Impact of FII and Indian stock market

1
A
COMPREHENSIVE PROJECT REPORT
ON
“IMPACT OF FOREIGN INSTITUTIONAL INVESTORS ON INDIAN STOCK
MARKET:”
Submitted to
MARWADI EDUCATION FOUNDATION GROUP OF INSTITUTE
IN PARTIAL FULFILLMENT OF THE
REQUIREMENT OF THE AWARD FOR THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION
Under
Gujarat Technological University
UNDER THE GUIDENCE OF
Faculty guide
Dr.Monica Varma
Submitted by
Kalariya Jaykumar A.
Enrollment N o . 147340592042
M.B.A - SEMESTER IV
MARWADI EDUCATION FOUNDATION GROUP OF INSTITUTE
M.B.A PROGRAMME
Affiliated to Gujarat Technological University
Ahmadabad
DECEMBER-2015

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PREFACE
Comprehensive Project is an integral part of the MBA program at MARWADI
EDUCATION FOUNDATION GROUP OF INSTITUTE . An exercise like this helps us
to have a firsthand experience as to what an academic ‗Research project‘ entails. It
exposes us to the process of identifying, systematizing and exploring specific
problems or issues. This process fosters creation of new knowledge and expansion
of existing framework of knowledge. To get acquainted with the theoretical aspects of
management and the practical implications of theory is greatly valuable for us. An
analysis of the direction of causality to understand the possible devastating effect of
volatility of FII flows on the Indian Stock Market is important. The present empirical
study has been undertaken to throw some light on the cause and effect relationship
between FII flows and Indian stock market returns. We felt that the utility of the report
could further enhance by widening its coverage and updating its contents wherever
necessary. We hope this report will provide necessary information. Comprehensive
project is the golden opportunities for the every student of the management

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ACKNOWLEDGEMENT
―No one who achieves success does so without acknowledging the help of
others Here it‘s an immense opportunity for us to articulate our ―Vote of
Thanks‖ towards all those persons who not only helped but inspire us making
research project with great learning.
First of all, we would like to Thank Dr.Monical verma for providing us initial
guidance regarding the framework of project.
We would like to express our thanks to Dr. Monica Varma who has not just
continuously guided us but taught us new concepts and made our journey of
preparing for project more interesting. His invaluable and significant guidelines
improved our outlook in making our project a real learning experience. He also
encouraged us to put in our best efforts and bring out the best of ourabilities.
We are also thankful to the whole staff of MEFGI and other faculties to whom we
approach during our project. At last but not the least, we take an opportunity to
appeal our profound gratitude to our adorable and beloved parents for their
everlasting love, strong moral support, encouragement without which we were
unable to reach the present status of education.

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DECLARATION
I, Kalariya Jaykumar A. hereby declare that the report for ―Comprehensive
project‖ entitled ――“IMPACT OF FOREIGN INSTITUTIONAL INVESTORS
ON INDIAN STOCK MARKET:” is a result of our own work and our
indebtedness to other work publications, if any, has been duly
acknowledged.
Place: Rajkot (signature)
Date: Kalariya Jaykumar

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Executive Summary
“Foreign Institutional Investor” means an institution established or
incorporated outside India, which proposes to make investment in India in
securities. (Regulation 2(f) of the FII regulation)
The issue of whether FII flow affects stock market returns or the other way round
is a matter of some controversy. It has been perceived in some quarters that FII
flows are the major drivers of stock markets in India and hence a sudden reversal
of such flows may harm the stability of its markets. Contrary to this belief, it is
viewed by others that FII flows react to the existing crisis in the stock market,
possibly exacerbating it rather than causing it.
In light of these events, Grand Project taken up dealt with three objectives.
One objective is to find out the cause and effect relationship between the FII and
BSE, NSE .Second, objective is to know how much FII and BSE,NSE affect each
other through Regression . Third objective is to assess the growth and development
of the Indian stock Market. Fourth, objective is to develop an understanding about the
concept and role of Foreign Institutional Investors (FII‘s) in India. Correlations
between the two estimated variables' series are determined to have a preliminary
understanding of the nature of relationship between stock market returns and FII
flows.

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Table of content
Chapter Particulars Page no.
1 1.1 About the Industry 9
1.2 Overview of World Market 16
1.3 Overview of Indian market 19
1.4 Growth of the industry 24
2 2.1 FII rules invest in India 33
3 introduction on Indian market 41
3.1market index 42
3.2 who can invest in India 44
3.3 Investment Opportunities for Retail
Foreign Investors
46
4 Introduction of study 48
4.1 Literature review 48
4.2 Background of the study 52
4.3 Problem statement of the study 53
4.4 Objective 54
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Research Methodology 56
5.1 Research Design 56
5.2 Sources of Data 56
5.3 Data Collection Method 56
5.4 Population 56
5.5 Sampling size 56
6 Data analysis and interpitation 57
7 Result and finding 63
8 Limitation of the study 65
9 Conclusion and suggestion 66

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LIST OF TABLE
LIST OF GRAPH
Graph no. Particular Page no.
1.1 growth of FII 25
1.2 Net investment by last 7 year 31
1.3 FII equity and debt data (April 2006 to december 2015) 32
3.1 BSE sensex index 43
table no. name of table page no.
1.1 BRIC Ranking for 6 pillars 16
1.2 Global Competitive Index 2014-2015 for BRICS Global rank 17
1.4 growth of FII 24
1.5 net invest by FII 2007 to 2006 30
2.1
Companies in which FII Investment is allowed up to 30% of their paid up
capital 36
2.2
Companies in which FII Investment is allowed upto 40% of their paid up
capital 37
2.3
Companies in which FII Investment is allowed upto 49% of their paid up
capital 37
2.4
Companies in which FII Investment is allowed up to 49% of their paid up
capital 38
2.5
Companies in which FII Investment is allowed upto sectoral cap/statutory
ceiling of their paid up capital 38
2.6
Companies where 22% FII investment limit has been reached and further
purchases are allowed with prior approval of RBI 39
2.7 top 10 FII in india as per 2005 39
6.1 FII and CNX NIFTY Regression 57
6.2 FII and CNX 500 Regression 59
6.3 FII and BSE sensex Regression 61
Anexture 68

