Impact of Foreign Institutional Investment on Indian Stock

Market (BSE/NSE
This Project Report is on Impact of Foreign Institutional Investment on Indian
Stock Market and Investment Structure Of FII Investing with information about
Interconnectivity of FIIs and BSE Sensex

Contents

1. Indian Stock Market

2. National Stock Exchange
3. Bombay Stock Exchange
4. Foreign Institutional Investor
5. Foreign Investment Mode
6. FIIs Registered
7. Investment Structure Of FII Investing
8. Regulation Relating to FII Operation
9. Objectives of the study
10. Research Methodology
11. Sensex trend from 1998 to 2008
12. Volatility of BSE Sensex (1998 to 2008)
13. FIIs trend in Monthly from 2005-08
14. FIIs trend Quarterly from 2005-08
15. Quarterly Statistical Mean of Net FIIs Investment (2005 to 2008)
16. Interconnectivity of FIIs and BSE Sensex (coefficient of
correlation(r) ) 
17. Conclusion

Indian Stock Market :  In India there are main nationalised stock exchange
these are as follows:

 National stock exchange (NSE)

 Bombay stock exchange (BSE)

National Stock Exchange : NSE was incorporated in November 1992 as a tax-

Paying company unlike other stock exchanges in the country. On its
recognition as a stock exchange under the Securities Contracts (Regulation)
Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt
Market (WDM) segment in June 1994. The Capital Market (Equities) segment
commenced operations in November 1994 and operations in Derivatives
segment commenced in June 2000.

S&P CNX Nifty (Standard & Poor's CRISIL NSE Indices)

Bombay Stock Exchange :  The Stock Exchange, Mumbai; popularly called

The Bombay Stock Exchange, or BSE has the greatest number of listed
companies in the world, with 4700 listed as of August 2007. It is located at
Dalal Street, Mumbai, India. On 31 December 2007, the equity market
capitalization of the companies listed on the BSE was US$ 1.79 trillion,
making it the largest stock exchange in South Asia and the tenth largest in the
world. The Bombay Stock Exchange was established in 1875. BSE SENSEX
(SENSitive index), also called the "BSE 30“

Sensex Milestones -

 1000, July 25, 1990

 2000, January 15, 1992
 3000, February 29, 1992
 4000, March 30, 1992
 5000, October 8, 1999
 6000, February 11, 2000
 7000, June 20, 2005
 8000, September 8, 2005
 9000, November 28, 2005
 10,000, February 6, 2006
 11,000, March 21, 2006
 12,000, April 20, 2006
 13,000, October 30, 2006
 14,000, December 5, 2006
 15,000, July 6, 2007
 16,000, September 19, 2007
 17,000, September 26, 2007
 18,000, October 09, 2007
 19,000, October 15, 2007
 20,000, October 29, 2007
 21,000, January 8, 2008
After that the world financial crises comes and Sensex and BSE drop down a
lot. Sensex comes in 6000 Point. But at present January-2011 Sensex comes
back in 20000 Point.

Foreign Institutional Investor :  The term Foreign Institutional Investor is

defined by SEBI as under:

"Means an institution established or incorporated outside India which

proposes to make investment in India in securities. Provided that a domestic
asset management company or domestic portfolio manager who manages
funds raised or collected or brought from outside India for investment in India
on behalf of a sub-account, shall be deemed to be a Foreign Institutional
Investor."

Foreign Investment refers to investments made by residents of a country in

financial assets and production process of another country.

Entities covered by the term ‘FII’ include “Overseas pension funds, mutual
funds, investment trust, asset management company, nominee company,
bank, institutional portfolio manager, university funds, endowments,
foundations, charitable trusts, charitable societies etc.(fund having more than
20 investors with no single investor holding more than 10 per cent of the
shares or units of the fund)” (GOI (2005)).

