A PROJECT REPORT ON

ROLE OF FINANCIAL INSTITUTION IN CAPITAL

MARKET IN INDIA

SUBMITTED BY
ROHAN J.MESHRAM

SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQURIEMENT FOR
POST GRADUATE DIPLOMA IN FINANCIAL
SERVICES (PGDFS)
OF
UNIVERSITY OF PUNE

UNDER THE GUIDANCE OF

Ms. RACHANA PHADKE

SINHGAD BUSINESS SCHOOL, PUNE CITY

SESSION- 2009-10
 BONAFIED CERTIFICATE

This is to certify that Mr. ROHAN MESHRAM

Studying in the second semester of Post Graduate
Diploma in Financial services of University of Pune
is a Bonafide student of Sinhgad Business School,
Pune City.

Director

Sinhgad Business School

Pune City
 DECLARATION

I, the undersigned, hereby declare that the Project Report

entitled ROLE OF FINANCIAL INSTITUTION IN CAPITAL
MARKET IN INDIA written and submitted by me to the
University of Pune, in partial fulfillment of the requirements
for the award of degree of Post Graduate Diploma In
Financial Services under the guidance of Ms. Rachana
Phadke is my original work and does not form earlier the
basis for the award of any degree or similar title of this or
any other University or examining body. In addition, the
conclusions drawn therein are based on the material
collected by myself.

Place: Pune Rohan J.Meshram

Date: Research Student

 APPROVAL CERTIFICATE

The project report of

Mr. ROHAN MESHRAM

ROLE OF FINANCIAL INSTITUTION IN CAPITAL

MARKET IN INDIA
is approved and is acceptable in quality and
form.

Internal Examiner
External Examiner

Signature:
Signature:
Name: Name:

GUIDES CERTIFICATE

This is to certify that the Project Report entitled ROLE

OF FINANCIAL INSTITUTION IN CAPITAL MARKET IN INDIA
which is being submitted herewith for the award of the
degree of Post Graduate Diploma In Financial Services of
University of Pune, is the result of the original research
work completed by Mr. ROHAN MESHRAM under my
supervision and guidance and to the best of my
knowledge and belief the work embodied in this Project
Report has not formed earlier the basis for the award of
any degree or similar title of this or any other University
or examining body.

CERTIFIED

Ms. Rachana Phadke

 Guides Name & Signature

TABLE OF CONTENTS
CONTENTS P PAGE NO
SDASD
ABSTRACT 8

1. INTRODUCTION 11

2. OBJECTIVE 13

3. METHODOLOGY 13

4. INSTITUTIONAL INVESTORS 14

5. TYPES OF INSTITUTIONAL INVESTOR 14

5.1 DOMESTIC INSTITUTIONAL INVESTORS 14

5.1.1 DOMESTIC FINANACIAL INSTITUTION 14

5.1.2 INSURANCE COMPANIES 15

 5.1.3 BANKS 15

5.1.4 ASSET MANAGEMENT COMPANY 15

5.2 FOREIGN INSTITUTIONAL INVESTORS 16

5.2.1 SOURCES OF FII IN INDIA 17

6. CAPITAL MARKET IN INDIA 18

7. INSTITUTIONAL INVESTORS REGISTERED IN INDIA 20

7.1 MUTUAL FUND REGISTERED IN INDIA 20

7.2 FII REGISTERED IN INDIA 21

8. MAJOR INSTITUTIONAL INVESTORS IN INDIA 22

8.1 DOMESTIC INSTITUTIONAL INVESTORS 23

8.1.1 LIFE INSURANCE CORPORATION 23

8.1.2 RELIANCE MUTUAL FUND 24

8.1.3 ICICI PRUDENTIAL 24

8.1.4 UTI MUTUAL FUND 25

8.1.5 HDFC MUTUAL FUND 25

8.2 FII 26

8.2.1 DEUTSCHE GROUP 26

8.2.2 CITIGROUP GROUP 27

8.2.3 HSBC GLOBAL INVESTMENT 27

8.2.4 MORGAN STANLEY &CO INTERNATIONAL LTD 27

8.2.5 DSP MERRILL LYNCH 28

9. INVESTMENT TRENDS OF INSTITUTIONAL INVESTORS IN INDIA 28

9.1 INVESTMENT TRENDS OF INDIAN MUTUAL FUND INDUSTRY 28

9.2 FOREIGN INSTITUTIONAL INVESTMENT 29

9.2.1 REASONS FOR GROWTH IN FII INVESTMENT 30

10. FII: COST BENEFIT ANALYSIS 31

11. DETERMINATION OF FII 34

12. COMPARISION BETWEEN FIIS & MUTUAL FUND INVESTMENT 36

13. ROLE OF INSTITUTIONAL INVESTORS IN CAPITAL MARKET 36

14. A STUDY OF MAJOR EPISODES OF VOLATILITY 40

15. STATISTICAL ANALYSIS 45

RECOMMENDATION 50

CONCLUSION 51

REFERENCES 52

ANEXURE 53
ABSTRACT:
"The whole is much more than just the sum of the parts"Aristotle
An economy, apart from everything else, is a highly fluid transmission mechanism. Its beauty lies
in how the smallest of changes have the most complex trickle-down effects. A paradigmatic
example of how seemingly minor policy changes can jumpstart the economy can be illustrated by
examining the effects liberalization on capital market in India.

Globalization had led to widespread liberalization and implementation of financial market

reforms in many countries, mainly focusing on integrating the financial markets with the global
markets. Indian Capital Market has also undergone metamorphic reforms in the past few years.
Every segment of Indian Capital Market viz primary and secondary markets, derivatives,
institutional investment and market intermediation has experienced impact of these changes
which has significantly improved the transparency, efficiency and integration of Indian market
with the global markets.

This is one of the prime reasons why the foreign portfolio investments have been increasingly
flowing into the Indian markets. A significant part of these portfolio flows to India comes in the
form of Foreign Institutional Investors (FIIs) investments, mostly in equities. Ever since the
opening of the Indian equity markets to foreigners, FII net investments have steadily grown. Thus,
we can see that there has been a consistent rise in the FII inflows into the country.

While the concerns such as FII pulling back their investments and the kind of destabilizing effect
on the capital market in India are all well-placed, comparatively less attention have been paid so
far to analyzing the FII flows data and understanding their key features. A proper understanding
of the nature and determinants of these flows, however, is essential for a meaningful debate about
their effects as well as predicting their chances of their sudden reversals. Thus this project aims at
studying the role of these Institutional investors and its impact on the capital markets in India
.This also aims to find out the various factors and determinants for their investments and also cite
out scenarios where in these investments when pulled back by these FII could really effect the
capital markets in India.

10
 Institutional investors are a permanent feature of the financial landscape, and their growth will
continue at a similar and perhaps faster pace. The factors that underpin their development are far
from transitory and in many cases have only just started having an impact. The behavioral
characteristics of institutional investors, therefore, will be an increasingly important determinant
of domestic and international financial market conditions, and the implications for financial
market stability warrant serious consideration"
Bank for International Settlements, Annual Report 1998, p95.

EXECUTIVE SUMMARY:

11
The objective of the project is to find the different role of institutional investors in the capital
market in india and then to find the role of instittutional investors in the major volatile episode in
the capital market in india.Finaly to find the relationship between the Sensex variation with the
variation of the investments made by the institutional investors. India opened its stock markets to
foreign investors in September 1992 and has, since 1993, received considerable amount of
portfolio investment from foreigners in the form of Foreign Institutional Investors (FII)
investment in equities. While it is generally held that portfolio flows benefit the economies of
recipient countries, policy makers worldwide have been more than a little uneasy about such
investments. Portfolio flows-often referred as hot money-are notoriously volatile compared to
other types of capital inflows. Investors are known to pull back portfolio investments at the
slightest hint of trouble in the host country often leading to disastrous consequences to its
economy. They have been blamed for exacerbating small economic problems in a country by
making large and concerted withdrawals at the first sign of economic weakness. The methodology
used to is regression analysis. The degree of association helps us to quantify the relation ship
between the variation in sensex due to the variation in the net investments made by the
institutional investors.
After completeing the project I could recommend that Government should certainly encourage
foreign institutional investment but should keep a check on the volatility factor. Long term funds
should be given priority and encouraged some of the actions that could be taken to ensure stability
are
Strengthening domestic institutional investors
Operational flexibility to impart stability to the market
Knowledge activities and research programs
To conclude with I would say the that the foreign funds is certainly one of the most important
cause of volatility in the Indian stock market and has had a considerable influence on it. Although
it would not be fair enough to come to any conclusion as there are a lot of other factors beyond
the scope of the study that effect returns and risks .it is not easy to predict the nature of the
macroeconomic factors and their behavior but it has a great significance on any economy and its
elements. Although generally a positive relation has been seen between the stock market returns
and the FII inflows it is not easy to say which is the cause n which is the effect.
1. INTRODUCTION:

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Financial markets are the catalysts and engines of growth for any nation. Indias financial market
began its transformation path in the early 1990s. The banking sector witnessed sweeping changes,
including the elimination of interest rate controls, reductions in reserve and liquidity requirements
and an overhaul in priority sector lending. Persistent efforts by the Reserve Bank of India (RBI) to
put in place effective supervision and prudential norms since then have lifted the country closer to
global standards. Around the same time, Indias capital markets also began to stage extensive
changes. The Securities and Exchange Board of India (SEBI) was established in 1992 with a
mandate to protect investors and usher improvements into the microstructure of capital markets,
while the repeal of the Controller of Capital Issues (CCI) in the same year removed the
administrative controls over the pricing of new equity issues. Indias financial markets also began
to embrace technology. Competition in the markets increased with the establishment of the
National Stock Exchange (NSE) in 1994, leading to a significant rise in the volume of
transactions and to the emergence of new important instruments in financial intermediation.

Indian investors have been able to invest through mutual funds since 1964, when UTI was
established. Indian mutual funds have been organized through the Indian Trust Acts, under which
they have enjoyed certain tax benefits. Between 1987 and 1992, public sector banks and insurance
companies set up mutual funds. Since 1993, private sector mutual funds have been allowed,
which brought competition to the mutual fund industry. This has resulted in the introduction of
new products and improvement of services. The notification of the SEBI (Mutual Fund)
Regulations of 1993 brought about a restructuring of the mutual fund industry. An arms length
relationship is required between the fund sponsor, trustees, custodian, and asset Management
Company. This is in contrast to the previous practice where all three functions, namely
trusteeship, custodianship, and asset management, were often performed by one body,
Usually the fund sponsor or its subsidiary. The regulations prescribed disclosure and
advertisement norms for mutual funds, and, for the first time, permitted the entry of private sector
mutual funds. FIIs registered with SEBI may invest in domestic mutual funds, whether listed or
unlisted. The 1993 Regulations have been revised on the basis of the recommendations of the

Mutual Funds 2000 Report prepared by SEBI. The revised regulations strongly emphasize the
governance of mutual funds and increase the responsibility of the trustees in overseeing the
functions of the asset management company. Mutual funds are now required to obtain the consent
of investors for any change in the fundamental attributes of a scheme, on the basis of which unit
13
holders have invested. The revised regulations require disclosures in terms of portfolio
composition, transactions by schemes of mutual funds with sponsors or affiliates of sponsors,
with the asset Management Company and trustees, and also with respect to personal transactions
of key personnel of asset management companies and of trustees.