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CHAPTER-1 ABOUT THE INDUSTRY
FIIs were allowed to trade in the Indian stock market from 14th
September 1992 but they made first investment in the month of January
1993. FII is defined as an institution organized outside of India for the
purpose of making investments into the Indian securities market under the
system prescribed by SEBI. „FIIs‟ 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, 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. 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‟. Foreign
institutional investor means an entity established or incorporated outside
India which proposes to make investment in India. Positive word about the
Indian economy combined with a fast-growing market has made India an
attractive destination for foreign institutional investors. FII is defined as an
institution organized outside of India for the purpose of making investments
into the Indian securities market under the regulations.
MEANING : 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.

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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.
1.1 ABOUT FOREIGN INSTITUTIONAL INVESTOR
“Foreign Institutional Investor” means an institution established or
incorporated outside India, which proposes to make investment in India in
securities (Regulation 2(f) of the FII regulation).
An investor or investment fund that is from or registered in a country
outside of the one in which it is currently investing. Institutional
investors include hedge funds, insurance companies, pension
funds and mutual funds.- Economic times

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Foreign institutional investors (FIIs) are those institutional investors which
invest in the assets belonging to a different country other than that where
these organizations are based.
‗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, 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.
A) Foreign Institutional Investors 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

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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.
(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.
(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.

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 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

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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.
(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.
(E) BENEFITS OF ENCOURAGING FIIS

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(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

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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.
(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.
(F) Rationale 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 spur domestic reforms aimed at

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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.
1.2 OVERVIEW OF WORLD MARKET
World Economic Forum came out with The Global Competitiveness
Report 2014- 2015 as per which Switzerland continues to top the
overall ranking in Global Competitive Index (GCI), characterized by
an excellent capacity for innovation and a very sophisticated business
culture. Sweden has moved ahead of Singapore and United States to
claim 2nd position this year. Singapore, United States ,Netherland
and Germany round out the top five. continue to prevail in the top 10
with Japan, Finland, Sweden, Hong Kong and united kingdom
following suit. After having fallen four positions over the past two
years, the United Kingdom moves up one spot to 10th place this year,
with a stable performance.
Table1.1 BRIC Ranking for 6 pillars
NO PILLARS BRAZIL RUSSIA INDIA CHINA
1 Recivedforegin
investment
13 16 20 4
2 Exports 6 8 12 1
3 Imports 21 17 8 2
4 foreignexchange
reserve
8 7 9 1
5 GDP(nominal) 8 15 7 2
6 GDP(PPP) 7 6 3 1
(source:-2014-15world economy report )

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Here we show in table 1 BRIC ranking here we see the china economy
during 2014-15 very strong and high import export and foreign exchange
reserve and GDP rate also high and also see that world highest economy.
India is GDP are high and good to Brazil and Russia but compares to
china, Brazil and Russia we less received foreign investment. China export
are more compare to import in 2nd
and export in 1st
number so its show
china’s economy condition are very good and attractive to investor but in
India exports are more and rank are 12 and import is 8 so our economy are
in deficit and low of our import and export rate because that our economy
is slow down that’s less foreign investor to invest our country compare to
china.
Table 1.2 Global Competitive Index 2014-2015 for BRICS Global rank
The Global competitiveness report 2014-15 and the Global
Competitiveness Index 12 pillars through process GCI gives above
rank that pillars Quality of institute, Energy and transfer infrastructure,

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Macroeconomic stability, health and primary education efficiency
enhance, Higher education and training, Goods and market
efficiency, Labor market efficiency, financial market sophistication,
Technology readiness, Market size innovation- driven, business
sophistication and innovation are that pillars give table-2 GCI rank.
China are high 12 pillars and that china is high rank(28) in
BRICS, After that Russia came 53rd
GCI rank and second in
BRICS,South Africa is 56th
GCI rank and 3rd
country in BRICS, Brazil
57th
rank and 4th
country in BRICS country and India is 71st
country in
GCI index through 12 pillars of GCI and it show that China is
Developed country in BRICS country and India is developing country.
All of the BRIC country rankings either improve slightly or stay the
same. China is to 28th
place. Brazil 57th
, India 71st
, and Russia stays
53rd
.

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1.3 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—

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was invested in debt and it is their record investment in the asset class,
while equities absorbed US$ 32.3 billion.
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

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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.
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

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(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.
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

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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 underlying 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.

