. The promoters’ holdings and the foreign investments are inversely related. Foreign investors
choose the companies where family shareholding of promoters is not substantial. Among the financial
performance variables the share returns and earnings per share are significant factors influencing their
investment decision. [7][8]
[7]
www:/researchpaper/4849-Impact-Foreign-Institutional-Investors-Indian-Stock-Market.aspx.html
[8]
3 RESEARCH METHODOLOGY
RATIONALE FOR STUDY:
Since last few months FII investment continuously increased in indian stock market. Mean
while sensex is also increased and crossed 20000 points. On 1st Oct. 2010, FII invested Rs. 1800 Cr. In
indian stock market because of that sensex closed 32 weeks high at 20446 points. I have selected this
topic to find out is there any relationship between FII flow and indian stock market return or not.
I will take daily data because as per literature review, monthly data do not give clear picture.
The study will provide a very clear picture of the impact of foreign institutional investors on
Indian stock indices. It will also describe the market trends due to FIIs inflow and outflow.
The study would be helpful for further descriptive studies on the ideas that will be explored.
Moreover, it would be beneficial to gain knowledge regarding foreign institutional investments, their
process of registration and their impact on Indian stock market.
SCOPE OF STUDY:
•The study is based on Sensex sample. The Sensex companies have an external image that they are
the best performers in the country. If the sample companies consist of probably a heterogeneous
group then the results may give better insight in to relationship of the specific variables.
•The data is taken on daily basis. The data of every minute basis can give more positive results.
•Due to time constraint, my project report is not fully exhaustive.
•Secondary data that I have used in this study may not give true picture of the concern.
OBJECTIVE:
Following are the objectives of the study:
• To study the scope and trading mechanism of Foreign Institutional investors in India.
• To find the relationship between the FIIs equity investment pattern and Indian stock indices.
• To analyze the impact of FIIs equity investment on specific industrial sector (FMCG, Consumer
Durables, Auto, Banking, Real Estate) indices.
RESEARCH DESIGN:
• Universe:
In this study the universe is finite and will take into the consideration related news and events that have
happened in last few year.
• Sampling Unit:
As this study revolves around the foreign institutional investment and Indian stock market. So for the
sampling unit is confined to only the Indian stock market.
•Sampling period:
3 year and 10 month (from 1st Jan. 2007 to 31st Oct. 2010)
Pre global crisis period (before 2008)
During global crisis period (during 2008)
Post global crisis period (after 2009)
•Sample size: Daily data

Approx. 1000 observations of each indices and net flow of FII
SAMPLING TECHNIQUE:
Convenient Sampling: Study conducted on the basis of availability of the Data and requirement of the
project. Study requires the events that have impact on the Indian stock market.
DATA COLLECTION METHOD:
Secondary data: For the secondary data various literatures, books, journals,
magazines, web links are used. As not possibilities of collecting data personally so no
questionnaire will made. If possible then I will do.
RESEARCH ANALYSIS TOOLS:
Regression analysis and Correlation analysis:
Regression Analysis: Analyze how a single dependent variable is affected by the

values of one or more independent variables — for example, how an athlete's
performance is affected by such factors as age, height, and weight. We can apportion
shares in the performance measure to each of these three factors, based on a set of
performance data, and then use the results to predict the performance of a new, untested
athlete.
Correlation: This analysis tool and its formulas measure the relationship between two
data sets that are scaled to be independent of the unit of measurement. The population
correlation calculation returns the covariance of two data sets divided by the product of
their standard deviations. We can use the Correlation tool to determine whether two
ranges of data move together — that is, whether large values of one set are associated
with large values of the other (positive correlation), whether small values of one set are
associated with large values of the other (negative correlation), or whether values in both
sets are unrelated (correlation near zero).
HYPOTHESES:
1.Null Hypothesis (Ho): The various BSE indices and S&P CNX Nifty index does not
rise with the increase in FIIs investment.
Alternate Hypothesis (Ha): The various BSE indices and S&P CNX Nifty index rises
with the increase in FIIs investment.
Issue study
4.1 To study the scope and trading mechanism of Foreign Instititutional Investors
in India.
The scope and the trading mechanism of Foreign Institutional investors in India is discussed as follow:
4.1.1 THE ELIGIBILITY CRITERIA FOR APPLICANT SEEKING FII REGISTRATION:

