1

EXECUTIVE SUMMARY

Foreign Institutional investors (FIIs) are entities established or incorporated outside India and make

proposals for investments in India. These investment proposals by the FIIs are made on behalf of sub accounts,

which may include foreign corporate, individuals, funds etc. In order to act as a banker to the FIIs, the RBI has

designated banks that are authorized to deal with them. The biggest source through which FIIs invest is the

issuance of Participatory Notes (P-Notes), which are also known as Offshore Derivatives.

It can affect the factor productivity of the recipient country and can also affect the balance of payments.

In developing countries there was a great need of foreign capital, not only to increase the productivity of labor

but also helps to build the foreign exchange reserves to meet trade deficit.

If FIIs are investing huge amounts in the Indian Stock Exchanges then it reflects their high confidence

and a healthy investor sentiment for our markets. But with the current global financial turmoil and a liquidity

and credit freeze in the international markets, FIIs have become net sellers (on a day to day basis). The entry of

FIIs in India has brought mixed consequences for our markets, on one hand they have improved the breadth

and depth of Indian markets and on the other hand they have also become the major sources of speculation in

testing times like these.

There is a huge need of FII in developing countries like India in order to keep growth of the infrastructure

sector like power, transport, mining & metallurgy, textiles, housing, retail, social welfare, medical etc. has to

be upgraded. India is left out to own devices to raise money and it has to build this sector for the betterment of

the economy in the near future.

This study mainly says about relationship between Foreign Institutional Investments with regards to

Bombay Stock Exchange indices ‗Sensex‘. It also covers the impact of Foreign Institutional Investments

affecting BSE Sensex in various ways. This study is done on the basis of current scenario of Foreign

Institutional Investments in India. Analysis on current trends in investments of FII v/s BSE (Sensex) has also

been explained.

This study includes comparison of Foreign Institutional Investments in India with other countries like UK,

USA, China and Canada, Current Trends of Foreign Institutional Investments , Statistical Survey and many

more.

The current scenario of FII investments in worth Rs. 11471389.20 crores in equities whereas in debt an

FII investment is worth Rs. 31,483.90 crores.

2

There is a need to determine push and pull factors behind any change in the FII, so that we can frame our

policies to influence the variables which drive-in foreign investment. Also FII has been a subject of intense

discussion, as it is held responsible for intensifying currency crises in 1990‘s.

3

OBJECTIVE

The basic objective is to know the Foreign Institutional Investments in India in detail.

To know the guidelines for Foreign Institutional Investments given by SEBI.

To get the knowledge of Stock Markets.

To find out the relationship between FII Investments and Stock Markets.

To know the volatility of BSE Sensex due to FII‘s.

To analyze the impact of FII‘s.

4

CHAPTER 1

1.1 INTRODUCTION

Foreign Investments

in India

Investments

through

listed/unlisted

entities but not

through the route

of stock

exchanges

Investments in

listed companies

through stock

exchanges

FDI Foreign

Venture

Capital

FII QFI

American

Depository

Receipts (ADR)

or Global

Depository

Receipts (GDR)

Investments

by NRI’s /

Persons of

Indian

Origin

5

Foreign Institutional Investor means an institution established or incorporated outside India which

proposes to make investments securities in India .

They are registered as FII‘s in accordance with Section 2 (f) of the SEBI (FII) Regulations 1995 .

FII‘s are allowed to subscribe to new securities or trade in already issued securities .

These investment proposals by FII‖s are made on behalf of sub accounts , which may include foreign

corporate , individuals , funds , etc.

In order to act as a banker to FII‘s the RBI has designated banks that are authorized to deal with them .

The biggest source through which FII‘s invest is the issuance of Participatory Notes , which are also

known as Offshore Derivatives.

6

PARTICIPATORY NOTES

Participatory Notes are the instruments issued by registered FIIs to overseas investors, who wish to

invest in the India Stock Markets without registering themselves with SEBI.

More than 30% of foreign institutional money coming to India is from hedge funds. Hedge Funds

which thrive on Arbitrage Opportunities, rarely hold a stock for a long time.

Participatory Notes are issued to the real investors on the basis of stocks purchased by the FII.

To monitoring investments through Participatory Notes, SEBI decided that FII‘s must report

Participatory Notes details.

FII‘s issue Participatory Notes on ―7th day of the following month‖.

FII merely invest for themselves through Participatory Notes on ―Quarterly Basis‖.

FII who do not issue Participatory Notes but have trades where there is ―Nil‖ undertaking on a

quarterly basis.

7

1.2 HISTORY OF FII IN INDIA

Since 1990-1991, the Government of India embarked on Liberalization and Economic reforms with a

view of bringing about rapid and substantial economic growth and move towards globalization of the

economy.

As a part of the reforms process, the Government under its New Industrial Policy revamped its foreign

investment policy recognizing the growing importance of foreign direct investment as an instrument of

technology transfer, augmentation of foreign exchange reserves and globalization of Indian economy.

Simultaneously, the government, for the first times permitted portfolio investments from abroad by

foreign institutional investors in the Indian Capital Market.

The entry of FII‘s seems to be a follow up of the recommendations of Narsimhan Committee Report on

Financial system.

While recommending their entry, the committee however, did not elaborate on the objectives of the

suggested policy.

The committee only suggested that the capital market should be gradually opened up to foreign

portfolio investments.

From 14, September 1992 with suitable restrictions Foreign Institutional Investors were permitted to

invest in all the securities traded on primary and secondary market, including shares, debentures and

warrants issued by the companies which were listed or were to be listed on the Stock Exchanges in

India.

While presenting the Budget of 1992-1993 the then Prime Minister Dr. Manmohan Singh had

announced the proposal to allow reputed foreign investors, such as pension funds etc. to invest in

Indian Capital Markets.

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1.3 IMPORTANCE OF FII IN THE INDIAN MARKETS

FIIs are among the major sources of liquidity for the Indian markets.

If FIIs are investing huge amounts in the Indian stock exchanges then it reflects their high confidence

and a healthy investor sentiment for our markets.

But with the current global The entry of FII‘s in India has brought financial turmoil and a liquidity and

credit freeze in the international markets, FIIs have become net sellers (on a day to day basis).

mixed consequences for our markets, on one hand they have improved the breadth and depth of Indian

markets and on the other hand they have also become the major sources of speculation in testing times like

these

9

1.4 ROLE OF FII’s

The Indian Stock Market has come of age and has substantially aligned itself with the international

trade.

Market has also witnessed a growing trend of ―institutionalization‖ that may be considered as a

consequence of globalization.

It is the influence of FII‘s which changed the face of the Indian stock markets. Screen based trading

and depositories are realities too largely because of FII‘s.

FII which based the pressure on the rupee from the balance of payments position and lowered the cost

of capital to Indian business.

FII‘s are 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 this scrip‘s, they exited the scrip‘s and

booked profits.

Rolling settlement was introduced at the insistence of FIIs as they were uncomfortable with the badla

system.

FIIs have started playing a critical role in the movement of stock market.

10

CHAPTER 2

2.1 POLICY MEASURES TO ATTRACT FIIs

The Government of India has introduced many policy measures to attract FII:

1. Automatic approval:

Automatic approval up to a specified limit is allowed in 34 specified high priority, capital intensive and

high technology industries.

Foreign investment has been allowed in exploration, production and refining of oil and marketing of

gases.

2. The Foreign Investment Promotion Board (FIPB):

FIBP has been set up to process applications in cases not covered by automatic approval.

3. A Foreign Investment Implementation Authority (FIIA):

FIIA was established in august 1999 within the Ministry of Industry in order to ensure the approvals

for Foreign Investment (including NRI investment) are quickly translated into actual investment

inflows and that proposals fructify into projects.

In particular, in case where FIBP clearance is needed, approval time has been reduced to 30 days.

Foreign companies have been allowed to use their trade marks on domestic sales from 14may 1992.

4. Provisions of the Foreign Exchange management act (FEMA) should be liberalized:

This is through an ordinance dated on 9th January 1997 as a result of which more than 40% of foreign

equity is also treated open are with fully owned Indian company.

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5. Disinvestment on equity:

Disinvestment on equity by foreign investors has been allowed at market rates on stock exchanges from

15 September 1992 with permission to repatriate the proceeds of such Disinvestment.

12

2.2 DOCUMENTS REQUIRED TO BE SUBMITTED AT THE TIME OF

APPLYING FOR REGISTRATION AS AN FII

Application in form ―A‖ duly signed by the authorized signatory of the applicant.

Certified copy of the relevant clauses or articles of M/A & A/A.

