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Executive Summary
The major impact during the recessionary period was mainly due to the negative flow of
FII in India while the FDI remained moderately unaffected with the global slowdown.
The attractiveness of India for FDI is far from receding and can surely be expected to
sustain over the next decade as well. The single most important parameter that is driving
FDI into the country is the rapid growth of Indias GDP and the huge potential returns for
the foreign investors. Moreover, FDI into India is focused on industries and sectors which
can be considered to be recession- proof. In contrasts, the FDI flows into India were
primarily into the services sector and were used for establishing BPOs. The businesses
setup with the FDI money in India remained active during and after the recession
The recession had an impact on the total foreign investments in India, as in the year
2007-08:Q4 the net FI was $ 4760 million which fell from $ 16892 million in 200708:Q3.This stagnant growth continued till 2008-09:Q3 where this further fell to $ -5376
million and in 2008-09:Q4 $ 492.However there are signs of recovery as the results of
2009-10:Q1 shows positive growth of $ 15101 million.
According to findings and results, we have concluded that FII did have significant impact
on BSE and NSE turnover but there is less co-relation with Bankex and IT.
2. Introduction
The report of the project Foreign direct investment (FDI) and foreign institutional
investors (FII) in India mainly focused on the following areas:
whenever there is a rise in market, it is explained that it is due to foreign investors' money
and a decline in market is termed as withdrawal of money from FIIs. This study tries to
examine the influence of FII on movement of Indian stock exchange during the post
liberalization period that is 1991 to 2010. Indian economy Portfolio investment mainly
comprising foreign institutional investors (FIIs) investments and American depository
receipts (ADRs)/global depository receipts (GDRs) witnessed large net inflows (US $
17.9 billion) in April-September 2009 (net outflows of US $ 5.5 billion in AprilSeptember 2008) due to large purchases by FIIs in the Indian capital market reflecting
revival in growth prospects of the economy and improvement in global investors
sentiment.
share of global foreign direct investment (FDI) and foreign institutional investment (FII),
primarily due to government restrictions on foreign involvement in the economy. But
beginning in 1991 and accelerating rapidly since 2000, India has liberalized its
investment regulations and actively encouraged new foreign investment, a sharp reversal
from decades of discouraging economic integration with the global economy.
The world is increasingly becoming interdependent. Goods and services followed by the
financial transaction are moving across the borders. In fact, the world has become a
borderless world. With the globalization of the various markets, international financial
flows have so far been in excess for the goods and services among the trading countries
of the world. Of the different types of financial inflows, the foreign direct investment
(FDI) and foreign institutional investment (FII)) has played an important role in the
process of development of many economies. Further many developing countries consider
foreign direct investment (FDI) and foreign institutional investment (FII) as an important
element in their development strategy among the various forms of foreign assistance.
The Foreign direct investment (FDI) and foreign institutional investment (FII) flows are
usually preferred over the other form of external finance, because they are not debt
creating, nonvolatile in nature and their returns depend upon the projects financed by the
investor. The Foreign direct investment (FDI) and foreign institutional investment (FII)
would also facilitate international trade and transfer of knowledge, skills and technology.
The Foreign direct investment (FDI) and foreign institutional investment (FII) is the
process by which the resident of one country(the source country) acquire the ownership
of assets for the purpose of controlling the production, distribution and other productive
activities of a firm in another country(the host country).
According to the international monetary fund (IMF), foreign direct investment (FDI) and
foreign institutional investment (FII) is defined as an investment that is made to acquire
a lasting interest in an enterprise operating in an economy other than that of investor.
The government of India(GOI) has also recognized the key role of the foreign direct
investment (FDI) and foreign institutional investment (FII) in its process of economic
development, not only as an addition to its own domestic capital but also as an important
source of technology and other global trade practices. In order to attract the required
amount of foreign direct investment (FDI) and foreign institutional investment (FII), it
has bought about a number of changes in its economic policies and has put in its practice
a liberal and more transparent foreign direct investment (FDI) and foreign institutional
investment (FII) policy with a view to attract more foreign direct investment (FDI) and
foreign institutional investment (FII) inflows into its economy. These changes have
heralded the liberalization era of the foreign direct investment (FDI) and foreign
institutional investment (FII) policy regime into India and have brought about a structural
breakthrough in the volume of foreign direct investment (FDI) and foreign institutional
investment (FII) inflows in the economy. In this context, this report is going to analyze
the trends and patterns of foreign direct investment (FDI) and foreign institutional
investment (FII) flows into India during the post liberalization period that is 1991 to 2010
year.
3.
3.1
Research Methodology
Objective 1: Examines the trends and patterns in the foreign direct investment (FDI)
across different sectors and from different countries in India during 1991-2010 period
means during post liberalization period.
Objective 2: Influence of recession on FII and FDI.
3.2
Hypothesis
H0-The NSE and BSE indexes do not rise with the increase in FIIs investments in India
means FIIs have no influence on Indian stock exchange.
H1-The NSE and BSE indexes results in a rise with the increase in FIIs investment in
India means FIIs have an influence on Indian stock exchange.
