FII Investment analysis across

different sectors of Indian

Economy

Amit Tiwari
09BM8078
AMRP Guide : Prof. C.S.Mishra
Agenda
Introduction
Literature survey
Methodology
Data collection
Expected Results
Findings
Scope for future work
Suggestions
Introduction
Indian economy has been booming since the advent of
liberalization policy during the nineties.
The growth has been under-pinned by not just the
Government expenditure and productivity of the local
businesses and industries but considerably also by the funds
flow from foreign countries particularly through the route of
FDI and FII. It has been cited in many research works that
FDI look for long term growth prospects besides others in
the country and FIIs for short term gains.
This work focuses on the reasons in variations of FII flows
in the various industry sectors in India keeping in view the
various factors influencing their decisions.
Objective
To work out the investment patterns and underlying
factors for the inflow of FII since 2003 to 2010 and
assigning reasons for variations in the same in the
context of leading industrial sectors in India based
upon S&P CNX Nifty Fifty of NSE.
Literature survey
Research Paper 1: Foreign Institutional Investors:
Investment Preferences in India
Availability of foreign capital depends on many firm
specific factors other than economic development of
the country. The paper examines the contribution of
FII in BSE Sensex.
The relationship between FII and firm specific
characteristics in terms of ownership structure,
financial performance and stock performance.
Research Paper 2: Inter-firm differences in FII
portfolio investment in India
To analyse the determinants of FII investments in firms in
high-tech corporate sectors like automobiles, drugs and
pharmaceuticals, IT software and IT hardware for the
period 2000 to 2004. Section II, focuses on the analytics of
transnational holding of equity and motivation for the
study.
The focus is the determinants of inter firm differences in
FII portfolio investments. In other words, motivated by the
objectives of risk reduction and return enhancement and
having decided to have an internationally diversified
portfolio, on which criteria does the foreign institutional
investor choose the firms in which to invest.
Research Paper 3: FII Flows to India:
Nature and Causes
FII flows and their relationship with other economic variables
and arrive at the following major conclusions:
 While the flows are highly correlated with equity returns in
India, they are more likely to be the effect than the cause of these
returns;
 The FIIs do not seem to be at an informational disadvantage in
India compared to the local investors
 The Asian Crisis marked a regime shift in the determinants of FII
flows to India with the domestic equity returns becoming the
sole driver of these flows since the crisis.
 Given the thinness of the Indian market and its susceptibility to
manipulations, FII flows can aggravate the equity market
bubbles, though they do not actually start them.
Research Paper 4: Foreign and Domestic Institutional
Investment in India’s Private Corporate Sector: Do they have
a Dependence?

Hardly any effort is made to understand whether there

is any lag-lead relationship between FII and DII.
Given the more stringent conditions of the FIIs for
investing in the private corporate sector, it is likely that
investment by FII in any corporate entity in India
sends a signal that it is a safe investment. Does this
then trigger an investment on the part of the Domestic
Institutional Investors? This has a serious implication
in case the FIIs withdraw their money from the private
corporate sector as is witnessed in times of global
crisis we observe now.
Research Paper 5: FII share and bank performance: an
empirical analysis of Indian banks
This paper investigates the relationship between the FII
presence and firm performance of 25 listed banks of the
Indian banking industry.
The results indicate that the FII share plays a significant
and positive role in determining the performance of public
sector but not necessarily private sector banks. This is
explained by the critical role that FII plays in public sector
banks in improving managerial efficiency by avoiding
issues relating to moral hazard. Private banks suffer less
from problems of moral hazard, and therefore, the role of
FII in such banks is not as critical as in the case of public
sector banks.
Research Paper 6: Foreign Institutional
Investment
International capital flows and capital controls have emerged as
important policy issues in the Indian context as well. The danger of
abrupt reversals and their destabilizing consequences on equity and
foreign exchange markets are always a concern. Nevertheless, in recent
years, the government has been making strong efforts to increase FII
flows in India. Others have argued that, far from being healthy for the
economy, FII inflows have actually imposed certain burdens on the
Indian economy.
Understanding the determinants and effects of FII flows and devising
appropriate regulation therefore constitute an important part of
economic policy making in India.
FII flows should be viewed not in isolation but as part of an integrated
policy package for all capital receipts keeping in mind their role in the
overall macroeconomic structure.
Research Paper 7: An Examination of Home Bias Argument
in the Indian Financial Markets: DIIs Vis-à-vis FIIs
In this paper we examine if DIIs have any home Bias compared to FIIs
for both the equity and debt segments of the Indian capital market.
We find that both the DIIs and FIIs follow a positive feedback trading
mechanism chasing stock market returns. However, FIIs seem to be
reacting faster compared to DIIs in the case of the equity market. This
may be owing to the fact that the former have international expertise
and greater resources and play a dominant role in this segment of
capital market as shown by their share in the trading volume. In
contrast, the DIIs lead the market returns which in turn attract the FIIs
thus, supporting home bias argument.
Interestingly, the DIIs unlike in the equity market, play a more
important role in debt market trading activities. The results point at
greater debt market inefficiency in the Indian context which may be a
reflection of the relatively underdeveloped nature of this market.
Research Paper 9: The Impact of FII Regulations in India : A
Time-Series Intervention Analysis of Equity Flows
The paper assesses the impact on FII flows of several policy revisions related to FII