FIIs can invest their own funds as well as invest on behalf of their overseas
clients registered as such with SEBI. These client accounts that the FII
manages are known as ‘sub-accounts’

Foreign Investment Mode

FIIs Registered

Indian stock market has experienced a steady growth in terms of registered

FIIs In 2006, there were 932 FIIs registered with SEBI, of which 115 were
registered in the first half of 2006 itself and 1110 FIIs were registered with
SEBI as on October 5,2007.

“70:30 rule”

Though initially restricted to investing only in listed company stocks, FIIs are
now allowed to invest in equity, bonds and derivative instruments in India
subject to limits of foreign ownership for various sectors as well as ceilings on
total investment per FII. Regular FIIs follow what has come to be known as
the “70:30 rule”, i.e. they must invest no less than 70% of their funds in equity-
related instruments and may invest the remainder in debt-related instruments.

Investment Structure Of FII Investing

Regulation Relating to FII Operation

 Investment by FIIs is regulated under SEBI (FII) Regulations, 1995 and

Regulation 5(2) of FEMA Notification No.20 dated May 3, 2000. SEBI
acts as the nodal point in the entire process of FII registration.
 FIIs are required to apply to SEBI in a common application form in
duplicate. A copy of the application form is sent by SEBI to RBI along
 with their 'No Objection' so as to enable RBI to grant necessary
permission under FEMA.
 RBI approval under FEMA enables a FII to buy/sell securities on stock
exchanges and open foreign currency and Indian Rupee accounts with
a designated bank branch.
 FIIs are required to allocate their investment between equity and debt
instruments in the ratio of 70:30. However, it is also possible for an FII
to declare itself a 100% debt FII in which case it can make its entire
investment in debt instruments.
 All FIIs and their sub-accounts taken together cannot acquire more than
24% of the paid up capital of an Indian Company. Indian Companies
can raise the above mentioned 24% ceiling to the Sectoral Cap /
Statutory Ceiling as applicable by passing a resolution by its Board of
Directors followed by passing a Special Resolution to that effect by its
General Body.
 Presence of Sectoral Cap/ Statutory ceiling means that foreign
investment from all sources cannot exceed a specified level. A
Company to which no sectoral cap/statutory ceiling is applicable can
raise the limit of permissible FII investment to 100% of the paid up
capital.
 No permission from RBI is needed so long as the FIIs purchase and sell
on recognized stock exchange.
 Registered Foreign Institutional Investors (FIIs) are allowed to trade in
all exchange traded derivative contracts approved by SEBI from time to
time subject to the limits prescribed by SEBI. 

Objectives of the Project Report

1. This study aims to know the impact of FIIs on BSE Sensex. Apart from
that the other objectives are:
2. To get the knowledge of stock market
3. To find out the relationship between the FIIs investment and stock
market.
4. To know about how many investment of FIIs in stock market.
5. To know the volatility of BSE Sensex due to FIIs.
6. To decide the favourable season in which FIIs prefer maximum fund
investment in the Indian capital market.

Research Methodology

 Nature of study
  Research Design
 Universe
 Sample Unit
 Collection of data

Sensex trend from 1998 to 2008

This figure shows that in year 1998 to 2004 Sensex in the range bound of
3500-5000 basic points but after the year 2004 and upto the December 2007
Sensex in their bullish trend and cross 20000 mark. In the year 2008 BSE
Sensex start decline and at the end of year 2008 BSE Sensex comes bellow
the 10000 mark.

Volatility of BSE Sensex (1998 to 2008)

Year Standard deviation Volatility in %

1998 0.0847 8.47
1999 0.0812 8.12
2000 0.0712 7.12
2001 0.0787 7.87
2002 0.0584 5.84
2003 0.0727 7.27
2004 0.0670 6.70
2005 0.0638 6.38
2006 0.0605 6.05
2007 0.0641 6.41
2008 0.1075 10.75
Mean   7.36
This table shows the volatility of BSE Sensex. Volatility is measured as
standard deviation on Sensex’s return. It is clear that the mean volatility of
Bombay Stock Exchange remained at 7.36 per cent for the eleven year
period.