As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required to
fulfill the following conditions to qualify for grant of registration:
• Applicant should have track record, professional competence, financial soundness, experience,
general reputation of fairness and integrity.
• The applicant should be regulated by an appropriate foreign regulatory authority in the same
capacity/category where registration is sought from SEBI. Registration with authorities, which are
responsible for incorporation, is not adequate to qualify as Foreign Institutional Investor.
• The applicant is required to have the permission under the provisions of the Foreign Exchange
Management Act, 1999 from the Reserve Bank of India.
• Applicant must be legally permitted to invest in securities outside the country or its in-corporation /
establishment.
• The applicant must be a "fit and proper" person.
• The applicant has to appoint a local custodian and enter into an agreement with the custodian. Besides
it also has to appoint a designated bank to route its transactions.
• Payment of registration fee of US $ 5,000.00
"Form A" as prescribed in SEBI (FII) Regulations, 1995 is to be filled before applying for FII
registration.
4.1.2 SUPPORTING DOCUMENTS REQUIRED ARE:
• Application in Form A duly signed by the authorized signatory of the applicant.
• Certified copy of the relevant clauses or articles of the Memorandum and Articles of
Association or the agreement authorizing the applicant to invest on behalf of its clients
• Audited financial statements and annual reports for the last one year, provided that the period
covered shall not be less than twelve months.
• A declaration by the applicant with registration number and other particulars in support of its
registration or regulation by a Securities Commission or Self-Regulatory Organization or any other
appropriate regulatory authority with whom the applicant is registered in its home country.
• A declaration by the applicant that it has entered into a custodian agreement with a domestic custodian
together with particulars of the domestic custodian.
• A signed declaration statement that appears at the end of the Form.
• Declaration regarding fit & proper entity.

The fee for registration as FII is US $ 5,000. The mode of payment is Demand Draft in favour of
"Securities and Exchange Board of India" payable at New York”.
SEBI generally takes 7 working days in granting FII registration. However, in cases where the
information furnished by the applicants is incomplete, seven days shall be counted from the days when
all necessary information sought, reaches SEBI.
In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from the Reserve
Bank of India (RBI). In such cases, 7 working days would be counted from the day no objection is
received from RBI.
The FII registration is valid for 5 years. After expiry of 5 years, the registration needs to be renewed.
Same as initial registration, Along with "Form A" and all the relevant documents, the applicants are
required to fill in additional form (Annexure 1) while applying for renewal. US $ 5,000 needs to be
paid for renewal of FII registration.
The application for renewal should be submitted three months before expiry of the FII registration. 100
% debt FIIs are debt dedicated FIIs which invest in debt securities only. The procedure for registration
of FII/sub-account, under 100% debt route is similar to that of normal funds besides a clear statement
by the applicant that it wishes to be registered as FII/sub-account under 100% debt route.
4.1.3 THE FII REGISTRATION APPLICATION SHOULD BE SENT TO:

Securities and Exchange Board of India
Division of FII & Custodian
Mittal Court "B" Wing, First Floor
224, Nariman Point
Mumbai 400 021
India.
4.1.4 INVESTMENT OPPORTUNITIES:

Financial instruments are available for FII investments:
a. Securities in primary and secondary markets including shares, debentures and warrants of
companies, unlisted, listed or to be listed on a recognized stock exchange in India;
b. Units of mutual funds;
c. Dated Government Securities;
d. Derivatives traded on a recognized stock exchange;
e. Commercial papers.
4.1.5 SUB-ACCOUNT REGISTRATION

a) Institution or funds or portfolios established outside India, whether incorporated or not.
b) Proprietary fund of FII.
c) Foreign Corporates
d) Foreign Individuals.
The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account are required
to sign the Sub-account application form.
"Annexure B" to "Form A" (FII application form) needs to be filled when applying for sub-account
registration. No document is needed to be sent with annexure B. The fee for sub-account registration is
US$ 1,000. The fee is to be submitted at the time of submitting the application. The mode of payment
is Demand Draft in the name of "Securities and Exchange Board of India" payable at New York. SEBI
generally takes three working days in granting FII registration. However, in cases where the
information furnished by the applicants is incomplete, three days shall be counted from the days when
all necessary information sought, reaches SEBI. The validity of sub-account registration is co-terminus
with the FII registration under which it is registered. The process of renewal of sub-account is same as
initial registration. Renewal fee in this case is US $ 1,000. OCBs / NRIs are not permitted to get
registered as FII/sub-account.
4.1.6 POST-REGISTRATION PROCESSES:

If a registered FII/sub-account undergoes name change, then the FII need to promptly inform SEBI
about the change. It should also mention the reasons for the name change and give an undertaking that
there has been no change in beneficiary ownership.
In case of name change of FII, the request should be accompanied with documents from home
regulator and registrar of the company evidencing approval of name change, and the original FII
registration certificate issued by SEBI should be sent back for necessary amendment.
4.1.7 PROCEDURE FOR TRANSFERRING A SUB-ACCOUNT FROM ONE FII TO
ANOTHER:
The FII to whom the Sub-account is proposed to be transferred has to send a request along with a
declaration that it is authorized to invest on behalf of the Sub-account. The transferor FII should also
submit a No-objection certificate.
The FII should send a request, along with no-objection certificate from existing domestic custodian, for
change in domestic custodian.
The FII would be required to send a request for cancellation of its registration or registration of its Sub-
account/s clearly mentioning the name and registration number of the entity. The FII should ensure that
it / Sub-account has nil cash / securities holdings.
4.1.8 PROCEDURE FOR CHANGE OF LOCAL CUSTODIAN:

In case of change of the local custodian of the FII / sub-account, the change should be intimated to
SEBI by the FII. On receipt of no objection from the existing custodian and acceptance from the
proposed custodian, the change of custodian would be approved - by SEBI.
4.1.9 PROCEDURE FOR REGISTRATION AS FII/SUB ACCOUNT UNDER 100% DEBT

