A STUDY ON FDI ON BSE STOCK MARKET

A COMPREHENSIVE PROJECT REPORT

ON

A STUDY OF FII INFLUENCE ON BSE STOCK MARKET.

BY

MR. VINEETH V. POLIYATH

ENROLLMENT NO: 107310592005

BATCH: 2010-13

UNDER THE GUIDANCE OF

PROF. PRANAV RAYTHATHA (Internal)

Assistant Professor, Laxmi Institute of Management, Sarigam

SUBMITTED TO

GUJARAT TECHNOLOGICAL UNIVESITY, AHMEDABAD

FOR THE AWARD OF THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

THROUGH

LAXMI VIDYAPEETH`S

LAXMI INSTITUTE OF MANAGEMENT, SARIGAM

College Code: 731 Branch Code: 92

Subject code: 84001 – Comprehensive Project

Laxmi Institute of Management,

DECLARATION

We hereby declare that the work incorporated in this grand project

report entitled “ “FII’s INFLUENCE ON BSE STOCK MARKET

OVER THE PERIOD 2002-2012” is the outcome of original study

undertaken by me under the guidance of Prof. Pranav Raythatha

(Internal) Assistant Professor, Laxmi Institute of Management, Sarigam

during 14th January 2013 to 30th May 2013. This project report has not

been submitted earlier to any other University or Institution for the

award of any Degree or Diploma.

Mr. VINEETH V. POLIYATH

107310592005

BATCH: 2010-12


CERTIFICATE

This is to certify that the content of this grand project report entitled “FII’s

INFLUENCE ON BSE STOCK MARKET OVER THE PERIOD 2002-

2012”by Mr. Vineeth V .Poliyath, Enrollment No. 107310592005 submitted to

Gujarat Technological University, Ahmadabad for the Award of Master of

Business Administration is original research work carried out by him under my

supervision during 14th January 2013 to 30th May 2013. On the basis of the

declaration made by him I recommend this project report for the evaluation.

This report has not been submitted either partly or fully to any other University

or Institute for award of any degree or diploma.

PROF. PRANAV RAYTHATHA DR. KEYUR M. NAIK

Project Guide Director

Asst. Professor Laxmi Institute of

Laxmi Institute of Management, Management,

Sarigam Sarigam


INDEX

SR. NO. PARTICULAR PAGE NO.

1 GENERAL INFORMATION 9-17

OVERVIEW OF INDIAN ECONOMY 10

2 THEORITICAL FRAMEWORK 18-33

STOCK EXCHANGE - BSE & NSE 19

FOREIGN INSTITUTIONAL INVESTORS 28

3 PRIMARY DATA 34-39

INTRODUCTION OF THE STUDY 35

LITERATURE REVIEW 37

BACKGROUND OF THE STUDY 40

4 RESEARCH METHODOLOGY 47-49

OBJECTIVE OF THE STUDY 48

SCOPE OF THE STUDY 48

METHODOLOGY OF THE STUDY 48

LIMITATION 49

5 DATA ANALYSIS & INTERPRETATION 50-72

PERFORMANCE OF Sensex 52

FII'S NET INVESTMENT V/S Sensex RETURN 55

COEFFICIENT OF CORELATION & 66

TREND ANALYSIS OF FII'S INVESTMENT 71

6 FINDING, CONCLUSION & SUGGESTION 73-80

BIBLIOGRAPHY 80


LIST OF TABLES

TABLE NO

TABLE

PAGE NO

4.1

LIST OF BSE SENSEX COMPANIES

22

4.2

INTERNATIONAL STOCK EXCHANGES

27

5.1

PERFORMANCE OF SENSEX 1991-201

52

5.2

FII’s NET INFLOW FROM 2002-2012

55

5.3

FII’s NET INFLOW V/S SENSEX RETURN

57

5.4

SENSEX RETURN 2010

60

5.5

FII NET INFLOW

62

5.6

FII INFLOW V/S SENSEX RETURN

64

5.7

SENSEX FLUCTUATION

66

5.8

CORRELATION 67

5.9

CORRELATION 2012 69

5.10

CURRENT TREND OF FII’s INVESTMENT 71

5.11

TREND ANALYSIS-FUTURE 73


LIST OF CHARTS

CHART NO

CHART NAME PAGE NO

5.1

SENSEX 1991-2010

53

5.2

FII NET INFLOW 2002-12

56

5.3

FII INFLOW 2000-2010 V/S SENSEX RETURN

58

5.4

SENSEX RETURN 2012

61

5.5

FII NET INFLOW 2012

63

5.6

SENSEX RFTURN V/S NET INFLOW 2012

65

5.7

TREND ANALYSIS

74


ACKNOWLEDGEMENT

The satiation and euphonies that accompany the success completion of a task would

be incomplete without a mention of people who made it possible. So, with immense

gratitude, I acknowledge all those, whose guidance and encouragement served as a

beacon light and crowned my effort with success.

I have taken efforts in this grand project. However, it would not have been possible

without the kind support and help of many individuals and organizations. I would like

to extend my sincere thanks to all of them.

We are highly indebted to Mr. Pranav Raythatha, Assistant Professer of Laxmi

Institute of Management, Sarigam for his guidance, constant help and for providing

necessary information regarding the stock market operation and various industry

sectors.

I express my thanks for his encouragement which help me in completion of this

project.

I would like to express my special gratitude to my parents who gave us continuous

support during the grand project work.

Mr. Vineeth Poliyath

107310592005

BATCH: 2010-12


EXECUTIVE SUMMARY

The project deals with the “Impact of Foreign Institutional Investors on Indian Stock

Market”. This research project studies the relationship between FIIs investment and

stock indices. For this purpose India’s major index i.e. BSE Sensex is selected. This

index would be used for to represent the picture of India’s stock markets. So this

project reveals the impact of FII on the Indian capital market.

