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. lobalization 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 !apital "arket has also undergone metamorphic reforms in the past few years. #very segment of Indian !apital "arket 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. $his 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 %oreign Institutional Investors& '%IIs&( investments, mostly in e)uities. #ver since the opening of the Indian e)uity markets to foreigners, %II net investments have steadily grown. $hus, we can see that there has been a consistent rise in the %II inflows into the country. *hile the concerns such as %II pulling back their investments and the kind of destabilizing effect on the capital market in India are all wellplaced, comparatively less attention have been paid so far to analyzing the %II 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. $hus this project aims at studying the role of these Institutional investors and its impact on the capital markets in India .$his 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 %II could really effect the capital markets in India. 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, p9 ! $he 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 institutional investors in the major volatile episode in the capital market in india.%inaly to find the relationship between the

+ensex variation with the variation of the investments made by the institutional investors. India opened its stock markets to foreign investors in +eptember ,--. and has, since ,--/, received considerable amount of portfolio investment from foreigners in the form of %oreign Institutional Investor&s '%II( investment in e)uities. *hile 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. 0ortfolio flows-often referred as 1hot money2-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 conse)uences to its economy. $hey have been blamed for exacerbating small economic problems in a country by making large and concerted withdrawals at the first sign of economic weakness. $he methodology used to is regression analysis. $he degree of association helps us to )uantify the relation ship between the variation in sensex due to the variation in the net investments made by the institutional investors. After completing the project I could recommend that overnment should certainly encourage foreign institutional investment but should keep a check on the volatility factor. 3ong term funds should be given priority and encouraged some of the actions that could be taken to ensure stability are 4 +trengthening domestic institutional investors 4 5perational flexibility to impart stability to the market 4 6nowledge activities and research programs $o 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.

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2. INTRODUCTION: %inancial markets are the catalysts and engines of growth for any nation. India&s financial market began its transformation path in the early ,--8s. $he banking sector witnessed sweeping changes, including the elimination of interest rate controls, reductions in reserve and li)uidity re)uirements and an overhaul in priority sector lending. 0ersistent efforts by the 9eserve :ank of India '9:I( to put in place effective supervision and prudential norms since then have lifted the country closer to global standards. Around the same time, India&s capital markets also began to stage extensive changes. $he +ecurities and #xchange :oard of India '+#:I( was established in ,--. with a mandate to protect investors and usher improvements into the microstructure of capital markets, while the repeal of the !ontroller of !apital Issues '!!I( in the same year removed the administrative controls over the pricing of new e)uity issues. India&s financial markets also began to embrace technology. !ompetition in the markets increased with the establishment of the ;ational +tock #xchange ';+#( in ,--<, leading to a significant rise in the volume of transactions and to the emergence of new important instruments in financial intermediation. Indian investors have been able to invest through mutual funds since ,-=<, when >$I was established. Indian mutual funds have been organized through the Indian $rust Acts, under which they have enjoyed certain tax benefits. :etween ,-?@ and ,--., public sector banks and insurance companies set up mutual funds. +ince --/, private sector mutual funds have been allowed, which brought competition to the mutual fund industry. $his has resulted in the introduction of new products and improvement of services. $he notification of the +#:I '"utual %und( 9egulations of ,--/ brought about a restructuring of the mutual fund industry. An arm&s length relationship is re)uired between the fund sponsor, trustees, custodian, and asset "anagement !ompany. $his is in contrast to the previous practice where all three functions, namely trusteeship, custodianship, and asset management , were often performed by one body, disclosure and advertisement nor ms for mutual funds, and, for the first time, permitted the entry of private sector mutual funds. %IIs registered with +#:I may invest in domestic mutual funds, whether listed or unlisted. $he ,--/ 9egulations have been revised on the basis of the recommendations of the "utual %unds .888 9eport prepared by +#:I. $he 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. "utual funds are now re)uired to obtain the consent of investors for any change in the 1fundamental attributes2 of a scheme, on the basis of which unit holders have invested. $he revised regulations re)uire disclosures in terms of portfolio composition, transactions by schemes of mutual funds with sponsors or affiliates of sponsors, with the asset "anagement !ompany 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 +eptember ,--. and has, since ,--/, received considerable amount of portfolio investment from foreigners in the form of %oreign Institutional Investor&s '%II( investment in e)uities. $his has become one of the main channels of
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portfolio investment in India for foreigners. In order to trade in Indian e)uity markets, foreign corporations need to register with the +#:I as %oreign Institutional Investor '%II(. +#:I&s definition of %IIs presently includes foreign pension funds, mutual funds, charitableAendowmentAuniversity fund&s etc. as well as asset management companies and other money managers operating on their behalf $he sources of these %II flows are varied . $he %IIs registered with +#:I come from as many as .? countries'including money management companies operating in India on behalf of foreign investors(.>+ based institutions accounted for slightly over <,B those from the >.6 constitute about .8B with other *estern #uropean countries hosting another ,@B of the %IIs. 0ortfolio investment flows from industrial countries have become increasingly important for developing countries in recent years. $he Indian situation has been no different. A significant part of these portfolio flows to India comes in the form of %II&s investments, mostly in e)uities. #ver since the opening of the Indian e)uity markets to foreigners, %II investments have steadily grown from about 9s..=88 crores in ,--/ to over 9s ..@.,=C crores till the end of %eb .88?.*hile 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. 0ortfolio flows- often referred as 1hot money2-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 conse)uences to its economy. $hey have been blamed for exacerbating small economic problems in a country by making large and concerted withdrawals at the first sign of economic weakness. $hey 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. $he danger of 1abrupt and sudden outflows2 inherent with %II flows and their destabilizing effect on e)uity and foreign exchange markets have been stressed. $he financial market in India have expanded and deepened rapidly over the last ten years. $he Indian capital markets have witnessed a dramatic increase in institutional activity and more specifically that of %II&s. $his 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 %II&s becoming the dominant owner of the free float of most blue chip Indian stocks. Institutions often trade large blocks of shares and institutional order&s can have a major impact on market volatility. In smaller markets, institutional trades can potentially destabilize the markets. "oreover, institutions also have to design and time their trading strategies carefully so that their trades have maximum possible returns and minimum possible impact costs.