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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.
1.4 GROWTH OF FII
Table-3 growth of FII
Year Equity (iNR crores) Debt (iNR crores) Total (iNR crores)
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
2007-08 53,404 12,775 66,179
2008-09 -47,706 1,895 -45,811
2009-10 1,10,221 32,438 1,42,658
2010-11 1,10,121 36,317 1,46,438
2011-12 43,738 49,988 93,726

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2012-13 1,40,033 28,334 1,68,367
Sources:SEBI)
Figure-1 growth of FII
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.
-150,000
-100,000
-50,000
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
Total (iNR crores)
Debt (iNR crores)
Equity (iNR crores)

26
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.
D. Improved corporate governance: Good corporate governance is
essential to overcome the principal-agent problem between share-holders

27
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.
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

28
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.
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

29
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

30
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.
Table-1.5 Net investment by FII last 10 year
Year net investment
2007 -1581.6
2008 -101802.6
2009 24132.1
2010 62713.4
2011 -26873
2012 105317.5
2013 87893.5
2014 66522.3
2015 -16331.3
2016 -13448.3

31
Figure1.2 Net investment last 7 year
In above figure 2 we show 2007 to 2016 year net data that show that 2007
and 2008 negative investment means in two years FII are sale their
investment that two years are recession. In 2009 and 2010 are positive
investment 24132.1 and 62713.4 respectively. In 2011 are again FII reduce
their investment and gone up to -26873.In 2012 FII investment are
105317.5 and that highest last 10 year. In year 2013 FII investment is
87893.5 its decreases previous year 2012. In 2014 FII investment are
66522.3 and its decrease to 2012 and 2013 FII investment. In 2015
-16331.3.

32
Figure-1.3 FII NET EQUITY & DEBT APRIL 2006 TO
DECEMBER 2015
Above figure show that FII net equity and debt data April 2006 to
December 2015. In June 2013 to November 2013 is show negative
investment in debt. Financial year 2006 is equity and debt investment
show positively. In 2007-08 due to world recession FII has sale there
investment and that show more sale in Indian market.
-40000
-30000
-20000
-10000
0
10000
20000
30000
40000
Apr/06
Dec/06
Aug/07
Apr/08
Dec/08
Aug/09
Apr/10
Dec/10
Aug/11
Apr/12
Dec/12
Aug/13
Apr/14
Dec/14
Aug/15
net equity
net debt

33
Chapter-2 FII RULES IN INVEST IN INDIA AND
REGULATION
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

34
transactions.
• Payment of registration fee of US $ 5,000.00
"Form A" as prescribed in SEBI (FII) Regulations, 1995 is to be filled
before applying for FII registration.
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.

35
• Declaration regarding fit & proper entity.
The fee for registration as FII is US $ 5,000. The mode of payment is
Demand Draft in favor 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 On receipt of such proposals, the Reserve Bank gives
clearances on a first-come-first served basis till such investments in

36
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.
Table no.2.1- 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

37
16. Sonata Software Ltd
17. The Credit Rating Information Services of India Ltd.
18. The Paper Products Ltd
19. Vikas WSP Ltd
Table no.2.2-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
Table no.2.3-Companies in which FII Investment is allowed upto 49%
1. Blue Dart Express Ltd

38
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.
Table no.2.4-Companies in which FII Investment is allowed up to 49%
1. ICICI Bank Ltd.
Table no.2.5-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%)

39
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 no.2.6-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.
In india approximately 4159 FII. As per December 2005 top 10 fii are
following table
Table no. 2.7- top 10 FII in india as per 2005
Top 10 Flls In India Based On M-
Cap
HSBC
Morgan Stanley
Merrill Lynch
Goldman Sachs
CLSA
Aberdeen
Copthall
Citi

41
CHAPTER-3 INTRODUCTION TO INDIAN STOCK MARKRT
Most of the trading in the Indian stock market takes place on its two stock
exchanges: the Bombay Stock Exchange (BSE) and the National Stock
Exchange (NSE). The BSE has been in existence since 1875. The NSE,
on the other hand, was founded in 1992 and started trading in 1994.
However, both exchanges follow the same trading mechanism, trading
hours, settlement process, etc. At the last count, the BSE had about 4,700
listed firms, whereas the rival NSE had about 1,200. Out of all the listed
firms on the BSE, only about 500 firms constitute more than 90% of its
market capitalization; the rest of the crowd consists of highly illiquid shares.
Almost all the significant firms of India are listed on both the exchanges.
NSE enjoys a dominant share in spot trading, with about 70% of the
market share, as of 2009, and almost a complete monopoly
in derivatives trading, with about a 98% share in this market, also as of
2009. Both exchanges compete for the order flow that leads to reduced
costs, market efficiency and innovation. The presence
of arbitrageurs keeps the prices on the two stock exchanges within a very
tight range.
Trading Mechanism
Trading at both the exchanges takes place through an open electronic limit
order book, in which order matching is done by the trading computer.
There are no market makers or specialists and the entire process is order-
driven, which means that market orders placed by investors are

42
automatically matched with the best limit orders. As a result, buyers and
sellers remain anonymous. The advantage of an order driven market is
that it brings more transparency, by displaying all buy and sell orders in the
trading system. However, in the absence of market makers, there is no
guarantee that orders will be executed.
All orders in the trading system need to be placed through brokers, many
of which provide online trading facility to retail customers. Institutional
investors can also take advantage of the direct market access (DMA)
option, in which they use trading terminals provided by brokers for placing
orders directly into the stock market trading system.
Settlement Cycle and Trading Hours
Equity spot markets follow a T+2 rolling settlement. This means that any
trade taking place on Monday, gets settled by Wednesday. All trading on
stock exchanges takes place between 9:55 am and 3:30 pm, Indian
Standard Time (+ 5.5 hours GMT), Monday through Friday. Delivery of
shares must be made in dematerialized form, and each exchange has its
own clearing house, which assumes all settlement risk, by serving as a
central counterparty.
3.1 Market Indexes
The two prominent Indian market indexes are Sensex and Nifty. Sensex is
the oldest market index for equities; it includes shares of 30 firms listed on
the BSE, which represent about 45% of the index's free-float market
capitalization. It was created in 1986 and provides time series data from
April 1979, onward. The main Index of BSE is SENSEX. The other indices