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 domestic custodian.

A signed declaration statement that appears at the end of the form.

Declaration regarding fir and proper entity.

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2.3 INVESTMENTS CONDITIONS AND RESTRICTIONS OF FII’s

Commencement of investment

A Foreign Institutional Investor shall not make any investments in securities in India without

complying with the provisions prescribed.

A Foreign Institutional Investor can only invest in the following:

(a) Securities in the primary and secondary market including shares and debentures and warrants of

companies, unlisted, listed or to be listed on a recognized stock exchange in India.

(b) Units of Schemes floated by domestic mutual funds including UTI, whether listed or not listed on a

recognized stock exchange in India.

(c) Dated Government securities.

(d) Derivatives traded on recognized stock exchanges.

(e) Commercial Paper.

(f) Security receipts.

The total investments in equity and equity related instruments made a Foreign Institutional Investor in

India, whether on his own account or account of his sub-accounts, should not be less than 70% of

aggregate of all investments of the Foreign Institutional Investor in India, made on his own account and

on account of his sub-accounts.

However, this is not applicable to any investment of the foreign institutional investor either on its own

account or on behalf of its sub-account in debt securities which are unlisted or listed to be on any stock

exchange if the prior approval of the SEBI has been obtained for such investments.

Further, SEBI will be granting approval for the investments may impose conditions as are necessary

with respect to the maximum amount which can be invested in debt securities by the foreign

institutional investor on his own account or through its sub-accounts. A foreign corporate or individual

is not eligible to invest through 100% debt route.

Even the investments made by FIIs in security receipts issued by securitization companies or asset

reconstruction companies under the Securitization and Reconstruction of Financial assets and

Enforcement of Security Interest Act, 2002 are not eligible for the investment limits mentioned above.

14

2.4 GENERAL OBLIGATIONS AND RESPONSIBILITIES

FII‘s have to face some other general obligations and responsibilities, which are as follows:

1) Appointment of Domestic Custodian:-

A Foreign Institutional Investor or a global custodian acting on behalf of the Foreign

Institutional Investor, shall enter into the agreement with a domestic custodian to act as a

custodian of securities for the Foreign Institutional Investor .

The domestic Custodian includes any person carrying on the activity of providing custodial

services with respect to securities.

The FII can appoint more than one custodian with the SEBI‘s prior permissions but only one

for a single sub- account.

The Foreign Institutional Investor shall ensure that the domestic custodian takes steps for:

Monitoring of investments of the Foreign Institutional Investor in India .

Reporting to the Board on a daily basis the transactions entered into by the Foreign

Institutional Investor.

Preservation for five years of records relating to his activities as a Foreign Institutional

Investor.

Furnishing such information to the Board as may be called for by the Board with regard to

the activities of the Foreign Institutional Investor and as may be relevant for the purpose of

this regulation.

15

2) Appointment of Designated Bank:

A Foreign Institutional Investor shall approach a bank approved by the Reserve Bank Of India

for opening of foreign currency denominated accounts and special non-resident rupee accounts

3) Investment Advice in Publically Accessible Media:

A Foreign Institutional Investors or any of his employees shall not render directly or indirectly any

investment advice about any security in the publically accessible media, whether real-time or non-real

time, unless a disclosure of his interest including long or short position in the said security has been

made, while rendering such advice.

In case, an employee of the Foreign Institutional Investor is rendering such advice, he shall also

disclose the interest of his dependent family members and the employer including their long or short

position in the said security, while rendering such advice.

4) Maintaining Of Proper Books of Accounts, Record:

Every Institutional Investor shall keep or maintain, as the case may be, the following books of

accounts, records and documents:

True and fair accounts relating to remittance of initial corpus for buying, selling and realizing capital

gains of investment made from the corpus;

Accounts of remittances to India for investments in India and realizing capital gains on investments

made from such remittances;

Bank statement of accounts;

Contract notes relating to purchase and sale of securities; and

Communication from and to the domestic custodian regarding investments in securities.

The Foreign Institutional Investor shall intimate to the Board in writing the place where such books,

records or documents will be kept or maintained.

16

1. Preservation Of Books Of Accounts, Records :

Subject to the Provisions of any other Law, for the time being in force, every Foreign Institutional

Investor shall preserve the books of accounts, records and documents for a minimum period of five

years.

2. Appointment of Compliance Officer:

Every Foreign Institutional Investor shall appoint a compliance officer who shall be responsible for

monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc.

issued by the Board or the Central Government.

The compliance officer shall immediately and independently report to the Board any non-compliance

observed by him.

3. Information to the Board:

Every Foreign Institutional Investor shall, as and when required by the Board or the Reserve Bank of

India, submit to the Board or the Reserve Bank of India, as the case may be, any information, record or

documents in relation to his activities as a Foreign Institutional Investor as the Board or as the Reserve

Bank of India may require.

Foreign Institutional Investors shall fully disclose information concerning the terms of and parties to

off-shore derivative instruments such as Participatory Notes, Equity Linked Notes or any other such

instruments, by whatever names they are called, entered into by it or its sub-accounts or affiliates

relating to any securities listed or proposed to be listed in any stock exchange in India, as and when and

in such form as the Board may require.

17

2.4 Securities Exchange Board of India Regulations

REGISTRATION PROCESS

FII‘s must be mandatorily registered with SEBI to buy, sell or otherwise deal in securities. After a

registration the FII gets a registration certificate. Following is the process of registration:

Yes

Comments No

Eligible Yes

Duly Filled in FORM”A”

With required Documents

SEBI

Is the applicant bank or

bank subsidiary

RBI Processing of Application

Is the Applicant

Communication of Rejection

with the reason and refund

of application fees

Issue of

Certificates

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Application For Registration:

- An application for the grant of certificate shall be made to SEBI in Form A.

- Any Foreign Institutional Investor who has made an application for the grant of certificate to the

Board prior to the commencement of these regulations shall be deemed to have an application and the

application shall be accordingly dealt with under these regulations.

Furnishing Of Information , Explanation, And Personal Representation:

- The Board may require the applicant to furnish such further information or clarification as the Board

considers necessary regarding matters relevant to the activities of the applicant for the grant of certificate.

- The applicant or his authorized representative shall, if so required by the Board, appear before the Board

for Personal representation in connection with a grant of a certificate.

Application To Conform To The Requirements:

- Subject to the provisions, the Board shall reject any application, which is not complete in all respects and

does not confirm to the instructions specified in the form or is false or misleading in any particular

material.

- Provided that, before rejecting any such application, the applicant shall be given a reasonable opportunity

to remove it, within the time specified by the Board.

Consideration Of Application :

- For the purpose of the grant of certificate the Board shall take into account all matters which are relevant

to the grant of a certificate and in particular the following: -

1) The applicant's track record, professional competence, financial soundness, experience, general

reputation of fairness and integrity.

19

2) Whether an appropriate foreign regulatory authority regulates the applicant.

3) Whether the applicant has been granted permission under the provisions of the Foreign Exchange

Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for making investments in India as a

Foreign Institutional Investor.

4) Whether the applicant is: -

(i) An institution established or incorporated outside India as Pension Fund or Mutual Fund or Investment

Trust.

(ii) An Asset Management Company or Nominee Company or Bank or Institutional Portfolio Manager,

established or incorporated outside India and proposing to make investments in India on behalf of broad

based funds and its proprietary funds, if any.

(iii) A Trustee or a Power of Attorney holder incorporated or established outside India, and proposing to make

investments in India on behalf of broad based funds.

(iv) University fund, endowments, foundations or charitable trusts or charitable societies.

5) While considering the applications the Board may take into account the following:

(i) Whether the applicant has been in existence for a period of at least 5 years.

(ii) Whether the applicant is legally permissible to invest in securities outside the country of its incorporation

or establishment.

(iii) Whether the applicant has been registered with any statutory authority in the country of their

incorporation or establishment.

(iv) Whether any statutory authority has initiated any legal proceeding against the applicant.

6) Whether the grant of certificate to the applicant is in the interest of the development of the securities

market.

20

- Whether the applicant is a fit and proper person. A domestic portfolio manager or a domestic asset

management company shall be eligible to be registered as a Foreign Institutional Investor to manage the funds of

the sub – accounts. It shall make an application.

- For the grant of certificate to the domestic asset management company or to a domestic portfolio manager the

Board shall consider the following:

a) Whether the applicant is an approved asset management company or a registered portfolio manager and that

the approval or registration is valid.

b) Whether any disciplinary proceeding is pending before the Board against such applicant.

