FII (Foreign Institutional Investor) in India and its impact on Indian Stock Market for last five Years

Introduction The term foreign institutional investment denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. These are actually the outsiders in the financial markets of the particular company. The foreign investment market was not developed in the past. But once the globalization took the whole world in its grip, the diversified global market became united. Because of this the investment sector become very strong and at the same time allowed the foreigners to enter the national finance market. At the same time developing countries understood the values of foreign investment and allowed the foreign direct investment and foreign institutional investors are unpredictable. The Security and Exchange Board of India looks after the foreign institutional investments in India. SEBI has imposed some rules and regulations on these investments.

What is Foreign Institutional Investors? An important feature of the 1990s was the participation of FIIs in the stock market. FII were allowed to participate in the Indian capital market in September 1992.Earlier, FII could invest in Indian securities only through the purchase of GDR (Global Depository Receipt)1, foreign currency convertible bonds etc. Foreign Institutional Investor means an entity established or incorporated outside India which proposes to make investment in India. FII denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. The SEBI (Foreign Institutional Investors) Regulations, 1995 define foreign institutional investors as an institution established or incorporated outside India, which proposes to make investment in India in securities. They are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme
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Global Depository Receipt is a certificate issued by a depository bank which purchases shares of foreign companies and deposits it on account. GDR represent ownership of an underlying number of shares.

(PIS). FII commenced their operations in the Indian stock markets with a token investment of Rs. 0.6 crore in January 1993.

Difference between FDI (Foreign Direct Investment) and FII (Foreign institutional investors): Before explaining the difference between FDI and FII explanation of FDI is necessary. Foreign Direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access of new technology, products, skills and financing. FDI means direct investment into production in a country by a company outside in another country. Either by buying company in the target country or by expanding operations of an existing business in that country. Difference between FDI and FII as under: FDI is for long term investment and FII is generally for short term investment. In FDI investment in physical assets whereas In FII investment in financial market. Aim of FDI is for increase the capacity of enterprises and productivity and in FII it results only in increase in capital flow FDI is generally deal with the primary market and FII generally deal with the secondary market FDI directly impact on employment and wages and in FII there is no impact on employment and wages.

EVOLUTION OF POLICY FRAMEWORK Historical evolution of FII Policy is summarized below:

September 1992 FIIs allowed investing by the Government Guidelines in all securities in both primary and secondary markets and schemes floated by mutual funds. Single FIIs to invest 5 per cent and all FIIs allowed investing 24 per cent of a companys issued capital. Broad based funds to have 50 investors with no one holding more than 5 per cent. The objective was to have reputed foreign investors, such as, pension funds, mutual fund or investment trusts and other broad based institutional investors in the capital market.

November 1996 100 per cent debt FIIs were permitted to give operational flexibility to FIIs. April 1997 aggregated limit for all FIIs increased to 30 per cent subject to special procedure and resolution. The objective was to increase the participation by FIIs. April 1998 FIIs permitted to invest in dated Government securities subject to a ceiling. Consistent with the Government policy to limit the short-term debt, a ceiling of USD 1 billion was assigned which was increased to USD 1.75 billion in 2004.

June 1998 Aggregate portfolio investment limit of FIIs and NRIs/PIOs/OCBs enhanced from 5 per cent to 10 per cent and the ceilings made mutually exclusive. Common ceilings would have negated the permission to FIIs. Therefore, separate ceilings were prescribed.

June 1998 Forward cover allowed in equity. FIIs permitted to invest in equity derivatives. The objective was to make hedging instruments available. February 2000 foreign firms and high net-worth individuals permitted to invest as sub-accounts of FIIs. Domestic portfolio manager allowed to be registered as FIIs to manage the funds of sub-accounts.

The objective was to allow operational flexibility and also give access to domestic asset management capability. March 2001 FII ceiling under special procedure enhanced to 49 per cent. The objective was to increase FII participation September 2001 FII ceiling under special procedure rose to sectorial cap.

December 2003 FII dual approval process of SEBI and RBI changed to single approval process of SEBI. The objective was to streamline the registration process and reduce the time taken for registration.

November 2004 Outstanding corporate debt limit of USD 0.5 billion prescribed. The objective was to limit short term debt flows. April 2006 outstanding corporate debt limit increased to USD 1.5 billion prescribed. The limit on investment in Government securities was enhanced to USD 2 bn. This was an announcement in the Budget of 2006-07

November, 2006 FII investment up to 23% permitted in infrastructure companies in the securities markets, viz. stock exchanges, depositories and clearing corporations. This is a decision taken by Government following the mandating of demutualization and corporatization of stock exchanges.

January and October, 2007 FIIs allowed to invest USD 3.2 billion in Government Securities (limits were raised from USD 2 billion in two phases of USD 0.6 billion each in January and October)

June, 2008 while reviewing the External Commercial Borrowing policy, the Government increased the cumulative debt investment limits from US $3.2 billion to US $5 billion and US $1.5 billion to US $3 billion for FII investments in Government Securities and Corporate Debt, respectively.

