ABSTRACT

The liberalization process was initiated in India in the early 1990s brought radical changes
in the functioning of Indian stock market. Rising globalization, deregulation, and foreign
portfolio investments made the Indian stock exchanges competitive and efficient in their
functioning. The role of investors is the key to success of market guided economic system
and since it is FIIs who pump their savings into the markets, their investments need to be
channelized to the most rewarding sectors of the economy. One of the most dominant
investors groups that have emerged to play a critical role in the overall performance of the
stock market are Foreign Institutional Investors (FIIs).

Being a developing country, India attracts a large sum of FOO every year. These foreign
investments have a great impact on the economy of India. Indian stock market, which is
one of the indicators of the economic status, is also being affected by the foreign
investments made.

This portfolio flows by FIIs bring with them great advantage as they are engines of growth
while lowering the cost of capital in the emerging market. This paper indicates whether
Foreign Institutional investors really have an impact on the stock market of India.

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 INTRODUCTION

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 securities takes place. This is a
market of speculation. Stock exchanges may also provide facilities for issue and redemption of securities
and other financial instruments, and capital events including the payment of income and dividends.
Securities traded on a stock exchange include stock issued by listed companies, unit trusts, derivatives,
pooled investment products and bonds. Stock exchanges often function as "continuous auction" markets,
with buyers and sellers consummating transactions at a central location. It provides necessary mobility to
capital and direct flow of the capital into possible and successful enterprise. The prices of particular
securities reflect the demand and supply. In fact, stock exchange is said to be a barometer of economy of
economy and financial health.

SECURITES AND EXCHANGE BOARD OF INDIA (SEBI)

The SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) is the regulator for the securities
market in India. It was established in the year 1988 and given statutory powers on 12 April 1992 through
the SEBI Act, 1992. The Preamble of the Securities and Exchange Board of India describes the basic
functions of the Securities and Exchange Board of India as "...to protect the interests of investors in
securities and to promote the development of, and to regulate the securities market and for matters
connected there with or incidental there to".
SEBI has to be responsive to the needs of three groups, which constitute the market:
the issuers of securities , the investors and the market intermediaries.

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 BOMBAY STOCK EXCHANGE

The BOMBAY STOCK EXCHANGE (BSE) is Asia's oldest stock exchange. Based in Mumbai, India, BSE
was established in 1875.The BSE is the world's 11th largest stock exchange with an overall market
capitalization of $1.7 trillion as of January 23, 2015. More than 5500 companies are listed on BSE making it
world's No. 1 exchange in terms of listed members and also the fastest & the Fastest Stock Exchange in world
with a median trade speed of 6 micro seconds.

BSE SENSEX

The S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also-called the BSE 30 or simply
the SENSEX, is a free-float market-
weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock
Exchange. The 30 component companies which are some of the largest and most actively traded stocks are
representative of various industrial sectors of the Indian economy. It is traded internationally on the EUREX as
well as leading exchanges of the BRCS nations (Brazil, Russia, China and South Africa).

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 NATIONAL STOCK EXCHANGE

The NATIONAL STOCK EXCHANGE (NSE) is a stock exchange in India. Set up in November 1992, NSE
is India's first fully automated electronic exchange with a nationwide presence. The exchange is the result of the
recommendations of a high-powered group set up to study the
establishment of new stock exchanges, which would operate on a pan-India basis. Its shareholders consist of 20
financial institutions including state-owned banks and insurance companies. NSE has a market capitalization of
more than US$1.65 trillion, making it the world’s 12th-largest stock exchange as of 23 January 2015

CNX NIFFTY

The NIFTY 50 index is National Stock Exchange of India's benchmark stock market index for Indian equity
market. It covers 22 sectors of the Indian economy and offers investment managers exposure to the Indian
market in one portfolio. NIFTY 50 Index has shaped up as a largest single financial product in India

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 FOREIGN PORTFOLIO INVESTMENT (FII)

FOREIGN PORTFOLIO INVESTMENT is the entry of funds into a country where foreigners deposit money in
a country's bank or make purchases in the country’s stock and bond markets, sometimes for speculation.

International portfolio flows refer to capital flows made by individuals or investors seeking to create an
internationally diversified portfolio rather than to acquire management control over foreign companies.
Diversifying portfolio internationally has been known as a way to reduce the overall portfolio risk and earn even
higher returns. Investors in developed countries can strengthen their portfolio by buying stocks in developing
countries where stock markets have relatively low correlations with those in developed countries.

The amount of FII is determined by the performance of the stocks of the countries where the investors wants to
invest his money relative to world markets. With the opening of stock markets in various emerging economies to
foreign investors, investors in industrial countries have increasingly sought to realize the potential for portfolio
diversification that these markets represent.

Foreign institutional investors play a very important role in any economy. These are the big companies such
as investment banks, mutual funds etc, who invest considerable amount of money in the Indian markets.

With the buying of securities by these big players, markets trend to move upward and vice-versa. They
exert strong influence on the total inflows coming into the economy. The FIIs are considered as both a
trigger and a catalyst for the market performance by encouraging investment from all classes of investors
which further leads to growth in financial market trends under a self-organized system.
FIIs are those institutional investors which invest in the assets belonging to a different country other than that
where these organizations are based.

Foreign investments in the country can take the form of investments in listed companies (i.e. FII
investments); investments in listed/unlisted companies other than through stock exchanges (i.e.
Foreign Direct Investment, Private Equity / Foreign Venture Capital Investment route); investments
through American Depository Receipts / Global Depository Receipts (ADR/GDR) or investments by
Non Resident Indians (NRIs) and Persons of Indian Origin (PIO) in various forms.

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A) FOREIGN INSTITUTIONAL INVESTOR REGISTRATION

Currently, entities eligible to invest under FII route are as follows

(A.1) As FII

Overseas pension funds, mutual funds, investment trust, asset Management Company,
nominee company, bank, institutional portfolio manager, university funds, endowments, foundations,
charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established
outside India proposing to make proprietary investments or investments on behalf of a broad-based fund
(i.e., fund having more than 20 investors with no single investor holding more than 10 per cent of the
shares or units of the fund).

(A.2) As Sub-accounts

The sub account is generally the underlying fund on whose behalf the FII invests. The following entities are
eligible to be registered as sub-accounts, viz. partnership firms, private company, public company,
pension fund, investment trust, and individuals.

(A.3) Domestic entity

A domestic portfolio manager or a domestic asset management company shall also be Eligible to be
registered as FII to manage the funds of sub-accounts.

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(B) FIIS REGISTERED WITH SEBI FALL UNDER THE FOLLOWING
CATEGORIES

(B.1) Regular FIIs – those who are required to invest not less than 70 Per cent of their investment in equity -
related instruments and up to 30 per cent in non-equity instruments.

(B.2) 100 per cent debt-fund FIIs – those who are permitted to invest only
in debt instruments.