H0- FDI has a negative impact on the investments in India
H1- FDI has a positive impact on the investments in India
The data regarding indices of NSE and BSE is taken from HANDBOOK OF
STATISTICS ON THE INDIAN SECURITIES MARKET 2008-09.
3.3
Methodology
The lifeblood of business and commerce in the modern world is information. The ability
to gather, analyze, evaluate, present and utilize information is therefore is a vital skill for
the manager of today.
In order to accomplish this project successfully I will take following steps.
instruments,
telecommunications etc. which had attracted larger inflow of FDI and data of NSE
and BSE stock exchanges will be taken to know the impact of FII.
2) Data Collection:
The research will be done with the help Secondary data (from internet
site and journals).
The data is collected mainly from websites, annual reports, World Bank
reports, research reports, already conducted survey analysis, database
available etc.
3) Analysis: Appropriate Statistical tools like correlation and regression has been
used to analyze the data like to analyze the growth and patterns of the FDI and FII
flows in India during the post liberalization period, the liner trend model will be used.
Further the percentage analysis will be used to measure the share of each investing
countries and the share of each sectors in the overall flow of FDI and FII into India.
3.4
Forbidden Territories
FDI is not permitted in the following industrial sectors:
Atomic Energy.
Railway Transport.
Lottery Business
Nidhi Company
record for good performance (financial or otherwise) for a minimum period of 3 years.
This condition would be relaxed for infrastructure projects such as power generation,
telecommunication, petroleum exploration and refining, ports, airports and roads.
1. Clearance from FIPB
There is no restriction on the number of Euro-issue to be floated by a company or a group
of companies in the financial year. A company engaged in the manufacture of items
covered under Annex-III of the New Industrial Policy whose direct foreign investment
after a proposed Euro issue is likely to exceed 51% or which is implementing a project
not contained in Annex-III, would need to obtain prior FIPB clearance before seeking
final approval from Ministry of Finance.
2. Use of GDRs
The proceeds of the GDRs can be used for financing capital goods imports, capital
expenditure including domestic purchase/installation of plant, equipment and building
and investment in software development, prepayment or scheduled repayment of earlier
external borrowings, and equity investment in JV/WOSs in India.
3. Restrictions
However, investment in stock markets and real estate will not be permitted. Companies
may retain the proceeds abroad or may remit funds into India in anticipation of the use of
funds for approved end uses. Any investment from a foreign firm into India requires the
prior approval of the Government of India.
10
4.3 Foreign direct investments in India are approved through two routes
5.
Sector/Activity
Hotel & Tourism
NBFC
Insurance
Telecommunication:
FDI
100%
49%
26%
49%
Entry/Route
Automatic
Automatic
Automatic
Automatic
Above
Gov. license
Automatic
100%
51%
11
49%
100%
100%
100%
100%
100%
100%
100%
Automatic
Automatic
Automatic
Automatic
Automatic
Automatic
Automatic
100%
Automatic
100%
Automatic,FI
100%
49%
100%
100%
49%
PB over 45%
FIPB
FIPB
FIPB
FIPB
i.
ii.
iii.
iv.
v.
Shipping
vi.
Source: http://dipp.nic.in/fdi_statistics/india_fdi_index.htm
12
4.5 Analysis of share of top ten investing countries FDI equity in flows.
Cumulative amount of FDI inflows (From Aug. 2000 to march 2010): Rs. 486,480
crore and US$ 109,219 million.
Foreign investors have begun to take a more active role in the Indian economy in recent
years. By country, the largest direct investor in India is Mauritius; largely because of the
India-Mauritius double-taxation treaty. Firms based in Mauritius invested 201,694 crores
in India between Aug. 1991 and March 2010, equal to 44 percent of total FDI inflows.
The second largest investor in India is the Singapore, with total capital flows of 41,431
crore during the 19912010 periods, followed by the U.S.A, United Kingdom, the
Netherlands, and Japan.
Mauritius
Mauritius invested Rs 201,894 crore in India up to the November2009, equal to 44% of
total FDI inflows. Many companies based outside of India utilize Mauritian holding
companies to take advantage of the India- Mauritius Double Taxation Avoidance
Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains taxes,
13
and may allow some India-based firms to avoid paying certain taxes through a process
known as round tripping.
The extent of round tripping by Indian companies through Mauritius is unknown.
However, the Indian government is concerned enough about this problem to have asked
the government of Mauritius to set up a joint monitoring mechanism to study these
investment flows. The potential loss of tax revenue is of particular concern to the Indian
government. These are the sectors which attracting more FDI from Mauritius Electrical
equipment Gypsum and cement products Telecommunications Services sector that
includes both non- financial and financial Fuels.
Singapore
Singapore continues to be the single largest investor in India amongst the Singapore with
FDI inflows into Rs. 41,431 crores up to August 2009. Sector-wise distribution of FDI
inflows received from Singapore the highest inflows have been in the services sector
(financial and non financial), which accounts for about 9 % of FDI inflows from
Singapore. Petroleum and natural gas occupies the second place followed by computer
software and hardware, mining and construction.