Grant Of Certificate :

- Where an application is made for grant of certificate under these regulations, the Board shall, as soon as

possible but not later than three months after information called for by it is furnished, if satisfied that the

application is complete in all respects, all particulars sought have been furnished and the applicant is found to be

eligible for the grant of certificate, grant a certificate subject to payment of fees.

- The registration fee shall be payable by the applicant by a draft in favor of "Securities and Exchange Board of

India" or by any appropriate mode or instrument as may be specified by the Board.

- Provided further that a domestic portfolio manager or domestic asset management company shall not be

liable to pay fee.

Validity Of Certificate:

- The certificate and each renewal thereof shall be valid for a period of five years from the date of its grant or

Renewal, as the case may be.

- Provided further that the certificate of registration granted or approved under the Securities and Exchange

Board of India (Portfolio Managers) Regulations, 1993 or the securities and Exchange Board of India (Mutual

Funds) Regulations, 1996, expires before the expiry of registration under these Regulations, or the certificate of

such entity is suspended, the domestic portfolio manager or domestic asset management company shall cease to

carry on any activity as foreign institutional investor and shall be subject to the directions of the Board with

regard to the fund, securities or records that may be in its custody or control as a foreign institutional investor.

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Application for Renewal of Certificate :

- Three months before the expiry of the period of certificate, the Foreign Institutional Investor, if he so desires,

may make an application for renewal.

- Provided that a Foreign Institutional Investor who does not desire to renew its registration or has failed to

make an application for renewal shall, at the time of expiry of registration, obtain a specific permission from the

Board, for disinvesting the securities held by it on its own account or on behalf of its sub-accounts, within a

stipulated time period, subject to such terms and conditions as may be specified by the Board.

- The application for renewal shall, as far as possible, may be dealt with in the same manner as if it were an

application made for grant of a certificate.

- The Board, on such application, if satisfied that the applicant fulfils the requirements, shall grant a

certificate subject to payment of fees.

22

2.5 Reserve Bank of India Regulations

Regulations

Foreign Institutional Investors (FIIs), Non- Resident Indians (NRIs) , and Persons of Indian Origin (PIOs)

are allowed to invest in the primary and secondary capital markets in India through portfolio investment

scheme (PIS). Under this scheme, FII/NRIs can acquire shares / debentures of Indian Companies through

stock exchanges in India.

The ceiling for overall investment for FIIs is 24 per cent of the paid –up capital of the Indian Company

and 10 per cent for NRIs / PIOs. The limit is 20 per cent of the paid up capital in the case of public

sector banks, including the State Bank of India.

The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/ statutory ceiling, subject

to the approval of the board and the general body of the company passing a special resolution to the

effect. And the ceiling of 10 per cent for NRIs/PIOs can be raised up to 24 per cent subject to the

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

The ceiling for FII is independent of the ceiling of 10/24 per cent for NRIs/PIOs.

The equity shares and convertible debentures of the companies within the prescribed ceilings are

available for purchase under PIS subject to:

The total purchase of all NRIs/PIOs both, on repatriation and non-repatriation basis, being within all

overall ceiling limit of (a) 24 per cent of the company‘s total paid up equity capital and (b) 24 per cent

of the total paid up value of each series of convertible debentures and

The investment made on repatriation basis by any single NRI/PIO in the equity shares and convertible

debentures not exceeding five per cent of the paid up equity capital of the company or five per cent of

the total paid up value of each series of convertible debentures issued by the company.

23

Monitoring Foreign Investments

The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian companies on a

daily basis.

For effective monitoring of foreign investments ceiling limts, the Reserve Bank has fixed cut-off points

that are two percentage points lower than the actual ceilings.

The cut-off point for instance, is fixed at 8 per cent for companies in which NRIs/PIOs can invest up to

10 per cent of the company‘s paid up capital.

The cut-off limit for companies with 30 per cent ceiling, is 28 per cent and so on.

Similarly, the cut-off limit for public sector banks ( including State Bank Of India) is 18 per cent.

Once the aggregate net purchases of equity shares of the comapny by FIIs/NRIs/PIOs reach the cut-off

point , which is 2% below the overall limit, the Reserve Bank cautions all designated bank branches so

as not to purchase any more equity shares of the respective company on behalf of FIIs/PIO/NRIs

without the prior approval of the Reserve Bank.

The link offices are then required to intimate the Reserve Bank about the total number and value of

equity shares/ convertible debentures of the company they propose to buy on behalf of FIIs/NRIs/PIOs.

On receipt of such proposals, the Reserve Bank gives clearances on a first-come-first served basis till

such investments in companies reach 10/24/30/40/49 per cent limit or the sectoral caps/ statutory

ceilings as applicable.

On reaching the aggregate limit, the Reserve Bank advises all designated banks branches to stop

purchases on behalf of their FIIs/NRIs/PIOs clients.

The Reserve Bank also informs the general public about the caution and the stop purchase in these

companies through a press release.

24

CHAPTER 3

3.1 Impact of FII on Indian Economy

Positive impact

It has been emphasized upon the fact that the stock market reform like improved market

transparency, automation, dematerialization and regulation on reporting and disclosure standards were

initiated because of the presence of the FIIs. But FII flows can be considered both as the cause and the

effect of the stock market reforms. The market reforms were initiated because of presence of them and this

in turn has led to increased flows.

Enhanced flows of equity capital

FII are well known for a greater appetite for equity than debt in their asset structure. For example,

pension fund in the United Kingdom and United States had 68 per cent and 64 per cent, respectively, of

their portfolios in equity in 1998. Not only it can help in supplementing the domestic savings for the

purpose of development projects like building economic and social infrastructure but can also help in

growth of rate of investment, it boosts the production, employment and income of the host country.

Managing uncertainty and controlling risks

FII‘s promote financial innovation and development of hedging instrument. These because of their

interest in hedging risks, are known to have contributed to the development of zero- coupon bonds and

index future. FIIs not only enhance competition in financial markets, but also improve the alignment of

asset prices to fundamentals. FIIs in particular are known to have good information and low transaction

costs. By aligning asset prices closer to fundamentals, they stabilize markets. In addition, a variety of

FIIs with a variety of risk-return preferences also help in dampening volatility.

Improving capital markets

FIIs as professional bodies of asset managers and financial analysts enhance competition and

efficiency of financial markets. By increasing the availability of riskier long term capital for projects,

and increasing firms‘ incentives to supply more information about them, the FIIs can help in the

process of economic development.

25

Negative impact

If we see the market trends of past few recent years it is quite evident that Indian equity markets

have become slaves of FIIs inflow and are dancing to their tune. And this dependence has to a great extent

caused a lot of trouble for the Indian economy. Some of the factors are:

Potential capital outflows

―Hot money‖ refers to funds that are controlled by investors who actively seek short-term returns.

These investors scan the market for short-term, high interest rate investment opportunities. ―Hot

money‖ can have economic and financial repercussions on countries and banks. When money is

injected into a country, the exchange rate for the country gaining the money strengthens, while the

exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the

banking institution will experience a shortage of funds.

Inflation

Huge amounts of FII fund inflow into the country creates a lot of demand for rupee, and the RBI

pumps the amount of Rupee in the market as a result of demand created. This situation leads to excess

liquidity thereby leading to inflation where too much money chases too few goods.

Problem to small investors

The FIIs profit from investing in emerging financial stock markets. If the cap on FII is high then

they can bring in huge amounts of funds in the country‘s stock markets and thus have great influence on

the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their

selling shows the stock market the downward path. This creates problems for the small retail investor,

whose fortunes get driven by the actions of the large FIIs.

Adverse impact on exports

FII flows leading to appreciation of the currency may lead to the exports industry becoming

uncompetitive due to the appreciation of the rupee.

26

Influence of FII on Indian market

Positive fundamentals combined with fast growing markets have made India an attractive

destination for foreign institutional investors (FIIs). Portfolio investments brought in by FIIs have been the

most dynamic source of capital to emerging markets in 1990s. At the same time there is unease over the

volatility in foreign institutional investment flows and its impact on the stock market and the Indian economy.

Apart from the impact they create on the market, their holdings will influence firm performance.

For instance, when foreign institutional investors reduced their holdings in Dr. Reddy‘s Lab by 7% to less than

18%, the company dropped from a high of around US$30 to the current level of below US$15. This 50% drop

is apparently because of concerns about shrinking profit margins and financial performance. These instances

made analysts to generally claim that foreign portfolio investment has a short term investment horizon. Growth

is the only inclination for their investment.

Some major impact of FII on stock market:

They increased depth and breadth of the market.

They played major role in expanding securities business.

Their policy on focusing on fundamentals of share had caused efficient pricing of share.