43
at BSE are: BSE 500, BSE 100, BSE 200, BSE PSU, BSE MIDCAP, BSE
SMLCAP, BSE BANKEX, BSE Teck, BSE Auto, BSE Pharma, BSE Fast
Moving Consumer Goods (FMCG), BSE Consumer Durable (SYMBOL:
Cons Dura), BSE Metal.
Figure-3.1 BSE sensex index
Another index is the S&P CNX Nifty; it includes 50 shares listed on the
NSE, which represent about 62% of its free-float market capitalization. It
was created in 1996 and provides time series data from July 1990, onward.
NSE main index is CNX Nifty. NSE also set up as index services firm
known as India Index Services & Products Limited (IISL) and has
launched several stock indices, including: S&P CNX Nifty, CNX
Nifty Junior, CNX 100 (= S&P CNX Nifty + CNX Nifty Junior), S&P
CNX 500 (= CNX 100 + 400 major players across 72 industries), CNX

44
Midcap (introduced on 18 July 2005 replacing CNX Midcap 200), Nifty
midcap 50.
Market Regulation
The overall responsibility of development, regulation and supervision of the
stock market rests with the Securities & Exchange Board of India (SEBI),
which was formed in 1992 as an independent authority. Since then, SEBI
has consistently tried to lay down market rules in line with the best market
practices. It enjoys vast powers of imposing penalties on market
participants, in case of a breach.
3.2 Who Can Invest in India?
India started permitting outside investments only in the 1990s. Foreign
investments are classified into two categories: foreign direct
investment (FDI) and foreign portfolio investment (FPI). All investments, in
which an investor takes part in the day-to-day management and operations
of the company, are treated as FDI, whereas investments in shares without
any control over management and operations are treated as FPI.
For making portfolio investment in India, one should be registered either as
a foreign institutional investor (FII) or as one of the sub-accounts of one of
the registered FIIs. Both registrations are granted by the market regulator,
SEBI. Foreign institutional investors mainly consist of mutual funds,
pension funds, endowments, sovereign wealth funds, insurance
companies, banks, asset management companies etc. At present, India
does not allow foreign individuals to invest directly into its stock market.

45
However, high-net-worth individuals (those with a net worth of at least
$US50 million) can be registered as sub-accounts of an FII.
Foreign institutional investors and their sub accounts can invest directly
into any of the stocks listed on any of the stock exchanges. Most portfolio
investments consist of investment in securities in the primary
and secondary markets, including shares, debentures and warrants of
companies listed or to be listed on a recognized stock exchange in India.
FIIs can also invest in unlisted securities outside stock exchanges, subject
to approval of the price by the Reserve Bank of India. Finally, they can
invest in units of mutual funds and derivatives traded on any stock
exchange.
An FII registered as a debt-only FII can invest 100% of its investment into
debt instruments. Other FIIs must invest a minimum of 70% of their
investments in equity. The balance of 30% can be invested in debt. FIIs
must use special non-resident rupeebank accounts, in order to move
money in and out of India. The balances held in such an account can be
fully repatriated. (For related reading, see Re-evaluating Emerging
Markets. )
Restrictions/Investment Ceilings
the government of India prescribes the FDI limit and different ceilings have
been prescribed for different sectors. Over a period of time, the
government has been progressively increasing the ceilings. FDI ceilings
mostly fall in the range of 26-100%.

46
By default, the maximum limit for portfolio investment in a particular listed
firm is decided by the FDI limit prescribed for the sector to which the firm
belongs. However, there are two additional restrictions on portfolio
investment. First, the aggregate limit of investment by all FIIs, inclusive of
their sub-accounts in any particular firm, has been fixed at 24% of the paid-
up capital. However, the same can be raised up to the sector cap, with the
approval of the company's boards and shareholders.
Secondly, investment by any single FII in any particular firm should not
exceed 10% of the paid-up capital of the company. Regulations permit a
separate 10% ceiling on investment for each of the sub-accounts of an FII,
in any particular firm. However, in case of foreign corporations or
individuals investing as a sub-account, the same ceiling is only 5%.
Regulations also impose limits for investment in equity-based derivatives
trading on stock exchanges.
3.3 Investment Opportunities for Retail Foreign Investors
Foreign entities and individuals can gain exposure to Indian stocks through
institutional investors. Many India-focused mutual funds are becoming
popular among retail investors. Investments could also be made through
some of the offshore instruments, like participatory notes (PNs) and
depositary receipts, such as American depositary receipts (ADRs), global
depositary receipts (GDRs), and exchange traded funds (ETFs)
and exchange-traded notes (ETNs).
As per Indian regulations, participatory notes representing underlying
Indian stocks can be issued offshore by FIIs, only to regulated

47
entities. However, even small investors can invest in American depositary
receipts representing the underlying stocks of some of the well-known
Indian firms, listed on the New York Stock Exchange and Nasdaq. ADRs
are denominated in dollars and subject to the regulations of the
U.S. Securities and Exchange Commission (SEC). Likewise, global
depositary receipts are listed on European stock exchanges. However,
many promising Indian firms are not yet using ADRs or GDRs to access
offshore investors.
Retail investors also have the option of investing in ETFs and ETNs, based
on Indian stocks. India ETFs mostly make investments in indexes made up
of Indian stocks. Most of the stocks included in the index are the ones
already listed on NYSE and Nasdaq. As of 2009, the two most prominent
ETFs based on Indian stocks are the Wisdom-Tree India Earnings Fund
(NYSE: EPI) and the Power Shares India Portfolio Fund (NYSE:PIN). The
most prominent ETN is the MSCI India Index Exchange Traded Note
(NYSE:INP). Both ETFs and ETNs provide good investment opportunity for
outside investors.