India opened its stock markets to foreign investors in September 1992 and has, since 1993,
received considerable amount of portfolio investment from foreigners in the form of Foreign
Institutional Investors (FII) investment in equities. This has become one of the main channels of
portfolio investment in India for foreigners. In order to trade in Indian equity markets, foreign
corporations need to register with the SEBI as Foreign Institutional Investor (FII). SEBIs
definition of FIIs presently includes foreign pension funds, mutual funds,
charitable/endowment/university funds etc. as well as asset management companies and other
money managers operating on their behalf
The sources of these FII flows are varied .The FIIs registered with SEBI come from as many as
28 countries(including money management companies operating in India on behalf of foreign
investors).US based institutions accounted for slightly over 41% those from the U.K constitute
about 20% with other Western European countries hosting another 17% of the FIIs.
Portfolio investment flows from industrial countries have become increasingly important for
developing countries in recent years. The Indian situation has been no different. A significant part
of these portfolio flows to India comes in the form of FIIs investments, mostly in equities. Ever
since the opening of the Indian equity markets to foreigners, FII investments have steadily grown
from about Rs.2600 crores in 1993 to over Rs.272165 crores till the end of Feb 2008.
While it is generally held that portfolio flows benefit the economies of recipient countries, policy
makers worldwide have been more than a little uneasy about such investments. Portfolio flows-
often referred as hot money-are notoriously volatile compared to other types of capital inflows.
Investors are known to pull back portfolio investments at the slightest hint of trouble in the host
country often leading to disastrous consequences to its economy. They have been blamed for

14
exacerbating small economic problems in a country by making large and concerted withdrawals at the
first sign of economic weakness. They have also been responsible for spreading financial crisis
causing contagion in international financial markets.
International capital flows and capital controls have emerged as an important policy issues in the
Indian context as well. The danger of abrupt and sudden outflows inherent with FII flows and their
destabilizing effect on equity and foreign exchange markets have been stressed.
The financial market in India have expanded and deepened rapidly over the last ten years. The
Indian capital markets have witnessed a dramatic increase in institutional activity and more
specifically that of FIIs. This change in market environment has made the market more
innovative and competitive enabling the issuers of securities and intermediaries to grow. In India the
institutionalization of the capital markets has increased with FIIs becoming the dominant owner of
the free float of most blue chip Indian stocks. Institutions often trade large blocks of shares and
institutional orders can have a major impact on market volatility. In smaller markets, institutional
trades can potentially destabilize the markets. Moreover, institutions also have to design and time
their trading strategies carefully so that their trades have maximum possible returns and minimum
possible impact costs.
2. OBJECTIVE OF THE PROJECT:
To Study the Impact of Institutional Investors especially the FII on the capital market in
India.

To study the major Episodes of volatility in India and analyzing the impact of Institutional
investors in these episodes.

To quantify the relation between FII flows and their relationship with economic variables,
particularly with NIFTY.

3. METHODOLOGY:

For covering the Theoretical part I shall be going through a lot of literature including books on FII
& Capital Market. Beyond this I shall be tracking the performance of FII through the help of internet.
To Study the major episodes of volatility in India, I would be reading through a lot of literature,
articles, and magazines and visiting various sites for their comments during that period.

15
 For the study purpose, I will take only NIFTY that is the National Stock Exchange (NSE)
benchmark Index is considered. This is because the larger chunk of FII activity in India happens
on the NSE. NSE is the dominant exchange in India with close to 75% of cash market turnover
and well over 90% of derivatives turnover in India happening on the NSE. The daily index
volatility and volatility in daily FII cash flows were studied and daily FII volatility on the Nifty
volatility. On the information so gathered I will be running SPSS analysis & reaching onto the
conclusion.

Thus throughout the project I shall be making use of secondary data.

4. INSTITUTIONAL INVESTOR:

An institutional investor is an investor, such as a bank, insurance company, retirement fund, hedge
fund, or mutual fund that is financially sophisticated and makes large investments, often held in
very large portfolios of investments. Because of their sophistication, institutional investors may
often participate in private placements of securities, in which certain aspects of the securities laws
may be inapplicable.

5. TYPES OF INSTITUTIONAL INVESTOR

5.1. DOMESTIC INSTITUTIONAL INVESTOR

is used to denote an investor - mostly of the form of an institution or entity, which invests
money in the financial markets of its own country where the institution or entity was
originally incorporated. In India, there are broadly four types of institutional investors.

5.1.1 DEVELOPMENTAL FINANCIAL INSTITUTIONS like Industrial Finance

Corporation of India (IFCI), Industrial Credit and Investment Corporation of

16
India (ICICI), Industrial Development Bank of India (IDBI), the State Financial
Corporations, etc. The role played by these financial institutions (FIs) is to extend funds to the
companies for both long term financing and (more recently) working capital financing. The
financial institutions extend both debt and equity financing to their nominee directors in the
companies.

5.1.2 INSURANCE COMPANIES like the Life Insurance Corporation (LIC),

General Insurance Corporation (GIC), and their subsidiaries.

5.1.3 BANKS: Earlier banks used to finance only the working capital of the
companies. But now they are also extending long-term finance to the
companies.

5.1.4 ASSET MANAGEMENT COMPANIES all the mutual funds including Unit
Trust of India (UTI). The mutual funds collect funds from both individuals and
corporate to invest in the financial assets of other companies. In India, the
mutual funds participate largely in the equity capital of the companies. The
mutual fund industry which is the major institutional investors in India started in
1963 with the formation of Unit Trust of India, at the initiative of the
Government of India and Reserve Bank.

The history of mutual funds in India can be broadly divided into four distinct
phases

First Phase: 1964-1987, Unit Trust of India (UTI) was established on

1963 by an Act of Parliament.

Second Phase : 1987- 1993, Entry of Public Sector Funds .1987 marked the
entry of non- UTI, public sector mutual funds set up by public sector
banks and Life Insurance Corporation of India (LIC) and General
Insurance Corporation of India (GIC).

Third Phase: 1993-2003, Entry of Private Sector Funds in 1993. Kothari

Pioneer (now merged with Franklin Templeton) was the first private
sector mutual fund registered in July 1993.As at the end of January 2003;

there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The
17
 Unit Trust of India with Rs.44, 541 crores of assets under management was way
ahead of other mutual funds.

Fourth Phase: 2003-2007 In Feb 2003 the Unit Trust of India Act 1963
UTI was bifurcated into two separate entities. The Specified Undertaking of
Unit Trust of India, functioning under an administrator and under the rules
framed by Government of India. The second is the UTI Mutual Fund Ltd,
sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and
functions under the Mutual Fund Regulations.

5.2 FOREIGN INSTITUTIONAL INVESTOR (FII)

is used to denote an investor - mostly of the form of an institution or entity, which

invests money in the financial markets of a country different from the one where in the
institution or entity was originally incorporated.FII investment is frequently referred to as
hot money for the reason that it can leave the country at the same speed at which it comes
in. In countries like India, statutory agencies like SEBI have prescribed norms to register
FIIs and also to regulate such investments flowing in through FIIs.

Pension Funds
Mutual Funds
Investment Trust
Insurance or reinsurance companies
Endowment Funds
University Funds
Foundations or Charitable Trusts or Charitable Societies
Asset Management Companies
Nominee Companies Institutional
Portfolio Managers Trustees

Power of Attorney Holders

Bank

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 5.2.1 SOURCES OF FII IN INDIA:

The sources of these FII flows are varied. The FIIs registered with SEBI come
from as many as 28 countries (including money management companies
operating in India on behalf of foreign investors). US-based institutions
accounted for slightly over 41%; those from the UK constitute about 20% with
other Western European countries hosting another 17% of the FIIs. It is,
however, instructive to bear in mind that these national affiliations do not
necessarily mean that the actual investor funds come from these particular
countries. Given the significant financial flows among the industrial countries,
national affiliations are very rough indicators of the home of the FII
investments. In particular institutions operating from Luxembourg, Cayman
Islands or Channel Islands, or even those based at Singapore or Hong Kong are
likely to be investing funds largely on behalf of residents in other countries.
Nevertheless, the regional breakdown of the FIIs does provide an idea of the
relative importance of different regions of the world in the FII flows.

6. CAPITAL MARKET IN INDIA

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The Bombay Stock Exchange (BSE), which began formal trading in 1875, is one of the oldest
in Asia. Over the last decade, there has been a rapid change in the Indian securities market,
both in primary as well as the secondary market. Advanced technology and online-based
transactions have modernized
the stock exchanges. In terms of
the number of companies listed
and total market capitalization,
the Indian equity market is
considered large relative to the
countrys stage of economic
development. Currently, there are 40 mutual funds, out of which 33 are in the private sector
and 7 are in the public sector. Mutual funds were opened to the private sector in 1992. Earlier,
in 1987, banks were allowed to enter this business, breaking the monopoly of the Unit Trust of
India (UTI), which maintains a dominant position. Before 1992, many factors obstructed the

20
expansion of equity trading. Fresh capital issues were controlled through the Capital
Issues Control Act. Trading practices were not transparent, and there was a large amount of
insider trading. Recognizing the importance of increasing investor protection, several
measures were enacted to improve the fairness of the capital market. The Securities and
Exchange Board of India (SEBI) was established in 1988. There have been significant
reforms in the regulation of the securities market since 1992 in conjunction with overall
economic and financial reforms. In 1992, the SEBI Act was enacted giving SEBI statutory
status as an apex regulatory body. And a series of reforms was introduced to improve
investor protection, automation of stock trading, integration of national markets, and
efficiency of market operations. India has seen a tremendous change in the secondary market
for equity.

Among the processes that have already started and are soon to be fully implemented are
electronic settlement trade and exchange-traded derivatives. Before 1995, markets in India
used open outcry, a trading process in which traders shouted and hand signaled from within
a pit. One major policy initiated by SEBI from 1993 involved the shift of all exchanges
to screen-based trading, motivated primarily by the need for greater transparency. The
first exchange to be based on an open electronic limit order book was the National Stock
Exchange (NSE), which started trading debt instruments in June 1994 and equity in
November 1994. In March 1995, BSE shifted from open outcry to a limit order book market.
Before 1994, Indias stock markets were dominated by BSE. In other parts of the country, the
financial industry did not have equal access to markets and was unable to participate in
forming prices compared with market participants in Mumbai (Bombay). As a result, the
prices in markets outside Mumbai were often different from prices in Mumbai. These
pricing errors limited order flow to these markets. Explicit nationwide connectivity and
implicit movement toward one national market has changed this situation. NSE has
established satellite communications which give all trading members of NSE equal access
to the market. Similarly, BSE and the Delhi Stock Exchange are both expanding the
number of trading terminals located all over the country. The arbitrages are eliminating
pricing discrepancies between markets.

The Indian capital market still faces many challenges if it is to promote more efficient
allocation and mobilization of capital in the economy.

21
 First, market infrastructure has to be improved as it hinders the efficient flow
of information and effective corporate governance.

Second, the trading system has to be made more transparent.

Third, India may need further integration of the national capital market
through consolidation of stock exchanges.

Fourth, the payment system has to be improved to better link the banking
and securities industries.

The capital market cannot thrive alone; it has to be integrated with the other segments
of the financial system. The global trend is for the elimination of the traditional wall
between banks and the securities market. Securities market development has to be
supported by overall macroeconomic and financial sector environments. Further
liberalization of interest rates, reduced fiscal deficits, fully market-based issuance of
Government securities and a more competitive banking sector will help in the
development of a sounder and a more efficient capital market in India.

7. INSTITUTIONAL INVESTORS REGISTERED IN INDIA:

7.1 MUTUAL FUNDS REGISTERED IN INDIA:

From the bar chart above it is clearly evident that the mutual fund industry is still at a
22
nascent stage as compared to the FIIs. Since its inception in 1964 when the first
mutual fund i.e. UTI had the monopoly for 25 years. It was thus in the year after 1989 that
public sector banks and financial institution started their AMC .Finally in the third phase
when private players entered the arena, it lead to a fierce battle to hold the top slot in the
Indian mutual fund industry .The growing number of mutual fund companies corroborates
the fact that Indian public are now looking for different avenues to invest their earnings and
are confident on the working of capital market in India. This shows that SEBI has in a way
restored the faith of these investors in spite of the different scams that rocked the capital
market in India.