investment during the period January 1999 to January 2004, through a multivariate
GARCH regression model.
Using techniques of time series intervention analyses author incorporates the effect of

each individual policy intervention in a model that includes the two most important
covariates of FII flows to India, namely stock market (BSE) returns and past FII flows.
The range of policies considered encompasses liberalisation policies as well as
restrictive ones taken to assure stability of flows.
Results strongly suggest that liberalisation policies have had the desired expansionary

effect and have either increased the mean level of FII inflows and/or the sensitivity of
these flows to a change in BSE return and/or the inertia of these flows.

On the other hand, interestingly, the restrictive measures aimed at achieving greater

control over FII flows also do not show any significant negative impact on the net
inflows; we find that these policies mostly render FII investments more sensitive to the
domestic market returns and raise the inertia of the FII flows.
Research Paper 10:Institutional Investors and
Executive Compensation
We find that institutional ownership concentration is
positively related to the pay-for-performance sensitivity of
executive compensation and negatively related to the level
of compensation, even after controlling for firm size,
industry, investment opportunities, and performance.
These results suggest that the institutions serve a monitoring
role in mitigating the agency problem between shareholders
and managers.
clientele effects exist among institutions for firms with
certain compensation structures, suggesting that institutions
also influence compensation structures through their
preferences.
Research Paper 11: Herding and Feedback Trading by
Institutional and Individual Investors
Strong positive correlation between changes in institutional
ownership and returns measured over the same period. The result
suggests that either institutional investors positive-feedback trade
more than individual investors or institutional herding impacts
prices more than herding by individual investors.
Both factors play a role in explaining the relation. Authors find
no evidence, however, of return mean-reversion in the year
following large changes in institutional ownership—stocks
institutional investors purchase subsequently outperform those
they sell. Moreover, institutional herding is positively correlated
with lag returns and appears to be related to stock return
momentum.
Research Paper 12: The colours of investors’ money: The role
of institutional investors around the world
Study the role of institutional investors around the world
using a comprehensive data set of equity holdings from
27 countries. all institutional investors have a strong
preference for the stock of large firms and firms with
good governance, while FIIs tend to overweight firms
that are cross-listed in the U.S. and members of the
Morgan Stanley Capital International World Index.
Firms with higher ownership by foreign and independent
institutions have higher firm valuations, better operating
performance, and lower capital expenditures.
Research Paper 13: The Influence of Institutional
Investors on Myopic R&D Investment
This paper examines whether institutional investors create or reduce incentives for corporate
managers to reduce investment in research and development (R&D) to meet short-term earnings
goals. Many critics argue that the frequent trading and short-term focus of institutional investors
encourages managers to engage in such myopic investment behavior. Others argue that the large
stockholdings and sophistication of institutions allow managers to focus on long-term value rather
than on short-term earnings. I examine these competing views by testing whether institutional
ownership affects R&D spending for firms that could reverse a decline in earnings with a
reduction in R&D.
Managers are less likely to cut R&D to reverse an earnings decline when institutional ownership
is high, implying that institutions are sophisticated investors who typically serve a monitoring role
in reducing pressures for myopic behavior.
However, a large proportion of ownership by institutions that have high portfolio turnover and
engage in momentum trading significantly increases the probability that managers reduce R&D to
reverse an earnings decline.
These results indicate that high turnover and momentum trading by institutional investors
encourages myopic investment behavior when such institutional investors have extremely high
levels of ownership in a firm
Otherwise, institutional ownership serves to reduce pressures on managers for myopic investment
behavior.
Research Paper 14: Volatility and the