48
Chapter-4 INTRODUCTION OF STUDY
4.1 Literature Review
1 Dr. Kajal Gandhi (May 2015) held that Foreign Institutional Inflows and
Indian Stock Market Volatility. In this context these paper examine the
dynamic linkage between foreign institutional investments and Indian stock
market was examined by applying Grangers causality test. The empirical
study shows a causal relation of foreign institutional investments on Indian
stock market. During recent times since FIIs are playing a dominant role in
driving Indian stock market, they have almost one-third of all the assets
under the custody of custodians in any period of time. But they have a
thirst for short term profitability for which they often mobilize funds. The
results are however, are tentative and there is a need to undertake an in-
depth research to address the issue.
2 Krishna Prasanna & Bharat Bansal (May 25, 2014) held that Foreign
Institutional Investments and Liquidity of Stock Markets: Evidence from
India. In these context these paper examine empirical assessment of this
claim using alternative liquidity measures. FIIs and the portfolio flows have
certainly contributed to the growth of stock market activity in India. Market
capitalization, volume and value traded grew significantly along with FII
flows. The results indicate that the foreign institutional trading significantly
influences the market liquidity in a negative direction. An increase in the
Gross Sales leads to an increase in the spread and the Illiquidity as
measured by the Amihud illiquidity ratio and hence a decrease in future
market liquidity. Similarly, an increase in Gross Purchases significantly
reduces the future market liquidity.

49
3 Bikramaditya Ghosh, Dr. Padma Srinivasan (august 2014) held that
An Analytical Study to Identify the Dependence of BSE 100 on FII & DII
Activity. In these context these paper examine Conventional wisdom
confirms that FIIs & DIIs are the principal movers & shakers in the Indian
equity market. They are seen as the cardinal constituents of the entire
investment domain in the union of India. This study is carried out to
measure their impact in a mathematical way, and to figure out whether
they are the true market movers or not.BSE 100 is a large Cap broad-
based Index & FII, DII data is from Sept 2007 to October 2013 for the said
Index. This study is intended to measure the impact of FII, DII trading
activity from September 2007 to October 2013 on BSE 100.Adjusted R
Square is most important in such a multivariate analysis, here it is found to
be quite feeble (0.02838). A relative high value of R Square increases the
predictability of the model, such a low value doesn’t help the cause at
all.74 observation points are in consideration over a little more than 6
years. Degree of Freedom (DF) suggests the number of variables, here
there are two (namely FII Activity/DII Activity. It is tested that BSE 100
does depend upon the DIIs (period Sept 2007 to Oct 2013). Now the next
question is, what the impact of DIIs in BSE 100 is; is it strong or feeble.
The difference between the observed value of the dependent variable (y)
and the predicted value (ŷ) is called the residual (e). So, each data point
has one residual.
4 Dr. Rakesh Kumar Miss Sarita Gautam (Octomber-2014) held that An
Empirical Study on impact of FII and other stock exchanges volatility on
BSE stock exchange volatility . In these context these paper examine the

50
impact of various factors through Multivariate Regression Analysis. This
analysis defined the degree as well as relationships among the factors.
Volatility of Stock market changed very rapidly, so except these others
factors should also consider for research work. FII and Nikkei have an
inverse relation whereas NASDAQ and FTSE have positive relations with
the BSE SENSEX. When investors are trading in secondary capital market
in this case they should consider these studied factors for the minimization
of risk and increase the return.
5 Anubha Shrivastav (2013) held that A Study of Influence of FII Flows on
Indian Stock Market. In these context these paper examine that
investments by FIIs and the movements of Sensex are quite closely
correlated in India and FIIs wield significant influence on the movement of
sensex. There is little doubt that FII inflows have significantly grown in
importance over the last few years According to findings and results, I
concluded that FII did have high significant impact on the Indian capital
market. Therefore, the alternate hypothesis is accepted. FII’S have positive
impact on BSE Sensex and Nifty. However there are other major factors
that influence the bourses in the stock market, but FII is definitely one of
the factors. This signifies that market rise with increase in FII’s and
collapse when FII’s are withdrawn from the market. Also BSE CG, BSE
CD, and BSE IT showed positive correlation but BSE FMCG showed
negative correlation with FII. The degree of relation was low in all the case.
It shows low degree of linear relation between FII and other stock index.
This implies that their impact on the stock prices varies from sector to
sector which is further influenced by the industry to which it belongs to and
the sectoral performance.

51
6Sanjana Juneja (December-2013) Understanding the Relation between
FII and Stock Market. In these context these paper examine Compared to
security markets in developed economies, Indian markets being narrower
and shallower, allows foreign investors with access to significant funds, to
become the dominant player in determining the course of markets.
Because of their over sensitive investment behavior and herding nature,
FIIs are capable of causing severe capital out flight abruptly, tumbling
share prices in no time and making stock markets unstable and
unpredictable. In the process, more often than not, the domestic individual
investors are on the receiving end, losing their precious savings in such
outrageous speculative trading. India as an emerging economic power
cannot afford to be intimidated down by the FIIs every now and then. We
need formidable Domestic Investors which can pump in liquidity even
during cash crunch circumstances thereby fuelling the development. With
savings to the tune of roughly 35% of GDP, India can use this to its
strength by formulating policies which ensure that domestic funds like
Pension Funds, Provident Funds & other Large Corpus Funds have a
greater exposure to the equity market. The foreign investment in India
should be encouraged, but only from a strategic long term perspective.