ROUTE:
The procedure for registration of FII/sub account under 100% debt route is similar to that of normal
funds besides a clear statement by the applicant that it wishes to be registered as FII/sub account under
100% debt route. However, Government of India allocates the overall investment limit for 100% debt
funds annually. The grant of investment limit for individual 100% debt funds is within this overall
limit. The funds have to seek further investment limit in case the limit allotted to them is exhausted and
they wish to invest further.
A Foreign Institutional Investor having an account with one custodian can open accounts with different
custodians for its different sub-accounts. However, one sub-account cannot be custodial with more than
one custodian.
Procedure if an existing sub-account wants to get registered as a Foreign Institutional Investor:

In case if a registered sub-account wishes to get itself registered as a Foreign Institutional Investor, then
it will have to apply in Form A to SEBI for the same and has to satisfy all the eligibility criteria norms
mentioned in SEBI (Foreign Institutional Investor) Regulations, 1995. It should also submit a letter
from the old FII indicating its 'No-objection' to such registration.
4.1.10 PROCEDURE FOR RENEWAL OF FII/SUB-ACCOUNT REGISTRATION:

They have to apply before 3 months of the expiry of registration in Form A. Circular No
FITTC/CUST/09/2000 dated September 21, 2000 may be referred.
4.1.11 IF THE FII DOES NOT RENEW ITS/SUB-ACCOUNT’S REGISTRATION:

The registration of the FII / Sub-account would get expired at due date and it would not be allowed to
trade in Indian securities markets. If it is not interested in renewal but has certain residual assets, it can
apply for disinvestment in terms of Circular No. FITTC/CUST/12/2001 dated June 04, 2001 and abides
by the guidelines specified in this regard.
4.1.12 INVESTMENT LIMITS ON EQUITY INVESTMENTS BY FII/SUB-ACCOUNT:

FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of an Indian
company.
Investment on behalf of each sub-account shall not exceed 10% of total issued capital of an India
company.
For the sub-account registered under Foreign Companies/Individual category, the investment limit is
fixed at 5% of issued capital.
These limits are within overall limit of 24% / 49 % / or the sectoral caps prescribed by Government of
India / Reserve Bank of India.
4.1.13 INVESTMENT LIMITS ON DEBT INVESTMENTS BY FII/SUB-ACCOUNT:

The FII investments in debt securities are governed by the policy if the Government for FII investments
in Government debt, currently of India. Currently following limits are in effect:
100 % Debt Route US $ 1.55 billion
70 : 30 Route US $ 200 million
Total Limit US $ 1.75 billion
For corporate debt the investment limit is fixed at US $ 500 million.

Other investment limits:
Normal FII (70:30 Route) 100% Debt FII
Total investment in equity and equity related instruments shall not be less than 70% of aggregate of all
investments. 100% investment shall be made in debt security only.
Securities to be registered in name of :
a. In the name of FII when making investments on its own behalf
b. In the name of sub-account when making investments on behalf of Sub-account
4.1.14 DERIVATIVES POSITION LIMITS:
1.The FII position limits in a derivative contracts (Individual Stocks)

The FII position limits in a derivative contract on a particular underlying stock i.e. stock option
contracts and single stock futures contracts are:
For stocks in which the market wide position limit is less than or equal to Rs. 250 Cr, the FII position
limit in such stock shall be 20% of the market wide limit.
For stocks in which the market wide position limit is greater than Rs. 250 Cr, the FII position limit in
such stock shall be Rs. 50 Cr.
2.FII Position limits in Index options contracts

FII position limit in all index options contracts on a particular underlying index shall be Rs. 250 Crores
or 15 % of the total open interest of the market in index options, whichever is higher, per exchange.
This limit would be applicable on open positions in all option contracts on a particular underlying
index.
3.FII Position limits in Index futures contracts:

FII position limit in all index futures contracts on a particular underlying index shall be Rs. 250 Crore
or 15 % of the total open interest of the market in index futures, whichever is higher, per exchange.
This limit would be applicable on open positions in all futures contracts on a particular underlying
index. In addition to the above, FIIs shall take exposure in equity index derivatives subject to the
following limits:
i. Short positions in index derivatives (short futures, short calls and long puts) not exceeding (in
notional value) the FII’s holding of stocks.
ii. Long positions in index derivatives (long futures, long calls and short puts) not exceeding (in
notional value) the FII’s holding of cash, government securities, T-Bills and similar instruments.
4.4.1.15 FII POSITION LIMITS IN INTEREST RATE DERIVATIVE CONTRACTS

At the level of the FII
The notional value of gross open position of a FII in exchange traded interest rate derivative contracts
shall be:
i. US $ 100 million.
ii. In addition to the above, the FII may take exposure in exchange traded in interest rate derivative
contracts to the extent of the book value of their cash market exposure in Government Securities.
At the level of the sub-account
The position limits for a Sub-account in near month exchange traded interest rate derivative contracts
shall be higher of Rs. 100 Cr or 15% of total open interest in the market in exchange traded interest rate
derivative contracts.
4.1.16 SCOPE OF INVESTMENTS UNDER THE PORTFOLIO INVESTMENT SCHEME.

