reforms of capital market with the introduction of fii

8/12/2019 Reforms of Capital Market with the introduction of FII

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REFORMS IN INDIAN CAPITAL

MARKET WITH RESPECT TO FIIS


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PROJECT ON:

REFORMS IN INDIAN CAPITAL MARKET WITH RESPECT TO FIIS

BACHELOR OR COMMERCE

FINANCIAL MARKET

SEMESTER VI

2012-2013

SUBMITTED BY

VIVEK MEHTA

ROLL NO: 28

SUBMITTED TO:

UNIVERSITY OF MUMBAI

UNDER THE GUIDANCE OF:

PROF. SHRUTI CHAVARKAR

S.K.SOMAIYA COLLEGE OF ARTS, SCIENCE AND COMMERCE

VIDHYAVIHAR (E), MUMBAI -400077

ACADEMIC YEAR-2012-2013


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ACKNOWLEDGEMENT

It is my esteemed pleasure to present the project report on REFORMS IN INDIAN CAPITAL

MARKET WITH RESPECT TO FIIS .

I express our deep gratitude to my project guide, Ms. Shruti Chavarkar, who gave the inspiration

to pursue the project and guided me in this endeavor. She has been a constant source of

motivation and encouragement for me. I thank her for all the initiative and zeal she filled in with

throughout the project work.

My profound sense of gratitude is due to our co-ordinator Prof. Shruti Chavarkar, for constant

encouragement and valuable guidance.

I like to express my deep gratitude to our beloved principal in charge, Sangita Kholi for

providing us all necessary facilities to carry out project successfully.

Last but not the least I am thankful to the faculty members without whose support at various

stages, th is project wouldnt have materialized. I am also thankful to all supporting staff at the

institute who directly or indirectly helped in completing this project.

Project By,

VIVEK MEHTA


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EXECUTIVE SUMMARY

This project deals with reforms in Indian capital market with respect to fii It

contains research methodology, research objective, scope analysis and interpretation of the data,

collected from secondary resources. It also consists limitations of the study. In this study I have

collected data from secondary source. This report talks about how capital market helps in

generates employment in the country, it also makes possible to generate foreign capital, and also

Capital markets provide excellent investment opportunities to investors.

The Indian stock market though one of the oldest in Asia being in operation since

1875, remained largely outside the global integration process until the late 1980s. In line with the

global trend, reform of the Indian stock market began with the establishment of Securities and

Exchange Board of India in 1988. Among the significant measures of integration, portfolio

investment by FIIs allowed since September 1992, has been the turning point for the Indian stock

market. As of now FIIs are allowed to invest in all categories of securities traded in the primary

and secondary segments and also in the derivatives segment.

The process of integration received a major impetus when the Indian corporate was

allowed to go global with GDR / ADR issues. Starting with the maiden issue of Infosys in March

1999, ADR issues has emerged as the star attraction due to its higher global visibility. Thus, the

Indian stock market, which was in isolation until recently, turns out to have been sensitive to

developments in the rest of the world by the end of the 1990s.

Capital market has been one of the most important generators of funds for the

government and small companies making them big and given a new vision in past and it is still

continuing its work and also for many coming years.

The important finding from this study is that Indian capital market is influenced by the

FII inflows to a considerable extent. This means that FII are playing in the index and blue chip

stocks in capital market.


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OBJECTIVE OF THE STUDY:

To learn about reforms in Indian capital market To analyze the respondents view abut the capital market and related concepts To understand the concept of FIIs. To study the impact of FII on Indian stock market.

.

SCOPE OF THE STUDY:

The scope of the study, by and large is very vast. It is very difficult to satisfy all

the areas of fii participation in Indian capital market. Therefore, an attempt is made

to cover as much as possible included in the study.

RESEARCH METHODOLOGY:

The research is exploratory research. The data is collected from various sources like

Internet, Newspaper and Magazines.

Secondary sources:

Study from books and articles Search from Various investor sites.


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CHAPTERISATION

INTRODUCTION TO CAPITAL MARKETS. REFORMS IN INDIAN CAPITAL MARKET. INTRODUCTION TO FOREIGN INSTITUTIONAL INVESTOR. ROLE AND PARTICIPATION OF FII IN INDIAN CAPITAL MARKET. REGULATION RELATING TO FIIS OPERATION.


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CHAPTER 1: INTRODUCTION TO

CAPITAL MARKETS


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1.1: INTRODUCTION

Capital market is a market for securities (debt or equity), where business enterprises

(companies) and governments can raise long-term funds. It is defined as a market in which

money is provided for periods longer than a year, as the raising of short-term funds takes placeon other markets (e.g., the money market). The capital market includes the stock market (equity

securities) and the bond market (debt). Financial regulators, such as the UK's Financial Services

Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital

markets in their designated jurisdictions to ensure that investors are protected against fraud,

among other duties.

