Dissertation on the Topic

“ROLE AND IMPACT OF FIIs ON INDIAN CAPITAL MARKET”

Session 2017-18

SUBMITTED TO:- SUBMITTED BY:-

DR. Anindita Chakraborty MR. PIYUSH GUPTA

Assistant Professor MBA

Faculty of Management Studies
17423MBA065
Banaras Hindu University
Varanasi (UP)
 ACKNOWLEDGEMENT
I would like to express my deepest regards to Mahamana Madan Mohan Malaviya, whose
blessing stands great university.

I would like to express my deepest appreciation to all those who provided me the possibility to
complete this report. A special gratitude I give to my faculty mentor, Dr.Anindita Chakraborty,
whose contribution in stimulating suggestions and encouragement, helped me to coordinate my
project especially in writing this report.
 Certificate

This is to certify Mr. Piyush Gupta student of MBA of Institute of Management Studies, Banaras
Hindu University, Varanasi has satisfactorily completed the minor project on “Role And Impact
Of FII’s On Indian Capital Market” under my supervision & guidance as partial fulfillment of
requirement of MBA.

____________________________

(Signature)
DR. Anindita Chakraborty,
Assistant Professor
Faculty of Management Studies
Banaras Hindu University
Varanasi (UP)
 DECLARATION
I, Piyush Gupta, hereby like to declare that the project work entitled “FINANCIAL LITERACY
IN INDIA” submitted to Institute of Management Studies, Banaras Hindu University, is a record
of an original work done by me under the guidance of Dr.Anindita Chakraborty, Faculty,
Institute of Management Studies, BHU.

This project work is submitted in partial fulfilment of the requirements for the award of degree of
Masters of Business Administration. The results embodied in this report have not been submitted
to any other university or Institute for award of any degree or diploma.

____________________________
(Signature)
Piyush Gupta,
Master of Business Administration (2017-19),
Institute of Management Studies, BHU
 EXECUTIVE SUMMARY

Since the beginning of liberalization FII flows to India have steadily grown in
importance. As a part of its initiative to liberalize its financial markets, India
opened her doors to Foreign Institutional Investors in September 1992. This event
represents a landmark event since it resulted in effectively globalizing its financial
services industry.
The foreign institutional investors (FIIs) have emerged as important players in the
Indian equity market in the recent past. This study makes an attempt to develop an
understanding of the dynamics of the trading behavior of FIIs. Along with this the
purpose of study is to find out the impact of FII inflows on Indian stock market, do
we need FII inflows? Do FII play an important role in Indian equity market? And
at last should we encourage FII inflows?
For this monthly, yearly data of FII inflow is taken into consideration. First, the
introduction about the Indian economy and FIIs is given followed by the
conceptual framework, guidelines, investing limits in Indian companies is
observed. Second, trends in FII flows and FII activities up to March 2012 are
considered. This is followed by the role of FIIs in the Indian stock market.
As per the study done it is found out that the trading behavior of FII do not have a
destabilizing impact on the equity market. It can be said that we can encourage FII
inflows into India through appropriate regulation of PNs and sub-accounts and
invent a series of check and balances system so as to protect the economy and look
over the fact that the economy works best with such kind of filters system. Thus, it
can be said that FII do play an important role in Indian equity market.
TABLE OF CONTENTS
 CHAPTER 1 : INRODUCTION TO THE PROJECT

Objective:

 FII inflow and outflow trends in Indian Capital Markets during the post liberalization
period.

 Influence of FII inflow and outflow trends on Indian Capital Markets

 To study the importance of FII on Indian economy as a whole

Type of Research
Exploratory Research method applied for the study. As an exploratory study is conducted with
an objective to gain familiarity with the phenomenon or to achieve new insight into it, this study
aims to find the new insights in terms of finding the relationship between FII'S and Indian Stock
Markets.

Rationale and Scope of the Study and Limitations

Foreign Institutional Investors are said to be the driver of the market. Those are the one cause
behind the rise and fall of Sensex and Nifty. FII investment trends tell us about many effects that
the Indian market is experiencing. The companies in which they invest are getting overvalued.
Whenever FII find any trouble they withdraw their investments.
Scope of the study is very broader and covers Capital Market Indices and its comparison with
foreign institutional investments. But, study is only going to cover foreign investments in form of
equity. The time period is from liberalization year 1992 to March 2012 as it will give exact
impact in both the bullish and bearish trend. The study will provide a very clear picture of the
impact of foreign institutional investors on Indian stock indices. It will also describe the market
trends due to FIIs inflow and outflow. The study would be helpful for further descriptive studies
and moreover, it would be beneficial to gain knowledge regarding foreign institutional
investments, their process of registration and their impact on Indian stock market.

The data on daily basis can give more positive results.In the study only FII equity investment and
sales were considered. Other economic variables of macro and micro environment such as
foreign exchange rate, speculative trading, interest rate prevailing in the market, political factors,
government policies related to specific sectors etc. which can affect the performance of Indian
capital market and FII inflow to the Indian capitalmarket were not considered. Inclusion of these
factors can provide more accurate insight to the findings of the present study
 Literature Review

According to India Report, Astaire Research

“A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for
an IMF bailout, gold was transferred to London as collateral, the rupee devalued and
economic reforms were forced upon India. That low point was the catalyst required to
transform the economy through badly needed reforms to unshackle the economy. Controls
started to be dismantled, tariffs, duties and taxes progressively lowered, state monopolies
broken, the economy was opened to trade and investment, private sector enterprise and
competition were encouraged and globalization was slowly embraced. The reforms process
continues today and is accepted by all political parties, but the speed is often held hostage by
coalition politics and vested interests.”

As a part of the reforms process, the Government under its New Industrial Policy
revamped its foreign investment policy recognizing the growing importance of foreign direct
investment as an instrument of technology transfer, augmentation of foreign exchange reserves
and globalization of the Indian economy. Simultaneously, the Government, for the first time,
permitted portfolio investments from abroad by foreign institutional investors in the Indian
capital market. The entry of FIIs seems to be a follow up of the recommendation of the
Narsimhan Committee Report on Financial System. While recommending their entry, the
Committee, however did not elaborate on the objectives of the suggested policy. The committee
only suggested that the capital market should be gradually opened up to foreign portfolio
investments.In India, the purchase of domestic securities by FIIs was first allowed in September
1992 as part of the liberalization process that followed the balance of payment crisis in 1990-91.

From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all
the securities traded on the primary and secondary markets, including shares, debentures and
warrants issued by companies which were listed or were to be listed on the Stock Exchanges in
India. The Indian market was integrated with the world economy and international investors
were invited to participate in India. Consequently, the committee on “the reforms of the financial
system” under the chairmanship of Mr M. Narsimham Rao was made which sought for reforms
in the financial sector.

Now days, a significant portion of Indian corporate sector's securities are held by Foreign
Institutional Investors, such as pension funds, mutual funds and insurance companies. These
investors are often viewed as sophisticated investors as these institutional investors are better
informed and better equipped to process information than individual investors.
 CHAPTER 2: INTRODUCTION TO THE TOPIC

2.1 Indian Capital Markets: An Overview

It all started in India, when twenty-two agents started the Bombay Stock Exchange (BSE). That
was way back in 1875. From then on, Indian markets have evolved continuously. Transparency
is a buzzword in the Indian business finance scene. Characterized by operational excellence, and
conformity to rules and regulations, the Indian financial market is a beacon of the economy. The
Indian stock market is probably the oldest in Asia. In 1994, the National Stock Exchange (NSE)
was commenced. NSE’s objectives are to provide for speedy transactions. It also encouraged
small investors.