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(C) MECHANISM OF FOREIGN INSTITUTIONAL INVESTORS

FII flows help supplement the domestic savings and augment domestic investments
without increasing the foreign debt of the recipient countries, correct current account deficits in the
external balance of payments' position, reduce the required rate of return for equity, and enhance stock
prices of the host countries, yet there are worries about the vulnerability of recipient countries' capital
markets to such flows.

FII flows, often referred to as 'hot money' (i.e., short-term and overly speculative), are extremely
volatile in character compared to other forms of capital flows. Foreign portfolio investors are regarded as 'fair
weather friends' who come in when there is money to be made and leave at the first sign of impending
trouble in the host country thereby destabilizing the domestic economy of the recipient country.

Often, they have been blamed for exacerbating small economic problems in the host nation
by making large and concerted withdrawals at the slightest hint of economic weakness.

It is also alleged that as they make frequent marginal adjustments to their portfolios on the basis of
a change in their perceptions of a country's solvency rather than variations in underlying asset value,
they tend to spread crisis even to countries with strong fundamentals thereby causing 'contagion' in
international financial markets.

Further, it is feared that too much of FII inflows may build up sizeable surpluses on a country's balance
of payments, create excess liquidity and hence exert upward pressure on the exchange rate of the
domestic currency or on domestic prices.

The fear of foreigners capturing a large part of the securities' market is also associated with FII
flows. Accordingly, it is viewed that as securities markets in developing countries like India are narrow
and shallow and as the foreign investors have command over considerable funds and occupy a
dominant position in the capital market, FII flows have the potential for major capital flight out of India
driving the prices down sharply and hence inducing considerable instability in the Indian stock market.
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(D) SEVERAL REASONS ON FIIs SELLING

It is always good to keep an eye on what the big movers are doing and plan individual strategy
accordingly. There are several reasons on FIIs selling, but there are three predominant factors that are
cited as being largely responsible.

The swings in the market forced several FIIs to withdraw from India and invest their dollars in other
emerging markets. Some of the other markets include Uruguay, Russia, the Ukraine, and several
other former Soviet countries. Though there have been swing‘s in the past too but FII response this
time was different because of margin pressures back home as even they have to provide regular
returns to their investors.

The Indian markets are not seen as a good short-term bet any more. India is seen as a good
investment for the medium to long term. FIIs seem to fear the pace of growth and the fundamentals of the
markets.

Most FIIs are looking at corporate governance and execution abilities, which could be significant
drivers in creating a strong portfolio of Indian stocks. Recent action taken by the market regulator
indicates that the Indian government would like to moderate the inflow of FII money.

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(E) BENEFITS OF ENCOURAGING FIIS

(E.1) Reduced cost of equity capital

FII inflows augment the sources of funds in the Indian capital markets. In a common sense way, the impact
of FIIs upon the cost of equity capital may be visualized by asking what stock prices would be if there
were no FIIs operating in India. FII investment reduces the required rate of return for equity, enhances
stock prices, and fosters investment by Indian firms in the country.

(E.2) Imparting stability to India's Balance of Payments

For promoting growth in a developing country such as India, there is need to augment domestic
investment, over and beyond domestic saving, through capital flows. The excess of domestic
investment over domestic savings result in a current account deficit and this deficit is financed by
capital flows in the balance of payments.

(E.3) Knowledge flows

The activities of international institutional investors help strengthen Indian finance. FIIs advocate modern
ideas in market design, promote innovation, development of sophisticated products such as financial
derivatives, enhance competition in financial intermediation, and lead to pullovers of human capital by
exposing Indian participants to modern financial techniques, and international best practices and
systems

(E.4) Strengthening corporate governance

Domestic institutional and individual investors, used as they are to the ongoing practices of Indian
corporate, often accept such practices, even when these do not measure up to the international
benchmarks of best practices. FIIs, with their invest experience with modern corporate
governance practices, are less tolerant of malpractice by corporate managers and owners (dominant
shareholder). FII participation in domestic capital markets often lead to vigorous advocacy of sound
corporate governance practices, improved efficiency and better shareholder value.

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(E.5) Improvements to market efficiency

A significant presence of FIIs in India can improve market efficiency through two channels. First, when
adverse macroeconomic news, such as a bad monsoon, unsettles many domestic investors, it may be easier for a
globally diversified portfolio manager to be more dispassionate about India's prospects, and engage in stabilizing
trades. Second, at the level of individual stocks and industries, FIIs may act as a channel through which knowledge
and ideas about valuation of a firm or an industry can more rapidly propagate into India.

For example, foreign investors were rapidly able to assess the potential of firms like Infosys, which are primarily
export-oriented, applying valuation principles that prevailed outside India for software services companies.

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(F) RATIONAL FOR ENCOURAGING FII FLOWS

Foreign investment – both portfolio and direct varieties – can supplement domestic savings and augment
domestic investment without increasing the foreign debt of the country. Such investment constitutes non-debt
creating financing instruments for the current account deficits in the external balance of payments.
Capital inflows into the equity market give higher stock prices, lower cost of equity capital, and
encourage investment by Indian firms. Foreign investors often help domestic reforms aimed at improving
the market design of the securities markets, and help strengthen corporate governance. These benefits do
require concomitant policy effort in terms of improving financial regulation and corporate governance

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 FOREIGN PORTFOLIO INVESTMENT IN INDIA

Since 1990-91, the Government of India embarked on liberalisation and economic reforms with a view to bring
about rapid and substantial economic growth and move towards globalization of the economy.

As a part of the reforms process, the government under its New Industrial Policy revamped its foreign investment
policy, recognising the growing importance of foreign investment as an instrument of technology transfer,
augmentation of foreign exchange reserves and globalisation of the Indian economy.
Simultaneously, the Government, for the first time, permitted portfolio investments from abroad by foreign
portfolio investors in the Indian capital market. The entry of FIIs seems to be a follow up of the recommendation
of the Narsimhan Committee Report on Financial System.. The committee only suggested that the capital
market should be gradually opened up to foreign portfolio investments.

From September 14, 1992 with suitable restrictions, Foreign portfolio Investors were permitted to invest in all the
securities traded on the primary and secondary markets, including shares, debentures and warrants issued by
companies which were listed or were to be listed on the Stock Exchanges in India. While presenting the Budget
for 1992-93, the then Finance Minister Dr. Manmohan Singh had announced a proposal to allow reputed
foreign investors, such as Pension Funds etc., to invest in Indian capital market. After a notification passed by
SEBI January 2014, the Foreign Institutional investors were classified under FII(Foreign portfolio investors).

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TIMELINE:

On September 14, 1992, the FIIs were allowed to invest in all the securities traded on the primary and
secondary markets, including shares, debentures and warrants issued by companies which were listed or were
to be listed in the stock exchange in India and in the schemes floated by domestic mutual funds, an important
milestone in the emergence of a rapidly developing India.

