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    1. Introduction

    The Foreign Institutional Investors (FIIs) have emerged as noteworthy players in

    the Indian stock market and their growing contribution adds as an important

    feature of the development of stock markets in India. To facilitate foreign capital

    flows, developing countries have been advised to strengthen their stock markets.

    As a result, the Indian tock !arkets have reached new heights and became more

    volatile making the researches work in this dimension of establishing the link 

     between FIIs and tock !arket volatility. "ence, it#s an interesting topic to

    ascertain the role of FIIs in Indian $apital !arkets.

    %ntil the &'s, there was a general reluctance towards foreign investment or 

     private commercial flows as India#s development strategy was focused on self*

    reliance and import substitution and current account deficits were financed largely

    through debt flows and official development assistance. A ma+or development in

    our country, post &''& has been liberaliation of the financial sector, especially that

    of capital markets. After the launch of the reforms, foreign institutional investors

    (FIIs) from eptember &-, &'', with suitable restrictions, were permitted to invest

    in all securities traded on the primary and secondary markets, including shares,

    debentures and warrants issued by companies which were listed or were to be

    listed on the tock /0changes in India and in schemes floated by domestic mutual

    funds. A positive contribution of the FIIs has been their role in improving the stock 

    market infrastructure and the /1I assured its contribution towards its

    development.

    FII is defined as an institution organied outside of India for the purpose of making

    investments into the Indian securities market under the regulations prescribed by

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    /1I.2FII# include 34verseas 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 /1I. These client accounts that the FII manages are

    known as 2sub*accounts#. A domestic portfolio manager can also register itself as

    an FII to manage the funds of sub*accountsforeign institutional investor means an

    entity established or incorporated outside India which proposes to make investment

    in India. 5ositive tidings about the Indian economy combined with a fast*growing

    market have made India an attractive destination for foreign institutional investors.

    In other words FII is defined as an institution organied outside of India for the

     purpose of making investments into the Indian securities market under the

    regulations prescribed by /1I.

    1.1 Investment by FIIs

    There are generally two methods to invest for Foreign Institutional Investors*

    • Equity Investment

    &6 investments could be in e7uity related instruments or up to 86 could be

    invested in debt instruments i.e.9 (/7uity Instruments): 8 (;ebt Instruments)

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    • 100% Debt

    &6 investment has to be made in debt securities only

    /?/T!/>T @4%T/: In case of /7uity route the FIIs can invest in

    the following instruments:

    A. ecurities in the primary and secondary market including shares which are

    unlisted, listed or to be listed on a recognied stock e0change in India.

    1. %nits of schemes floated by the %nit Trust of India and other domestic mutual

    funds, whether listed or not.$. arrants

    &6 ;/1T @4%T/: In case of ;ebt @oute the FIIs can invest in the following

    instruments:

    a. ;ebentures (>on $onvertible ;ebentures, 5artly $onvertible ;ebentures etc.)

     b. 1onds

    c. ;ated government securities

    d. Treasury 1ills

    e. 4ther ;ebt !arket Instruments

    It should be noted that foreign companies and individuals are not be eligible to

    invest through the& 6 debt route.

    1.2 Scope & Trading ec!anism o" Foreign Institutiona# Investors In India.

    The scope and the trading mechanism of Foreign Institutional investors in India is

    discussed as follow:

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    T!e e#igibi#ity criteria "or app#icant see$ing FII registration

    As per @egulation B of /1I (FII) @egulations,&''C, Foreign Institutional

    Investors are re7uired to fulfill the following conditions to 7ualify for grant of 

    registration:

    • Applicant should have good track record, professional competence, financial

    soundness, e0perience, good reputation of fairness and integrity.

    • The applicant should be regulated by an appropriate foreign regulatory

    authority in the same category where registration is sought from /1I.

    @egistration with authorities, which are responsible for incorporation, is not

    ade7uate to 7ualify as Foreign Institutional Investor.

    • The applicant is re7uired to have the permission under the provisions of the

    F/!A, &''' from the @eserve 1ank of India.

    • Applicant must be legally permitted to invest in securities outside the

    country or its in*corporation D establishment.

    • The applicant must be a Efit and properE person not dis7ualified by any

    law.• The applicant has to appoint a local custodian and enter into an agreement

    with the custodian. Along with the above it also has to appoint a designated

     bank to route its transactions.

    • 5ayment of registration fee of % G C,.

    EForm AE as prescribed in /1I (FII) @egulations, &''C is to be filled before

    applying for FII registration.

    Supporting documents required are

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    • Application in Form A duly signed by the authoried signatory of the

    applicant.

    • $ertified copy of the relevant clauses or articles of the !emorandum and

    Articles of Association or the agreement authoriing the applicant to investon 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 ecurities $ommission or 

    elf*@egulatory 4rganiation 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.

    • ;eclaration regarding fit proper entity.

    The application fee for registration as FII is % G C,. The mode of payment is

    ;emand ;raft in favor of Eecurities and /0change 1oard of IndiaE payable at

     >ew =orkH.