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3. OBJECTIVE OF THE PROJECT: $o +tudy the Impact of Institutional Investors especially the %II on the capital market in India. 4 $o study the major #pisodes of volatility in India and analyzing the impact of Institutional investors in these episodes. 4 $o )uantify the relation between %II flows and their relationship with economic variables, particularly with ;I%$D. 4. METHODOLOGY: %or covering the $heoretical part I shall be going through a lot of literature including books on %II E !apital "arket. :eyond this I shall be tracking the performance of %II through the help of internet. $o +tudy the major episodes of volatility in India, I would be reading through a lot of literature, articles, and magazines and visiting various sites for their comments during that period. %or the study purpose, I will take only ;I%$D that is the ;ational +tock #xchange ';+#( benchmark Index is considered. $his is because the larger chunk of %II activity in India happens on the ;+#. ;+# is the dominant exchange in India with close to @CB of cash market turnover and well over -8B of derivatives turnover in India happening on the ;+#. $he daily index volatility and volatility in daily %II cash flows were studied and daily %II volatility on the ;ifty volatility. 5n the information so gathered I will be running +0++ analysis E reaching onto the conclusion. $hus throughout the project I shall be making use of secondary data. 5. 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. :ecause of their sophistication, institutional investors may often participate in private placements of securities, in which certain aspects of the securities laws may be inapplicable.

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6. TYPES OF INSTITUTIONAL INVESTOR 6.1. 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. 6.1.1 DEVELOPMENTAL FINANCIAL INSTITUTIONS like Industrial %inance !orporation of India 'I%!I(, Industrial !redit and Investment !orporation of India 'I!I!I(, Industrial Fevelopment :ank of India 'IF:I(, the +tate %inancial !orporations, etc. $he role played by these financial institutions '%Is( is to extend funds to the companies for both long term extend both debt and e)uity financing to their nominee directors in the companies.
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6.1.2 INSURANCE COMPANIES like the 3ife Insurance !orporation '3I!(, eneral Insurance !orporation ' I!(, and their subsidiaries. 6.1.3 BAN S: #arlier banks used to finance only the working capital of the companies. :ut now they are also extending long-term finance to the companies. 6.1.4 ASSET MANAGEMENT COMPANIES all the mutual funds including >nit $rust of India '>$I(. $he 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 e)uity capital of the companies. $he mutual fund industry which is the major institutional investors in India started in ,-=/ with the formation of >nit $rust of India, at the initiative of the overnment of India and 9eserve :ank. $he history of mutual funds in India can be broadly divided into four distinct phases.

F!"#$ P%&#': 1(64)1(*+, U,!$ >nit $rust of India '>$I( was established on ,-=/ by an Act of 0arliament. S'-.,/ P%&#' : 1(*+) 1((3, #ntry of 0ublic +ector %unds. ,-?@ marked the entry of non- >$I, public sector mutual funds set up by public sector banks and 3ife Insurance !orporation of India'3I!( and eneral Insurance !orporation of India ' I!(. T%!"/ P%&#': 1((3)2003, #ntry of 0rivate +ector %unds in ,--/. 6othari 0ioneer 'now merged with %ranklin $empleton( was the first private sector mutual fund registered in Guly ,--/.As at the end of Ganuary .88/H there were // mutual funds with total assets of 9s. ,, .,,?8C crores. $he>nit $rust of India with 9s.<<, C<, crores of assets under management was way ahead of other mutual funds. F.1"$% P%&#': 2003)200+ In %eb .88/ the >nit $rust of India Act ,-=/ >$I was bifurcated into two separate entities. $he +pecified >ndertaking of >nit $rust of India, functioning under an administrator and under the rules framed by overnment of India. $he second is the >$I "utual %und 3td, sponsored by +:I, 0;:, :5: and 3I!. It is registered
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with +#:I and functions under the "utual %und 9egulations. 6.2 FOREIGN INSTITUTIONAL INVESTOR 2FII3 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.%II investment is fre)uently 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 +#:I have prescribed norms to register %IIs and also to regulate such investments flowing in through %IIs. 0ension %unds "utual %unds Investment $rust Insurance or reinsurance companies #ndowment %unds >niversity %unds %oundations or !haritable $rusts or !haritable +ocieties Asset "anagement !ompanies ;ominee !ompanies Institutional 0ortfolio "anagers $rustees 0ower of Attorney Iolders :ank 6.2.1 SOURCES OF FII IN INDIA: $he sources of these %II flows are varied. $he %IIs registered with +#:I come from as many as .? countries 'including money management companies operating in India on behalf of foreign investors(. >+-based institutions accounted for slightly over <,BH those from the >6 constitute about .8B with other *estern #uropean countries hosting another ,@B of the %IIs. 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. iven the significant financial flows among
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the industrial countries, national affiliations are very rough indicators of the Jhome& of the %II investments. In particular institutions operating 3uxembourg, !ayman Islands or !hannel Islands, or even those based at +ingapore or Iong 6ong are likely to be investing funds largely on behalf of residents in other countries. ;evertheless, the regional breakdown of the %IIs does provide an idea of the relative importance of different regions of the world in the %II flows.