7.2 FII REGISTERED IN INDIA:

Lets look at some of the data to get an idea about the trend of FIIs in India, and also to
see the future direction of their movement.
India had 528 FIIs were registered with SEBI by end of 2001 and by end of Feb-2008
the number increased to1303. The trend in the number of registered FIIs has been
consistently on the rise as can be seen from the table; showing the significant
amount of confidence that Indian Capital market has developed in the last few years.

Not only has been the number increasing on a consistent basis, but the amount of
inflow into Indian market has also seen a manifold increased. The gross purchase,
sales and net investment figure on an annual basis gives a fair idea about the
consistency of their investments in our country.

23
 As we can see in the investment trends table, except for 1998, the net investment
by the FIIs in the Indian market has always been positive since liberalization
which to a large extent tells about the consistency of their presence in Indian
market. This is also evident from the fact that the number of FII registering in India
is increasing in spite of the fact that SEBI has declined to issue any further PN notes
and also asked them to get registered. This shows that India still remains the hot
spot for the foreign investors in the coming years.

8. MAJOR INSTITUTIONAL INVESTORS IN INDIA

The total number of Domestic institutional investors specially the mutual funds is 40 in
number. Similarly insurance companies and other banks are very large in number. But
out of these there are some heavy weights which solely by their investments are among
the top 5 domestic institutional investors in india.Among the total FII registered i.e. 1303
by the end of feb 2008 the top 5 FII in terms of their investment in India are listed
below.

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 8.1. DOMESTIC INSTITUTIONAL INVESTORS

8.1.1. LIFE INSURANCE CORPORATION OF INDIA.

Life Insurance in its modern form came to India from England in the year 1818.
The first two decades of the twentieth century saw lot of growth in insurance
business. From 44 companies with total business-in-force as Rs.22.44 crore, it rose
to 176 companies with total business-in-force as Rs.298 crore in 1938. During the
mushrooming of insurance companies many financially unsound concerns were
also floated which failed miserably. However, it was much later on the 19th of
January, 1956, that life insurance in India was nationalized. About 154 Indian
insurance companies, 16 non-Indian companies and 75 provident were operating in
India at the time of nationalization. Nationalization was accomplished in two
stages; initially the management of the companies was taken over by means of an
Ordinance, and later, the ownership too by means of a comprehensive bill. The
Parliament of India passed the Life Insurance Corporation Act on the 19th of June
1956, and the Life Insurance Corporation of India was created on 1st September,
1956, with the objective of spreading life insurance much more widely and in
particular to the rural areas with a view to reach all insurable persons in the
country, providing them adequate financial cover at a reasonable cost.
LICs emergence as the biggest investor in the country should not surprise anyone. The
state-owned company is 51 years old and enjoyed a state-sanctioned monopoly over
the life insurance business till 2000. The firm has issued 220 million policies and earned
total premium income of Rs39, 541 crore in 2006-07. It is allowed to invest 35% of its funds in
equities.

The largest chunk in LICs portfolio is the stake it owns in listed engineering giant
Larsen and Toubro Ltd. The 15.7% stake in L&T is valued at more than Rs19, 642
crore. Other major investments include a 4.14% stake in Reliance Industries Ltd,
the largest Indian company by market capitalization, 7.2 % in ICICI Bank Ltd,
13.4% in ITC Ltd and 4.2 % in Reliance Communications Ltd.

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8.1.2 RELIANCE MUTUAL FUNDS:

Reliance Mutual Fund (RMF) is one of Indias leading Mutual Funds, with
Average Assets Under Management (AAUM) of Rs. 90,938 Crores (AAUM for
Mar 08 ) and an investor base of over 66.87 Lakhs.Reliance Mutual Fund, a part of
the Reliance - Anil Dhirubhai Ambani Group, is one of the fastest growing mutual
funds in the country. Reliance Capital Ltd. is one of Indias leading and fastest
growing private sector financial services companies, and ranks among the top 3
private sector financial services and banking companies, in terms of net worth.
Reliance Capital Ltd. has interests in asset management, life and general insurance,
private equity and proprietary investments, stock broking and other financial
services.

8.1.3 ICICI PRUDENTIAL FUNDS:

ICICI Prudential Asset Management Company enjoys the strong parentage of
prudential plc, one of UK's largest players in the insurance & fund management
sectors and ICICI Bank, a well-known and trusted name in financial services in
India. ICICI Prudential Asset Management Company, in a span of just over eight
years, has forged a position of pre-eminence in the Indian Mutual Fund industry
as one of the largest asset management companies in the country with assets under
management of Rs. 37,906.24 crore (as of March 31, 2007). The Company
manages a comprehensive range of schemes to meet the varying investment needs
of its investors spread across 68 cities in the country. Upon its inception in May
1998 it manages 2 funds of Rs 160 Cr and has grown to manage 35 Funds worth
Rs 62,008.95 Cr.

26
8.1.4 UTI MUTUAL FUNDS:

UTI Mutual Fund came into existence on 1st February 2003. Bank of Baroda
(BOB), Punjab National Bank (PNB) and State Bank of India (SBI) and Life
Insurance Corporation of India (LIC) are the sponsors of the UTI Mutual Fund.
UTI Mutual Fund is managed by UTI Asset Management Company Private
Limited (AMC). UTI AMC is a registered portfolio manager under the SEBI
(Portfolio Managers) Regulations, 1993 for undertaking portfolio management
services and also acts as the manager and marketer to offshore funds. UTI Mutual
Fund has a nationwide network consisting 70 UTI Financial Centers (UFCs) and
UTI International offices in London, Dubai and Bahrain. The fund has a track
record of managing a variety of schemes catering to the needs of every class of
citizenry.

8.1.5 HDFC MUTUAL FUND:

HDFC (Housing Development Finance Corporation Limited) is one of the dominant
players in the Indian mutual fund space. HDFC was incorporated in 1977 as the first
specialized Mortgage Company in India. HDFC Mutual Funds are handled by
HDFC Asset Management Company Limited. HDFC Asset Management Company
was incorporated under the Companies Act, 1956, on December 10, 1999, and was
approved to act as an Asset Management Company for the Mutual Fund by SEBI on
July 3, 2000. The company also provides portfolio management / advisory services.

27
8.2 FOREIGN INSTITUTIONAL INVESTORS:

8.2.1 DEUTSCHE GROUP:

DWS Investments part of Deutsche Asset Management, was founded in 1956 in

Frankfurt/Main. With fund assets under management of euro 267 bn, the company
is one of the Top 10 companies worldwide. In Europe, DWS is one of the leading
mutual fund companies and currently manages euro 173 bn. In excess of more than
euro 147 bn assets under management, DWS represents 22, 3% of the fund market
in Germany, making it the unchallenged number one.

The International nature of its business differentiates DWS significantly from its
domestic and international competitors. DWS Investments activities span all the
key European markets. In the USA, DWS is represented by DWS Scudder and
manages assets of euro 86 bn. In spring 2006, it launched its first funds as well as
the DWS brand in Singapore and India, continuing its successful expansion in the

28
 Asia-Pacific region. Thereafter, more funds were registered in other countries in
Asia-Pacific.

8.2.2 CITIGROUP:
The formation of Citigroup in 1998 created a new model of financial services
organization to serve its clients financial needs. As the company continues to grow and
evolve, its increasingly evident that such a large, complex grouping of
businesses can indeed succeed. With 275,000 employees working in more than 100
countries and territories, Citigroups globality and diversity contribute to its
continued success.

8.2.3 HSBC GLOBAL INVESTMENTS:

HSBC Investments is one of the world's premier fund management

organizations. It has established a strong reputation with institutional investors
including corporations, governments, insurance companies and charities the world
over for delivering consistently superior returns. In India we offer fund
management services for institutional as well as retail investors. Our array of
products includes Equity Funds Income /Debt Funds.

8.2.4 MORGAN STANLEY &CO INTERNATIONAL LTD:

Morgan Stanley is a global financial services firm and a market leader in securities,
investment management and credit services. It has more than 600 offices in 27
countries and manages $421 billion in assets for institutional and individual clients
around the world. Stanley Investment Management (MSIM), the asset
management company of Morgan Stanley was established in 1975. Morgan
Stanley entered Indian market in 1989 with the launch of India Magnum Fund. In
1994, Morgan Stanley launched Morgan Stanley Growth Fund (MSGF). It is one of
the largest private sector schemes investing in equities.

8.2.5 DSP MERRILL LYNCH :

29
 DSP Merrill Lynch Mutual Funds are managed by DSP Merrill Lynch Fund
Managers. DSP Merrill Lynch Ltd. (DSPML) is a premier financial services
provider and Merrill Lynch (ML) holds 90% stake in DSPML. DSPML was
originally called DSP Financial Consultants Ltd. The firm traces its origins to D. S.
Purbhoodas & Co., a securities and brokerage firm with over 140 years of
experience in the Indian market. Merrill Lynch is one of the world's leading wealth
management, capital markets and advisory companies with offices in 37 countries
and territories and total client assets of approximately $1.5 trillion.

9. INVESTMENT TRENDS OF INSTITUTIONAL INVESTORS:

9.1 INVESTMENT TRENDS OF INDIAN MUTUAL FUND INDUSTRY:

The Assets under Management of UTI was Rs.4563 Cr by the end of 1987. Let me
concentrate about the performance of mutual funds in India through figures. From Rs.
4563 Cr. the Assets under Management rose to Rs. 32977 Cr in March
1993

The net asset value (NAV) of mutual funds in India declined when stock prices started
falling in the year 1992. Those days, the market regulations did not allow portfolio shifts
into alternative investments. There was rather no choice apart from holding the cash or to
further continue investing in shares.

A lone UTI with just one scheme in 1964 now competes with as many as 400 odd
products and 34 players in the market. In spite of the stiff competition and losing market
share, Last six years have been the most turbulent as well as exiting ones for the industry.
New players have come in, while others have decided to close shop by either selling off
or merging with others. Product innovation is now pass with the game shifting to
performance delivery in fund management as well as service. The industry is also having
a profound impact on financial markets. While UTI has always been a dominant player

30
 on the bourses as well as the debt markets, the new generations of private funds, which
have gained substantial mass, are now flexing their muscles. Fund managers, by their
selection criteria for stocks have forced corporate governance on the industry. Rewarding
honest and transparent management with higher valuations has created a system of risk-
reward created where the corporate sector is more transparent then before.

Funds collection has been increasing in last 5 years which can be attributed to the fact of
sound economic growth and the confidence of the retail investors on the capital market of
India.

9.2 FOREIGN INSTITUTIONAL INVESTMENT

(FII) is one of the main channels of foreign investment in India. Foreign institutional
investors (FIIs) were permitted to invest in Indian securities market in 1993. Since then,
their investments into Indian equity market have grown by leaps and bounds. In fact,
FIIs, as a class of institutional investors, have assumed a major role in mature and
emerging market economies, in recent years. The FII in the Indian equity markets has
risen steadily since 2003-04. The gross purchases of debt and equity together by FIIs
increased by 50.0 per cent to Rs. 5,20,508 crore in 2006-07 from Rs. 3,46,978 crore in
2005-06.