    /1I generally takes 9 working days in granting FII registration. "owever, in

    cases where the information furnished by the applicants is incomplete or missing,

    seven days shall be counted from the days when all necessary information sought,

    reaches /1I.

    In cases where the applicant is bank and subsidiary of a bank, /1I seeks

    comments from the @eserve 1ank of India (@1I). In such cases, 9 working days

    would be counted from the day no ob+ection is received from @1I.

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    The FII registration is valid for C years. After e0piry of C years, the registration

    needs to be renewed.

    ame as initial registration, Along with EForm AE and all the relevant documents,

    the applicants are re7uired to fill in additional form (Anne0ure &) while applying

    for renewal. % G C, needs to be paid for renewal of FII registration.

    The application for renewal should be submitted three months before e0piry of the

    FII registration. & 6 debt FIIs are debt dedicated FIIs which invest in debt

    securities only. The procedure for registration of FIIDsub*account, under &6 debt

    route is similar to that of normal funds besides a clear statement by the applicant

    that it wishes to be registered as FIIDsub*account under &6 debt route.

    . iterature 'evie(

     Foreign institutiona# investment)a !istory in India

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    The remarkable economic growth during the past two decades in most of the

    emerging countries had been stimulated by foreign capital inflows from developed

    countries. The post &''s period witnessed sharp augment inflows of foreign

     private capital and official development finance lost its predominance in net capital

    inflows. !ost of the developing countries opened their capital markets to foreign

    investors either because of inflationary pressures, widening current account

    deficits, e0change depreciation, increase in foreign debt or as a result of economic

     policy. There was a surge in capital inflows into India too since &'' as in India,

    the purchase of domestic securities by FIIs was first allowed in eptember &'' as

     part of the liberaliation process that followed the balance of payment crisis in

    &''*'& (ordon and upta, 8).

     >ow days, a significant portion of Indian corporate sector#s securities are held by

    Foreign Institutional Investors, such as pension funds, mutual funds and insurance

    companies. These investors are often viewed as sophisticated investors as these

    institutional investors are better informed and better e7uipped to process

    information than individual investors ("an and ang, -). As the share of 

    foreign investors in emerging markets has risen, they have influenced the assets

     prices considerably. $onse7uently, policymakers have become increasingly

    concerned about the factors determining international investment, the performance

    of foreign capital investments, and the impact of foreign investment on local

    turnover and on the volatility of stock prices (Tesar and erner, &''C).

    The impact study of FIIs flows on domestic stock market is important from

    government as well as investor point of view, for e0ample, does the opening up of 

    the market for FII increase speculation in the market and thus make the market

    more volatile and more vulnerable to foreign shocks (Ji, ). The immediate

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    impact of market opening to FIIs is the surge in trading volume and capital inflows

    to domestic stock markets, result of which the boom in stock prices. The stock 

    market boom, typically, does not last for the entire period is of capital inflows. It

    usually starts with the initial surge in capital inflows and ends before the episode of 

    capital inflows completely subsides ($alvo and !endoa, ).

    "enry () reports the two possible conse7uences of market liberaliation in the

    light of international asset pricing models. First outcome of market liberaliation

    (because of its impact on the cost of capital) is an increase in a country#s e7uity

     prices because market learns that domestic markets will liberalie more in near 

    future. The second impact of market liberaliation is on physical investment that

    will increase because of fall in cost of capital as new entrepreneurs will initiate

    more investment pro+ects. The second effect of market liberaliation will definitely

    increase the rate of economic growth.

    imilarly ompers et al. (&) prove that institutional investors invested in li7uid

    and large stocks having low returns during the previous year. o an increase in the

    institutional demand in share market will affect stock market prices and returns if 

    supply and demand curves for that particular share are not perfectly elastic.

    "an et al. (-) also analye the impact of institutional investors on stock prices

    from a different perspective. They studied the impact on stock prices because of 

    the investment constraints on institutional investors by their unit holders.

    Institutional constraints some time refrain from selling or purchasing of stock 

    about which they have even some goodDbad news. o they conclude that higher 

    institutional investment constraints have strong price momentum on the shares.

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    imilarly Jin et al. (B) conclude that the investment performance of FIIs high

    holding stocks is significantly better than that of FIIs low holding stocks. They

     presented the evidence that FIIs trading behavior has generated better returns and

     portfolio performance since the stock market#s full liberaliation. Ji () studies

    the impact of market opening to foreign investors on Taiwan stock market behavior 

    and found no significant changes in stock market return after market opening. 1ut

    author agreed that the impact on return should be there because large international

    investors tend to study companies more thoroughly. The involvement of foreign

    investors disseminates information better hence leads to more efficient market.

    @ichards (-) analye data of si0 Asian emerging e7uity markets and found two

    interesting findings. The trading behavior of foreign investors was largely

    influenced by the return in global market that is positive feedback trading. The

     price impact associated with foreign investors trading was much large than

    estimated earlier.