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+. CAPITAL MAR ET IN INDIA

$he :ombay +tock #xchange ':+#(, which began formal trading in ,?@C, is one of the oldest in Asia. 5ver 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 e)uity market is considered large relative to the country&s stage of economic development. !urrently, there are <8 mutual funds, out of which // are in the private sector and @ are in the public sector. "utual funds were opened to the private sector in ,--.. #arlier, in ,-?@, banks were allowed to enter this business, breaking the monopoly of the >nit $rust of India '>$I(, which maintains a dominant position. :efore ,--., many factors obstructed the expansion of e)uity trading. %resh capital issues were controlled through the !apital Issues !ontrol Act. $rading practices were not transparent, and there was a large amount of insider trading. 9ecognizing the importance of increasing investor protection, several measures were enacted to improve the fairness of the capital market. $he +ecurities and #xchange :oard of India '+#:I( was established in ,-??.$here have been significant reforms in the regulation ofthe securities market since ,--. in conjunction with overall economic and financial reforms. In ,--., the +#:I Act was enacted giving +#:I 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 atremendous change in the secondary market for e)uity. Among the processes that have already started and are soon to be fully implemented are electronic settlement trade and exchange-traded derivatives. :efore ,--C, markets in India used open outcry, a trading process in which traders shouted and hand signaled from within a pit. 5ne major policy initiated by +#:I from ,--/ involved the shift of all exchanges to screen-based trading, motivated primarily by the need for greater transparency.
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$he first exchange to be based on an open electronic limit order book was the ;ational +tock #xchange';+#(, which started trading debt instruments in Gune ,--< and e)uity in ;ovember ,--<. In "arch ,--C, :+# shifted from open outcry to a limit order book market. :efore ,--<, India&s stock markets were dominated by :+#. In other parts of the country, the financial industry did not have e)ual access to markets and was unable to participate in forming prices compared with market participants in "umbai ':ombay(. As a result, the prices in markets outside "umbai were often different from prices in "umbai. $hese pricing errors limited order flow to these markets. #xplicit nationwide connectivity and implicit movement toward one national market has changed this situation. ;+# has established satellite communications which give all trading members of ;+# e)ual access to the market. +imilarly, :+# and the Felhi +tock #xchange are both expanding the number of trading terminals located all over the country. $he arbitrages are eliminating pricing discrepancies between markets. $he Indian capital market still faces many challenges if it is to promote more efficient allocation and mobilization of capital in the economy. %irst, market infrastructure has to be improved as it hinders the efficient flow of information and effective corporate governance. +econd, the trading system has to be made more transparent. $hird, India may need further integration of the national capital market through consolidation of stock exchanges. %ourth, the payment system has to be improved to better link the banking and securities industries. $he capital market cannot thrive aloneH it has to be integrated with the other segments of the financial system. $he global trend is for the elimination of the traditional wall between banks and the securities market. +ecurities market development has to be supported by overall macroeconomic and financial sector environments. %urther liberalization of interest rates, reduced fiscal deficits, fully market-based issuance of overnment securities and a more competitive banking sector will help in the development of a sounder and a more efficient capital market in India.

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*. INSTITUTIONAL INVESTORS REGISTERED IN INDIA: *.1 MUTUAL FUNDS REGISTERED IN INDIA:

%rom the bar chart above it is clearly evident that the mutual fund industry is still at a nascent stage as compared to the %II&s. +ince its inception in ,-=< when the first mutual fund i.e. >$I had the monopoly for .C years. It was thus in the year after ,-?- that public sector banks and financial institution started their A"! .%inally in the third phase when private players entered the arena, it lead to a fierce battle to hold the top slot in the Indian mutual fund industry .$he 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. $his shows that +#:I has in a way restored the faith of these investors in spite of the different scams that rocked the capital market in India.

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*.2 FII REGISTERED IN INDIA:

3et&s look at some of the data to get an idea about the trend of %IIs in India, and also to see the future direction of their movement. India had C.? %IIs were registered with +#:I by end of .88, and by end of %eb-.88? the number increased to ,/8/. $he trend in the number of registered %IIs has been consistently on the rise as can be seen from the tableH showing the significant amount of confidence that Indian !apital market has developed in the last few years. ;ot only has been the number increasing on a consistent basis, but the amount of inflow into Indian market has also seen a manifold increased. $he gross purchase, sales and net investment figure on an annual basis gives a fair idea about the consistency of their investments in our country. As we can see in the investment trends table, except for ,--?, the net investment by the %IIs 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. $his is also evident from the fact that the number of %II registering in India is increasing in spite of the fact that +#:I has declined to issue any further 0; notes and also asked them to get registered. $his shows that India still remains the hot spot for the foreign investors in the coming years.

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(. MAJOR INSTITUTIONAL INVESTORS IN INDIA

$he total number of Fomestic institutional investors specially the mutual funds is <8 in number. +imilarly insurance companies and other banks are ver y large in number. :ut out of these there are some heavy weights which solely by their investments are among the top C domestic institutional investors in india.Among the total %II registered i.e. ,/8/ by the end of feb .88? the top C %II in terms of their investment in India are listed below.

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(.1. DOMESTIC INSTITUTIONAL INVESTORS (.1.1LIFE INSURANCE CORPORATION OF INDIA. 3ife Insurance in its modern form came to India from #ngland in the year ,?,?.$he first two decades of the twentieth century saw lot of growth in insurance business. %rom << companies with total business-in-force as 9s....<< crore, it rose to ,@= companies with total business-in-force as 9s..-? crore in ,-/?. Furing the mushrooming of insurance companies many financially unsound concerns were also floated which failed miserably. Iowever, it was much later on the ,-th of Ganuary, ,-C=, that life insurance in India was nationalized. About ,C< Indian insurance companies, ,= non-Indian companies and @C provident were operating in India at the time of nationalization. ;ationalization was accomplished in two stagesH initially the management of the companies was taken over by means of an 5rdinance, and later, the ownership too by means of a comprehensive bill. $he 0arliament of India passed the 3ife Insurance !orporation Act on the ,-th of Gune ,-C=, and the 3ife Insurance !orporation of India was created on ,st +eptember, ,-C=, 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 ade)uate financial cover at a reasonable cost. 3I!&s emergence as the biggest investor in the country should not surprise anyone. $he state-owned company is C, years old and enjoyed a state-sanctioned monopoly over the life insurance business till .888. $he firm has issued ..8 million policies and earned total premium income of 9s/-, C<, crore in .88=-8@. It is allowed to invest /CB of its funds in e)uities. $he largest chunk in 3I!&s portfolio is the stake it owns in listed engineering giant 3arsen and $oubro 3td. $he ,C.@B stake in 3E$ is valued at more than 9s,-, =<.crore. 5ther major investments include a <.,<B stake in 9eliance Industries 3td,the largest Indian company by market capitalization, @.. B in I!I!I :ank 3td,,/.<B in I$! 3td and <.. B in 9eliance !ommunications 3td.