U.S.A.
The United States is the third largest source of FDI in India (8% of the total), valued at
RS 35194 crore in cumulative inflows up to November 2009. According to the Indian
government, the top sectors attracting FDI from the United States to India are fuel,
telecommunications, electrical equipment, food processing, and services. According to
the available M&A data, the two top sectors attracting FDI inflows from the United
States are computer systems design and programming and manufacturing
U.K.
The United Kingdom is the fourth largest source of FDI in India (5 % of the total), valued
at Rs 24679 crores in cumulative inflows up to November2009.Over 17 UK companies
under the aegis of the Nuclear Industry Association of UK have tied up with Ficci to
identify joint venture and FDI possibilities in the civil nuclear energy sector.UK
14
companies and policy makers the focus sectors for joint ventures, partnerships, and trade
are non-conventional energy, IT, precision engineering, medical equipment, infrastructure
equipment, and creative industries.
Netherlands
FDI from Netherlands to India has increased at a very fast pace over the last few years.
Netherlands ranks fifth among all the countries that make investments in India. The total
flow of FDI from Netherlands to India came to Rs. 19,180 crores between 1990 and
2009. The total percentage of FDI from Netherlands to India stood at 4% out of the total
foreign direct investment in the country up to November 2009.
Following Various industries attracting FDI from Netherlands to India are:
Horticulture
15
Ranks
Sector
1. SERVICES SECTOR (financial & non-financial)
2. COMPUTER SOFTWARE & HARDWARE
TELECOMMUNICATIONS (radio paging,
3. cellular mobile, basic telephone services)
4 HOUSING & REAL ESTATE
CONSTRUCTION ACTIVITIES (including roads
5.
6.
7.
8.
9.
10.
& highways)
POWER
AUTOMOBILE INDUSTRY
METALLURGICAL INDUSTRIES
PETROLEUM & NATURAL GAS
CEHMICALS (other than fertilizers)
TOTAL FDI INFLOWS
Percentage
of total
7%
7%
20,006 (4,428)
19,566 (4,322)
12,990 (3,032)
11,261 (2,612)
10,567 (2,343)
2,32,041
4%
4%
3%
2%
2%
The sectors receiving the largest shares of total FDI inflows between August 1991 and
March 2010 were the service sector and the computer software and hardware sector, each
accounting for 22 and 9 percent respectively. These were followed by the
telecommunications, housing, power, and automobile sectors. The top sectors attracting
FDI into India via M&A activity were manufacturing; information; and professional,
scientific, and technical services. These sectors correspond closely with the sectors
identified by the Indian government as attracting the largest shares of FDI inflows
overall.
The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers)
registered maximum growth of 227 per cent during April 2008 March 2009 as
compared to 11.71 per cent during the last fiscal. The sector attracted USD 749 million
FDI in FY 09 as compared to USD 229 million in FY 08.
During the year 2009 government had raised the FDI limit in telecom sector from 49 per
cent to 74 per, which has contributed to the robust growth of FDI. The telecom sector
16
registered a growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal.
The sector attracted USD 2558 million FDI in FY 09 as compared to the USD 1261
million in FY 08, acquired 9.37 per cent share in total FDI inflow.
India automobile sector has been able to record 70 per cent growth in foreign investment.
The FDI inflow in automobile sector has increased from USD 675 million to 1,152
million in FY 09 over FY 08.
The other sectors which registered growth in highest FDI inflow during April March
2009 were housing & real estate (28.55 per cent), computer software & hardware (18.94
per cent), construction activities including road & highways (16.35 per cent) and power
(1.86 per cent).
1.
2.
3.
4.
5.
6.
7.
8.
9.
Financial Year
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Total FDI
Total
(Rs crore)
Inflows
Previous Year
18406
29235
24367
19860
27188
39674
103367
138276
161481
(US mill)
4,029
6,130
5,035
4,322
6,051
8,961
22,826
34,362
35,168
---(+) 52
(-) 18
(-) 14
(+) 40
(+) 48
(+) 146
(+) 51
(+) 02
17
18
In 2006-07 the total FDI inflow in India was US $ 22,826 million while the outflow of
FDI from India was US $ -15046 million resulting in total FDI of US $ 7693 million. The
same trend continued and the total FDI substantially increased to US $ 15401 million in
the year 2007-08 due to an increase in the inflow of US $ 34236 million. During the
global slowdown period the FDI showed a positive trend in 2008-09 with an increase of
FDI to US $ 17496 million.