Need for FII 1. Infrastructure Renewal: To keep the Indian economy growing the infrastructure sector like power, transport, mining & metallurgy, textiles, housing, retail, social welfare, medical etc. has to be upgraded. This upgrade is needed prior or in step with the industrial and service exports sector growth. It has to be placed on a higher priority. 2. Bridge the technological gap: Developing countries has a very low level of technology. Their technology is not up to the standards and they lack in modern technology. Such technology usually comes with foreign capital.

3. Optimum utilization of resources: A number of developing countries possess huge mineral resources which are4 untapped and unexploited. Due to lack of technology these countries are not able to use their resources to the fullest. As a result they have to depend on the foreign investment with the help of which technology of the country and that will ultimately lead to the optimum utilization of the resources. India has very huge reserves of mineral resources and to optimize their use or rather for extracting them efficiently and effectively modern technology is required which is possible through foreign investment.

4. Balancing the balance of payment position: In the initial phase of economic development, the under developing countries need much larger imports. As a result the balance of payment position generally turns adverse. This creates gap between earnings and foreign exchange. The foreign capital presents short run solution to the problem. So in order to balance the Balance of Payment Foreign Investment is needed. Stock Market: A stock market is a public entity for the trading of company stock (shares) and derivatives at an agreed price. These are securities listed on a stock exchange as well as those only traded privately. Market participants include individual retail investors, institutional investors such as mutual funds, banks, insurance companies and hedge
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funds, and also publicly traded corporations trading in their own shares. Some studies have suggested that institutional investors and corporations trading in their own shares generally receive higher risk-adjusted returns than retail investors. The stock market is one of the most important sources for Companies to raise money. This allows businesses to be publicly traded, or raise additional financial capital for expansion by selling shares of ownership of the company in a public market. Indian stock market contains more than 20 stock exchanges, some of which are popular nationally as well as regionally. The first stock market started in the country was the Bombay Stock Exchange (BSE). It is oldest stock market in Asia and was established as the Native Share and stock Brokers Association in the year 1875. It has around 5000 listing and volume of more than US$1 Trillion. The other most popular stock exchange is the National Stock Exchange (NSE). It is also a largest stock exchange in the country and third in the world. These two exchanges constitute a major part of the Indian Capital Market2. Stock markets basic role is to provide a platform for the masses of the country to invest their savings and also as a source of funds for various organizations and institutions. It provides an opportunity for any person to become a part-owner of the company by buying the companys shares. These shares can be sold and exchanged as well as used as collateral in certain cases.one can deal in variety of financial instruments in a stock market such as equity, currency future, derivatives, bonds etc. Trading can only be performed by a registered broker of the respective stock one wants to deal in or through broker.3

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www. articlebase.com www. articlebase.com

Who can be registered as FII?

1) Pension Funds 2) Mutual Funds 3) Investment Trust 4) Assets Management Companies 5) Nominee Companies 6) Banks 7) Institutional Portfolio Managers 8) University Funds 9) Endowments, Foundations, Charitable trust, charitable societies 10) A trustee or power of attorney holder incorporated or established outside India proposing make proprietary investments on behalf of a broad based funds(i.e., fund having more than 20 investors with no single investors holding more than 10% of the share or units of the fund).

Pension funds A pension funds if pool of assets that form an independent legal entity that are bought with the contributions to a pension plan for the exclusive purpose of financing pension plan benefits. It manages pension and health benefits for employees , retirees and their families. FII activity in India gathered momentum mainly after the entry of CalPERS( California Public employees Retirement System), a large US- based pension fund in 2004. Mutual Funds A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short term money market instruments, or other such securities. The mutual fund will have a
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fund manager that trades the pooled money on a regular basis. The net proceeds or losses are then distributed to the investors. Investment trust An Investment trust is a form of collective investment .Investment trusts are closed-end funds and are constituted as public limited companies. A collective investment scheme is a way of investing money with others to participate in a wider range of investments than feasible for most individual investors, and to share the costs and benefits of doing so.

Endowment fund It is a transfer of money or property donated to an institution, usually with the stipulation that it be invested, and the principal remain intact in perpetuity or for a defined time period. This allows for the donation to have an impact over a longer period of time than if it were spent all at once.

Asset Management Company An asset management company is an investment management firm that invests the pooled funds of retail investors in securities in line with the stated investment objectives. For a fee, the investment company provides more diversification, liquidity, and professional management consulting service than is normally available to individual investors. The diversification of portfolio is done by investing in such securities which are inversely correlated to each other. They collect money from investors by way of floating various mutual fund schemes.

Charitable Trusts or Charitable Societies A trust created for advancement of education, promotion of public health and comfort, relief of poverty, furtherance of religion, or any other purpose regarded as charitable in law. Benevolent and philanthropic purposes are not necessarily charitable unless they are solely and exclusively for the benefit of public or a class or section of it.

Charitable trusts (unlike private or non-charitable trust) can have perpetual existence and are not subject to laws against perpetuity.

Entry Options for Foreign Investors A foreign company planning to set up business operations in India has the following options. 1. Incorporated entity: A) By incorporating a company under the companies Act, 1956 through Joint venture; or Wholly owned subsidiaries.