    2.1 Determinants o" FII Investment

    2.1.1 Impact cost

    4ne of the pre*re7uisites for an investor to be able to comfortably trade fre7uently

    in the market (to reconstitute the investment portfolio) is the ability to do so

    comfortably in a market without having to suffer a great transaction cost. In other words, it re7uires the market to be li7uid. Financial Kforeign shareholders have

    financial focus and lay emphasis on li7uidity, argue $offee (&''&) and Aguilera

    and Lackson (8). Ji7uidity, in this conte0t, means the ability of the market to

    absorb large 7uantities of trade without a heavy transaction cost. The transaction

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    cost, here, would mean not the fi0ed costs like brokerage, depository chares etc.

     but the cost that is attributable to lack of market li7uidity. ince these costs are

    different in different countries and also vary across the stocks listed in the same

    country#s bourses, it could be one of the important considerations for the Foreign

    5ortfolio Investors.

    2.1.2 ar$et 'eturn

    The basic rationale for the international capital flows is the rate of return which is

    higher in a foreign market compared to the domestic market. $apital flows across

    the geographical boundaries of the countries is mainly to enhance the productivity

    and efficiency of capital at the global level. "ence the rate of return should

    certainly e0plain the choice of a particular stock for investment by the FIIs.

    !ohanty (&'') has found that the institutional investors as a group have invested

    in companies with good financial performance. $lark and 1erko (&''B) show a

     positive contemporaneous relation between e7uity flows and stock returns using

    monthly data for !e0ico. The study has used the market return of the >ifty

    companies# stock as the average of the market return for the 8 months Lune*August

    -, as it is reported by >/.

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    2.1.* +on),romoter S!are!o#ding

    The shares that are available for trading in the normal course are those that are with

    the investors other than the promoters and other interested and special categories of 

    investors. This is an important variable to be considered in investing in a stock 

     because the available free*float in most American companies is above ' per cent

    whereas in India promoters have more than C per cent stakes in ma+ority of large

    companies.(1iswal, 8) As early as in &'B, ;emset (&'B) has found that one

    of the important determinants of secondary market li7uidity is the number of 

    shareholders. As the number of persons currently holding a particular share

    increases, the number of market participants interested in trading the asset

    increases in direct proportion. Therefore, the number of transactions per unit of 

    time also increases. 4ne of the findings of his study is that the increase in the

    number of shareholders reduces the bid*ask spread. 1enston and "agerman (&'9-)

    also have observed a direct relation between a pro0y for insider holdings and bid*

    ask spread. These studies show that the number of shareholders and the ratio of 

    non*promoter shareholders to total shareholders have a bearing on the interest of 

    the investors in wanting to include that security in their portfolio and also the bid*

    ask spread. The ratio of shares held by >on*promoter category to 5romoters

    category as of eptember - is used in the model. This is a measure of li7uidity

    of a stock in the bourses. This is the 7uantum of shares that an investor can actually

     buy and sell. The FIIs investment cap has not been included as one of the

    e0planatory variables because only &9 out of the C >ifty companies studied haveFIIs investment cap different from the generic cap. The balance 88 companies have

    stayed with the generic cap only. "ence, FIIs investment cap is not considered for 

    the model.

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    2.2 'ecent FII trends in India

    1ansal And 5asricha ('), studied the impact of market opening to FIIs, on

    Indian stock market behavior. India announced its policy regarding the opening

    of stock market to FIIs for investment in e7uity and related instruments on &-th

    eptember &''. %sing stock market data related to 1ombay tock /0change,

    for both before and after the FIIs policy announcement day, they conducted an

    empirical e0amination to assess the impact of the market opening on the returns

    and volatility of stock return. they found that while there is no significant

    changes in the Indian stock market average returns, volatility is significantly

    reduced after India unlocked its stock market to foreign investors.

    5. Mrishna 5rasanna () has e0amined the contribution of foreign

    institutional investment particularly among companies included in sensitivity

    inde0 (ense0) of 1ombay tock /0change. Also e0amined 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

    5rasanna () e0amined FIIs investment preferences in India. The study has

    observed that apart from economic development of the country, firm specific

    factors to a large e0tent determine FIIs investment in a firm. FIIs invested more

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    in companies with higher volume of shares owned by general public. The

     promoters# holdings and foreign investment were inversely related and also

    foreign investors tend to choose companies where family holding of promoters

    is not substantial. @eturns and earnings per share were significant factors

    influencing the investment decisions by FIIs.

    @ai Mulwant et al (8) held that the present study tries to e0amine the

    determinants of Foreign Institutional Investments in India, which have crossed

    almost %G & billion by the end of . iven 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 liberaliing

    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

    e0*ante risk. In terms of magnitude, the impact of stock market returns and the

    e0*ante risk turned out to be ma+or 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. tabiliing the stock market volatility and minimiing the e0*

    ante risk would help in attracting more FII inflow that has positive impact on

    the real economy.

    Agarwal, $hakrabarti et al (8) have found in their research that the e7uity

    return has a significant and positive impact on the FII. 1ut 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 +acking*up the asset prices and sell when the asset prices are

    increasing. "ence, there is a possibility of bi*directional relationship between

    FII and the e7uity returns.

