A Study on IMPACT OF FDI & FII ON INDIAN STOCK MARKET-2011

Project Report Submitted In the partial fulfillment of the Degree of Master of Business Administration Semester-III

By DARSHAN BHATT 01 NITISH PATEL 11 PRATIK PATEL 12

Under the Guidance of: Pro. MITTAL DATTANI CENTER FOR MANAGEMENT STUDIES

Submitted To: CENTER FOR MANAGEMENT STUDIES Ganpat University, Ahmadabad.

(2010-2012)

Preface
As a Part of MBA Program, Student has to pursue a project duly approved by the Faculty of Concerned area. We had the privilege of undertaking the project on Impact of FDI & FII on Indian Stock Market. Main aim of the Project is to measure the relation between the Flow of investment and the stock market. This study assumes that the investment decision is independent variable, weather it is FDI or FII. And the stock Indices is dependent variable. Sensex and S&P CNX Nifty are taken as a benchmark of stock market. This study is dependent on secondary sources that possibility of error may arise on the results. The results of this study are from the twenty years statistics. To measure the relation between the indices and Flow of investment, Correlation Coefficient is used in this study, and further for extreme results the Correlation Determination and Probability Error are being used. This study report contains the in-depth study of Foreign Direct Investment, the various investments avenues for Foreign Direct Investment, Reasons to invest overseas, and why should invest in India. As far as the results of study for the relation between the FDI and Stock market Indices, the relation is partial positive, but so far the FDI flow of investment does not make any significant change on the value of indices. Foreign direct investment in any country do not invested money in the capital market. They invest in the economy or the Invest in the industry of the country. This study paper also focused on the foreign institutional investment. The various avenues for FII and the rules and regulations for the FII. The FII is the direct way for the investment in the capital or money market of the country. So far the results of the study indicate that the relation of FII with Stock market indices have partial positive relation. That mean the FII investment flow impacts the value of the indices. The study assumes the Stock market is dependent on the FII Flow of investment. Apart from this FDI & FII this paper includes the detailed description of the main regulating bodies for the capital market; they are Reserve bank of India, security exchange board of India, national stock exchange, Bombay stock exchange. For measuring the impact of FDI & FII on Indian stock market, here the statistical tools are used, the correlation coefficient of foreign Direct investment & BSE-Sensex, Foreign Direct investment & S&P CNX Nifty, and further correlation coefficient of Foreign institutional investment & BSE-Sensex, & Foreign Institutional Investment & S&P CNX Nifty, the other statistical tools are used to support the results and they are Correlation Determination & Probability Error.

Acknowledgments
We are very much thankful to Center for Management Studies, Ganpat University for their excellent guidance, support and appreciation and also provided us with this great opportunity to enhance our knowledge about the Practical Corporate and to sharpen our management skills. We express our sincere thanks to Mr. M. Sharma (chancellor), CA. Ujal Mehta (central coordinator), and Dr. Vipul Patel (coordinator) for such kind of activities. Our sincere thanks to Prof. Mittal Dattani, Center for Management Studies, Ganpat University, Ahmadabad, for her constant guidelines, support and motivation, and helped us in understanding the project and the implementation of the same. Her suggestions really helped us think on a broad perspective and give us motivation to do our best. Date: Place: Nitish Patel. Darshan Bhatt. Pratik Patel.

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Table of Content
Chapter Particulars Preface Acknowledgments Table of content List of Tables & Graphs Research Methodology FDI & FII 2.1 Introduction to FDI & FII 2.2 Categories of Overseas Investment 2.3 Why do companies invest overseas? 2.4 Factors Influencing Foreign Investment Decisions 2.5 Foreign Direct Investment 2.6 Foreign Institutional Investment 2.7 Why to invest in India? 2.8. 8 Reasons to invest in India Stock Exchange 3.1 Important Institutions 3.2 Reforms in Indian Stock Market Findings & Analysis 4.1 Sensex & FDI 4.2. Sensex & FII 4.3. S&P CNX Nifty & FDI 4.4. S&P VNX Nifty & FII Conclusion Bibliography Page no. I II III III 1 3 3 3 4 5 6 7 11 12 14 15 17 18 18 20 22 24 26 27

Chapter 1 Chapter 2

Chapter 3

Chapter 4

Chapter 5 Chapter 6

List of Tables & Graphs

Sr no. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Particulars Number of FIIs registered with SEBI Investment limits on debt investments Tax norms on FII in India Data of Sensex & FDI Relation Between Sensex & FDI Graph of Sensex & FDI Data of Sensex & FII Relation between Sensex & FII Graph of Sensex & FII Data of S&P CNX Nifty & FDI Relation Between S&P CNX Nifty & FDI Graph of S&P CNX Nifty & FDI Data of S&P CNX Nifty & FII Relation between S&P CNX Nifty & FII Graph of S&P CNX Nifty & FII Page no. 9 10 10 18 18 19 20 20 21 22 22 23 24 24 26 iii

