A study on Foreign Institutional Investors (FIIs) in India

(2007-2012)




Neha Thadani
BMS III, SEM VI
Roll No: 108521
2010 2013 Batch




St. Francis College for Women, Begumpet, Hyderabad
Dept. of Business Management Studies
March 2012





DECLARATION

I, Neha Thadani of BMS III, roll no 108521, declare that this project titled, A study on
Foreign Institutional Investors (FIIs) in India submitted to St. Francis College For Women
is a bonafide work undertaken under the guidance of my mentor- Mrs. Geetha Anand and has
not been submitted to any other college or university for award of any degree/diploma.



DATE:
Signature of the Student
Name of the Student: Neha Thadani
Roll No. 108521
B.M.S VI Semester











SUPERVISORS CERTIFICATE

This is to certify that the project work entitled A study on Foreign Institutional
Investors(FIIs) in India is a bonafide work carried out by Ms Neha Thadani, student of
BMS III, St. Francis College for Women, Begumpet during the academic year 2012-2013 in
partial fulfillment for the award of the Degree of Bachelor of Management Studies.
I hereby certify that the results embodied in this work have not been submitted to any other
Institution or University for an award or diploma. This work has been done under my
supervision.



Date: Signature of the Project Work Guide
Name of the Guide: Mrs. Geetha Anand
Lecturer
Dept. of B.M.S


ACKNOWLEDGEMENTS

I would like to thank my institution St. Francis College for Women to give me this wonderful
opportunity to take up this project.
I would like to convey a special thanks to my H.O.D Mrs. Mallika Shetty who was always
available to clarify all my doubts.
I would like to thank my Mentor and Guide Mrs. Geetha Anand who encouraged and
supported me all throughout the project with her valuable suggestions and comments on
bringing out this project in the best possible way.
Finally, yet importantly, I would like to express my hearty thanks to my beloved parents for
their blessings and my friends for their help and cooperation extended in this endeavor of
mine and wishing me for the successful completion of this project.















LIST OF TABLES

Table No
Title Page no.
2.1 Forms Of Foreign Investment in India 5
3.1 Net Investment by FII's during 1993-2006 25
3.2 FII Investments in India during 2007-2012 28
3.3 Net FII Investments In India during 2007-2012 29
3.4 Trend Analysis Of Net FII Investments During
2007-2012
30
3.5 Relationship between BSE Sensex and FII
Investments
33
3.6 Relationship through Coefficient correlation 35








LIST OF FIGURES/GRAPHS

Figure No
Title Page no.
2.1
Forms Of Foreign Investment in India
5
3.1
Number of FIIs Registered
23
3.2 FII Investments in Equity and Debt during 1993-2006 26
3.3 Total Investment during 1993-2006 26
3.4 FII Investments during 2007-2012 28
3.5 Net FII Investments In India during 2007-2012 30
3.6 Trend Analysis 31
3.7 FII Investment and Sensex Relationship 34






Contents
Chapter Page Numbers
I. INTRODUCTION 1
1.1 Research Problem 2
1.2 Significance of the Project 3
1.3 Objectives of the study 3
1.4 Methodology
1.4a Sample Design
1.4b Sources of information
1.4c Tools and Techniques of analysis

3
1.5 Scope of the study 4
II. REVIEW OF LITERATURE
2.1 Theoretical back ground 5
2.2 Citing of past works 14
III. DATA ANALYSIS AND INFERENCES 18
IV. SUMMARY AND CONCLUSION 36
ANNEXURES
WEBLIOGRAHPY & BIBLIOGRAPHY






Chapter 1
INTRODUCTION
Stock Markets
A stock market or equity market is a public entity for the trading of company stock (shares)
and derivatives at an agreed price; these are securities listed on a stock exchange as well as
those only traded privately.
The stocks are listed and traded on stock exchanges which are entities of a corporation
or mutual organization specialized in the business of bringing buyers and sellers of the
organizations to a listing of stocks and securities together. The largest stock market in
the United States, by market capitalization, is the New York Stock Exchange (NYSE). Major
European examples of stock exchanges include the Amsterdam Stock Exchange, London
Stock Exchange, Paris Bourse. Asian examples include the Singapore Exchange, the Tokyo
Stock Exchange, the Hong Kong Stock Exchange, the Shanghai Stock Exchange, and
the Bombay Stock Exchange.
Market participants include individual retail investors, institutional investors such as mutual
funds, banks, insurance companies and hedge funds, and also publicly traded corporations
trading in their own shares. A few decades ago, worldwide, buyers and sellers were
individual investors, such as wealthy businessmen, usually with long family histories to
particular corporations. Over time, markets have become more "institutionalized"; buyers and
sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, index
funds, exchange-traded funds, hedge funds, investor groups, banks and various
other financial institutions).

The rise of the institutional investor has brought with it some improvements in market
operations. There has been a gradual tendency for "fixed" (and exorbitant) fees being reduced
for all investors, partly from falling administration costs but also assisted by large institutions
challenging brokers' oligopolistic approach to setting standardized fees.
The stock market is one of the most important sources for companies to raise money. This
allows businesses to be publicly traded, or raise additional financial capital for expansion by
selling shares of ownership of the company in a public market. The liquidity that an exchange
affords the investors gives them the ability to quickly and easily sell securities. This is an
attractive feature of investing in stocks, compared to other less liquid investments. Some
companies actively increase liquidity by trading in their own shares.
History has shown that the price of shares and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of social mood. An
economy where the stock market is on the rise is considered to be an up-and-coming
economy. In fact, the stock market is often considered the primary indicator of a country's
economic strength and development.
Foreign Institutional Investors (FIIs)
Most of the under developed countries suffer from low level of income and capital
accumulation. Though, despite this shortage of investment, these countries have developed a
strong urge for industrialization and economic development. As we know the need for
Foreign capital arises due to shortage from domestic side and other reasons. Indian economy
has experienced the problem of capital in many instances.
Definition of FII
An investor or investment fund that is from or registered in a country outside of the one
in which it is currently investing is known as Foreign I nstitutional I nvestment and
investors are known as Foreign I nstitutional Investors.
Institutional investors include hedge funds, insurance companies, pension funds and mutual
funds. The term is used most commonly in India to refer to outside companies investing in
the financial markets of India. International institutional investors must register with the
Securities and Exchange Board of India to participate in the market. One of the major market
regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies.
1.1 Research Problem
FII is allowed to enter into our country only through stock exchanges either in the form of
equity or debt. Thus it makes an impact on the rise or fall of major market indice, since FII is
allowed to be purchased or sold daily. The daily transaction of FII is one of the major reasons
behind the volatility in the stock markets and has strong impact on the various macro-
economic variables and the economy as a whole. Thus, the project attempts to analyze the
trends in the FII flows during the period 2007-2012 and also to analyze the impact of
variation in FII on Sensex (BSE Index) and to study the degree of relationship between them
in various FII movement scenarios.
1.2 Significance of the Study
Indian economy is growing at a very fast pace. Foreign Institutional Investors play a major
role in the economic growth of India. Their impact is significant even though their market
capitalization is not much and is improving year on year. Most of the FIIs are investing in
India due to its significant growth. These FIIs though they are investing in the country, they
not only invest for profit they also are affecting the movement of stocks in stock markets.
Hence they are impacting the stock market in a large way which is an important perimeter of
the Indian economy as it contributes to the growth process of Indian Economy. So it is
significant to study the trends in the FII investments and impact of Foreign Institutional
Investments on Indian Stock Market.