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    ordon and upta (8) analyed the factors affecting portfolio e7uity flows

    into India. The analysis has shown that, the magnitude of flows was smaller in

    India compared to other emerging markets and also less volatile than other 

    emerging markets. 5ortfolio flows were determined by both domestic and

    e0ternal factors. Among e0ternal factors Jibor was prominent and in domestic

    factors credit ratings and lagged returns were important determinants of 

     portfolio flows. In 7uantitative terms both domestic and e0ternal factors were

    found to be e7ually important in determining portfolio flows.

    1atra (8) e0amined FII trading behavior and returns in Indian e7uity market

     based on daily and monthly data. The study has found trend chasing and

     positive feedback trading by FIIs on daily basis at an aggregate level. 1ut no

    such evidence was found in monthly basis. 1ased on the impact of trading

    imbalance, study concluded that bias of FIIs do not have destabiliing impact

    on the e7uity market.

    $hakrabarti (&) e0amined the nature and causes of FII flows to India. The

    study has found FII inflows were highly correlated with e7uity returns in India

    and argued that FII flows are effects of returns rather than the cause of it. The

    study also argued that, FIIs do not seem to have informational disadvantage

    compared to local investors. It was found that Asian crisis resulted in a regime

    shift and since then domestic e7uity returns became the single most important

    determinant of FII flows to India.

    !ukher+ee et al. () e0amined the daily flows of FIIs investment in Indian

    stock market. The study has found that domestic e7uity returns was the most

    important factor in influencing the FIIs investment flows into the country and

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    FIIs investment flows do not have significant impact on returns. FIIs sale and

    net flows were significantly affected by the performance of the e7uity market

    whereas FIIs purchase was not responsible for such a performance. The study

    has also found that, FIIs investment flows were highly auto correlated.

    tanley !organ () has e0amined that FIIs have played a very important

    role in building up India#s fore0 reserves, which have enabled a host of 

    economic reforms. econdly, FIIs are now important investors in the country#s

    economic growth despite sluggish domestic sentiment. The !organ tanley

    report notes that FII strongly influence short*term market movements during

     bear markets. "owever, the correlation between returns and flows reduces

    during bull markets as other market participants raise their involvement

    reducing the influence of FIIs. @esearch by !organ tanley shows that the

    correlation between foreign inflows and market returns is high during bear and

    weakens with strengthening e7uity prices due to increased participation by

    other players.

    uresh 1abu and 5rabheesh () e0amined the causal relationship between

    foreign institutional investment and stock returns. The study has found bi

    directional causality between FIIs investment and stock returns. FIIs investment

    flows were more stock return driven.

    Thenmohi and Mumar (') e0amined the dynamic interaction between

    mutual fund flows and security returns and between mutual fund flows and

    volatility. They found a positive contemporaneous relationship between stock 

    market returns and mutual fund flows measured as stock purchases and sales.

    The study has found that mutual funds flows are significantly influenced by

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    returns but returns were not influenced by mutual fund flows. The study has

    also identified a strong positive relationship between stock market volatility and

    mutual fund flows.

    ome of the studies reviewed in this section belong to early part of . They

    are the initial periods in the development of institutional investment. It gives

    enough +ustification to have revisit the pattern of institutional investment. The

    studies of uresh 1abu and 5rabheesh (), and Thenmohi and Mumar 

    (') do belong to the latest period and have addressed the primary ob+ective

    of the present study individually i.e. e0amining the relationship between returns

    and institutional investment as represented by FIIs and !Fs. 1ut, both studies

    have considered only one estimation window. In the present study an attempt is

    made to analye the relationship between institutional investments and market

    return over a period of time by dividing the study to cover different phases in

    the market.

    2.* -vervie( o" Indian Stoc$ ar$et

    tock markets refer to a market place where investors can buy and sell stocks. The

     price at which each buying and selling transaction takes is determined by the

    market forces (i.e. demand and supply for a particular stock. A stock e0change

    includes an association of persons or firms to regulate and supervise all

    transactions, rules, regulations and standard practices to govern all marketdealings, authoried stock brokers and an e0change floor where stock brokers or 

    their approved agents meet during fi0ed business hours to buy and sell securities.

    The ecurities and /0change 1oard of India (/1I) is the regulatory body of the

    stock market. It gives rules and regulation to control the stock e0changes. These

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    rules and regulation are called the stock market reforms. To study the stock market

    reforms in detail, we have to study the concepts of capital market in detail firstly.

    The financial securities deal with the capital market, which include primary market

    and secondary market. The primary market is that part of capital market that deals

    with the issuance of new securities. 5rimary market issue can be classified in to

    initial public offer, right issue and preferential issue. The secondary market is the

    financial market for trading of securities that have already been issued in initial

     private or public offering. ecurities initially issued in the primary market by

    companies are traded on the secondary market.