The Company Act of 1956 governs the securities market in India. Having the powers to regulate
companies, the central government and the company law board abide by the companies act of
1956. Powers such as auditing of accounting information, reviewing the business finance model
and looking into the other affairs of the company are given to the government. Investigators from
the directorate of investigation do the audits.

The Securities Contracts (Regulation) Act of 1956 and the Securities and Exchange Board of
India (SEBI) Act of 1992.are the other body of rules that govern the Indian capital markets.
Control of stocks, listings, contracts and a variety of other things are dealt by the former act.
SEBI is concerned with the growth of the securities and business finance market in India. It
looks into various other things like eligibility criteria for registration, developing the code of
conduct, and so on. One of SEBI’s main activities is to protect the business finance interests of
investors, by providing the facilities to safeguard their wealth. In many ways, SEBI is
instrumental in attracting investments, due to the safe nature in the Indian business finance scene.

At a broad level, the Indian security market can be grouped into the savers and the spenders. The
savers are normal households, and the spenders are companies and the government. If the money
of the savers is put in financial securities, then spenders get money to operate, and in turn the
savers get interest or dividend to enjoy. Hence the security market is where the companies meet
the savers.
The changes in economic scenario(after the liberalization) and the economic growth have raised
the interest of Indian as well as Foreign Institutional Investors(FII’s) in the Indian capital
market. The recent massive structural reforms on the economic and industry front in the form of
de-licensing rupee convertibility, tapping of foreign funds, allowing foreign investors to come to
India, have resulted, on one hand, in the quantum leap in activities/volume in the Indian capital
market, and on the other hand and more importantly, that the Indian capital market has
undergone a metamorphosis in terms of institutions, instruments, etc. The capital market in India
is rightly termed as an emerging and promising capital market. During last 20 years or so, the
Indian capital market has witnessed growth in volume of funds raised as well as of.

The buoyancy in the capital market has appeared as a result of increasing industrialisation,
growing awareness globalisation of the capital market, etc. Several financial institutions,
financial instruments and financial services have emerged as a result of economic liberalisation
policy of the Government of India.

The capital market has two interdependent segments :the primary market and the secondary
market. The primary market is the channel for creation of new securities. These securities are
issued by public limited companies or by government agencies’ In the primary market, the
resources are mobilized either through the public issue or through private placement route. It is a
public issue if anybody and everybody can subscribe for it, whereas if the issue is made available
to a selected group of persons it is termed as private placement. There are two major types of
issuers of securities, the corporate entities who issue mainly debt and equity instruments and the
Government (Central as well as State) who issue debt securities. These new securities issued in
the primary market are traded in the secondary market. The secondary market enables
participants who hold securities to adjust their holdings in response to changes in their
assessment of risks and returns.

2.2Foreign Institutional Investments (FIIs)

In present era of globalization no country or economy has been left untouched from international
trade and commerce. More access to international capital markets and foreign investments has
helped developing countries surmount their less developed capital markets. During the past few
years, a flow of capital has been seen from the developed part of the world to the less developed
economies which has led to decrease in the vulnerability of developing countries to financial
crisis by reduction in their external debt burden from 39% of gross national income in 1995 to
26% in 2006 and increase in foreign exchange reserves to 92% of long term debt and 423% of
more volatile short term debt in 2006. Over the years same scenario has been witnessed in the
Indian economy also. And thus, today most of the market entities are interested in attracting
foreign capital as it not only helps in creating liquidity for the firms stock and the stock market
but also leads to lowering of the cost of the capital for the firms and allows them to compete
more effectively in the global market place.

Foreign Investment

It has been defined as “a transfer of funds or materials from one country (called capital exporting
country) to another country (called host country) in return for a direct or indirect participation in
the earnings of that enterprise.” Foreign investments provide a channel through which one can
have access to foreign capital and after the opening up of the Indian economy; these have grown
in leaps and bounds.

Basically foreign investment can be made through following routes:

 Foreign Direct Investment (FDI)

 Foreign Portfolio Investment (FPI).
 Private Equity investments-Foreign venture capital investor(FVCI)

Firstly, foreign direct investment pertains to international investment in which the investor
obtains a lasting interest in an enterprise in another country. Mostly it takes the form of buying or
constructing a factory in a foreign country or adding improvements to such a facility in form of
property, plants or equipments and thus is generally long term in nature. On the other hand, a
private equity investment is one made by foreign investors in Indian Venture Capital
Undertakings (VCU) and Venture Capital Funds (VCF). Thirdly, a foreign portfolio
investmentis a short-term to medium- term investment mostly in the financial markets and is
commonly made through foreign Institutional Investors (FIIs), non resident Indian (NRI) and
persons of Indian origin (PIO).

2.3Foreign Institutional Investors

The term ‘FII’ is used to denote an investor, mostly in 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 the entity is originally incorporated. According to Securities and Exchange Board
of India (SEBI) it is “an institution that is a legal entity established or incorporated outside India
proposing to make investments in India only in securities”. These can invest their own funds or
invest funds on behalf of their overseas clients registered with SEBI. The client accounts are
known as ‘sub-accounts’. A domestic portfolio manager can also register as FII to manage the
funds of the sub-accounts. From the early 1990s, India has developed a framework through
which foreign investors participate in the Indian capital market. A foreign investor can either
come into India as a FII or as a sub-account. As on March 31, 2011, there were 1,722 FIIs
registered with SEBI and 5,686 sub-accounts registered with SEBI as on March 31, 2011

Basically FIIs have a huge financial strength and invest for the purpose of income and capital
appreciation. They are no interested in taking control of a company. Some of the big American
mutual funds are fidelity, vanguard, Merrill lynch, capital research etc. They are permitted to
trade in securities in primary as well as secondary markets and can trade also in dated
government securities, listed equity shares, listed non convertible debentures/bonds issued by
Indian company and schemes of mutual funds but the sale should be only through recognized
stock exchange. These also include domestic asset management companies or domestic portfolio
managers who manage funds raised or collected or bought from outside India for the purpose of
making investment in India on behalf of foreign corporate or foreign individuals. In the Indian
context, foreign institutional investors (FIIs) and their sub-accounts mostly use these instruments
for facilitating the participation of their overseas clients, who are not interested in participating
directly in the Indian stock market.

FIIs contribute to the foreign exchange inflow as the funds from multilateral finance institutions
and FDI are insufficient.

 It lowers cost of capital, access to cheap global credit.

 It supplements domestic savings and investments.
 It leads to higher asset prices in the Indian market.
 And has also led to considerable amount of reforms in capital market and financial sector.
2.4 Introduction to FII

Since 1990-91, the Government of India embarked on liberalization and economic reforms with
a view of bringing about rapid and substantial economic growth and move towards globalization
of the economy. As a part of the reforms process, the Government under its New Industrial
Policy revamped its foreign investment policy recognizing the growing importance of foreign
direct investment as an instrument of technology transfer, augmentation of foreign exchange
reserves and globalization of the Indian economy. Simultaneously, the Government, for the first
time, permitted portfolio investments from abroad by foreign institutional investors in the Indian
capital market. The entry of FIIs seems to be a follow up of the recommendation of the
Narsimhan Committee Report on Financial System. While recommending their entry, the
Committee, however did not elaborate on the objectives of the suggested policy. The committee
only suggested that the capital market should be gradually opened up to foreign portfolio
investments. From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in
all the securities traded on the primary and secondary markets, including shares, debentures and
warrants issued by companies which were listed or were to be listed on the Stock Exchanges in
India. While presenting the Budget for 1992-93, the then Finance Minister Dr. Manmohan Singh
had announced a proposal to allow reputed foreign investors, such as Pension Funds etc., to
invest in Indian capital market. To operationalise this policy announcement, it had become
necessary to evolve guidelines for such investments by Foreign Institutional Investors (FIIs).
A major development in our country post 1991 has been liberalization of the financial sector,
especially that of capital markets. Our country today has one of the most prominent and followed
stock exchanges in the world. Further, India has also been consistently gaining prominence in
various international forums, though we still have a long way to go.