Chapter 1. RESEARCH METHODOLOGY

1.1. OBJECTIVES OF THE STUDY -To Understand the Indian stock market. -To know the impact of FIIs on Indian stock market. -To know the impact of FDIs on Indian stock market. 1.2. RESEARCH METHODOLOGY Research Methodology has many dimensions, it include not only research methods but also considers the logic behind the methods used in the context of the study and explains why only a particular method of technique had been used so that research lend themselves to proper evaluations. Thus in a way it is a written game plan for concluding research therefore in order to solve research problem it is necessary to design a research methodology for the problem as the same differ from problem to problem. 1.3. Research Design: The research design is a pattern or an outline of a research project. It is a statement only the essential of a study those provide the basic guidelines for the detail of the project. The present study being conducted follows a descriptive research design has the data would be responses from a simple containing g a large numbers of sources .It is a cross section of the situation design of the descriptive studies including the nature and the analytical method. 1.4. Data Collection The data was collected from the Internet by exploring the Secondary sources available on websites. The secondary data constitutes of daily FII flows data which was collected from Money Control and Equity Master, the daily returns of SENSEX and NIFTY from BSE and NSE websites respectively. The trends in FDI flow from the RBI website and information on FII from SEBI. 1.5. DATA ANALYSIS:PLAN OF ANALYSIS The data gathered from various sources were primarily studied and necessary data was sorted out sequentially keeping in mind the procedure of the study. The analysis has been made by, correlating the FDI flow & FII purchases, sales and net investment with Capital market returns to identify whether a relation exists between them. Findings are included which transmits the important points, which were gathered from the study. The Impact of FDI & FII is being measured with the use of followings. - Correlation Coefficient. - Correlation Determination. - Probability Error. 1.6. SCOPE OF THE STUDY The report examines The Impact of Foreign Institutional Investments and Foreign Direct Investment on Stock Market in India. The scope of the research comprises of information derived from secondary data from various websites. The various information and statistics were derived from the websites of BSE, NSE, Money Control, RBI and SEBI. Sensex and CNX Nifty was a natural choice for inclusion in the study, as it is the most popular market indices and widely used by market participants for benchmarking. 1

1.7. LIMITATIONS OF THE STUDY -As the time available is limited and the subject is very vast. -It is mainly based on the data available in various websites &other secondary sources. -The inferences made are purely from the past years performance. -There is no particular format for the study. -Sufficient time is not available to conduct an in-depth study

Chapter 2. FDI & FII.

2.1. Introduction
When people think about globalization, they often first think of the increasing volume of trade in goods and services. Trade flows are indeed one of the most visible aspects of globalization. But many analysts argue that international investment is a much more powerful force in propelling the world toward closer economic integration. Investment, often alters entire methods of production through transfers of know-how, technology and management techniques, and thereby initiates much more significant change than the simple trading of goods. Over the past ten years, foreign investment has grown at a significantly more rapid pace than either international trade or world economic production generally. From 1980 to 1998, international capital flows, a key indication of investment across borders, grew by almost 25% annually, compared to the 5% growth rate of international trade. This investment has been a powerful catalyst for economic growth. But as with many of the other aspects of globalization, foreign investment is raising many new questions about economic, cultural and political relationships around the world. Flows of investment and the rules that govern or fail to govern it can have profound impacts upon such diverse issues as economic development, environmental protection, labor standards and economic stability. Forms of Foreign Investment International investment or capital flows fall into four principal

2.2 Categories:Commercial loans: These primarily take the form of loans by banks to foreign businesses or governments.

a. Official flows:
This category refers generally to the forms of development assistance given by developed countries to developing ones.

b. Foreign Direct Investment (FDI):

This category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. FDI is calculated to include all kinds of capital contributions, such as the purchases of stocks, as well as the reinvestment of earnings by a wholly owned company incorporated abroad (subsidiary), and the lending of funds to a foreign subsidiary or branch. The reinvestment of earnings and transfer of assets between a parent company and its subsidiary often constitutes a significant part of FDI calculations. An investor's earnings on FDI take the form of profits such as dividends, retained earnings, management fees and royalty payments. c. Foreign Portfolio/ Institutional Investment (FII): FII is a category of investment instruments that are more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise. These include investments via equity instruments (stocks) or debt (bonds) of a foreign enterprise which does not necessarily represent a long-term interest. The returns that an investor acquires on FII usually take the form of interest payments or non-voting dividends. Investments in FII that are made for less than one year are distinguished as short-term portfolio flows.

Until the 1980s, commercial loans from banks were the largest source of foreign investment in developing countries. However, since that time, the levels of lending through commercial loans have remained relatively constant, while the levels of global FDI and FII have increased dramatically. Over the period 1991 - 1998, FDI and FII comprised 90% of the total capital flows to developing countries. Similarly, when viewed against the tremendous and growing volume of FDI and FII, the funds provided in the past by governments through official development assistance, or lending by commercial banks the World Bank or IMF, are diminishing in importance with each passing year. When one talks about the recent phenomenon of globalization therefore, one is referring in large part to the effects of FDI and FII, and these two instruments will therefore be the primary focus of this issue brief. Calculating Investment: Calculations of FDI and FII are typically measured as either a "flow," referring to the amount of investment made in one year, or as "stock," measuring the total accumulated investment at the end of that year.

2.3. Reasons, why do Companies Invest Overseas?

Companies choose to invest in foreign markets for a number of reasons, often the same reasons for expanding their operations within their home country. a. Market seeking - Firms may go overseas to find new buyers for goods and services. Market-seeking may happen when producers have saturated sales in their home market, or when they believe investments overseas will bring higher returns than additional investments at home. This is often the case with high technology goods. b. Resource seeking - Put simply, a company may find it cheaper to produce its product in a foreign subsidiary- for the purpose of selling it either at home or in foreign markets. The foreign facility may be able to obtain superior or less costly access to the inputs of production (land, labor, capital and natural resources) than at home. c. Strategic asset seeking - Firms may seek to invest in other companies abroad to help build strategic assets, such as distribution networks or new technology. This may involve the establishment of partnerships with other existing foreign firms that specialize in certain aspects of production. d. Efficiency seeking - Multinational companies may also seek to reorganize their overseas holdings in response to broader economic changes. Fluctuations in exchange rates may also change the profit calculations of a firm, leading the firm to shift the allocation of its resources. Foreign Investment Increased so dramatically in recent Decades? As stated earlier in this brief, international investment levels have exploded in recent decades. These increases in the flows of foreign investment have themselves marked a new and distinct phenomenon in the era of globalization. Several factors have helped drive this growth: 1) Technology. Telecommunications and transportation advances have simply made it easier to do business across large distances. As former President Clinton once pointed out, in the 1960s, transatlantic telephone lines could only accommodate 80 simultaneous calls between Europe and the United States. Today, satellites and other telecommunications infrastructure can handle one million calls at one time. Fax machines, email and the drop in the cost of air travel have also contributed significantly to the growth of FDI. As you can imagine, a business owner might think twice about trying to run an affiliate in a foreign country if 4