2007-08
2008-09
Particulars
Credit
Debit
Net
Credit
Debit
Net
Credit
Debit
Net
a)FDI (i + ii)
23590
15897
7693
36838
21437
15401
36258
18762
17496
i) In India
22826
87
22739
34361
125
34236
35148
166
34982
Equity
Reinvested
earnings
16481
87
16394
26866
108
26758
27975
166
27809
5828
5828
7168
7168
6426
6426
Other capital
517
327
17
747
764
15810
2477
21312
1110
18596
-17486
Equity
Reinvested
earnings
764
13368
2477
16898
310
18835
14421
747
ii) Abroad
517
15046
12604
1110
14668
-13558
1076
-1076
1084
-1084
1084
-1084
1366
-1366
3330
-3330
2844
-2844
Other capital
India has emerged as the second most attractive destination for FDI after China and ahead
of the US, Russia and Brazil. India has experienced a marked rise in FDI inflows in the
last few years. Not surprisingly Indias growth strategy has depended predominantly on
domestic enterprises and domestic demand as opposed to FDI and export demand.1 For
instance, Indias FDI as a share of GDP in 2007 represented only about 1.7 percent
compared to 2.8 percent in China and even below Pakistan, and its share of gross fixed
investment is 5.2 percent compared to 7.0 in China and 16.7 percent in Pakistan.
19
4) Since there were foreign exchange controls in force, for various permissions
under exchange control, along with their application for initial registration, FIIs
were also supposed to file with SEBI another application addressed to RBI for
seeking various permissions under FERA, in a format that would be specified by
RBI for the purpose. RBI's general permission would be obtained by SEBI before
granting initial registration and RBI's FERA permission together by SEBI, under a
single window approach.
5) For granting registration to the FII, SEBI should take into account the track record
of the FII, its professional competence, financial soundness, experience and such
other criteria that may be considered by SEBI to be relevant. Besides, FII seeking
initial registration with SEBI were be required to hold a registration from the
21
Securities Commission, or the regulatory organization for the stock market in the
country of domicile/incorporation of the FII.
6) SEBI's initial registration would be valid for five years. RBI's general permission
under FERA to the FII would also hold good for five years. Both would be
renewable for similar five year periods later on.
7) RBI's general permission under FERA would enable the registered FII to buy, sell
and realize capital gains on investments made through initial corpus remitted to
India, subscribe/renounce rights offerings of shares, invest on all recognized stock
exchanges through a designated bank branch, and to appoint a domestic Custodian
for custody of investments held.
8) This General Permission from RBI would also enable the FII to:
Open foreign currency denominated accounts in a designated bank. (There
could even be more than one account in the same bank branch each designated
in different foreign currencies, if it is so required by FII for its operational
purposes);
Open a special non-resident rupee account to which could be credited all
receipts from the capital inflows, sale proceeds of shares, dividends and
interests;
Transfer sums from the foreign currency accounts to the rupee account and vice
versa, at the market rate of exchange;
Make investments in the securities in India out of the balances in the rupee
account;
Transfer repairable (after tax) proceeds from the rupee account to the foreign
currency account(s);
Repatriate the capital, capital gains, dividends, incomes received by way of
interest, etc. and any compensation received towards sale/renouncement of
rights offerings of shares subject to the designated branch of a bank/the
custodian being authorized to deduct withholding tax on capital gains and
22
arranging to pay such tax and remitting the net proceeds at market rates of
exchange;
Register FII's holdings without any further clearance under FERA.
9) There would be no restriction on the volume of investment minimum or
maximum-for the purpose of entry of FIIs, in the primary/secondary market. Also,
there would be no lock-in period prescribed for the purposes of such investments
made by FIIs. It was expected that the differential in the rates of taxation of the
long term capital gains and short term capital gains would automatically induce
the FIIs to retain their investments as long term investments.
10) Portfolio investments in primary or secondary markets were subject to a ceiling of
30% of issued share capital for the total holdings of all registered FIIs, in any one
company. The ceiling was made applicable to all holdings taking into account the
conversions out of the fully and partly convertible debentures issued by the
company. The holding of a single FII in any company would also be subject to a
ceiling of 10% of total issued capital. For this purpose, the holdings of an FII
group would be counted as holdings of a single FII.
11) The maximum holdings of 24% for all non-resident portfolio investments,
including those of the registered FIIs, were to include NRI corporate and noncorporate investments, but did not include the following:
Foreign investments under financial collaborations (direct foreign investments),
which are permitted up to 51% in all priority areas.
Investments by FIIs through the following alternative routes:
i. Offshore single/regional funds;
ii. Global Depository Receipts;
iii. Euro convertibles.
23
12) Disinvestment would be allowed only through stock exchange in India, including
the OTC Exchange. In exceptional cases, SEBI may permit sales other than
through stock exchanges, provided the sale price is not significantly different
from the stock market quotations, where available.
13) All secondary market operations would be only through the recognized
intermediaries on the Indian Stock Exchange, including OTC Exchange of India.
A registered FII would be expected not to engage in any short selling in securities
and to take delivery of purchased and give delivery of sold securities.
14) A registered FII can appoint as Custodian an agency approved by SEBI to act as
custodian of Securities and for confirmation of transactions in Securities,
settlement of purchase and sale, and for information reporting. Such custodian
should establish separate accounts for detailing on a daily basis the investment
capital utilization and securities held by each FII for which it is acting as
custodian. The custodian was supposing to report to the RBI and SEBI semiannually as part of its disclosure and reporting guidelines.