2.5Investments by FIIs

A FII may invest through 2 routes:

 EquityInvestment
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)
 100% Debt
100% investment has to be made in debt securities only

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

100% Debt route: In case of Debt Route the FIIs can invest in the following instruments:

A. Debentures (Non Convertible Debentures, Partly Convertible Debentures etc.)

B. Bonds
C. Dated government securities
D. Treasury Bills
E. Other Debt Market Instruments

It should be noted that foreign companies and individuals are not be eligible to invest through the
100% debt route.

The evolution of FII policy in India has displayed a steady and cautious approach to
liberalisation of a system of quantitative restrictions (QRs). The policy liberalization has taken
the form of,

(i) relaxation of investment limits for FIIs;

(ii) relaxation of eligibility conditions;

(iii) liberalisation of investment instruments accessible for FIIs

Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside India

which proposes to make investment in India in securities. A Working Group for Streamlining of
the Procedures relating to Foriegn Institutional Investors, constituted in April, 2003, inter alia,
recommended streamlining of SEBI registration procedure, and suggested that dual approval
process of SEBI and RBI be changed to a single approval process of SEBI. This recommendation
was implemented in December 2003.

Currently, entities eligible to invest under the FII route are as follows:
  As FII: Overseas pension funds, mutual funds, investment trust, asset management
company, nominee company, bank, institutional portfolio manager, university funds,
endowments, foundations, charitable trusts, charitable societies, a trustee or power of
attorney holder incorporated or established outside India proposing to make proprietary
investments or with no single investor holding more than 10 per cent of the shares or
units of the fund.
 As Sub-accounts: The sub account is generally the underlying fund on whose behalf the
FII invests. The following entities are eligible to be registered as sub-accounts, viz.
partnership firms, private company, public company, pension fund, investment trust, and
individuals.

FIIs registered with SEBI fall under the following categories:

 Regular FIIs- those who are required to invest not less than 70 % of their investment in
equity-related instruments and 30 % in non-equity instruments.
 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

Prohibitions on Investments:

Foreign Institutional Investors 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:

 Business of chit fund

 Nidhi Company
 Agricultural or plantation activities
 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).
 Trading in Transferable Development Rights (TDRs).

Trends of Foreign Institutional Investments in India.

Portfolio investments in India include investments in American Depository Receipts (ADRs)/

Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in
offshore funds. Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies
were allowed to undertake portfolio investments in India. Thereafter, the Indian stock markets
were opened up for direct participation by FIIs. They were allowed to invest in all the securities
traded on the primary and the secondary market including the equity and other
securities/instruments of companies listed/to be listed on stock exchanges in India.

Procedure for Registration: The Procedure for registration of FII has been given by SEBI
regulations. It states- “no person shall buy, sell or otherwise deal in securities as a Foreign
Institutional Investor unless he holds a certificate granted by the Board under these regulations”.
An application for grant of registration has to be made in Form A, the format of which is
provided in the SEBI (FII) Regulations, 1995.

2.6 Entities which can register as FII’s in India- Eligibility

Entities who propose to invest their proprietary funds or on behalf of “broad based” funds (fund
having more than twenty investors with no single investor holding more than 10 per cent of the
shares or units of the fund) or of foreign corporate and individuals and belong to any of the under
given categories can be registered for Foreign Institutional Investors (FII’s)

 Pension Funds
 Mutual Funds
 Investment Trust
 Insurance or reinsurance companies
 Endowment Funds
 University Funds
 Foundations or Charitable Trusts or Charitable Societies who propose to invest on their
own behalf
 Asset Management Companies
 Nominee Companies
 Institutional Portfolio Managers
 Trustees
 Power of Attorney Holders
 Banks
 Foreign Government Agency
 Foreign Central Bank
 International or Multilateral Organization
 or an Agency thereof

FII Regulations:
Investment by FIIs is regulated under SEBI (FII) Regulations, 1995. Following are some of
important regulations by SEBI and RBI:

1. A Foreign Institutional Investor may invest only in the instruments mentioned earlier.

2. The total investments in equity and equity related instruments (including fully convertible
debentures, convertible portion of partially convertible debentures and tradable warrants) made
by a FII in India, whether on his own account or on account of his sub- accounts, should be at
least 70% of the aggregate of all the investments of the FII in India, made on his own account
and through his sub-accounts.

3. The cumulative debt investment limit for FII investments in Corporate Debt is US $15 billion.
The amount was increased from US $6 billion to USD 15 billion in March 2009.

4. US $8 billion will be allocated to the FIIs and Sub-Accounts through an open bidding platform
while the remaining amount is allocated on a ‘first come first served’ basis subject to a ceiling of
Rs.249 cr. per registered entity.

5. The debt investment limit for FIIs in government debt is currently capped at $5 billion and
cumulative investments under 2% of the outstanding stock and no single entity can be allocated
more than Rs. 1000 crores of the government debt limits.

Further, in 2008 amendments were made to attract more foreign investors to register with
SEBI, these amendments are:

1. The definition of “broad based fund” under the regulations was substantially widened allowing
several more sub accounts and FIIs to register with SEBI.

2. Several new categories of registration viz. sovereign wealth funds, foreign individual, foreign
corporate etc. were introduced,

3. Registration once granted to foreign investors was made permanent without a need to apply
for renewal from time to time thereby substantially reducing the administrative burden,

4. Also the application fee for foreign investors applying for registration has recently been
reduced by 50% for FIIs and sub accounts

5. 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.
6. Also the rigid criteria of requiring FIIs and sub-account to register as a 70:30 FII/ sub-account
or 100% debt FII/sub-account has recently been done away with(as has been discussed above in
the essay).

With regard to investments in the secondary market, SEBI states that:

 The Foreign Institutional Investor is allowed to transact business only on the basis of
taking and giving deliveries of securities bought and sold.
 Short selling in securities is not allowed. However, in December 2007, abroad regulatory
framework enabling short selling by FIIs was put in place. Which stipulated that naked
short selling was not permitted and settlement of securities sold short would be through a
mechanism for borrowing of securities.
 FIIs are not permitted to short sell equity shares which are in the caution list of RBI.
 Equity shares can be borrowed by FIIs only for the purpose of delivery into short sale.
 No transactions on the stock exchange can be carried forward.
 Transaction of business in securities can be carried out only through stock brokers who
has been granted a certificate by the Board.
 A Foreign institutional Investor or a sub-account having an aggregate of securities worth
rupees ten crore or more, as on the latest balance sheet date, can settle their only through
dematerialised securities.
 Securities have to be registered in the name of the Foreign Institutional Investor, if he is
making investments on his own behalf or in his name on account of his sub-account, or in
the name of the sub-account, in case he is investing on behalf of the sub-account.
 The purchase of equity shares of each company by a Foreign Institutional Investor
investing on his own account cannot exceed ten percent of the total issued capital of that
company.
 Investment by individual FIIs cannot exceed 10% of paid up capital. Investment by
foreign registered as sub accounts of FII cannot exceed 5% of paid up capital. All FIIs
and their subaccounts taken together cannot acquire more than 24% of the paid up capital
of an Indian Company. An Indian Company can raise the 24% ceiling to the Sectoral Cap
/ Statutory Ceiling by passing a resolution by its Board of Directors followed by passing
a Special Resolution to that effect by their General Body.
 For FIIs investing in the equity shares of a company on behalf of his sub-accounts, the
investment on behalf of each such sub-account cannot exceed ten percent of the total
issued capital of that company.