Initially, the holding of a single FII and all of FIIs in any company were subject to a limit of 5% and 24%
of the company's total issued capital respectively.

A condition was placed that funds invested by FIIs had to have at least 50 participants with no one holding
more than 5%. This was done to broaden the base of FII investment.

The FIIs were allowed to invest 100% in debt securities subject to approval by SEBI from November 1996.
The total investment had to be within an overall ceiling of US$ 1.5 billion.

In 1997, the aggregate limit on investment by all FIIs was allowed to be raised from 24% to 30% by the
board of directors of individual companies by passing a resolution in their meeting and by special resolution to
that effect in the company's general body meeting.

From the year 1998, the FIIs were also allowed to invest in the dated government securities, treasury bills
and money market instruments.

In 2000, the foreign corporate and high net worth individuals were also allowed to invest as sub-accounts
(underlying fund on whose behalf FII invests) of SEBI registered FIIs. This was done to include the domestic
portfolio managers or domestic asset management companies.

In March 2000, 40% became the ceiling on the aggregate FII portfolio investment. This was subsequently
th
raised to 49% on March 8, 2001 and to specific sectoral cap in 2001. In a recent circular dated 30 march it
notified about raising the total investment in government securities to Rs. 1, 40,000 crore from April 5, 2016
which will further be raised by 4,000 crore from July 5, 2016.

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 A committee was set up on March 13, 2002 for identification of the sectors in which FII portfolio
investment will not be subject to sectoral limits for FDI.

The increase in investment ceiling for FIIs in debt funds from US$ 1 billion to US$ 1.75 billion was
notified in 2004.

SEBI also reduced the turnaround time for processing of FII applications for registrations from 13 working
days to 7 working days except in the case of banks and subsidies.

In addition, limit for investment by FIIs in state development loans will be enhanced to Rs. 10,500 crore on
April 4 and Rs. 14,000 crore on July 5, respectively. Presently the existing limit is Rs. 7,000 crore.

The limit for overseas investors in securities was hiked to Rs. 1, 29,000 crore from October 12 last year, and
it was further Increased to Rs. increased to Rs.1,35,000 crore from January 1 The limit for overseas investors
in securities was hiked to Rs. 1, 29,000 crore from October 12 last year, and it was further increased to Rs.1,
35,000 crore from January 1, 2016.

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REGULATIONS:

FII registration and investment are mainly governed by SEBI (FII) regulations, 1995.

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

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Further, following entities proposing to invest on behalf of broad based funds, are
also eligible to be registered as FIIs:

1. Asset Management Companies

2. Institutional Portfolio Managers

3. Trustees

4. Power of Attorney Holders

FIIs registered with SEBI fall under the following categories:

1. Regular FIIs-those who are required to invest not less than 70% of their investment in
equity-related instruments and 30% in non-equity investments.

2. 100% debt fund FIIs-those who are permitted to invest only in debt instruments.

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THE ELIGIBILITY CRITERIA FOR APPLICANT SEEKING FII

REGISTRATION

As per Regulation 6 of SEBI (FII) Regulations 1995, Foreign Institutional Investors are
required to fulfill the following conditions to qualify for grant of registration:

• Applicant should have track record, professional competence, financial soundness,

experience, general reputation of fairness and integrity

• The applicant should be regulated by an appropriate foreign regulatory

authority in the same capacity/category where registration is sought from SEBI.
Registration with authorities, which are responsible for incorporation, is not
adequate to qualify as Foreign Institutional Investor.

• The applicant is required to have the permission under the provisions of the
Foreign Exchange Management Act, 1999 from the Reserve Bank of India enter into an
agreement with the custodian. Besides it also has to appoint a designated bank to
route its transactions.

• Payment of registration fee of US $ 5,000.00

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 SUPPORTING DOCUMENTS REQUIRED

Application in Form A duly signed by the authorized signatory of the applicant.

Certified copy of the relevant clauses or articles of the Memorandum and Articles
of Association or the agreement authorizing the applicant to invest on behalf of its clients.
• Audited financial statements and annual reports for the last one year, provided that the
period covered shall not be less than twelve months.
• A declaration by the applicant with registration number and other particulars in support of
its registration or regulation by a Securities Commission or Self Regulatory
Organization or any other appropriate regulatory authority with whom the applicant is
registered in its home country.
• A declaration by the applicant that it has entered into a custodian agreement with a
domestic custodian together with particulars of the domestic custodian.
• A signed declaration statement that appears at the end of the Form.
• Declaration regarding fit & proper entity.

The fee for registration as FII is US $ 5,000. The mode of payment is Demand Draft in
favour of "Securities and Exchange Board of India" payable at New York‖. SEBI
generally takes 7 working days in granting FII registration Limits on FII to invest in India
The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in
Indian companies on a daily basis. For effective monitoring of foreign investment ceiling limits,
the Reserve Bank has fixed cut-off points that are two percentage points lower than the actual
ceilings. The cut-off limit for companies with 24 per cent ceiling is 22 per cent and for
companies with 30 per cent ceiling, is 28 per cent and so on. Similarly, the cut-off limit for public
sector banks (including State Bank of India) is 18 per cent.

Once the aggregate net purchases of equity shares of the company by FIIs reach the cut-off
point, which is 2% below the overall limit, the Reserve Bank cautions all designated bank
branches so as not to purchase any more equity shares of the respective company on behalf
of FIIs without prior approval of the Reserve Bank. The link offices are then required to
intimate the Reserve Bank about the total number and value of equity shares/convertible
debentures of the company they propose to buy on behalf of FIIs.

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On receipt of such proposals, the Reserve Bank gives clearances on a first-come-first
served basis till such investments in companies reach 22/30/49 per cent limit or the
sectoral caps/statutory ceilings as applicable. On reaching the aggregate ceiling limit, the
Reserve Bank advises all designated bank branches to stop purchases on behalf of their FIIs
clients. The Reserve Bank also informs the general public about the `caution’ and the `stop
purchase’ in these companies through a press release.

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INVESTMENT OPPORTUNITIES FOR FIIs

The following 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.

Investment limit 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.

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.

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INVESTMENT LIMIT ON DEBT INVESTMENTS

The FII investments in debt securities are governed by the policy of the government of
India. Currently following limits are in the effect:

For FII investments in government debt, currently following limits are applicable:

100 % Debt Route US $ 1.55 billion

70 : 30 Route US $ 200 million
Total Limit US $ 1.75 billion

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

PROHIBITION ON INVESTMENTS

FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They
are also not allowed to invest in any company which is engaged or proposes to engage in the
following activities:

1) Business of chit fund

2) Nidhi Company
3) Agricultural or plantation activities
4) Real estate business or construction of farm houses (real estate business does not include
development of townships, construction of residential/commercial premises, roads or bridges).
5) Trading in Transferable Development Rights (TDRs).