15) The RBI should make available to the designated bank branches a list of
companies where no investment will be allowed on the basis of the upper
prescribed ceiling of 30% having been reached under the portfolio investment
scheme.
16) Reserve Bank of India may at any time request by an order a registered FII to
submit information regarding the records of utilization of the inward remittances
of investment capital and the statement of securities transactions. Reserve Bank of
India and/or SEBI may also at any time conduct a direct inspection of the records
and accounting books of a registered FII.
24
17) FIIs investing under this scheme will benefit from a concessional tax regime of a
flat rate tax of 20% on dividend and interest income and a tax rate of 10% on long
term (one year or more) capital gains.
These guidelines were suitably incorporated under the SEBI (FIIs) Regulations, 1995.
These regulations continue to maintain the link with the government guidelines through
an inserted clause that the investment by FIIs should also be subject to Government
guidelines. This linkage has allowed the Government to indicate various investment
limits including in specific sectors.
ii)
iii)
Whether the applicant has been granted permission under the provisions of the
Foreign Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of
India for making investments in India as a Foreign Institutional Investor.
26
iv)
v)
vi)
The SEBIs initial registration is valid for a period of three years from the date of its grant
of renewal.
Investment Conditions and Restrictions for FIIs:
A Foreign Institutional Investor may invest only in the following: Securities in the primary and secondary markets including shares, debentures and
warrants of companies, unlisted, listed or to be listed on a recognized stock
exchange in India.
units of schemes floated by domestic mutual funds including Unit Trust of India,
whether listed or not listed on a recognized stock exchange.
Dated Government securities.
Derivatives traded on a recognized stock exchange.
Commercial paper.
Security receipts.
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 Foreign Institutional Investor in India, whether on his own account or on
27
account of his sub- accounts, should not be less than seventy per cent of the aggregate of
all the investments of the Foreign Institutional Investor in India, made on his own
account and on account of his sub-accounts. However, this is not applicable to any
investment of the foreign institutional investor either on its own account or on behalf of
its sub-accounts in debt securities which are unlisted or listed or to be listed on any stock
exchange if the prior approval of the SEBI has been obtained for such investments.
Further, SEBI while granting approval for the investments may impose conditions as are
necessary with respect to the maximum amount which can be invested in the debt
securities by the foreign institutional investor on its own account or through its subaccounts. A foreign corporate or individual is not eligible to invest through the hundred
percent debt route.
Even investments made by FIIs in security receipts issued by securitization companies or
asset reconstruction companies under the Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 are not eligible for the investment
limits mentioned above. No foreign institutional should invest in security receipts on
behalf of its sub-account.
28
With the beginning of FII in India in 1992-93 the number of registrations with SEBI has
been increasing ever since. In the year 1995-96 353 FII were registered, this increased to
527 in 2000-01.During 2007-08 1279 registrations have been made which increased to
1609 in 2008-09
According to analysts, the upward revision of economic growth from 5.8 per cent to 6.1
per cent, better-than-expected performance of companies in the quarter ended-June 30,
the proposed new direct taxes code that might lead to savings in the tax payers money,
and the trade policy with an ambitious target of US$ 200 billion exports for 2010-11 have
all revived the confidence of FIIs investing in India. FIIs have made net investments of
US$ 10 billion in the first six months (April to September) of 2009-10. A major portion
of these investments have come through the primary market, than through buying via
secondary markets. (Source: India Brand Equity Foundation) FII inflows into Indian
29
equities have been steady ever since the markets were opened up to FIIs in 1993. With
the exception of FY99 and FY09, net flows have been positive. FIIs own a dominant 16%
of Indian equities (worth US$147bn) and account for 10-15% of the equity volumes.
Although FIIs pulled out US$ 9.77 billion of the Indian equity markets during FY09, they
have been quick to return in FY10 and within just the first four months they have nearly
made up for the exit, reinvesting US$ 8.50 billion or 87% of the amount that they had
pulled out in FY09. (Source: CLSA Asia-Pacific Markets) India is well placed to attract
FII flows over the long term. With FIIs holding 16 per cent of equity of India's biggest
500 companies (Source: India Brand Equity Foundation) and as growth in the Indian
economy accelerates, FII sentiment is expected to remain positive towards India.Data
released by the market regulator, Securities and Exchange Board of India (SEBI), shows
that the cumulative FII net inflow in equity market has reached $75.12 billion (Rs
325,216 crore) on March 11, from $72.62 billion (Rs 313,838 crore) at the beginning of
current calendar year 2010.
30
31
Year
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Percentage
39338%
-6%
45%
24%
-31%
-127%
-739%
-2%
-12%
-69%
1602%
0%
-10%
-26%
115%
-169%
The gross purchases of debt and equity by FIIs declined by 35.2 per cent to Rs.6,14,576
crore in 2008-09 from Rs.9,48,018 crore in 2007-08. The combined gross sales by FIIs
also declined by 25.1 per cent to Rs.6,60,386 crore from Rs.8,81,839 crore during the
same period. The total net outflow of FII was Rs.45,811 crore in 2008-09 as against a net
inflow of Rs.66,179 crore in 2007-08. This was the highest net outflow for any financial
year so far. There was a negative 169% decrease in the net outflow in 2008-09 as
compared to 2007-08.