(.1.2 RELIANCE MUTUAL FUNDS:

9eliance "utual %und '9"%( is one of India&s leading "utual %unds, with Average Assets >nder "anagement 'AA>"( of 9s. -8,-/? !rores 'AA>" for "ar 8? ( and an investor base of over ==.?@ 3akhs.9eliance "utual %und, a part of the 9eliance - Anil Fhirubhai Ambani roup, is one of the fastest growing mutual funds in the country. 9eliance !apital 3td. is one of India&s leading and fastest growing private sector financial services companies, and ranks among the top / private sector financial services and banking companies, in terms of net worth. 9eliance !apital 3td. has interests in asset
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management, life and general insurance, private stock broking and other financial services. (.1.3 ICICI PRUDENTIAL FUNDSK

e)uity and proprietary investments,

I!I!I 0rudential Asset "anagement !ompany enjoys the strong parentage of prudential plc, one of >6Ls largest players in the insurance E fund management sectors and I!I!I :ank, a well-known and trusted name in financial services in India. ICICI 0rudential Asset "anagement !ompany, in a span of just over eight years, has forged a position of pre-eminence in the Indian "utual %und Industry as one of the largest asset management companies in the country with assets under management of 9s. /@,-8=..< crore 'as of "arch /,, .88@(. $he !ompany manages a comprehensive range of schemes to meet the varying investment needs of its investors spread across =? cities in the country. >pon its inception in "ay ,--? it manages . funds of 9s ,=8 !r and has grown to manage /C %unds worth 9s =.,88?.-C !r.

(.1.4 UTI MUTUAL FUNDS: >$I "utual %und came into existence on ,st %ebruary .88/. :ank of :aroda ':5:(, 0unjab ;ational :ank '0;:( and +tate :ank of India '+:I( and 3ife Insurance !orporation of India '3I!( are the sponsors of the >$I "utual %und. >$I "utual %und is managed by >$I Asset "anagement !ompany 0rivate 3imited 'A"!(. >$I A"! is a registered portfolio manager under the +#:I '0ortfolio "anagers( 9egulations, ,--/ for undertaking portfolio management services and also acts as the manager and marketer to offshore funds. >$I "utual %und has a nationwide network consisting @8 >$I %inancial !enters '>%!s( and >$I International offices in 3ondon, Fubai and :ahrain. $he fund has a track record of managing a variety of schemes catering to the needs of every class of citizenry. (.1.5 HDFC MUTUAL FUND:

IF%! 'Iousing Fevelopment %inance !orporation 3imited( is one of the dominant players in the Indian mutual fund space. IF%! was incorporated in ,-@@ as the first specialized "ortgage !ompany in India. IF%! "utual %unds are handled by IF%! Asset "anagement !ompany 3imited. IF%! Asset "anagement !ompany was incorporated under the !ompanies Act, ,-C=, on Fecember ,8, ,---, and was approved to act as an Asset "anagement !ompany for the "utual %und by +#:I on Guly /, .888. $he company also provides portfolio management A advisor y services.

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(.2 FOREIGN INSTITUTIONAL INVESTORS:

(.2.1 DEUTSCHE GROUP: F*+ Investments part of Feutsche Asset "anagement, was founded in ,-C= in %rankfurtA"ain. *ith fund assets under management of euro .=@ bn, the company is one of the $op ,8 companies worldwide. In #urope, F*+ is one of the leading mutual fund companies and currently manages euro ,@/ bn. In excess of more than euro ,<@ bn assets under management, F*+ represents .., /B of the fund market in ermany, making it the unchallenged number one. $he International nature of its business differentiates F*+ significantly from its domestic and international competitors. F*+ Investments& activities span all the key #uropean markets. In the >+A, F*+ is represented by F*+ +cudder and manages assets of euro ?= bn. In spring .88=, it launched its first funds as well as the F*+ brand in +ingapore and India, continuing its successful expansion in the Asia-0acif ic region. $hereafter, more funds were registered in other countries in Asia-0acific. (.2.2 CITIGROUP: $he formation of !itigroup in ,--? created a new model of financial services organization to serve its clients& financial needs. As the company continues to grow and evolve, it&s increasingly evident that such a large, complex grouping of businesses can indeed succeed. *ith .@C,888 employees working in more than ,88
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countries and territories, !itigroup&s globality and diversity contribute to its continued success. (.2.3 HSBC GLOBAL INVESTMENTS: I+:! Investments is one of the worldLs premier fund management organizations. It has established a strong reputation with institutional investors including corporations, governments, insurance companies and charities the world over for deliver ing consistently superior returns. In India we offer fund management services for institutional as well as retail investors. 5ur array of products includes #)uity %unds Income AFebt %unds.

(.2.4 MORGAN STANLEY 4 CO INTERNATIONAL LTD: "organ +tanley is a global financial services firm and a market leader in securities,investment management and credit services. It has more than =88 offices in .@ countries and manages M<., billion in assets for institutional and individual clients around the world. +tanley Investment "anagement '"+I"(, the asset management company of "organ +tanley was established in ,-@C. "organ+tanley entered Indian market in ,-?- with the launch of India "agnum %und. In ,--<, "organ +tanley launched "organ +tanley rowth %und '"+ %(. It is one of the largest private sector schemes investing in e)uities.

(.2.5 DSP MERRILL LYNCH : F+0 "errill 3ynch "utual %unds are managed by F+0 "errill 3ynch %und "anagers. F+0 "errill 3ynch 3td. 'F+0"3( is a premier financial services provider and "errill 3ynch '"3( holds -8B stake in F+0"3. F+0"3 was originally called F+0 %inancial !onsultants 3td. $he firm traces its origins to F. +. 0urbhoodas E !o., a securities and brokerage firm with over ,<8 years of experience in the Indian market. "errill 3ynch is one of the worldLs leading wealth management, capital markets and advisory companies with offices in /@ countries and territories and total client assets of approximately M,.C trillion.