    2.*.1. istory o" Indian Stoc$ ar$et

    The earliest records of security dealings in India are somewhat obscure. The /ast

    India $ompany was the dominant institution in the country#s economy and it is

     presumed that transactions in its loan securities first began in the eighteenth

    century. 1y the &8Ns, shares of banks and cotton companies were actively traded

    in 1ombay. Though the list of tradable securities kept increasing there were only

    half a doen brokers recognied by banks and merchants during the &-s and

    &Cs. The number of brokers increased to about C shortly thereafter, when a

    true Nshare maniaN took place in India. The stock boom was the result of a

    disruption in the cotton supply from the %nited tates to 1ritain due to the

    American $ivil ar. Jater, in &9C, the tock /0change of !umbai (1/) was

    established as EThe >ative hare and tockbrokers AssociationE. The 1/ is the

    oldest e0change in Asia. The 1/ has evolved over the years and is currently thelargest stock e0change in the country accounting for one third of trading volume

    and the largest share of listings and market capitaliation. In the &'s, the number 

    of e0changes grew dramatically and today there are 8 recognied stock e0changes

    in the country. In addition to the 1/, the >ational tock /0change of India Jtd.

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    (>/) and the Inter*connected tock /0change of India (I/) are significant in

    terms of market capitaliation and trading value. The >/ was incorporated in

    &'' and in &''- began operations in the holesale ;ebt !arket (;!) and the

    e7uities segment. Trading of derivative instruments was introduced on the

    e0change in . I/ is a national*level e0change providing trading, clearing,

    settlement, risk management and surveillance support to the inter*connected

    market system. Fifteen regional stock e0changes are currently linked through I/

    linkage and connectivity to all the participating e0changes to widen their market.

    2.*.2+ationa# Stoc$ E/c!ange

    4n the basis of the recommendations of high powered 5herwani $ommittee, the

     >ational tock /0change was incorporated in &'' by Industrial ;evelopment

    1ank of India, Industrial $redit and Investment $orporation of India, Industrial

    Finance $orporation of India, all Insurance $orporations, selected commercial

     banks and others. >/ provides e0posure to investors in two types of markets,

    namely: holesale debt market and $apital market .holesale ;ebt !arket is

    similar to money market operations, debt market operations involve institutional

    investors and corporate bodies entering into transactions of high value in financial

    instruments like treasury bills, government securities, etc. >/ has some positive

     points such as fully automated screen*based trading mechanism, trictly follows

    the principle of an order*driven market, trading members are linked through a

    communication network, this network allows them to e0ecute trade from their 

    offices, the prices at which the buyer and seller are willing to transact will appear 

    on the screen, when the prices match the transaction will be completed and a

    confirmation slip will be printed at the office.

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    .8.8ombay stoc$ e/c!ange

    1ombay stock e0change is the oldest stock e0change in Asia with a rich heritage,

    new spanning three centuries in its &88 years of e0istence. hat is now popularly

    known as 1/ was established as 3The >ative share stock 1rokers‟

    AssociationH in &9C. 1/ is the first stock e0change in the country which

    obtained permanent recognition (in&'CB) from the ovt. of India under the

    ecurities $ontracts (@egulation) Act &'CB. 1/ pivotal and preeminent role in the

    development of the Indian $apital !arkets is widely recognied. It changed from

    the open outcry system to an outline screen based order driven trading system in

    &''C. 1/ is now a corporatied under the provisions of the $ompanies Act &''C.

    2.*.Stoc$ ar$et 'e"orms about FII I+ I+DI

    FII have been allowed to invest in the Indian securities market since eptember 

    &'' when the uidelines for Foreign Institutional Investment were issued by the

    overnment. The /1I (Foreign Institutional Investors) @egulations were

    enforced in >ovember &''C, largely based on these uidelines. The regulations

    need FIIs to register with /1I and to obtain approval from the @eserve 1ank of 

    India (@1I) under the Foreign /0change @egulation Act to buy and sell securities,

    release foreign currency and rupee bank accounts, and to forward and repatriate

    funds. 4nce /1I registration has been obtained, an FII does not re7uire any

    further consent to buy or sell securities or to move funds in and out of the country,

    sub+ect to compensation of applicable ta0. Foreign investors, whether registered as

    FIIs or not, may also invest in Indian securities outside the FIIs process. Foreign

    financial service institutions have also been allowed to set up +oint ventures in

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    stock broking, asset management companies, merchant banking, and other 

    financial services firms along with Indian partners. Foreign portfolio investments

    in Indian companies are limited to individual foreign ownership at & percent of 

    the total issued capital of any one company and to aggregate foreign ownership at

    8 percent of the total issued capital of any one company. hen India opened

    investment into listed e7uities through the FIIs framework not all foreign investors

    were eligible to register with the Indian securities regulator (/1I). >o FII was

     permitted to own more than C6 of a firm and there were restrictions on ownership

     by all FIIs taken together. Foreign investors faced many difficulties in

    accomplishing transactions in the Indian e7uity market. For e0ample in &''8, the

    settlement system which was based on physical paper share certificates found it

    difficult to handle the settlement volume of foreign investors. imilarly, foreign

    investors who sent orders to open outcry trading floor of the 1ombay stock 

    e0change found an array of problems including high transactions costs and low

     probability of order e0ecution. Thus from &''8 to 8, the !inistry of Finance

    and /1I led a strong reforms aiming at a fundamental transformation of the

    e7uity market. 5resently the ceiling for overall investment for FIIs is -6 of the

     paid up capital of the Indian company. The limit is 6 of the paid up capital in

    the case of public sector banks, including the tate 1ank of India. The ceiling can

     be raised up to sectoral capDstatutory ceiling, sub+ect to the approval of the board

    and the general body of the company passing a special resolution to that effect.