FIIs, under the Portfolio Investment Scheme, are permitted to make both primary and secondary
investments in the India capital markets. Unlike an investor which relies solely on FDI regulations, a
foreign investor which registers as a FII would be allowed to buy and sell securities over Indian stock
exchanges. In addition, FIIs are entitled to effect transactions in a broader category of securities than an
investor relying on FDI regulations alone. FIIs are permitted to purchase equity securities (both listed
and unlisted), units of schemes floated by the Unit Trust of India and other domestic municipal funds,
warrants, debentures, bonds, governmental securities and derivative instruments which are traded on a
recognized stock exchange. There is no limit on the amount that FIIs may invest in the Indian market,
and no lock-up periods apply to investments made by FIIs.
4.1.17 EXCHANGE CONTROLS:
FIIs are required to open up one or more bank accounts with certain designated banks and must also
appoint a domestic custodian for custody of investment made by the FII. Through the designated
accounts, FIIs are authorized to freely transfer funds from foreign currency accounts to Rupee accounts
and vice versa; make Rupee denominated investments in Indian companies; freely transfer after-tax
proceeds from Rupee accounts to foreign currency accounts, and repatriate capital, capital gain,
dividends interest income and other gains, subject to deduction for applicable withholding taxes. So
long as FIIs execute purchases and sales on a recognized Indian stock exchange, they are not required
to obtain transaction specific approval from the Reserve Bank. FIIs are also entitled to effect
transactions using their own proprietary funds, or the funds of their sub accounts.
4.1.18 INVESTMENT RESTRICTIONS:
Certain limitations apply to investments by FIIs into India. First, FIIs’ and their sub- accounts’
investment in an Indian company can not exceed ten percent (10%) of the total issued share capital of
the Indian company (five percent if the subaccount is a foreign corporation or individual). In addition,
the aggregate investment of all FIIs in an Indian company may not exceed twenty four percent (24%)
of its total issued share capital, without the express approval of its board of directors and shareholders.
Even with board of director and shareholder approval, the same sectoral limits which apply to foreign
direct investment would continue to apply. FIIs may register with SEBI as a debt fund or an equity
fund. FIIs which are registered as equity funds, are required to invest at least seventy percent (70%) of
their funds in equity and equity-related securities. A FII registered as a debt fund, on the other hand,
must invest one hundred percent (100%) of its funds in debt instruments. FIIs are not permitted to
engage in short selling, other than in respect of derivative securities traded over a recognized exchange,
and must effect transactions through a registered stock broker. Sector investment prohibitions and caps
which apply to foreign direct investment also apply to investments by FIIs, and FII investments must
also comply with the pricing requirements applicable to foreign direct investment. In addition, FIIs are
not permitted to invest in print media.
5. Relationship between the FIIs equity investment pattern and Indian
stock indices.
The sample data consists of about 1000 observations for FII, BSE indices and S&P CNX Nifty starting
from January 2007 to October 2010.
All the daily indices and daily observations of net investments made by FII is taken into
consideration in the study.
5.FII was taken as independent variable.

6.Stock indices were taken as dependent variable.
The data was taken from various financial sites.
The relationship between the FII’s equity investment pattern and Indian stock indices is studied
from the year 2007 to 2010 with the help of correlation and regression analysis. The results and the
analysis are shown below:
2007
NSE CD IT Realty Auto Bankex FMCG
Correlations -0.04 -0.05 0.2 -0.02 0.08 -0.04 0.06
R Square 0.0019 0.0024 0.0413 0.0005 0.0059 0.0020 0.0039
Std. Error of 828.38 828.16 811.85 828.95 826.71 828.35 827.56
the Estimate
Regression -0.05 -0.06 0.47 -0.01 0.18 -0.02 0.32
NSE:
There is negative effect of FII on NSE but the correlation coefficient is low. This means that NSE has
inverse relation with FII but the FII is not influencing the NSE much.
The standard error comes out to be 828.38 which is very high and so it means that the deviation from
the mean value is very high. This does not mean the relation is false but we can say that the error in
linear relation is high.
The coefficient of determination = Explained Variance/Total Variance

Explained Variance = FIIs impact on overall fluctuation in Nifty
Unexplained Variance = impact of other factors
R square is 0.0019 which means 1% change in NSE due to explained variance and all other volatility is
due to other factors.
The regression coefficient is -0.05 which reflects 5.0 % variability in Sensex with the independent
variable.
CD:
The effect of FII on CD is negative, But the correlation coefficient is very low and it is only -0.05. This
means that CD has inverse relation with FII but the FII is not influencing the CD much.
The standard error comes out to be 828.16 which is high. This does not mean that the relation is false
but the error in linear relation is high.
R square is 0.0024 which means 1% change in CD due to explained variance and all other volatility is
variable.
IT:
The IT is positively correlated with FIIs. The correlation coefficient is 0.02 which is almost near to
zero and so we can say that FII are almost unrelated to IT.
The coefficient of determination = Explained Variance/Total Variance