INVESTMENTS BY FOREIGN INSTITUTIONAL INVESTORS

The gross sales by FIIs also rose by 60.3 per cent to Rs. 4, 89,667 crore from Rs. 3,
05,512 crore during the same period. However, the net investment by FIIs in 2006-07

31
declined by 25.6 per cent to Rs. 30,840 crore in 2006-07 from Rs. 41,467 crore in 2005-
06 mainly due to large net outflows from the equity segment. But the cumulative net
investment by FIIs in Indian stock market (since 1993) crossed USD 50 billion at the end
of March 2007. As on March 31, 2007, the cumulative net investment by FIIs was USD
52 billion. The cumulative net investment by FIIs at acquisition cost, which was USD
15.8 billion at the end of March 2003, had risen to USD 45.3 billion at the end of March
2006. The FII in equity, which was high in the previous years, declined in 2006-07.
During 2006-07, FIIs reduced their investment, in both equities as well as debt securities.
The net FII investment in equity during 2006-07 was Rs. 25,236 crore, at its lowest in
past three years. This was mainly due to large net sales in some months of 2006-07.
NET INVESTMENT BY FII

INVESTMENT TRENDS BY FII

As far as the investment trends of FII are considered we can see that the trend and the
actual investment go hand in hand except in 98-99 and 2003-2004.The net investment
flows by FIIs were negative during 1998-99 primarily because of the uncertainty that
prevailed after India tested a series of nuclear bombs in May 1998 and the imposition of
economic sanctions by the US, Japan and other industrialized countries but the FIIs
portfolio flows quickly recovered and have become a positive net investment from the
subsequent years onwards.

9.2.1 REASONS FOR GROWTH IN FII INVESTMENTS

Global liquidity is, of course, the primary cause of the recent surge in Asian markets
including India. Also low interest rate regime has led foreign investors to look for
fresh avenues to invest. This has resulted in most emerging markets seeing heavy
inflows.
FIIs see India as a good destination to invest in and make money. They are happy
with the Indian government's commitment to economic reforms. They are also
looking closely at sectors (and companies within these sectors) which they think

32
 have potential. Infact, the growing competitiveness of Indian companies is an
enticing factor.
Long-Term Capital Gains Tax: which is the tax an investor pays when he sells
his shares after more than a year -- has been abolished; thus one can sell his
shares without having to pay the government any kind of tax.
Rupee Appreciation: The dollar has been falling in value vis--vis other
currencies. As a result, FIIs dont find the thought of investing in the US market all
that attractive. They know they will make more money if they invest elsewhere.
Economic Growth: As mentioned earlier we witnessed a GDP growth rate of about
8.5% last year. Our industries like Telecom, Banking etc are doing relatively well.
All these make our country very attractive to invest in.
The sheer size of India and the relative stability the country offers are other obvious
plus points. Whatever the case may be, a perception is gaining momentum that
foreign investors are here to stay at least in the short-term.

10 . FOREIGN INSTITUTIONAL INVESTMENT: A COST BENEFIT ANALYSIS

The role of foreign investment over the years cant be ignored . It certainly has had an impact on
the Indian stock market with a lot of benefits but along with these benefits there are a few costs
attached with it. Therefore it is useful to summarize the benefits and costs for India of having
foreign inflows.

BENIFITS
a) Reduced cost of equ ity

FII inflows augment the sources of funds in the Indian capital markets. FII investment
reduces the required rate of return for equity, enhances stock prices, and fosters investment by
Indian firms in the country. The impact of FIIs upon the cost of equity capital may be
visualized by asking what stock prices would be if there were no FIIs operating in India.

33
b) Stability in the balance of payment

For promoting growth in a developing country such as India, there is need to augment
domestic investment, over and beyond domestic saving, through capital flows. The excess of
domestic investment over domestic savings result in a current account deficit and this deficit
is financed by capital flows in the balance of payments. Prior to 1991, debt flows and official
development assistance dominated these capital flows. This mechanism of funding the current
account deficit is widely believed to have played a role in the emergence of balance of
payments difficulties in 1981 and 1991. Portfolio flows in the equity markets, and FDI, as
opposed to debt-creating flows, are important as safer and more sustainable mechanisms for
funding the current account deficit.

c) Knowledge flows

The activities of international institutional investors help strengthen Indian finance. FIIs
advocate modern ideas in market design, promote innovation, development of sophisticated
products such as financial derivatives, enhance competition in financial intermediation, and
lead to spillovers of human capital by exposing Indian participants to modern financial
techniques, and international best practices and systems.

d) Strengthening corporate governance

Domestic institutional and individual investors, used as they are to the ongoing practices of
Indian corporate, often accept such practices, even when these do not measure up to the
international benchmarks of best practices. FIIs, with their vast experience with modern
corporate governance practices, are less tolerant of malpractice by corporate managers and
owners (dominant shareholder). FII participation in domestic capital markets often lead to
vigorous advocacy of sound corporate governance practices, improved efficiency and better
shareholder value.

34
e) Improving market efficiency

A significant presence of FIIs in India can improve market efficiency through two
channels. First, when adverse macroeconomic news, such as a bad monsoon, unsettles
many domestic investors, it may be easier for a globally diversified portfolio
manager to be more dispassionate about India's prospects, and engage in stabilizing
trades. Second, at the level of individual stocks and industries, FIIs may act as a
channel through which knowledge and ideas about valuation of a firm or an industry
can more rapidly propagate into India. For example, foreign investors were rapidly
able to assess the potential of firms like Infosys, which are primarily export-oriented,
applying valuation principles that prevailed outside India for software services
companies.

COSTS
a) Hedging and positive feedback
training
There are concerns that foreign investors are chronically ill informed about india, and
this lack of sound information may generate herding (a large number of FIIs buying or
selling together) and positive feedback (buying after positive returns, selling after
negative returns).These Kinds of behavior can exacerbate volatility ,and push prices
away from fair values.

b) Balance of payment
vulnerability
There are concerns that in an extreme event, there can be a massive flight of foreign
capital out of India, triggering difficulties in the balance of payments front. India's
experience with FIIs so far, however, suggests that across episodes like the Pokhran
blasts, or the 2001 stock market scandal, no capital flight has taken place. A billion or
more of US dollars of portfolio capital has never left India within the period of one
month. When juxtaposed with India's enormous current account and capital
account flows, this suggests that there is little vulnerability so far.

c) Possibility of

35
 takeovers
While FIIs are normally seen as pure portfolio investors, without interest in control,
portfolio investors can occasionally behave like FDI investors, and seek control of
companies that they

have a substantial shareholding in. Such outcomes, however, may not be inconsistent
with India's quest for greater FDI. Furthermore, SEBI's takeover code is in
place, and has functioned fairly well, ensuring that all investors benefit equally in the
event of a takeover.

11. DETERMINANTS OF FOREIGN INSTITUTIONAL INVESTMENT

After the initiation of economic reforms in the early 1990s, the movement of foreign capital
flow increased very substantially. There are a lot of factors that determine the nature and
cause of foreign institutional investment in a country a few of them being inflation
exchange rate equity returns, government policies, price earring ratio and risk. Now if we
try to analyze the relation of each of these factors with the level of foreign inflow in the
country, we might have a better understanding. let us broadly classify the factors into
inflation, risk and stock market returns and understand the basic principle behind the
inflows.

a) Equity returns- An increase in the return in the foreign market will induce
investors to withdraw from the Indian (domestic) stock market to invest in the foreign
market. Investors are believed to follow a higher return, hence when the return in the
domestic market increases, FII flows to the domestic market. While the flows are highly
correlated with equity returns in India, they are more likely to be the effect than the
cause of these returns. . It is assumed that the equity returns have a positive impact on
the FII inflow but foreign investors can also get involved in profit booking. They can
buy financial assets when the prices are declining, thereby jacking-up the asset prices
and sell when the asset prices are increasing and hence be the cause of such returns so
making it more of a bi-directional relationship.

b) Risk- Investors are considered to be risk averse, hence when risk in the domestic
market increases they will withdraw from the domestic market, when risk in the
36
 foreign market increases, investors will withdraw from the foreign market and invest in
the Indian (domestic) market. Investments, either domestic or foreign, depend heavily
on risk factors. Hence, while studying the behavior of FII, it is important to consider
the risk variable. Risk can be divided into ex-ante and unexpected risk. While the ex-
ante risk certainly has an inverse relation with the foreign investment nothing can be
clearly said about the unexpected risk.

c) Inflation- The inflation no doubt has an inverse relation with the foreign investment inflow
as the investor would keep in mind the purchasing power of the funds invested and as
inflation increase i.e. the purchasing power declines the investor is most likely to withdraw
his money. When inflation in the domestic country increases, the purchasing power of the
funds invested declines, hence investors will withdraw from the domestic market. Similarly,
when inflation in the foreign country increases, the purchasing power of funds invested in
the foreign country declines, causing institutional investors to withdraw from the
foreign market and make investment in the domestic (Indian) market.

d) Exchange rate When the value of the home currency is stronger the FII investments
will also increase as the percentage of returns the FII get automatically increases and visa
versa

So it can be said that the inflation and risk in the domestic country and return in the foreign
country adversely affect the FII flowing to the domestic country, whereas inflation and risk in
the foreign country and return in the domestic country have a favorable effect on the flow of FII.

12. COMPARISON BETWEEN FIIS AND MUTUAL FUNDS

INVESTMENTS

The comparison between the FII purchases and net investment with Mutual funds for the

37
period reveals some interesting information. As can be seen from the figure,

The amount of mutual fund investment in our country is very meager as compared to
that of FIIs. It means that Indian public is still not putting its bet on mutual funds and.

FIIs are much more aggressive in nature than mutual funds, who seem to have been
very constant in there approach to the Indian equity market.

Since May04, when the stock market crashed by 800 points in a day, the market has
recovered smartly and the FIIs have been able to cash on to the gains by buying
Value

stocks during the lean periods, or buying on the dips. While the mutual funds have
seems to taken a different route altogether and have been net sellers for most of the
period since May04.

But after the year 2004 mutual Fund investment have also a tremendous increase.
There activity is the proof of the condition that has prevailed in the capital market
recently that has created a lot of faith among the retail investors also.

Also in the year 2007 has so far been the best year for mutual fund industry as it has
shown a tremendous growth in terms of net investment.This corroborates the fact that
now Indian public has started recognizing mutual fund as tool for investing in the
capital market in india.

13. ROLE OF INSTITUTIONAL INVESTORS IN CAPITAL MARKET IN INDIA :

As the Indian capital market opened its gates for the foreign institutional investors . with
time there has been an increasing trends of there participating in the capital market. With
there increasing participation there has been a lot of effect on many parametes of the indiaN
capital market. The major effect of the increasing participation of the institutional investors
has been observed in the following areas.
Liquidity: Market liquidity is a business, economics or investment term that refers to
an asset's ability to be easily converted through an act of buying or selling without
causing a significant movement in the price and with minimum loss of value. An act of
exchange of a less liquid asset with a more liquid asset is called liquidation. Liquidity
also refers both to that quality of a business which enables it to meet its payment

38
 obligations, in terms of possessing sufficient liquid assets; and to such assets themselves.

A liquid asset has some or more of the following features. It can be sold (1) rapidly, (2)
with minimal loss of value, (3) anytime within market hours. The essential
characteristic of a liquid market is that there are ready and willing buyers and sellers at
all times. An elegant definition of liquidity is also the probability that the next trade is
executed at a price equal to the last one. A market may be considered deeply liquid if
there are ready and willing buyers and sellers in large quantities. This is related to a
market depth, where sometimes orders cannot strongly influence prices.The liquidity of
a product can be

measured as how often it is bought and sold; this is known as volume. Often investments in
liquid markets such as the stock exchange or futures markets are considered to be more liquid
than investments such as real estate, based on their ability to be converted quickly. Some
assets with liquid secondary markets may be more advantageous to own, are willing to pay a
higher price for the asset than for comparable assets without a liquid secondary market.

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 there use
through the capital market in india.earlier the companies use to go for debt financing
which has a cost attachd 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. fair value of their.

Role of speculation: Generally people transact for three reasons hedging speculating and
arbitraging Hedgers are those to intend to hedge their risk. Speculation may be defined as
the purchase or sale of a good with a view to resale or repurchase at a later date, where the
motive behind such action is the expectation of changes in the prices.