    Also the rigid criteria of re7uiring FIIs and sub*account to register as a 9:8 FIID

    sub*account or &6 debt FIIDsub*account has recently been done away with.

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    2.*.3 T!ere are some ot!er re"orms and t!eir e""ects on FIIs a#so mentioned

    be#o(

    &. Jimit of investment by FIIs increased from -'6 to the limit of sectoral cap for 

    F;I with the approval of the board of directors the shareholders. FIIs

    investments in sectors like hotels and tourism, petroleum, air, roads, highways, port

    etc. can be up to &6. These reforms increase the profit of FIIs.

    . After the year 9, FIIs are permitted to entering to the short selling

    transactions only in accordance with the specified by /1I. This would prohibit

    the market manipulation.

    8. >ow no transaction could be carried forward and the transaction in securities

    would be only through stock broker is granted a certificate by /1I.

    -. After the year 9 FIIs are permitted to invest % G 8. billion in ovt.

    ecurities.

    C. Internet trading promotes competition and improves investor service.

    B. @olling settlement has a positive impact on the FIIs. This would increase the

    fle0ibility in transacting of the institutional investors. 1ecause of it the speculative

    volumes reduce which was very high in India.

    9. FIIs are permitted up to 86 in infrastructure companies in the security market

    vi. stock e0changes, deposits

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    8. 'esearc! -b4ective and ypot!esis

    -b4ectives o" t!e Study

    Following are the ob+ectives of the study:

    • To study the scope and trading mechanism of Foreign Institutional

    investors in India.

    To find the relationship between the FIIs e7uity investment pattern andIndian stock indices.

    ypot!esis

     >ull "ypothesis ("o): The 1/ Inde0 does not rise with the increase in FIIs

    investment.

    Alternate "ypothesis ("a): The various 1/ ense0 rises with the increase in

    FIIs investment.

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    -. Scope nd +eed -" Study

    cope of the study is very broader and covers both the values of 1/ ense0 andits comparison with foreign institutional investments. 1ut, study is only going to

    cover foreign investments in form of e7uity. The time period is limited from

    Lanuary to ;ecember && as it will give e0act impact in both the bullish and

     bearish trend.

    The study will provide a very clear picture of the impact of foreign institutional

    investors on 1/ ense0. 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

    e0plored. !oreover, it would be beneficial to gain knowledge regarding foreign

    institutional investments, their process of registration and their impact on 1/

    sense0.

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    3. 'esearc! et!odo#ogy

    @esearch methodology is the arrangement of conditions for collection and analysis

    of data in a manner that aims to combine relevance to the research purpose with

    economy in procedure. @esearch methodology is the conceptual structure within

    which research is conducted. It constitutes the blueprint for the collection

    measurement and analysis of the data.

    The research methodology here includes:

    O @esearch problem

    O @esearch design

    O ampling design

    O ampling techni7ue

    O ;ata collection method

    3.1 'esearc! ,rob#em

    There is a saying 3a problem well defined is half solvedH. The pro+ect deals with

    the 3Impact of Foreign Institutional Investors on 1/ ense0 H. This research

     pro+ect studies the relationship between FIIs investment and 1/ sense0. This

    indice, in a way, represent the picture of India#s stock markets. o this pro+ectreveals the impact of FII on the Indian capital market.

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    There may be many other factors on which a stock inde0 may depend i.e.

    overnment policies, budgets, bullion market, inflation, economic and political

    condition of the country, F;I, @e.D;ollar e0change rate etc. 1ut for this study I

    have selected only one independent variable i.e. FII. This study uses the concept of 

    correlation and regression to study the relationship between FII and stock inde0.

    The FII started investing in Indian capital market from eptember &''when the

    Indian economy was opened up in the same year. Their investments include e7uity

    only. The sample data of FIIs investments consists of monthly average from

    Lanuary to ;ecember &&.

    3.2 'esearc! Design

    /0ploratory @esearch

    As an e0ploratory study is conducted with an ob+ective to gain familiarity with the

     phenomenon or to achieve new insight into it, this study aims to find the new

    insights in terms of finding the relationship between FII# and Indian tock 

    Indices.

    3.* Samp#ing Design

    • %niverse

    In this study the universe is finite and will take into the consideration related

    news and events that have happened in last few years.

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    • ampling %nit

    As this study revolves around the foreign institutional investment and 1/

    ense0.o for the sampling unit is confined to only the Indian stock market.

    3. Samp#ing Tec!nique)

    $onvenient ampling: tudy conducted on the basis of availability of the ;ata and

    re7uirement of the pro+ect. tudy re7uires the events that have impact on the Indian

    stock market.