Explained Variance = FIIs impact on overall fluctuation in Nifty
Unexplained Variance = impact of other factors
R square is 0.0413 which means 4% change in IT due to explained variance and all other volatility is
The standard error is 811.85 which is high. This does not mean that the relation is false but the error in
variable.
Realty:
The effect of FII on Realty is negative, But the correlation coefficient is very low and it is only -0.02.
This means that Realty has inverse relation with FII but the FII is not influencing the Realty much.
R square is 0.0005 which means 0% change in Realty due to explained variance and all other volatility
is due to other factors.
variable.
Auto:
The Auto is positively correlated with FIIs. The correlation coefficient is 0.08 which is almost near to
zero and so we can say that FII are almost unrelated to Auto. This does not mean that there is no
relation at all between them. It shows the absence of linear relation between the two variables but not a
lack of relationship altogether.
R square is 0.0059 which means 1% change in Auto due to explained variance and all other volatility is
The regression coefficient is 0.18 which reflects 18.0 % variability in Sensex with the independent
variable.
Bankex:
The effect of FII on Bankex is negative, But the correlation coefficient is very low and it is only -0.04.
This means that Bankex has inverse relation with FII but the FII is not influencing the Realty much.
R square is 0.0020 which means 0% change in Bankex due to explained variance and all other
volatility is due to other factors.
variable.
FMCG:
The FMCG is positively correlated with FIIs. The correlation coefficient is 0.06 which is almost near
to zero and so we can say that FII are almost unrelated to IT. This does not mean that there is no
lack of relationship altogether.
R square is 0.0039 which means 1% change in FMCG due to explained variance and all other volatility
variable.
2008

Correlations -0.08 -0.14 -0.02 -0.12 -0.11 -0.13 0.04
R Square 0.0063 0.0205 0.0006 0.0150 0.0128 0.0178 0.0018
Std. Error of 760.7 755.28 762.91 757.4 758.21 756.3 762.45
the Estimate
Regression -0.07 -0.09 -0.03 -0.03 -0.1 -0.05 0.17
NSE:
The effect of FII on NSE is negative, But the correlation coefficient is very low and it is only -0.08. It
interprets that NSE is more correlated to FII in 2008 as comparable to the 2007. This means that NSE
has inverse relation with FII but the FII is not influencing the Realty much.
R square is 0.0063 which means 1% change in NSE due to explained variance and all other volatility is
variable. It can be interpreted that with the fall in market in 2008 the FII have started withdrawing from
the NSE.
CD:
The effect of FII on CD is negative, -0.14. It interprets that CD is more correlated to FII in 2008 as
comparable to the 2007. This means that CD has inverse relation with FII but the FII is not
influencing the CD much.
variable.
IT:
The effect of FII on IT is negative, But the correlation coefficient is very low and it is only -0.02. It
interprets that IT is positively correlated to FII in 2007 while negatively in 2008. This means that NSE
has inverse relation with FII but the FII is not influencing the IT much.
R square is 0.0006 which means 0% change in IT due to explained variance and all other volatility is
variable. In 2008 with the withdrawal of money by FIIs in 2008 the IT Sector index has also fallen.
Realty:
The effect of FII on Realty is negative, -0.12. It interprets that Realty is more correlated to FII in 2008
as comparable to the 2007. This means that Realty has inverse relation with FII but the FII is
influencing the Realty much compare to last year.
R square is 0.015 which means 2% change in Realty due to explained variance and all other volatility
variable.
Auto:
The effect of FII on Auto is negative, -0.11. It interprets that Auto is more correlated to FII in 2008 as
comparable to the 2007. This means that Auto has inverse relation with FII but the FII is influencing
the Auto much compare to last year.
R square is 0.0128 which means 1.3% change in Auto due to explained variance and all other volatility
variable.
Bankex:
The effect of FII on Bankex is negative, -0.13. It interprets that Bankex is more correlated to FII in
2008 as comparable to the 2007. This means that Bankex has inverse relation with FII but the FII is
influencing the Bankex much compare to last year.
variable.
FMCG:
The FMCG is positively correlated with FIIs. The correlation coefficient is 0.04 which is almost near to
zero and so we can say that FII are almost unrelated to IT. This does not mean that there is no relation
at all between them. It shows the absence of linear relation between the two variables but not a lack of
relationship altogether.
is due to other factors. It is more than previous year
variable.
2009