communication with that office were not both easy and cheap. Changes in practices tend to be driven by changes in capabilities, and these new methods to communicate have unquestionably helped drive much of the subsequent desire to promote economic integration. 2) The lure of higher profits. Many countries in East Asia had built their phenomenal growth on a foundation based on greater integration into the international economy, particularly emphasizing export-led growth. Investors from around the world realized that access to East Asian markets and their trading partners might help them attain much higher returns on their investments than they could obtain at home. 3) Financial liberalization. Prior many countries imposed strict limits on the rights of companies and individuals to invest overseas, to purchase foreign securities, or even to hold foreign currencies. Many of these restrictions were put in place following the Great Depression of the 1930's, which had produced volatile movements of capital, triggering financial panics in some cases. Financial liberalization has been the most direct, and probably the single biggest, factor accounting for the growth of international investment flows over the past several decades.

2.4 Factors Influencing Foreign Investment Decisions

The policy frameworks relating to FDI and FII are relatively similar, although there are a few differences. The determinants of FII are somewhat complex because portfolio investment earnings are more likely to be tied to the broader macroeconomic indicators of a country, such as overall market capitalization of an economy, they can be more sensitive to factors such as: High national economic growth rates Exchange rate stability General macroeconomic stability Levels of foreign exchange reserves held by the central bank General health of the foreign banking system Liquidity of the stock and bond market Interest rates In addition to these general economic indicators, portfolio investors also look at the economic policy environment as well, and especially at factors such as: The ease of repatriating dividends and capital Taxes on capital gains Regulation of the stock and bond markets The quality of domestic accounting and disclosure systems The speed and reliability of dispute settlement systems The degree of protection of investor's rights

2.5. Foreign direct investment (FDI)

It is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. The FDI relationship, consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm.

Types of Foreign Direct Investment 1. Greenfield investment:

Direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nations promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. Downside of Greenfield investment is that profits from production do not feed back into the local economy, but instead to the multinational's home economy. This is in contrast to local industries whose profits flow back into the domestic economy to promote growth.

2. Mergers and Acquisition

Transfers of existing assets from local firms to foreign firms takes place; the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity.

3. Horizontal Foreign Direct Investment:

Investment in the same industry abroad as a firm operates in at home. Investing company invest in the same business what they does I their own domestic country.

4. Vertical Foreign Direct Investment:

1) Backward vertical FDI: where an industry abroad provides inputs for a firm's domestic production process 2) Forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic production

Attractiveness as FDI Destination

-Strong and stable government -Pro-active government policies -Investor-friendly and transparent decision making process -Sound diversified industrial infrastructure -Comfortable power situation -Abundant skilled manpower -Harmonious industrial relations -Quality work culture

2.6 Foreign Institutional Investment Government Policy:

Investment by FII was jointly regulated by Securities and Exchange Board of India (SEBI) through the SEBI (Foreign Institutional Investors) Regulations, 1995 and by the Reserve Bank of India through Regulation 5(2) of the Foreign Exchange Management Act (FEMA), 1999. The promulgation of legislation pertaining to foreign investment by SEBI in 1995 market a watershed for FII flows to India; this led to a significant increase in the level of FII equity inflows in the pre-Asian crisis period. The SEBI FII Regulations and RBI policies are amended and modified from time to time in response to the gradual maturing of the Indian financial market and changes taking place in the global economic scenario. In order to trade in India equity market, foreign corporation need to register with SEBI as Foreign Institutional Investors. Without registration they can invest, but cases require the approval from RBI. They are generally concentrated in secondary market. FII are allowed to invest in a) Securities in primary and secondary market including shares, debentures and warrant of companies, unlisted, listed or to be the listed in India. b) Units of mutual funds c) Dated government securities d) Derivative traded in a recognized stock market and e) Commercial papers FII 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. FII sub accounts include those foreign corporate, foreign individual, institution funds or portfolio established or incorporated outside India. FII may issue deal in or hold off share derivative instrument such as participatory notes (PN).The entities that can subscribe to the PN are a) Any entity incorporated in a jurisdiction that requires filing of constitutional or other documents with a registrar of companies or comparable regulatory agency or body under the applicable companies legislation in that jurisdiction b) Any entity that is regulated authorized or supervised by a central bank, such as the Bank of England, or any other similar body provided that the entity must not only be authorized but also be regulated by the aforesaid regulatory bodies c) Any entity that is regulated, authorized or supervised by a securities or futures commission, such as the Financial Services Authority or other securities or futures authority or commission in any country, state or territory d) Any entity that is a member of securities or futures exchanges such as the New York Stock Exchange or other self-regulatory securities or futures authority or commission within any country, state or territory provided that the aforesaid mentioned organizations which are in the nature of self- regulatory organizations are ultimately accountable to the respective securities financial market regulators. 7

Investment limit for FIIs:

As per the September 1992 policy permitted foreign institutional investment registered FII could individually invest in a maximum of 5% of a companys issued capital and all FIIs together up to a maximum of 24%. From November 1996 are allowed to make 10 percentage investment in debt securities subject to the specific approval from SEBI as a separate category of FIIs or sub accounts as 100% debt fund investment such investment were of occurs subjected to the fund specific ceiling prescribed by SEBI and had to be within overall ceiling US 1.5 $. The investment was however, restricted to the debt instrument of companies listed or to be listed on the stock exchanges. In 1997, the aggregate limit on investment by FIIs was allowed to be raised from 24% to 30% by then board of directors of individual companies by passing a resolution in their meeting and by special resolution to that effect in the companys Board meeting. In June 1998 the 5% individual limit was raised to 10%.In March 2000, the ceiling on aggregate FII portfolio investment increased to 49%.This was subsequently raised to 49%, on March 8 2001, Finance minister announced February 28 2002 that foreign institutional investors can invest in accompany under the portfolio investment rout beyond 24% of the paid up capital of the company with the approval of the general body of the share holders by a special resolution.

New registration criteria for FIIs in India:

With a view to make the P-Note holders eligible for FII registration thereby obviating the need for ODIs, SEBI has made the following relaxations in the FII registration criteria Broad Based CriteriaRegistration criteria for broad based funds has been modified to include entities having at least 20 investors with no single investor holding more than 49% of the shares or units of the fund as against the earlier 10% limit. Track Record of the ApplicantTrack record of individual fund managers will be considered for the purpose of ascertaining the track record of a newly set up fund, subject to such fund manager providing its disciplinary track record details. Perpetual RegistrationFII and sub-account registrations will be perpetual, subject to payment of fees. Under the earlier regime, FIIs and their sub-accounts were registered for a period of three years after which the renewal application was subject to a re-examination by SEBI. Relaxation of the regulated requirementPension Funds, Foundations, Endowments, University Funds and Charitable trusts or societies have been exempted from the requirement of being regulated for registration as FIIs.

ACTS AND RULES

FII registration and investment are mainly governed by SEBI (FII) Regulations, 1995. A. ELIGIBILITY FOR REGISTRATION AS FII: Following entities / funds are eligible to get registered as FII: 1. Pension Funds 2. Mutual Funds 3. Insurance Companies 4. Investment Trusts 5. Banks 6. University Funds 7. Endowments 8. Foundations 9. Charitable Trusts / Charitable Societies 8

Further, following entities proposing to invest on behalf of broad based funds (a fund established or incorporated outside India, which has at least twenty investors with no single individual investor holding more than 10% shares or units of the fund), are also eligible to be registered as FIIs: 1. Asset Management Companies 2. Institutional Portfolio Managers 3. Trustees 4. Power of Attorney Holders

B. Number of FIIs registered with SEBI:

The following table represents the number of FIIs registered with SEBI from 1992 to 2010 yearly. From the below table its clear that the number of FIIs increases year by year except for the years 1998- 1999, and 2001- 2002. Year End of March End of December 1992-93 0 1993-94 3 1994-95 156 1995-96 353 1996-97 439 1997-98 496 1998-99 450 1999-00 506 2000-01 527 2001-02 490 2002-03 502 517 2003-04 540 637 2004-05 685 823 2005-06 882 993 2006-07 997 1219 2007-08 1319 1594 2008-09 1626 1706 2009-2010 1713 1750 Figure-1 C. INVESTMENT OPPORTUNITIES FOR FIIs The following financial instruments are available for FII investments a) Securities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India; b) Units of mutual funds; c) Dated Government Securities; d) Derivatives traded on a recognized stock exchange; e) Commercial papers. 1. Investment limits on equity investments a) FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of an Indian company. b) Investment on behalf of each sub-account shall not exceed 10% of total issued capital of an India company. 9

c) For the sub-account registered under Foreign Companies/Individual category, the investment limit is fixed at 5% of issued capital. These limits are within overall limit of 24% / 49 % / or the sectoral caps a prescribed by Government of India / Reserve Bank of India. 2. Investment limits on debt investments The FII investments in debt securities are governed by the policy if the Government of India. Currently following limits are in effect: - For FII investments in Government debt, currently following limits are applicable:

Figure-2 - For corporate debt the investment limit is fixed at US $ 500 million.

D. TAXATION
The taxation norms available to a FII are shown in the table below.
Nature of Income Long-term Capital Gain Short-term Capital Gain Dividend Income Interest Income TAX Rate 10% 30% NIL 20%

Figure-3 Long term capital gain: Capital gain on sale of securities held for a period of more than one year. Short term capital gain: Capital gain on sale of securities held for a period of less than one year.