The FII position limits in a derivative contracts (Individual Stocks)

  The FII position limits in a derivative contract on a particular underlying stock i.e. stock
option contracts and single stock futures contracts are:
 For stocks in which the market wide position limit is less than or equal to Rs. 250 Cr, the
FII position limit in such stock is 20% of the market wide limit.
 For stocks in which the market wide position limit is greater than Rs. 250 Cr, the FII
position limit in such stock is Rs. 50 Cr.

2.7 FIIs and their impact on Indian Stock market

It is influence of the FIIs which changed the face of the Indian stock markets. Screen based
trading and depository are realities today largely because of FIIs. Equity research was something
unheard of in the Indian market a decade ago. It was FII which based the pressure on the rupee
from the balance of payments position and lowered the cost of capital to Indian business. It is
due to the FIIs that a concept like corporate governance is being increasingly adopted by Indian
companies; this is benefiting domestic investors also. FIIs are the trendsetters in any market.
They were the first ones to identify the potential of Indian technology stocks. When the rest of
the investors invested in these scrips, they exited the scrips and booked profits. Before the arrival
of FIIs, the activity in stocks used to be evenly attributed with little differences between volumes
in specified and cash groups. However since FIIs concentrate on the top 200 companies against
the 6,000 listed companies on BSE, the stock trading activity has concentrated to these liquid
scrips making them less liquid scrips totally illiquid. Thus, FIIs have become the driving force
behind the movements of the stock indices on the Indian stock markets.

Rolling settlement was introduced at the insistence of FIIs as they were uncomfortable with the
badla system. The major beneficiaries of the rolling settlement system are FIIs as short
settlement cycles offer them quick exit from the market.

With their massive financial muscle FIIs have almost replaced conventional market of the Indian
bourse. Today financial institutions and mutual funds including UTI can do little to help the
stock markets at a time of crisis. Even UTI, which used to be counter force for FIIs has ceased to
play that role in the Indian stock markets.

It is expected that with the adoption of international practices such as rolling settlement and
derivatives FII participation will increase and more money will flow into the Indian capital
market.
2.8 EFFECTS ON INDIAN ECONOMY

The various reforms introduced by Indian government to encourage FIIs to invest in Indian
market have been effective to such an extent that in November 2010 FIIs stood at 5426 whereas
it stood at 1713 in early 1990s. The changes have led to increase in liquidity, reduce risk,
improve disclosure and thus FIIs have become the corner stone in the phenomenal rise of the
Indian stock market. From the table below it becomes apparent that from just Rs 4 crores of net
investment in 1992-93, the investment rose to Rs 5445 the next financial year when the
economic changes were introduced and further today in 2010-11 it stands at Rs 133,049.

YEAR Net Investments by FIIs (rs cr.)

1992-93 4
1993-94 5445
1994-95 4777
1995-96 6721
1996-97 7386
1997-98 5908
1998-99 -729
1999-00 9765
2000-01 9682
2001-02 8273
2002-03 2669
2003-04 44000
2004-05 41416
2005-06 47,602
2006-07 36,396.60
2007-08 71,952
2008-09 -53,796
2009-2010 84,269
2010-2011 133,049

In 1993 the first and only FII to invest in India was Pictet Umbrella Trust Emerging Markets’
Fund, an institutional investor from Switzerland but today Indian growth story has attracted
global majors like CLSA, HSBC, Citigroup, Merrill Lynch, Crown Capital, Fidelity, Goldman
Sachs and Morgan Stanley, among others to enter the Indian financial market. Goldman Sachs
and Macquarie have acquired a 20% stake each in PTC India Financial services Ltd. Temasek
Holdings, Investment Corporation of Dubai, Goldman Sachs, Macquarie, AIF Capital, Citigroup
and India Equity Partners (IEP) have picked a combined stake of 10% in Bharti Infratel. Also an
entity of Merrill Lynch has picked up 49% stake in seven residential projects of real estate major,
DLF.

This boost, though good for Indian economy has led to a number of negative consequences. Let
us study the positive and the negative side of this rise of investments by FIIs one by one.

Positive impact: It has been emphasized upon the fact that the capital market reforms like
improved market transparency, automation, dematerialization and regulations on reporting and
disclosure standards were initiated because of the presence of the FIIs. But FII flows can be
considered both as the cause and the effect of the capital market reforms. The market reforms
were initiated because of the presence of them and this in turn has led to increased flows.

A. Enhanced flows of equity capital: FIIs are well known for a greater appetite for equity than
debt in their asset structure. For example, pension funds in the United Kingdom and United
States had 68 per cent and 64 per cent, respectively, of their portfolios in equity in 1998. Not
only it can help in supplementing the domestic savings for the purpose of development projects
like building economic and social infrastructure but can also help in growth of rate of
investment, it boosts the production, employment and income of the host country.

B. Managing uncertainty and controlling risks: FIIs promote financial innovation and
development of hedging instruments. These because of their interest in hedging risks, are known
to have contributed to the development of zero-coupon bonds and index futures. FIIs not only
enhance competition in financial markets, but also improve the alignment of asset prices to
fundamentals. FIIs in particular are known to have good information and low transaction costs.
By aligning asset prices closer to fundamentals, they stabilize markets. In addition, a variety of
FIIs with a variety of risk-return preferences also help in dampening volatility.

C. Improving capital markets: FIIs as professional bodies of asset managers and financial
analysts enhance competition and efficiency of financial markets. By increasing the availability
of riskier long term capital for projects, and increasing firms’ incentives to supply more
information about them, the FIIs can help in the process of economic development.

Negative impact: If we see the market trends of past few recent years it is quite evident that
Indian equity markets have become slaves of FIIs inflow and are dancing to their tune. And this
dependence has to a great extent caused a lot of trouble for the Indian economy. Some of the
factors are:

A. Potential capital outflows: “Hot money” refers to funds that are controlled by investors who
actively seek short-term returns. These investors scan the market for short-term, high interest rate
investment opportunities. “Hot money” can have economic and financial repercussions on
countries and banks. When money is injected into a country, the exchange rate for the country
gaining the money strengthens, while the exchange rate for the country losing the money
weakens. If money is withdrawn on short notice, the banking institution will experience a
shortage of funds.

B. Inflation: Huge amounts of FII fund inflow into the country creates a lot of demand for
rupee, and the RBI pumps the amount of Rupee in the market as a result of demand created. This
situation leads to excess liquidity thereby leading to inflation where too much money chases too
few goods.

C. Problem to small investors: The FIIs profit from investing in emerging financial stock
markets. If the cap on FII is high then they can bring in huge amounts of funds in the country’s
stock markets and thus have great influence on the way the stock markets behaves, going up or
down. The FII buying pushes the stocks up and their selling shows the stock market the
downward path. This creates problems for the small retail investor, whose fortunes get driven by
the actions of the large FIIs.