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 TAXATION OF FIIs

The taxation norms available to FIIs are shown in the table below:

Nature of Income Tax rate

Long-term capital gains 10%
Short-term capital gains 30%
Dividend income Nil
Interest income 20%
Dividend Nil

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 OVERVIEW OF INDIAN MARKET

Introduction

Economies like India, which offer relatively higher growth than the developed
economies, have gain favour among investors as attractive investment destinations for
foreign institutional investors (FIIs). Investors are optimistic on India and sentiments
are favourable following government’s announcement of a series of reform measures in
recent months.
According to a poll conducted by Bank of America Merrill Lynch (BofA-ML) recently, in which
50 investors participated, India was the most favourite equity market for the global investors
for the year 2015 at 43 per cent, followed by China at 26 per cent. The global investment bank
is of the view that India remains to be in a structural bull market.
India is poised to become the second biggest ecosystem option after the US in the next two
years on account of the ongoing high growth rates. Several technology based start-ups have
received over US$ 2.3 billion in funding since 2010, while over 70 private equity (PE) and
venture capital (VC) funds remain active in the segment.

Market Size

FII’s net investments in Indian equities and debt have touched record highs in the past financial
year, backed by expectations of an economic recovery, falling interest rates and improving
earnings outlook. FIIs have invested a net of US$ 89.5 billion in 2014-15— expected to
be their highest investment in any fiscal year. Of this, a huge amount—US$ 57.2 billion—
was invested in debt and it is their record investment in the asset class, while equities
absorbed US$ 32.3 billion.

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India continues to be a preferred market for foreign investors. India-focused offshore
equity funds contributed US$ 0.5 billion, whereas India-focused ETFs added a much higher
US$ 1.2 billion of the total net inflows of about US$ 1.7 billion into the India-focused
offshore funds and ETFs during the quarter ended June 2015.
The total Mergers and Acquisitions (M&A) transaction value for the month of July 2015 was
US$ 4.57 billion involving a total of 46 transactions. In the M&A space, energy and natural
resources was the dominant sector amounting to 56 per cent of the total transaction value.
In Private Equity, a total of 110 deals worth disclosed value of US$ 2.15 billion were reported
in July 2015.

Government Initiatives

Government of India has accepted the recommendation of A.P. Shah Committee to not
impose minimum alternate tax (MAT) on overseas portfolio investors retrospectively for
the years prior to April 01, 2015, thereby providing significant relief to foreign portfolio
investors (FPIs).
The RBI has also allowed a number of foreign investors to invest, on repatriation basis,
in non-convertible/redeemable preference shares or debentures issued by Indian
companies listed on established stock exchanges in India. The investment should be
within the overall limit of US$ 51 billion allocated for corporate debt. Long-term investors
registered with SEBI will also be deemed as eligible investors

After the launch of the reforms in the early 1990s, there was a gradual shift towards capital
account convertibility. From September 14, 1992, with suitable restrictions, FIIs and Overseas
Corporate Bodies (OCBs) were permitted to invest in financial instruments.

25
The policy framework for permitting FII investment was provided under the Government of India
guidelines, which enjoined upon FIIs to obtain an initial registration with SEBI and also
RBI’s general permission under FERA. The Government guidelines of 1992 also provided
for eligibility conditions for registration, such as track record, professional competence, financial
soundness and other relevant criteria, including registration with a regulatory organisation in the
home country. The guidelines were suitably incorporated under the SEBI (FIIs) Regulations,
1995.With coming into force of the Foreign Exchange Management Act, (FEMA), 1999
foreign exchange related transactions of FIIs were permitted by RBI. Right from 1992, FIIs
have been allowed to invest in all securities traded on the primary and secondary
markets, including shares, debentures and warrants issued by companies which were listed or
were to be listed on the Stock Exchanges in India and in schemes floated by domestic
mutual funds.

The holding of a single FII, and of all FIIs, NRIs and OCBs together in any company were
initially subject to the limit of 5 per cent and 24 per cent of the company’s total issued capital,
respectively. Furthermore, to ensure a broad base and prevent such investment acting as a
camouflage for individual investment in the nature of FDI and requiring Government
approval, funds invested by FIIs have to have at least 50 participants (changed to 20
investors in August, 1999) with no single participant holding more than 5 per cent (revised to 10
per cent in February, 2000).

However, this was allowed to be increased subject to passing of resolution by the Board of
Directors of the company followed by passing of a special resolution by the General Body of
the company. The ceiling limit under special procedure was enhanced in stages as follows:

to 30 per cent from April 4, 1997

to 40 per cent from March 1, 2000,

to 49 per cent from March 8, 2001,and

to sectoral cap/statutory ceiling from September 20,2001.

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The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset management
companies, nominee companies and incorporated/institutional portfolio managers or their
power of attorney holders (providing discretionary and non discretionary portfolio management
services) to be registered as FIIs. While the guidelines did not have a specific provision
regarding clients, in the application form the details of clients on whose behalf investments
were being made were sought. While granting registration to the FII, permission was also
granted for making investments in the names of such clients. Asset management
companies/portfolio managers are basically in the business of managing funds and investing
them on behalf of their funds/clients. Hence, the intention of the guidelines was to allow
these categories of investors to invest funds in India on behalf of their ‘clients’. These ‘clients'
later came to be known as sub-accounts. The broad strategy consisted of having a wide variety of
clients, including individuals, intermediated through institutional investors, who would be
registered as FIIs in India. A Working Group for Streamlining of the Procedures relating to
FIIs, constituted in April, 2003, inter alia, recommended streamlining of SEBI registration
procedure, and suggested that dual approval process of SEBI and RBI be changed to a single
approval process of SEBI. This recommendation was implemented in December 2003.

Under eligibility conditions, the definition of broad based funds was relaxed in August, 1999 and in
February, 2000 and newer entities, such as foreign firms were allowed to invest as sub-accounts.
In order to have a level playing field in intermediation, domestic portfolio managers were allowed
in February, 2000 to manage the funds of sub-accounts, so as to give end-customers a greater
choice about the identity of their fund manager in India. FIIs were initially allowed to only
invest in listed securities of companies. Gradually, they were allowed to invest in unlisted
securities, rated government securities, commercial paper and derivatives traded on a recognised
stock exchange. From November 1996, any registered FII willing to make 100 per cent
investment in debt securities were permitted to do so subject to specific approval from SEBI as a
separate category of FIIs or sub-accounts as 100 per cent debt funds In order to increase
transparency, SEBI issued a circular on October 31, 2001 to all FIIs and their custodians
advising the FIIs to report as and when any derivative instruments with Indian underly in
securities are issued/renewed/redeemed by them, either on their own account or on behalf of
sub-accounts registered under them. In 2003 this circular was further revised to include
disclosure of more details about terms, nature and contracting parties.
27
The overall cap on investments in Government securities, both through the normal route and the
100 per cent debt fund route, was revised from US$1 billion to US$1.75 billion in November,
2004. Moreover, investments were allowed only in debt securities of companies listed or to be
listed in stock exchanges. Investments were free from maturity limitations. From April
1998, FII investments were also allowed in dated Government securities. Treasury bills, being
money market instruments, were originally outside the ambit of such investments, but were
included subsequently from May, 1998.In April 2006 there was a rise in the cumulative debt
investment limits from US $1.75 billion to US $2 billion and US $0.5 billion to US $1.5 billion
for FII/Sub Account investments in Government securities and Corporate Debt, respectively.