Foreign equity into such Indian companies can be up to 100% depending on the requirements of the investor, subject to the equity caps in respect of the area of activity under the foreign direct investment policy.

Unincorporated entity A) As a foreign company through Liaison office/ representative office. Project office Branch office

Such offices can undertake activities permitted under the Foreign Exchange Management (establishment in India of branch or office of other place of business) Regulations, 2000.

2. Incorporation of company: For registration and incorporation, an application has to be filed with the registrar of companies (ROC). Once a company has been duly registered and

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incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies. 3. Liaison office/ representative office: The role of liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/ import from/ to India and also facilitate technical/ financial collaboration between parent companies and company in India.

Legal Framework for FII 1. Registration Process of FIIs: A FII is required to obtain a certificate by SEBI for dealing in securities. SEBI grants the certificate SEBI by taking into account the following criteria: i) The applicant's track record, professional competence, financial soundness, experience, general reputation of fairness and integrity. ii) iii) Whether the applicant is regulated by an appropriate foreign regulatory authority. Whether the applicant has been granted permission under the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for making investments in India as a Foreign Institutional Investor. iv) Whether the applicant is a) an institution established or incorporated outside India as a pension fund, mutual fund, investment trust, insurance company or reinsurance company. b) an International or Multilateral Organization or an agency thereof or a Foreign Governmental Agency or a Foreign Central Bank. c) an asset management company, investment manager or advisor, nominee company, bank or institutional portfolio manager, established or incorporated outside India and proposing to make investments in India on behalf of broad based funds and its proprietary funds in if any or d) university fund, endowments, foundations or charitable trusts or charitable societies. v) Whether the grant of certificate to the applicant is in the interest of the development of the securities market. vi) Whether the applicant is a fit and proper person.
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The SEBIs initial registration is valid for a period of three years from the date of its grant of renewal.

2. Investment by FIIs Area of Investments Foreign Institutional Investor may invest through 2 routes: 1. Equity Investment route 100% investments could be in equity related instruments or upto 30% could be invested in debt instruments i.e.70 (Equity Instruments): 30 (Debt Instruments)

2. 100% Debt route 100% investment has to be made in debt securities only

Equity Investment route In case of Equity route the Foreign Institutional Investor can invest in the following instruments: Securities in the primary and secondary market including shares which are unlisted, listed or to be listed on a recognized stock exchange in India. Units of schemes floated by the Unit Trust of India and other domestic mutual funds, whether listed or not Warrants

100% Debt route In case of Debt Route the Foreign Institutional Investors can invest in the following instruments: Debentures (Non-Convertible Debentures, Partly Convertible Debentures etc.) Bonds Dated government securities Treasury Bills Other Debt Market Instruments

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Foreign corporates and foreign individuals shall not be eligible to invest through the 100% debt route.

3. WHY FOREIGN INSTITUTIONAL INVESTORS INVEST IN INDIA The FII, given its short-term nature, might have bi-directional causation with the returns of other domestic financial markets like money market, stock market, foreign exchange market, etc. Hence, understanding the determinants of FII is very important for any emerging economy as it would have larger impact on the domestic financial markets in the short run and real impact in the long run. The following is the break up of the various determinants affecting such decision making:

1. Market Size: Econometric studies comparing a cross section of countries indicate a well-established correlation between FII and the size of market (proxied by the size of GDP) as well as some of its characteristics (e.g. average income levels and growth rates). Some studies found GDP growth rate to be a significant explanatory variable, while GDP was not, probably indicating that where the current size of national income is very small, increments may have less relevance to FII decisions than growth performance, as an indicator of market potential.

2. Liberalized Trade Policy: Whilst across to specific markets judged by their size and growth is important, domestic market factors are predictability much less relevant in export oriented foreign firms. A range of surveys suggests a widespread perception that open economies encourage more foreign investment. One indicator of openness is the relative size of the export sector.

3. Labour Costs and Productivity: Empirical research has also found relative labour costs to be statistically significant, particularly for foreign investment in labour intensive industries and for export oriented subsidiaries. In India labour market rigidities and relatively high wages in the formal sector

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have been reported as deterring any significant inflows into the export sector in particular. The decision to invest in china has been heavily influenced by the prevailing low wage rate.

4. Political Scenario: The ranking of the political risk among FII determinants remains somewhat unclear. Where the host country possesses abundant natural resources, no further incentive may be required, as is seen in politically unstable countries such as Nigeria and Angola, where high returns in the extractive industries seem to have compensated for political instability. In general, so long as the foreign company is confident of being able to operate profitably without undue risk to its capital and personnel, it will continue to invest. Large mining companies, for example, overcome some of the political risks by investing in their own infrastructure maintenance and their own security forces. Moreover, these companies are limited neither by small local markets nor by exchange rate risks since they tend to sell almost exclusively on the international, market at hard currency prices.