D. Adverse impact on Exports: FII flows leading to appreciation of the currency may lead to
the exports industry becoming uncompetitive due to the appreciation of the rupee.

2.9FII activity in India from 1992-2006

The Indian financial market was opened to the foreign institutional investors in 1992 to widen
and broaden the Indian capital market. Since then, the net investment by FIIs in India has been
positive every year except in 1998-99. During the last few years, there has been a phenomenal
increase in the portfolio investment by FIIs in the Indian market. (Table 1 & Chart 1). The gross
purchases of debt and equity together by FIIs increased by 59.9 per cent to Rs.3,46,978 crore in
2005-06 from Rs.2,16,953 crore in 2004-05. The gross sales by FIIs also rose by 78.6 per cent to
Rs.3,05,512 crore from Rs. 1,71,072 crore during the same period. However, the net investment
by FIIs in 2005-06 declined by 9.6 per cent to Rs.41,467 crore in 2005-06 from Rs.45,881 crore
in 2004-05 mainly due to large net outflows from the debt segment. The cumulative net
investment by FIIs at acquisition cost, which was US$15.8 billion at the end of March 2003, rose
to US$ 45.3 billion at the end of March 2006. (Chart 2) The provisional net investment figure as
of March 2007 was US $ 3225 million as per RBI.
Table 2: Investments by FIIs

Source : SEBI Annual Report 2005-06

Chart 1 : FII Investments in India

Source : SEBI Annual Report 2005-06

 The FII investment in equity increased significantly since 2003-04. During 2005-06, FIIs
increased their net investment in equities, but reduced their commitments in debt Securities
(Table 2). The net FII investment in equity during 2005-06 was Rs.48,801 crore, the highest ever
in a single year. Buoyancy in the markets was sustained in 2005-06 on account of surge in net
investment by the institutional investors with FIIs playing a major role. Month-wise, FII
investment was negative in the months of April, May and October 2005. However, during the
remaining months of the financial year, there was large net equity investment by FIIs,
particularly in the second half of 2005-06, which drove the benchmark indices to surpass the
earlier record highs on several occasions. The net FII investment in December 2005 was the
highest for 2005-06, followed by July 2005 and February 2006.

Table 2: Investments by MFs & FIIs

Source : SEBI Annual Report 2005-06

Table 3: FIIs Registered in India

FINANCIAL YEAR DURING THE YEAR TOTAL REGISTERED AT

THE END OF THE YEAR

1992-93 0 0

1993-94 3 3

1994-95 153 156

1995-96 197 353

1996-97 99 439

1997-98 59 496

1998-99 59 450

1999-00 56 506

2000-01 84 528

2001-02 48 490

2002-03 51 502

2003-04 83 540

2004-05 145 685

2005-06 210 882

Source : Expert Group Report, GOI 2005

SOURCES OF FIIS

As on March 31, 2006, SEBI had registered FIIs from 37 countries. The highest number of FIIs,
as on March 31, 2006, was from the USA (342), followed by the UK (148). About 90 per cent
FIIs come from the top 13 countries. There has been increase in the number of FII registrations
from non-traditional countries like Malaysia, Australia, Saudi Arabia, Trinidad and Tobago,
Denmark, Italy, Belgium, Canada, Sweden, Ireland etc. (chart 3). These developments have
helped improve the diversity of the set of FIIs operating in India.
Chart 3: Country-wise FIIs Registered with SEBI as on 31st March 2006

Several factors were responsible for increasing confidence of FIIs on the Indian stock market
which include:

 Strong economic fundamentals and attractive valuations of companies.

 Improved regulatory standards, high quality of disclosure and corporate governance
requirement, accounting standards, shortening of settlement cycles, efficiency of clearing
and settlement systems and risk management mechanisms.
 Product diversification and introduction of derivatives.

2.10 FII ACTIVITY FOM 2006-2010

2008 FII sell-off the largest ever

The Indian equity market kept on sliding in September 2008 with the S&P CNX NIFTY,
showing the second sharpest fall since January 2008, with a decline of around 10%. With all
courtesy to the US financial markets and its crisis bug, an estimated amount of Rs 2.3 trillion of
shareholders' wealth were eroded in the Indian stock markets.

The market slide can be attributed to lower FII inflows in 2011. A look at stock indices since
2006 shows that the markets peak when FII inflows are the highest and fall when FIIs are
missing in action. For instance, in 2008, the BSE Sensex fell almost 50% due to the global
financial meltdown, wiping out the gains of 2007. The year 2008 has seen the biggest ever FIIs
sell-off for the Indian markets. FIIs were allowed to invest since 1991 when the economy opened
up. FIIs sell-off of USD 13.16 billion or Rs 53,000 crores has accounted for a 20% sell-off of the
total FII's equity investment since 1991. FIIs have invested USD 53.16 billion or Rs 2.3 lakh
crores.

The number of registered FIIs have increased from 1,219 in 2007 to 1,595 in 2008, while
the number of registered sub-accounts have increased from 3644 in 2007 to 4872 in 2008. In
2008, there were negative FIIs' flows seen for 10 months, and the longest selling streak was seen
from May to November. Since 1999, there have been 32 months of negative FIIs flows as against
88 months of positive flows. Since 2003, there have been 19 months of negative FIIs' flows as
against 53 months of positive flows. October and January were two carnage months, where USD
3.8 billion and UDS 3.2 billion, respectively, were sold.

The depreciation by 23% in rupee and the 51% sell-off in the markets has resulted in the
Defty falling 61%, making India one of the worst emerging market performers for 2008. The
biggest sell-off was seen in March, when the FIIs sold Rs 1,881 crore. In January, a correction
bought the most at Rs 7,702 crore follwed by Rs 3,179 crore in June.

"What hurt in 2008 was not the performance of companies but rapid outflow of $13
billion (Rs 55,000 crore) as investors fled risky assets," says Nick Paulson-Ellis, India head,
Espirito Santo Securities.The markets were flat during the first three months of 2009 as FIIs
stayed away. After that, governments across the globe implemented plans to boost their
economies. India, helped by robust economic growth, became a preferred destination for
investors.

Table 1: Net FIIs Investment in Equity (2007-10)

MONTH 2007 2008 2009 2010

JAN 94.45 -17326.30 -3009.50 5902.40
FEB 6065 5419.90 -2690.50 2113.50
MARCH 1403.30 124.40 269 18833.60
APRIL 5431.80 979.00 7384.20 9764.50
MAY 4574.50 -4917.30 20606.90 -8629.90
JUNE 7939.60 -10577.70 3224.90 10244.60
JULY 18132.80 -1012.90 11625.30 17120.60
AUG -7526.80 -2065.80 4028.70 11185.30
SEPT 18948.50 -7937.00 19939.50 29195.80
OCT 15577.60 -14248.60 8304.10 24770.80
NOV -4597.40 -2820.30 5317.80 18519.90
DEC 4896.70 1330.90 10367.20 1476.10

Table shows the position of FIIs investment in equity from 2006-10. It is clear from the
above table that during 2007, apart from August 2007, FII‟s showed keen interest in purchasing
the equity in the Indian market. But so far as the month of August was concerned, FII‟s turned
towards net selling in equity for profit booking and seeing the massive sell out of shares in global
markets including India especially on August 16 & 17 when there was massive equity selling.
Consequently the SENSEX broke down to even 4 to 5% of its previous levels. Moreover, the
bears took command of the market and some brokers also started off-loading their positions
anticipating a further fall and stop loss button was pressed by many investors. So far as the
month of October was concerned, the impact of supportive level was pulling the FII‟s money in
India. As a result positive impact in the net position was seen

The analysis of the above table depicts a negative view of the FII‟s investment in India
during 2008. The main reason could be tremendous selling at the beginning of the year. The next
three months i.e. February, March & April showed a consistent pattern in the trading activities.
But from the month of May to November, FII‟s again showed the exit mode from the stock
market. This was due to the fact that impact of international recession had started affecting
Indian markets also. Further the famous subprime crisis of USA e.g. the crash of Banks and
investment firms like Lehman Brother had also started impacting global economy. Market
analysts feel that the foreign fund managers were trying to play safe and therefore rushed
towards risk aversion and taking off their money. Due to this reason a negative impact of FII‟s
was reflected showing immense selling and taking back their money from the Indian stock
market.