1.3 Objectives Of the Study
To study and understand the role of FIIs in India.
To study the government policy with respect to FIIs.
To study the trends in the FII flows in India during 2007-2012.
To analyze the variations in FII flows and their impact on the major indices of Stock
Market during 2007-2012.
To give suggestions & conclusion.

1.4 Methodology of the study
This study mainly depends on the Secondary research.
1.4a Sample design
As the objective of the study is to analyze the trend in FII investments in the country and
their impact on stock markets, data for the same is all secondary data.
1.4b Sources of Information
All the secondary data for the analysis is obtained from the websites of SEBI and BSE
majorly and many others, Journals, Books and magazines.
1.4c Tools and Techniques of Analysis
The study involves the analysis of trend in FII flows and thus time series analysis have been used to
find a trend in the investments by FIIs during 2077-2012. Another objective of the study involves
analysis of relationship between the benchmark index of Indian Stock Market i.e. BSE Sensex index
and FII flows during 2007-2012. Foe this purpose, Karl Pearsons correlation coefficient has been
used to determine the degree of relationship between the two.

1.5 Scope Of The Study
1. The scope of the study is limited to the analysis of FII investments during 2007-2012.
2. For the purpose of 4
th
objective, that is to study the impact of FII flows on the major
indices of Stock Market, the scope of the analysis is only limited to BSE Sensex,
which is the bench mark index of the Indian stock market.
3. The study is limited by time and cost factors.
4. The limited period of study may not be detailed and full-fledged in all the aspects.








Chapter 2
Review of Literature
2.1 Theoretical Background
This part of chapter gives you insight into different forms of foreign investment and all the
major concepts, guidelines given by RBI & SEBI pertaining to FIIs, registration process and
impact of FIIs on various aspects of economy.
Different Forms of Foreign Investment
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., through the foreign direct investment or 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 (PIOs) in various forms. The chart below depicts the forms of investment in India.
Figure 2.1
Forms Of Foreign Investment in India

FOREIGN INSTITUTIONAL INVESTOR: The term Foreign Institutional Investor is
defined by SEBI as under:
"Means an institution established or incorporated outside India which proposes to make
investment in India in securities. Provided that a domestic asset management company or
domestic portfolio manager who manages funds raised or collected or brought from outside
India for investment in India on behalf of a sub-account, shall be deemed to be a Foreign
Institutional Investor."
Foreign Investment refers to investments made by residents of a country in financial assets
and production process of another country.
Entities covered by the term FII include Overseas pension funds, mutual funds, investment
trust, asset management company, nominee company, bank, institutional portfolio manager,
university funds, endowments, foundations, charitable trusts, charitable societies etc.(fund
having more than 20 investors with no single investor holding more than 10 per cent of the
shares or units of the fund) (GOI (2005)).
FIIs can invest their own funds as well as invest on behalf of their overseas clients registered
as such with SEBI. These client accounts that the FII manages are known as sub-accounts.
The term is used most commonly in India to refer to outside companies investing in the
financial markets of India. International institutional investors must register with Securities
Exchange Board of India (SEBI) to participate in the market. One of the major market
regulations pertaining to FII involves placing limits on FII ownership in Indian companies.
They actually evaluate the shares and deposits in a portfolio.

WHY FIIS REQUIRED?
FIIs contribute to the foreign exchange inflow as the funds from multilateral finance
institutions and FDI (Foreign direct investment) are insufficient. Following are the some
advantages of FIIs.
It lowers cost of capital, access to cheap global credit.
It supplements domestic savings and investments.
It leads to higher asset prices in the Indian market.
And has also led to considerable amount of reforms in capital market and financial sector.

HISTORY OF FII
India opened its stock market to foreign investors in September 1992, and in 1993, received
portfolio investment from foreigners in the form of foreign institutional investment in
equities. This has become one of the main channels of FII in India for foreigners. Initially,
there were terms and conditions which restricted many FIIs to invest in India.
But in the course of time, in order to attract more investors, SEBI has simplified many terms
such as:-
The ceiling for overall investment of FII was increased 24% of the paid up capital of
Indian company.
Allowed foreign individuals and hedge funds to directly register as FII.
Investment in government securities was increased to US$5 billion.
Simplified registration norms.

INVESTMENTS BY FIIS
There are generally two ways to invest for FIIs.
Equity Investment
100% investments could be in equity related instruments or up to 30% could be invested in
debt instruments i.e.70 (Equity Instruments): 30 (Debt Instruments)
100% Debt
100% investment has to be made in debt securities only
EQUITY INVESTMENT ROUTE: In case of Equity route the FIIs can invest in the
following instruments:
A. Securities in the primary and secondary market including shares which are unlisted,
listed or to be listed on a recognized stock exchange in India.
B. Units of schemes floated by the Unit Trust of India and other domestic mutual funds,
whether listed or not.
C. Warrants.
100% DEBT ROUTE: In case of Debt Route the FIIs can invest in the following
instruments:
A. Debentures (Non Convertible Debentures, Partly Convertible Debentures etc.)
B. Bonds
C. Dated government securities
D. Treasury Bills
E. Other Debt Market Instruments