32
During 2008-09, there was an outflow from the equity segment amounting to Rs.47,706
crore (Table 2.49). The debt segment, however, witnessed a positive net inflow of
Rs.1,895 crore. Month-wise, the net FII outflow was the highest in equity segment in
October 2008 (Rs.15,347 crore) and June 2008 (Rs.10,096 crore). In the equity segment,
FII investment was negative in nine months of the financial year. In the debt segment,
outflow was the highest in March 2009 (Rs.6,420 crore) and October 2008 (Rs.1,858
crore) .
33
2006-07
25,236
5,605
30,841
2007-08
53,404
12,775
66,179
2008-09
-47,706
1,895
-45,811
8-Apr
1,075
-1,702
-627
8-May
-5,012
-163
-5,174
8-Jun
-10,096
-999
-11,095
8-Jul
-1,837
3,619
1,782
8-Aug
-1,212
1,258
46
8-Sep
-8,278
3,204
-5,074
8-Oct
-15,347
-1,858
-17,205
8-Nov
-2,598
4,215
1,617
8-Dec
1,750
627
2,377
9-Jan
-4,245
802
-3,443
9-Feb
-2,437
-688
-3,124
9-Mar
530
-6,420
-5,890
Source: Securities and exchange board of India
The FIIs were permitted to trade in the derivatives market since February 2002. The
cumulative FII trading in derivatives was Rs.2,45,653 crore as on March 31, 2009.
Reversing the existing trend, open interest position of FIIs in index options was the
highest at Rs.19,603 crore by end-March 2009, followed by stock futures (Rs.12,751
crore), index futures (Rs.8,837 crore) and stock options (Rs.602 crore) .
This project, in a way, reveals the influence of FIIs investment on movement of Indian
stock exchange (national stock exchange of India) during the post liberalization period
that is 1991 to 2010. I have applied a simple linear model to estimate the effect of FII on
the stock index. The data analysis tools used in the research is correlation and regression.
2006-07
Credit
Portfolio
investments
109620 102560
7060
235924
-14034
i) In India
109534 102530
7004
235688
-13855
of which:
FIIs
105756 102530
3226
226621
-15017
ii) Abroad
Net
Credit
2008-09
Particulars
GDRs/ADRs
Debit
2007-08
Debit
Net
Credit
Debit
Net
3776
3776
8769
8769
1162
1162
86
30
56
236
74
162
140
319
-179
The total FPI in the year 2006-07 was US $ 7060 million this comprised of mainly inlow
of FII unto US $ 3226 million and ADR/GDR US$ 3776 million with only US$ 56 millin
outflow abroad from India. The total FPI increased to US $ 29556 million pre recession
in the global economy. During recession the FPI reduced to greatly to US $ -14034
million mainly to the plow back of money made by developed from India which fell to
US $ -13855 in the year 2008-09.
35
36
The recent Sensex crash on January 2008 swept with it a large number of small scale
investors while registering a record dip of 2062 points in a day. 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
(FIIs) withdrawing their money from the Indian markets. In 1000 points rally from
20,000 to 21,000 FIIs infused Rs. 2403 cr in the equity markets in duration of 49 trading
days. The Foreign institutional investors were Net Investors during the 1,000 point rally
except for November 2007 where in they were net sellers to the tune of Rs. 5849.90 cr on
account of weak global sentiments and crude prices touching new highs. Foreign
institutional investors had pumped Rs. 1929.70 cr into Indian stocks this calendar year till
07thJanurary 08. According to the Securities and Exchange Board of India FIIs hold
total investments to the tune of Rs. 285398.10 cr in Indian equity market. The number of
Registered FII's as on 07th January08 was recorded at 1235.
The year 2010 has started off on a positive note for Indian equities, especially in terms
of attracting inflows from overseas investors. In the first 15 days of the year, foreign
institutional investors (FII) have net purchased Indian equities worth Rs 8,191.6 crore
or $1.8 billion, close to the average monthly inflow of Rs 9,852.18 crore witnessed in
the past six months. During 2009, FIIs had net purchased equities worth Rs 83,400
crore, the highest so far in a single calendar year.
However, it has been seen that many of the overseas investors are heading towards
small-and mid-cap stocks rather than large-cap stocks. During the first two weeks of
January, the BSE small-cap and mid-cap indices have clearly managed to outperform
the 30-share Sensex. The small-cap index had generated a return of 7.33%, while the
BSE mid-cap index climbed 4.95%, compared with Bombay Stock Exchange Sensexs
marginal gain of 0.51%
Foreign institutional investors (FIIs) were gross buyers of shares worth Rs 13,738.80
crore, while they sold equities worth Rs 10,000 crore, resulting in a net investment of
37
Rs 3,738.70 crore, as per the data available with capital market regulator Securities &
Exchange Board of India (Sebi).