Table No: 2 FII Inflows in Equity (2006-10)

YEARS NET PURCHASE/ SALES TREND %
RS. (IN CRORES)
2006 32254.08 100.00
2007 70940.05 226.978
2008 -530517.70 -169.743
2009 85367.2 264.494
2010 140497.2 436.949
It is evident from this table that apart from the year 2008, in all other years, there has
been a positive trend in FII inflows in India. The year 2008, as we all know, was the year of
worldwide recession. The value of the trend is higher during last two years of this study i.e. 2009
and 2010 because of the fact that Indian economy could recover well from the shocks of
worldwide recession due to its strong fundamentals and rules and regulations.

Table 3: FII Investments in Debt (2006-10)

YEARS NET PURCHASE/ TREND (%)
SALES
RS. (IN CRORES) DEBT
2006 3629.18 100.00
2007 8356.13 230.248
2008 12340.40 147.68
2009 3458.40 28.025
2010 54442.80 1574.219
The analysis of the above table depicts the positive trend of FII‟s investment in debt
market. The sharp rise in the FII inflows into the debt market came after a sharp rise in the
interest rates over the past couple of years which attracted the foreign investors towards the
Indian market. Besides that market observers believed that the huge inflow into the Indian equity
market also led to FIIs parking a portion of their capital into the debt market as a hedge against
any potential downslide in the stocks. The sharp rally in rupee against the US dollar also led to
an increase in the FII interest in the debt market.

Table 4: Comparison between FII inflows & Industrial Growth Rate

YEARS NET FII INFLOWS INDUSTRIAL
GROWTH RATE (%)
2006 32254.08 7.4
2007 70940.05 7.6
2008 -530517.70 9.8
2009 85367.2 6.3
2010 140497.2 5.8
The analysis of above table shows that there is a Low Degree of Correlation between FII
inflows & Industrial Growth Rate. It means that during the period under study, with the increase
of FII inflows, the industrial growth of India also rose up. Industrial growth plays a pivotal role
in increasing the GDP. In the year 2008, in spite of major outflows, the industrial growth rate
still increased. During the next two years, a fall in industrial growth can be observed. Thus it can
be safely said that industrial growth rate has not been much influenced by the FII inflows.

Table 5: Relationship between FII Inflows & SENSEX

YEAR SENSEX FII INFLOWS
2006 13786 31254.08
2007 20826 70940.05
2008 9647 -53051.70
2009 17464 85367.20
2010 20509 140497.20
 Table 5 shows the impact of FII‟s on SENSEX. In 2006 the foreign institutional investors
(FII) inflows were a bit slow, but they once again proved that they were the drivers of the Indian
equity market. Interestingly, the dependence of the Indian equity markets on the foreign
investors was further proved by the fact that in the period between May 10, 2006 to June 14,
2006, when the SENSEX moved from a high of 12,612.38 to a low of 8,928.44.
In the year 2007 when FIIs were pumping money in stock market and were Net Buyers of Equity
worth Rs. 70940.05 Crores; the SENSEX was moving upwards on the weekly basis. It took
nearly two months for the SENSEX to move from the level of 15000 to 17000. But from 17000
to 20000 it moved in a span of few weeks i.e. from 26th September 2007 to 29th October 2007.
As the Indian markets move from one peak to another this year, foreign institutional investors
(FIIs) have pumped top dollar into stocks. Investments during 2007 by foreign funds were the
most influential group of investors in the market. In September, FIIs injected $2.7 billion into the
markets, sending the benchmark indices to record peaks. The bulk of this amount came in after
the US Fed cut interest rates on September 18 which ultimately led to increasing liquidity in
global markets.

In January 2008 the SENSEX touched the new height of 21000. This rally of 1000 points
of SENSEX infused Rs. 2403 Crores during a period of just 49 trading days. But in the later part
of 2008 the SENSEX crashed affecting large number of investors. The major cause of this crash
was attributed to the recession in the global economies, especially with the US dollar losing its
strength to the Indian rupee. A large amount of equity in the form of shares was floated in the
Indian economy as an impact of Foreign Institutional Investors (FII‟s) withdrawing their money
from the Indian markets. This has disturbed the demand and supply ratio to a great extent
resulting in easy availability of shares of well-performing companies, thus leading to a dip in the
selling price of these shares.
However, in 2009 with the sign of revival of economies, the trend turned positive and overseas
investors started betting big on the domestic bourses as the liquidity conditions started
improving. In 2010 most of the stocks which have shown an increase in prices were driven by
huge FII buying. India continued to be a favored destination for FIIs and would continue to be so
because of its strong fundamentals. This could well be reflected in the FII inflows towards the
country, which had already reached all-time highs. Thus it can be observed that there is a
positive correlation between FII inflows and SENSEX.

PROPPING UP STOCKS
Investing in stocks with high FII interest can give good returns. For instance, the FII holding in
HDFC has been 58-60% since 2008. Similarly, the FII holding in ICICI Bank has been 38-40%
for years. Between March 2008 and 29 September 2011, HDFC Bank and ICICI Bank have risen
35% and 20%, respectively.
2.11 Scenario from 2010 to 2018

Trends in Foreign Institutional Investment

Foreign Institutional Investors play an important role in Indian securities markets.Since 1992-93,
when FIIs were allowed entry into Indian financial markets, foreign institutional investment has
increased over the years except in 2008-09. In tandem with the boom in stock markets and a
better global scenario, investments by FIIs into India were quite high in last few years,
particularly since 2003-04. FIIs made a record investment in the Indian equity market in
2010-11, surpassing the 2009-10 inflows.

Chart: Trends in Foreign Institutional Investment

The gross purchases of debt and equity by FIIs increased by 17.3 percent to 9,92,599 crore in
2010-11 from 8,46,438 crore in 2009-10 (Table 2.50). The combined gross sales by FIIs also
increased by 20.2 percent to 8,46,161 crore from ` 7,03,780 crore during the same period in
previous year. The total net investment of FII was 1,46,438 crore as compared to of 1,42,658
crore in 2009-10. This was the highest net FII investments into Indian securities market in
any financial year so far.
Table : Investment by Foreign Institutional lnvestors

Cumulative investment by FIIs at acquisition cost, which was US$ 89,335 million at the end of
March, 2010, increased to US$ 1,21,561 million at the end of March, 2011. During 2010-11, FIIs
invested 1,10,121 crore in equity and 36,317 crore in debt as compared to an investment of
1,10,220 crore in equity and 32,438 crore in debt during 2009-10 respectively (Table 2.51 and
Chart 2.12). Month-wise, the net FII investment was the highest in equity segment in October,
2010 (28,563 crore) followed by September,2010 ( 24,979 crore) and November,2010 (18,293
crore). In debt segment, FII investment was the highest in January, 2011 (10,177 crore) followed
by July, 2010 (8,107 crore) and September, 2010(7,690 crore).