Correlations 0.17 0.1 0.12 0.17 0.14 0.15 0.06
R Square 0.0304 0.0095 0.0151 0.0294 0.0187 0.0211 0.0034
Std. Error of 716.17 723.83 721.78 716.53 720.47 719.59 726.05
the Estimate
Regression 0.15 0.09 0.09 0.12 0.06 0.05 0.13
NSE:
The NSE is positively correlated with FIIs. The correlation coefficient is 0.17 which is 17% and so we
can say that FII are somewhat related to NSE. FII inflow/Outflow moving in same direction, while
previus year negatively related.
R square is 0.0304 which means 3% change in NSE which means that FII has a big impact on the NSE
sector index due to explained variance and all other volatility is due to other factors.
variable.
CD:
The CD is positively correlated with FIIs. The correlation coefficient is 0.10 which is 10% and so we
can say that FII are somewhat related to CD. FII inflow/Outflow moving in same direction, while
previus year negatively related.
variable.
IT:
The IT is positively correlated with FIIs. The correlation coefficient is 0.12 which is 12% and so we
can say that FII are somewhat related to IT. FII inflow/Outflow moving in same direction, while
previous year negatively related.
R square is 0.0151 which means 1.5% change in IT due to explained variance and all other volatility is
variable.
Realty:
The Realty is positively correlated with FIIs. The correlation coefficient is 0.17 which is 17% and so
we can say that FII are somewhat related to Realty. FII inflow/Outflow moving in same direction,
while previous year negatively related.
R square is 0.0294 which means 3% change in Realty which means that FII has a big impact on the
NSE sector index due to explained variance and all other volatility is due to other factors.
variable.
Auto:
The Auto is positively correlated with FIIs. The correlation coefficient is 0.14 which is 14% and so we
can say that FII are somewhat related to Auto. FII inflow/Outflow moving in same direction, while
previous year negatively related.
R square is 0.0187 which means 2% change in Auto which means that FII has a big impact on the Auto
sector index due to explained variance and all other volatility is due to other factors.
variable.
Bankex:
The Bankex is positively correlated with FIIs. The correlation coefficient is 0.15 which is 15% and so
we can say that FII are somewhat related to Bankex. FII inflow/Outflow moving in same direction,
while previous year negatively related.
variable.
FMCG:
The FMCG is positively correlated with FIIs. The correlation coefficient is 0.06 which is almost near
to zero and so we can say that FII are almost unrelated to IT. This does not mean that there is no
lack of relationship altogether. There is not much increase in this year compare to last year
is due to other factors. It is more than previous year
variable.
2010

Correlations 0.52 0.39 0.5 0.27 0.47 0.47 0.46
R Square 0.2733 0.1550 0.2539 0.0732 0.2247 0.2201 0.2081
Std. Error of 694.96 749.36 704.14 784.82 717.82 719.94 725.44
the Estimate
Regression 1.16 0.37 1.3 0.78 0.44 0.26 1.16
NSE:
The NSE is positively correlated with FIIs. The correlation coefficient is 0.52 which is 52% and so we
can say that FII are very much related to NSE compare to previous year. FII inflow/Outflow moving in
same direction.
R square is 0.2733 which means 27% change in NSE which means that FII has a big impact on the
NSE sector index compare to previous year due to explained variance and all other volatility is due to
other factors.
variable. It reflects how the market is going up with the increase in FIIs.
CD:
The CD is positively correlated with FIIs. The correlation coefficient is 0.39 which is 39% and so we
can say that FII are very much related to CD compare to previous year. FII inflow/Outflow moving in
same direction.
R square is 0.1550 which means 16% change in CD which means that FII has a big impact on the CD
sector index compare to previous year due to explained variance and all other volatility is due to other
factors.
variable.
IT:
The IT is positively correlated with FIIs. The correlation coefficient is 0.5 which is 50% and so we can
say that FII are very much related to IT compare to previous year. FII inflow/Outflow moving in same
direction.
R square is 0.2539 which means 25% change in IT which means that FII has a big impact on the IT
sector index compare to previous year due to explained variance and all other volatility is due to other
factors.
variable.
Realty:
The Realty is positively correlated with FIIs. The correlation coefficient is 0.27 which is 27% and so
we can say that FII are very much related to Realty compare to previous year. FII inflow/Outflow
moving in same direction.
R square is 0.0732 which means 7% change in Realty which means that FII has a big impact on the
Realty sector index compare to previous year due to explained variance and all other volatility is due to
other factors.
variable.
Auto:
The Auto is positively correlated with FIIs. The correlation coefficient is 0.47 which is 47% and so we
can say that FII are very much related to Auto compare to previous year. FII inflow/Outflow moving
in same direction.
R square is 0.2247 which means 23% change in Auto which means that FII has a big impact on the
NSE sector index compare to previous year due to explained variance and all other volatility is due to
other factors.
variable.
Bankex:
The Bankex is positively correlated with FIIs. The correlation coefficient is 0.47 which is 47% and so
we can say that FII are very much related to Bankex compare to previous year. FII inflow/Outflow
R square is 0.2201 which means 22% change in Bankex which means that FII has a big impact on the
Bankex sector index compare to previous year due to explained variance and all other volatility is due
to other factors.
variable.
FMCG:
The FMCG is positively correlated with FIIs. The correlation coefficient is 0.46 which is 46% and so
we can say that FII are very much related to FMCG compare to previous year. FII inflow/Outflow
R square is 0.2081 which means 21% change in FMCG which means that FII has a big impact on the
FMCG sector index compare to previous year due to explained variance and all other volatility is due
to other factors.
variable. It can be seen that BSE FMCG is affected a lot by FII and with more FIIs index is also going
up.
Standard Deviation:
FII NSE CD IT Realty Auto Bankex FMCG