Institutional Investor
Inconsistent with the relationship predicted by most
academic theory, a positive contemporaneous
association is documented between the level of
institutional ownership and security return volatility
after accounting for capitalization.
 This relationship is consistent with two stories: Either
riskier securities attract institutional investors, or an
increase in institutional holdings results in an increase
in volatility. These empirical results are consistent with
the latter interpretation.
Research Paper 15: Direct foreign ownership,
institutional investors, and firm characteristics
In this paper, characterize foreign ownership using a dataset
of ownership and attributes of Swedish firms. The analysis
reveals that foreigners show a preference for large firms,
firms paying low dividends, and firms with large cash
positions on their balance sheets.
Further, the preference for large firms, market liquidity and
presence in international markets, measured through export
sales or listings on other exchanges, seem to characterize
foreign holdings better than firm size alone. Foreigners also
tend to underweight firms with a dominant owner.
Hence, we identify an institutional investor bias rather than a
foreign investor bias.
Research Paper 16:The Day-of-the Week Anomaly: The Role
of Institutional Investors
Studies have suggested that individual investor
behavior is the primary cause of the weekend effect.
This examination of differences in the daily returns of
securities held primarily by individual investors versus
securities held by institutional investors indicates that
institutional behavior is the primary source of day-of-
the-week return differences. Day-of-the-week patterns
in returns and volumes are more pronounced in
securities in which institutional investors play a greater
role.
Research Paper 17: Share holding Pattern
and Firm Performance
Corporate Governance deals with the issue of how suppliers of finance to
corporations assure themselves of getting a return on their investment. Several
Studies have examined the relationship between ownership structure and firm
performance. Using different data samples most of the studies provide general
support for the argument that increase in managerial ownership increases firm
performance. However, these results have been questioned recently.
This study examines empirically the effects of ownership structure on the firm
performance for a large sample of Indian Corporate Firms, from an `agency
perspective'. We examine the effect of interactions between corporate, foreign,
financial institutions, and managerial ownership on firm performance. We provide
empirical evidence, which suggests that firm size and age in positively related to the
firm performance. Using panel data framework, we show that a large fraction of
cross-sectional variation, in firm performance, found in several studies, is explained
by unobserved firm heterogeneity, rather than the ownership structure. We do not find
any evidence that the differences in ownership structure, affect firm performance;
after controlling for observed firm characteristics and firm fixed effects.
Methodology
For the investments from FII to be attracted by a firm
in a particular sector, the corporate performance is a
major influencing factor. The study concentrates on
impact of five firm level variables on portfolio
investment of fund companies. The variables are:
P/E multiple, P/B multiple, Yield, Average Returns
and EPS. The effect of the level of Nifty Index is also
taken into account.
All these variables are collected for each quarter for
eight years from 2003 to 2010 for CNX Nifty Fifty
listed companies across different sectors.
Methodology continued…
Thus there are two kinds of information available for analysis
- cross sectional information reflected in between the
companies, and time series with in company information over
time. Panel data regression technique will be used to
understand the relationship between this two-way information.
The dependent variable is the percentage of Foreign Investor’s
shareholding in the sample unit. Company is unit variable and
quarter is time variable. The analysis will be given in three
parts
 measuring time series effect, cross sectional effect and random
effect.
Multi-variate Regression Analysis
Data collection
Data on FII holdings in companies listed on S&P CNX
Nifty fifty from 2003-2010.
Independent factors being –
P/E ratio
P/B ratio
EPS
Yield
Annual returns
Level of S&P CNX Nifty Fifty of NSE
Results of Multi-variate Regression Analysis
R2 values for the years 2003-2010 are varying from 0.05 to 0.15
which reflect that a very small portion of the predicted is data is
being explained by the model.