The FIIs have been permitted to trade in the derivatives market since February, 2002. The
cumulative FIIs trading in derivatives was 5,34,748 crore as on March 31, 2011 as compared to
3,88,310 crore as on March 31,2010. Open interest position of FIIs in index options was the
highest at 11,33,838 crore by end-March 2011, followed by stock futures( 6,22,875 crore), index
futures (2,83,890 crore) and stock options ( 22,547 crore) (Table 2.52).
Table 2.51: FII & DII(Provisional Figures) v/s Nifty

Why foreign investors gave India a miss in 2018

The year 2018 will probably be remembered as the darkest for the foreign institutional investors
(FIIs) in terms of ouflows from the Indian capital markets. The year which saw heightened
volatility in the Indian market weakened the rationale for foreign investors to infuse their funds
into Indian bourses.
Foreign investors were extremely bullish on the Indian market in 2017 and infused over Rs 2
lakh crore, the highest into Indian equity and debt markets during any calender year.
In 2017, Sensex gained 29.58% while the NSE Nifty rose 30.28%.
This year, foreign investors pulled out a record Rs 81,912 crore from the equity and debt
segments of the Indian market.
The amount denotes the highest ever outflows by FIIs from the Indian market and their waning
interest in the Indian growth story.
As the year comes to an end, the Sensex has logged over 4.79% gains and the Nifty has risen
nearly 2.02% since the beginning of 2018. The gains are mediocre when compared to 2017.
A key factor deciding the Sensex, Nifty gains this year was the FII flows recorded for the Indian
capital market.
Here's a look at factors why FIIs made a sudden exit out of Indian markets this year.
IL&FS crisis
Country's leading infrastructure finance company came under the scanner of multiple regulators,
including Sebi, for alleged defaults related to financial disclosures and corporate governance in
September this year.
The firm also defaulted on interest payments on commercial papers. Commercial paper is a key
component of money-market mutual funds, which have surged in popularity in response to low
bank deposit rates and persistent inflation. The group with 24 direct subsidiaries , 135 indirect
subsdiaries, six joint ventures and four associate companies was reported to be sitting on a debt
of about Rs 91,000 crore.
The repayment crisis helped to raise borrowing costs in credit markets, with the average yield on
one-year corporate notes jumping to the highest since 2015.
Analysts said banks'margins would come under pressure in a rising interest rate environment and
higher credit costs on account of IL&FS exposure.
Higher borrowing costs led the markets lower especially NBFC and banking and auto stocks
taking a hit.
This prompted FIIs to withdraw money from the Indian markets. In September, FIIs pulled out
Rs 21,035 crore from the Indian market. The negative trend continued in October with FIIs
taking out a record Rs 38,906 crore in order to minimise losses in their investments.
Federal Reserve rate hike
The US Federal Reserve raised key short-term interest rates four times this year. in response to a
strong US economy and signaled that it expects to maintain a pace of gradual rate hikes.
A rate hike by Federal Reserve leads to a rise in US treasuries yield and acts as an incentive for
foreign funds to park their money into the US markets since they will get higher returns for their
investment.
This leads to foreign fund outflows from the Indian market as rate hike lowers investment returns
for foreign investors and prompt them to sell.
Depreciation in rupee
The Indian rupee fell to an all-time low of 74.48 or 16.61% year-to-date on October 11 this year
due to high crude oil prices and strengthening of the US dollar. The rupee fall led to the erosion
of value of FII holdings in dollar terms which prompted them to exit the Indian market.
Long-term capital gains tax
The Modi government imposed long-term capital gains tax on equities with effect from April 1
in Budget 2018-19 this year. The imposition of LTCG dealt a big blow to the funding plans of
FIIs into the Indian market. Continuing their winining streak from 2017, FIIs infused Rs 22,272
crore in January this year. The amount was the highest monthly infusion by foreign investors into
the Indian market this calender year.
On February 1, the government announced the imposition of LTCG tax on equities which hit
investor sentiment. FIIs withdrew Rs 11,674 crore from the Indian market in February. In
March, investors poured Rs 2662 crore into the market but that was a shortlived respite for the
indain bourses.
The LTCG tax which came into effect from April 1, 2018 led the foreign investors running for
cover for three months.
Till June, foreign investors withdrew a huge Rs 61,132 crore (April 15,561 cr, May 29,776 cr,
and June 15,795 cr) from the Indian market hurt by the impact of LTCG tax on their investments.
Government Measures to Promote Foreign Direct Investment in India
To promote Foreign Direct Investment(FDI), the Government has put in place an investor-
friendly policy, wherein except for a small negative list, most sectors are open for 100% FDI
under the Automatic route. Further, the policy on FDI is reviewed on an ongoing basis, to ensure
that India remains attractive & investor friendly destination. Changes are made in the policy after
having intensive consultations with stakeholders including apex industry chambers,
Associations, representatives of industries/groups and other organizations taking into
consideration their views/comments. The FDI policy is applicable across the sectors/ industries
and equally applies to SME sector.

Foreign Investment in various sectors bring international best practices and latest technologies
leading to economic growth in the country and providing much needed impetus to manufacturing
sector and job creation in India. In line with the policy to provide boost to the manufacturing
sector and give impetus to the ‘Make in India’ initiative, the Government has permitted a
manufacturer to sell its product through wholesale and/or retail, including through e-commerce
under automatic route.

To look after the interest of Indian SME sector, certain provisions have been provided for FDI in
retail trading sector. For retail trading of single brand products, in respect of proposals involving
foreign investment beyond 51%, sourcing of 30% of the value of goods purchased, has been
mandated to be done from India, preferably from MSMEs, village and cottage industries, artisans
and craftsmen, in all sectors.

With a view to benefit farmers, give impetus to food processing industry and create vast
employment opportunities, 100% FDI under Government route for trading, including through e-
commerce, has been permitted in respect of food products manufactured and/or produced in
India.
Detailed information