Speculation is one of the most watched activity in any capital market its importance varies in
different countries in countries like in US it forms an integral part of the market
whereas in developing countries like India its taken as a threat. It is often believe that
speculators even out the price fluctuation by due to change in demand and supply

39
condition but the concerns about the adverse effects of speculation come from two
sources. First, the possibility that speculation, instead of evening out price fluctuations,
may end up exacerbating such fluctuations. Second, is the problem of speculation
destabilizing rather than stabilizing prices and hence affecting resource allocation.
Through speculation, future expected price not only depends on, but also has an impact on
the spot price.

The market for shares is subject to much larger fluctuations than the market for bonds or
even commodities. Shares represent a share in the expected future profits of a company.
When fortunes of companies both in the short run as well as in the medium to long run
fluctuate, so do share prices. Uncertainty regarding the future leads to heavy discounting of
future profits, and to focus on short-period expectations about capital value rather than long-
period prospects of the company.

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
manipulation is acute in small emerging markets and liquidity is often poor. Although
there are many policy initiatives 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 and efficiency. Second, opening the market to foreign
speculators may increase the valuation of local companies, thereby reducing the cost of
equity capital.

Volatilty: Volatility most frequently refers to the standard deviation of the change in
value of a financial instrument with a specific time horizon. It is often used to quantify the
risk of the instrument over that time period. Volatility is typically expressed in annualized
terms, and it may either be an absolute number ($5) or a fraction of the mean (5%).
Volatility is often viewed as a negative in that it represents uncertainty and risk. However,
volatility can be good in that if one shorts on the peaks, and buys on the lows one can
make money, with greater money coming with greater volatility. The possibility for money to
be made via volatile markets is how short term market players like day traders hope to

40
make money, and is in contrast to the long term investment view of buy and hold. In
today's markets, it is also possible to trade volatility directly, through the use of derivative
securities such as options and variance swaps. 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 behavior, small and periodic shifts in
their behavior 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 companies listed 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. Apart from 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 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

41
 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 favor or against
a country it borings about sharp changes.

14. A STUDY OF MAJOR EPISODES OF VOLATILITY

14.1 Asian Major Episodes of Volatility

Excess volatility induced by the foreign investment is often taken as an

argument against liberalization with such incidences happening in the past.
Let us now try to find out whether the foreign investors in particular
destabilize the capital market beyond a level. The two most common
examples of such destabilization caused by the portfolio investment
particularly the hedge funds are the Asian crisis of 1997 and the ERM crisis of
1992.

I. ERM crisis The high-profile ERM crisis of 1992 came with

speculators betting that the member countries of the European
Monetary System (EMS) were converging to the European Monetary
Union (EMU), and high-inflation countries would have to realign their
exchange rates, but the extent of depreciation would be less than the
interest rate differential between the high-inflation and low-inflation
countries. The expectation regarding the extent of exchange rate
adjustment led to
carry trade borrowing from the low interest ERM countries and
lending to the high interest countries, or in the forward currency market,
taking a long position in the higher yielding currency and shorting the
lower-yielding currency. In spite of the material impact of hedge fund
activities in the ERM crisis, the role of the hedge funds in the crisis was
limited. The practice of extending lines of credit to offshore entities on a
non-recourse basis against collateral was not widely accepted by most
42
 banks, and foreign exchange trading was primarily an inter-bank activity.

East Asian crisis After ten years (198697) of pegging of the Thai baht to
the U.S. dollar, on July 2, 1997, the peg had to be abandoned, and this created
pressure

on other Asian currencies, and eventually brought down the Malaysian

ringgit, the Indonesian rupiah, the Philippine peso, and the Korean won. By
end-1997, these currencies had lost between 44 and 56 percent of their value
against the U.S. dollar, bankrupting many Asian corporations and banks that
had borrowed in foreign currencies, and leading to a

significant contraction of the economies. This episode is known as the East Asian
crisis or Asian crisis.Foreign investors were often blamed for the dramatic
difficulties of the East Asian countries at the times of the 1997 crisis. It was
believed that the developing countries were more vulnerable to vacillations in
international flows than ever before A variety of reasons are adduced to explain
why foreign investors can have a destabilizing effect on capital markets in emerging
economies. Foremost among them are the pursuit of a positive feedback strategy that
is buying when prices are rising and selling when prices are falling, thereby
exacerbating both the upswings and downswings. Positive feedback leads to
bubbles when prices depart from fundamentals and to crashes when bubbles
burst.It is also believed that the Asian financial crisis was the result of a panic
created in the market Prime Minister Mahathir Mohammed of Malaysia accused
hedge funds of being the modern equivalent of highwaymen in breaking
the Asian currencies. Aggressive flow of the carry trade down the credit spectrum
in Asia during the 1990s from sovereign credit, to top -tier domestic commercial
banks, to lower-tier commercial banks and finance companies, and finally to
firms. The excessive build-up of foreign debt, they attribute to the confidence of
domestic companies and banks in the fixed official exchange rate. FII investment
in equities had little role to play in the crisis. Fung, Hsieh, and Stsatsaronis (2000)
report At the height of the episode, some 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
43
 examining the role of hedge funds in the Asian currency crisis. The resulting study
by Eichengreen, Mathieson, Chadha, Jansen, Kodres, and

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 lead to some major fall in the sensex value.

FII investment behavior during these four specific events indicates that these
events did affect the behavior of the foreign portfolio investors. But, these events did
affect domestic investors behavior as well.

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. Product diversification and introduction of derivatives.
Strengthening of the rupee dollar exchange rate and low interest rates in the US.

I. Post 2004 Major Volatile Episodes:

44
As from the above graph it is clear that in the month of jan 2008 the BSE sensex was
already moving down due to the weak global cues and US recession and similarly the
FII investment fell drastically during that period running panick among the investors
and further exacerbating the fall. But in the case of mutual fund investment went up
during the time shows that the the domestic institutional investors cash on the fall of
sensex because of the strong fundamentals of the Indian capital market.
By looking at the above graph we can very well say that this time around the fall of
BSE sensex was majorly due to the FII which went on a selling spree which lead to
the fall of the market during this Crash.FII acted in this fashion because of the weak
global cues i.e at that point of time other emerging markets were also down .

The fall of 769 points by sensex on Dec 17,2007 was attributed to the fact mainly due to
the subprime losses and also was exacerbated due to the withdrawl of investments by the
FII. As the subprimelosses mainly hit the US economy and the majority of FII
participating in the Indian capital market are from US .To cover there losses in US
they started selling in india which lead to the fall of sensex on that particular day and
subsequent days.

During the month of Ostober 2007 indian govt took some strict measure to control the
usage of the Participatory notes. The restrictions proposed by SEBI in regulating
participatory notes in a sudden announcement wrought havoc in the operations of the
share market causing a fall of over 1,700 points in the Sensex on Wednesday. SEBI

should have used some pragmatic caution by avoiding the announcement

and introducing regulatory steps in a phased manner. The share market is
extremely vulnerable to the sentiments created by the utterances of those in
regulatory authority.

This lead the FII to withdraw from the Indian market as they were not sure of how

45
 the measure taken by the govt will be implemented .This is clearly vivble from the
above graph that this time around the FII were the main cause of the crash of the
sensex on
18th oct . But also there comes an interesting fact that there was also a heavy
selling on 22nd October but this time the FII Withdrawl effect was offset by
the Huge investment made by domestic institutional investor specially
LIC,which saved the market from a heavy meltdown.
The reasons being given for the crash are the sale of Rs 7300 crore (Rs
73
Billion)sharwes by FIIs in the past 1 week, an expected increase in interest rates
by the US Feds, a crash in the international commodity prices, and the straw
which broke its back seems to be a government circular which was interpreted
that FIIs should be taxed. P Chidambaram, the countrys Finance Minister, issued
an evening press release denying the latter.

15. STATISTICAL ANALYSIS

For the purpose of statistical analysis I have considered 7 yrs data of FII Net Investments,
Mutual Funds Net Invesments ,NSE S&P CNX Nifty and BSE Sensex Indices.
Statistical Analysis is carried out to find the degree of association between the Net
investments by the institutional investors with the capital market i.e (Sensex & Nifty
indices). Since 7 years data is a very comprehensive data and the internal and the
extraneous factors have been changing

over the time which does have impact on the Indian capital market. So in order to have
appropriate data I calculated the volatility of BSE Sensex for each year and then divided them

46
into 3 periods i.e 2001-2003,2004-2005,2006-Feb 2008. Then I have applied regression
analysis to find out the degree of association among the FII Net Investments ,the Sensex and
Mutual Fund Investments , the Sensex . Similarly the degree of association is been calculated
for Nifty index with FII and Mutual funds net investments.
To calculate the volatility of the BSE Index and to find out the degree of association ,the
formula and the methodology is given below.
I. Volatility
Volatility is a measure of the range of an asset price about its mean level over a fixed
amount of time. It follows that volatility is linked to the variance of an asset price. If a
stock is labeled as volatile then the price will varies greatly over time. Conversely, a less
volatile stock will have a price that will deviate relatively little over time. Since volatility is
associated with risk, the more volatile that a stock is, the more risky it is. Consequently, the
more risky a stock is, the harder it is to say with any certainty what the future price of the
stock will be.

Computing the Volatility

The estimation of volatility comes from a mathematical model of stock prices. The
mathematical model we will use is based on three assumptions about stock prices and their
movements. The first assumption that we will be using is that volatility is constant. The
next assumption is that stock prices cannot be negative; once a stock price reaches $0 it
cannot go any lower. The third assumption is that the price of a stock is a normal random
variable.

Thus volatility is calculated as standard deviation as it is the standard measurement device

used worldwide to calculate the volatility.

Standard deviation is a statistical term that provides a good indication of volatility. It

measures how widely values (closing prices for instance) are dispersed from the average.

Dispersion is difference between the actual value (closing price) and the average value
(mean closing price). The larger the difference between the closing prices and the average
price, the higher the standard deviation will be and the higher the volatility. The closer the
closing prices are to the average price, the lower the standard deviation and the lower the
volatility.

47
Standard Deviation = (Xi-X)2

Where
n Number of observations,
_

X bar - mean of observations,

Xi ith observation.

48
II. Regression Analysis:

Regression Analysis is another statistical tool for measuring the association between two
variables. It is a technique used to predict the nature and closeness of relationships
between two or more variables. This analysis helps the researchers to evaluate the causal
effect of one variable on another variable. It is used to predict the variability in the
dependent variable based on the information of one or more independent
variable.Regression analysis that involves two variable is termed as bivariate linear
regression analysis. It is expressed as following equation.

Y=a+b*X

Where

Y is the dependent variable (Sensex and Nifty Indices )

X is the independent variable (FII Investments and Mutual Funds Investments). a

& b are two constants which are known as regression coefficients.

b is the slope coefficient i.e the value of b is the change in value of Y with corresponding
change in one unit of X.

The constant b can be calculated using following formula:

b = n(XY)- XY
n(X)2 (-X)2

a represents Y intercepts when X=0.

a =Y-bX

where Y=the mean of values of dependent variable.

X=the mean of values of independent variable.

We now develop the estimated regression equation

47
 = a+bX

represents the estimated value of dependent variable for a given value of X.

Strength of Association - R2

The above developed estimated regression equation can only explain the nature of
relationshipbetween two variables.However, if the researcher wants to know how strong or
weak the relationship is i.e to what degree that the variation in Y can be explained by
X.the coefficient of determination denoted by R2 is used. R2 which is measured
in percentage will explain how much of the total variation in Y is explained by X variable.

R2 = explained Variance / Total

Variance

Total Variance=Explained Variance Unexplained

Variance
R2 = (Total Variance- Unexplained Variance) / Total

Variance. Unexplained Variance = (Yi- )2

Total variance= (Yi- Y)2

Tables below give the results of the regression analysis done on the data above mentioned.