Registration of Foreign Institutional Investors
An application for registration has to be made in Form A, the format of which is provides in
the SEBI(FII) Regulations, 1995 and submitted with under mentioned documents in duplicate
addressed to SEBI as well as to Reserve Bank of India (RBI) and sent to the following
address within10 to 12 days of receipt of application.
Address for application
The Division Chief
FII Division
Security and Exchange Board of India
224, Mittal Court, B wing, 1
st
floor
Nariman Point, Mumbai-400021
India




Supporting documents required are
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 of last one year, provided 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
or any other appropriate regulatory authority with whom the applicant is registered in
its home country.
A declaration by the applicant that it had 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.
Who can get registered as FII?
Following foreign entities / funds are eligible to get registered as FII:
1. Pension Funds
2. Mutual Funds
3. Investment Trusts
4. Banks
5. Insurance Companies / Reinsurance Company
6. Foreign Central Banks
7. Foreign Governmental Agencies
8. Sovereign Wealth Funds
9. International/ Multilateral organization/ agency
10. University Funds (Serving public interests)
11. Endowments (Serving public interests)
12. Foundations (Serving public interests)
13. Charitable Trusts / Charitable Societies (Serving public interests)
Thus it may be seen that sovereign wealth funds (SWFs) are also regulated under FII
regulations only, and no separate regulation exists for SWFs. 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. Investment Manager/Advisor
3. Institutional Portfolio Managers
4. Trustee of a Trust
5. Bank

Foreign individuals can register as sub-accounts of FII to make investments in Indian
securities. Sub-account refers to any person who is resident outside India on whose behalf
investments are proposed to be made in India by a foreign institutional investor, and who is
registered as a sub-account under the SEBI (FII) Regulations, 1995.

The General Permissions from RBI
Open foreign currency denominated account(s) in a designated bank
Open a special non-resident rupee account to which could be credited all receipts
from the capital flows, sale proceeds of shares, dividends and interests.
Transfer sums from the foreign currency accounts to rupee account and vise-versa, at
the market rate of exchange.
Make investments in securities in India out of the balances in the rupee account
Transfer repatriable (after tax) from the rupee account to the foreign currency
accounts
Repatriate the capital, capital gains, dividends, incomes received by way of interest ,
etc. and any compensation received towards sale/enouncement of rights offerings of
shares subject to the designated branch of bank/the custodian being authorized to
deduct withholding tax on capital gains and arranging to pay tax and remitting the net
proceeds at market rates of exchange.
Register FIIs holdings without any further clearance under FERA
There is no restriction on the volume of investment minimum or maximum for the purpose of
entry of FIIs in the primary/secondary market. Also, there is no lock in period for the
purpose of such investments made by FIIs. Portfolio investments in primary or secondary
markets will be subject to a ceiling of 24% of issued share capital for the total holdings of all
the registered FIIs, in any one company. The ceiling would apply all the holdings taking into
account the conversions out of the fully and partly convertible debentures issued by the
companies. The holding of a single FII in any company would also be subject to a ceiling of
5% of total issued capital. For this purpose, the holding of a FII ground will be counted as
holdings of a single FII.

THE ELIGIBILITY CRITERIA FOR APPLICANT SEEKING FII REGISTRATION
IS AS FOLLOWS:
Good track record, professional competence and financial soundness.
Regulated by appropriate foreign regulatory authority in the same capacity/category where
registration is sought from SEBI.
Permission under the provisions of the Foreign Exchange Management Act, 1999 (FEMA)
from the RBI.
Legally permitted to invest in securities outside country or its incorporation/establishment.
The applicant must be a fit and proper person.
Local custodian and designated bank to route its transactions.

ELIGIBLE SECURITIES
A FII can make investments only in the following types of securities:
Securities in the primary and secondary markets including shares, debentures and warrants
of unlisted, to- be-listed companies or companies listed on a recognized stock exchange.
Units of schemes floated by domestic mutual funds including Unit Trust of India, whether
listed on a recognized stock exchange or not, and units of scheme floated by a Collective
Investment Scheme.
Government Securities
Derivatives traded on a recognized stock exchange like futures and options. FIIs can now
invest in interest rate futures that were launched at the National Stock Exchange (NSE) on
31st August, 2009.
Commercial paper.
Security receipts
FIIs are allowed to trade in all exchange traded derivative contracts subject to the position
limits as prescribed by SEBI from time to time. Clearing Corporation monitors the open
positions of the FII/ sub-accounts of the FII for each underlying security and index, against
the position limits, at the end of each trading day.

Impact of FIIs on the other important aspects of the Economy
FII affecting the Exchange Rates : FII needs to maintain an account with the RBI for all the
transactions. To understand the implications of FII on the exchange rates we have to
understand how the value of one currency goes up or goes dowmn against the other currency.
The simple way of understanding is through Demand and Supply. If say US imports from
India, it creates demand for Rupee thus the Indian rupee appreciates against the dollar. If
India imports than the dollar appreciates with respect to the Indian rupee.
Now considering FIIs for every dollar they bring in the country, there is a demand for rupee
created and the RBI has to print and release money in the country. Since the FIIs are creating
a demand for rupee, it appreciates w.r.t the dollar. Thus, if for example if prior to the demand
the exchange rate was 1 USD=Rs 40, it could become 1USD =Rs 39 after they
invest.Similarly when the FIIs withdraw the capital from the markets, they need to earn back
the green buck (USD) so that leads to a demand for dollars, the rupee depreciates, 1USD goes
back to Rs 40. Thus FII inflows make currency of the country invested in appriciate (e.g FII
investing in India may lead to Rupee appreciating w.r.t several other currencies) and their
selling and disinvestment may lead to depreciation.

Depreciating currency not favorable to the FIIs: Considering a simple hypothetical
exampleI invest 1USD in India at an exchange rate of 1 USD =Rs 40. If rupee appreciates ,
the exchange rates become 1USD =Rs 20. Now if I disinvest I get 2 dollars, whereas I
invested only 1 USD thereby a gain of 1 USD. Similarly, when rupee depreciates w.r.t to US
dollar and exchange rate becomes 1 USD= Rs 80, I get only 0.5 Dollar and I lose 0.5 of the 1
USD invested. Thus, we observe that for the FIIs to gain investing in India the rupee should
appreciate w.r.t the dollar.

FII and Inflation: The huge amount 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 by FIIs. This situation could lead to excess liquidity (mount of excess cash
floating in the market ) thereby leading to inflation, where too much money chases too few
goods . Thus, there should be a limit to the inflow in the country.