Capital markets may be classified as primary markets and secondary markets. In

primary markets, new stock or bond issues are sold to investors via a mechanism known as

underwriting. In the secondary markets, existing securities are sold and bought among investors

or traders, usually on a securities exchange, over-the-counter, or elsewhere.

INTERMEDIARIES IN CAPITAL MARKET:

Capital market requires many intermediaries who are responsible to transfer funds from those

who save to those who require these funds for investments. The efficiency of the markets is

dependent on the specialization attained by these intermediaries. Some of them are as follows:

1. Stock Exchanges.

2. Banks.

3. Investment Trusts and Companies.

4. Specialized Financial Institutions or Development Banks.

5. Mutual Funds.

6. Non-Banking Financial Institutions.

7. International Financial Investors and Institutions.


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INVESTORS IN CAPITAL MARKET:

The supply in this market comes from savings from different sectors of the

economy. These savings accrue from the following sources:

1. Individuals.

2. Corporate.

3. Governments.

4. Foreign countries.

5. Banks.

6. Provident Funds.

7. Financial Institutions.

All these entities contribute to savings in the economy part of these savings naturally

flow in the capital markets. Individuals invest in these markets directly by investing in shares or

debentures of companies through bond issues of public sector units or through mutual funds.

Corporate who have more savings than their requirement for funds also are participants in this

market.


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1.2: SCENARIO OF INDIAN CAPITAL MARKET

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200

years ago. The earliest records of security dealings in India are meagre and obscure. The East

India Company was the dominant institution in those days and business in its loan securities usedto be transacted towards the close of the eighteenth century. By 1830's business on corporate

stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was

broader in 1839, there were only half a dozen brokers recognized by banks and merchants during

1840 and 1850.The 1850's witnessed a rapid development of commercial enterprise and

brokerage business attracted many men into the field and by 1860 the number of brokers

increased into 60.

In 1860-61 the American Civil War broke out and cotton supply from United States of

Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to

about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump

began (for example, Bank of Bombay Share, which had touched Rs2850/-, could only be sold at

Rs.87/-). At the end of the American Civil War, the brokers who thrived out of Civil War in

1874, found a place in a street (now appropriately called as Dalal Street) where they would

conveniently assemble and transact business. In 1887, they formally established in Bombay, the

"Native Share and Stock Brokers' Association" (which is alternatively known as The StockExchange"). In 1895, the Stock Exchange acquired a premise in the same street and it was

inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.

In the era of globalization and liberalization, the capital market assumes a greater

importance. The smooth functioning of the capital market depends on the regulators, participants

and investors. The past decade has been a golden age for capital markets in India. It is now a far

more important source of finance than traditional financial intermediaries for corporate sector. It

is poised to dominate the future of corporate finance in India. Over the past several years thecapital market has witnessed a sea change. The market has become more in terms of

infrastructure, adoption of best international practices and introduction of competition.

Reforms in the capital market, particularly the establishment empowerment of SEBI,

market determined allocation of resources, screen based nation-trading, dematerialization and


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electronic transfer of securities, rolling settlement and ban on deferral products, sophisticated

risk management and derivatives trading, have greatly improved the regulatory framework and

efficiency of trading and settlement. Indian market is now comparable to many developed

markets in terms of a number of quantitative parameters.

The process of reforms has led to a pace of growth of markets almost unparalleled in the

history of any country. Capital market in India has grown exponentially as measured in terms of

amounts raised from the market, number of stock exchanges and intermediaries; the number of

listed stocks, market capitalization, trading volumes and turnover on stock exchanges and

investors population. Along with this, the profiles of the investors, issuers and intermediaries

have changed significantly. The market has witnessed fundamental institutional changes

resulting in drastic reduction in transaction cost and significant improvements in efficiency,

transparency and safety. Indian market is now comparable to many developed markets. There are

few countries, which have higher turnover ratio than India, market capitalization as percentage of

GNP compares favourably even with advanced countries and is much better than emerging

market.


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1.3: ROLE OF CAPITAL MARKET IN INDIA

1. CAPITAL FORMATION

The capital market encourages capital formation in the country. Rate of capital formation

depends upon savings in the country. Though the banks mobilize savings, they are not sufficientto match the requirements of the industrial sector. The capital market mobilizes savings of

households and of the industrial concern. Such savings are then invested for productive purposes.

Thus savings and investment leads to capital formation in country.

2. ECONOMIC GROWTH

Capital market facilitates the growth of the industrial sector as well as other sectors of the

economy. The main function of the capital market is to transfer resources (funds) from masses to

the industrial sector. The capital market makes it possible to lend funds to various projects, both

in the private as well as public sector.

3. DEVELOPMENT OF BACKWARD AREAS

The capital markets provide funds for the projects in backward areas. This facilitates the

economic development of backward areas.