2007 827.49 723.26 732.39 354.25 1832.89 353.49 1490.52 159.49
2008 761.51 918.3 1196.96 664.74 3132.41 892.13 2037.24 184.06
2009 725.8 870.21 779.22 1014.34 1078.23 1652.62 2114.95 331.02
2010 813.25 365.44 857.78 315.89 281.49 867.77 1442.62 318.68
Shows more volatile year Shows less volatile year

Standard Deviation
3500
3000
2500
2000
Value
1500
1000
500
0
2007 2008 2009 2010
Year
FII NSE CD IT Auto Realty Bankex FMCG
The standard deviation indicates that the FIIs net investment in 2007(827.49) and 2010(813.25) are
relatively more volatile as compared to 2008(761.57) and 2009(725.8).
While in indies, only two sector FMCG and Realty are relatively more volatile at time of more
volatility of FII ( In 2007 and 2010)
Further, When FII was less volatile, most of the sector more volatile ( In 2008 and 2009)
FINDINGS
After the analysis following are the findings of the study:
1) Impact of FIIs In 2007, the correlation coefficient is less in Sectoral Indices as well as NSE which
interprets that the relationship between these two variables is less in the period when there is bearish
trend. But in this year FIIs were not much positively correlated, so a less significant impact of FIIs is
seen. The error is very high in both the years which doesn’t mean that relation is false but we can say
that the error in linear relation is high.
2)Impact of FIIs In 2008, the correlation coefficient is more compare to previous year which interprets
that the relationship between these two variables is more in the period when there is bearish trend. But
in this year FIIs with Sectoral Indices as well as NSE were negatively correlated except FMCG(0.04).
so a less significant impact of FIIs is seen. The error is very high in both the years which doesn’t mean
that relation is false but we can say that the error in linear relation is high.
3)Impact of FIIs In 2009, the correlation coefficient is more compare to previous year which interprets
that the relationship between these two variables is more in the period when there is bullish trend. In
this year FIIs with Sectoral Indices as well as NSE were positively correlated. so a more significant
impact of FIIs is seen. The error is very high in both the years which doesn’t mean that relation is false
but we can say that the error in linear relation is high.
4)Impact of FIIs In 2010, the correlation coefficient is very high compare to previous years which
interprets that the relationship between these two variables is very much in the period when there is
bullish trend. In this year FIIs with Sectoral Indices as well as NSE were positively correlated. so a
more significant impact of FIIs is seen. The error is very high in both the years which doesn’t mean that
relation is false but we can say that the error in linear relation is high.
5) In bearish trend of 2009 and 2010 the volatility in Indian Stock indices due to FIIs is more than in
bullish trend of 2007 - 2008. No doubt FII inflow is more in 2007 and 2010. The domestic investors
were also playing an important role in 2007 but in 2008 FIIs are influencing market more as domestic
investors are not in the market.
6) In 2010, R square is very high compare to previous year it indicate in that year all indices highly
depended on FII flow. The injunction by FIIs is resulting a bull in indices and so FIIs are playing good
role during this time. While in 2007, 2008 and 2009 FII not much affect on stock market. So FIIs have
less impact on Indian stock indices and other unexplained variables are also influencing the Indices in
these period.
7) The regression coefficient predicts the value from an independent variable i.e. FII for the dependent
variable indices. In 2008 and in 2007 Regression coefficient which replicates that how indices have
gone down by withdrawal of FIIs and in 2009 and 2010 gone up by inflow of FIIs
CONCLUSION
In developing countries like India foreign capital helps in increasing the productivity of
labor and to build up foreign exchange reserves to meet the current account deficit. Foreign Investment
provides a channel through which country can have access to foreign capital.
According to Data analysis and findings, it can be concluded that FII do have any significant
impact on the Indian Stock Market but there are other factors like government policies, budgets, bullion
market, inflation, economical and political condition, etc. do also have an impact on the Indian stock
market.
There is a positive correlation between stock indices and FIIs in 2009 and 2010 but FIIs didn’t
have any significant impact except 2010 on Indian Stock Market.
Also the coefficient of determination is less in all the case except 2010.
Also FII is not the only factor affecting the stock indices. There are other major factors that
influence the courses in the stock market.
LIMITATIONS
Besides following scientific methodologies the study has come across some limitations. These are:
The study is based on NSE sample. The NSE companies have an external image that they are
the best performers in the country. If the sample companies consist of probably a heterogeneous group
then the results may give better insight in to relationship of the specific variables.
The data is taken on daily basis. The data on shorter period basis can give more positive results.
Due to time constraint, my project report is not fully exhaustive.
Secondary data that I have used in this study may not give true picture of the concern.
RECOMMENDATIONS
After the analysis of the project study, following recommendations can be made:
1) Simplifying procedures and relaxing entry barriers for business activities and providing investor
friendly laws and tax system for foreign investors.
2) Allowing foreign investment in more areas. In different industries indices the FIIs should be
encouraged through different patterns like futures, options, etc.
3) Somewhere, a restriction related to the track record of Sub- Accounts is also to be made on the
investors who withdraw money out of the Indian stock market who have invested with the help of
participatory notes.
4) We have to modernize and also have to save our culture. Similarly the laws should be such that it
protect domestic investors and also promote trade in country through FIIs.
5) Encourage industries to grow to make FIIs an attractive junction to invest.