FIIs poured in a record Rs 83,400 crore in the domestic equities in 2009. FIIs were the
net investor of Rs 4,417.90 crore in debt instruments, according to the Sebi data.
Interestingly, Sensex grew by 0.43% to close at 17,540.29 points during the period
under review. Sensex registered an impressive gain of over 81% last year.
FIIs investment of Rs 83,400 crore in 2009 was the highest inflow in the country in
rupee terms in a single year and came a year after overseas investors pulled out over
Rs 50,000 crore
Portfolio investors have pumped in a net $1.6 billion into Indian equities within six
trading sessions in the new calendar, raising hopes that many overseas fund
managers may increase their allocations to India in 2010
Revival in capital inflows gathers momentum
The revival in capital flows, which started in financial year 2009-10 and gathered
momentum in the second quarter, has remained buoyant even in the third quarter,
according to the second-quarter macroeconomic and monetary development report
released by the Reserve Bank of India (RBI).
Net inward Foreign Direct Investment (FDI) continued to remain upbeat during the
second quarter of 2009-10, reflecting relatively better growth prospects for the
economy.
In the April-November period, FDI value increased marginally to $25 billion (Rs
1,13,750 crore) from $23.3 billion (Rs 1,06,015 crore) in the corresponding period
last year.
Portfolio investments, too, continued their upward trend, mainly due to the revival in
Foreign Institutional Investment (FII) inflows since the first quarter of 2009-10.
In the period from April 2009 to January 15, 2010, net FII inflows increased to $24.7
billion (Rs 1,12,385 crore) compared to an outflow of $12.1 billion (Rs 55,055 crore)
in the same period last financial year.
38
Inflows under portfolio investment were led by large purchases of equities by FIIs in
the Indian stock market and revival in net inflows under American Depository
Receipts (ADRs) and Global Depository Receipts (GDRs) due to resurgence in stock
prices of Indian companies
The value of ADRs and GDRs nearly tripled to $3.1 billion in April-November 2009
compared to $1.1 billion in the corresponding period last year.
The better than expected macroeconomic performance of India during 2009-10 and
positive sentiments of global investors about Indias growth prospects are the factors
primarily responsible for sustained capital inflows during the year so far, the report
said.
During the first half of 2009-10, net capital flows were high, mainly driven by foreign
investment inflows, particularly reflecting the turnaround in FII inflows. In banking
capital, net inflows under NRI deposits remained high
39
The total foreign investments during the year 2005-06 was Rs 15528 crore with FDI
contributing Rs 5915 crore and FPI contributing 12494 crore. There was a substantial
increase in the total foreign investments in 2007-08 which was Rs 44957 crore this was
due to a fall in the FPI to Rs -3736 crore resulting in the foreign investments to reduce to
Rs 4760 crore in 2007-08:Q4.Substantially there was a decline in the total investments
due to a constant reduction in FPI in the subsequent years. In 2008-09 the total FPI was
Rs -14035 crore due to which the total foreign investments came down to Rs 3463 crore
even though the FDI was at Rs 278080 crore.
40
7. KEY FINDING
For objective 1
a) Net FDI in India was valued at $ 7693 million in the 200607 Indian fiscal year,
and nearly doubled, to $ 15401 million, in the 200708 fiscal year. Almost 35 %
of the FDI is invested in the Mumbai followed by 19% in New Delhi.
b) By country, the largest investors in India are Mauritius, the United States, and the
United Kingdom. Investors based in many countries have taken advantage of the
India-Mauritius bilateral tax treaty to set up holding companies in Mauritius
which subsequently invest in India, thus reducing their tax obligations.
c) By industry, the largest destinations for FDI are electrical equipment (including
computer
software
and
electronics),
services,
telecommunications,
and
transportation.
For objective 2
There may be many other factors on which a stock index may depend i.e. Government
policies, budgets, bullion market, inflation, economic and political condition of the
country, FDI, Re./Dollar exchange rate etc. But for my study I have selected only one
independent variable i.e. FII and dependent variable is indices of nifty.
41
From the above table we can say that FII has a positive impact on all the indices which
means that if FIIs come in India then it is goods for the Indian economy. FIIs have more
co-relation with Sensex so we can say that they are mostly invest in big and reputed
companies which are included in Sensex. According to findings and results, we have
concluded that FII did have significant impact on Sensex but there is less co-relation with
Bankex and IT results (may be). Also FII is not the only factor affecting the stock indices.
There are other major factors that influence the bourses in the stock market.
1. Impact of FII on S&P CNX Nifty: The effect of FII on Nifty is positive and the coefficient of correlation is high so the effect is also high. The standard error comes out to
be 575.658 which are high. This does not mean the relation is false but we can say that
the error in linear relation is high.
