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A STUDY ON FOREIGN INSTITUTIONAL

INVESTMENT (FII)
(With Reference to the Indian Stock Market)

By
M. SHANMUKHA RAO

under the guidance of:


Prof. D. Prabhakara Rao
Prof. V Krishnamohan
Dept of Commerce and Management Studies
Introduction
In the light of the importance of foreign investment
for economic growth and development. In most
developing countries like India, domestic capital is
inadequate for the purpose of economic growth.

Foreign capital is typically seen as a way of filling


in gaps between the domestically available
supplies of savings, foreign exchange, government
revenue and the planned investment necessary to
achieve developmental targets.
The Foreign investment is classified into Foreign
Direct Investment (FDI) and Foreign Portfolio
Investment (FPI).
The FDI refers an investment made by the foreign
company directly into Indian companies and
influence on the operations and management of
domestic company directly.
Whereas FPI reflects the investment made in the
Indian securities through stock exchanges.
The stock market reforms, help to redesign the
performance and corporate governance of the stock
market; furthermore in the backing of getting the outside
assets through the securities market.

The Government of India had issued guidelines on 14th


September 1992 to allow Foreign Institutional Investors
(FIIs) for trading in the Indian securities market with the
reasonable limitation on investments.

This investment permitted in the stock market in both


Primary and Secondary markets, including shares,
debentures and warrants issued by companies which
listed or to be listed on the Stock Exchanges in India
and in schemes floated by mutual funds such as UTI.
Entities of FIIs
Foreign Institutional Investors (FIIs) including
institutions such as:
Pension Funds
Mutual Funds
University Funds
Foundations
Charitable Trusts
Insurance companies
Foreign Central Banks
Sovereign Wealth Funds
Investment Trusts
Asset Management Companies
Definition

As per SEBI (FII) Regulations, 1995 Foreign


Institutional Investor is defined as:

An institution established or incorporated


outside India, which proposes to make
investment in India in securities.
Need for the study
The Indian stock markets performed greatly
after the initiation of reforms and Indian stock
market become the best destination for the
foreign investors, this supported by the IMF
forecasting the growth of GDP.
India is one of the top emerging economies in
the world, the IMF estimate the Indias GDP
growth 7.3 percent for 2015-16 and 7.5
percent for the 2016-17 fiscal year; even the
world economic growth cut down to 3.4
percent from 3.6 percent in the fiscal year
2015-16 (WEO, 2016).
India opened doors to Foreign Institutional
Investors (FIIs) on 14th September, 1992 to trade
in the Indian stock market in the form of equity
investment with suitable restrictions;
Since FII allowed into the Indian stock market,
FIIs investment constant increase identified and
this investment aid to improve the liquidity and
performance of Indian corporate as well as to an
economic development.
Indian stock market achieved the new highs in
terms of trading volume and market capitalization.
The FIIs funds flow highly influenced the Indian stock
market indices, majorly SENSEX and NIFTY fluctuates
according to the moves of FIIs.

The study conducted for the period of April 2005 to March


2015, which covers both bullish and bearish trends in the
stock market during this period. In this consideration
identified the importance to study about the Foreign
Institutional Investment in connection with the Indian stock
market.
In addition to this, to get better knowledge in making
decisions by retail investors and other investors for better
returns. To examine, is the company's market
capitalization influenced by FIIs shareholding? The study
recognized as very important.
Objectives of the study
The following objectives were framed in this study:
i) To study the trends of the Foreign Institutional
Investor (FII) trading activities in Indian stock
market.
ii) To study the relationship between FII investment
and Stock Market returns in India.
iii) To study the impact of FII investment on Sector
wise market returns.
iv) To study the FII shareholding pattern in selected
companies in NSE.
Scheme of Thesis Presentation

The study is reported in the following chapters:


Chapter-1: Introduction
Chapter-2: Review of Literature
Chapter-3: Stock Market in India
Chapter-4: An overview of Foreign Institutional
Investment (FII) in India
Chapter-5: Data analysis of the Study
Chapter-6: Findings, Summary & Suggestions
Research Methodology

The data used in the study is time series in


nature and data collected from the secondary
sources; the study conducted for the period of
April 2005 to March 2015. The data analyzed
using the different software's like MS-Excel,
SPSS, E-Views 9.0.

Statistical tools used in the study such as Mean,


Median, S.D., Skewness ,Kurtosis, JB test,
Correlation, Regression, Econometrics
ADF(Augmented Dicker Fuller) test, BG LM (
Bruesch Godfrey Larange Multiflier) test etc.,
Variables of the study

In conducting of study, the following variables


have used and these variables include FIIs
activities such as:
FIIs purchases and Sales
FIIs Net Investment
Stock Market returns (of both NSE & BSE),
FIIs Shareholding and the market
capitalization of selected companies.
Data Sources

In this study, data collected from the various


sources includes various reports for different
time period (monthly, quarterly, annually) ,
books, journals, magazines, articles, news
papers etc.

These reports collected from BSE, NSE,


SEBI, RBI, NSDL, CDSL, IMF, IBRD, MSCI,
WFE etc,.
Major Findings
From the study identified that the number of FIIs
registered in India increased gradually, this is the sign
of the strong fundamentals of the economy and also
corporate earnings, accounting standards adopted
according to international standards i.e., International
Financial Reporting Standard (IFRS). This helps in
improvement of accounting disclosure norms and
corporate governance etc.