28
29
 LITERATURE REVIEW

While looking at literatures available it was found that most of the developing counties
opened up their economies by dismantling capital controls with a view to attracting
foreign capital, supplementing it with domestic capital in the early 1990's.

Gordon and Gupta, (2003) found causation running from FII inflows to return in BSE. They
observed that FIIs act as market makers and book profits by investing when prices are low and
selling when they are high. Hence, there are contradictory findings by various researchers
regarding the causal relationship between FII net inflows and stock market capitalization and
returns of BSE/ NSE. Therefore, there is a need to investigate whether FIIs are the cause or effect
of stock market fluctuations in India.

Rajesh Chakraborty (2001) in his research paper titled 'FII Flows to India: Nature and Causes'
concluded that since the beginning of liberalization FII flows to India have steadily grown in
importance. The author analysed these flows and their relationship with other variables Pal, P.
(2004) found that FIIs are the major players in the Indian stock market and their impact on the
domestic market is increasing. Trading activities of FIIs and the domestic stock market turnover
indicates that FII‟s are becoming more important at the margin as an increasingly higher share of
stock market turnover is accounted for by FII trading in India.

Stanley Morgan (2002) has examined that FIIs have played a very important role in building up
India’s forex reserves, which have enabled a host of economic reforms. Secondly, FIIs are now
important investors in the country’s economic growth despite sluggish domestic sentiment. The
Morgan Stanley report notes that FII strongly influence short-term market movements during
bear markets. However, the correlation
between returns and flows reduces during bull markets as other market participants raise their
involvement reducing the influence of FIIs. Research by Morgan Stanley shows that the
correlation between foreign inflows and market returns is high during bear and weakens with
strengthening equity prices due to increased participation by other players.

30
Anand Bansal and J.S. Pasricha (2009) studied the impact of market opening to FIIs
on Indian stock market behaviour. They empirically analyze the change of market
return and volatility after the entry of FIIs to Indian capital market and found that
while there is no significant change in the Indian stock market average returns;
volatility is significantly reduced after India unlocked its stock market to foreign
investors. In the next section we are discussing the data sources and methodology of
the study.

Karimullah: The article examines the impact of foreign institutional investors FII equity
investment behavior in the Indian stock market. It attempts to find out the two-way
causality between foreign institutional investors (FIIs) behavior and performance of
Indian stock market for t h e Period of January 1997 to June 1997 to June 2007.

This article seeks to examine the ideas that financial liberalization induces increased
efficiency in the financial market as permission of FII’s equity investment is an important
example of financial liberalization.

31
 RESEARCH METHODOLOGY

Research Methodology has many dimensions, it includes 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 has been used so that research lend themselves to proper
evaluations.

SCOPE OF THE STUDY

The paper is done to study the relation between the stock index movement of the Indian stock
market and the FII flow into Indian markets. The study takes some years into consideration
from . The period has been selected so that the impact on Indian stock market can be
ascertained from the initial period FII investment was permitted in India. BSE SENSEX and
NIFTY 50, the two biggest indices, have been selected for the study.

32
 DATA COLLECTION

The study is descriptive in nature and is based on secondary data. The data has been collected
from internet by exploring the secondary sources available on the websites. The data related
to FII flows has been collected from the SEBI website while the data related to Monthly
closing value of SENSEX and NIFTY have been taken from the BSE and NSE website
respectively. Yearly closing index values are taken so that they represent the real economic
conditions of that period. Individual BSE SENSEX and NIFTY data and FII investment act
as sample elements.

Average closing values for each day of both the indices, SENSEX & NIFTY, for the period
under study were expressed in MS excel and the average closing values of the indices have
been calculated for further analysis.

33
 ANALYTICAL TECHNIQUE

In order to analyze the collected data statistical tools such as correlation and regression have
been used. Various line graphs have been used to show proper pictorial representation of the
data for easy understanding. Correlation coefficient is a statistical measure that determines
the degree which two variable's movements are associated. Its value ranges from -1 to 1. The
analysis has been made by correlating the FII purchases and the closing value of the indices
for that particular year to identify whether a relationship exists between them. 'Pearson
correlation' has been used as data sets are real and it gives an accurate statement of the
strength of linear association between the two variables. The regression analysis is used to
evaluate the effects of independent variables on a single dependent variable. In the current
paper an effort has been made to study the impact of FII on Indian stock exchange.

34
 DATA ANALYSIS
FII and DII Investment Move in Opposite Directions

Above figure, tells us that FIIs and DIIs have usually operated in opposite directions. The years FIIs
have bought, DIIs have sold, or not bought as much, and vice versa. Of all the years, 2012-2013 was
the year of extremes. With FIIs buying stocks worth Rs 1,40,033 crore and DIIs selling stocks worth
Rs 66,936 crore.

The same is true for the current financial year as well.

As the stock prices have soared over the last few years, the FIIs have not bought much. A
bulk of their buying in Indian stocks happened before and in 2014-2015. Between 2009-2010
and August 2018, the FIIs invested Rs 6,45,917 crore in Indian stocks. Of this, Rs 5,95,155
crore, came in before March 2015.

At the end of March 2014, the BSE Sensex was a little over 22,300 points. As of end August
2018, it was a little over 38,600 points. Basically, FIIs have gained quite a lot from the
dramatic rise of Indian stocks, by investing early and holding on to their investment.

35
 (Table 2)

Monthly FPI/FII Net Investments (Calendar Year - 2019)

INR crores
Calendar Year
Equity Debt Hybrid Total

January -4262 -1301 7 -5556

February 17220 -6037 871 12053

March 33981 12002 2769 48751

April 21193 -5099 634 16728

May 7920 1187 2264 11370

June 2596 8319 2196 13111

July -12419 9433 -17 -3003

August -17592 11672 49 -5871

September ** -4985 1870 13 -3102

Total – 2019 43652 32046 8786 84481

36
 (Table 3)

FII REPORT FROM YEAR 2001-2018.

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

37
A. Enhanced flows of equity capital: FIIs are well known for a greater
appetite for equity than debt in their asset structure. For example, pension funds in the
United Kingdom and United States had 68 per cent and 64 per cent, respectively, of
their portfolios in equity in 1998. Not only it can help in supplementing the domestic
savings for the purpose of development projects like building economic and social
infrastructure but can also help in growth of rate of investment, it boosts the
production, employment and income of the host country.