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2.7 Why to invest in India

The Indian economy has witnessed a paradigm shift since the last decade and is on a robust growth trajectory. Today, the Indian economy boasts a stable annual growth rate, booming capital markets, and rising foreign exchange reserves. According to the Asian Development Bank's (ADB) report titled Asia Capital Markets Monitor, the equity market in India, with a market capitalization of approximately US$ 600 billion, has emerged as the third-largest equity market, behind China and Hong Kong, in the emerging Asian region. 1. Investor-Friendly Indian Market: The Indian government made a number of policy changes during the past 1015 years to reduce the discriminatory bias against foreign investors. Some changes are as follows: For foreign companies, the long-term capital gains rate was reduced to 20%. With a view to liberalize the Indian market, the Indian government has amended the exchange control regulations that were previously applicable to businesses having significant foreign participation. The government has also lifted the ban against using foreign trademarks/brand names. Besides, the budget for the fiscal year of 19941995 lowered the corporate tax rate for foreign firms to 55% from 65%. Per the Indian Income Tax Act, both Indian and foreign firms have been exempted from export earnings. The Indian government has introduced many other significant changes to encourage FDIs in India. For example, the Securities and Exchange Board of India (SEBI) recently formulated the guidelines to encourage the operations of foreign brokers, on behalf of registered Foreign Institutional Investors (FIIs), in India. Due to this, the foreign brokers can now set up rupee or foreign currency-denominated accounts to credit inward remittances, brokerage fees, and commissions. The Indian government has eliminated the condition of dividend balancing for all but 22 consumer goods industries. In addition, the Reserve Bank of India (RBI) now allows 100% foreign investment when it comes to the construction of roads or bridges. In the March 1995 budget, the peak custom duty rate was lowered significantly from 65% to 50%. 2. Future Prospects for Foreign Investment in India: The World Bank has predicted that the Indian economy will register an 8% growth in 2010. If this prediction comes true, India will become the fastest growing economy for the first time, The resilient nature of the Indian economy can be gauged from many leading indicators, such as freight movement at major ports, an increase in hiring, and encouraging data from various key manufacturing segments, namely cement and steel. Recent indicators from reputed indices, such as ABN Amro's Purchasing Managers' Index (PMI), UBS' Lead Economic Indicator (LEI), and Nomura's Composite Leading Index (CLI), also support this optimism in the Indian economy. 11

The success of investment prospects in India will depend primarily on the precise estimation of its potential. Overestimation of its possibilities or underestimation of its complexity can lead to failure. For entering India's marketplace, companies will need to have a well-planned strategy backed by careful research and serious thought. For people looking at India as an opportunity for long-term growth instead of short-term profit, the trip will surely be worth the effort.

2.8. 8 Reasons to Invest in India

Here are at least eight reasons why India is a seriously compelling story for investors: 1. Size of India India's GDP is currently US$1.3 trillion, making it the 8th largest economy in the world. However, in PPP terms, which recognises India's low cost base, the GDP notionally rises to three times this amount (US$3.8 trillion) which places it on a similar size to Japan and, by 2013, it will become the third largest economy in the world (after the USA and China) in PPP terms. However, despite representing 7.5% of Global GDP (on a PPP basis) in 2010, India attracts less than 0.5% of investment inflows. An anomaly which is unlikely to continue for much longer! 2. Economic growth India's economy is currently growing by 8.75% per annum (in 2010) and this GDP growth rate is expected to increase to 9% - 10% per annum for each of the next 10 years. India's GDP will grow five times in the next 20 years, and GDP per capita will almost quadruple. 3. Diversity The Indian economy offers investors exposure to a wide range of opportunities from consumer goods and pharmaceuticals to infrastructure, energy and agriculture. With its strong services sector (comprising 50% of India's economy), particularly in knowledge-based services (IT, software and business services) India has proved that industrialisation and the export of commodities and resources is not the only path to rapid economic development. 4. Demographics India is one of the youngest countries in the world, with an average age of 25 and likely to get younger. India's working-age population will increase by 240 million over the next 20 years. With a population of 1.2 billion, a strong work ethic, high levels of education, democracy, English language skills and an entrepreneurial culture, India is poised to dominate the global economy in the next 20 years. 5. High Savings With a savings rate of 37% of GDP, India's domestic savings fuels most of its investment requirements, and only 20% of India's total public debt is sourced from foreign borrowing. With significant investment to be made in upgrading India's poor infrastructure in the next 10 years (estimated to be US$1.7 trillion) India's Government is taking various steps to further encourage private and foreign investments. 6. Domestic economy India's domestic consumption, generally led by the private sector, has played a significant role in India's growth and is expected to remain firm as more people enter the workforce and 12

the emerging middle classes. India's wealthiest consumers (those earning US$1m or more in PPP terms) will increase by 40 million in the next 10 years! Every sector within India's consumer market is booming, making India far less vulnerable to external shocks and pressures than other emerging markets. 7. A robust financial sector India has a robust, diversified and well regulated financial system which has allowed it to weather the global financial crisis without any major difficulties and present an image of quality, resilience and transparency. India's banking sector is strong, with top quality balance sheets, high levels of competition (there are around 80 banks in India) and strong corporate governance. 8. Quality of Investment Markets The Bombay Stock Exchange is the second oldest in the world (165 years) and offers investors a low cost, highly efficient, modern and well governed environment in which to prosper from India's extraordinary economic growth. The Indian stock market has generated investment returns of over 15% per annum for the last 10 years and experts expect this rate to increase in the next decade. More significantly perhaps, Indian investors have doubled their money over the last 3 years at a time when many have lost money in almost every other market.

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Chapter 3. STOCK EXCHANGE

A STOCK EXCHANGE is a platform where buyers and sellers of securities issued by governments, finance institutions, corporate houses etc., meet and where trading of these corporate securities take place. This is a market of speculation. If speculation of investors become wrong than the investors loss. Nobody knows what will happen even after a second. A Stock Exchange refers to the segments of the capital market where the securities issued by corporate are trade. It is open auction market where buyers and sellers meet and involve competitive prices of the securities. It reflects hopes aspiration fair of people regarding the performance of the economy. I t provides necessary mobility to capital and direct flow of the capital into possible and successful enterprise. Since buying and selling of the different of securities take place on stock exchange. The prices of particular securities reflect there demand and supply. In fact, stock exchange is said to be a barometer of economy and financial health. The stock market in India, Securities and Exchange Board of India (SEBI) is on the issue of acceptance of hedge funds into Indian financial market. At the sometime worldwide trade shows that hedge funds are important force to the reckoned with us. The impact of hedge funds activity is new to the Indian financial investors (FII) flows volatility of the stock market. This is so because hedge funds activity in Indian primary through participatory notes (PN) and the sum is reflected under FII inflows. Large stock operators and investment arms certain large corporate in India in the period consideration used to use oversees body (OCB) as a mechanism to take exposure to the India n market. OCB activity in the Indian context is pretty similar to funds trading historically OCB flows also used to appear under the head of FII flows traditionally a large chuck of the PN and OCB activity in India use to happen through the Mauritius route due to taxation benefits. With the latest budget presented by the Indian government. (Will become Effective from 1st September 2004) reducing long term capital gains to zero and short term capital gains to 10 % the taxation to Mauritius to exist .