52
4.2Background of Study
FII inflows and control have emerged as important policy issue in India.
Among the Indian policymakers, FIIs flows are believed to have a positive
impact on the country‘s development. FII flows supplement and augment
domestic savings and domestic investment without increasing the foreign
debt of country. Added to this, FII inflows to the equity market increase
stock prices, lower cost of equity capital and encourage the investment by
Indian firms and lead to improvements in securities market design and
corporate governance. The foreign institutional investment inflows have the
potential of influencing the process of economic development of India
through the positive impacts on macro-economic fundamentals of the
country. Therefore, the outlook is that the policy makers of India should
provide the FIIs with more opportunities and reasons to invest in Indian
markets by suggesting and implementing prudential norms. The FII
manipulate the situation of boom in such a manner that they wait till the
index rises up to a certain height and exit at an appropriate time. This
tendency increases the volatility further. But, volatility is too good for the
market as it helps in keeping the economy cycle moving and it will again
help the values of the stocks at a fair price for investments to again keep
flowing and so will the FIIs too.
Unexpected flows (FII) have a greater impact than expected flows and
further some researchers claim that foreigners‘ do not destabilize the
market Thus, there are many different opinions related to the impact of FII
flows on Indian capital market and that is why for the same reason we
have done a research.

53
4.3 PROBLEM STATEMENT AND IMPORTANCE OF THE STUDY
The issue of whether FII flows affects stock market returns or the other
way round is a matter of some controversy. It has been perceived in some
quarters that FII flows are the major drivers of stock markets in India and
hence a sudden reversal of such flows may harm the stability of its
markets. Contrary to this belief, it is viewed by others that FII flows react to
the existing crisis in the stock market, possibly exacerbating it rather than
causing it. An analysis of the direction of causality to understand the
possible devastating Impact of FII flows on the Indian economy is
important from the viewpoint of Indian policy makers especially when such
flows have recorded a sharp rise over the last decade. But, as very few
studies have been done so far in this regard, the present empirical study
has been undertaken to throw some light on the cause and effect
relationship between FII flows and Indian stock market returns.

54
4.4 Objectives
 The objective of this study is to identify whether there exist a
causal relationship between net investment made by FIIs and the
stock market indices in the Indian Stock Market.
 We analyze the relationship between foreign institutional investment
and stock indices in India (CNX NIFTY ,CNX 500 AND S&P BSE
SENSEX)
 The aid of yearly data from April 2006 to December 2015 through
correlation coefficient, Regression.
Null Hypotheses
H01:- there is no significant impact of FII on CNX NIFTY.
H02:- there is no significant impact of FII on CNX 500.
H03:- there is no significant impact of FII on BSE SENSEX.
The CNX Nifty is a well diversified 50 stock index accounting for 13
sectors of the economy. It is used for a variety of purposes such as
benchmarking fund portfolios, index based derivatives and index
funds.CNX Nifty is owned and managed by India Index Services and
Products Ltd. (IISL).
The CNX 500 is India’s first broad-based stock market index of the Indian
stock market. The CNX 500 represents about 96% of total market
capitalization and about 93% of the total turnover on the National Stock
Exchange of India (NSE).

55
The S&P CNX 500 companies are disaggregated into 72 industry indices,
the S&P CNX Industry Indices. Industry weights in the index reflect the
industry weights in the market. The CNX 500 Index represents about
95.77% of the free float market capitalization of the stocks listed on NSE
as on March 31, 2015.
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.

56
Chapter-5 RESEARCH METHODOLOGY
5.1 Research Design
It is a descriptive research between FII and Indian stock market.
5.2 Sources of Data
NSE, SEBI, MONEY CONTROL
5.3 Data Collection Method
Secondary
5.4 Population
NSE, BSE (April 2006 to December 2015)
5.5 Sampling size
CNX NIFTY, CNX 500, S&P BSE SENSEX

57
Chapter-6 DATA ANALYSIS AND INTERPRETATION
Null Hypotheses
H01:- there is no significant impact of FII on CNX NIFTY.
H02:- there is no significant impact of FII on CNX 500.
H03:- there is no significant impact of FII on BSE SENSEX.
FII AND CNX 500
Table no. 6.1
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.16618754
R Square 0.027618298
Adjusted R Square 0.019162805
Standard Error 1244.098578
Observations 117
ANOVA
Df SS MS F Significance F
Regression 1 5055540.206 5055540.206 3.266314367 0.073330613
Residual 115 177994846.3 1547781.272
Total 116 183050386.5
REGRESSION RESULT
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 4330.043378 130.8152107 33.10045793 1.28436E-60 4070.923631 4589.163125 4070.923631 4589.163125
NET EQUITY FII
X 0.021679912 0.011995781 1.807294765 0.073330613 -0.00208142 0.045441244 -0.00208142 0.045441244
From the above table 6.1of Regression analysis of FII and CNX 500 ratio
shows that multiple correlation coefficient are 0.16618754. This
indicates that the correlation among independent and depended variable is

58
positive. The coefficient of destermination is 2.76%.This means that
close to 3% of the variation in the dependent variable is explained by the
independent variable. Since p-value of F-static is 0.073330613 which is
greater than 0.05 at 5% level of significance, so we accept the null
hypotheses and conclude that there is no significant relationship between
FII and CNX 500.

59
FII AND CNX NIFTY
Table no.6.2.
SUMMARY OUTPUT
R Square 0.033382739
Observations 117
ANOVA
df SS MS F Significance F
Regression 1 8957484.142 8957484.142 3.971597789 0.048642002
Residual 115 259369334.7 2255385.519
Total 116 268326818.9
REGRESSION RESULT
Coefficients
Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 5342.030388 157.9115314 33.82926086 1.32253E-61 5029.238046 5654.82273 5029.238046 5654.82273
NET FII X 0.028858035 0.014480519 1.992886798 0.048642002 0.000174915 0.057541155 0.000174915 0.057541155
From the above table 6.2of Regression analysis of FII and CNX NIFTY
ratio shows that multiple correlation coefficient are0.182709439. This
positive. The coefficient of determination is 3.338%.This means that
close to 3% of the variation in the dependent variable is explained by the
less than 0.05 at 5% level of significance, so we reject the null

60
hypotheses and conclude that there is significant relationship between FII
and CNX NIFTY.