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10. INVESTMENT TRENDS OF INSTITUTIONAL INVESTORS: 10.1 INVESTMENT TRENDS OF INDIAN MUTUAL FUND INDUSTRY: $he Assets under "anagement of >$I was 9s.<C=/ !r by the end of ,-?@. 3et me concentrate about the performance of mutual funds in India through figures. %rom 9s. <C=/ !r. the Assets under "anagement rose to 9s. /.-@@ !r in "arch ,--/ $he net asset value ';AN( of mutual funds in India declined when stock prices started falling in the year ,--.. $hose days, the market regulations did not allow portfolio shifts into alternative investments. $here was rather no choice apart from holding the cash or to further continue investing in shares. A lone >$I with just one scheme in ,-=< now competes with as many as <88 odd products and /< players in the market. In spite of the stiff competition and losing market share, 3ast six years have been the most turbulent as well as exiting ones for the industry. ;ew players have come in, while others have decided to close shop by either selling off or merging with others. 0roduct innovation is now passO with the game shifting to performance delivery in fund management as well as service. $he industry is also having a profound impact on financial markets. *hile >$I has always been a dominant player 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. %und managers, by their selection criteria for stocks have forced corporate governance on the industry. 9ewardinghonest and transparent management with higher valuations has created a system of risk-reward created where the corporate sector is more transparent then before. %unds collection has been increasing in last C 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 10.2 FOREIGN INSTITUTIONAL INVESTMENT 2FII3 is one of the main channels of foreign investment in India. %oreign institutional investors '%IIs( were permitted to invest in Indian securities market in ,--/. +ince then, their investments into Indian e)uity market have grown by leaps and bounds. In fact,%IIs, as a class of institutional investors, have assumed a major role in mature and emerging market economies, in recent years. $he %II in the Indian e)uity markets has risen steadily since .88/-8<. $he gross purchases of debt and e)uity together by %IIs increased by C8.8 per cent to 9s. C,.8,C8? crore in .88=-8@ from 9s. /,<=,-@? crore in .88C-8=.

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INVESTMENTS BY FOREIGN INSTITUTIONAL INVESTORS $he gross sales by %IIs also rose by =8./ per cent to 9s. <, ?-,==@ crore from 9s. /,8C,C,. crore during the same period. Iowever, the net investment by %IIs in .88=-8@ declined by .C.= per cent to 9s. /8,?<8 crore in .88=-8@ from 9s. <,,<=@ crore in .88C-8= mainly due to large net outflows from the e)uity segment. :ut the cumulative net investment by %IIs in Indian stock market 'since ,--/( crossed >+F C8 billion at the end of "arch .88@. As on "arch /,, .88@, the cumulative net investment by %IIs was >+F C. billion. $he cumulative net investment by %IIs at ac)uisition cost, which was >+F ,C.? billion at the end of "arch .88/, had risen to >+F <C./ billion at the end of "arch .88=. $he %II in e)uity, which was high in the previous years, declined in .88=-8@. Furing .88=-8@, %IIs reduced their investment, in both e)uities as well as debt securities.$he net %II investment in e)uity during .88=-8@ was 9s. .C,./= crore, at its lowest in past three years. $his was mainly due to large net sales in some months of .88=-8@.

NET INVESTMENT BY FII INVESTMENT TRENDS BY FII As far as the investment trends of %II are consider ed we can see that the trend and the actual investment go hand in hand except in -?--- and .88/-.88<.$he net investment flows by %IIs were negative during ,--?--- primarily because of the uncertainty that prevailed after India tested a series of nuclear bombs in "ay ,--? and the imposition of economic sanctions by the >+, Gapan and other industrialized countries but the %IIs portfolio flows )uickly recovered and have become a positive net investment from the subse)uent years onwards. 10.2.1 REASONS FOR GRO5TH IN FII INVESTMENTS lobal li)uidity 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. $his has resulted in most emerging markets seeing heavy inflows. %II&s see India as a good destination to invest in and make money. $hey are happy with the Indian governmentLs commitment to economic reforms. $hey are also looking closely at sectors 'and companies within these sectors( which they think have potential. Infact, the growing competitiveness of Indian companies is an enticing factor. L.,6)T'"7 C&8!$&9 G&!,# T&:K which is the tax an investor pays when he sells his shares after more than a year - has been abolishedH thus one can sell his shares without having to pay the government any kind of tax.
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R18'' A88"'-!&$!.,: $he dollar has been falling in value vis-P-vis other currencies. As a result, %IIs don&t find the thought of investing in the >+ market all that attractive. $hey know they will make more money if they invest elsewhere. E-.,.7!- G".;$%: As mentioned earlier we witnessed a F0 growth rate of about ?.CB last year. 5ur industries like $elecom, :anking etc are doing relatively well. All these make our country very attractive to invest in. $he sheer size of India and the relative stability the country offers are other obvious plus points. *hatever the case may be, a perception is gaining momentum that foreign investors are here to stay at least in the short-term. 10.2.3 FOREIGN INSTITUTIONAL INVESTMENT: A COST BENEFIT ANLYSIS $he role of foreign investment over the years can&t 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. $herefore it is useful to summarize the benefits and costs for India of having foreign inflows. BENIFITS &3 R'/1-'/ -.#$ .< '=1!$> %II inflows augment the sources of funds in the Indian capital markets. %II investment reduces the re)uired rate of return for e)uity, enhances stock prices, and fosters investment by Indian firms in the country. $he impact of %IIs upon the cost of e)uity capital may be visualized by asking what stock prices would be if there were no %IIs operating in India. ?3 S$&?!9!$> !, $%' ?&9&,-' .< 8&>7',$ %or promoting growth in a developing country such as India, there is need to augment domestic investment, over and beyond domestic saving, through capital flows. $he 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. 0rior to ,--,, debt flows and official development assistance dominated these capital flows. $his mechanism of funding the current account deficit is widely believed to have played a role in the emergence of balance of payments difficulties in ,-?, and ,--,. 0ortfolio flows in the e)uity markets, and %FI, as opposed to debt-creating flows, are important as safer and more sustainable mechanisms for funding the current account deficit.
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-3 ,.;9'/6' <9.;# $he activities of international institutional investors help strengthen Indian finance. %IIs 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 techni)ues, and international best practices and systems.

/3 S$"',6$%',!,6 -."8."&$' 6.@'",&,-' Fomestic 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. %IIs, with their vast experience with modern corporate governance practices, are less tolerant of malpractice by corporate managers and owners 'dominant shareholder(. %II participation in domestic capital markets often lead to vigorous advocacy of sound corporate governance practices, improved efficiency and better shareholder value.

'3 I78".@!,6 7&"A'$ '<<!-!',-> A significant presence of %IIs in India can improve market efficiency through two channels. %irst, 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 IndiaLs prospects, and engage in stabilizing trades. +econd, at the level of individual stocks and industries, %IIs may act as a channel through which knowledge and ideas about valuation of a firm or an industry can more rapidly propagate into India. %or 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 &3 H'/6!,6 &,/ 8.#!$!@' <''/?&-A $"&!,!,6 $here are concerns that foreign investors are chronically ill informed about india, and this lack of sound information may generate herding 'a large number of %IIs buying or selling together( and positive feedback 'buying after positive returns, selling after negative returns(.$hese 6inds of behavior can exacerbate volatility ,and push prices away from fair values.
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?3 B&9&,-' .< 8&>7',$ @19,'"&?!9!$> $here 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. IndiaLs experience with %IIs so far, however, suggests that across episodes like the 0okhran blasts, or the .88, stock market scandal, no capital flight has taken place. A billion or more of >+ dollars of portfolio capital has never left India within the period of one month. *hen juxtaposed with IndiaLs enormous current account and capital account flows, this suggests that there is little vulnerability so far.