The above table which shows the result of the regression analysis done with ssensex as the
dependent variable and FII as the independent variable. Volatility is calculated for sensex and
the table shows that the sensex volatility has been increasing over the years.The value of R2
implies that the in the year 2001 2003 , the total variation of sensex nearly 27% is explained
by the variation of FII investments.Over the years it has been following a decreasing
trend which is good for the Indian capital market as this shows that FII is not the only
criteria on which the volatility of sensex is dependent.

The above table shows the analysis ran between the sensex and the mutual funds in
india.As we know mutual funds in india are at a nascent stage . the result of R 2 tells us that
the dependency of sensex variation on the mutual fund investment has been increasing over the
49
years.

The Above graph shows us the volatility of Nifty over the period of seven years and the
results tell us that the volatility has been increased over the years. The Value of R 2 also
tells us that the total variation of nifty index, nearly 26% is explained by the variation in FII
net investment in the year 2001-2003 and has been decreasing over the years.

Interpretation of the Analysis.

Now looking at the result table above it is clearly visible that volatility has increased
tremendously during the years.Volatility has increased six times in the case of Sensex and for
nifty it has increased nine times as compared to what it was there in the years 2001-
2003. Also the value of the constant a in the regression equation is following an
increasing trend which tells the effect on the dependent variable when the independent
variable is zero. Similarly the constant bwhich tells the magnitudinal change with one unit
change in the independent variable is also following a decreasing trend in the case of FII
investments but in the case of mutual funds it is showing an increasing trend which tells us
that domestic institutional investors are also restoring faith in the market and

subsequently they have increased there participation in the capital market. The degree of
association i.e R square tells us an important fact that slowly and steadily the degree of
association of FII investments with the Sensex is decreasing .It tells us the fact that in the
year 2001-2003 around 27% of the total variance shown by sensex could be explained by
FII investments in both the leading stock exchanges in india.Also in the subsequent years
the value or R square is decreasing in case of FII investments leading to the fact that the
volatility effect of FII on the capital market is on the decreasing trend,which is beneficial
for the Indian stock market.Also the increasing value of R square in case of mutual funds
is also a positive sign for the Indian stock market as it tells us that the domestic investors
over the years has shown increased participation and helped the market to stablise inspite
of such high volatility .

Recommendations
50
 After analyzing the nature and behavior of the foreign institutional investment in the past and its
influence on the Indian stock market it would be safe enough to say that foreign funds are one of
the most volatile instruments floating in the market and needs to be handled cautiously.

Government should certainly encourage foreign institutional investment but should keep a check
on the volatility factor. Long term funds should be given priority and encouraged some of the
actions that could be taken to ensure stability are

Strengthening domestic institutional investors

The participation of domestic pension funds in the equity market would augment the diversity of
views on the market and hence the domestic pension funds must be encouraged .
Broad basing of eligible entities

In order to address the market integrity concerns arising out of allowing some entities, which do
not have reputational risk or are unregulated, there is merit in prohibiting such entities from
getting registered.
Operational flexibility to impart stability to the market
The stability of foreign investment in India will be enhanced if FIIs are able to switch between
equity and debt investments in India, depending on their view about future equity returns. SEBI
can make such policies.
Knowledge activities and research programs
There must be a lot of research programs and studies conducted by the economic affairs
regulators in India

Conclusion
After analyzing the nature of FII in the past it would be safe enough to say that the foreign funds

48
is certainly one of the most important cause of volatility in the Indian stock market and has had a
considerable influence on it. Although it would not be fair enough to come to any conclusion as
there are a lot of other factors beyond the scope of the study that effect returns and risks .it is not
easy to predict the nature of the macroeconomic factors and their behavior but it has a great
significance on any economy and its elements. Although generally a positive relation has been
seen between the stock market returns and the FII inflows it is not easy to say which is the cause n
which is the effect and strange behavior has also been noticed in the past.

Foreign investment certainly are influencing the Indian stock market but the extent of this
influence cannot be determined or rather the extent of Indias dependence on the FIIs is a
subjective issue as on no clear grounds can we see a permanent relationship between the stock
market returns and the Foreign inflows. But to generalize they have shown a positive relation
most of the time apart from a few occasions where the behavior of their relation was difficult to
explain.

48
REFERENCES:

WEPSITE:

www.nseindia.com

www.finmin.nic.in

www.bseindia.com

www.investopedia.com

www.indiainfoline.com

www.amfiindia.com

www.livemint.com

www.sebi.gov.in

www.capitaline.com

52
ANEXURE:

Table 1: Data of Sensex,Nifty,FII and Mutual Fund Net Investment

Mutual
FII in Funds in
Date Sensex Crore Crore Nifty
3-Jan-05 6679.2 106.7 23.1 2059.8
4-Jan-05 6651.01 345.9 7.8 2080.5
5-Jan-05 6458.84 200.6 107.7 2115
6-Jan-05 6367.39 -57.9 19.9 2103.75
7-Jan-05 6420.46 -31.8 73.2 2032.2
10-Jan-05 6308.54 -68.3 44.4 1998.35
11-Jan-05 6222.87 -32 60.3 2015.5
12-Jan-05 6102.74 -86.5 72 1982
13-Jan-05 6221.06 -185.8 51.8 1952.05
14-Jan-05 6173.82 -0.8 131.1 1913.6
17-Jan-05 6194.07 116 5.9 1954.55
18-Jan-05 6192.35 15.8 -9.3 1931.1
19-Jan-05 6173.32 -164.6 -67.4 1932.9
20-Jan-05 6183.24 -77.3 24.1 1934.05
24-Jan-05 6106.43 -13.3 -29.8 1926.65
25-Jan-05 6162.98 -158.6 -16.3 1925.3
27-Jan-05 6239.43 -281.8 92.8 1909
28-Jan-05 6419.09 198.8 62.3 1931.85
31-Jan-05 6555.94 632 -24.6 1955
1-Feb-05 6552.47 895.3 -1 2008.3
2-Feb-05 6530.06 820.4 -49.2 2057.6
3-Feb-05 6619.97 1374 -113 2059.85
4-Feb-05 6618.23 489.3 44 2052.25
7-Feb-05 6535.17 249.6 -16.2 2079.45
8-Feb-05 6544.77 105.3 17.6 2077.95
9-Feb-05 6593.53 220.1 -85.5 2055.1
10-Feb-05 6577.83 128.4 29.7 2055.15
11-Feb-05 6633.76 176.6 52.3 2070
14-Feb-05 6679.33 249.5 49.7 2063.35
15-Feb-05 6670.06 834.2 61.6 2082.05
16-Feb-05 6607.78 604.1 45.2 2098.25
17-Feb-05 6589.29 473 -132 2089.95
18-Feb-05 6584.32 233.3 22.2 2068.8
21-Feb-05 6534.68 252 -97.3 2061.9
22-Feb-05 6589.41 210.8 -49.4 2055.55
23-Feb-05 6582.5 257 -58.4 2043.2
24-Feb-05 6574.21 297.8 -73 2058.4
25-Feb-05 6569.72 41.5 82.3 2057.1
28-Feb-05 6713.86 464.1 239.7 2055.3

53
 1-Mar-05 6651.08 342.8 105 2060.9
2-Mar-05 6686.89 538.2 -22.8 2103.25
3-Mar-05 6784.72 698.5 -172.3 2084.4
4-Mar-05 6849.48 367.6 46.4 2093.25
7-Mar-05 6878.98 554.3 175.8 2128.85
8-Mar-05 6915.09 461.8 216.1 2148.15
9-Mar-05 6892.82 498.3 142.4 2160.1
10-Mar-05 6907.65 793.2 -21.1 2168.95
11-Mar-05 6853.73 1310 24.8 2160.8
14-Mar-05 6810.04 130.7 -38.6 2167.4
15-Mar-05 6752.45 2897.5 49.9 2154
16-Mar-05 6746.88 -46.1 -71.6 2146.35
17-Mar-05 6669.52 -198.8 38.7 2128.95
18-Mar-05 6700.34 64.2 160.6 2125.55
21-Mar-05 6656.69 136 51.1 2098.5
22-Mar-05 6535.45 43.8 47.8 2109.15
23-Mar-05 6454.46 -42.5 142.3 2096.6
24-Mar-05 6442.87 -131.2 91.3 2061.6
28-Mar-05 6510.74 263.2 153.3 2026.4
29-Mar-05 6367.86 535.3 225.2 2015.4
30-Mar-05 6381.4 -1724 -70.8 2029.45
31-Mar-05 6492.82 9.4 183.3 1983.85
1-Apr-05 6605.04 358.6 95 1993.7
4-Apr-05 6604.42 27.9 77 2035.65
5-Apr-05 6550.29 244 104.5 2067.65
6-Apr-05 6606.41 103.4 16.8 2063.4
7-Apr-05 6545.64 95.1 41.9 2052.55
8-Apr-05 6479.54 59.9 -8 2069.3
11-Apr-05 6397.52 -54.3 69.5 2052.85
12-Apr-05 6464.61 70.5 65.4 2031.2
13-Apr-05 6467.92 -108.7 -2.5 2008.2
15-Apr-05 6248.34 176.4 57.3 2024.95
18-Apr-05 6156.78 -574.4 49.9 2025.45
19-Apr-05 6134.86 -456.7 27.1 1956.3
20-Apr-05 6243.74 -124.1 225.1 1927.8
21-Apr-05 6299.2 -231.2 138.6 1909.4
22-Apr-05 6346.57 -22.8 -17.3 1929.7
25-Apr-05 6377.85 284 162.8 1948.55
26-Apr-05 6339.98 12.9 176.2 1967.35
27-Apr-05 6278.5 -55.5 54.4 1970.95
28-Apr-05 6284.2 -133.9 79.8 1957.1
29-Apr-05 6154.44 -325.2 132 1935.4
2-May-05 6195.15 -34.3 50 1941.3
3-May-05 6216.77 -16 41.5 1902.5
4-May-05 6289.55 30.2 53.1 1916.75
5-May-05 6359.65 -67.6 109.7 1920.7
6-May-05 6388.48 123.3 64.4 1942.6
9-May-05 6481.35 127.3 140 1963.3

54
55
10-May-05 6454.71 39 110.2 1977.5
11-May-05 6445.13 -98.7 213.4 2000.75
12-May-05 6456.82 -173.2 187 1994.3
13-May-05 6451.54 -44.5 99.2 1985.95
16-May-05 6528.03 190.7 167.4 1993.15
17-May-05 6466 -188.3 286.4 1988.3
18-May-05 6447 -74 374.5 2012.6
19-May-05 6478.94 -438.5 180.9 1990.8
20-May-05 6499.5 63.5 446.3 1982.75
23-May-05 6539.83 -22.9 123.6 1990.85
24-May-05 6565.37 64 77.7 1992.4
25-May-05 6597.6 -162.5 70.2 2013.9
26-May-05 6670.78 -10.9 366.9 2028.6
27-May-05 6707.72 -185.1 293.2 2043.85
30-May-05 6663.55 -446.9 123.8 2074.7
31-May-05 6715.11 185.3 68.8 2076.4
1-Jun-05 6729.9 298.5 -136.3 2072.4
2-Jun-05 6655.56 205.2 -75.4 2087.55
3-Jun-05 6748.85 125.5 20.3 2087.55
4-Jun-05 6753 302.5 -111.3 2064.65
6-Jun-05 6758.19 32.7 -102.5 2094.25
7-Jun-05 6781.25 87.7 0.9 2092.35
8-Jun-05 6858.24 76.4 -2 2092.8
9-Jun-05 6832.53 292.8 23.6 2098.15
10-Jun-05 6781.99 293.5 46.4 2112.4
13-Jun-05 6832.68 261.9 -36.9 2103.2
14-Jun-05 6860.18 -2131.3 -30.1 2090.6
15-Jun-05 6906.98 185.3 4.7 2102.75
16-Jun-05 6900.41 392.8 21.5 2112.35
17-Jun-05 6906.52 418.3 -13.9 2128.65
20-Jun-05 6984.55 229.5 -86.3 2123.7
21-Jun-05 7076.52 460.8 -166.8 2123.4
22-Jun-05 7145.34 298.9 -228.1 2144.35
23-Jun-05 7119.76 1467.6 -68.2 2170
24-Jun-05 7148.62 485.3 -306.3 2187.35
27-Jun-05 7151.08 354.2 -317.3 2183.85
28-Jun-05 7049 275.5 -32.9 2194.35
29-Jun-05 7119.88 521.9 -88.4 2199.8
30-Jun-05 7193.85 393.1 -211.9 2169.85
1-Jul-05 7210.77 732.1 -73.9 2191.65
4-Jul-05 7277.31 314.5 -57.6 2220.6
5-Jul-05 7220.25 196 -187.8 2211.9
6-Jul-05 7287.6 380.3 0.2 2230.65
7-Jul-05 7145.13 387.8 -62.9 2210.75
8-Jul-05 7212.08 405.9 -37.7 2228.2
11-Jul-05 7306.74 322.3 -103.3 2179.4
12-Jul-05 7303.95 462.6 -92.8 2196.2
13-Jul-05 7247.91 376.9 -111.1 2218.85