4. GENERATES EMPLOYMENT

Capital market generates employment in the country:

i) Direct employment in the capital markets such as stock markets, financial institutions

etc.

ii) Indirect employment in all sectors of the economy, because of the funds provided for

developmental projects.

5. LONG TERM CAPITAL TO INDUSTRIAL SECTOR

The capital market provides a permanent long-term capital for the companies. Once, thefunds are collected through issues, the money remains with the company. The company is left

free with the funds while investors exchange securities among themselves.

6. GENERATION OF FOREIGN CAPITAL


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The capital market makes possible to generate foreign capital. Indian firms are able to

generate capital from overseas markets by way of bonds and other securities. Such foreign

exchange funds are vital for the economic development of the nation.

7. DEVELOPING ROLE OF FINANCIAL INSTITUTIONSThe various agencies of capital market such as Industrial Financial Corporation of India

(IFCI), State Finance Corporations (SFC), Industrial Development Bank of India (IDBI),

Industrial Credit and Investment Corporation of India (ICICI), Unit Trust of India (UTI), Life

Insurance Corporation of India (LIC), etc. have been rendering useful services to the growth of

industries. They have been financing, promoting and underwriting the functions of the capital

market.

8. INVESTMENT OPPORTUNITIESCapital markets provide excellent investment opportunities to the members of the public.

The public can have alternative source of investment i.e. in bonds, shares and debentures etc.


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CHAPTER 2: REFORMS IN INDIAN

CAPITAL MARKET


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The major Capital market reforms can be classified into three,

Change in the structure and functioning of Stock Exchanges.

Automation of Trading and Post trade systems.

Introduction of Surveillance and Monitoring systems.

Market Surveillance and Monitoring systems were introduced to detect the Insider trading or

market manipulation transactional activities and a protocols were established for investigation of

abnormal stock fluctuations and in case of an wrong going to curb the excessive volatility in the

market, suspension of stock scrip trade for a period of time in the way of "Circuit breakers" were

introduced.

Financial Institutional Investors(FII) under SEBI regulated 1995 governing the regulation of

portfolio investment by FII's and allowing the FII to participate by making the investment in the

Indian securities market and a proper pricing procedures were made mandatory for the purpose

of transparency in the trade execution for e.g., a proper separation in levering the order and

brokerage charges. Further a modification of Takeover Code, which comes under play when an

acquisition takes places.

Over the years for the proper functioning of Capital market, a collaboration with ICAI andformed National Committee on Accounting standards(NACAS) and made mandatory the

presentation of the company's performance report in detailed within equal intervals. This

disclosure clause has given a birth to corporate governance where policies like clear indication of

director remuneration, whistle blowing, cash flow and financial statement certification by

CEO/CFO has made mandatory and transparency in disclosure of reports for public offering,

periodicals and other transaction related. Such move by SEBI has made the capital market

function smooth and more reliable on it thus other policies created a trust among the investors.


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5.1: RECENT DEVELOPMENTS IN INDIAN CAPITAL MARKET

The major reforms undertaken includes:-

1. Establishment of SEBI : The Securities and Exchange Board of India (SEBI) was

established in 1988. It got a legal status in 1992. SEBI was primarily set up to regulate the

activities of the merchant banks, to control the operations of mutual funds, to work as a

promoter of the stock exchange activities and to act as a regulatory authority of new issue

activities of companies. The SEBI was set up with the fundamental objective, "to protect the

interest of investors in securities market and for matters connected therewith or incidental

thereto." The main function of SEBI are:-

1. To regulate the business of the stock market and other securities market.

2. To promote and regulate the self regulatory organizations.

3. To prohibit fraudulent and unfair trade practices in securities market.

4. To promote awareness among investors and training of intermediaries about safety of

market.

5. To prohibit insider trading in securities market.

6. To regulate huge acquisition of shares and takeover of companies.

2. Establishment of Creditors Rating Agencies : Three creditors rating agencies viz. The

Credit Rating Information Services of India Limited (CRISIL - 1988), the Investment

Information and Credit Rating Agency of India Limited (ICRA - 1991) and Credit Analysis

and Research Limited (CARE) were set up in order to assess the financial health of different

financial institutions and agencies related to the stock market activities. It is a guide for theinvestors also in evaluating the risk of their investments


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3. Growing Merchant Banking Activities : Many Indian and foreign commercial banks haves

set up their merchant banking divisions in the last few years. These divisions provide

financial services such as underwriting facilities, issue organizing, consultancy services, etc.

It has proved as a helping hand to factors related to the capital market.

4. Candid Performance of Indian Economy : In the last few years, Indian economy is growing

at a good speed. It has attracted a huge inflow of Foreign Institutional Investments (FII). The

massive entry of FIIs in the Indian capital market has given good appreciation for the Indian

investors in recent times. Similarly many new companies are emerging on the horizon of the

Indian capital market to raise capital for their expansions.