27

3.2 Impact of FII on Indian Stock Markets

Investments of FIIs are motivated not only by the domestic and external economic conditions but

also by short run expectations shaped primarily by market sentiment.

The element of speculation and high mobility in FII investment can increase the volatility of stock

return in emerging markets.

Volatility is an unattractive feature that has adverse implications for decisions pertaining to the

effective allocation of resources and investment.

Volatility makes investors averse to holding stock due to increased uncertainty.

Investors in turn demand risk premium so as to ensured against increased uncertainty.

A greater risk premium implies higher cost of capital and consequently lowers physical investment.

In addition great volatility may increase the option to wait thereby delaying investment.

Also weak regulatory system in emerging markets economies reduce the efficiency of market

signals and the processing of information, which further magnifies the problem of volatility.

Trading by FIIs happens on a continuous basis and therefore has a casting impact on the local stock

market.

There is a little empirical evidence on the impact of FIIs trading on the host country's stock return

volatility, thereby making it imperative that this aspect of local markets.

A significant improvement has also taken place in India relating to the flow of foreign capital

during the period of post economic reforms.

The major capital flows particularly in FII in investments has taken place following the changes in

trade and industrial policy.

28

Over the past 15 years or so India has gradually emerged as an important destination of global

investors investments in emerging equity markets.

29

CHAPTER 4

4.1 Trends of Foreign Institutional Investments in India

Portfolios Investments in India include investments in American Depository Receipts (ADR's) /

Global Depository Receipts (GDR's) , Foreign Institutional Investments and Investments in

Offshore Funds.

Before 1992 , only NRIs and Overseas Corporate Bodies were allowed to undertake portfolio

investments in India.

Thereafter, the Indian Stock Markets were opened up for direct participation for FIIs.

They were allowed to invest in all the securities on the primary and secondary market including the

equity and other securities instruments of companies listed / to be listed on stock exchanges in

India.

In 2004, FII investments crossed $9 billion, the highest in the history of Indian capital markets.

The total investments 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.

30

4.2 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 systems.

Checking the growth of Population , India is the second highest Populated country in the world

after china. However in terms of density exceeds china, as India's land area is almost half of china's

total land. Due to high population growth, GNI per capital income is very poor.

Boosting agricultural growth through diversification and development of agro processing.

Developing world class infrastructure for sustaining growth in all the sectors.

Allowing foreign investments in more areas.

Effecting fiscal consolidation and eliminating the revenue deficit through revenue enhancement and

expenditure management.

31

4.3 Current Data of FII Investment for Previous Years

Year Gross Purchase

(Cr)

Gross Sale

(Cr)

Net

Investment

(Cr)

Cumulative

Investment

($Mn)

2013 794,231.70 681,267.70 112,968.70 20,037.30

2012 669,184.40 540,823.90 128,360.70 24,372.19

2011 611,055.60 613,770.80 -2714.20 -357.83

2010 766,283.20 633,017.10 133,266.80 29,361.83

2009 624,239.70 540,814.70 83,424.20 17,458.14

2008 721,607.00 774,594.30 -52987.40 -11,974.30

2007 814,877.90 743,392.00 71,486.30 17,655.80

2006 475,624.90 439,084.10 36,540.20 8,107.00

2005 286,021.40 238,840.90 47,181.90 10,706.30

2004 185,672.00 146,706.80 38,965.80 8,669.80

2003 94,412.00 63,953.50 30,459.00 6,627.60

2002 46,479.10 42,849.80 3,629.60 749.50

2001 51,761.20 38,651.00 13,128.20 2,806.40

2000 74,791.50 68,421.60 6,370.08 1,532.60

32

Current Data of FII Investment for Past 12 months

Month Gross

Purchase (Cr)

Gross Sale

(Cr)

Net Investment

(Cr)

Cumulative

Investment

($Mn)

Feb-14 48,428.50 47,024.20 1,404.30 124.64

Jan-14 64,478.90 63,764.40 714.30 228.94

Dec-13 64,259.40 48,173.60 16,085.80 2,601.84

Nov-13 55,806.50 47,690.80 8,116.10 1,300.71

Oct-13 57,051.30 41,344.90 15,706.20 2,491.97

Sep-13 73,123.80 60,066.50 13,057.80 2,062.27

Aug-13 69,308.40 75,231.10 -5,922.50 -902.51

Jul-13 60,371.00 66,624.20 -6,253.30 -1,042.88

Jun-13 55,321.40 66,348.50 -11,026.90 -1,852.15

May-13 74,468.90 52,300.40 22,168.60 4,067.42

Apr-13 61,007.30 55,593.10 5,414.10 1,000.27

Mar-13 66,766.60 57,642.70 9,124.30 1,675.48

33

4.4 Investments by FII in Equity and Debt

34

FII Investment in India

35

Stake of FIIs Sector wise Break up

36

SEBI Registered FIIs in India

SEBI Registered FII’s In India

Year End of March

1992-1993 18

1993-1994 158

1994-1995 308

1995-1996 367

1996-1997 439

1997-1998 496

1998-1999 450

1999-2000 506

2000-2001 556

2001-2002 482

2002-2003 489

2003-2004 517

2004-2005 639

2005-2006 822

2006-2007 993

2007-2008 1219

2008-2009 1594

2009-2010 1648

2010-2011 1713

2011-2012 1765

2012-2013 1756

2013-2014 1719

37

4.5 Methods to Increase Investments by FII

1. Increase Cap on G-sec Bond Markets:- The Indian Markets are not fully developed and see low

volumes. The lifting of the chapter on FIIs will increase the traded volumes and it will also help in

preventing the crowding out of investment for private enterprises.

2. Allow Dollar Settlements in India:- The suggestion by SEBI to permit dollar settlements for FIIs

will help mitigate risks of currency fluctuations for FIIs and help in improving the volume and

liquidity of the derivative markets with dollar settlements, many participants who want to take

exposure to Indian markets through index buying will be able to participate freely. This in turn will

give stability to Indian markets as there will be buying of underlying stocks by the sellers of these

contracts to FIIs. At present settlements in India are done in rupee denominations.

3. Stricter implementation of regulation to curb Participatory Notes:- Participatory Notes is one

of the categories of ODIs. The underlying asset class could be stocks and returns would be directly

related to the appreciation in prices of those stocks. Any dividends / capital gains collected from the

underlying securities go back to the investors. Since international access to Indian capital market is

limited to FIIs the market has found a new way to circumvent this by creating P-notes. To prevent the

misuse of the Participatory notes there should be stricter implementation of the regulations.

38

4.6 Profitable Future Impact on Indian Stock Markets

1. Buying or Selling of FIIs :- FII activity was seen as the key driver that could impact the Indian

Markets over the longer term. Higher FII flows have been an important parameter determining the

movement of the stock markets.

2. Policy or Regulatory initiatives in India :- While the government is pursuing economic reforms,

the pace of implementation leaves a lot to be desired. In order to improve the economic growth , need

is for structural and economic policies on a faster scale. Policies are vital for faster infrastructure

development, employment growth and strong Gross Domestic Product growth. Further policies

regarding improving public finances , fiscal policy, FDI limits and Privatization are also a requisite.

3. Elections :- Elections play an important role in determining the investor sentiments. The elections

are very important as they will be held in an environment of a global credit crises , lower domestic

growth , higher fiscal deficit , rising terrorism and religious conflicts. In order to continue with our

growth story a stable development oriented government in need of the day.

4. Terrorism in India:- A Harvard University study states that highest levels of terrorism risk are

associated with lower levels of net FDI. The loss of foreign investor confidence following acts of

terrorism would prompt large outflows of capital. If the terror attacks and domestic violence continues

in India , the impact on stock markets would be greater.

39

CHAPTER 5

5.1 Relationship between Stock Market and Investments

It is generally believed that the flow of FII in the market is beneficial to the economy of the

recipient country.

FII flows are often referred to as "hot money" .

It is considered to be volatile as compared to other forms of capital inflows.

Therefore, policy makers in the recipient country are hesitant about allowing FIIs to their own

country.

FIIs have been blamed to cause economic crises in the recipient country.

This is because if there even a hint of economic weakness in the nation.

There is concentrated withdrawal of capital by FII.

40

5.2 Impact of Entry of FII on Instability and Return of the Indian Stock Market

A study was done to explain the direction of movement of exchange rates and stock prices.

In the study, it was found out that FIIs were using 'Positive Feedback Trading Strategies'.

It was also known that the Portfolio balancing by the foreign investors would affect the demand and

supply of currency, which would in turn lead to fluctuations in currency exchange rates.