FII and Local companies: FII bring lot of funds to the country markets leading to free
availability of funds for local companies in need of funds to carry on expansion in their
production capacities or starting new ventures.

FII and Exports: Because the FII lead to appreciation of the currency, they lead to the
exports industry becoming uncompetitive due to the appreciation of the rupee. For example,
if 1 USD=Rs 40 and a soap costs 1 USD. Now when the rupee appreciates 1 USD = Rs. 20, I
will have to sell the same soap to the Us for 2 Dollars in order to sustain the same income that
I have been making i.e. RS 40. Thus excess of FII fund inflow in the country can also make a
negative impact on the economy of the country. Thus FIIs bring in a lot of funds to the
country which could be used by the companies to achieve rapid growth but there should also
be a mechanism to keep a check on them.
2.2 Citing of Past works
The investment made by FIIs in any capital market has grabbed the attention of researchers to
identify the relationship between the capital market performance and net inflow of FIIs. A
good number of research findings are available indicating the volatility shifts in the capital
market movement due to immunization of FIIs and vice-versa. Also the study of the trend of
investment by FIIs helps the investors understand reasons of fluctuations in the market and
thus helps in predicting the future course to the possible extent. This section of the chapter
gives an insight into past research studies done with respect to FIIs in India. The research
studies covered here are national and international researches and results obtained from the
analysis of such research.

Stanley Morgan (2002) ,
1
FIIs influence on Stock Market.
Stanley Morgan (2002) has examined that FIIs have played a very important role in building
up Indias forex reserves, which have enabled a host of economic reforms. Secondly, FIIs are
now important investors in the countrys 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.

Anand Bansal and J.S. Pasricha (2009),
2
Foreign Institutional Investors Impact on Stock
Prices in India
Anand Bansal and J.S. Pasricha (2009)

studied the impact of market opening to FIIs on Indian
stock market behavior. 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.

Chakrabarti, R (2001),
3
FII Flows to India: Nature and Causes,
Using monthly data between May 1993 and Dec. 1999, Chakrabarti (2001) found that FII
flows and stock returns are strongly correlated in India. The entire sample period was sub-
divided into Pre-Asian Crisis and Post-Asian Crisis period to capture the impact of the Asian
crisis on the net FII inflows. Following analysis, he suggested that FII inflows are more likely
to be the effect than the cause of the stock returns. It was also found that FIIs do not have any
informational disadvantage in comparison with domestic investors in India, since the US and
world return are not significant in explaining FII flows. Besides, changes in country risk
ratings for India do not appear to affect the FII flows. The beta of the Indian market with
respect to S&P 500 index seems to affect the FII flows inversely, but the effect disappeared
in the post-Asian crisis period. There appear to be significant differences in the nature of FII
flows before and after the Asian crisis. In the post-Asian crisis period i.e. from 1998 onwards,
returns on the BSE National Index became the sole driving force behind the FII flows.

Rai, K, and NR Bhanumurthy (2003),
4
Determinants of Foreign Institutional Investment In
India: The Role of Return, Risk and Inflation
The possibility of bi-directional relationship between FII and the equity returns was explored
by Rai and Bhanumurthy (2003). They studied the determinants of foreign institutional
investment in India during the period 1994-2002. They found, using monthly data that the
equity returns is the main driving force for FII investment and is significant at all levels. They
further studied the impact of news on FII flows and found that the FIIs react more (sell
heavily) to bad news than to good news.

Kumar, SSS (2001),
5
Does the Indian Stock Market Play to the Tune of FII Investments: An
Empirical Investigation
Kumar (2001) investigated the effects of FII inflows on the Indian stock market represented
by the Sensex using monthly data from January 1993 to December 1997. Kumar (2001)
inferred that FII investments are more driven by Fundamentals and they do not respond to
short-term changes or technical position of the market. In testing whether Net FII Investment
(NFI) has any impact on Sensex, a regression of NFI was estimated on lagged values of the
first difference of NFI, first difference of Sensex and one lagged value of the error correction
term (the residual obtained by estimating the regression between NFI and Sensex). The study
concluded that Sensex causes NFI. Similarly, regression with Sensex as dependent variable
showed that one month lag of NFI is significant, meaning that there is causality from FII to
Sensex. This finding is in contradiction with the findings of Rai and Bhanumurthy (2003)
who did not find any causation from FII to return in BSE using similar data between 1994
and 2002. However, Rai and Bhanumurthy have also found significant impact of return in
BSE on NFI.

Prasuna, CA (2000),
6
Determinants of Foreign Institutional Investment in India
Prasuna (1999) also studied the determinants of FI investments in India using monthly data
from January 1993 to March 1998. He found that lagged FII investment is significant at 1%
level. Also, percentage change in BSE Sensex is also significant at 1%. Exchange rate,
interest rates, forward premium and foreign exchange reserves have been found to be
insignificant.

Gordon, J. and Gupta, P., (2003),
7
Portfolio Flows into India: Do Domestic Fundamentals
Matter?
Most of the existing literature on FIIs in India found that the equity return has a significant
and positive impact on the FIIs .But, Gupta and Gordon found that, given the huge volume of
investments, foreign investors could play a role of market makers and book their profits, i.e.
they can buy financial assets when the prices are declining, thereby jacking-up the asset
prices and sell when the asset prices are increasing

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.

Therefore motivated by some interesting and time varying evidences with regard to the
relationship between FIIs and stock market performance, the present study is destined to
examine the relationship of FIIs and performance of Indian stock market and also study the
trend of investments made by FIIs. The study is limited to the period 2007-2012.





















Chapter 3
DATA ANALYSIS

This chapter analyses the data collected from the secondary sources and thus intends to
achieve the objectives of the study. This chapter deals with understanding of government
policies with respect to FIIs, analyzing the trends in the FII flows during the period 2007-
2012 and analyze the FII flows and their impact on the major indices of the Stock Market
during 2007-2012.

The analysis is done in three stages- Section A, Section B and Section C
Section A: The First stage of analysis deals with understanding all the government policies
and changes in them over a period of time, with respect to FIIs. This stage satisfies the 2
nd

objective of the study To study the Government Policies with respect to FIIs.
Section B: The Second stage of analysis deals with the study of the trend in the FII flows
and analyzing the same during 2007-2012. It includes:
A general analysis of net investments by FIIs during the period 1993-2006.
Analysis of investments by FIIs in Equity and Debt during 2007-2012.
Analysis of Net Investments made during 2007-2012.
Trend Analysis of the net investments.