 Investment made by NRIs, PIOs and OCIs under Schedule 4 of FEMA (Transfer or Issue
of Security by Persons Resident Outside India) Regulations on non-repatriation basis is
now deemed to be domestic investment at par with the investment made by residents.
 The special dispensation of NRIs has also been extended to companies, trusts and
partnership firms, which are incorporated outside India and are owned and controlled by
NRIs.
 In order to provide simplicity to the FDI policy and bring clarity on application of
conditionalities and approval requirements across various sectors, different kinds of
foreign investments have been made fungible under one composite cap.
 FDI up to 100% through automatic route has been allowed in White Label ATM
Operations.
 Reforms in FDI Policy on Construction Development sector include:
 § Removal of conditions of area restriction and minimum capitalization to be brought in
within the period of six months of the commencement of business.
 § Exit and repatriation of foreign investment is now permitted after a lock-in-period of
three years. Transfer of stake from one non-resident to another non-resident, without
repatriation of investment is also neither to be subjected to any lock-in period nor to any
government approval.
 § Exit is permitted at any time if project or trunk infrastructure is completed before the
lock-in period.
 § 100% FDI under automatic route is permitted in completed projects for operation and
management of townships, malls/ shopping complexes and business centres.
 Foreign investment up to 49% in defence sector has been permitted under automatic route
along with specified conditions. Further portfolio investment and investment by FVCIs
has been allowed up to permitted automatic route level of 49%. The foreign investment
beyond 49% has been permitted through government approval in cases resulting in access
to modern technology in the country or for other reasons to be recorded. Further, FDI
limit for defence sector has also been made applicable to Manufacturing of Small Arms
and Ammunitions covered under Arms Act 1959.
 Sectoral cap on Broadcasting sector has been raised across various activities as follows:
 § 74% to 100% in Teleports, DTH, Cable Networks (Digital), Mobile TV, HITS
 § 26% to 49% for FM Radio, up-linking of news and current affairs
 § 49% to 100% for Cable Networks (not undertaking digitisation)
 FDI route for Teleports, DTH, Cable Networks (Digital), Mobile TV, HITS, Cable
Networks (not undertaking digitisation), and Up-linking of Non- ‘news and current
affairs’ and down-linking of channels has been changed to automatic route.
 Full fungibility of foreign investment has been introduced in Banking-Private sector.
Accordingly, FIIs/FPIs/QFIs, following due procedure, can now invest up to sectoral
limit of 74%.
 Certain plantation activities namely coffee, rubber, cardamom, palm oil tree and olive oil
tree plantations have been opened for 100% foreign investment under automatic route.
 A manufacturer has been permitted to sell its product through wholesale and/or retail,
including through e-commerce under automatic route.
 Government has reviewed single brand retail trading (SBRT) FDI policy to provide that
sourcing of 30% of the value of goods purchased would be reckoned from the opening of
first store. In case of entities undertaking Single Brand Retail Trading of products having
‘state of art’ and ‘cutting edge’ technology and where local sourcing is not possible,
sourcing norms have been relaxed up to three years for entities undertaking Single Brand
Retail. Further, an entity operating SBRT through brick and mortar stores has been
permitted to undertake e-commerce activities as well.
 Indian brands are equally eligible for FDI to undertake SBRT. In this regard, it has been
provided that certain conditions of the FDI policy on the sector namely- products to be
sold under the same brand internationally and investment by non-resident entity/ entities
as the brand owner or under legally tenable agreement with the brand owner, will not be
made applicable in case of FDI in Indian brands.
 100% FDI is now permitted under automatic route in Duty Free Shops located and
operated in the Customs bonded areas.
 FDI policy on wholesale cash & carry activities has been reviewed to provide that a
single entity will be permitted to undertake both the activities of SBRT and wholesale.
 100% FDI is now permitted under the automatic route in Limited Liability Partnerships
(LLP) operating in sectors/activities where 100% FDI is allowed, through the automatic
route and there are no FDI-linked performance conditions. Further, the terms ‘ownership
and ‘control’ with reference to LLPs have also been defined.
 Regional Air Transport Service has been opened for foreign investment up to 100%, with
49% under automatic route, and beyond that through government approval route. Foreign
equity cap of activities of Scheduled Air Transport Service/ Domestic Scheduled
Passenger Airline has been increased from 49% to 100%, with 49% under automatic
route, and beyond that through government approval route. Further, foreign equity cap of
activities of Non-Scheduled Air Transport Service, Ground Handling Services have been
increased from 74% to 100% under the automatic route.
 With a view to aid in modernization of the existing airports to establish a high standard
and help ease the pressure on the existing airports, 100% FDI under automatic route has
been permitted in Brownfield Airport projects.
 Foreign investment cap on Satellites- establishment and operation has now been raised
from 74% to 100% under the government route.
 Foreign investment cap on Credit Information Companies has now been increased from
74% to 100% under the automatic route.
 In order to achieve faster approvals on most of the proposals, the Government has raised
the threshold limit for approval by FIPB to Rs. 5000 crore (800 million USD).
 FDI Policy on Insurance and Pension sector has been reviewed to permit foreign
investment up to 49% under the automatic route.
 In order to provide clarity to the e-commerce sector, the Government has issued
guidelines for foreign investment in the sector. 100% FDI under automatic route is
permitted in the marketplace model of e-commerce.
 With an objective of increase investment in the country, 100% FDI in Asset
Reconstruction Companies has been allowed under automatic route.
 100% FDI under government approval route has been permitted for trading, including
through e-commerce, in respect food products manufactured and/or produced in India.
 In Pharmaceutical sector, with the objective of making the sector more attractive to
foreign investors, 74% FDI under automatic route has been permitted in brownfield
pharmaceuticals. FDI beyond 74% will be allowed through government approval route.
 FDI limit for Private Security Agencies has been raised to 74%. FDI up to 49% is
permitted under automatic route in this sector and FDI beyond 49% and up to 74% would
be permitted with government approval.
 For establishment of branch office, liaison office or project office or any other place of
business in India if the principal business of the applicant is Defence, Telecom, Private
Security or Information and Broadcasting, it has been provided that approval of Reserve
Bank of India would not be required in cases where FIPB approval or license/permission
by the concerned Ministry/Regulator has already been granted.
 As per FDI Policy 2016, FDI in Animal Husbandry (including breeding of dogs),
Pisciculture, Aquaculture and Apiculture was allowed 100% under Automatic Route
under controlled conditions. This requirement of ‘controlled conditions’ for FDI in these
activities has now been done away with.
 Government has reviewed FDI policy on Other Financial Services and NBFCs to provide
that foreign investment in financial services activities regulated by financial sector
regulators such as RBI, SEBI, IRDA etc. will be 100% under the automatic route. In
financial services, which are not regulated by any financial sector regulator or where only
part of the financial service activity is regulated or where there is doubt regarding
regulatory oversight, foreign investment upto 100% will be allowed under the
government approval route.
 Research Methodology

The study carried out is analytical and empirical in nature in which it explores the
relationship betweenthe Inflows of FII and their impact on Indian Capital Market. The
study focuses on Bombay Stock Exchange. In this research the sale and gross purchases
data was used to find therelation with sensex

Framing Of Hypothesis:-
Following hypotheses were developed for the study and tested at 5% level of significance.

Hypothesis 1
 Hypothesis (H1) There is significant relationship between Sensex and FII equity
investment
 Null Hypothesis (Ho): There is no significant relationship between Sensex and FII
equity investment

Hypothesis 2
 Hypothesis (H2) Sensex is significantly correlated with FII equity purchases
 Null Hypothesis (Ho): There is no significant relationship between Sensex and FII
equity purchases

Hypothesis 3
 Hypothesis (H3) Sensex is significantly correlated with FII equity sale
 Null Hypothesis (Ho): There is no significant relationship between Sensex and FII
equity sale

3.1 Research Design

Exploratory Research method applied for the study. As an exploratory study is conducted
with an objective to gain familiarity with the phenomenon or to achieve new insight into it,
this study aims to find the new insights in terms of finding the relationship between FII'S
and Indian Stock Markets.

3.2 Data Collection

Data for the study collected primarily from Secondary sources. For this various literatures,
books, journals, magazines, web links were used. Monthly closing data of sensex (1992-
2012), Monthly data of FII flow in equity (1992-2012), Yearly data of FII flow in equity
(1992-2012),Yearly data of sensex (1992-2012)
3.3 Sampling Method
Convenient Sampling method used for the Study.Convenience sampling is a non-
probability sampling technique where subjects are selected because of their convenient
accessibility and proximity .