5. Infrastructure: Infrastructure covers many dimensions, ranging from roads, ports, railways and telecommunication systems to institutional development (e.g. accounting, legal services, etc.). Studies in China reveal the extent of transport facilities and the proximity to major ports as having a positive significant effect on the location of FII within the country. Poor infrastructure can be seen, as both, an obstacle and an opportunity for foreign investment. For the majority of the low income countries, it is often cited as one of the major constraints. But foreign investors also point potential for attracting significant FII if host country government permits more substantial foreign participation in the infrastructure sector.

6. Incentives and Operating Conditions: Most of the empirical evidence supports the notion that specific incentives such as lower taxes have no major impact on FII particularly when they are seen as compensation for continuing comparative disadvantages. On the other hand, removing restrictions and providing good business operating conditions are generally believed to have a positive effect. Further incentives such as granting of equal treatment to foreign investors in relation to local counterparts and the opening up of markets (e.g. air transport, retailing, banking,) have been reported as important factors in encouraging FII flows in India.

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7. Disinvestment Policy: Though privatization has attracted some foreign investment flows in recent years, progress is still slow in majority of low income countries, partly because the divestment of the state assets is a highly political issue. In India for example, organized labour has fiercely resisted privatization or other moves, which threaten existing jobs workers rights. A number of structural problems are constraining the process of privatization. Financial markets in most low income countries are slow to become competitive; they are characterized by the inefficiencies, lack of debt and transparency and the absence of regulatory procedures.

The main reason why Foreign Institutional Investors put their money in India is because India has the ability to produce goods and provide services at a lower cost. The scarcity of employment opportunities in India has created a situation where industries can easily hire a well-qualified or even an over qualified professional at a lower cost, usually at a fraction of international wage standards. In developed countries getting good service from the well qualified professionals can be a significant burden on their budget. Staffing costs affect the profitability and the survival of many foreign companies.

In India, there are so many qualified people, competing for good jobs. Pay scales provided by foreign companies may be much lower than their domestic rate, but that lower salary will be an excellent one for people in India due to lower living costs and currency exchange rate. If today a single job vacancy is put up, it is common to get a list of 100 candidates, each of them almost equally well qualified. As such the scarcity of employment opportunities brings good competition in the labour force and automatically improves the quality and productivity which is highly favorable for foreign corporations. Labour costs in India rise each year and in some fields like software, it is believed that a double digit salary increase is not possible anymore. This is important to protect the cost benefits and continue to attract Foreign Institutional Investors to India. This is the reason that industries like BPO, IT and Manufacturing are steadily rising in India.

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An FII can invest only in the following:-

(i)

securities in the primary and secondary markets including shares, debentures and warrants of companies ,unlisted, listed or to be listed on a recognized stock exchange in India;

(ii)

units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed or not listed on a recognized stock exchange; units of scheme floated by a Collective Investment Scheme.

(iii) (iv) (v) (vi)

dated Government securities and derivatives traded on a recognized stock exchange; commercial paper; Security receipts.

In case foreign institutional investor or sub-account holds equity shares in a company whose shares are not listed on any recognized stock exchange, and continues to hold the shares after initial public offering and listing, then such shares would be subject to lock-in for the same period, if any is applicable to shares held by a foreign direct investor placed in similar position, under the policy of the Central Government relating to foreign direct investment for the time being in force.

3.

THE

ELIGIBILITY

CRITERIA

FOR

APPLICANT

SEEKING

FII

REGISTRATION IS AS FOLLOWS:

Good track record, professional competence and financial soundness. Regulated by appropriate foreign regulatory authority in the same capacity/category where registration is sought from SEBI. Permission under the provisions of the Foreign Exchange Management Act, 1999 (FEMA) from the RBI. Legally permitted to invest in securities outside country or its

incorporation/establishment. The applicant must be a fit and proper person. Local custodian and designated bank to route its transactions.

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4. ELIGIBLE SECURITIES

A FII can make investments only in the following types of securities: Securities in the primary and secondary markets including shares, debentures and warrants of unlisted, to- be-listed companies or companies listed on a recognized stock exchange. Units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed on a recognized stock exchange or not, and units of scheme floated by a Collective Investment Scheme. Government Securities Derivatives traded on a recognized stock exchange like futures and options. FIIs can now invest in interest rate futures that were launched at the National Stock Exchange (NSE) on 31st August, 2009. Commercial paper. Security receipts

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5. PROCESS OF THE APPLICATION

6. INVESTMENT LIMITS FOR FII As mentioned earlier also, FIIs are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs can acquire shares/debentures of Indian companies through the stock exchanges in India The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company. The limit is 20 per cent of the paid up capital in the case of public sector banks, including the State Bank of India The ceiling of 24 per cent for FII investment can be raised up to sectorial cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect To further increase FII participation in the Indian market, the Government and SEBI have agreed to allow foreign individuals, corporate and other investors such as hedge
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funds to register directly as foreign institutional investors - a move designed to increase transparency and reduce transaction costs for these investors SEBI has also hiked the total permissible investment limit in government and corporate debt to US$ 4.1 billion from US$ 3.5 billion. While the limit in corporate debt remains unchanged, FII investment limit in government securities has been increased to US$ 2.6 billion from US$ 2 billion Also, institutional investors--including FIIs and their sub-accounts--have been allowed to undertake short-selling, lending and borrowing of Indian securities from February 1, 2008 FIIs can now invest up to $15 billion in government securities (G-secs) and $20 billion in corporate bonds. An individual investment limit of 5% of the paid up capital An aggregate investment limit of 10% of the paid up capital FIIs permitted to invest 23% in Indian Commodity Exchanges without Government Approval.