5. Growing of Electronic Transactions : Due to technological development in the last few

years. The physical transaction with more paper work is reduced. Now paperless transactions

are increasing at a rapid rate. It saves money, time and energy of investors. Thus it has made

investing safer and hassle free encouraging more people to join the capital market.

6. Growing Mutual Fund Industry : The growing of mutual funds in India has certainly

helped the capital market to grow. Public sector banks, foreign banks, financial institutions

and joint mutual funds between the Indian and foreign firms have launched many new funds.

A big diversification in terms of schemes, maturity, etc. has taken place in mutual funds in

India. It has given a wide choice for the common investors to enter the capital market.

7. Growing Stock Exchanges : The numbers of Stock Exchanges in India are increasing.

Initially the BSE was the main exchange, but now after the setting up of the NSE and the

OTCEI, stock exchanges have spread across the country. Recently a new Inter-connected

Stock Exchange of India has joined the existing stock exchanges.


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8. Investor's Protection : Under the purview of the SEBI the Central Government of India has

set up the Investors Education and Protection Fund (IEPF) in 2001. It works in educating and

guiding investors. It tries to protect the interest of the small investors from frauds and

malpractices in the capital market.

9. Growth of Derivative Transactions : Since June 2000, the NSE has introduced the

derivatives trading in the equities. In November 2001 it also introduced the future and

options transactions. These innovative products have given variety for the investment leading

to the expansion of the capital market.

10. Insurance Sector Reforms : Indian insurance sector has also witnessed massive reforms in

last few years. The Insurance Regulatory and Development Authority (IRDA) was set up in

2000. It paved the entry of the private insurance firms in India. As many insurance

companies invest their money in the capital market, it has expanded.

11. Commodity Trading : Along with the trading of ordinary securities, the trading in

commodities is also recently encouraged. The Multi Commodity Exchange (MCX) is set up.

The volume of such transactions is growing at a splendid rate.

12. INVESTOR S PROTECTION BILL : When there was a boom seen in the Indian capital market,

number of companies have collected funds from the investors through capital markets andvanished in no time. In order to protect the small investor from this kind of vanishing

companies SEBI has drafted a bill clarifying the role of the "Department of Company

Affairs" and acquiring the power to debar the directors and trace and attach the assets of

those companies.


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13. Net Broking : With affect from March 2000 SEBI framed guidelines to start Internet broking

on Indian securities, which could increase the transparency in the operations, and reduce

flaws and loopholes in the transactions of Indian capital markets.

14. Investors Protection Fu nd: The government of India has notified the establishment of

investor protection fund in October 2001 under sec 205c of the Companies Act, according to

which a fund will be created with amounts such as amounts in unpaid dividend accounts of

companies etc, which have remained, unclaimed and unpaid for 7 years from the date they

became due for payment. The creation of this fund shows that the Indian capital markets havereached to a sustainable level ensuring the investors to get back their investments in case of

any default of the companies

15. Scams Pertaining To Indian Capital Market: Number of government norms and

legislations had been imposed for keeping the market free from trickery and deception. In

spite of these norms and regulations Indian capital markets could not be perfectly sterilizedfrom scams, even then their performance is quite noticeable and the market has really

boosted up.

Various measures have been taken up and policies have been framed from time to time

to contain these scams and to reoccur in future. In spite of these scams, the markets stood at a

comfortable level and in fact have been positive in nature, which can be said as a symbol of

sustainability.

16. Benchmark: As it is a known fact that in India SENSEX is considered as the yardstick of the

capital market, and the following observations speak about the growth and sustainability of

the capital markets in India.


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CHAPTER: 3 INTRODUCTIONS

TO

FOREIGN INSTITUTIONAL INVESTORS


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3.1: INTRODUCTION

FII Or foreign institutional investors is an investment made by an investment made an

investment in the markets of a foreign nation. In FII the companies only need to get registered in

the stock market to make investments. The FII investment flows only into the secondary market.It helps in increasing capital availability in general rather than enhancing the capital of a specific

enterprise.

Indias decision in 1991 to permit Foreign Institutional Investors (FIIs) to invest in

India was a major step in the globalization of Indian capital market. FIIs have played a major

role in Indias secondary markets and have virtually re written the rules of the market in recent

years. FIIs drive the stock market, especially in technology and media stocks, using international

valuation models and even linking NASDAQ trends with Indian market capitalization values.The Reserve Bank of India monitors FII activity in a daily basis.

Foreign companies/Individuals are permitted to invest in equity shares traded in Indian

Stock markets if they are registered as a Foreign Institutional Investor (FII) or if they have a sub

account in India.

Investment in Indian securities is also possible through the purchase of Global

Depository Receipts (GDR), American Depository Receipts (ADR), Foreign Currency

Convertible Bonds and Foreign Currency Bonds issued by Indian issuers, which are listed, traded

and settled overseas and mainly denominated in US dollars.