-(P.##!?!9!$> .< $&A'.@'"# *hile %IIs are normally seen as pure portfolio investors, without interest in control, portfolio investors can occasionally behave like %FI investors, and seek control of companies that they have a substantial shareholding in. +uch outcomes, however, may not be inconsistent with IndiaLs )uest for greater %FI. %urthermore, +#:ILs takeover code is in place, and has functioned fairly well, ensuring that all investors benefit e)ually in the event of a takeover.

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11. DETERMINANTS OF FOREIGN INSTITUTIONAL INVESTMENT After the initiation of economic reforms in the early ,--8s, the movement of foreign capital flow increased very substantially. $here are a lot of factors that deter mine the nature and cause of foreign institutional investment in a country a few of them being inflation exchange rate e)uity returns, government policies, price earring ratio and risk. ;ow if we try to analyze the relation of each of these factors with the level of foreign inflow in the country, we might have a better understanding. let us broadly classif y the factors into inflation, risk and stock market returns and understand the basic principle behind the inflows. &3E=1!$> "'$1",# - 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, %II flows to the domestic market. *hile the flows are highly correlated with e)uity returns in India, they are more likely to be the effect than the cause of these returns. . It is assumed that the e)uity returns have a positive impact on the %II inflow but foreign investors can also get involved in profit booking. $hey 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. ?3R!#A - 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 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. Ience, while studying the behavior of %II, it is important to consider the risk var iable. 9isk can be divided into ex-ante and unexpected risk. *hile the ex-ante risk certainly has an inverse relation with the foreign investment nothing can be clearly said about the unexpected risk.

-3I,<9&$!., - $he inflation no doubt has an inverse relation with the foreign investment inflow as the investor would keep in mind the purchasing power of the funds invested and as inflation increase i.e. the purchasing power declines the investor is most likely to withdraw his
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money. *hen inflation in the domestic country increases, the purchasing power of the funds invested declines, hence investors will withdraw from the domestic market. +imilar ly, when inflation in the foreign country increases, the purchasing power of funds invested in the foreign country declines, causing institutional investors to withdraw from the foreign market and make investment in the domestic 'Indian( market. /3E:-%&,6' "&$' ) *hen the value of the home currency is stronger the %II investments will also increase as the percentage of returns the %II get automatically increases and visa versa +o it can be said that the inflation and risk in the domestic country and return in the foreign country adversely affect the %II 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 %II.

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12. COMPARISON BET5EEN FIIS AND MUTUAL FUNDS INVESTMENTS $he comparison between the %II purchases and net investment with "utual funds for the period reveals some interesting information. As can be seen from the figure, $he amount of mutual fund investment in our country is very meager as compared to that of %IIs. It means that Indian public is still not putting its bet on mutual funds and. %IIs are much more aggressive in nature than mutual funds, who seem to have been very constant in there approach to the Indian e)uity market. +ince "ay&8<, when the stock market crashed by ?88 points in a day, the market has recovered smartly and the %IIs have been able to cash on to the gains by buying JNalue stocks2 during the lean periods, or buying on the dips. *hile the mutual funds have seems to taken a different route altogether and have been net sellers for most of the period since "ay&8<. :ut after the year .88< mutual %und investment have also a tremendous increase. $here 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 .88@ has so far been the best year for mutual fund industry as it has shown a tremendous growth in terms of net investment. $his corroborates the fact that now Indian public has started recognizing mutual fund as tool for investing in the capital market in india.

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13. ROLE OF INSTITUTIONAL INVESTORS IN CAPITAL MAR ET 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. *ith there increasing participation there has been a lot of effect on many parameters of the indian capital market. $he major effect of the increasing participation of the institutional investors has been observed in the following areas. L!=1!/!$>: M&"A'$ 9!=1!/!$> is a business, economics or investment term that refers to an assetLs ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. An act of exchange of a less li)uid asset with a more li)uid asset is called 9!=1!/&$!.,. L!=1!/!$> also refers both to that )uality of a business which enables it to meet its payment obligations, in terms of possessing sufficient li)uid assetsH and to such assets themselves. A li)uid asset has some or more of the following features. It can be sold ',( rapidly, '.( with minimal loss of value '/( anytime within market hours $he essential characteristic of a li)uid market is that there are ready and willing buyers and sellers at all times. An elegant definition of li)uidity is also the probability that the next trade is executed at a price e)ual to the last one. A market may be considered deeply li)uid if there are ready and willing buyers and sellers in large )uantities. $his is related to a market depth , where sometimes orders cannot strongly influence prices.$he li)uidity of a product can be measured as how often it is bought and soldH this is known as volume. 5ften investments in li)uid markets such as the stock exchange or futures markets are considered to be more li)uid than investments such as real estate, based on their ability to be converted )uickly. +ome assets with li)uid secondary markets may be more advantageous to own, are willingto pay a higher price for the asset than for comparable assets without a li)uid secondarymarket.0rice. ?1!9/!,6 7'-%&,!#7K *ith 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 attachOd to it and also in those days the cost of issuing an I05 was higher as compared to the funds that were being generated by the companies.*ith the help of %IIthe market has become more competitive. fair value
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of their.