A Foreign Institutional Investor (investing on own behalf) or a sub account can hold upto 10% of Paid-up Equity Capital of any Company. The total investment made by all the foreign corporates and foreign individuals shall not exceed 5% of the total issued capital of that company within the aggregate limit for FII portfolio investments. The total investment by Foreign Institutional Investors and Sub accounts in any Indian Company cannot exceed 24% of its total Paid-Up Capital.

However, in certain companies, which have passed a special resolution in this regard, the total Foreign Institutional Investor Investment can be made upto 49% of Paid-Up Capital. This limit of 24% / 49% is exclusively available for investment by Foreign Institutional Investors only.

This 24% limit does not include investments made by the Foreign Institutional Investors outside the Portfolio Investment route, i.e. through the direct investment approval process. Investments made offshore through purchases of GDRs(global depository receipt), ADRs(American depository receipt) and Foreign Currency Convertible Bonds are also excluded.
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Reserve Bank of India monitors the overall investment limit. When the overall Foreign Institutional Investors investment level reaches 22% in a company, Reserve Bank of India gives a caution notice. Subsequently, all purchases have to be done by prior approval of Reserve Bank of India. For companies with Foreign Institutional Investors investment limit of 49% this caution notice is given at 47%. The Reserve Bank of India does monitoring of company wise investment limits.

The 100% Route Foreign Institutional Investors can make 100% investments in debt securities subject to specific approval from SEBI as a separate category of Foreign Institutional Investor or subaccount. Foreign Institutional Investors investment in debt through the 100% debt route is subject to an overall cap under the category of external commercial borrowings. SEBI allocates individual ceilings to Foreign Institutional Investors or sub-accounts within this overall limit on the basis of their track record or experience in debt markets. Foreign Institutional Investors investing through the 100% debt route may either invest proprietary funds or on behalf of broad based funds. Foreign corporate and foreign individuals shall not be eligible to invest through the 100% debt route. Foreign Institutional Investors may invest in the following securities through the 100% debt route: Debentures of companies which are listed or to be listed Dated government securities Treasury bills

7. PROHIBITIONS ON INVESTMENTS: FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities: 1) Agricultural or plantation activities 2) Real estate business or construction of farm houses (real estate business does not include development of townships, construction of residential/commercial premises, roads or bridges. 3) Trading in Transferable Development Rights (TDRs).

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8. Company wise investment Limit List of Companies Companies in which FII Investment is allowed upto 30% of their paid up capital 1. Aptech Ltd 2. Asian Paints (India) Ltd 3. Capital Trust Ltd 4. Container Corporation of India 5. Ferro Alloys Corporation Ltd 6. Garware Polyester Ltd 7. GIVO Ltd (formerly KB&T Ltd) 8. Gujarat Ambuja Cements Ltd 9. Infotech Enterprises Ltd. 10. Mastek Ltd 11. Orchid Chemicals and Pharmaceuticals Ltd 12. Pentasoft Technologies Ltd (Pentafour Communications Ltd) 13. Polyplex Corporation Ltd 14. Ranbaxy Laboratories Ltd 15. Software Solutions Integrated Ltd 16. Sonata Software Ltd 17. The Credit Rating Information Services of India Ltd. 18. The Paper Products Ltd 19. Vikas WSP Ltd

Companies in which FII Investment is allowed up to 40% of their paid up capital 1. Balaji Telefilms Ltd 2. M/s. Burr Brown (India) Ltd 3. M/s. Elbee services Ltd. 4. Hero Honda Motors Ltd 5. Jyoti Structure Ltd 6. Maars Software International Ltd 7. Padmini Technologies Ltd
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8. Pentamedia Graphics Ltd 9. Thiru Arooran Sugars Ltd 10.UTV Software Ltd 11. Visualsoft Technologies Ltd 12.M/s. Silverline Technologies Ltd 13. Ways India Ltd 14. SSI Ltd.

Companies in which FII Investment is allowed upto 49% of their paid up capital 1. Blue Dart Express Ltd 2. CRISIL 3. HDFC Bank Ltd 4. Hindustan Lever Ltd 5. Himachal Futuristic communication Ltd 6. Infosys Technologies Ltd 7. NIIT Ltd 8. Dr. Reddys Laboratories 9. Panacea Biotech Ltd 10. Reliance Industries Ltd 11. Reliance Petroleum Ltd 12. Sofia software Ltd 13. Sun pharmaceutical Industries Ltd 14. United Breweries Ltd 15. Zee Telefilms Ltd

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 Companies in which NRI/FII Investment is allowed upto 49% of their paid up capital 1. ICICI Bank Ltd

Companies which FII investment is allowed up to sectorial cap/statutory ceiling of their paid up capital 1. GTL Ltd (74%) 2. Housing Development Finance Corporation Ltd. (74%) 3. Infosys Technologies Ltd (100%) 4. Pentamedia Graphics Ltd (100%) 5. Mascon global Ltd (100%) 6. Pentasoft Technologies Ltd (100%) 7. Punjab Tractors Ltd (64%) 8. Satyam Computer Services Ltd (60%).