Foreign Investors (whether registered as a FII or not) can also invest in Indian

securities outside the FII route. Such investments require case-by-case approval from the Foreign

Investment Promotion Board in the Ministry of Industry and Reserve Bank of India (RBI), or

only by the RBI depending on the size of the investment and the industry in which this

investment is to be made.

FII investments in Indian capital market are more than US $ 11,000 million. Indian

Stock market with a market capitalization of over US $ 165,000 million has been a major

attraction for investors all over the world, because of the new economy boom and excellent

functioning of Stock Exchanges in the Country. The combined daily turnover of National Stock


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Exchange (NSE) and The Stock Exchange, Mumbai (BSE) is in excess of US $ 30,000 million.

The screen base trading of NSE and BSE provides transparency in execution of orders,

settlement & trade guarantees and elimination of risk of bad deliveries (in case of dematerialized

shares, which constitute over 90% of trade).

TERMS RELATED TO FII:

SUB ACCOUNT

Sub-account" includes those institutions, established or incorporated outside India and

those funds, or portfolios, established outside India, whether incorporated or not, on whose

behalf investments are proposed to be made in India by a Foreign Institutional Investor.

DESIGNATED BANK

Any bank in India which has been authorized by Reserve Bank Of India to act as a bankerto FII.

DOMESTIC CUSTODIAN

Domestic custodian means any entity registered with SEBI to carry on the activity of providing custodian services in respect of securities.


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3.2: FOREIGN INVESTMENT MODE:

Different between FDI & FII

Foreign Direct Investment (FDI) Foreign Insitutional Investor (FII)

FDI can be define as investment made by

non- resident investor in the equity shares

of a domestic company with the intension

of participating in the management of thecompany.

FII can be defined as investment by non-

resident investors in equity of a domestic

company with the intension of getting

quick capital gain

FDI normally involves a long term

association between the investor and the

target company.

FII normally involves a short term

investment in the target company

FDI normally takes place through a direct

transaction between existing promoters and

the investor by private placement.

FII doesnt involve any interaction between

the investor and the target company and

such transaction are made through stock

exchange.

FDI is usually a primary market

transaction.

FII is usually a secondary market

transaction.


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FDI has an impact on balance sheet of the

company since it involves introduction of

fresh capital, technology, etc.

FII has no direct impact on the balance

sheet of the company since a secondary

market investment only involves an

exchange between investors.

FDI normally involves introduction of new

technology, market, financing arrangement

etc. since the new investor actively

participate in the management process.

FII does not involves any direct linkage

between the new investor and the

management. There is no intention of

participating in the management process in

such investment.

FDI leads to economic growth since it

increases employment.

FII doesnt directly create economic

growth.

FDI is normally desired by all Government

as a catalyst for economic growth.

Due to the problem of HOT MONEY most

government impose restriction / limitation

on such investment.

FDI involves investment in physical assets. FII involves investment in financial assets.


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3.3: ROLE OF FOREIGN INSTITUTIONAL INVESTORS IN CAPITAL MARKET ININDIA:

VOLATILITY:

Foreign institutional investment is certainly volatile in nature and its volatility has

certainly posed some threats to the Indian stock market considering its influence on the market.

Given the presence of foreign institutional investors in Sensex companies and their active trading

behaviour, small and periodic shifts in their behaviour lead to market volatility. Such volatility is

an inevitable result of the structure of Indias financial markets as well. Markets in developing

countries like India are thin or shallow in at least three senses. First, only stocks of a few

companies are actively traded in the market. Thus, although there are more than 8,000 companieslisted on the stock exchange, the BSE Sensex incorporates just 30 companies, trading in whose

shares is seen as indicative of market activity. Second, of these stocks there is only a small

proportion that is routinely available for trading, with the rest being held by promoters, the

financial institutions and others interested in corporate control or influence. And, third the

number of players trading these stocks is also small.

In such a scenario investment by the foreign institutional investors leads to a sharp

price increase this provides incentives to FII investment and enhances investment and when the

correction in the stock prices begins it would have to be a pull out by the FII and can result in

sharp decline in the prices. The other reason for volatility is that the foreign institutional

investors are attracted to a market by the expectation of price increase that tend to be

automatically realized, the inflow of foreign capital can result in an appreciation of the rupee vis-

-vis the dollar This increases the return earned in foreign exchange, when rupee assets are sold

and the revenue converted into dollars. As a result, the investments turn even more attractive

triggering an investment spiral that would imply a sharper fall when any correction begins. Apartfrom that the growing realization by the FIIs of the power they wield in what are shallow

markets, encourages speculative investment aimed at pushing the market up and choosing an

appropriate moment to exit. This manipulation of the market would certainly enhance the

volatility and in volatile markets even the domestic investors try to manipulate the market when

the prices are really high. Overall the foreign institutional investors have been


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Bullish on the Indian stocks but the problem is that this bullish nature might be a result of the

activities outside the Indian market it might be due to the performance of their equity market or

their non equity returns. Therefore they seek out for best returns and diversified geographical

portfolio in order to hedge their risk and when they make some adjustments in their portfolio and

make shifts in favour or against a country it borings about sharp changes.