The number of FIIs registered in India decreased to


previous year registrations in the year 1998-99 from
496 to 450 for the first time, again declined in the year
2001-02 from 527 to 490 and 2012-13 onwards for
three consecutive financial years from 1765 to 1757,
1710 and 1444 respectively.
The majority of share in Foreign Institutional
Investment (FII) contributed to Indian stock
market by the United States for the end of
March 2015, which having share of 36 per
cent in the overall FIIs investment in the
country wise, before 2013 Mauritius has taken
first place in the contribution of FIIs.

The net FIIs flows were found the positive for


the major study period both in the equity
market and the debt market except in the year
2008-09, in this year FIIs pulled out their funds
from the Indian stock market heavily. In this
year FIIs evacuated around Rs. 45,811 Crores
from the Indian stock market, which affected
by the global recession
In the year 2009-10 found , the Indian stock
market revived from the global recession. This
proved by the massive inflow of FIIs into India
stock market and net FIIs recorded around Rs.
1,42,658 Crores. Whereas, in the preceding
year negative flows identified in the stock
market.

The large FII flows found in the year 2014-15,


which greatly reflected by the stable new
government formation. This improved
confidence in the overseas investors and
helped to infusion of FIIs into Indian stock
market.
The net FIIs have highly correlated with the NSE
Nifty in compared to the BSE Sensex and
correlation coefficient found that 56 and 54
percent respectively
The CNX Midcap returns found higher than
other market capitalization indices returns i.e.,
CNX 100, CNX 500, CNX Small cap.

In BSE 500 returns shown high correlation in


comparison to BSE 100, Midcap and Small cap
returns
In the sectoral returns, CNX Bank returns extremely
correlated with the Net FIIs flows and this correlation
followed by the CNX Pharma, CNX IT, CNX Auto and
CNX FMCG returns
NSE Nifty had given good returns and also it proved
that it is safest in terms of risk
NSE Small Cap market identified as the risky market
among the other NSE market indices, but it provided
good returns in the study period
During the study period found that NSE Auto sector
gave the highest returns when compared to other
sector returns of NSE and second highest returns from
the CNX Pharma sector followed by the FMCG,
Banking, and IT sectors.
The BSE giant index Sensex gave the highest
returns and safest market to invest in the other
BSE market indices and the returns followed by
the BSE 100, BSE 500, BSE Midcap and BSE
Small Cap markets

The BSE Auto sector gave maximum returns


among the other sectoral market in BSE followed
by the BSE Health Care sector, BSE FMCG, BSE
Banking and BSE Information Technology sector.

The FIIs shareholding higher in the Private


companies in comparison to government
companies.
The Net FIIs impact high on Nifty returns in
compared to the BSE Sensex returns during
the study period

In governmental companies, the ONGC has


highest market capitalization among the other
governmental companies in NSE Nifty selected
companies, i.e., BHEL, BPCL, GAIL, PNB, SBI.

The FIIs holdings found the maximum in the


HDFC among the selected companies of NSE
Nifty companies, the average shareholding of
FIIs around the 65.83 per cent for the study
period.
SUGGESTIONS

The interest in the economy ought to be


improved apart the rising demand for investable
assets. This should be possible by making
powerful, more FII inflows into the nation,
especially given the favorable position that FII is
a type of non-debt making inflows and hence
does not expand the nation's obligation
liabilities.
The FIIs flow creates instability in the stock market
due to limited restrictions on investment. This ought
to be checked by regulatory authorities to protect the
interest of retail and other domestic investors
The FIIs investment supposed to be increased in the
small and mid-cap companies for their liquidity
improvement, which battles high lack of the capital
requirements.
The administrative powers should consider the
confinements on sectoral caps in expanding the
substance of demand in the present day situation.
The restrictions on investment of FIIs ought to be
liberalized in the governmental companies.
Limitations of the study
The study used secondary data and which
collected from the annual and quarterly reports
of the selected variables. The reliability of data
depends on upon the published reports by the
respective organizations.
The study conducted for selected stock market
indices, of both BSE and NSE.
Stock market returns are influenced by many
factors, but a study conducted main
consideration to FIIs investment only.
To study the FIIs shareholding pattern, only the
selected companies have taken for the study.
CONCLUSION
India becomes one of the prominent emerging stock
markets as a result of the various economic growth
aspects of the country.

The overseas investors are attracted by superior returns


from the Indian stock market. The FIIs increased funds into
the Indian stock market and determine the returns of Indian
stock market; and also causes the fluctuations in major
Indian stock indices of both BSE Sensex and NSE Nifty.

The Net FIIs equity investment impacted greater on the


NSE Nifty in comparison to BSE Sensex. The stock market
returns in the study proved, the greater risk involved for
higher returns. The FIIs held maximum holding in the non-
governmental scripts than governmental.
Scope for further Research
There is a satisfactory extent of undertaking further
research on Foreign Institutional Investments and related
issues.

Firstly, Consideration of more economic variables like


DOLLEX, macroeconomic variables of host nations and so
forth might be taken up for examination.

Secondly, comparative study amongst FIIs and Domestic


Institutional investors might be embraced to recognize the
patterns and strategies adopted.

Thirdly, the impact of policy changes on FII flows on the


stock market can be analyzed through event study
methodology.
Finally, future researchers can look at the benefits and risks
of FII investments in light of firm specific characteristics.
THANK YOU

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