B. Managing uncertainty and controlling risks: FIIs promote financial

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

C. Improving capital markets: FIIs as professional bodies of asset

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

38
D. Improved corporate governance:
Good corporate governance is essential to overcome the principal-agent problem
between share-holders and management. Information asymmetries and incomplete
contracts between share-holders and management are at the root of the agency
costs. Bad corporate governance makes equity finance a costly option. With boards
often captured by managers or passive, ensuring the rights of shareholders is a
problem that needs to be addressed efficiently in any economy. Incentives for
shareholders to monitor firms and enforce their legal rights are limited and
individuals with small share-holdings often do not address the issue since others can
free-ride on their endeavor. FIIs constitute professional bodies of asset managers
and financial analysts, who, by contributing to better understanding of firms’
operations, improve corporate governance. Among the four models of corporate
control -takeover or market control via equity, leveraged control or market control
via debt, direct control via equity, and direct control via debt or relationship banking-the
third model, which is known as corporate governance movement, has
institutional investors at its core. In this third model, board representation is
supplemented by direct contacts by institutional investors.

39
 Negative impact: If we see the market trends of past few recent years it is quite evident
that Indian equity markets have become slaves of FIIs inflow and are dancing to their
tune. And this dependence has to a great extent caused a lot of trouble for the Indian
economy. Some of the factors are:

A. Potential capital outflows: “Hot money” refers to funds that are

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

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

C. Problem to small investors: The FIIs profit from investing in emerging

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

D. Adverse impact on Exports: FII flows leading to appreciation of the

currency may lead to the exports industry becoming uncompetitive due to the
appreciation of the rupee.

40
E. Issue related to participatory notes:
When Indian-based brokerages buy India-based securities and then issue
participatory notes to foreign investors. Any dividends or capital gains collected
from the underlying securities go back to the investors. Any entity investing in
participatory notes is not required to register with SEBI (Securities and Exchange Board
of India), whereas all FIIs have to compulsorily get registered. Trading through
participatory notes is easy because participatory notes are like contract notes
transferable by endorsement and delivery. Secondly, some of the entities route their
investment through participatory notes to take advantage of the tax laws of
certain preferred countries. Thirdly, participatory notes are popular because they
provide a high degree of anonymity, which enables large hedge funds to carry out
their operations without disclosing their identity. The hedge funds borrow money
cheaply from western markets and invest these funds into stocks in emerging
economies. It is also feared that the hedge funds, acting through
participatory notes, will cause economic volatility in Indian exchange and generally
these are blamed for the sudden fall in indices. These unlike FIIs are not directly
registered under SEBI, but they operate through sub accounts with FIIs and
according to a number of studies it has been found that more than 50% of the funds are
flowing through this anonymous route, which can lead to a great loss to the Indian
economy.
Further, FIIs have contributed a lot in making Indian economy one of the fastest
growing economy in the world today. Foreign institutional investment can play
a useful role in development by adding to the savings of low and middle income
developing countries. And India among the world inventors is believed to be a good
investment destination inspite of all the political uncertainty and infrastructural
inefficiencies. After the liberalization of financial policies India has been able to attract a
lot of FII from rest of the world and which in turn has played its part very well by
helping in development of Indian economy from what it was in early 1990s to a would
be super power that it is today. But still the harsh consequences of FIIs should not
be ignored by the government and further reforms should be introduced in the
economic sector to counter the tendency of the FIIs to destabilize the emerging
equity market. And also attempts should be made to encourage small domestic investors
to participate in the equity market.

41
 Recent Developments/Investments

Some of the recent significant FII/FPI developments are as follows:

 In March 2019, initial public offer (IPO) of India’s first real estate investment trust
(REIT) was subscribed 2.6 times.
 In February 2019, net inflows from foreign portfolio investors (FPI) in India reached a
15-month high of Rs 17,220 crore (US$ 2.49 billion).
 Union Bank of Switzerland (UBS) maintained its Nifty target at 9,500 by March
2019.
 Morgan Stanley expects the BSE Sensex to reach 42,000 by December 2019 end.
 In September 2018, Embassy Office Parks filed the papers for India’s first Real Estate
Investment Trusts (REIT).

42
43
 Government/Regulatory Initiatives

 A report filed by a panel appointed by the Securities and Exchange Board of India
(SEBI) on December 04, 2018 has proposed direct overseas listing of Indian
companies and other regulatory changes.
 In September 2018, the Securities and Exchange Board of India (Sebi) relaxed the
Know-Your-Client (KYC) requirement for Foreign Portfolio Investors (FPIs).
 In September 2018, SEBI allowed Bombay Stock Exchange (BSE) and National
Stock Exchange (NSE) to start commodity derivate segments.
 SEBI has also allowed foreign entities to participate in the commodity derivatives
segment of Indian stock exchanges, to help them hedge their exposures. It has also
proposed to allow Non Resident Indians (NRIs) to invest through FPI route after
meeting specific KYC norms.
 In August 2018, SEBI reduced the timeline for public issue of debt securities from 12
days to six days.
 Foreign Portfolio Investors are also allowed to invest up to 25 per cent in Category III
Alternative Investment Funds (AIF) in India. Different types of funds such as hedge
funds, Private Investment in Public Equity (PIPE) funds, etc. are operating in India as
Category III AIFs.
 Investments by FPIs have also been allowed in Real Estate Investment Trusts (REITs)
and Infrastructure Investment Trust (InvITs).

44
 Correlation between FII and SENSEX

Correlation has been used to determine the statistical relationship between variables
under study FII and BSE SENSEX.

(Table 4)

SENES
FII EX
FII Pearson
Correlation 1 .659**
Sig. (2-tailed) .002
N 20 20
SENES Pearson
EX Correlation .659** 1

Sig. (2-tailed) .002

N 20 20
**. Correlation is significant at the
0.01 level (2-tailed).

Interpretation:
From the above table, it is found that the correlation between Net FIIs investment and
BSE SENSEX is 0.659. This shows that there is strong relationship between net FIIs
investment and BSE SENSEX. It shows that there is a strong impact of FIIs investment
on stock market index.
This positive correlation reveals the fact that the FIIs investment is an important factor
in enhancing the market capitalization of Bombay stock exchange. In other words it
can be said that due to FIIs activity in the Indian stock market the SENSEX value may
go up or down by 65.9%.
Also, since the significance value is 0.002 which is less than 0.01 we can deduce
that there is a relation between FII and SENSEX.

45
 Regression analysis between FII and SENSEX

Regression has been used to determine the dependency between FII and BSE
SENSEX. Here, Independent variable is FII investment and dependent variable is
BSE SENSEX.

(Table 5)
Variable (Entered / Removed)

Model Variable entered Variable Removed Method

1 b . Enter
FII

a. Dependent Variable: SENESEX

b. All requested variables entered.