PRICE BUILDING MECHANISM:

With the increasing participation of the institutional investors in the capital market, it has

also helped the different companies to raise funds for their use through the capital market in

India. Earlier the companies use to go for debt financing which a cost has attached to it and also

in those days the cost of issuing an IPO was higher as compared to the funds that were being

generated by the companies. With the help of FII the market has become more competitive fairvalue of their.

ROLE OF SPECULATION:

The effect of foreign speculative activity in emerging markets can be particularly beneficial if in the emerging market, liquidity is poor first, the potential of market manipulationis acute in small emerging markets and liquidity is often poor. Although there are many policyinitiatives that could increase liquidity and reduce the degree of collusion among large traders,there may not be a sufficient mass of domestic speculators to ensure market liquidity andefficiency. Second, opening the market to foreign speculators may increase the valuation of localcompanies, thereby reducing the cost of equity capital.


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FACTORS AFFECTING FIIS FLOWS:

FII flows and stock returns:

FII flows depend on the performance of the stock exchange of the country. TheEPS of the stock exchange of the country is one of the important factors which have a

bearing on the FII flows in to the country. The FIIs study the average EPS of various

countries stock exchange and invest in the profi table ones. The specific return of specific

stocks also influences the FII decisions.

Country risk measures:

This includes political and other risks in addition to the usual economic and

financial variables, which may be expected to have an impact on portfolio flows to India

though they are likely to matter more in the case of FDI flows.


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CHAPTER: 4 ROLES AND

PARTICIPATION OF FII IN INDIAN

CAPITAL MARKET


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4.1: NUMBER OF FIIS REGISTERED WITH SEBI:

The following table represents the number of FIIs registered with SEBI from 1992 to

2010 yearly. From the below table its clear that the number of FIIs increases year by year except

for the years 1998- 1999, and 2001- 2002.

Number of FIIs registered with SEBI- (1992-1993 to 2008-2009).

Year End of March End of December

1992 93 0 ----

1993 94 3 ----

1994 95 156 ----

1995 96 353 ----

1996 97 439 ----

1997 98 496 ----

1999 00 450 ----

2000 01 506 ----

2001 02 527 ----

2002 03 490 517

2003 04 502 637

2004 05 540 823

2005 06 685 993


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2006 07 882 1219

2007 08 997 1594

2008 09 1319 1706

2009 10 1626

Source- www.sebi.org

This table shows the no. of fiis registered with sebi from 1992 to 2010, it shows the

increase in number of fiis, The number of foreign institutional investors which was 3 in1993

increased to 1713 in the year 2010. It shows that how the foreign investors are more interested in

investing in Indian capital market. And due to this the Indian capital market becoming more and

more attractive.
http://www.sebi.org/http://www.sebi.org/http://www.sebi.org/http://www.sebi.org/


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4.2: FII INVESTMENT IN INDIA:

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

policies, budgets, bullion market, inflation, economic and political condition of the country, FDI,

Re./Dollar exchange rate etc. The following table revels the pattern of gross sales, gross purchase, and net investment during the period: 1993- 1994 to 2009- 2010.

.

Year Gross purchase Rs.

In crores

Gross sales Rs. In

crores

Net investment Rs.

In crores

1993 94 5593 466 5126

1994 95 7631 2835 4796

1995 96 9694 2752 2752

1996 97 15458 6974 8484

1997 98 16679 11804 4876

1998 99 16507.5 17935.9 -1428.5

1999 00 57430.4 46846.3 10582.5

2000 01 73269.3 64179.1 9511.5

2001 02 50184.4 41453.7 8648

2002 - 03 148514.3 44186 2822

2003 04 148514.3 99547.1 48968.3

2004 05 214524.1 171604.6 42920.3

2005 06 347850.6 106697.7 41153.3

2006 07 522417.8 489770.2 32647.8


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2007 08 947770.5 882699 65073.2

2008 09 612406.5 658791.9 -46385.7

2009 10 111053

Source- www.moneycontrol.com

The net investment made by FII in Indian market is volatile. Based on the performance

of the Indian market the net investment changes. During the year of 2007- 2008, the net

investment was very high which reaches to RS. 65073.2 crores. But on the consequent year i.e.,

2008- 2009, and on 1997- 1998, the net investment goes to negative (RS. -46385.7 crores). The

gross purchase is lower than the gross sales because of the economic crisis. FII crossed 65

thousand crores in the Indian history of capital market in 2008 is the highest investment made by

FII.
http://www.moneycontrol.com/http://www.moneycontrol.com/http://www.moneycontrol.com/http://www.moneycontrol.com/


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4.3: A STUDY OF MAJOR EPISODES OF VOLATILITY:

FII investment in equities had little role to play in the crisis.