On the other hand foreign investors tend to withdraw their funds from markets where they anticipate a

fluctuation in exchange rates.

The relationship between FIIs and stock prices on one hand and FIIs and exchange rates on other,

creates an indirect relationship between FIIs and exchange rates.

41

5.3 Bombay Stock Exchange (BSE)

Established in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is Asia‘s first

Stock Exchange and one of India‘s leading exchange groups. Over the past 137 years, BSE has

facilitated the growth of the Indian corporate sector by providing it an efficient capital-raising

platform. Popularly known as BSE, the bourse was established as "The Native Share & Stock

Brokers' Association" in 1875.

BSE is a corporatized and demutualised entity, with a broad shareholder-base which includes two

leading global exchanges, Deutsche Bourse and Singapore Exchange as strategic partners.

BSE provides an efficient and transparent market for trading in equity, debt instruments,

derivatives, mutual funds. It also has a platform for trading in equities of small-and-medium

enterprises (SME).

More than 5000 companies are listed on BSE making it world's No. 1 exchange in terms of listed

members.

The companies listed on BSE Ltd command a total market capitalization of USD 1.32 Trillion as

of January 2013.

It is also one of the world‘s leading exchanges (3rd largest in December 2012) for Index options

trading.

BSE also provides a host of other services to capital market participants including risk

management, clearing, settlement, market data services and education. It has a global reach with

customers around the world and a nation-wide presence.

BSE is the first exchange in India and second in the world to obtain an ISO 9001:2000

certification.

It is also the first Exchange in the country and second in the world to receive Information Security

Management System Standard BS 7799-2-2002 certification for its On-Line trading System

(BOLT).

42

It operates one of the most respected capital market educational institutes in the country (the BSE

Institute Ltd.).

BSE also provides depository services through its Central Depository Services Ltd. (CDSL) arm.

BSE‘s popular equity index - the S&P BSE SENSEX - is India's most widely tracked stock

market benchmark index.

It is traded internationally on the EUREX as well as leading exchanges of the BRCS nations

(Brazil, Russia, China and South Africa).

43

SENSEX

An abbreviation of the Bombay Exchange Sensitive Index (Sensex) - the benchmark index of the

Bombay Stock Exchange (BSE).

It is composed of 30 of the largest and most actively-traded stocks on the BSE.

Initially compiled in 1986, the Sensex is the oldest stock index in India.

The index is calculated based on a free-float capitalization method when weighting the effect of a

company on the index.

This is a variation of the market cap method, but instead of using a company's outstanding shares

it uses its float, or shares that are readily available for trading.

The free-float method, therefore, does not include restricted stocks, such as those held by

company insiders that can't be readily sold.

To find the free-float capitalization of a company, first find its market cap (number of outstanding

shares x share price) then multiply its free-float factor.

The free-float factor is determined by the percentage of floated shares to outstanding.

For example, if a company has a float of 10 million shares and outstanding shares of 12 million,

the percent of float to outstanding is 83%. A company with an 83% free float falls in the 80-85%

free-float factor, or 0.85, which is then multiplied by its market cap (e.g., $120 million (12 million

shares x .$10/share) x 0.85 = $102 million free-float capitalization)

44

5.4 Analysis of Sensex Returns v/s FIIs Investments

Table of Sensex Return from 2013 to 2014

Month Close Return %

Jan-13 19894.98 -

Feb-13 18861.54 -5.1944761

Mar-13 18835.77 -0.1366272

Apr-13 19504.18 3.5486205

May-13 19760.30 1.313154411

Jun-13 19395.81 -1.8445570

Jul-13 19345.70 -0.258354

Aug-13 18619.72 -3.7526685

Sep-13 19379.77 4.0819625

Oct-13 21164.52 9.2093456

Nov-13 20791.93 -1.76044625

Dec-13 21170.68 1.8216202

Jan-14 20513.85 -3.1025455

Feb-14 21120.12 2.95541792

Mar-14

(07/03/2014)

21919.79 3.786294774

-6

-4

-2

0

2

4

6

8

10

Feb

-13

Mar

-13

Ap

r-1

3

May

-13

Jun

-13

Jul-

13

Au

g-1

3

Sep

-13

Oct

-13

No

v-1

3

Dec

-13

Jan

-14

Feb

-14

Mar

-14

…

Axi

s Ti

tle

Returns % -

Returns % -

45

Chapter 6

6.1 SWOT Analysis of FII

SWOT Analysis

Strengths:

1. Provides the most important resource i.e.

finance.

2. Contributes to the economic growth of

the country.

Balances the Balance of Payment Position.

Weakness:

1. Focuses more on developing countries.

2. Hampering the progress due to anytime

withdrawal.

3. Provides only short term opportunities.

4. Provides more returns than in domestic

countries.

5. Develops relationship between two

countries.

Opportunities:

1. Better infrastructure.

2. Exploitation of resources to the

maximum.

3. Better technology available.

Threats:

1. Anytime withdrawal of investments.

2. Investments made in foreign countries

poses threat to Indian Countries.

3. Increased Returns.

46

Strengths:-

1. Provides the most important resource i.e. finance:

To start any business and to make the idea to be actually implemented it needs finance.

The FIIs bring the inflow of the money into the country.

Many projects that require funding is done with the help of FII‘s.

Today in the world, the Finance is the only resource, which has the capability to be easily transferred

from one place to another, and hence providing as a base for business opportunities.

Free flow of capital is conducive to both the total world welfare and the welfare of each individual.

2. Continues to the economic growth of the country:

When FII‘s enter the domestic country they bring in the money and act as the facilitator of the business

development. As money comes into the country, it provides various benefits to the leading sectors and

ultimately results into the development of various sectors.

In India I.T. sector is the most booming sector and has shown the signs of improvement thus attracting

the FII‘s.

3. Balances the balance of payments:

In the initial phase of economic development, the under developing countries need much larger imports.

As a result, the balance of payment position generally turns adverse.

This creates gap between earnings and foreign exchange.

The foreign capital presents short run solution to the problem.

So in order to balance the Balance of Payment Foreign Investment is needed.

47

4. Provides more returns domestic countries:

FII provides more returns to the investors as compared to the domestic country.

This is one of the most important strength of FII‘s.

The main reason is that the countries in which the Foreign Institutional Investors invest their money,

provides more opportunities and many benefits.

So investors invest in foreign countries rather than in the domestic countries.

5. Develops relationship between two countries:

Due to FIIs the investors from the countries come into picture and various people also come into the

contract with each other.

This develops a sense of relationship between different people and develops a nice intra-cultural

atmosphere.

48

Weakness:-

1. Focuses more on developing countries:-

The main weakness of foreign institutional investors is that they provide opportunities to the only

developed and developing countries.

The foreign institutional investor focuses on the developing countries rather than on the underdeveloped

countries and because of this the under developed countries remain underdeveloped.

So this drawback of the FII‘s should be improved upon by making their investments in the under

developed countries.

2. Hampering the progress due to anytime withdrawal:

The FII‘s do not provide any guarantee i.e. the Foreign Institutional Investors can anytime withdraw

their money when they want to see this makes the nature of the FII‘s unpredictable and ultimately

hampering the progress of the economy of the country.

3. Provides only the short term opportunities:

FII‘s provides only short term opportunities i.e. they do not provide long term opportunities as they are

very much supple in nature and thereby limiting its scope to short term opportunities.

As far as the market seems to be good the FII‘s are attracted and after that they are not predictable.

So FII‘s bound to provide only the short term opportunities.

49

Opportunities:-

1. Better Infrastructure:

Better infrastructure is available only when there is adequate finance available and this comes with the

help of FII‘s.

Infrastructure covers many dimensions, ranging from roads, ports, railways and tele-communication

systems to institutional development studies in china reveal the extent of transport facilities and the

proximity to major ports as having a positive significant effect on the location of FII within the

country.

Poor Infrastructure can be developed with the help of foreign investment.

Foreign investors also point potential for attracting significant FII if host country government permits

more substantial foreign participation in the infrastructure sector.

2. Exploitation of resources to the maximum:

The major resources i.e. manpower, material and machines can be utilized to its fullest so as to get the

maximum benefit out of it.

Through FII‘s, the reserves or the resources that are untapped because of the lack of funds can be

exploited.

Potential areas for exploration ventures include gold, diamonds, copper, zinc, Lead, cobalt silver, tin

etc.

There is also scope for setting up manufacturing units for value added products.

3. Better Technology available:

Technology is the main aspect on which the growth of the country is determined.

Developing countries has a very low level of technology.