FIIs trend in Monthly from 2005-08

FII`s Investment                                       Rs(crores)  
  2005 2006 2007 2008TOTAL
January 377 3,530.30 492.1 -13,035.20 -8635.8
February 8,375.90 7,587.50 7,239.70 1,733.80 24936.9
March 7,497.40 6,688.90 -1,081.80 -130.5 12974
April -654.2 522.10 6,679.10 1,074.50 7621.5
May -1,140.40 -7,354.10 3,959.50 -5,011.50 -9546.5
June 5,026.00 479.60 1,642.70 -10,095.90 -2947.6
July 8,017.80 1,144.90 23,872.40 -1,837.10 31198
August 5,054.40 4,642.70 -7,770.50 -1,211.70 714.9
September 4,646.20 5,425.20 14,703.10 -7,679.90 17094.6
October -3,693.90 8,013.50 20,591.40 -15,347.30 9563.7
November 3,790.70 9,379.80 -5,342.40 -1,221.00 6607.1
December 9,335.00 -3,667.30 5,278.60 1,750.30 12696.6
TOTAL 46631.9 36,393.10 70263.9 -51,011.50 102277.4

FIIs trend Quarterly from 2005-08

  2005 2006 2007 2008 Total

Q1 16,250.30 17,806.70 6,650.00 -11,431.90 29,275.10
Q2 3,231.40 -6,352.40 12,281.30 -14,032.90 -4,872.60
Q3 17,718.40 11,212.80 30,805.00 -10,728.70 49,007.50
Q4 9,431.80 13,726.00 20,527.60 -14,818.00 28,867.40
Total 48636.9 38399.1 72270.9 -51,011.50 102277.40
This table shows that quarterly net FIIs investment. In the Q2 in year 2006
there is selling by FIIs, in year 2007 there is buying in all quarters and in year
2008 it is huge selling made by the FIIs in all quarters because of the global
recession.

Quarterly Statistical Mean of Net FIIs Investment (2005 to 2008)

Quarters Standard Deviation Statistical Mean

Q1 11638.33 7318.77
Q2 9907.21 -1218.15
Q3 15027.37 12251.87
Q4 13322.77 7216.85

This table shows that quarterly statistical mean of net FIIs. The mean
quarterly analysis has been done in order to know which quarter of the year
attracts the foreign investors more. As a common psychology of theirs, it has
been observed that the foreign remain in our country till the months of July,
August and September.

Interconnectivity of FIIs and BSE Sensex (coefficient of correlation(r) )

coefficient 0f correlation      coefficient of Determination
Years (r) (r2)
1998 0.2833 0.0802
1999 -0.0066 0.0000
2000 0.5092 0.2593
2001 0.8640 0.7464
2002 0.6755 0.4563
2003 0.8619 0.7429
2004 0.8081 0.6531
2005 0.6131 0.3758
2006 0.2186 0.0478
2007 0.2205 0.0486
2008 0.1326 0.0176
Total 5.1801 3.4281
Mean 0.4709 0.3116
This table shows the interconnectivity of FIIs and BSE Sensex. The result
indicate that there is a correlation between BSE Sensex and FIIs. Their mean
coefficient of correlation is 0.4709. This shows a moderate degree of positive
correlation between the overseas funds and Indian stock market. Coefficient
of determination (r2) shows the mean 0.3116.

Conclusion

This study analysis the impact primarily of FII Inflows on the Volatility of the
Index (Sensex). Sensex in the year 2005-07 reached its peak and after the
starting of the year 2008 Sensex start to be going decline. Similarly, the FII
trend also follow the same pattern during these years.

On the basis of the results from the analysis given above it can be said that
the impact of FII cash inflows on the index trend as well as volatility is
significant enough to influence. The correlation between the FII inflow and
Sensex is positive. The growing realization by FIIs regarding what are shallow
markets encourages speculative investment aimed at pushing the market up
and choosing an appropriate movement to exit. This manipulation implies a
substantial increase in volatility of the stock market.