Section C: The Third stage of analysis deals with analysis of relationship between BSE
SENSEX and FII Investments which is the 4
th
objective of the study.





Section A
Understanding Government Policies with respect to FIIs
Evolution of policy framework
Until the 1980s, Indias development strategy was focused on self-reliance and import-
substitution. Current account decits were nanced largely through debt ows and official
development assistance. There was a general disinclination towards foreign investment or
private commercial ows. Since the initiation of the reform process in the early 1990s,
however, Indias policy stance has changed substantially, with a focus on harnessing the
growing global foreign direct investment (FDI) and portfolio ows
After the launch of the reforms in the early 1990s, there was a gradual shift towards capital
account convertibility. From September 14, 1992, FIIs and overseas corporate bodies (OCBs)
were permitted to invest in nancial instruments, with suitable restrictions. The policy
framework for permitting FII investment was provided under the Government of Indias
guidelines, vide a press note dated September 14, 1992, which enjoined upon FIIs to obtain
an initial registration with the SEBI and also the RBIs general permission under the FERA.
Both the SEBIs registration and the RBIs general permissions under the FERA were to hold
good for ve years, and were to be renewed after that period. The RBIs general permissions
under the FERA would enable the registered FII to buy, sell, and realize capital gains on
investments made through an initial corpus remitted to India, to invest on all recognized
stock exchanges through a designated bank branch, and to appoint domestic custodians for
the investments held.
The government guidelines of 1992 also provided the eligibility conditions for registration,
such as track record, professional competence, nancial soundness, and other relevant
criteria, including registration with a regulatory organization in the home country. The
guidelines were suitably incorporated under the SEBI (FIIs) Regulations, 1995. These
regulations continue to maintain the link with the government guidelines through a clause
that was added to the effect that the investment by FIIs should also be subject to government
guidelines. This linkage has allowed the government to indicate various investment limits,
including those in specic sectors. With the Foreign Exchange Management Act (FEMA),
1999 coming into force in 2000, the Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident Outside India) Regulations, 2000 were issued to provide the
foreign exchange control context where foreign exchange-related transactions of FIIs were
permitted by the RBI. A philosophy of preference for institutional funds and the prohibition
of portfolio investments by foreign natural persons have been followed, except in the case of
non-resident Indians, where direct participation by individuals takes place. 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 that were listed or
were to be listed on the stock exchanges in India and in schemes oated by domestic mutual
funds.
International institutional investors must register with the Securities and Exchange Board of
India to participate in the market. One of the major market regulations pertaining to FIIs
involves placing limits on FII ownership in Indian companies.
Investment limits for FII
Foreign Institutional Investors (FIIs) are allowed to invest in the primary and secondary
capital markets in India through the portfolio investment scheme (PIS). Under this scheme,
FIIs can acquire shares/debentures of Indian companies through the stock exchanges in India.
The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian
company. The limit is 20 per cent of the paid up capital in the case of public sector banks,
including the State Bank of India. The ceiling of 24 per cent for FII investment can be raised
up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body
of the company passing a special resolution to that effect. And the ceiling of 10 per cent for
NRIs/PIOs can be raised to 24 per cent subject to the approval of the general body of the
company passing a resolution to that effect. The ceiling for FIIs is independent of the ceiling
of 10/24 per cent for NRIs/PIOs.
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 point, for instance, is fixed at 8 per cent for companies in which NRIs/
PIOs can invest up to 10 per cent of the companys paid up capital. 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/NRIs/ PIOs 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/NRIs/PIOs 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/ NRIs/PIOs. On receipt of such proposals, the Reserve Bank gives
clearances on a first-comefirst served basis till such investments in companies reach 10 / 24 /
30 / 40/ 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/NRIs/PIOs clients. The Reserve Bank also informs the
general public about the caution and the stop purchase in these companies through a press
release
Major Guidelines with respect to FIIs
September 1992 : FIIs allowed to invest by the government. Single FIIs to invest %
and all other FIIs were allowed to invest24% of a companys issued capital. Broad
Based funds to have 50 investors with no one holding more than 5%.
November 1996: 1005 debt FIIs were permitted.
April 1997 :Aggregate limit for all the FIIs increased to 30% subject to special
procedure and resolution
April 1998: FIIs permitted to invest in dated Government securities subject to a
Ceiling. Aggregate portfolio investment limit of FIIs enhanced from 5% to 10% and
the ceilings were made mutually exclusive. FII s permitted to invest in equity
derivatives.
February 2000: Foreign firms and high net-worth individuals permitted t invest as
sub-accounts of FIIs. Domestic portfolio managers allowed to be registered as FIIs to
manage the funds of sub-accounts
March 2001: FII ceiling under special provision enhanced to 49%
September 2002: FII ceiling under special provision raised to special cap
December 2003: FII dual approval process of SEBI and RBI change to single
approval process of SEBI
November 2004 : Outstanding corporate debt limit of USD 0.5 billion prescribed.
October 2005: 145 new FIIs registered themselves with SEBI.
October 2007: SEBI issued a discussion paper proposing that FIIs and their sub-
accounts should be prevented from issuing new or renewing old Overseas Derivative
Instruments (ODIs) with immediate effect.
Further, in 2008 amendments were made to attract more foreign investors to register
with SEBI, these amendments are:
The definition of broad based fund under the regulations was substantially
widened allowing several more sub accounts and FIIs to register with SEBI.
Several new categories of registration viz. sovereign wealth funds, foreign
individual, foreign corporate etc. were introduced,
Registration once granted to foreign investors was made permanent without a
need to apply for renewal from time to time thereby substantially reducing the
administrative burden,
Also the application fee for foreign investors applying for registration has
recently been reduced by 50% for FIIs and sub accounts
Also, institutional investors including FIIs and their sub-accounts have been
allowed to undertake short-selling, lending and borrowing of Indian securities
from February 1, 2008.

March & August 2009: Disapproval of FIIs lending shares abroad and FIIs allowed to
participate in interest rate futures.
April 2010 FIIs allowed to offer domestic government securities and foreign
sovereign securities with AAA rating as collateral (in addition to cash) to recognized
stock exchanges in India for their transactions in the cash segment of the market.
November 2010 Investment cap for FIIs increased by US $ 5 billion each in
government securities and corporate bonds to US $ 10 billion and US $ 20 billion,
respectively.
March 2011 The limit of US $ 5 billion in corporate bonds issued by companies in the
infrastructure sector with a residual maturity of over ve years increased by an
additional limit of US $ 20 billion, taking the total limit to US $ 25 billion

As is evident from the above summary, the evolution of the FII policy in India has displayed
a steady and cautious approach to the liberalization of a system of quantitative restrictions
(QRs). The policy liberalization has taken the form of (i) the relaxation of investment limits
for FIIs; (ii) the relaxation of the eligibility conditions; and (iii) the liberalization of the
investment instruments accessible to FIIs.