Their technology is not up to the standards and they lack in modern technology.

Developing countries possess strong urge for industrialization to develop their economies and to

wriggle out of the low-level equilibrium trap in which they are caught.

This raises the necessity for importing technologies from advanced countries.

50

Threats:-

1. Anytime withdrawal of investments:

The FII‘s are more flexible in nature i.e. unlike FDI they are not guaranteed.

Foreign Institutional Investors can withdraw at any time they want.

FDI is for fixed period and the investments could not be withdrawn until a specific period.

2. Investments made in Foreign Companies poses threat to Indian Companies:

Many MNC‘s have their set up in India and these MNC‘s provide a stiff competition to the domestic

industries.

The Foreign Institutional Investors invest their money in these MNC‘s and they are equipped with the

latest technology to provide products at cheaper rates.

Moreover, the Indian Laborers are opposing the use of modern technology as the company downsizes

the number of workers that substitutes the modern technology.

3. Increased returns results in outflow of money:

Increased returns a pose a threat to the domestic country as the money outflows of the country and this

may affect the economy of the domestic country.

The returns that the Foreign Institutional Investors are getting are very much high and this returns they

take to their home country and this leads to the outflow of money from domestic country to the foreign

country.

51

Chapter 7

Analysis and Data Interpretation

Q1. Should the regulations on FIIs in India be more stringent?

Particulars Frequency No. of Respondents (%)

Yes 16 69.56%

No 7 30.43%

Out of 23 interviewees;

About 69.56% said that the rules of FIIs in India should be more stringent.

About 30.43% said that rules of FIIs in India should not be more stringent.

Interpretation:

Out of the interviewees most of them are of the opinion that the rules and regulations for FII should

be more stringent. The current scenarios are not favorable to keep the rules stringent. That is because

the FIIs coming into India will withdraw their investments.

Yes

No

52

Q2. What are the disadvantages for you as an investor?

Particulars Frequency No. of Respondents (%)

No interference 2 8.69%

Cannot make any decision 3 13.04%

Both 5 21.73%

None of the above 13 56.52%

Out of 23 interviewees;

About 8.69% said that there is No interference as an investor.

About 13.04% said that they cannot make any decision as an investor

About 21.73% said that both are the disadvantages for them as an investor.

About 56.25% said that none of the above are the disadvantages for them as an investor.

Interpretation:

Most of the people are individuals who do not have any disadvantages because individuals of high

net worth i.e. who have huge capital amounts can invest in FII. Individuals cannot invest as they do

not have huge capital amounts for investing in FII. Thus they are not concerned about the

disadvantages.

No interference

Cannot make any

decision

Both

None of the above

53

Q3. Why is FII needed?

Particulars Frequency No. of Respondents (%)

Foreign Exchange 6 26.08%

Development of Economy 15 65.21%

Others 1 4.34%

Out of 23 interviewees;

About 26.08% said that FII is needed for Foreign Exchange.

About 65.21% said that FII is needed for Development of Economy.

About 4.34% said that FII is needed for other.

Interpretation:

Out of the interviewees most of them are of the opinion that FII is needed for the development of the

economy. As per the current scenario FII is needed not only for the development of the economy but

also for the foreign capital in order to build the foreign exchange reserves to meet trade deficit.

Foreign Exchange

Development of Economy

Others

54

Q4. What kind of Foreign Capital is good for the country?

Particulars

Frequency No. of Respondents (%)

FDIs 20 86.95%

FPIs 3 13.04%

Out of 23 interviewees;

About 86.95% said that FDIs are good for the country.

About 13.04% said that FPIs are good for the country.

Interpretation:

At present, it was seen that the interviewees had proper insights about various forms of capital

inflows into the country. The most common one was FDI. It was followed by FII. FPI also in the

opinion of the interviewees were to for a part of foreign capital flow.

FDIs

FPIs

55

Q5. Are there any loop holes in the control of rise on FIIs?

Particulars Frequency No. of Respondents (%)

Yes 21 91.30%

No 2 8.69%

Out of 23 interviewees;

About 91.30% said that there are loop holes in the rise of FIIs.

About 8.69% said that there are loop holes in the rise of FIIs.

Interpretation:

Most of the interviewees who have answered are aware of the new rules and regulations for FIIs

which has been announced by SEBI. The new rules and regulations for FIIs says that Unregulated

pension fund, university fund, charitable fund, endowments etc to be treated as FIIs, No dilution

of KYC norms for registration of FIIs to create money laundering , FIIs to be registered on

permanent basis instead of earlier practice of renewing registration every three years. Thus, they

are aware of the loop holes that may be there in the system.

Yes

No

56

Q6. Can FIIs be considered as Qualified Institutional Investors?

Particulars Frequency No. of Respondents (%)

Yes 18 78.26%

No 5 21.73%

Out of 23 interviewees;

About 78.26% said that FIIs can be considered as Qualified Institutional Investors.

About 21.73% said that FIIs cannot be considered as Qualified Institutional Investors.

Interpretation:

Qualified Institutional Investors are those institutional investors who are generally perceived

to possess expertise and the financial muscle to evaluate and invest in the capital markets.

Yes

No

57

Q7. Are you aware about the concept of Participatory Notes?

Particulars Frequency No. of Respondents (%)

Yes 19 82.60%

No 4 17.39%

Out of 23 interviewees;

About 82.60% said they are aware about Participatory Notes.

About 17.39% said they aren‘t aware about Participatory Notes.

Interpretation:

Participatory Notes are the instruments issued by registered FIIs to overseas investors, who wish to

invest in the India Stock Markets without registering themselves with SEBI. FIIs issue Participatory Notes

on the “7th day of the following month”.

Yes

No

58

Q8. According to you which is the best policy measure to attract FIIs?

Particulars Frequency No. of Respondents (%)

Automatic Approval 11 47.82%

FIPB 7 30.43%

FIIA 5 21.79%

Out of 23 interviewees;

About 47.82% said that automatic approval is the best policy measure to attract FIIs.

About 30.43% said that FIPB is the best policy measure to attract FIIs.

About 21.79% said that FIIA is the best policy measure to attract FIIs.

Interpretation:

Most of the interviewees are of the opinion that automatic approval is the best policy measures to

attract FIIs but there are some who are of the opinion that FIPB is the only best policy measure to attract

FIIs.

Automatic Approval

FIPB

FIIA

59

Q9. Where can a description of the specific eligibility requirements for Foreign Institutions

Participants are found?

Particulars Frequency No. of Respondents (%)

Securities Exchange Board of India 11 47.89%

Reserve Bank of India 12 52.17%

Out of 23 interviewees;

About 47.89% said that specific eligibility requirements for Foreign Institutions Participants

are found in Securities Exchange Board of India.

About 52.17% said that specific eligibility requirements for Foreign Institutions Participants

are found in Reserve Bank of India.

Interpretation:

Most of the interviewees are of the opinion that the specific eligibility requirements for

Foreign Institutions Participants are found in Reserve Bank of India as all the requirements

related to FIIs are found in Reserve Bank of India.

Securities Exchange

Board of India

Reserve Bank of India

60

Q10. Which form needs to be filled when applying for FII registration?

Particulars Frequency No. of Respondents (%)

Form ―A‖ as prescribed in SEBI (FII) Regulations, 1995 20 86.95%

Annexure ‗B‘ 3 13.04%

Out of 23 interviewees;

About 86.95% said that Form ―A‖ as prescribed by SEBI (FII) Regulations, 1995 needs to be

filled while applying for FII registration.

About 13.04% said that Annexure ‗B‘ needs to be filled while applying for FII registration.

Interpretation:

Most of the Interviewees are of the opinion that Form ―A‖ prescribed by SEBI (FII) Regulations,

1995 needs to be filled while applying for FII registration that is because there are various parameters

on which SEBI decides FII applicants eligibility.

Form ―A‖ as prescribed

in SEBI (FII)

Regulations, 1995

Annexure ―B‖

61

Q11. Out of over 1,100 FIIs registered with SEBI this year, how many have been issuing

Participatory Notes?

Particulars Frequency No. of Respondents (%)

34 13 56.52%

36 7 30.43%

38 3 13.04%

Out of 23 interviewees;

About 56.52% said that 34 have been issuing Participatory Notes out of 1,100 registered

FII with SEBI this year.

About 30.43% said that 36 have been issuing Participatory Notes out of 1,100 registered

FII with SEBI this year.

About 13.04% said that 38 have been issuing Participatory Notes out of 1,100 registered

FII with SEBI this year.

Interpretation:

Most of the interviewees are of the opinions that out of over 1,100 FIIs registered this year 34

are issuing participatory notes.