2. Impact of FII on Bank Nifty: The effect of FII on Bank Nifty is positive. So, FII is
directly related to Bank Nifty. But the co-efficient of correlation is high so the effect is
also high. The standard error comes out to be 1229.644 which are very high. This means
that the deviation from the mean value is high. This does not mean the relation is false
but we can say that the error in linear relation is high. The value of multiple-R is also
high. We can say that FII have significant impact on Bank Nifty during the period of 31January-2000 to 30-March-09.
42
3. Impact of FII on CNX 100: CNX 100 is inversely related to FII for the period of 31January-03- 30-March-2009. But the extent of impact is low as co-efficient of correlation
is -0.159.
4. Impact of FII on CNX IT: FII has inversely little significant relation with CNX IT, as
the value of correlation is -0.191. This does not mean that there is no relation at all
between them. It shows the absence of linear relation between the two variables but not a
lack of relationship altogether.
5. Impact of FII on CNX NIFTY JUNIOR: CNX NIFTY JUNIOR directly related to
FII for the period of 31-Oct-1995- 30-March-2009. But the value of R is high so the
degree of relation is also high low. Standard error in this case is 1319.6 which is high
compared to other standard errors between FII and other stock indices.
6. Impact of FII on S&P CNX 500: S&P CNX 500 is also highly correlated with FII. In
this case again the degree of relation is high.
One of the reasons for high degree of any linear relation can also be due to the sample
data. The data was taken on monthly basis. The data on daily basis can give more positive
Monthly average turnover of all the indices has been taken. For FIIs monthly average of
the net investments made by them in the Indian capital market is taken.
Net Investments = gross purchases gross sales (fig. is in Rs crore)
Use of Model: A simple linear relationship has been shown between two variables using
correlation and regression as the data analysis tools. One variable is dependent and the
other is independent. I have taken FII as the independent variable while the stock index
has been taken as dependent variable. The impact of FII has been separately analyzed
with each of the index. So, correlation and regression has been separately run between FII
and six indices taking one index at a time with help of Microsoft excel.
Inference: If the hypothesis holds good then we can infer that FIIs have significant impact
on the Indian capital market. This will help the investors to decide on their investments in
43
stocks and shares. If the hypothesis is rejected, or in other words if the null hypothesis is
accepted, then FIIs will have no significant impact on the Indian bourses.
Regression Analysis: This analysis tool performs linear regression analysis by using the
"least squares" method to fit a line through a set of observations. I can analyze how a
single dependent variable is affected by the values of one or more independent variables
for example, how an athlete's performance is affected by such factors as age, height,
and weight.
Correlation: This analysis tool and its formulas measure the relationship between two
data sets that are scaled to be independent of the unit of measurement. The population
correlation calculation returns the covariance of two data sets divided by the product of
their standard deviations. I can use the Correlation tool to determine whether two ranges
of data move together that is, whether large values of one set are associated with large
values of the other (positive correlation), whether small values of one set are associated
with large values of the other (negative correlation), or whether values in both sets are
unrelated (correlation near zero).
44
8. CONCLUSION
For objective 1:
The process of economic reforms which was initiated in July 1991 to liberalize and
globalize the economy had gradually opened up many sectors of its economy for the
foreign investors. A large number of changes that were introduced in the countrys
regulatory economic policies heralded the liberalization era of the FDI policy regime in
India and brought about a structural breakthrough in the volume of the FDI inflows into
the economy maintained a fluctuating and unsteady trend during the study period. It
might be of interest to note that more than 50% of the total FDI inflows received by India
during the period from 1991-2010 came from Mauritius and the USA. The main reason
for higher levels of investment from Mauritius was that the fact that India entered into a
double taxation avoidance agreement (DTAA) with Mauritius were protected from
taxation in India. Among the different sectors, the electrical and equipment had received
the larger proportion followed by service sector and telecommunication sector.
For objective 2:
According to findings and results, I concluded that FII did have high significant impact
on the Indian capital market. Therefore, the alternate hypothesis is accepted. S&P CNX
NIFTY, BANK NIFTY, CNX NIFTY JUNIOR, S&P CNX 500 showed positive
correlation but CNX 100, CNX IT showed negative correlation with FII. Also the degree
of relation was high in all the case. It shows high degree of linear relation between FII
and stock index. This shows that there is relationship between them.
One of the reasons for high degree of any linear relation can also be due to the sample
data. The data was taken on monthly basis. The data on daily basis can give more positive
results (may be). Also FII is not the only factor affecting the stock indices. There are
other major factors that influence the bourses in the stock market. I also analyzed that FII
had significant impact on the stock index for the period starting from January 1991 to
March 2007. The sample data available for other indices like BANK NIFTY, CNX 100,
45
S&P CNX 500 was low with just 51, 87 and 94 respectively observations that have also
hampered the results.
According to findings and results, we have concluded that FII did have significant impact
on Sensex but there is less co-relation with Bankex and IT.
One of the reasons for high degree of any linear relation can also be due to the sample
data. The data was taken on monthly basis. The data on daily basis can give more positive
results (may be). Also FII is not the only factor affecting the stock indices. There are
other major factors that influence the bourses in the stock market.
46
9. REFERENCES
47