Companies where 22% FII investment limit has been reached and further purchases are allowed with prior approval of RBI

1. ACC Ltd 2. Digitla GlobalSoft Ltd

Public sector banks including SBI in which 20% limit has been reached. 1. State Bank of India.

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9. Policy on FII investment / Portfolio investment The policy regulating FII, (Foreign Institutional Investors) NRI,( Non-Resident Indians) and PIO (Persons of Indian Origin) investment are as follows:

(FIIs), (NRIs), and (PIOs) can invest in Indian capital market- both primary and secondary capital markets through the portfolio investment scheme (PIS). Through this scheme, foreign institution investors and Nonresident Indians (NRIs) can acquire shares/debentures of Indian companies through the stock exchanges in India.

FIIs can invest only up to 24 per cent of the paid up capital of the Indian company whereas for NRIs and PIOs this ceiling is kept up to 10 per cent. However for investment in public sector banks, including the State Bank of India the limit is 20 per cent of the paid up capital.

The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, if it is approved by the board and the general body of the company through a special resolution. Similarly the ceiling limit for NRIs and PIOs can be raised to 24% from 10% if it is approved by the general body of the company passing a resolution to that effect.

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

The equity shares and convertible debentures of the companies within the prescribed ceilings are available for purchase under PIS subject to: 1. the total purchase of equity and debentures by all NRIs/PIOs both, on repatriation and non-repatriation basis, should be within an overall ceiling limit of (a) 24 per cent of the company's total paid up equity capital and (b) 24 per cent of the total paid up value of each series of convertible debenture; and 2. the investment made on repatriation basis by any single NRI/PIO in the equity shares and convertible debentures not exceeding five per cent of the paid up equity capital of the company or five per cent of the total paid up value of each series of convertible debentures issued by the company. The FIIs can divide their investment between equity and debt instruments in the ratio of 70:30. FII can also pronounced itself as a cent percent(100 percent) debt FII in which case it can make its entire investment in debt instruments.

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The FIIs are allowed to both purchase and sell securities on stock exchanges. These FIIs can also invest in listed and unlisted securities outside Stock Exchanges where the price has been approved by RBI.

Individual FII or Sub account is not allowed to purchase more than 10% of the paid up capital of an Indian company. Acquiring more than 24% of the paid up capital of an Indian Company, by all FIIs and their sub-accounts taken together is prohibited.

Investment by SEBI registered FIIs and its sub accounts cannot exceed 10per cent of the paid up capital of the Indian company. However, in case of foreign corporates or High Net worth Individuals (HNIs) registered as sub accounts of an FII, their investment shall be restricted to 5 per cent of the paid up capital of the Indian company. All FIIs and their subaccounts taken together cannot acquire more than 24 per cent of the paid up capital of an Indian Company. An Indian company can raise the 24 per cent ceiling to the sectoral cap / statutory ceiling, as applicable, by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by their General Body. The Indian company has to intimate the raising of the FII limit to the Reserve Bank to enable the Bank to notify the same on its website for larger public dissemination.

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Literature Review The journal of international finance and economics, volume 9, Number 5, 2009, this article is highlight on relationship between FII investments and the Indian stock market performance during November 2003 and January 2007 by using ARIMA4 model. This study shows us the impact of FII on current BSE as well as NSE Index. Through this study one can have better idea to understand the movement of the stock market. P.Krishna Pransanna, Foreign institutional investors: Investment preference in India,volume 3, No.2, here in this article it examined the relationship between foreign institutional investment and firm specific characteristics in terms of ownership structure, financial performance and stock performance. Promoters holdings and the foreign investments are inversely related. Variables like share returns and earning per share are significant factors that influencing their investment decision. Foreign capital helps in increasing the productivity of labor and to build up foreign exchange reserves to meet the current account deficit. Dr. Rajeev Shukla Indore, FII Equity Investment and Indian Capital Market, here in this article it study the contribution FII equity investment in shaping Indian capital market and market trends. Batra, A. (2004) has analyzed that there is strong evidence that FIIs have been positive feedback investors and trend chasers at the aggregate level on a daily basis. But there is no evidence of positive feedback trading on a monthly basis. The results also indicate that foreign investors have a tendency to herd together in their trading activity in India. The trading behavior and biases of the FIIs do not appear to have a destabilizing impact on the equity market. Mangesh Tayde, S.V.D Nageshwara Rao(2011), Do foreign institutional investors exhibit herding and positive feedback trading in Indian stock markets? here it is found that FIIs exhibit herding and positive feedback trading during different phases of the stock market. This observed behavior is prominent in but restricted to large cap stocks as they enjoy better liquidity. The herding and positive feedback trading by FIIs is a cause for concern for government of India, capital market regulator (SEBI) and countrys central bank (RBI) as it adversely affects stick prices and volatility. They are required to formulate and implement a

ARIMA- Auto Regressive- Integrated Moving Average

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suitable policy response given their objective of protecting the interests of small investors in the market.

