Impact of Fii

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INTRODUCTION

Financial markets are the catalysts and engines of growth for any nation. Indias

financial market began its transformation path in the early 1990s. The banking sector

witnessed sweeping changes, including the elimination of interest rate controls,

reductions in reserve and liquidity requirements and an overhaul in priority sector

lending. Persistent efforts by the Reserve Bank of India (RBI) to put in place effective

supervision and prudential norms since then have lifted the country closer to global

standards. Around the same time, Indias capital markets also began to stage extensive

changes. The Securities and Exchange Board of India (SEBI) was established in 1992

with a mandate to protect investors and usher improvements into the microstructure ofcapital markets, while the repeal of the Controller of Capital Issues (CCI) in the same

year removed the administrative controls over the pricing of new equity issues.

Indias financial markets also began to embrace technology. Competition in the

markets increased with the establishment of the National Stock Exchange (NSE) in

1994, leading to a significant rise in the volume of transactions and to the emergence

of new important instruments in financial intermediation.

Indian investors have been able to invest through mutual funds since 1964, when UTI

was established. Indian mutual funds have been organized through the Indian Trust

Acts, under which they have enjoyed certain tax benefits. Between 1987 and 1992,

public sector banks and insurance companies set up mutual funds. Since 1993, private

sector mutual funds have been allowed, which brought competition to the mutual fund

industry. This has resulted in the introduction of new products and improvement of

services. The notification of the SEBI (Mutual Fund) Regulations of 1993 brought

about a restructuring of the mutual fund industry. An arms length relationship is

required between the fund sponsor, trustees, custodian, and asset Management

Company. This is in contrast to the previous practice where all three functions,

namely trusteeship, custodianship, and asset management, were often performed by

one body,

Usually the fund sponsor or its subsidiary. The regulations prescribed disclosure and

advertisement norms for mutual funds, and, for the first time, permitted the entry of

private sector mutual funds. FIIs registered with SEBI may invest in domestic mutual


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funds, whether listed or unlisted. The 1993 Regulations have been revised on the basis

of the recommendations of the Mutual Funds 2000 Report prepared by SEBI. The

revised regulations strongly emphasize the governance of mutual funds and increase

the responsibility of the trustees in overseeing the functions of the asset management

company. Mutual funds are now required to obtain the consent of investors for any

change in the fundamental attributes of a scheme, on the basis of which unit holders

have invested. The revised regulations require disclosures in terms of portfolio

composition, transactions by schemes of mutual funds with sponsors or affiliates of

sponsors, with the asset Management Company and trustees, and also with respect to

personal transactions of key personnel of asset management companies and of

trustees.

India opened its stock markets to foreign investors in September 1992 and has,

since 1993, received considerable amount of portfolio investment from foreigners in

the form of Foreign Institutional Investors (FII) investment in equities. This has

become one of the main channels of portfolio investment in India for foreigners. In

order to trade in Indian equity markets, foreign corporations need to register with the

SEBI as Foreign Institutional Investor (FII). SEBIs definition of FIIs presently

includes foreign pension funds, mutual funds, charitable/endowment/university funds

etc. as well as asset management companies and other money managers operating on

their behalf

The sources of these FII flows are varied .The FIIs registered with SEBI come from as

many as 28 countries(including money management companies operating in India on

behalf of foreign investors).US based institutions accounted for slightly over 41%

those from the U.K constitute about 20% with other Western European countries

hosting another 17% of the FIIs. Portfolio investment flows from industrial countries

have become increasingly important for developing countries in recent years. The

Indian situation has been no different. A significant part of these portfolio flows to

India comes in the form of FIIs investments, mostly in equities. Ever since the

opening of the Indian equity markets to foreigners, FII investments have steadily

grow from about Rs.2600 crores in 1993 to over Rs.272165 crores till the end of Feb

2008. While it is generally held that portfolio flows benefit the economies of recipient

countries, policy makers worldwide have been more than a little uneasy about such


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investments. Portfolio flows often referred as hot money-are notoriously volatile

compared to other types of capital inflows. Investors are known to pull back portfolio

investments at the slightest hint of trouble in the host country often leading to

disastrous consequences to its economy. They have been blamed for exacerbating

small economic problems in a country by making large and concerted withdrawals at

the first sign of economic weakness. They have also been responsible for spreading

financial crisis causing contagion in international financial markets.