    3.3 Data co##ection et!od

    econdary data: For the secondary data various literatures, books, +ournals,

    magaines, web links are used. As there are not possibilities of collecting data

     personally so no 7uestionnaire is made.

    3.5 'esearc! na#ysis Too#s

    3.5.1 'egression ana#ysis and 6orre#ation ana#ysis

    @egression Analysis: e can analye how a single dependent variable is affected

     by the values of one or more independent variables P for e0ample, how an

    athleteNs performance is affected by such factors as age, height, and weight. e 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.

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    $orrelation: 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. e can use the $orrelation tool to

    determine whether two ranges of data move together P 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 

    ero).

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    B. na#ysis

    5.1 6orre#ations

    Correlations

    SensexVal FII

    SensexVal

    Pearson Correlation 1 .403**

    Sig. (2-tailed) .005

    N 4 4

    FII

    Pearson Correlation .403** 1

    Sig. (2-tailed) .005

    N 4 4

    **. Correlation is signi!i"ant at t#e 0.01 le$el (2-tailed).

    Inferences:*

    &. As the 5earson correlation coefficient between FII and ense0 ?alue is

    good and positive (.-8) and the p value is .C, this implies that null

    hypothesis is re+ected.

    . o we can infer that Foreign Institutional Investments have significant

    correlation with ense0.

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    'egression

    Model Summaryb

    %odel & & S'are dsted &

    S'are

    Std. +rror o! t#e

    +sti,ate

    1 .403a .12 .144 24.33/

    a. Predi"tors (Constant) FII

    . eendent Variale SensexVal

    Coefficientsa

    %odel nstandardi6ed

    Coe!!i"ients

    Standardi6ed

    Coe!!i"ients

    t Sig. 5.07 Con!iden"e

    Inter$al !or 8

    Correlations

    8 Std.

    +rror 

    8eta 9o:er  

    8ond

    er 

    8ond

    ;ero-

    order 

    Partial Part

    1(Constant) 15412.41

    45.

    333.11/ .000

    144/5.

    1/

    134.21

    FII .100 .033 .403 2.5 .005 .033 .1/ .403 .403 .403

    a. eendent Variale SensexVal

    @egression /7uation is ense0 Q&C-&.&9R .& FII

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    6!arts

    The histogram shows the residuals of the ense0 variable. @esidual is what remains after 

    independent co*efficient have been determined. This curve is not a normal curve which

    implies that some part of histogram is outside the normal curve. This implies that residual

    is more after carrying out the regression analysis.

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    The normal p*p plot of regression standardied residual shows the residual values

    all hugging the line of least s7uares or the line of greatest fit. These values must be

    close to the line of least s7uares which is an idealied plot. o in this plot there is

    some deviation.

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    The scatter plot shows the distribution of data which must be randomly distributed.

    If the data is not randomly distributed then we have heteroscedasticity present in

    our data which implies that we don#t have confidence in standard error associated

    with our database.

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    Frequencies

    Sense/ 7a#ues Statistics

    NValid 4

    %issing 0

    %ean 1024./1

    Std. +rror o! %ean 451.553

    %edian 1/25.50

    Std. e$iation 312.453

    Varian"e //215.232

    S

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    Foreign Institutiona# Investment Statistics

    NValid 4

    %issing 0

    %ean 135.2353

    Std. +rror o! %ean 122.31/

    %edian 2/5.300000

    Std. e$iation 122.0312

    Varian"e 154/1/4.50

    S

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    39448

    39479

    39508

    39539

    39569

    39600

    39630

    39661

    39692

    39722

    39753

    39783

    -20000

    -15000

    -10000

    -5000

    0

    5000

    10000

    15000

    20000

    25000

    FY - 2008

    SensexVal

    FII

    Interpretation• After plotting the values of 1/ ense0 of the year and the values of 

    respective FII#s, we find that the values of FII#s and ense0 are interrelated

    in some manner.

    • hen there is a downfall in FII#s the value of ense0 also comes down and

    vice*versa.

    • 1ut there is some deviations or e0ceptions to this were found. For e0 from

    Lan to Feb the value of FII#s has been increased and ense0 value have

     been decreased, which indicates that there has been some other factors

    which effects ense0 values.

    • The period of has been a period of tremor for the Indian !arkets, the

    Indian !arkets plunged after making high of &- in Lan. to as low as

    ''8 in ;ec. almost decrease of around C6.

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    39814 39845 39873 39904 39934 39965 39995 40026 40057 40087 40118 40148

    -10000

    0

    10000

    20000

    30000

    40000

    50000

    60000

    FY - 2009

    #REF! #REF!

    Interpretation

    • After plotting the values of 1/ ense0 of the year ' and the values of 

    respective FII#s, we find that the values of FII#s and ense0 are not

    following a particularly related to each other.

    • ense0 in this year has been continuously increasedS on the contrary FII#s

    values undergo some variations. This indicates that there have been some

    other factors which affect ense0 values.

    • ense0 has shown some recovery from the past recessionary period of .