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Part 2 Project Study

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Introduction Objective of the Study

Main objective The broad objective of the project is to study the Foreign Institutional Investors in India and impact of FII investment in Indian Stock Market for last five years Secondary Objective 1. To find the relationship between the FIIs investment and Indian Stock Market.

Limitation of the study Besides following scientific methodologies the study has come across some limitations. These are:

1. The data is taken on monthly basis. 2. Secondary data that we have used in this study may not give true picture of the concern.

Scope of the Study In order to give better picture of role of FIIs in Indian Stock Market, the study should cover both the stock indices and its comparison with foreign institutional investments.

Methodology The study has carried out on the basis of secondary data which is collected from data bank of BSE, NSE and publications of Securities Exchange Board of India (SEBI). The study period data has been processed, tabulated and interpreted. Further, necessary data is collected from official websites.

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FII Data Analysis (Monthly)

Months Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10

Equity(in Crore Rs.) 492.10 7,239.60 -1,082.00 6,679.20 3,959.70 1,643.10 23,872.40 -7,770.50 16,132.60 20,590.90 -5,849.90 5,579.10 -13,035.70 1,733.30 -130.40 1,074.80 -5,011.50 -10,095.80 -1,836.80 -1,211.70 -8,278.10 -15,347.30 -2,598.30 1,750.10 -4,245.30 2,436.60 530.30 6,508.20 20,117.20 3,830.00 11,066.30 4,902.70 18,344.30 9,077.00 5,497.00 10,233.10 -500.30

Debt( in Crore Rs.) -2,174.00 955.50 1,442.60 1,042.30 1,360.10 -541.40 -1,263.00 608.40 2,655.80 2,499.50 -469.30 3,312.00 1,953.80 2,496.80 -879.70 -1,701.70 -162.90 -998.70 3,618.90 1,257.80 3,204.20 -1,858.10 4,215.00 626.50 802.30 -687.80 -6,420.30 2,490.30 -2,711.40 1,068.30 2,115.40 -379.40 2,228.40 6,895.60 684.40 -1,522.40 8,912.90 30

Total( in Crore Rs.) -1,681.90 8,195.10 360.60 7,721.50 5,319.80 1,101.70 22,609.40 -7,162.10 18,788.40 23,090.40 -6,319.20 8,891.10 -11,081.90 4,230.10 -1,010.10 -626.90 -5,174.40 -11,094.50 1,782.10 46.10 -5,073.90 -17,205.40 1,616.70 2,376.60 -3,443.00 1,748.80 -5,890.00 8,998.50 17,405.80 4,898.30 13,181.70 4,523.30 20,572.70 15,972.60 6,181.40 8,710.70 8,412.60

Sensex

14,090.92 12,938.09 13,072.10 13,872.37 14,544.46 14,650.51 15,550.99 15,318.60 17,291.10 19,837.99 19,363.19 20,286.99 17,648.71 17,578.72 15,644.44 17,287.31 16,415.57 13,461.60 14,355.75 14,564.53 12,860.43 9,788.06 9,092.72 9,647.31 9,424.24 8,891.61 9,708.50 11,403.25 14,625.25 14,493.84 15,670.31 15,666.64 17,126.84 15,896.28 16,926.22 17,464.81 16,357.96

Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11

1,216.90 19,928.00 9,361.30 -9,436.70 10,508.40 16,617.40 11,687.20 24,978.50 28,562.90 18,293.10 2,049.60 -4813.2 -4585.5 6897.8 7213.3 -6614.4 4572.2 8030.1 -10833.6 -158.3 1677.4 -4197.9 97.9

3,146.10 9,509.50 3,031.80 2,450.60 740.70 8,106.60 2,999.10 7,689.50 -4,260.30 2,917.60 1,164.20 10176.7 1315.7 -14.9 -17.2 2338.4 311.1 2622.8 2931.1 -1707.4 1401.4 934.7 21774.6

4,363.00 29,437.50 12,393.10 -6,986.10 11,249.10 24,724.00 14,686.30 32,668.00 24,302.60 21,210.70 3,213.80 5363.5 -3269.8 6882.9 7196.1 -4276 4883.3 10652.9 -7902.5 -1865.7 3078.8 -3263.2 21872.5

16,429.55 17,527.77 17,558.71 16,944.63 17,700.90 17,868.29 17,971.12 20,069.12 20,032.34 19,521.25 20,509.09 18,327.76 17,823.40 19,445.22 19,135.96 18,503.28 18,845.87 18,197.20 16,676.75 16,453.76 17,705.01 16,123.46 15,454.92

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Graphical Representation Lets take first relationship between Equity and Sensex. The graphical representation of this relationship is as under:

35,000.00 30,000.00 25,000.00 20,000.00 15,000.00 10,000.00 5,000.00 0.00 Oct-06 Apr-07 Nov-07 Jun-08 Dec-08 Jul-09 Jan-10 Aug-10 Feb-11 Sep-11 Apr-12 -5,000.00 -10,000.00 -15,000.00 -20,000.00 Equity Sensex