R.9' .< #8'-19&$!.,K enerally people transact for three reasons hedging speculating and arbitraging Iedgers are those to intend to hedge their risk. +peculation may be defined as the purchase or sale of a good with a view to resale or repurchase at a later date, where the motive behind such action is the expectation of changes in the prices. +peculation is one of the most watched activity in any capital market its importance varies in different countries in countries like in >+ it forms an integral part of the market whereas in developing countries like India its taken as a threat. It is often believe that speculators even out the price fluctuation by due to change in demand and supply condition but the concerns about the adverse effects of speculation come from two sources. %irst, the possibility that speculation, instead of evening out price fluctuations,of speculation destabilizing rather than stabilizing prices and hence affecting resource allocation.$hrough speculation, future expected price not only depends on, but also has an impact on the spot price. $he market for shares is subject to much larger fluctuations than the market for bonds or even commodities. +hares represent a share in the expected future profits of a company. *hen fortunes of companies - both in the short run as well as in the medium to long run fluctuate, so do share prices. >ncertainty 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. $he effect of foreign speculative activity in emerging markets can be particularly beneficial if in the emerging market, li)uidity is poor %irst, the potential of market manipulation is acute in small emerging markets and li)uidity is often poor. Although there are many policy initiatives that could increase li)uidity and reduce the degree of collusion among large traders, there may not be a sufficient mass of domestic speculators to ensure market li)uidity and efficiency. +econd, opening the market to foreign speculators may increase the valuation of local companies, thereby reducing the cost of e)uity capital. V.9&$!9$>K Nolatility most fre)uently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon. It is often used to )uantify the risk of the instrument over that time period. Nolatility is typically expressed in annualized terms, and it may either be an absolute number 'MC( or a fraction of the mean 'CB(. Nolatility is often viewed as a negative in that it represents uncertainty and risk . Iowever, 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. $he possibility for money to be made via volatile markets is how short term market players like day traders hope to make money, and is in contrast to the long term investment view of buy and hold . In todayLs markets, it is also possible to trade volatility directly, through the use of derivative securities such asoptions andvariance swaps.
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%oreign 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. iven the presence of foreign institutional investors in +ensex companies and their active trading behavior, small and periodic shifts in their behavior lead to market volatility. +uch volatility is an inevitable result of the structure of India&s financial markets as well. "arkets in developing countries like Indiaare thin or shallow in at least three senses. %irst, only stocks of a few companies are actively traded in the market. $hus, although there are more than ?,888 companies listed on the stock exchange, the :+# +ensex incorporates just /8 companies, trading in whose shares is seen as indicative of market activity. +econd, 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 %II investment and enhances investment and when the correction in the stock prices begins it would have to be a pull out by the %II and can result in sharp decline in the prices. $he 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-P-vis the dollar $his 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 whenany correction begins. Apart from that the growing realization by the %IIs 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. $his 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. 5verall 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 due to the performance of their e)uity market or their non e)uity returns. $herefore 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.

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14. A STUDY OF MAJOR EPISODES OF VOLATILITY 14.1 A#!&, M&B." E8!#./'# .< V.9&$!9!$> #xcess volatility induced by the foreign investment is often taken as an argument against liberalization with such incidences happening in the past. 3et us now try to find out whether the foreign investors in particular destabilize the capital market beyond a level. $he two most common examples of such destabilization caused by the portfolio investment particularly the hedge funds are the Asian crisis of ,--@ and the #9" crisis of ,--.. $he high-profile #9" crisis of ,--. came with speculators betting. I. #9" crisis that the member countries of the #uropean "onetary +ystem '#"+( were converging to the #uropean "onetary >nion '#">(, 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. $he expectation regarding the extent of exchange rate adjustment led to Jcarry trade& - borrowing from the low interest #9" 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 #9" crisis, the role of the hedge funds in the crisis was limited. $he practice of extending lines of credit to offshore entities on a non-recourse basis against collateral was not widely accepted by most banks, and foreign exchange trading was primarily an inter-bank activity. #ast Asian crisis After ten years ',-?=--@( of pegging of the $hai baht to the >.+. dollar, on Guly ., ,--@, the peg had to be abandoned, and this created pressure on other Asian currencies, and eventually brought down the "alaysian ringgit, the Indonesian rupiah, the 0hilippine peso, and the 6orean won. :y end-,--@, these currencies had lost between << and C= percent of their value against the >.+. dollar, bankrupting many Asian corporations and banks that had borrowed in foreign currencies, and leading to a significant contraction of the economies. $his episode is known as the #ast Asian crisis or Asian crisis. %oreign investors were often blamed for the dramatic difficulties of the #ast Asian countries at the times of the ,--@ 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. %oremost among them are the pursuit of a positive feedback strategy
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that is buying when prices are rising and selling when prices are falling, thereby exacerbating both the upswings and downswings. 0ositive 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 0rime "inister "ahathir "ohammed of "alaysia accused hedge funds of being the modern e)uivalent of 1highwaymen2 in breaking the Asian currencies. Aggressive flow of the carry trade down the credit spectrum in Asia during the ,--8s -from sovereign credit, to top -tier domestic commercial banks, to lower-tier commercial banks and finance companies, and finally to firms. $he excessive build-up of foreign debt, they attribute to the confidence of domestic companies and banks in the fixed official exchange rate. %II investment in e)uities had little role to play in the crisis. %ung, Isieh, and +tsatsaronis '.888( report 1At 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 "onetary %und 'I"%( responded by examining the role of hedge funds in the Asian currency crisis. $heresulting study by #ichengreen, "athieson, !hadha, Gansen, 6odres, and Furing the stock market scam which shook the capital market in india the %II were also one of the major factors which exacerbates the fall in the sensex. Furing the :lack "onday episode the %II were also on a heavy selling spree which ultimately lead to some major fall in the sensex value. %II investment behavior during these four specific events indicates that these events did affect the behavior of the foreign portfolio investors. :ut, these events did affect domestic investors& behavior as well. $hese experiences show that %II outflow of as much as a billion dollars in a month - which corresponds to an average of M<8 million or 9s.,@8 crore per day - has never been observed. $hese values - 9s.,@8 crore per day - are small when compared with e)uity turnover in India. In calendar .88<, gross turnover on the e)uity market of 9s.?? lakh crore contained 9s.C lakh crore of gross turnover by %IIs. $his suggests that as yet, %IIs are a small part of the Indian e)uity market. $ransactions by %IIs of 9s.C lakh crore in a year might have been large in ,--/, but the success of a radical new market design in the Indian e)uity market have led to enormous growth of li)uidity and market efficiency on the e)uity market. $hrough this, India&s ability to absorb substantial transactions on the e)uity market appears to be in place.$he net %II inflows into India have been less volatile compared to other emerging markets this stability could be attributed to several factorsK +trong economic fundamentals and attractive valuation of companies. Improved regulatory standards, high )uality of disclosure and corporate governance re)uirement, accounting standards, shortening of settlement cycles, efficiency of clearing and settlement systems and risk management mechanisms. 0roduct diversification and introduction of derivatives. +trengthening of the rupee dollar exchange rate and low interest rates in the >+.