P-values are seen to very high, ranging from 0.4 to 0.9

The coefficients of the independent variables are coming too less for
P/E (of the order of 0.01 or so)
In some instances, the coefficient for Annual returns is coming out
to be negative, which shouldn’t have been the case. It means FII
holding increase when returns decrease, which does not seem
plausible as per earlier findings.
On preliminary analysis, this model does not provide a robust
frame-work to catch all the underlying complexities of this project.
Panel Data Analysis Results
Expected Results of Panel Data Analysis
The expected results would provide the pattern of
investments in these sectors by FIIs and insights
regarding which sectors have been attractive enough at
different points of time together with the underlying
reasons.
This work is expected to reveal behaviour of FIIs and
their priorities using the variables mentioned above.
References
 Foreign Institutional Investors: Investment Preferences in India
 Inter-firm differences in FII portfolio investment in India
 FII Flows to India:Nature and Causes, ICRA Bulletin, Money and Finance, Oct –Dec 2001
 Share holding Pattern and Firm Performance
 FII share and bank performance: an empirical analysis of Indian banks, Afro-Asian J.
Finance and Accounting, Vol. 1, No. 1, 2008, Umakrishnan Kollamparambil, School of
Economic and Business Sciences, University of Witwatersrand, Johannesburg, South Africa,
Indrani Banerjee, Reserve Bank of India, Ahmedabad, India
 Foreign Institutional Investment Rajesh Chakrabarti
 An Examination of Home Advantage (Bias) Argument in the Indian Financial Markets:
Domestic Financial Institutional Investors (DFIIs) Vis-a-Vis Foreign Institutional Investors
(FIIs) Sanjay Sehgal (corresponding author) Professor of Finance Department of Financial
Studies University of Delhi, ESC-Pau,France Neeta Tripathi Dyal Singh College, University
of Delhi, India
 The Impact of FII Regulation in India : A Time-Series Intervention Analysis
of Equity Flows SUCHISMITA BOSE† AND DIPANKOR COONDOO, ICRA Bulletin
Money and Finance, July-Dec 2004
THE JOURNAL OF FINANCE _ VOL. LVIII, NO. 6 DECEMBER 2003
Institutional Investors and Executive Compensation JAYC. HARTZELL
and LAURAT. STARKS
THE JOURNAL OF FINANCE • VOL. LIV, NO. 6 • DECEMBER 1999
Herding and Feedback Trading by Institutional and Individual
Investors JOHN R. NOFSINGER and RICHARD W. SIAS
Journal of Financial Economics 88 (2008) 499–533 , The colors of
investors’ money: The role of institutional investors around the world
The Influence of Institutional Investors on Myopic R&D Investment
BehaviorAuthor(s): Brian J. BusheeSource: The Accounting Review, Vol.
73, No. 3 (Jul., 1998), pp. 305-333Published
V olatility and the Institutional InvestorAuthor(s): Richard W. SiasSource:
Financial Analysts Journal, Vol. 52, No. 2 (Mar. - Apr., 1996), pp. 13-
20Published by: CFA InstituteStable
Journal of Financial Economics 59 (2001) 413}440 Direct foreign
ownership, institutional investors, and firm characteristicsq Magnus
Dahlquist!,*, GoK ran Robertsson"
Fuqua School of Business, Duke University, Durham, NC 27708, USA
Stockholm Institute for Financial Research, SE-103 68, Stockholm, Sweden
CFA InstituteThe Day-of-the-Week Anomaly: The Role of Institutional
InvestorsAuthor(s): Richard W. Sias and Laura T. StarksSource:
Financial Analysts Journal, Vol. 51, No. 3 (May - Jun., 1995), pp. 58-
67Published
Proceedings of a Conference held at the H.C. Coombs Centre for
Financial Studies, Kirribilli on 8/9 July 1996, THEFUTUREOF
THEFINANCIAL SYSTEM Economic GroupmReserve Bank of
Australia
THANK YOU !!