The impact or the result of all the various policies and reforms could be seen in the increase
in the number of FIIs getting registered with every coming year.
Figure 3.1
Number of FIIs Registered

From the above figure 3.1, it is clear that there is constant growth in the number of registered
FIIs in India. In the year 2006 (January, 2006), the number of registered FIIs were 832 only.
The same number has been increased to 1697 by the year 2010 (January 2010). The number
has been increased by more than 100 per cent. In spite of the global financial crisis the
number of registered FIIs has shown a significant increase. Irrespective of the situation in
Indian stock markets these FIIs has earmarked their presence. But the investment made by
FIIs has experienced drastic decline in the recent past. This is mainly because of the global
economic meltdown. Though the number of registered FIIs increased the net investment was
not increased proportionately.
Hence, to conclude, we can say that after the adoption of Liberalization, Privatization and
Globalization (LPG) philosophy from 1991, the flow of foreign funds gradually increased
and in 21st century it became vital. Of late, the Indian stock market has registered
tremendous growth despite high volatility in prices of stocks. The causes include global
factors, information boom, IT revolution, internet myth, psychological factors, changes in the
income pattern of middle class, foreign direct investment (FDI) and foreign institutional
investment (FII). Among the aforesaid, the later plays a dynamic role in stock market and
also causes high fluctuations in stock market prices. Many times, FIIs caused accumulation
of wealth, some times caused to collapse the entire market and crores of rupees in single
trading day.

















Section B
The Second stage of analysis deals with the study of the trend in the FII flows and analyzing
the same during 2007-2012.
We begin with a general analysis of FII investments during 1993-2006, in order to understand
the position of FII before the period which comes under the scope of study.

Net Investment by Foreign Institutional Investor's during 1993-2006

Table 3.1
Financial Year Equity Debt Total
1992-93 13 0 13
1993-94 5,127 0 5,127
1994-95 4,796 0 4,796
1995-96 6,942 0 6,942
1996-97 8,546 29 8,575
1997-98 5,267 691 5,958
1998-99 -717 -867 -1,584
1999-00 9,670 453 10,122
2000-01 10,207 -273 9,933
2001-02 8,072 690 8,763
2002-03 2,527 162 2,689
2003-04 39,960 5,805 45,765
2004-05 44,123 1,759 45,881
2005-06 48,801 -7,334 41,467
2006-07 25,236 5,605 30,840
*Source : SEBI
The above Table- 3.1 shows the investments made by the foreign institutional investors after
the liberalization period (1992-93) to 2006-07. The table shows the amount of investments in
the equity and debts separately and finally the net investments, in the form of total i.e. adding
up the investments made through the equity and debt respectively.


Figure 3.2

*Source: Data from above table collected from SEBI

Figure 3.2 presents the long term trend of investments made by FIIs, ever since foreign
portfolio investors were allowed to invest in Indian financial markets in September 1992.

Figure 3.3

*Source: Data from above table collected from SEBI

-10000
0
10000
20000
30000
40000
50000
FII Investments in Equity and Debt during 1993-2006
Equity Debt
-10000
0
10000
20000
30000
40000
50000
Total Investment
Total
The data from the table 3.3 has been shown in the form of connecting scatter graph, which
shows the trend in the investments made over the years since 1992-93 to 2006-07. FII
inflows, Underwent a sea-saw movement in India during the last decade.

Initially in the first financial year a slow response was noticed, as the amount of funds
invested were low, which may be because of the apprehensiveness of the investors to
the new market and also the restrictions laid by the government.
But in the next year i.e. 1993-94, FIIs experienced a sudden lift and from then , the
growth was almost on a consistent path.
It again marked a severe downturn in the year 1998-99, when the economy
experienced capital outflow, the reason being Indias nuclear tests and the excessive
volatility in the rupee/dollar exchange rate.
They registered spectacular growth especially since the middle of 2003 due to the
higher growth rate in Indian GDP, good corporate performance and an investment-
friendly environment.
The FII flow continued in a consistent manner over the period 2004-2006. But in May
2006, Indian capital market faced a tough situation witnessing a massive foreign fund
outflow of worth Rs. 11,131 crores. The major reason behind the sell-off was the rise
in US interest rates.











FII Investments in India during 2007-2012

Table 3.2

Financial Year Equity Debt Total
2007-08 53,404 12,775 66,179
2008-09 -47,706 1,895 -45,811
2009-10 110,221 32,438 142,658
2010-11 110,121 36,317 146,438
2011-12 43,738 49,988 93,726
2012-13* 130,284 22,539 153,448

* As on February 28, 2013
Source: SEBI

The above table 3.2 gives the information about the investments made by FIIs in Equity and
Debt and the Net investments during the period 2007-2013 ( * as on February 28, 2013).
Figure 3.4

* As on February 28, 2013
Source: SEBI
-60,000
-40,000
-20,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13*
FII Investments during 2007-2012
Equity
Debt
The Figure 3.4 , presents the FII investments activity during 2007-2012. Its presents the
investments mad by FIIs during the period in equity and debt separately. Form the above
graph, it can be inferred that investments have been fair in 2007 after the withdrawal in the
year 2006, as we discussed in the previously. But then again , there was a massive outflow of
funds in the year 2008 due to the global economic crisis . The investments were, thereafter ,
recovered in the following years and have seen consistent growth during the years 2009-
2012.


Net FII Investments In India during 2007-2012
Table 3.3
Segments 2007 2008 2009 2010 2011 2012*
Equity 71,486.30 -52,987.40 83,424.20 133,266.30 -2,714.20 127736.2
Debt 9,428.50 11,771.90 4,563.40 46,408.30 42,067.00 34989.4
Total 80,915 -41,216 87,988 179,675 39,353 162,726
Source: SEBI, Calendar year Statistics

The above table 3.3, gives the yearly(calendar year) flow of FII investments through equity
and debt.