34

36

38

62

Q12. Is there any renewal fee for FII registration?

Particulars Frequency No. of Respondents (%)

Yes 19 82.60%

No 4 17.39%

Out of 23 interviewees;

About 82.60% said that there is a renewal fee for FII registration.

About 17.39% said that there is no renewal fee for FII registration.

Interpretation:

Out of the interviewees majority of them are of the opinion that there is a renewal fee for FII

registration. Thus, the renewal fee for FII registration is US $5000.

Yes

No

63

Q13. When the application for renewal fee should be submitted?

Out of 23 interviewees;

About 82.60% said that the application for renewal should be submitted three months before the

expiry of FII registration.

About 17.39% said that the application for renewal should be submitted three months after the

expiry of FII registration.

Interpretation:

Out of the interviewees majority of them are of the opinion that the application for renewal should

be submitted three months before the expiry of FII registration as per the SEBI (FII)

Regulations, 1995.

Three months before the

expiry of FII registration

Three months after the

expiry of FII registration

Particulars Frequency No. of Respondents (%)

Three months before the expiry of FII

registration

19 82.60%

Three months after the expiry of FII registration 4 17.39%

64

Conclusion

Foreign Institutional Investors are very much needed for India. They are necessary for the

continuous development of our country. The economy of our country has shown a better performance and has

led to the economic growth due to the FIIs. Though there are threats from the Foreign Institutional Investments

we should be positive and see the future of our country. In last 50 years, India has developed

a strong and professionally competent technical, marketing and business manpower in Livestock production

and Information Technology.

Foreign Institutional Investors, who invest their money in different countries in order to get a good

portfolio of investment, and India, has been in the list of their portfolio for many years. The increasing GDP

growth rate and the overall development of India in different sectors like industrial and agricultural field and

others are the prime reason for the increasing nature of FII‘s inflow. There is a positive as well as negative

correlation between stock indices and FIIs but FIIs didn‘t have any significant impact on Indian Stock Market.

Also the coefficient of determination is less in all the case. It shows the absence of linear relation between FII

and stock index. This does not mean that there is no relation between them. One of the reasons for absence of

any linear relation can also be due to the sample data. The data was taken on yearly basis. Also FII is not the

only factor affecting the stock indices. There are other major factors that influence the bourses in the stock

market. And from the FII‘s analysis on Sensex return, 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.

Various studies conclude that there is a need to stabilize the frequent volatility in the domestic

stock market. More focus is given on regaining the confidence of investors in the domestic market.

There are various myths about FII investments in India:-

1. FIIs invest through Stock Exchange only.

2. FIIs cannot invest at the time of IPO.

3. FIIs are more interested in capital gains only.

This is a study regarding Foreign Institutional Investors. Results have been proved by doing a

statistical survey of Foreign Institutional Investments.

There are professionals who are saying that more number of FIIs should be allowed for

developing countries like India so that the policies can be raised for FIIs and also there will be an increase in

the flow of foreign exchange market for developing countries like India.

65

ANNEXURE

NEWS ARTICLES

THE TIMES OF INDIA

Government to provide similar tax treatment to FPI, FII

Dec 24, 2013, 07.35PM IST

MUMBAI: The government has agreed to provide similar tax treatment to Foreign Portfolio Investors

(FPIs), as available to FIIs presently, market regulator Sebi said on Tuesday.

The three categories of Foreign Portfolio Investors — FIIs (Foreign Institutional Investors), sub-accounts and

qualified foreign investors (QFIs) — would be given similar tax treatment as available to FIIs currently.

The new rules aim to bring all foreign investors under a common framework called the Sebi (Foreign Portfolio

Investors) Regulations, 2013.

These measures come at a time when the rupee has weakened considerably against the dollar and recently hit

its all-time low levels of 60 against the American currency.

Also, FIIs have been pulling out money from the Indian debt market, which has resulted in the hardening of

yields on government bonds.

As regards FPI Regulations, "the communication from the Department of Economic Affairs to the CBDT and

to SEBI, conveying the decision that all three categories of FPIs would be given similar tax treatment as

available to FIIs presently," the regulator said in a statement issued after the board meeting.

The Securities and Exchange Board of India (Sebi) has earlier sought clarity from the Finance Ministry on the

issue of taxability of all categories of investors.

The committee, headed by former cabinet secretary K M Chandrasekhar, had recommended that "government

may consider bringing more clarity and certainty while prescribing the taxation provisions for FPIs".

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THE FINANCIAL EXPRESS

Another week of loss for BSE Sensex, NSE Nifty as FII selloff unabated

Mumbai | Updated: Feb 08 2014, 10:54 IST

The benchmark indices ended flat on Friday with markets expecting the US payroll data to allay global growth

concerns. The BSE benchmark Sensex ended 65.82 points, or 0.32%, higher at 20,376.56 points, while NSE‘s

Nifty ended 26.90 points, or 0.45%, higher at 6,063.20 points.

On Friday, foreign institutional investors (FIIs) sold $43 million worth of equities, as per provisional data on

the BSE. FIIs have increased their selling after US Fed decided to cut its stimulus package further by $10

billion on January 29. Since then, FIIs have sold $338.74 million worth of Indian equities, taking this year‘s

total selling to $229.03 million.

Experts warn that the selloff in developing markets is likely to continue. ―The negative sentiment is pretty

much in place, so you can expect a lot more selling,‖ said Mark Mobius, executive chairman, Franklin

Templeton. Globally, markets are witnessing a risk-off sentiment.

Investors pulled a record weekly amount of $28.3 billion out of US equity funds and put a record amount of

$14.8 billion into US bond funds for the week ended February 5, according to Citi Research data. Investors

also pulled $6.4 billion from emerging markets funds, including the 15th week of outflows for EM equity

funds, according to Citi.

It was, however, a tepid week for the markets with the 30-share Sensex shedding 0.66% even as it inched

higher in four out of five sessions. On Monday, Sensex plunged 304.59 points after the government revised the

GDP growth to 4.5% from 5% estimated earlier. It has managed to gain 167.3 points since then.

On Friday, the markets opened on a positive note in the morning, gaining as much as 139.77 points, or 0.68%,

intra-day amid a firm trend in Asian indices ahead of the US jobs data. As per a Reuters poll, non-farm

payrolls are expected to have increased by 185,000 in January compared to the 75,000 payrolls added in

December, which was the lowest in three years.

Tata Steel (6.39%), Sesa Sterlite (3.66%) and Sun Pharmaceutical Laboratories (2.80%) led the market. The

Tata Steel scrip ended at RS.384.45, or 23.10 points higher, as upbeat quarterly results from rival, Arcelor

Mittal, triggered hopes of better-than-expected earnings from India‘s top steel maker. Arcelor Mittal reported a

23% y-o-y rise in its Ebitda (earnings before interest, tax, depreciation and amortization) at $1.9 billion. Tata

Steel‘s quarterly results will be out on Tuesday.

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Among peers, most Asian indices ended in the green on Friday. Nikkei was up 2.17%. Hang Seng (1%), Kospi

(0.77%), Straits Times (0.83%), Jakarta Composite (0.95%) and Shanghai Composite (0.56%) were the major

gainers. Among European indices, FTSE 100 (0.17%), DAX (0.21%) and CAC 40 (0.23%) were trading in the

green at 7 pm IST. However, during the week, Shanghai Composite (-0.53%), Kospi (-0.41%) and Hang Seng

(-2.20%) remained negative in dollar terms.

Back home, 20 of the 10 Sensex stocks advanced. For the broader market, the breadth was strong with 2,739

advances against 1,220 declines. Most of the 12 sectoral indices ended in the green. BSE Metal (2.66%), BSE

Realty (1.04%) and BSE Healthcare (1.69%) were the major gainers.

68

THE FINANCIAL EXPRESS

Street on fire; BSE Sensex, NSE Nifty scale new peaks on FII buying

Mumbai | Updated: Mar 08 2014, 17:02 IST

Stocks: Markets ignored the anxiety caused by the geopolitical tension over Ukraine and spurted to all-time

highs on a slew of positive domestic factors and robust FII buying ahead of high-stake elections.

The benchmark indices - S&P BSE Sensex and the CNX Nifty - were in a record-breaking spree. The former

hovered near the key milestone of 22,000-mark, while the latter breached the historic landmark of 6,500 this

week.

Aggressive buying by foreign institutional investors (FIIs), the main market mover, reflected their faith in

Indian economy and its growth story in a week when the Election Commission announced the schedule for the

Lok Sabha polls.