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I.

0ost .88< "ajor Nolatile #pisodesK

As from the above graph it is clear that in the month of jan .88? the :+# sensex was already moving down due to the weak global cues and >+ recession and similarly the %II investment fell drastically during that period running panick among the investors and further exacerbating the fall. :ut 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. :y looking at the above graph we can very well say that this time around the fall of :+# sensex was majorly due to the %II which went on a selling spree which lead to the fall of the market during this !rash. %II acted in this fashion because of the weak global cues i.e at that point of time other emerging markets were also down . $he fall of @=- points by sensex on Fec ,@,.88@ was attributed to the fact mainly due to the subprime losses and also was exacerbated due to the withdrawl of investments by the %II. As the sub prime losses mainly hit the >+ economy and the majority of %II participating in the Indian capital market are from >+ .$o cover there losses in >+ they started selling in india which lead to the fall of sensex on that particular day and subse)uent days. Furing the month of 5ctober .88@ indian govt took some strict measure to control the usage of the 0articipatory notes. $he restrictions proposed by +#:I in regulating participatory notes in a sudden announcement wrought havoc in the operations of the share market causing a fall of over ,,@88 points in the +ensex on *ednesday. +#:I should have used some pragmatic caution by avoiding the announcement and introducing regulatory steps in a phased manner. $he share market is extremely vulnerable to the sentiments created by the utterances of those in regulatory authority. $his lead the %II to withdraw from the Indian market as they were not sure of how the measure taken by the govt will be implemented .$his is clearly vivble from the above graph that this time around the %II were the main cause of the crash of the sensex on ,? oct . :ut also there comes an interesting fact that there was also a heavy selling on .. 5ctober but this time the %II *ithdrawl effect was offset by the Iuge investment made by domestic institutional investor specially 3I!,which saved the market from a heavy meltdown. $he reasons being given for the crash are the sale of 9s @/88 crore '9s @/ :illion( shares by %II&s in the past , week, an expected increase in interest rates by the >+ %eds, a crash in the international commodity prices, and the straw which broke its back seems to be a government circular which was interpreted that %IIs should be taxed. 0 !hidambaram, the country&s %inance "inister, issued an evening press release denying the latter.
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15. STATISTICAL ANALYSIS %or the purpose of statistical analysis I have considered @ yrs data of %II ;et Investments, "utual %unds ;et Invesments ,;+# +E0 !;Q ;ifty and :+# +ensex Indices. +tatistical Analysis is carried out to find the degree of association between the ;et investments by the institutional investors with the capital market i.e '+ensex E ;ifty indices(. +ince @ years data is a very comprehensive data and the internal and the extraneous factors have been changing over the time which does have impact on the Indian capital market. +o in order to have appropriate data I calculated the volatility of :+# +ensex for each year and then divided them into / periods i.e .88,-.88/,.88<.88C,.88=-%eb .88?.$hen I have applied regression analysis to find out the degree of association among the %II ;et Investments ,the +ensex and "utual %und Investments , the +ensex . +imilarly the degree of association is been calculated for ;ifty index with %II and "utual funds net investments. $o calculate the volatility of the :+# Index and to find out the degree of association ,the formula and the methodology is given below. I. V.9&$!9!$> Nolatility is a measure of the range of an asset price about its mean level over a fixed amount of time. It follows that volatility is linked to the variance of an asset price. If a stock is labeled as volatile then the price will varies greatly over time. !onversely, a less volatile stock will have a price that will deviate relatively little over time. +ince volatility is associated with risk, the more volatile that a stock is, the more risky it is. !onse)uently, the more risky a stock is, the harder it is to say with any certainty what the future price of the stock will be. R'-.77',/&$!.,# After analyzing the nature and behavior of the foreign institutional investment in the past and itsinfluence 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. overnment should certainly encourage foreign institutional investment but should keep a check on the volatility factor. 3ong term funds should be given priority and encouraged some of the actions that could be taken to ensure stability are

+trengthening domestic institutional investors

$he participation of domestic pension funds in the e)uity market would augment the diversity of views on the market and hence the domestic pension funds must be encouraged . 4 :road basing of eligible entities
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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. 4 5perational flexibility to impart stability to the market $he stability of foreign investment in India will be enhanced if %IIs are able to switch between e)uity and debt investments in India, depending on their view about future e)uity returns. +#:I can make such policies. 4 6nowledge activities and research programs $here must be a lot of research economic affairs regulators in India. programs and studies conducted by the

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16. CONCLUSION After analyzing the nature of %II in the past it would be safe enough to say 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 %II 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. %oreign investment certainly are influencing the Indian stock market but the extent of this influence cannot be determined or rather the extent of India&s dependence on the %IIs is a subjective issue as on no clear grounds can we see a permanent relationship between the stock market returns and the %oreign inf lows. :ut 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.

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1+. BIBLIOGRAPHY: RESEARCH PAPER 6.+. !halapati 9ao, 6.N.6. 9anganathan and ".9. "urthy,2 %oreign Institutional Investments And $he Indian +tock "arket2. 0aramita "ukherjee, +uchismita :ose and Fipankor !oondoo , 1%oreign Institutional Investment In $he Indian #)uity "arket2. 9ajesh !hakrabarti,2%ii %lows $o IndiaK ;ature And !auses2 JOURNALS Information from Articles from 1:usiness world2, 1$he #conomic $imes2 etc are being researched. !urrently information from websites of 9:I, +#:I and %inance "inistry are being referred. BOO S %or concepts, books on %oreign Institutional Investors, I!%AI $ext. %or concepts, books on %oreign Institutional Investors an Introduction, I!%AI $ext. +ecurities "arket in India - An 5verview - ;+# publications %or concepts, books on Indian !apital "arkets $rends and 9eform, I!%AI $ext. %inancial "anagement by I" 0andey

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5EBSITES 4www.nseindia.com 4www.finmin.nic.in 4www.bseindia.com 4www.investopedia.com 4www.indiainfoline.com 4www.amfiindia.com 4www.livemint.com 4www.sebi.gov.in 4www.capitaline.com

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