56
57
 14-Jul-05 7187.7 253 -125.9 2220.8
15-Jul-05 7271.54 176.6 -138.8 2204.05
18-Jul-05 7347.1 204.6 40.5 2185.1
19-Jul-05 7346.63 369.4 106.6 2212.55
20-Jul-05 7342.89 388.1 10.1 2234
21-Jul-05 7304.32 317.7 63.4 2237.3
22-Jul-05 7423.25 299.1 70.8 2241.9
25-Jul-05 7505.6 1040.6 35.9 2230.5
26-Jul-05 7552.77 621.5 148 2265.6
27-Jul-05 7605.03 490.9 143.7 2291.75
29-Jul-05 7635.42 194.2 180.6 2303.15
1-Aug-05 7669.45 1010.2 108.4 2319.1
2-Aug-05 7756.04 642.7 343.8 2312.3
3-Aug-05 7756.47 563.8 -134.4 2318.05
4-Aug-05 7797.08 279.8 116.1 2353.65
5-Aug-05 7754 241 204.4 2357
8-Aug-05 7606.17 807.2 94.7 2367.8
9-Aug-05 7595.57 419.9 68.1 2361.2
10-Aug-05 7729.82 118.7 -86.8 2324.4
11-Aug-05 7816.51 -101.3 -93.4 2318.7
12-Aug-05 7767.49 -0.2 189.1 2360.15
16-Aug-05 7768.24 274.9 235.6 2380.9
17-Aug-05 7859.53 17.6 505.6 2361.55
18-Aug-05 7811.33 156.3 132 2369.8
19-Aug-05 7780.76 47.1 43.1 2403.15
22-Aug-05 7750.6 -77.1 110.1 2388.45
23-Aug-05 7615.99 9.4 -33 2383.45
24-Aug-05 7612 60.6 70.7 2367.85
25-Aug-05 7660.42 -110.5 95.9 2326.1
26-Aug-05 7680.22 306.8 170.8 2322.5
29-Aug-05 7634.43 117 157 2354.55
30-Aug-05 7745 9.2 45.5 2357.05
1-Sep-05 7876.15 371.4 47.1 2337.65
2-Sep-05 7899.77 313.1 197.2 2367.75
5-Sep-05 7925.24 234 177.8 2405.75
6-Sep-05 7946.78 247.9 192.3 2415.8
8-Sep-05 8052.56 70.7 88.8 2422.95
9-Sep-05 8060.01 543.3 -45.5 2428.65
12-Sep-05 8138.42 -50 183.3 2454.45
13-Sep-05 8193.96 167.6 284.6 2455.45
14-Sep-05 8189.48 418.2 315.9 2484.15
15-Sep-05 8283.76 158.7 270.3 2500.35
16-Sep-05 8380.96 407.2 132.2 2492.45
19-Sep-05 8444.84 443.7 39.6 2523.95
20-Sep-05 8500.28 101.1 164.4 2552.35
21-Sep-05 8487.14 321.9 121.2 2567.1
22-Sep-05 8221.64 307.6 74.9 2578
23-Sep-05 8222.59 514.4 90.9 2567.3

58
59
26-Sep-05 8478.91 -325.5 1.5 2476.5
27-Sep-05 8525.52 199.3 86.1 2477.75
28-Sep-05 8606.03 26.3 133.3 2557.35
29-Sep-05 8650.17 42.5 231.4 2574.85
30-Sep-05 8634.48 133.4 200.2 2598.05
3-Oct-05 8697.65 -36.9 454.4 2611.2
4-Oct-05 8799.96 -118.4 27 2601.4
5-Oct-05 8724.47 421.6 156.3 2630.05
6-Oct-05 8528.7 54.1 -42 2663.35
7-Oct-05 8491.56 -568.5 -149.5 2644.4
10-Oct-05 8483.86 -291.9 71.3 2579.15
11-Oct-05 8540.56 74.4 210.7 2574.05
13-Oct-05 8376.9 -135.5 -66.9 2566.85
14-Oct-05 8201.73 -399.6 177.7 2589.55
17-Oct-05 8202.62 293.1 23.2 2537.3
18-Oct-05 8122.25 -299.1 -80.7 2484.4
19-Oct-05 7971.06 -223.8 237.4 2485.15
20-Oct-05 7935.12 -196.7 312.7 2468.2
21-Oct-05 8068.95 -71.1 596.8 2412.45
24-Oct-05 7920.8 -404.4 25.7 2395.45
25-Oct-05 7991.74 -132.1 276.7 2443.75
26-Oct-05 7974.69 -232.7 189.8 2394.85
27-Oct-05 7798.49 -453.6 285.5 2418.2
28-Oct-05 7685.64 -755.1 92 2408.5
1-Nov-05 7944.1 -148.6 223.8 2352.9
2-Nov-05 8072.75 50.6 202.6 2316.05
7-Nov-05 8206.83 384.5 2.8 2386.75
8-Nov-05 8317.8 530.8 -124.3 2419.05
9-Nov-05 8308.78 609.2 -28 2461.6
10-Nov-05 8308.93 99.1 -38.1 2492.65
11-Nov-05 8471.04 -137 -83.3 2489.1
14-Nov-05 8494.29 29.2 207.1 2500.7
16-Nov-05 8595.92 34 69.6 2548.65
17-Nov-05 8649.52 145.3 107.5 2558.7
18-Nov-05 8686.65 90.8 114.3 2582.75
21-Nov-05 8610.74 286.3 117 2603.95
22-Nov-05 8534.97 423.7 -96.7 2620.05
23-Nov-05 8638.34 167.6 35.4 2602.5
24-Nov-05 8744.04 311.9 0.4 2572.85
25-Nov-05 8853.21 461.4 103.7 2608.6
26-Nov-05 8889.03 247.9 65.2 2635
28-Nov-05 8994.94 39.4 17.9 2664.3
29-Nov-05 8931.16 158.7 176.6 2683.45
1-Dec-05 8944.78 261.5 -33.1 2712
2-Dec-05 8961.61 425.1 -333.4 2698.3
5-Dec-05 8823.31 514.7 -52.2 2698.95
6-Dec-05 8815.53 -46.8 -183.1 2697.95
7-Dec-05 8895.81 72.8 183.5 2660.5

60
61
 8-Dec-05 8906.31 -68.5 124.7 2662.3
9-Dec-05 9067.28 -41 241.9 2693
12-Dec-05 9133.67 420.1 48.8 2706.7
13-Dec-05 9263.9 281.2 -128.8 2756.45
14-Dec-05 9241.76 1163.9 -134.3 2776.2
15-Dec-05 9170.4 432.6 -295.5 2812.3
16-Dec-05 9284.46 542.1 -145.3 2804.55
19-Dec-05 9394.27 2685.5 -420.1 2778.55
20-Dec-05 9346.24 1125.1 -5.3 2810.15
21-Dec-05 9339.17 322 -155.9 2842.6
22-Dec-05 9372.3 384.7 -82.9 2826.2
23-Dec-05 9256.91 260.6 -95.9 2822.9
26-Dec-05 9085.89 241.6 7.7 2835.25
27-Dec-05 9283.16 56 -19.7 2804.85
28-Dec-05 9257.51 21.6 126.9 2749.6
29-Dec-05 9323.25 144.9 29.9 2805.9
30-Dec-05 9397.93 135.3 189.1 2798
2-Jan-06 9390.14 526.9 -222.6 2835.95
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6-Jan-06 9640.29 86.9 -14.6 2914
9-Jan-06 9583.45 344.5 -310.2 2910.1
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2-Feb-06 9843.87 508.1 -51.3 2967.45
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62
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17-Feb-06 9981.11 247.1 69.9 2981.5
20-Feb-06 10079.3 344.4 -157.6 3005.85
21-Feb-06 10168.11 586.1 -18.8 3035.5
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24-Feb-06 10200.76 761.4 -149.5 3050.05
27-Feb-06 10282.09 1001.8 59.7 3067.45
28-Feb-06 10370.24 383.8 217.3 3074.7
1-Mar-06 10565.47 201.8 204.1 3123.1
2-Mar-06 10626.78 576 135.5 3150.7
3-Mar-06 10595.43 645.7 -25.2 3147.35
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9-Mar-06 10573.54 832.3 217.8 3129.1
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28-Mar-06 11086.03 550.2 317.8 3325
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29-Apr-06 12042.56 -51.4 82.3 3557.6

64
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 2-May-06 12218.78 60.9 48.8 3605.45
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66
67
 6-Jul-06 10767.97 556 -213.4 3156.4
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13-Sep-06 11893.79 -120.6 112.5 3389.9

68
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14-Sep-06 11973.02 519.4 381.8 3454.55
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23-Nov-06 13680.83 -21.1 -285.8 3856.15
24-Nov-06 13703.33 1178.7 -78.8 3918.25

70
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27-Nov-06 13773.59 994.6 206.3 3954.75
28-Nov-06 13601.95 405.6 -276.2 3945.45
29-Nov-06 13616.73 -335.3 -339.5 3950.85
1-Dec-06 13844.78 258.1 -26.1 3968.9
4-Dec-06 13874.33 349.3 -269 3921.75
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6-Dec-06 13949 433.2 -88.4 3954.5
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8-Dec-06 13799.49 10.1 43.1 4001
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29-Dec-06 13786.91 -1049.7 347.9 3871.15
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9-Feb-07 14538.9 698.9 -165.5 4215.35

72
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12-Feb-07 14190.7 274.6 -28.3 4195.9
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28-Feb-07 12938.09 -415.7 0.7 4040
1-Mar-07 13159.55 -1644.3 37.2 3938.95
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23-Apr-07 13928.33 748.7 -251.1 3984.95

74
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 24-Apr-07 14136.72 -68.5 19.1 4011.6
25-Apr-07 14217.77 501.5 -25.8 3997.65
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28-May-07 14397.89 -147.1 -47.5 4278.1
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14295.
19-Jun-07 5 -28.9 -67.9 4113.05
14411.
20-Jun-07 95 653.1 -33.1 4170
14499.
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14467.
22-Jun-07 36 1641.6 208.2 4147.1
14487.
25-Jun-07 72 78.2 -33.9 4214.3