BIBLIOGRAPHY
References for articles:

Sivakumar S (October 2003) : “FIIs: Bane or boon?” , Journal : Journal of stock market volatility , Vol:
34. Publisher: MCB UP Ltd.
Stanley Morgan (2002) :“FII’s influence on Stock Market”, Journal: Journal of impact of Institutional
Investors on ism. Vol 17. Publisher: Emerald Group Publishing Limited
Trivedi & Nair, and Agarwal, Chakrabarti (2003) , Journal: International Journal of foreign money
supply Management, Vol: 19. Publisher: MCB UP Ltd.
References from weblinks:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=565861
http://www.joaag.com/uploads/4_PrasannaFinal3_2_.pdf
http://knowledge.wharton.upenn.edu/articlepdf/885.pdf?
CFID=4849913&CFTOKEN=38706388&jsessionid=a83084e3a6ca3577732b738405bd1766251b
http://cmr.ba.ouhk.edu.hk/cmr/webjournal/v9n2/CMR503E05.pdf
http://www.ibef.org/economy/foreigninvestors.aspx
http://www.isb.edu/faculty/rajeshchakrabarti/FII_Basu.pdf
http://www.citeman.com/4005-fiis-and-their-impact-on-indian-stock-market/
www.bseindia.com
www.nseindia.com
www.sebi.org.
www.rbi.org
www.moneycontrol.com
Journals:
Economic Political Weekly
ICFAI Journals
Magazines and Newspapers:
Economic times
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Final Report 2

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Final Report 2

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Mega Research Project

FII and Stock market

Prepared By: Guided by:

Centre for Management study, Dharmsinh Desai University,

1.1 FOREIGN INSTITUTIONAL INVESTORS:

1.3 IMPORTANT TERMS TO KNOW ABOUT FIIS:

1.4 FOREIGN INSTITUTIONAL INVESTORS REGISTRATION:

1.5 TREND OF FIIS WITH THE HELP OF ECONOMIC FIGURES:

source: sebi website

source: sebi website

•Boosting agricultural growth through diversification and development of agro processing.

•Allowing foreign investment in more areas.

Author Frequency Flows’ Period Finding (relation)

Author Frequency Flows’ Period Finding (relation)

RATIONALE FOR STUDY:

•Sample size: Daily data

DATA COLLECTION METHOD:

RESEARCH ANALYSIS TOOLS:

Regression analysis and Correlation analysis:

Regression Analysis: Analyze how a single dependent variable is affected by the

4.1.1 THE ELIGIBILITY CRITERIA FOR APPLICANT SEEKING FII REGISTRATION:

• The applicant must be a "fit and proper" person.

4.1.2 SUPPORTING DOCUMENTS REQUIRED ARE:

• Application in Form A duly signed by the authorized signatory of the applicant.

• A signed declaration statement that appears at the end of the Form.

• Declaration regarding fit & proper entity.

4.1.3 THE FII REGISTRATION APPLICATION SHOULD BE SENT TO:

4.1.4 INVESTMENT OPPORTUNITIES:

4.1.5 SUB-ACCOUNT REGISTRATION

4.1.6 POST-REGISTRATION PROCESSES:

4.1.8 PROCEDURE FOR CHANGE OF LOCAL CUSTODIAN:

4.1.9 PROCEDURE FOR REGISTRATION AS FII/SUB ACCOUNT UNDER 100% DEBT

Procedure if an existing sub-account wants to get registered as a Foreign Institutional Investor:

4.1.10 PROCEDURE FOR RENEWAL OF FII/SUB-ACCOUNT REGISTRATION:

4.1.11 IF THE FII DOES NOT RENEW ITS/SUB-ACCOUNT’S REGISTRATION:

4.1.12 INVESTMENT LIMITS ON EQUITY INVESTMENTS BY FII/SUB-ACCOUNT:

4.1.13 INVESTMENT LIMITS ON DEBT INVESTMENTS BY FII/SUB-ACCOUNT:

For corporate debt the investment limit is fixed at US $ 500 million.

4.1.14 DERIVATIVES POSITION LIMITS:

1.The FII position limits in a derivative contracts (Individual Stocks)

2.FII Position limits in Index options contracts

3.FII Position limits in Index futures contracts:

4.4.1.15 FII POSITION LIMITS IN INTEREST RATE DERIVATIVE CONTRACTS

4.1.16 SCOPE OF INVESTMENTS UNDER THE PORTFOLIO INVESTMENT SCHEME.

5.FII was taken as independent variable.

The coefficient of determination = Explained Variance/Total Variance

The coefficient of determination = Explained Variance/Total Variance

NSE CD IT Realty Auto Bankex FMCG

NSE CD IT Realty Auto Bankex FMCG

NSE CD IT Realty Auto Bankex FMCG

FII NSE CD IT Realty Auto Bankex FMCG

Shows more volatile year Shows less volatile year

After the analysis following are the findings of the study:

Due to time constraint, my project report is not fully exhaustive.

5) Encourage industries to grow to make FIIs an attractive junction to invest.

References for articles:

References from weblinks:

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