Figure 3.5


The above figure 3.5, presents the yearly flow of investments by FIIs. It is noted that over
the period 2007-2012, the flow of funds have dipped twice i.e. in the year 2008 and 2011
because of the recession and the weak performances of the major indices in India and growth
concerns, respectively. Flow have remained fairly good in the years 2007 and 2009 and being
highest in 2010 and 2012.













-100,000
-50,000
0
50,000
100,000
150,000
200,000
2007 2008 2009 2010 2011 2012*
Net FII Investments In India during 2007-2012
Total
TREND ANALYSIS OF NET FII INVESTMENTS DURING 2007-2012

Table 3.4
YEAR Investments
(in crs)
2007 80,914.80
2008 -41,215.50
2009 87,987.60
2010 179,674.60
2011 39,352.80
2012 163350.1

Figure 3.6


The above table and figure shows the trend of investments made by FIIs during 2007-2012.
We analyze the trend by looking into the various reasons in each year that has led to the
formation of the trend.

-50,000.00
0.00
50,000.00
100,000.00
150,000.00
200,000.00
2007 2008 2009 2010 2011 2012
Trend Analysis
Investments (in crs)
In the year 2007, FIIs average inflows and outflows of funds for equity were very
high when compared to the year 2006.According to the estimate available on RBIs
website the net FII inflow during April 2007 to September 2007 was a whopping
$15.5 billion. There were also withdrawals by FIIs twice during the year.
The year 2008 witnessed the financial crisis around the globe, which effected the
flows of foreign investment in the country, leading to the withdrawal of Rs. 17,326.30
crore alone in January. There was outflow of equity throughout the year. Inflow of
funds was quite less. Whereas, debt inflow was quite good comparing the equity
inflows. Equity outflow was mainly due to recession.
The year 2009 was the recovery period after the global economic crises in 2008. With
liquidity across the globe remaining high and investor confidence increasing, net FII
in India crossed the $11 billion mark in the first nine months of the year and were able
to recover whatever FIIs had pulled out following the global economic crisis and
turmoil in the market.
In the year 2010, the faith of FIIs in Indian markets was back and thus, the total
inflow of FIIs was recorded to be $ 38.76 billion till December, 2010. Analysts
believed the reason for the investments to be the growth potential of the emerging
markets of India.
In the 2011, the equity participation by FIIs dropped to a five-year-low, with gross
purchases in the calendar year falling sharply as compared to the previous years. Net
investments by FIIs in 2011 stood at Rs 39,35crore as against the net investment I of
Rs. 179,675 crore in 2010.
The year 2012 saw foreign investors betting high on India. The cumulative inflow
from FIIs in the calendar year crossed $125 billion mark-the second highest in 14
years. The net inflows were 1.23 lakh crore ($23 billion) during the year. Indian
market has attracted highest amount of foreign flows compared with Asian peers in
2012. The reason behind the huge investments, were believed to be initiatives taken
by the government to boost economic growth and investor sentiments.



Section C
The Third stage of analysis deals with analysis of relationship between BSE SENSEX and FII
Investments which is the 4
th
objective of the study.

Relationship between BSE Sensex and FII Investments

Table 3.5

Year SENSEX Values(points) Net FII Investment ( Rs. Cr)
2007 20,286.00 80,914.80
2008 9,647.00 -41,215.50
2009 17,464.00 87,987.60
2010 20,509.00 179,674.60
2011 15,454.00 39,352.80
2012 19,426.00 163350.1
Total 102,786.00 510,064.40
*Source : BSE and SEBI reports.

The Table 3.5, shows the relationship between the BSE Sensex and FII investments.








Figure 3.7

*Source : BSE and SEBI reports

The figure 3.7 depicts the data from the table 3 in the form of trend, showing the relationship
between the BSE Sensex and FII investment. Form the above figure it can be seen that there
is a positive relation between the BSE Sensex and FII investment. It is noted that , the
decrease in the investment during 2008 because of the global economic crisis, has led to the
fall in the BSE Sensex .Whereas, the rise in the Sensex points is noted when the investments
increased in the years 2009 and 2010 which was the recovery period after the global crisis. It
again went on to decrease to 15,454 pts in the year 2011 because of the large withdrawal of
the funds from the equity , when compared to the year 2010 where, investments in equity was
all time high. But in the year 2012, the market index rose to its all time high because of the
fair amount of investments made by FIIs in equity and debt, apart from the other aspects of
the economy affecting the sensex.


-100,000.00
-50,000.00
0.00
50,000.00
100,000.00
150,000.00
200,000.00
2007 2008 2009 2010 2011 2012
FII Investment and Sensex Relationship
SENSEX Value (in Points)
FII Investment (in Rs. cr)

Relationship through Coefficient correlation
Table 3.6
Year Sensex(X) FII(Y) XY X^2 Y^2
2007 20286 80,914.80 1641437633 411521796 6,547,204,859.04
2008 9,647.00 -41,215.50 -397605928.5 93064609 1,698,717,440.25
2009 17,464.00 87,987.60 1536615446 304991296 7,741,817,753.76
20010 20,509.00 179,674.60 3684946371 420619081 32,282,961,885.16
2011 15,454.00 39,352.80 608158171.2 238826116 1,548,642,867.84
2012 19,426.00 163350.1 3173239043 377369476 26,683,255,170.01
Total 102,786.00 510,064.40 10,246,790,735.90 1,846,392,374.00 76,502,599,976.06



Correlation(r)= 0.896020195

r = XY (X)(Y) X
2
- (X)
2
* Y
2
- (Y)
2


It has been found during the study (Table: 3.6) that BSE sensex and foreign institutional
investment has followed a close relationship. The Pearson correlation values indicate positive
correlation between the foreign institutional investments and the movement of sensex
(Pearsons correlation value is (0.896020195). It is evident that the sensex has increased
when there are positive inflows of FIIs and there was decrease in sensex when there were
negative FII inflows.