61
FII AND BSE SENSEX
Table no. 6.3
SUMMARY OUTPUT
R Square 0.033302311
Observations 117
ANOVA
Df SS MS F Significance F
Regression 1 96161274.66 96161274.66 3.961699477 0.048918778
Residual 115 2791364325 24272733.26
Total 116 2887525599
REGRESSION RESULT
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 17839.27153 518.0394015 34.43612876 2.05355E-62 16813.13521 18865.40785 16813.13521 18865.40785
FII X 0.094552678 0.047504316 1.990401838 0.048918778 0.000455774 0.188649582 0.000455774 0.188649582
From the above table 6.3of Regression analysis of FII and SENSEX ratio
shows that multiple correlation coefficient are0.182489207. This
positive. The coefficient of determination is 3.33%.This means that close
to 3% of the variation in the dependent variable is explained by the
less than 0.05 at 5% level of significance, so we reject the null

62
hypotheses and conclude that there is significant relationship between FII
and SENSEX.

63
Chapter-7 RESULTS AND FINDING
 Correlation of coefficient is0.182709439 that indicate positive
correlation of FII and CNX NIFTY.
 P-value of F-static 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.
 Correlation of coefficient is 0.16618754 so that indicate positive
correlation of FII and CNX 500.
 P-value of F-static is 0.073330613 which is greater than 0.05 at 5%
level of significance, so we accept the null hypotheses and
conclude that there is no significant relationship between FII and
CNX 500.
 Coefficient of correlation is 0.182489207 so that indicate positive
correlation of FII and SENSEX.
 P-value of F-static is 0.048918778 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 SENSEX.

64
FINDINGS
 Financial Year 2000-01 to 2007-08 FII increase their investment
 Financial year 2008-09 FII is withdraw their investment because of
world market recession.
 Financial Year 2008-09 to 2012-13 FII increase their investment in
debt market.

65
Chapter-8 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.

66
Chapter-9 CONCLUSION AND SUGESSION
 There is a positive impact of FII and Indian stock market
 Its Positive impact of FII on CNX NIFTY AND SENSEX
 There is no impact on FII and CNX 500.

67
BIMLIOGRAPHY
 http://www.craytheon.com/charts/fii_dii_nse_bse_trading_chart
_graph.php
 http://www.moneycontrol.com/stocks/hist_index_result.php?ind
ian_indices=7
 http://www.moneycontrol.com/india/stockmarket/foreigninstituti
onalinvestors/15/42/activity/FII/200604201512
Works Cited
Bansal, K. P. (2014). Foreign Institutional Investments and Liquidity of Stock Markets:. 16.
Bikramaditya Ghosh, D. P. (2014). An Analytical Study to Identify the Dependence of BSE 100 on FII & DII
Activity. 5.
Dr. Rakesh Kumar, M. S. (2015). AN EMPIRICAL STUDY ON IMPACT OF FII AND OTHER STOCK
EXCHANGES VOLATILITY ON BSE STOCK. 10.
Gandhi, D. K. (2015). A Study of Foreign Institutional Inflows andndian Stock Market Volatility. 4.
Juneja, S. (2013). Understanding The Relation Between FII and Stock Market. 7.
Shrivastav, A. (2013). Influence of FII Flows on Indian Stock Market. 31.

68
ANEXTURE
Months FII EQUITY
CNX500 CNXNIFTY BSE SENSEX
Apr-06 589.2 3064.7 3557.6 12042.56
May-06 -8,247.20 2635.25 3071.05 10398.61
Jun-06 1,418.20 2562.5 3128.2 10609.25
Jul-06 1,447.90 2562.55 3143.2 10743.88
Aug-06 4,774.00 2807.95 3413.9 11699.05
Sep-06 6,231.70 2988.25 3588.4 12454.42
Oct-06 4,578.54 3114.55 3744.1 12961.9
Nov-06 6,574.74 3280.45 3954.5 13696.31
Dec-06 -3,410.90 3295.05 3966.4 13786.91
Jan-07 94.45 3393.1 4082.7 14090.92
Feb-07 6,065.00 3107.75 3745.3 12938.09
Mar-07 1,403.30 3145.35 3821.55 13072.1
Apr-07 5,431.80 3379.1 4087.9 13872.37
May-07 4,574.50 3563.65 4295.8 14544.46
Jun-07 7,939.60 3625.75 4318.3 14650.51
Jul-07 18,132.80 3783.85 4528.85 15550.99
Aug-07 -7,526.80 3711.55 4464 15318.6
Sep-07 18,948.50 4188.55 5021.35 17291.1
Oct-07 15,577.60 4806.85 5900.65 19837.99
Nov-07 -4,597.40 4869.55 5762.75 19363.19
Dec-07 4,896.70 5354.7 6138.6 20286.99
Jan-08 -17,326.30 4349 5137.45 17648.71
Feb-08 5,419.90 4360.7 5223.5 17578.72
Mar-08 124.4 3825.85 4734.5 15644.44
Apr-08 979 4222.1 5165.9 17287.31
May-08 -4,917.30 3959.65 4870.1 16415.57
Jun-08 -10,577.70 3203.35 4040.55 13461.6
Jul-08 -1,012.90 3456.7 4332.95 14355.75
Aug-08 -2,065.80 3489.05 4360 14564.53
Sep-08 -7,937.00 3058.6 3921.2 12860.43
Oct-08 -14,248.60 2225.7 2885.6 9788.06
Nov-08 -2,820.30 2093.1 2755.1 9092.72
Dec-08 1,330.90 2295.75 2959.15 9647.31