Asian government officials accused speculators and hedge funds of attacking the

currencies and causing their downfall. A public debate ensued, and the International Monetary

Fund (IMF) responded by examining the role of hedge funds in the Asian currency crisis.

During the stock market scam which shook the capital market in India the FII were also one of

the major factors which exacerbates the fall in the Sensex. During the Black Monday episode the

FII were also on a heavy selling spree which ultimately leads to some major fall in the Sensex

value.

There have been four episodes of vulnerability in India, which are negative shocks

affecting the economy, and influencing the behavior of investors. These are: the East-Asian crisis

in 1997, , the stock market scam of early 2001, the Black Monday of May 17, 2004, and gobal

crises of 2008,have impacted the The investment behavior of the FIIs vis--vis the movements

of the stock market

FII investment behaviour during these four specific events indicates that these

events did affect the behaviour of the foreign portfolio investors. But, these events did affectdomestic investors behaviour as well

indices during these episodes are given in Table.

FII Behaviour during East Asian Crisis:

Month BSE sensex for the month FII investments (Rs. In cr)

July 1997 4256.11 1002.8

August 1997 4276.31 493.66

September 1997 3944.78 598.59


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October 1997 3991.75 641.59

November 1997 3611.83 -289.87

December 1997 3515.54 -182.38

January 1998 3472.87 -374.97

February 1998 3402.96 629.05

March 1998 3816.89 472.22

Source- www.bse india.com

.

The Asian financial crisis was a period of financial crisis that gripped much of Asia

beginning in July 1997, and raised fears of a worldwide economic meltdown due to financial

contagion. Due to this financial crises bse sensex show continuous dropping from 4256 to 3816,

because of less investment of fiis and selling of fiis in Indian stock market.

-1000

0

1000

2000

3000

4000

5000

Jul-97 Aug-97

Sep-97

Oct-97

Nov-97

Dec-97

Jan-98

Feb-98

Mar-98

BSE sensex for the month

FII investments (Rs. In cr.)
http://en.wikipedia.org/wiki/Financial_crisishttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/Financial_contagionhttp://en.wikipedia.org/wiki/Financial_contagionhttp://en.wikipedia.org/wiki/Financial_contagionhttp://en.wikipedia.org/wiki/Financial_contagionhttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/Financial_crisis


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FII Behaviour during the Stock Market Scam 2001:

Month BSE SENSEX for the

month

FII investment Rs in cr

November 2000 3928.10 1090.11

December 2000 4081.42 -461.78

January 2001 4152.39 3971.58

February 2001 4310.13 1574.44

March 2001 3807.64 2204.80


The year2000- 2001 was the time of ketan parekh scam, it was the biggest scam after the harshad

Mehta scam. Due this scam in 2000 fiis have lost their trust from time being and they take away

their investment from India .again after 1 year the fii investments are again coming in India.

These show the behaviour of fiis from time to time.

-5000

50010001500200025003000350040004500

Nov-00 Dec-00 Jan-01 Feb-01 Mar-01

BSE sensex for themonth

FII investment Rs. Incr


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FII Behaviour around Black Monday, May 17, 2004:

Month BSE sensex for the month FII investment Rs in cr

May 2004 5204.65 -3151.29

June 2004 4823.87 511.00

July 2004 4972.88 1292.83


17th may 2004 Monday known as black Monday in the history of Indian sock market,

in that day fiis have sold 3151.29 crore value of their investment in just one day and stockmarket drop more than 6-7% in just one day, in that day India has suffer the first big negative

impact of fiis.

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

6000

May-04 Jun-04 Jul-04

Bse sensex for the month

FII investment rs in cr


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FII Behaviour during 2008 crises:

Indias financial markets were impacted significantly by the crisis, due to this globalcrises Indian stock market come down to near 9000 from 21000 bse benchmark index ,lots of

people lost their money, in that particular financial year of 2008 fiis have take away their

investment from India of more than the 50000 crore value. and this has drastic impact on Indian

capital market as well as Indian economy.


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These experiences show that FII outflow of as much as a billion dollars in a month

which corresponds to an average of $40 million or Rs.170 crore per day has never been

observed. These values Rs.170 crore per day are small when compared with equity turnover

in India. In calendar 2004, gross turnover on the equity market of Rs.88 lakh crore contained

Rs.5 lakh crore of gross turnover by FIIs. This suggests that as yet, FIIs are a small part of the

Indian equity market. Transactions by FIIs of Rs.5 lakh crore in a year might have been large in

1993, but the success of a radical new market design in the Indian equity market have led to

enormous growth of liquidity and market efficiency on the equity market. Through this, Indias

ability to absorb substantial transactions on the equity market appears to be in place.