Chapter -4
Finding and Conclusion
Findings
The study on Foreign Institutional Investors has been undertaken with an objective to study
the role of FIIs in India and policies framed by the government, RBI and SEBI regarding
investment from foreign institution/investor. Also to study the trends in FII flow during 2007-
2012 and their impact stock markets, with special reference to BSE sensex.
Form the study the following observations have been made.
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 that were listed or were to be listed on the stock exchanges in India and in
schemes oated by domestic mutual funds.
The continuous reform in government policies, the general guidelines giving by SEBI,
the relaxation of regulations, paperwork, fees for registering and revising the limits
and raising the ceiling of investment by RBI, all have resulted in a positive outcome
for the FIIs as the net investments and the number of foreign investors have increased,
though it was subject to fluctuations during the period.
Though the number of registered FIIs increased the net investment was not increased
proportionately.
FII investment has increased by great amount over the years i.e. from 5,127 crores in
1993-94 to 153,448 crores in 2012-13 (as on February 28,2013)
It was found that since 2006 there is no outflow of II for Debt market.
It was found that domestic sources of outside finance are limited in many countries,
particularly those with emerging markets. Through capital market liberalization,
foreign capital has become increasingly significant source of finance.
It was found that FIIs investment is also dependent on the economic condition of the
nation, as we can observe from the table-3.4 that during the time of economic crisis in
2008, FIIs have withdrawn amount.
After the massive downturn in 2008, it was noticed that the investments in the year
2009 were impressive and could cover up the deficit caused because of the huge
outflow in the previous year.
During the year 2010, the FII flow in India, were highest with the net investments
recording $29.32 billion. This was because of the regained faith of the investors in the
Indian markets and its growth potential.
It was observed that in spite of the high record investment in the year 2010, the
investment declined drastically in 2011 because of lower levels of index in the year
and the weak QIP and IPO market which lead to the less participation by the FIIs
during the year.
It is interesting to note that even in the calendar year 2008 and 2009 when global
markets were under pressure after the collapse of Lehman Brothers, FII gross
purchases were significantly higher than in the year 2011. The growth concerns and
economic conditions in India were the major reasons for the FIIs to hold back their
investment.
It was observed that, after a not very favorable year in 2011, the year 2012 saw
foreign investors betting high on India. The cumulative inflow from FIIs in the
calendar year crossed $125 billion mark-the second highest in 14 years. The net
inflows were 1.23 lakh crore ($23 billion) during the year.
The study observed that the fluctuations in the global markets have great impact on
the FII flows which in turn affects the BSE Sensex, benchmark index in India.
It was found that there is a direct relationship between the FII flows and BSE Sensex.
FII buying leads to a rise in the Sensex and FII selling leads to a fall in stock market.
It has been found during the study that BSE sensex and foreign institutional
investment has followed a close relationship. The Pearson correlation values indicate
positive correlation between the foreign institutional investments and the movement
of sensex (Pearsons correlation value is (0.896020195).
It is evident that the sensex has increased when there are positive inflows of FIIs and
there was decrease in sensex when there were negative FII inflows.






Conclusion
The important result of this analysis is that the FIIs investment behavior is determined by
stock market return and risk in and economic factors of India. It can be concluded that, FIIs
investment decisions are not the major factors for stock market boom and crash, in India but
there are numerous other reasons which determine the trend of FII inflows and outflows,
from and in India. The FII flows have been growing ever since 1992. Form the year 1993-94
the growth has been consistent till 1998-99, when there were outflows experienced because
of the rupee/dollar fluctuations. But again from the year 2003-04 there was a steep rise in the
investments made by the foreign institutors because of the better economic conditions and the
growth potential of the Indian markets.
In the year 2008, markets witnessed massive outflows because of the global economic crisis.
Its impact was seen in the form of huge amount of withdrawals. But again in the year 2009
the FIIs again infused money in the Indian market because they predicted the positive signs
of, growth of Indian capital market. The flow of foreign funds through FIIs reached all time
high in 2010 and again dipped in the year 2011 because of the slow moment of the market
indices and slow growth of the Indian economy. Recently in the year 2012, the FII inflows
were very impressive and were recorded to be $23 billion, second highest amount of inflow,
after 2010, which had a positive impact on the market indices.
Now-a-days FIIs are the major contributors to the stock market and the pros of allowing FIIs
outweighs the cons. Therefore, in the emerging markets like India where, domestic sources of
outside finance are limited. It is up to the policy makers of India to allow FIIs to operate and
provide them with more opportunities and reasons to invest in Indian markets, so that the
country can have access to foreign capital.







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1. Stanley Morgan (2002), FIIs influence on Stock Market, Journal: Journal of impact
of Institutional Investors on ism. Vol 17. Publisher: Emerald Group Publishing
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No.2 , October 2009.
3. Chakrabarti, R (2001), FII Flows to India: Nature and Causes, Money and Finance,
Vol. 2, Issue 7, Oct-Dec.
4. Rai, K, and NR Bhanumurthy (2003), Determinants of Foreign Institutional
Investment In India: The Role of Return, Risk and Inflation, JEL Classification: E44,
G15, G 11.
5. Kumar, SSS (2001), Does the Indian Stock Market Play to the Tune of FII
Investments: An Empirical Investigation, The IUP Journal of Applied Finance, Vol.
7, No. 3, pp. 36-44.
6. Prasuna, CA (2000), Determinants of Foreign Institutional Investment in India,
Finance India, Vol. XIV, No. 2, pp. 411-421.
7. Gordon, J. and Gupta, P., (2003),
7
Portfolio Flows into India: Do Domestic
Fundamentals Matter? IMF Working Paper No. 03/20, January, International
Monetary Fund, Washington DC.
8. FIIs continue to earn from the Indian Stock market
http://stockshastra.moneyworks4me.com/economic-outlook/fiis-continue-to-earn-
from-the-indian-stock-market/

9. http://portal.indiainfoline.com/datamonitor/MId-Year-Economic-Analysis-2012-
13/Overview-of-the-Economy/Net-FII-Investment-in-India-during-2007-2012.aspx
10. http://www.nseindia.com/content/us/ismr2011ch7.pdf
11. http://www.indianexpress.com/news/fii-inflows-cross--11-bn-wipe-out-2008-
deficit/522235
12. http://www.thehindubusinessline.com/markets/stock-markets/article3799457.ece
13. http://www.thehindubusinessline.com/opinion/columns/aarati-krishnan/whos-afraid-
of-fiis/article4496458.ece?homepage=true

14. SEBI website
http://www.sebi.gov.in/sebiweb/investment/statistics.jsp?s=fii
15. RBI website
http://www.rbi.org.in/scripts/faqview.aspx?id=26#3
16. FII cumulative investments in stocks reach $125 bn during 2012
http://articles.economictimes.indiatimes.com/2012-12-26/news/36007998_1_indian-
stock-markets-fiis-net-inflow
17. http://www.moneycontrol.com/stocksmarketsindia/
18. BSE website
http://www.bseindia.com/