46
 (Table 6)

ANOVAa

Sum of Mean
Model Squares df Square F Sig.
1 Regressi 50637780 50637780
1 b
on 5.650 5.650 13.825 .002

Residual 65931179 36628433.

4.172 18 010

Total 11656895
99.822 19

a. Dependent Variable SENESEX

b. Predictors: (Constant), FII

47
 (Table 7)

Coefficientsa

Standardiz ed
Coefficient s
Unstandardized
Coefficients

Model B Std. Error Beta t Sig.

1 (Consta
nt) 7256.259 1720.377 4.218 .001

FII .072 .019 .659 3.718 .0044

2

Dependent Variable: SENESEX

Interpretation: It can be observed from table 5 that all explanatory variables,

2
taken together establish a relationship nearly 43.4 percent (R =0.434) of total
variables in the BSE SENSEX of Indian stock market in each year. This means
whatever changes in the market capitalization of BSE for period under study the
FII investments are responsible upto 43.4%. From this it can be deduced that
there are other factors which have indirectly affected the BSE.
Also, it can be observed table 7 that the value of t statistics is 3.718 which is
significant at 5% level of significance and hence thus shows that there is
significant impact of FIIs on the BSE SENSEX thereby accepting that FII
investment has the positive impact on Indian stock market.

Thus, it can be concluded that the behaviour of FIIs matched the behaviour of
SENSEX during this period.

48
 (Table 8 )
FII AND CNX NIFTY

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.182709439
R Square 0.033382739
Adjusted R Square 0.024977371
Standard Error 1501.7941
Observations 117

ANOVA
d SS M F Significance F
Regression f 1 89 S 3.9715 0.048642002
89574
Residual 1 57
25 84.14
22553 97789
11 48
93 285.51
Total 26
4.1
51 69
83 9
42
33
6 26
4.7
81
REGRESSION RESULT
8.9
Standar
Coefficients d Error t Stat P-value Lower Upper 95% Lower U
95% 95.0% p
p
Intercept 5342.030388 157.911531 33.829260 1.32253E- 5029.2380 5654.822 5029.2 e 5
4 86 61 46 73 38046 r 6
5
NET FII X 0.028858035 0.01448051 1.9928867 0.0486420 0.0001749 0.0575411 0.0001 04
9 98 02 15 55 74915 9. .
50
.58
From the above table of Regression analysis of FII and CNX NIFTY 072
2
%57
ratio shows that multiple correlation coefficient are0.182709439. This indicates that 43
the correlation among independent and depended variable is positive. The coefficient 1
1
of determination is 3.338%.This means that close to 3% of the variation in the 5
dependent variable is explained by the independent variable. Since p-value of F-static 5
is 0.048642002 which is less than 0.05 at 5% level of significance, so we
reject the null hypotheses and conclude that there is significant relationship between
FII and CNX NIFTY.

49
 (Table 9)
Companies in which FII Investment is allowed up to 30% of their
paid up capital.

1. Aptech Ltd

2. Asian Paints (India) Ltd

3. Capital Trust Ltd

4. Container Corporation of India

5. Ferro Alloys Corporation Ltd

6. Garware Polyester Ltd

7. GIVO Ltd (formerly KB&T Ltd)

8. Gujarat Ambuja Cements Ltd

9. InfoTech Enterprises Ltd.

10. Mastek Ltd

11. Orchid Chemicals and Pharmaceuticals Ltd

12. Pentasoft Technologies Ltd (Pentafour Communications Ltd)

13. Polyplex Corporation Ltd

14. Ranbaxy Laboratories Ltd

15. Software Solutions Integrated Ltd

16. Sonata Software Ltd

17. The Credit Rating Information Services of India Ltd.

18. The Paper Products Ltd

19. Vikas WSP Ltd

50
 (Table 10)
Companies in which FII Investment is allowed upto 40% of their paid
up capital

1. Balaji Telefilms Ltd.

2. M/s. Burr Brown (India) Ltd.

3. M/s. Elbee Services Ltd.

4. Hero Honda Motors Ltd.

5. Jyoti Structures Ltd

6. Maars Software International Ltd.

7. Padmini Technologies Ltd

8. Pent media Graphics Ltd.

9. Thiru Arooran Sugars Ltd.

10. UTV Software Ltd.

11. Visual Soft Technologies Ltd

12. M/s. Silver line Technologies Ltd.

13. Ways India Ltd

14. SSI Ltd

51
 (Table 11)

Companies in which FII Investment is allowed upto 49% of their paid

up capital

1. Blue Dart Express Ltd

2. CRISIL

3. HDFC Bank Ltd

4. Hindustan Lever Ltd

5. Himachal Futuristic Communications Ltd

6. Infosys Technologies Ltd.

7. NIIT Ltd.

8. Dr. Reddy's Laboratories

9. Panacea Biotec Ltd

10. Reliance Industries Ltd.

11. Reliance Petroleum Ltd.

12. Sofia Software Ltd

13. Sun Pharmaceutical Industries Ltd

14. United Breweries Ltd.

15. United Breweries (Holdings) Ltd.

16. Zee Tele films Ltd.

52
 (Table 12)
Companies in which FII Investment is allowed upto sectoral
cap/statutory ceiling of their paid up capital

1. GTL Ltd. - (74%)

2. Housing Development Finance Corporation Ltd. - (74%)

3. Infosys Technologies Ltd. - (100%)

4. Pent media Graphics Ltd. - (100%)

5. Pentasoft Technologies Ltd. - (100%)

6. Mascon Global Ltd. - (100%)

7. Punjab Tractors Ltd. - (64%)

8. Satyam Computer Services Ltd - (60%)

(Table 13)
Companies where 22% FII investment limit has been reached and
further purchases are allowed with prior approval of RBI

1. ACC Ltd.

2. Digital Global Soft Ltd.

53
Impact of FIIs Movements on Stock Prices: A Case
Study

An important feature of the development of stock market in India in the last 15 years has
been the growing participation of Institutional Investors. Institutional investors comprise both
foreign institutional investors and the domestic institutions like (mutual funds, insurance
companies etc). In India, these institutional investors manage large amount of funds which
constitutes a significant share of the entire market capitalization. The role of these investors
especially FIIs (also known as foreign portfolio investors) in Indian stock market has been a
matter of debate. FII investments seem to have influenced the Indian stock market to a
considerable extent.

Why are FIIs important?

Attracting foreign capital appears to be the main reason for opening up of the stock
markets for FIIs. In order to attract portfolio investments, it has been advocated to develop
stock markets. The general perception about the foreign portfolio investments is that, not only
do they expand the demand base of the stock market, but they can also stabilise the market
through investor diversification.

Impact on Share price:

Price discovery of stocks are results of the interaction between supply-demand forces.
Buying equities in huge chunks leads to a steep rise in the prices and heavy selling leads to a
massive fall in the prices. Heavy buy and selling of stocks create a demand-supply gap
situation for that particular stock and which ultimately result in the fall or rise in the price.
This is what happened when FIIs come into play.