The net FII inflows into India have been less volatile compared to other emerging

markets this stability could be attributed to several factors: Strong economic fundamentals and

attractive valuation of companies. Improved regulatory standards, high quality of disclosure and

corporate governance requirement, accounting standards, shortening of settlement cycles,

efficiency of clearing and settlement systems and risk management mechanisms.


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CHAPTER: 5 REGULATIONS RELATING

TO FII OPERATION


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5.1: REGULATIONS REGARDING PORTFOLIO INVESTMENTS BY FOREIGN

INSTITUTIONAL INVESTORS (FIIS):

Investment by FIIs is regulated under SEBI (FII) Regulations, 1995 and Regulation 5(2) of

FEMA Notification No.20 dated May 3, 2000. SEBI acts as the nodal point in the entire

process of FII registration. FIIs are required to apply to SEBI in a common application form in duplicate. A copy of

the application form is sent by SEBI to RBI along with their 'No Objection' so as to enable

RBI to grant necessary permission under FEMA. RBI approval under FEMA enables an FII to buy/sell securities on stock exchanges and

open foreign currency and Indian Rupee accounts with a designated bank branch. FIIs are required to allocate their investment between equity and debt instruments in the

ratio of 70:30. However, it is also possible for an FII to declare itself a 100% debt FII in

which case it can make its entire investment in debt instruments. FIIs can invest in listed and unlisted securities including shares, debt instruments dated

Government Securities and Treasury Bills. No individual FII/sub-account can acquire more

than 10% of the paid up capital of an Indian company. All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up

capital of an Indian Company. Indian Companies can raise the above mentioned 24%

ceiling to the Sectoral Cap / Statutory Ceiling as applicable by passing a resolution by its

Board of Directors followed by passing a Special Resolution to that effect by its General

Body Presence of Sectoral Cap/ Statutory ceiling means that foreign investment from all sources

cannot exceed a specified level. A Company to which no sectoral cap/statutory ceiling is

applicable can raise the limit of permissible FII investment to 100% of the paid up capital

A Company to which a 49% cap is applicable can raise the limit of permissible FII

investment to 49% and if there is an existing foreign direct investment of 15%, possible FII

investment can only be up to 34%. No permission from RBI is needed so long as the FIIs purchase and sell on recognized

stock exchange.


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All non-stock exchange sales/purchases require RBI permission. In order to ensure that the sectoral / statutory ceilings on foreign investment in a company

are not violated due to investment by FIIs, RBI monitors these ceilings for the companies

in respect of which sectoral caps /statutory ceiling have been indicated by Government of

India. When the total holdings of FIIs reaches within 2% of the applicable limit, Reserve Bank

issues a notice to all concerned that any further purchases of the shares of the said

Company requires prior approval of RBI. High Net worth Individuals /foreign corporate can invest through SEBI Registered FIIs

subject to a sub-limit of 5% each within the aggregated limit of 24%. Registered Foreign Institutional Investors (FIIs) are allowed to trade in all exchange traded

derivative contracts approved by SEBI from time to time subject to the limits prescribed bySEBI.


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CONCLUSION

The Indian capital markets have come a long way and SEBI has already set the pace ofreforms at a much steadier speed than market participants would have expected. There is a need

to consolidate on these laurels and move ahead to make Indian markets more mature. the capitalmarket in India has become efficient and modern over the years. It has also become much saferfor the retail as well as foreign investors. Investment by FIIs allowed since September 1992, has

been the turning point for the Indian stock market.

According to findings and results, it is concluded that FII have positive relation with

SENSEX as well as other sectorial indices but did not have any significant impact on the Indian

capital market.

FII have not any significant effect on SENSEX not much affected by FIIs investment.

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.

Many research papers says about FIIs have significant impact on Indian Capital Market

but it can be because of their investment, Indian Institutional Investor as well as retail investor

may act on their direction of trading and overall impact will be positive. Through which we

cannot directly say that FIIs have significant impact.


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WEBLIOGRAPHY:

The information provided in this project have been taken from the following sources :

WEBSITIES:

www.google.com www.indiastat.com

www.moneycontrol.com www.bse india.com www.capitalmarket.com

OTHER SOURCES:

NEWSPAPER:

THE TIMES OF INDIA

ECONOMICS TIMES

BIBLIOGRAPHY:

BOOKS:

INDIAN CAPITAL MARKETS EDITION OF AUGUST 2009

(SHRIN RATHORE, MUNEESH KUMAR, AMITABH GUPTA)
http://www.google.com/http://www.google.com/http://www.indiastat.com/http://www.indiastat.com/http://www.moneycontrol.com/http://www.moneycontrol.com/http://www.capitalmarket.com/http://www.capitalmarket.com/http://www.capitalmarket.com/http://www.moneycontrol.com/http://www.indiastat.com/http://www.google.com/


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reforms of capital market with the introduction of fii

Documents