FEATURES OF STOCK EXCHANGE

-It is the place where listed securities are bought and sold. -It is an association of persons known as members. -Trading in securities is allowed under rules and regulations of stock exchange. -Membership is must for transacting business. -Investors and speculators, who want to buy and sell securities, can do so through members of stock exchange i.e. brokers

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3.1 BRIEF PROFILE OF IMPORTANT INSTITUTIONS:

A brief profile of important institutions included in the study is given below.

1. RESERVE BANK OF INDIA

India's Central Bank - the RBI - was established on 1 April 1935 and was nationalized on 1 January 1949. Some of its main objectives are regulating the issue of bank notes, managing India's foreign exchange reserves, operating India's currency and credit system with a view to securing monetary stability and developing India's financial structure in line with national socio-economic objectives and policies. The RBI acts as a banker to Central/State governments, commercial banks, state cooperative banks and some financial institutions. It formulates and administers monetary policy with a view to promoting stability of prices while encouraging higher production through appropriate deployment of credit. The RBI plays an important role in maintaining the exchange value of the Rupee and acts as an agent of the government in respect of India's membership of IMF. The RBI also performs a variety of developmental and promotional functions. The first concern of a central bank is the maintenance of a soundly based commercial banking structure. While this concern has grown to comprehend the operations of all financial institutions, including the several groups of non-bank financial intermediaries, the commercial banks remain the core of the banking system. A central bank must also cooperate closely with the national government. Indeed, most governments and central banks have become intimately associated in the formulation of policy. They are often responsible for formulating and implementing monetary and credit policies, usually in cooperation with the government. they have been established specifically to lead or regulate the banking system.

2. SECURITUIES AND EXCHANGE BOARD OF INDIA

In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers has been set up. The basic objectives of the Board were identified as: -To protect the interests of investors in securities; -To promote the development of Securities Market; -To regulate the securities market and for matters connected therewith or incidental thereto. Since its inception SEBI has been working targeting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market. SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and risk management systems for Clearing houses of stock exchanges, surveillance system etc. which has made dealing in securities both safe and transparent to the end investor. Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000.

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A market Index is a convenient and effective product because of the following reasons: -It acts as a barometer for market behavior; -It is used to benchmark portfolio performance; -It is used in derivative instruments like index futures and index options; -It can be used for passive fund management as in case of Index Funds. Two broad approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading products, so that there is an increase in number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark.

3. BOMBAY STOCK EXCHANGE:

Of the 22 stock exchanges in the country, Mumbai's (earlier known as Bombay), Bombay Stock Exchange is the largest, with over 6,000 stocks listed. The BSE accounts for over two thirds of the total trading volume in the country. Established in 1875, the exchange is also the oldest in Asia. Among the twenty-two Stock Exchanges recognized by the Government of India under the Securities Contracts (Regulation) Act, 1956, it was the first one to be recognized and it is the only one that had the privilege of getting permanent recognition abinitio. Approximately 70,000 deals are executed on a daily basis, giving it one of the highest per hour rates of trading in the world. There are around 3,500 companies in the country which are listed and have a serious trading volume. The market capitalization of the BSE is Rs.5 trillion. The BSE `Sensex' is a widely used market index for the BSE. The main aims and objectives of the BSE are to provide a market place for the purchase and sale of security evidencing the ownership of business property or of a public or business debt. It aims to promote, develop and maintain a well-regulated market for dealing in securities and to safeguard the interest of members and the investing public having dealings on the Exchange. It helps industrial development of the country through efficient resource mobilization. To establish and promote honorable and just practices in securities transactions

BSE Sensex
The BSE Sensex is a value-weighted index composed of 30 companies with the base April 1979 = 100. It has grown by more than four times from January 1990 till date. The set of companies in the index is essentially fixed. These companies account for around one-fifth of the market capitalization of the BSE.

4. NATIONAL STOCK EXCHANGE OF INDIA

The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and 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.

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S&P CNX Nifty

S&P CNX Nifty is a well-diversified 50 stock index accounting for 23 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL. IISL is India's first specialized company focused upon the index as a core product. IISL have a consulting and licensing agreement with Standard & Poor's (S&P), who are world leaders in index services. Impact cost of the S&P CNX Nifty for a portfolio size of Rs.5 million is 0.07% S&P CNX Nifty is professionally maintained and is ideal for derivatives trading.