General perception about FIIs that they bring good money and also their entry symbolizes a
mature market. Though, it is true that FIIs do help in formation of an efficient market, their
sudden movements of funds have been responsible for some of the biggest stock
market crash in the history.

54
Investment by FIIs is heavily dependent on the expected return. Whenever there is a change
in the expected return scenario (due to political situation, restrictions etc) or availability of a
better investment opportunity, a movement of funds can be seen by these FIIs. This comes
through heavy selling of the stock holdings in their portfolio. And due to this heavy selling
massive falls in stock prices take place.

Individual investors who jumped into the fray when market was rising feel the pinch most
when these FIIs sell off their holdings. These investors incur heavy losses due to the sudden
fall. The stocks also take severe beatings as these stocks takes a long time to recover due to
loss of confidence, despite the companies’ good financial performance.

Here, we will see the effect of FIIs fund movement on stock prices through the analysis of
historical price and shareholding pattern of Vakrangee Software, a domestic mid-cap IT
Company.

The Company: Vakrangee Software

Vakrangee Softwares Ltd is a domestic IT company. The company’s businesses include

Document Management Services (DMS), Printing Management Services (PMS) and IT & IT
Enabled Services (ITes). The company has a good business model and expected to grow with
a rapid growth rate in future.

The stock of the company is currently trading at Rs.32. The company’s stock price has fallen
from all time high of Rs.291 to Rs. 19 due to heavy sell off by FIIs. The fall of stock price
started from September,2008 onwards due to heavy selling by FIIs. Their stake in company
has come down to zero in Dec, 2008. The sudden fall in stock price can be seen in historical
price chart (between 31/07/09 to 28/11/09).

55
 FII old share holding pattern

FII new share holding pattern

These two Pi-Charts explain the change in the share holding pattern of the company in last
two quarters. Before September quarter, FIIs had a major share (18%) in the company. Their
share was almost equals to the promoters share. Now, in December quarter, FIIs share came
down to zero due to their sudden exit which led to a massive fall in stock price. Currently, the
company is available at a deep discount and with almost no risk. Here no risk implies zero
FIIs’ stake in the company.

56
Finding:

By the analysis of Vakrangee Software, we can conclude that the companies in which FIIs
have very large stake are more prone to have stock price crash than the companies in which
FIIs has no or very low stake. Before investing in such companies, investors should always
do some research and try to find out whether FIIs are dumping the stocks.

Here the result of this analysis also applies to the whole market. A very large amount of fund
under FIIs management without any restrictions on their movements can destabilize the
market.

57
 CONCLUSION

A number of developments have taken place in the Indian capital market with
launching of financial reforms since summer 1991. With the advent of liberalization,
Indian capital market has gone under tremendous changes. Today, it is one of the most
attractive markets for the foreign institutional investors (FIIs). Since then the country
has been receiving large amounts of portfolio investment. With the ongoing
globalization the role of institutional investors in foreign capital flows has increased to
a great extent. They are being regarded as key player of financial globalization.

It can be observed that during the past 10 years there has been a gradual increase in the
FII investment. This reflects an increase in the confidence of the FIIs. It can be stated
that FIIs have significant influence on the movements of the stock market indexes in
India. There is a steadily growing influence of FIIs in the domestic stock market if one
looks at the total FII trade in equity.
FIIs and the movements of SENSEX are quite closely related in India and FIIs wield
significant influence on the market sentiments and price trends. This is because other
market participants perceive the FII flawless in their assessment of the market and tend
to follow the decisions taken by FIIs.

Results not only show that the FIIs are the major players in the domestic stock market
in India but also that their influence on the domestic market is growing. Data on
trading activity of FIIs and domestic stock market suggests that FIIs are becoming
more important at the margin as an increasingly higher share of stock market turnover
is accounted for FII trading. FIIs are playing the role of movers and shaker in the
Indian stock market as they injected the money in the market and encourage the other
investors to make investment. When the prices of indices go up they pull the money
and shake the market. Particularly, in the companies that constitute the BSE Sensitivity
Index (SENSEX) and NIFTY, their level of control is very high.

58
FII investments constitute a large share of the equity capital of a financial entity, an FII
pullout, even if driven by development outside the country can have significant
implications for the financial health of the index.

The year 2008 created history for the Indian stock market as it was the worst year in
terms of the performance. At the time of global financial crisis in 2008, the bubbling in
the market forced several FIIs to step-down from India and stepped in other emerging
markets.. Huge withdrawals by the FII from the Indian stock markets were mainly due
to the crash of financial markets in European markets that has been attributed to events
like anticipation of a hike in the interest rate in US, fall in the prices in the stock
market across the globe and technical correction in respect of overvalued stocks in the
Indian stock market. Notwithstanding the crash in the Indian market, FIIs continue to
be interested in investing in India-mostly due to the reforms that had been undertaken
to ease the policies relating to foreign investments.

The steady increase in the size of FII inflow in the recent years has attracted
unwarranted attention as to whether the capital account of India is gradually coming
to be dominated by ‘Hot Money’ – a phrase that is commonly used to describe the FII
flows, though the usage might not be completely correct.

FII investments seem to have influenced the Indian stock market to a considerable
extent. Analysis suggested a strong influence of FII investment on the SENSEX.

However, there may be other factors on which stock exchange may depend i.e.
Government policies, budgets, bullion market, inflation, economic and political
condition of the country, exchange rate etc.

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 LIMITATION OF THE STUDY

Here data size are not huge so it’s not show proper impact of FII and Indian stock
market

Here we take just three indices in Indian stock market so we not take a whole
Indian market

Here we apply regression and correlation not apply any other test so its limitation
of study.

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 REFERENCES
Chakrabarti, R. (2001). “FII Flows to India : Nature and Causes”,
Money and Finance, Vol. 2, No. 7.

Aggarwal, R., Klapper, L. & Wysocki, P. D. (2005). “Portfolio

preferences of foreign institutional investors”, Journal of Banking
and Finance, Vol. 29, No. 12, pp. 2919-2946.

http://www.bseindia.com/static/FII/RegulatoryFrameworkandFI
INorms.aspx?expandable=1

http://www.bseindia.com/indices/IndexArchiveData.aspx

http://www.business-standard.com/article/markets/goodbye-fii-
hello-FII-114060201103_1.html

http://shodhganga.inflibnet.ac.in/bitstream/10603/4121/13/13
_chapter%205.pdf

http://shodhganga.inflibnet.ac.in/bitstream/10603/13010/13/1
3_chapter%206.pdf

http://indiainbusiness.nic.in/newdesign/index.php?param=adva
ntage/173

https://www.FII.nsdl.co.in/Reports/RegisteredFIISAFII.aspx

http://madaan.com/fii.html

https://www.cdslindia.com/publications/FIIFIIYrWiseInvstmntDtl
s.aspx

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