International capital flows and capital controls have emerged as an important policy

issues in the Indian context as well. The danger of abrupt and sudden outflows

inherent with FII flows and their destabilizing effect on equity and foreign exchange

markets have been stressed. The financial market in India have expanded and

deepened rapidly over the last ten years. The Indian capital markets have witnessed a

dramatic increase in institutional activity and more specifically that of FIIs. This

change in market environment has made the market more innovative and competitive

enabling the issuers of securities and intermediaries to grow. In India the

institutionalization of the capital markets has increased with FIIs becoming the

dominant owner of the free float of most blue chip Indian stocks. Institutions often

trade large blocks of shares and institutional orders can have a major impact on

market volatility. In smaller markets, institutional trades can potentially destabilize

the markets. Moreover, institutions also have to design and time their trading

strategies carefully so that their trades have maximum possible returns and minimum

possible impact costs.

FII (FOREIGN INSTITUTIONAL INVESTORS)

India opened its door to foreign institutional investors in September 1992 inorder to liberalize the financial market. Foreign investment refers to investments made

by the residents of a country in the financial assets and the production processes of

other country. FII flows form a part of foreign portfolio investment has a greater

importance in India and this resulted in effective globalisation in financial service

industries.


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FIIs are the trendsetters in any market. They were the first ones to identify the

potential of Indian technology stocks. When the rest of the investors invested in these

scrips, they exited the scrips and booked profits. Before the arrival of FIIs, the activity

in stocks used to be evenly attributed with little differences between volumes in

specified and cash groups. However since FIIs concentrate on the top 200 companies

against the 6,000 listed companies on BSE, the stock trading activity has concentrated

to these liquid scrips making them less liquid scrips totally illiquid. Thus, FIIs have

become the driving force behind the movements of the stock indices on the Indian

stock markets. So, in this situation there is need to study the impact of FII on Indian

Stock Market.

OBJECTIVES OF THE STUDY:

Following are the objectives of the study:

1. To study the scope and trading mechanism of Foreign Instititutional investors

in India.

2. To find the relationship between the FIIs equity investment pattern and Indian

stock indices.

3. To analyze the impact of FIIs equity investment on specific industrial sector.

4. To study the impact of FII on Indian stock market.

5. To understand the concept of BSE sensitive index.

6. To understand the concept of FIIs.

7. To understand the relationship between the Sensex and FII.

8. To know the sector which get affected more by activities of FIIs.

SCOPE OF THE STUDY:

Scope of the study is very broader and covers both the stock indices and its

comparison with foreign institutional investments. But, study is only going to cover

foreign investments in form of equity. The time period is limited from January 2012

to December 2012 as it will give exact impact in both the bullish and bearish trend.


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independent variable i.e. FII. This study uses the concept of correlation, regression

and hypothesis to study the relationship between FII and stock index. The FII started

investing in Indian capital market from September 1992when the Indian economy was

opened up in the same year. Their investments include equity only. The sample data

of FIIs investments consists of daily basis from January 2001 to February 2011.

DATA SOURCES

The proposed study is carried with the help of both primary and secondary

sources of data.

PRIMARY DATA

Relevant primary data would be collected with the help of the interview

method.

SECONDARY DATA

All the secondary data used for the study would be extracted from the annual

reports, manuals, websites and other published materials of the company.

LIMITATIONS OF STUDY

Detailed study of the topic was not possible due to limited size of the project.

There was a constraint with regard to time allocation for the research study i.e.

for a period of 45 days.

Suggestions and conclusions are based on the limited data.

Impact of Fii

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