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PROJECT TITLE IMPACT OF FIIs ON INDIAN STOCK MARKET

SYNOPSIS OF THE CAPSTONE PROJECT

Submitted to: Mrs. Richa Singh

Group Members: Jatinder Pal Singh ( 3020070159) Gauri Gupta (3020070016) Simranpal Singh (3020070210) Saurabh Nagpal (3020070142)

Introduction FII is defined as an institution organized outside of India for the purpose of making investments into the Indian securities market under the regulations prescribed by SEBI. An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds. Financial institutional investors is commonly used in India. It refers to outside companies that invest in the financial markets of India. One needs to register with the Securities & Exchange Board of India (SEBI) to participate in the market. Now coming to one of the major market regulations pertaining to FIIs, it involves placing limits on FII ownership in Indian companies. They also actually evaluate the shares and deposits in a portfolio. In order to invest in the stock market, it is very necessary that you have a good idea of different concepts like NSE, BSEetc. There are Institutional investors that include hedge funds, insurance companies, pension funds and mutual funds. According to research there are 1484 FIIs and 38 foreign brokers registered to Securities & Exchange Board of India (SEBI.) There are times when we come to know that whenever there is a rise in market, it is due to foreign investors' money and also a decline in market. This is termed as withdrawal of money from FIIs. FII include Overseas pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or investments on behalf of a broad-based fund. FIIs can invest their own funds as well as invest on behalf of their overseas clients registered as such with SEBI. These client accounts that the FII manages are known as sub-accounts. A domestic portfolio manager can also register itself as an FII to manage the. funds of sub-accounts. Foreign institutional investor means an entity established or incorporated outside India which proposes to make investment in India. Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for foreign institutional investors.

How does FIIs enter into the market?


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.

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 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.

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.

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 incorporation / 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. 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 Organisation 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 A signed together with particulars that of appears the at the domestic end of custodian. the Form. declaration statement

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.

Needs of the study The FIIs (Financial Institutional Investors) is monies, which chases the stock in the market place. It is not exactly brick and mortar money, but in the long run it may translate into brick and mortar. Sudden influx of FIIs, drives the stock market up as too much money chases too little stock. In the last four months of an influx of about $ 1.5 billion has driven the Indian stock market 20% higher. If the stock market arises in the form of FIIs, it is still good but it has to be controlled. Internal resources and the withdrawal from foreign reserves, trade loans, long term financing from World Bank etc, will add additional luster to the investment plan. Scope of the study
The research covers the stock index (sensex) and its comparison with foreign institutional investments. The study covers the rise and fall of the sensex due to the change in inflow of FIIs over the past 10 years (2001 2011). The study will provide a very clear picture of the impact of foreign institutional investors on Indian stock index. It will also describe the market trends due to FIIs inflow.

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.

Objectives of the study 1. To study the Impact of FIIs in the Indian stock market 2. To study how Government policies effects the trend of inflows of FIIs in India.

Review of literature
1. Andy Lin Chih-Yuan Chen1 (2006) has explored the relationship between qualified foreign institutional investors (QFIIs) and Taiwans stock market and evaluates the effect of QFIIs investment transactions on Taiwans stock market. By taking the date of easing regulatory restrictions on foreigners stock investment holdings as a cut off 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.

The Impact of Qualified Foreign Institutional Investors on Taiwans Stock Market Journal of FII, Publisher: SSRN Group Publishing Limited. 1 http://cmr.ba.ouhk.edu.hk/cmr/webjournal/v9n2/CMR503E05.pdf

2. Ilangovan Prof. D. et al2 (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 spill overs 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.

3. Richard W.Sias (1996)3 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.

2. FII and Stock Market in India

Publisher: MCB UP Ltd. Journal: International Journal of foreign money supply Management http://www.slideshare.net/bhanupratapsingh/698816-impactoffion

3. On the dynamic relation between stock prices and exchange rates Journal: Journal of ICFAI, Publisher: MCB UP Ltd.
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http://www.scribd.com/doc/47535905/final-report-2

4. Chakrabarti (2001)4 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.

5. Rai Kulwant et al (2003)5 held of 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 behaviour 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 exante 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.

Asian Crisis due to effect of FIIs, Journal of foreign institution investments Publisher: SSRN Group Publishing Limited. http://www.eurojournals.com/IRJFE_41_16.pdf
5

Determinants of Foreign Institutional Investment in India, Journal of Institutional Investors,Publisher: Emerald Group Publishing Limited http://onlinelibrary.wiley.com/doi/10.1111/j.1746-1049.2004.tb00246.x/abstract

6. Bose Suchismita et al (2005)6 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

This paper provides a brief overview of certain considerations applicable to foreign

Investments in India. It states that foreign investment regulations in India are the subject of frequent change. While reform efforts stalled somewhat during the weak coalition governments of the mid-1990s, the Bharatiya Janata Party-led government launched a second round of economic reforms, which included major privatization, deregulation and tariff reduction initiatives. Annual foreign direct investment in India rose from approximately $100 million in 1990 to an estimated $5.5 billion in 2003, and while some barriers continue to restrict foreign investment in India, momentum toward liberalization of the Indian economy seems to be irreversible.

The Impact of FII Regulations in India, Journal: International Journal of financial market trends, Publisher: MCB UP Ltd http://www.indiastudychannel.com/projects/4849-Impact-Foreign-Institutional-Investors-Indian-StockMarket.aspx 7. Foreign Investment in India,Journal: Journal of financial research, Publisher: MCB UP Ltd http://www.mayerbrown.com/publications/article.asp?id=2099

8. FIIs: Bane or boon? Foreign institutional investors (FIIs) investment in India: a trend analysis of monthly flows Journal of stock market volatility Publisher: MCB UP Ltd. In this paper researchers have made an attempt to analyze the trend of FIIs investment in India. The information regarding monthly and yearly investment by Foreign Institution Investors (FII's) in India have been collected from the RBIs annual manual. The period covered under the study is from January 2004 to August 2010.The findings of the study indicate that in 2009 FIIs have invested Rs. 912,033 million. While they have withdrawn Rs. 604,266 million in 2008 this is due to the effect of global meltdown and recession in world economy. During the study we found that Market size, Political scenario, Labour cost and productivity, Liberalized Trade Policy, Infrastructure, Incentives and Operating conditions and Disinvestment policy were the causes of FIIs investment in India.

9. Foreign Institutional Investors impact on stock prices in India Journal: academic research in economics This study shows the impact of market opening to FIIs, on Indian stock market behaviour. On 14th September 1992 India announced its policy regarding the opening of stock market to FIIs for investment in equity and related instruments. Using stock market data related to Bombay Stock Exchange, for both before and after the FIIs policy announcement day. Observation were made to assess the impact of the market opening on the returns and volatility of stock return. They found that while there were no significant changes in the Indian stock market average returns, volatility was significantly reduced after India unlocked its stock market to foreign investors.
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http://www.business-standard.com/india/news/fiis-bane-or-boon/140167/

http://www.jare-sh.com/downloads/num_1_issue_2_2009/bansal.pdf

BIBLIOGRAPHY
http://finance.indiamart.com/india_business_information/sebi_foreign_institutional_investor.html http://www.rbi.org.in/scripts/BS_FiiUSer.aspx http://www.investopedia.com/search/default.aspx?q=FII#axzz1ZG6dg4xu http://www.sharetipsinfo.com/Fii-Newsstockmarket.html