FIIs bought shares worth Rs 5,044.54 crore in the week, including provisional data of March 7.

Narrowing Current Account Deficit (CAD), rising rupee against the dollar and easing inflation played their

part to boosting investor sentiment.

India's current account deficit fell to USD 4.2 billion, or 0.9 per cent of GDP, in December quarter of 2013-14

on the back of a rise in exports and fall in gold imports.

The lower CAD, the difference between outflow and inflow of foreign exchange, bolstered the rupee and

attracted increased overseas investment. The Indian currency gained 68 paise, or 1.10 per cent, against the US

unit in the week.

Barring healthcare, IT and teck shares, which performed poorly, all other sectoral indices surged. The rally

was led by realty, banking, capital goods, and metal, oil & gas and power stocks.

Sharp surge was seen in BHEL, ICICI Bank, Axis Bank, RIL, Bharti Airtel, HDFC Bank, Maruti Suzuki,

L&T, SBI, Coal India, Hindalco, ONGC, Tata Steel, HDFC, Gail India and ITC.

The Bombay Stock Exchange 30-share gauge resumed lower on global meltdown on fears of an imminent war

between Russia and Ukraine as possible sanctions by the West against Moscow, and touched a low of

20,920.98 on Monday.

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Sensex bounced back after tension between Russia and Ukraine eased and China retained economic growth

target for this year.

After that the BSE barometer never looked back. It rallied to a historic intra-trade high of 21,960.89 before

settling at a new closing pea of 21,919.79.

The Sensex zoomed by a whopping 799.67 points, or 3.79 per cent, this week, logging the biggest weekly gain

in more than 15 months.

Previously, it had flared up by 833.33 points, or 4.50 per cent, in the last week of November 2012. In the

previous three weeks, the BSE benchmark has jumped by a staggering 1,552.97 points, or 7.62 per cent.

The broad-based CNX Nifty of the NSE zoomed by 249.70 points, or 3.98 per cent, to end at a record high of

6,526.65. The 50-share index touched a new intra-day peak of 6,537.80.

The NSE index had hit an intra-day peak of 6,415.25 and a closing high of 6,363.90 on December 9, 2013.

Besides realty, banking counters, mainly PSU, attracted heavy buying interest after Finance Minister P

Chidambaram said the Government will continue to provide capital support to state-run lenders.

Chidambaram on Friday said the fiscal and current account deficits are under control and the economy is more

stable than it was 18 months ago.

HSBC Purchasing Managers' Index (PMI) for manufacturing stood at 52.5 points in February, a one-year high.

It was 51.4 points in January.

70

THE FINANCIAL EXPRESS

FIIs invest Rs 5,000 cr in Indian equities in two weeks

New Delhi | Updated: Mar 16 2014, 11:43 IST

Foreign investors poured in over Rs 5,000 crore in the Indian stock market in a fortnight, mainly on hopes of a

strong mandate for the government to be elected in polls starting next month.

Foreign institutional investors (FIIs) were gross buyers of shares worth Rs 42,035 crore and sellers of stocks to

the tune of Rs 36,967 crore till March 14, resulting in a net inflow of Rs 5,068 crore (USD 828 million),

according to data with the Securities and Exchange Board of India.

FIIs also infused Rs 14,140 crore (USD 2.3 billion) in the debt market during the period.

According to market analysts, a sharp drop in the current account deficit and easing inflation, which bolstered

expectations that the economy will see a turnaround soon, as well as hopes for a strong mandate for the next

government prompted overseas investors to pump in money in equities.

Finance Minister P Chidambaram, earlier this month, said the fiscal and current account deficits are under

control and the economy is more stable than it was 18 months ago.

Foreign investors have sidelined their concerns of further tapering by the US Federal Reserve.

FIIs, the major drivers of the Indian stock market, have helped push the benchmark BSE Sensex almost 690

points, or 3.26 per cent so far this month.

Overseas investors have purchased a net Rs 7,186 crore of stocks so far in 2014. They invested a net Rs 1,404

crore in equities in February and Rs 714 crore in stocks in January.

As of March 14, there were 1,719 registered FIIs in the country and 6,318 sub-accounts.

71

Live Mint

FIIs invest $2 billion in government debt so far this year

First Published: Fri, Jan 17 2014. 12 08 AM IST

Mumbai: Foreign institutional investors (FIIs) have put in close to $2 billion in Indian debt in the first 15 days

of the year, most of it in short-term government debt, to take advantage of higher yields and relatively lower

hedging costs.

The inflows in the month-to-date are the highest since February 2012, when FIIs had bought, net of selling,

$2.23 billion in Indian debt during the entire month. If the pace of buying continues, inflows in January could

be well ahead of that.

Data available with National Security Depository Ltd showed FIIs have now exhausted 70.03% of their $5.5

billion limit on Treasury bills, against only 33.2% of their T-bills limit that they utilized at the end of 2013. In

rupee terms, the investment translates into Rs.17,798 crore as on 15 January from Rs.8,434 crore as on 31

December—an increase of Rs.9,364 crore in 15 days.

These short-term Treasury bills offer investors yields of 8.5-8.7%, while the hedging cost for one to three

months is about 4%. This means, even after hedging, and accounting for a funding cost of 2%, investors get to

earn a neat 2-2.5% on their investment. Added to it, if the rupee strengthens by the time of maturity of these

bills, FIIs can just cancel their forward contracts and earn even more on their investments through exchange

rate appreciation.

However, there is very little for the Indian bond market to cheer about here.

Excluding the investment in short-term bills, FIIs investment in long-term bonds in these 15 days have been

only Rs.4,308 crore, less than half of their investment in treasury bills.

FIIs have almost completely shunned the corporate bond market in this buying spree, investing only Rs.313

crore in corporate bonds.

This makes bond market investors skeptical about how sticky the FII money in the debt markets will prove

to be.

―It is a temporary phenomenon and they are unlikely to show the same interest in long-term bonds,‖ said Arun

Srinivasan, senior vice-president, fixed income, at ICICI Prudential Life Insurance Co. Ltd. ―FIIs are

primarily buying T-bills in the two-three month maturity space. There are very few of them actually buying

72

10-12 year government bonds. Most of them are enjoying the carry game till March-April, essentially till

election time,‖ Srinivasan said.

Sensing a weakening of the Indian currency due to an anticipated tapering in asset purchases by the US

Federal Reserve, FIIs had liquidated their bond holding in India in mid-2013. In June alone, FIIs had

withdrawn net $5.3 billion from the debt market. The rupee fell to its record low of 68.85 a dollar on 28

August.

They again turned net buyers in December after a gap of six months as the rupee stabilized around 62 a dollar

level and hedging cost moderated for the short-term.

According to bond dealers, FII interest may also have picked up in light of the softer inflation numbers and an

assurance from the finance minister that the fiscal deficit would be below the budget target of 4.8% of gross

domestic product (GDP).

Both consumer and wholesale price based inflation came below analysts‘ expectation in December. Consumer

price gains were 9.87% while wholesale inflation rose 6.16%.

The 10-year bond rallied with yields falling to 8.62%, its lowest level since October on Thursday.

―FIIs are interested now because of falling inflation and a steady rupee environment. Finance minister also

said the deficit will be lower than 4.8% in this fiscal. With inflation coming under control, a rate cut by the

Reserve Bank is almost a surety by March. This is good for the bond market and FIIs invested here,‖ said

Prasanna Patankar, senior bond dealer at STCI Primary Dealership Ltd. However, FIIs may not want to

take a long-term view on Indian debt just yet.

―In all probability, the next year‘s borrowing programme will be a massive Rs.6-6.5 trillion with heavy

issuances every week. There is not enough appetite for such an issuance. Bond prices will fall and it will be

bad for FIIs who are not interested in getting locked in for a long period. Besides, much depends upon who

makes the next government; for now it seems we are heading towards a hung Parliament,‖ said the head of

treasury of a foreign bank who did not want to be named.

73

BIBLOGRAPHY

www.financialexpress.com

www.livemint.com

www.economictimes.com

www.timesofindia.com

www.moneycontrol.com

www.indiainfoline.com

http://www.rbi.org.in/scripts/BS_FiiUSer.aspx

http://www.indiastudychannel.com/projects/4849-Impact-Foreign-Institutional-Investors-Indian-Stock-

Market.aspx

http://www.theglobaljournals.com/ijar/file.php?val=MTMyMw

http://businesstoday.intoday.in/story/the-importance-of-fii-investments-for-the-indian-market/1/186486.html

http://www.gjimt.com/3_Dr%20Renuka%20Sharma.pdf

www.sebi.gov.in