76
 14501.
26-Jun-07 08 497.8 158.2 4248.65
14431.
27-Jun-07 06 -299.6 76 4267.4
14504.
28-Jun-07 57 -470.5 -9.5 4252.05
14659.
29-Jun-07 51 -441.8 -7.3 4259.4
14806.
2-Jul-07 51 5837.1 162.2 4285.7
14880.
3-Jul-07 24 200.7 122.9 4263.95
14861.
4-Jul-07 89 410 97.9 4282
14964.
5-Jul-07 12 824.8 187.9 4318.3
15045.
6-Jul-07 73 1275 -201.6 4313.75
15009.
9-Jul-07 88 3179.3 122.1 4357.55
14956.
10-Jul-07 45 889.3 -410.5 4359.3
14910.
11-Jul-07 62 702.1 195.2 4353.95
15092.
12-Jul-07 04 363.5 28.4 4384.85
15272.
13-Jul-07 72 699.6 -190.1 4419.4
15311.
16-Jul-07 22 2346.4 -167.3 4406.05
15289.
17-Jul-07 82 1660.1 -331.7 4387.15
15301.
18-Jul-07 17 946.4 117.1 4446.15
15550.
19-Jul-07 13 1233.7 295.8 4504.55
15565.
20-Jul-07 55 883.1 -371.9 4512.15
15732.
23-Jul-07 2 1223.1 -103 4496.75
15794.
24-Jul-07 92 1096 -174.8 4499.55
15699.
25-Jul-07 33 1285.6 130 4562.1
15776.
26-Jul-07 31 -59.2 -316.5 4566.05
15234.
27-Jul-07 57 248.2 -48.5 4619.35
30-Jul-07 15260. -1222.4 -486.8 4620.75

77
 91
15550.
31-Jul-07 99 -150 51.6 4588.7
14935.
1-Aug-07 77 433.6 0.9 4619.8
14985.
2-Aug-07 7 -982.7 251.6 4445.2
15138.
3-Aug-07 4 -419 523.1 4440.05
14903.
6-Aug-07 03 192.8 186.3 4528.85
14932.
7-Aug-07 77 -1166.6 -147.5 4345.85
15307.
8-Aug-07 98 -123.6 -7.5 4356.35
15100.
9-Aug-07 15 190.2 256.8 4401.55
14868.
10-Aug-07 25 382.6 47.9 4339.5
15017.
13-Aug-07 21 -408.1 -5.2 4356.35
15000.
14-Aug-07 91 -520.2 377.3 4462.1
14358.
16-Aug-07 21 -127.5 45.3 4403.2
14141.
17-Aug-07 52 -2849.9 -169.8 4333.35
14427.
20-Aug-07 55 -3242.7 23 4373.65
13989.
21-Aug-07 11 92.8 151.5 4370.2
14248.
22-Aug-07 66 -9.8 239.2 4178.6
14163.
23-Aug-07 98 -668.1 878.3 4108.05
14424.
24-Aug-07 87 330.4 152.3 4209.05
14842.
27-Aug-07 38 414.5 -16.5 4074.9
14919.
28-Aug-07 19 1201.8 211.6 4153.15
14992.
29-Aug-07 04 365.6 331.4 4114.95
15121.
30-Aug-07 74 -192.1 84.7 4190.15
31-Aug-07 15318.6 -664.5 345.4 4302.6
15422.
3-Sep-07 05 677.3 45.9 4320.7
4-Sep-07 15465. 527.7 59.8 4359.3

78
 4
15446.
5-Sep-07 15 630.4 726.4 4412.3
15616.
6-Sep-07 31 410.4 463.6 4464
15590.
7-Sep-07 42 623.1 142.5 4474.75
15596.
10-Sep-07 83 580.9 98.8 4479.25
15542.
11-Sep-07 77 -62.9 67.4 4475.85
15505.
12-Sep-07 36 445.6 45.2 4518.6
15614.
13-Sep-07 44 281.9 -187.7 4509.5
15603.
14-Sep-07 8 -46.6 10.1 4507.85
15504.
17-Sep-07 43 1159.4 -179.3 4497.05
15669.
18-Sep-07 12 -267.4 73.3 4496.85
16322.
19-Sep-07 75 -137.5 80 4528.95
16347.
20-Sep-07 95 2484.5 -217.1 4518
16564.
21-Sep-07 23 1629.5 -203.6 4494.65
16845.
24-Sep-07 83 924.3 -19 4546.2
16899.
25-Sep-07 54 1284.4 491.1 4732.35
16921.
26-Sep-07 39 1550.3 -234.6 4747.55
17150.
27-Sep-07 56 1004 128.7 4837.55
17291.
28-Sep-07 1 2433.3 -35.4 4932.2
17328.
1-Oct-07 62 3493.3 -430.5 4938.85
17847.
3-Oct-07 04 2196 -517.5 4940.5
17777.
4-Oct-07 14 3161.5 92.7 5000.55
17773.
5-Oct-07 36 575 31.2 5021.35
17491.
8-Oct-07 39 -127.8 5068.95
18280.
9-Oct-07 24 3419.9 -102.1 5210.8

79
 18658.
10-Oct-07 25 1951.1 -532.1 5208.65
18814.
11-Oct-07 07 1747.9 -274.9 5185.85
18419.
12-Oct-07 04 991 -340.9 5327.25
19058.
15-Oct-07 67 781 -354.5 5441.45
19051.
16-Oct-07 86 3858.5 1 5524.85
18715.
17-Oct-07 82 1154.1 -723.8 5428.25
17998.
18-Oct-07 39 -1776.6 111.4 5670.4
17559.
19-Oct-07 98 125.7 -300.3 5668.05
17613.
22-Oct-07 99 -3215.5 16.2 5559.3
18492.
23-Oct-07 84 -1210.3 -265.5 5351
18512.
24-Oct-07 91 777 -231.7 5215.3
18770.
25-Oct-07 89 1861 -326.3 5184
19243.
26-Oct-07 17 213 286.8 5473.7
19977.
29-Oct-07 67 -256.8 337.4 5496.15
19783.
30-Oct-07 51 1047.4 735.3 5568.95
19837.
31-Oct-07 99 -303.3 831.4 5702.3
19724.
1-Nov-07 35 228 421.1 5905.9
19976.
2-Nov-07 23 180.6 -533.6 5868.75
19590.
5-Nov-07 78 -761.4 -11.2 5900.65
19400.
6-Nov-07 67 -656.8 -358 5866.45
19289.
7-Nov-07 83 5.1 218 5932.4
19058.
8-Nov-07 93 37.7 83.5 5847.3
18907.
9-Nov-07 6 62.8 5786.5
12-Nov-07 18737.22 -286.9 -158.9 5782.35
19035.
13-Nov-07 48 -820 -218.8 5698.75

80
 19929.
14-Nov-07 06 122.2 -139.4 5617.1
19784.
15-Nov-07 89 952 -12.8 5695.4
19698.
16-Nov-07 36 788.4 483 5937.9
19633.
19-Nov-07 36 -79.1 187.7 5912.1
19280.
20-Nov-07 8 -26.8 142.9 5906.85
18602.
21-Nov-07 62 -1072.1 -255.5 5907.65
18526.
22-Nov-07 32 -2222.4 138.2 5780.9
18852.
23-Nov-07 87 -843.9 -151.1 5561.05
19247.
26-Nov-07 54 -173.4 305.2 5519.35
19127.
27-Nov-07 73 470.2 334.7 5608.6
18938.
28-Nov-07 87 -263.7 252.9 5731.7
19003.
29-Nov-07 26 -450 128.6 5698.15
19363.
30-Nov-07 19 -977.6 57.1 5617.55
19603.
3-Dec-07 41 1480.4 403.4 5634.6
19529.
4-Dec-07 5 114.4 660.5 5762.75
19738.
5-Dec-07 07 19.5 449.4 5865
19795.
6-Dec-07 87 1081.3 -25.7 5858.35
7-Dec-07 19966 822.4 -297.5 5940
19930.
10-Dec-07 68 5.2 97.7 5954.7
20290.
11-Dec-07 89 300.6 72.4 5974.3
20375.
12-Dec-07 87 689.9 -292.1 5960.6
20104.
13-Dec-07 39 59.8 308.1 6097.25
20030.
14-Dec-07 83 1082.1 37.1 6159.3
19261.
17-Dec-07 35 407.5 -181.1 6058.1
19079.
18-Dec-07 64 -1098.7 -218.9 6047.7

81
 19091.
19-Dec-07 96 -2449.8 -199 5777
19162.
20-Dec-07 57 -1092.5 346.6 5742.3
19854.
24-Dec-07 12 -515.8 123.6 5751.15
20192.
26-Dec-07 52 167.4 658.2 5766.5
20216.
27-Dec-07 72 2420.5 830.1 5985.1
20206.
28-Dec-07 95 944 742.7 6070.75
20286.
31-Dec-07 99 1140.9 716.9 6081.5
20300.
1-Jan-08 71 797.9 34.3 6079.7
20465.
2-Jan-08 3 142.3 -178.4 6138.6
20345.
3-Jan-08 2 -244.5 183.5 6144.35
20686.
4-Jan-08 89 725.1 295.2 6179.4
20812.
7-Jan-08 65 508.8 490 6178.55
20873.
8-Jan-08 33 -80.9 616.6 6274.3
20869.
9-Jan-08 78 1053.4 30 6279.1
20582.
10-Jan-08 08 274.6 12.5 6287.85
20827.
11-Jan-08 05 -630.8 -201.2 6272
20728.
14-Jan-08 05 113.7 46.3 6156.95
20251.
15-Jan-08 09 174.4 -274.2 6200.1
19868.
16-Jan-08 11 225.8 -551.4 6206.8
19700.
17-Jan-08 82 -2279.6 -519.5 6074.25
19013.
18-Jan-08 7 -2186 -59.5 5935.75
17605.
21-Jan-08 35 -1356.1 460.9 5913.2
16729.
22-Jan-08 07 -2425.7 -271.2 5705.3
17594.
23-Jan-08 07 -2256.2 2001.8 5208.8
24-Jan-08 17221. -2499.9 1195.1 4899.3

82
 74
18361.
25-Jan-08 66 -1351.2 874.4 5203.4
18152.
28-Jan-08 78 669.1 350.1 5033.45
18091.
29-Jan-08 94 -1513.4 221.2 5383.35
17758.
30-Jan-08 64 -285.1 368.8 5274.1
17648.
31-Jan-08 71 -611.4 -117.7 5280.8
18242.
1-Feb-08 58 -3393.4 416.3 5167.6
18660.
4-Feb-08 32 1034.3 2134.5 5137.45
18663.
5-Feb-08 16 3810.7 100 5317.25
18139.
6-Feb-08 49 576.9 818.9 5463.5
17526.
7-Feb-08 93 -528.2 -297.5 5483.9
17464.
8-Feb-08 89 -168.4 -212.2 5322.55
16608.
12-Feb-08 01 -1845.6 -78.4 5133.25
16949.
13-Feb-08 14 -115.1 -293.5 5120.35
17766.
14-Feb-08 63 349 -99.9 4838.25
18115.
15-Feb-08 25 -1183.1 600.4 4929.45
18048.
18-Feb-08 05 1147.5 296.3 5202
18075.
19-Feb-08 66 -115.9 161.9 5302.9
17617.
20-Feb-08 6 1585.1 456.7 5276.9
17734.
21-Feb-08 68 56.7 -326.8 5280.8
17349.
22-Feb-08 07 285.6 -191.3 5154.45
17650.
25-Feb-08 57 -453.8 -226.8 5191.8
17806.
26-Feb-08 19 738.5 -163.6 5110.75
17825.
27-Feb-08 99 85.4 -140.5 5200.7
17824.
28-Feb-08 48 396.4 525.9 5270.05

83
Table 2 Variables Calculated for Sensex and FII investments from the table 1 data
for the calculation of R2 .

Table 3 Variables Calculated for Sensex and Mutual Fund investments from the
table 1 data for the calculation of R2 .

Table 4 Variables Calculated for Nifty and FII investments from the table 1 data for
the calculation of R2 .

Table 5 Variables Calculated for Nifty and Mutual Fund investments from the table 1 data for
the calculation of R2 .

84