3.2 Reforms in Indian Stock Market

Stock market liberalization is the decision by a government to allow foreign investors to purchase shares in the local stock market and domestic investors to purchase shares abroad. International asset pricing models predict that the integration with world financial markets should lead to a reduction in the cost of capital. A number of papers assess the impact of stock market liberalization on the cost of equity capital, finding evidence of an increase in share prices around the liberalization date and a reduction in the cost of capital afterwards. As part of the capital market reform programs, governments approved new laws and regulations aimed at creating the proper legal and regulatory framework for capital markets to flourish. Many countries tried to improve corporate governance practices, by introducing new standards in a number of different areas, including voting ratings, tender procedures, and the structure of the board of directors. These reforms were expected to improve market performance, by increasing liquidity, enhancing efficiency, and reducing trading costs. Focus on analysis on the replacement of traditional trading floors, on which brokers manually match orders using an open outcry system, by fully automated electronic trading systems. Electronic trading systems may increase liquidity and improve efficiency by reducing transaction costs and increasing information availability. These trading systems may also attract new pools of liquidity, by providing affordable remote access to investors. Some countries also enacted new insider trading regulations and improved accounting and disclosure standards. To account for improvements in the legal framework for investors, focus on the enforcement of insider trading regulations. Increases the pool of capital available to local firms and broadens the investor base. This is likely to lead to increased liquidity and larger amounts of research. Improving the basic environment for capital market operations, including new policies related to securities clearance and settlement systems, trading platforms, and custody arrangements. These reforms were expected to improve market performance, by increasing liquidity, enhancing efficiency, and reducing trading costs.

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Chapter 4. Findings & Analysis

In this study for measuring Impact of FDI & FII on Indian Stock Market, I have used Correlation Coefficient, Correlation Determination and Probability Error for more perfect measurement in the study. As per the study, this data taken by me is from secondary sources and the stock market doesnt volatile with any particular factor it is dependent on the other factors as well.

4.1. Sensex & FDI.

In this study I assume that FDI is independent variable & Sensex is dependent variable.
Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011(August) Sensex Value 1,908 2,615 3,346 3,926 3,110 3,085 3,658 3,055 5,005 3,972 3,262 3,377 5,838 6,602 9,397 13,786 20,286 9,647 17,464 20,509 18,446 FDI

408 1094 2018 2018 6916 9554 13548 12343 10311 12645 19361 14932 12117 17138 24584 56390 98624 123025 123120 88520 13846

Figure-4 Correlation coefficient 0.7464 Correlation determination 0.54 Probability Error 0.067 Figure-5 InterpretationRelation between foreign direct investment and stock market- BSE-Sensex is 0.7464; we can say that the two variables are having partial positive relation. The relation is partial positive 18

so the flow of direct investment & Sensex are 74% related to each other. Both are increase or decrease in a parallel way.
^ s y &/ z

Figure-6

Introduction PhaseThe Foreign direct investment in India was having very long introduction phase. it was around 14 years. From the starting of the FDI in India, it was having very law investment in India directly. The phase ends up in 2004 and the total amount invested in India since 1991 to 2004 was 134403 Crores

Growing phaseThe foreign direct investment in India grown from starting of the year 2005. Mass number of new multinational company came into the Indian market and the flow of investment grown very high in few years. But the phase wont for longer period. In the year 2008 due to economic crises in India and as well in the world this phase ends. The total investment in this phase was 302623 Crores.

Stable phaseThis phase stars from 2008, but ends with in a year. After the economic crises the flow of investment in country gets stable for a while. The investors outside country are not in a position or are not willing to invest in Indian market. The investment in this phase was 246145 Crores.

Decline phaseThe flow of investment in India was decreasing after the year 2009, the overseas corporations stopped investing in India and the flow gets decrease in between 2009 to 2010. The investment in this phase was 88520 Crores. The flow of investment in India in this phase is getting very down and the existing companies also not investing much. Apart from this the Sensex & FDI have a significant relation; the phase of FDI is directly or indirectly depends on the Sensex volatility. The major effect on FDI arises at the time of global economic crises in the year 2008. The Sensex value got to the bottom level as well the FDI also get decreased, when the stock market was in bullish trend the FDI were also in positive flow. 19

4.2 Sensex & FII

Here Independent variable is FII & Dependent variable is Sensex. Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 ( August) Sensex Value FII 3,346 3,926 3,110 3,085 3,658 3,055 5,005 3,972 3,262 3,377 5,838 6,602 9,397 13,786 20,286 9,647 17,464 20,509 18,446 Figure-7 5126 4796 2752 8484 4876 28771 6697.3 6510.9 13299.5 3677.9 35153.3 42048.5 41663.6 40588.9 80914.6 -41215.5 87987.2 179674.1 18170.70

Correlation coefficient 0.7850 Correlation coefficient 0.6162 Probability Error 0.06 Figure-8 InterpretationThe relation between the BSE-Sensex & FDI is having partial positive relation. The relation between them is 78%. We can say that 78% off the FII flow in the market is dependent in Sensex volatility. Major effect we can see in the global economic crisis that the collapse in the stock market lead FII in negative trend. The major loss in the FII flow was in 2008. That time stock market was bearish. That makes direct effect on FII. But when the market was bullish the FII was having highest investment in equity & debt fund in Stock market.

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&//

Figure-9 The phases in the FII are not in a significant flow. It is totally dependent on stock market. The major effect we can find in stock market volatility & in FII flow are, in the year between 1997 and 1999 the total institutional investment was 40344 Crores and an another notable effect was in the year 2003, the market went to a stable level and the FII was in growing level. The major junk I found in the year 2008, the reason for this was the global economic crises. The stock market collapse to Sensex- Rs 9647, and the FII leads in to negative with 41215 Crores, this gets the significant effect in FII, after the crises market gets to a much stable level and that make an effect to FII as well. FII increase with a good level and that also make a highest investment in Indian market.

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4.3 S&P CNX Nifty & FDI

Here in this study I have assumed that the FDI is Independent variable and S&P CNX Nifty is Independent variable.

Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

S & P CNX Nifty 558.63 761.31 1042.59 1182.28 908.53 899.1 1079.4 884.25 1480.45 1263.55 1059.05 1093.5 1879.75 2080.5 2836.55 2080.5 6138.6 2959.15 5201.05 6134.5 5001 Figure-10

FDI 408 1094 2018 2018 6916 9554 13548 12343 10311 12645 19361 14932 12117 17138 24584 56390 98624 123025 123120 88520 13846

Correlation coefficient 0.76 Correlation determination 0.58 Probability error 0.06 Figure-11 InterpretationThe relation between FDI and S&P CNX Nifty is a partial positive in nature because the correlation between them is 0.76, and the Correlation determination is 0.58. So that we can say that the volatility in the value of nifty can be related to the flow of money through foreign direct investment in India. As far as my opinion to this is the FDI flow do not directly affect the value of the Nifty. There are many more factors drive the value, but the notable point is the FDI provides the more number of shares or securities to the investor, and the investors have more option to invest in. FDI is not the direct way to invest in the securities but. That investment comes into the Indian market in the form of money for the companies from overseas. They invest in companies and the companies use that to increase the productivity and profitability of their firm and that makes effect to their securities listed in the exchanges, the basic law of economics talks about price and supply, the same law works in the capital 22

market as well. When the market have much supply of securities then the investor would buy it and that factors make an impact on the whole capital market.
^ W Ey E &/

Figure-12 As we have already discussed in the previous discussion about the FDI performance in India. That all phases of Foreign Direct Investment in Indian market. In the Introduction phase FDI was not so effective in Indian market but in the growing phase it makes a drafting change in the flow in India. FDI flow reaches to the highest stage in the growth phase and gets stable for a while and then with in a one year it is on a position of decline. That decline phase comes only because of the global crises in the world. But so far this impact is consent the FDI doesnt make so significant effect on Indian stock market. It makes a indirect effect through the various ways which we discussed.

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4.4 S&P CNX Nifty & FII.

Here in this study I have assumed that the FII is Independent variable and S&P CNX Nifty is Independent variable. Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 S & P CNX Nifty 1042.59 1182.28 908.53 899.1 1079.4 884.25 1480.45 1263.55 1059.05 1093.5 1879.75 2080.5 2836.55 2080.5 6138.6 2959.15 5201.05 6134.5 5001 Figure-13 FII 5126 4796 2752 8484 4876 28771 6697.3 6510.9 13299.5 3677.9 35153.3 42048.5 41663.6 40588.9 80914.6 -41215.5 87987.2 179674.1 18170.70

Correlation Coefficient 0.72 Correlation Determination 0.52 Probability Error 0.07 Figure-14 InterpretationForeign Institutional Investment & CNX Nifty is having partial Positive relation. As per the statistical data the Correlation Coefficient is 0.72, we can say that the there is 72% market is dependent on FII flow in the capital market, the Probability Error indicates there may be 0.07 change in the relation between them. It can volatile between 0.07. Foreign Institutional Investment in Indian Capital market makes much impact, because the flow of money comes into the capital market directly. The basic economics law says about the demand and supply and also about the price and demand of particular product. If there is more liquid money is available to investor and they invest in the capital market then it makes the significant effect on the whole market. The performance of the nifty is on a certain stable level. It was not so much volatile. up to the year 2005 Nifty was having stable value but in the year 2008 because of certain factors and the global crises the values collapse and the direct effect we found on FII earning. And

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the performance of the FII is having very low investment flow in the starting phase and then after the flow of investment was having good sound. It got increased in a very short period

W Ey E

&//

Figure-15 As the above graph indicates the flow of CNX Nifty and the FII in India. We found that the nifty and FII is up to some parallel level but in the year 2002. FII flow was increased and the stock market also gets stable. The major collapse in the year 2008. Market was bearish and FII earning was in negative but within a short period of two years and it gets stable. The impact of FII on Indian stock market makes direct effect.

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Chapter 5. Conclusion Impact of FDI & FII on Indian stock market, as per the results of the statistics the both are having a positive relation with the stock market indices. In detail we have been discussed the how FDI & FII makes an impact on the stock market. But as far as the study is having the assumptions that are Stock market indices, BSE-Sensex & S&P CNX Nifty are dependent variable. But in the practical life every time it does not depends on the FDI or FII, there are more other factors which drives the stock market either bullish or bearish. The correlation of FDI & Sensex or Nifty is in a positive nature, we can consider that the FDI investment flow makes an effect on the value of the indices, but the FDI does not makes a direct impact on the stock market, FDI in India was started vary early and in the starting phase the flow in India was very law, but in the recent 10 years it come to a highest level and it helps Indian economy to grow up. As far as the stock market is consent the FDI is having the positive correlation with the stock market and the FDI is one of the factors which drive the capital market. The correlation of FII & Sensex or Nifty is having a positive relation; FII is the direct way to investment in the capital market as a huge investment. The major factor we can consider as foreign institutional investment, the results and the performance of FII in India in the introduction phase was not so effective on stock market that may be because the investment flows very low. But after a decade it enters in to the growing phase and the investment flow also arise and the number of institutions was increased. Major collapse in the stock market and in FII was in the year, due to the global crises in the world economy and that makes a drastic effect on Indian stock market. But after a year the FII flow arise and come to a stable level and also the stock market is on a stable level if we exclude some scams in the stock market.

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Chapter 6. Bibliography. Websiteshttp://www.nseindia.com/index.htm http://www.bseindia.com/stockinfo/indices.aspx http://www.moneycontrol.com/mccode/globalmarkets/ http://articles.economictimes.indiatimes.com/2009-12-13/news/27663369_1_bse-sensexsecond-half-first-half

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