From the above diagram we can analyze as follows: On X- axis there is Months of last five years. On Y axis there is FII (Equity) and Sensex data. In this type of data Scatter diagram gives a clear picture for the analysis. If we see in above diagram that from the November07 to Dec08 Sensex is decline but not as much as FII flows (Equity). If we see in above diagram that from the January10 to February11 FII flows (Equity) increase but it is not very much affect positively to the Sensex

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Now lets take a relationship between Total FII inflows. Total FII inflows involve Equity market and Debt market. The graphical relationship of this is as under:

40,000.00 30,000.00 20,000.00 10,000.00 0.00 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Oct-07 Oct-08 Oct-09 Oct-10 -10,000.00 -20,000.00 Oct-11 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Total FII Flow Sensex

Jul-09

Jul-07

Jul-08

Jul-10

From the above diagram we can analyze as follows: On X- axis there is Months of last five years. On Y axis there is FII (Equity + Debt) and Sensex data. If we see the diagram form October07 to October08 then we can say that total FII flows (Equity + Debt) goes down but if we see the Sensex simultaneously then we can see that it is not declining as much as FII flow. Now if we see the diagram from January10 to January11 we can see the total FII flows (Equity + Debt) increases but if we look at the Sensex then we can say that it is somewhat stable there is not much fluctuation we see in it.

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Jul-11

Now lets take a relationship between Cumulative total FII flows. The graphical relationship of this is as under:

400,000.00 350,000.00 300,000.00 250,000.00 200,000.00 150,000.00 100,000.00 50,000.00 0.00 May-07 May-08 May-09 May-10 May-11 Jan-07 Jan-08 Jan-09 Jan-10 Sep-07 Sep-08 Sep-09 Sep-10 Jan-11 -50,000.00 Sep-11 Sensex Total Cummulative FII Flow

From the above diagram we can analyze as follows:

On X- axis there is Months of last five years. On Y axis there is Cumulative total FII flow and Sensex data. Now if we see in the diagram from September07 to September08 cumulative total FII flow growing but somehow from January08 it is declining. There is not that much influence on the Sensex. After May09 cumulative total FII flow increases. After May09 cumulative total FII Flows increases. That means there are chances that foreign institutional investors are more attract to the Indian Stock market.

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Statistical Analysis:
As per the project study objective and the data available from the various Government websites it is possible now to see what the relationship is showing us about whether FII Flow including equity and debt are really matters or influence on the Sensex of the stock market. Above we see that the graphical representation of FII flows and Sensex. We see that there is not that much impact on Indian stock market. So for some precise analysis we need to look for statistical tool so that we can understand it more precisely whether FII Flow is really influence on the Sensex. For the Statistical analysis, here Correlation Coefficient is taken as a statistical tool. With this correlation coefficient we can understand about the relationship between FII flow and Sensex of Indian Stock market. Here analysis are in a two parts first part analysis is include relationship between the FII Flow (Equity) and Sensex of Indian Stock Market and second analysis include relationship between the total FII flow (Equity + Debt) and Sensex of Indian Stock Market. Correlation Coefficient indicates that a degree of relationship between two variables one is dependent and other is independent. How one variable is related with the other variable or we can say at what degree?

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Here is the analysis of relationship between the FII Flow (Equity) and Sensex of Indian Stock Market. From using the SPSS STATISTIC SOFTWARE, we have output which indicates about the relationship with the FII Flow (Equity) and Sensex of Indian Stock Market. Following is the output where correlation table is given to us. Correlation Table

Correlations Equity Equity Pearson Correlation Sig. (2-tailed) N Sensex Pearson Correlation Sig. (2-tailed) N 60 .357
**

Sensex 1 .357
**

.005 60 1

.005 60 60

**. Correlation is significant at the 0.01 level (2-tailed).

From above table of correlation we can understand that FII Flow is correlated with the Sensex of Indian stock market with 0.357 or 35.7 %. We can say that FII Flow is correlated with the Sensex moderately positively with the Sensex of Indian Stock market. So, we can say that FII Flow (Equity) is not that much influence on Indian Stock markets Fluctuation.

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Here is the analysis of relationship between the Total FII Flow (Equity+ Debt) and Sensex of Indian Stock Market. From using the SPSS STATISTIC SOFTWARE, we have output which indicates about the relationship with the Total FII Flow (Equity + Debt) and Sensex of Indian Stock Market. Following is the output where correlation table is given to us. Correlation Table

Correlations Total FII Flow Total FII Flow Pearson Correlation Sig. (2-tailed) N Sensex Pearson Correlation Sig. (2-tailed) N 60 .394
**

Sensex .394
**

.002 60 1

.002 60 60

**. Correlation is significant at the 0.01 level (2-tailed).

From above table of correlation we can understand that Total FII Flow is correlated with the Sensex of Indian stock market with 0.394 or 39.4 %. We can say that FII Flow is correlated with the Sensex moderately positively with the Sensex of Indian Stock market. So, we can say that Total FII Flow is not that much influence on Indian Stock markets Fluctuation.

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