    S

    F

    FII

    Sens

    FII

    Sens

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    40179 40210 40238 40269 40299 40330 40360 40391 40422 40452 40483 40513

    -10000

    -5000

    0

    5000

    10000

    15000

    20000

    25000

    30000

    35000

    FY - 2010

    #REF! #REF!

    Interpretation

    • The period of & has showed continuity in uptrend in the markets.

    • The 1/ ense0 has surged to CB& as on 8& st  ;ec. & from &B8CB in

    Lan. & gaining -&'C points and the inflows from the FIINs have been

    robust during this period.

    • The total FII inflow during this period has been to the tune of @s. &9'B9-

    crs.

    FII

    Sens

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    Nov-10 Jan-11 Feb-11 A-11 J"n-11 J"l-11 Se-11 Nov-11 e$-11

    -10000

    -5000

    0

    5000

    10000

    15000

    20000

    25000

    FY-2011

    #REF! #REF!

    Axis Title

    Axis Title

    Interpretation

    • The period of && has shown a mi0 trend in sense0 values.

    • From Lan to !arch && !arch it has been decreased and then follow a

    continuous downtrend and reached &C-C-,and the inflows from the FIINs

    have also been not so good during this period.

    • The total FII inflow during this period has been to the tune of @s. 9& crs.

    • There had been months in this period where FII#s inflow is ma0imum

    i.e.&BC &9 in the months of Luly and ;ecember.

    Sens

    FII

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    0

    5000

    10000

    15000

    20000

    25000

    SensexVal

    SensexVal

    Interpretation

    • Above line chart shows the ense0 values from Lan# to ;ec &&.

    • There has been strong downfall in the value of ense0 during the year ,

     because of the global recession.

    • In the ne0t year the ense0 has been recovered much from the recessionary

     pressures of , in the month of ;ec & it has reached the value of 

    CB which was its life time high.

    • Again in the year of && it starts declining and reached the level of &C-C-

    in ;ec &&.

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    -30000

    -20000

    -10000

    0

    10000

    20000

    30000

    40000

    50000

    60000

    FII

    FII

    Interpretaion

    • Above line chart shows different inflows and outflows of Foreign

    Institutional Investments in India.

    • Foreign investors have been continuously investing in India because only in

    the year of outflow of investments were there otherwise there were

    inflows in the country.

    • The highest inflow of foreign capital was in the month of ;ec ' which was

    around -B crores.

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    -30000

    -20000

    -10000

    0

    10000

    20000

    30000

    40000

    50000

    60000

    FY 2008-2011

    SensexVal

    FII

    Interpretation

    • The above chart shows the relative effect of Foreign Institutional

    Investments on 1/ ense0 from Lan 9 to ;ec && we can see that

    how the FII investments have affected the movement in the Indian !arkets.

    Also the study supports this fact as the correlation between the two is

     positive (.-8) Thus, FII investments play an important role in our Indian

    !arkets.

    • This being an important factor should always be tracked upon. the period of

    was a period of pain due to economic crisis in the global economy, this

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    recessionary period had severe impact on the Indian !arkets too as the

    global investors sell*off was seen.

    • The period of ' saw simultaneous recovery due to reassurance by the

    overnment in the form of relief packages and the recovery in the economy

    itself.

    • The period of & has been the continuity of the recovery for the Indian

    !arkets as we are a growing economy with lots of potential.

    • The ;5 of India is on constant rise, the business prospects and political

    stability all are attracting the foreign investors to be a part of the Indian

    !arkets.

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     FI+DI+8S

    After the analysis following are the findings of the study:

    &) There is a positive and significant correlation (.-8) between Foreign

    Institutional Investments and the value of sense0, which states that FII#s inflows

    and outflows, has significant impact on 1/ ense0.

      ) ;eterminants of the FII#s are Impact cost, >on promoter holding, !arket

    return.

    8) In bearish trend of the volatility in Indian tock indices due to FIIs is more

    than in bullish trend of '. >o doubt FII inflow is more in '. The domestic

    investors were also playing an important role in ' but in FIIs is

    influencing market more as domestic investors are not in the market.

    'ecommendations

    After the analysis of the pro+ect study, following recommendations can be made:

    &) implifying procedures and rela0ing entry barriers for business activities and

     providing investor friendly laws and ta0 system for foreign investors.

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    ) Allowing foreign investment in more areas. In different industries indices the

    FIIs should be encouraged through different patterns like futures, options, etc.

    8) omewhere, a restriction related to the track record of ub* 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.

    -) e have to modernie and also have to save our culture. imilarly the laws

    should be such that it protects domestic investors and also promote trade in country

    through FIIs.

    C) /ncourage industries to grow to make FIIs an attractive +unction to invest.

    imitation

    There are certain limitations in the study which is to be conducted. ome of theselimitations are discussed below:*

    &. There can be some other determinants which may affect the stock market

    volatility, but not taken into account in this study.

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    . The data to be analyed will be collected for a period of four years only which is

    a short interval when analying the impact of FII#s on Indian tock /0change.

    8. As the data is to be analyed on monthly basis so it may lead to some error if it

    is analyed on weekly or daily analysis as this analysis provides more data and

    hence better analysis can be done.