69
Jan-09 -3,009.50 2209.05 2874.8 9424.24
Feb-09 -2,690.50 2112.85 2763.65 8891.61
Mar-09 269 2294.85 3020.95 9708.5
Apr-09 7,384.20 2662.95 3473.95 11403.25
May-09 20,606.90 3579.9 4448.95 14625.25
Jun-09 3,224.90 3469.7 4291.1 14493.84
Jul-09 11,625.30 3764.1 4636.45 15670.31
Aug-09 4,028.70 3840.25 4662.1 15666.64
Sep-09 19,939.50 4118.65 5083.95 17126.84
Oct-09 8,304.10 3853.15 4711.7 15896.28
Nov-09 5,317.80 4145.45 5032.7 16926.22
Dec-09 10,367.20 4329.1 5201.05 17464.81
Jan-10 5,902.40 4156.05 4882.05 16357.96
Feb-10 2,113.50 4127.55 4922.3 16429.55
Mar-10 18,833.60 4313.25 5249.1 17527.77
Apr-10 9,764.50 4368.1 5278 17558.71
May-10 -8,629.90 4226.6 5086.3 16944.63
Jun-10 10,244.60 4420.7 5312.5 17700.9
Jul-10 17,120.60 4475.15 5367.6 17868.29
Aug-10 11,185.30 4537.25 5402.4 17971.12
Sep-10 29,195.80 4925.15 6029.95 20069.12
Oct-10 24,770.80 4972.95 6017.7 20032.34
Nov-10 18,519.90 4781.4 5862.7 19521.25
Dec-10 1,476.10 4940.95 6134.5 20509.09
Jan-11 -6,330.20 4424.6 5505.9 18327.76
Feb-11 -3,754.50 4247.15 5333.25 17823.4
Mar-11 6,966.70 4626.45 5833.75 19445.22
Apr-11 7,018.50 4615.3 5749.5 19135.96
May-11 -5,158.20 4492.9 5560.15 18503.28
Jun-11 3,172.10 4522.95 5647.4 18845.87
Jul-11 7,411.10 4424.05 5482 18197.2
Aug-11 -10,214.60 4038.35 5001 16676.75
Sep-11 -1,147.00 3978.35 4943.25 16453.76
Oct-11 2,468.80 4215.9 5326.6 17705.01
Nov-11 -3,946.60 3811.25 4832.05 16123.46
Dec-11 -128.5 3597.75 4624.3 15454.92
Jan-12 12,967.20 4082.85 5199.25 17193.55
Feb-12 25,217.40 4275.55 5385.2 17752.68
Mar-12 8,832.90 4221.8 5295.55 17404.2
Apr-12 -1,865.60 4178.35 5248.15 17318.81

70
May-12 -1,522.80 3913.05 4924.25 16218.53
Jun-12 133.5 4170.65 5278.9 17429.98
Jul-12 10,346.40 4126.45 5229 17236.18
Aug-12 9,729.60 4129.9 5258.5 17429.56
Sep-12 20,769.00 4504.35 5703.3 18762.74
Oct-12 10,272.90 4448.85 5619.7 18505.38
Nov-12 10,967.10 4675.25 5879.85 19339.9
Dec-12 24,299.20 4743.45 5905.1 19426.71
Jan-13 22,673.90 4795.3 6034.75 19894.98
Feb-13 21,122.40 4477.5 5693.05 18861.54
Mar-13 11,660.50 4438.35 5682.55 18835.77
Apr-13 5,145.30 4641.75 5930.2 19504.18
May-13 21,267.70 4681.45 5985.95 19760.3
Jun-13 -9,318.70 4510.9 5842.2 19395.81
Jul-13 -7,120.20 4379.65 5742 19345.7
Aug-13 -6,200.00 4175.85 5471.8 18619.72
Sep-13 12,632.90 4392.05 5735.3 19379.77
Oct-13 18,012.80 4804.85 6299.15 21164.52
Nov-13 7,079.40 4770.1 6176.1 20791.93
Dec-13 15,425.60 4914.85 6304 21170.68
Jan-14 -141.3 4709.15 6089.5 20513.85
Feb-14 2,593.70 4849.5 6276.95 21120.12
Mar-14 22,351.70 5224.85 6704.2 22386.27
Apr-14 7,299.50 5255.65 6696.4 22417.8
May-14 16,512.00 5802.85 7229.95 24217.34
Jun-14 13,990.85 6174.2 7611.35 25413.78
Jul-14 9,355.77 6194.45 7721.3 25894.97
Aug-14 6,436.65 6360.75 7954.35 26638.11
Sep-14 5,448.79 6415.7 7964.8 26630.51
Oct-14 892.35 6685.75 8322.2 27865.83
Nov-14 14,302.23 6918.05 8588.25 28693.99
Dec-14 -864.34 6773.65 8282.7 27499.42
Jan-15 17,689.09 7166.7 8808.9 29182.95
Feb-15 8,892.86 7239.45 8901.85 29361.5
Mar-15 8,717.04 6978.15 8491 27957.49
Apr-15 8,702.56 6749.65 8181.5 27011.31
May-15 -1,895.03 6959.85 8433.65 27828.44
Jun-15 -5,480.24 6897.2 8368.5 27780.83
Jul-15 2,592.68 7106.2 8532.85 28114.56
Aug-15 -17,248.65 6669.35 7971.3 26283.09

71
Sep-15 -5,695.70 6646.1 7948.9 26154.83
Oct-15 4,204.28 6750.95 8065.8 26656.83
Nov-15 -7,628.81 6686.1 7935.25 26145.67
Dec-15 205.49 6724.75 7946.35 26117.54

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