There may be many other factors on which a stock index may depend i.e. Government

policies, budgets, bullion market, inflation, economic and political condition of the

country, FDI, Re./Dollar exchange rate etc. But for this study I have selected only one

independent variable i.e. FII. This study uses the concept of correlation, regression

and hypothesis to study the relationship between FII and stock index. The FII started

investing in Indian capital market from year 1991 when the Indian economy was

opened up in the same year. Their investments include equity only.


CHAPTER-I

GENERNAL INFORMATION


OVERVIEW OF INDIAN ECONOMY

The Indian economy has continuously recorded high growth rates and has become an

attractive destination for investments, according to Ms Pratibha Patil, the Indian

President. "India's growth offers many opportunities for mutually beneficial

cooperation," added Ms Patil. "Today India is among the most attractive destinations

globally, for investments and business and FDI had increased over the last few years,"

said Ms Patil.

The Indian economy is expected to grow at around 7.5 per cent, according to Dr

Manmohan Singh, the Indian Prime Minister. The PM acknowledged Asia's emerging

economies were "growing well" and were, "in fact, contributing to the recovery of the

world economy".

The overall growth of gross domestic product (GDP) at factor cost at constant prices,

as per Revised Estimates, was 8.5 per cent in 2010-11 representing an increase from

the revised growth of 8 per cent during 2009-10, according to the monthly economic

report released for the month of September 2011 by the Ministry of Finance. Overall

growth in the Index of Industrial Production (IIP) was 4.1 per cent during August

2011.

The eight core Infrastructure industries grew by 3.5 per cent in August 2011 and

during April-August 2011-12, these sectors increased by 5.3 per cent. In addition,

exports and imports in terms of US dollar increased by 44.3 per cent 41.8 per cent

respectively, during August 2011.

Over the next two years India could attract foreign direct investment (FDI) worth US$

80 billion, according to a research report by Morgan Stanley. India has received US$

48 billion FDI in the last two years. Considering the pace of FDI growth in India,

KPMG officials believe that FDI in 2011-12 might cross US$ 35 billion mark.


In addition, India has entered the club of top 20 exporters of goods and reclaimed its

position among top 10 services exporters in 2010. India's goods exports rose by 31 per

cent in 2010, helping it to improve its world ranking moving up two places to 20 from

22 in 2009.


The Economic Scenario:

• A report titled, 'World Investment Prospects Survey 2009-2012' by the United

Nations Conference on Trade and Development (UNCTAD) has ranked India

at the second place in global foreign direct investments (FDI) in 2010 and

expects India to remain among the top five attractive destinations for

international investors during 2010-12.

• India Inc announced 177 mergers and acquisitions (M&A) deals worth US$

26.8 billion in the first nine months of 2011. For the quarter July-September

2011, inbound deals worth US$ 7.32 billion were registered as against the deals

worth US$ 2.65 billion in the previous quarter. Foreign institutional investors

(FIIs) have invested more than Rs 41,000 crore (US$ 7.81 billion) in

government papers and Rs 68,000 crore (US$ 12.95 billion) in corporate bonds

as on October 31, 2011

• The latest available data from the Reserve Bank of India show a 77 per cent

jump in the FDI in the first half of the current financial year (April-September),

compared to what was US$ 19.5 billion during the same period a year ago

• The total amount of FDI equity inflows during financial year 2011-12 from

April 2011 to September 2011 stood at US$ 19.14 billion aggregating to 74 per

cent growth over last year

• India's foreign exchange (Forex) reserves have increased by US$ 2 billion to

US$ 320 billion for the week ended October 28, 2011, on account of

revaluation of foreign currency assets, according to the weekly statistical

bulletin released by the Reserve Bank of India (RBI)


• The Government has approved fund raising worth Rs 60,950 crore (US$

11.61billion) by companies through external commercial borrowings (ECB) or

foreign currency convertible bonds (FCCB) for infrastructure projects in the

financial years 2009-2011

• India's merchandise exports have registered an increase of nearly 82 per cent

during July 2011 from a year ago to touch US$ 29.3 billion, according to a

release by the Ministry of Commerce and Industry. Exports during April-July

2011 reached US$ 108.3 billion, up 54 per cent over the same period a year

ago, according to Mr. Rahul Khullar, Commerce Secretary. Exports in the

referred period increased on back of demand for engineering and petroleum

products, gems and jewellery and readymade garments

• Private equity (PE) investments in India stood at US$ 6.14 billion in value

terms, while the number of deals increased by 33 per cent to 195, during

January-June 2011, according to data compiled by Chennai-based Venture

Intelligence. The rise in the value of the deals so far (June 2011) recorded a

growth of 52 per cent, as compared to US$ 4.04 billion raised last year

• The Indian metals and minerals sector has received PE investments worth US$

650 million in the first half of 2011, according to estimates by VC Edge. The

metal making industry has attracted PE players; in addition the mining assets

are also a major draw due to the sharp demand for ownership of raw materials

• India currently holds the 12th position in Asia and 68th position in the overall

list world's most attractive tourist destinations, as per the Travel and Tourism

Competitiveness Report 2011 by the World Economic Forum (WEF). A study

conducted by global hospitality services firm, HVS, to measure marketing


effectiveness on Internet puts Karnataka Tourism's Web site in the sixth

position in India

• The wind energy sector has attracted foreign direct investment (FDI) worth Rs

1,510 crore (US$ 287.62 million) over the past three years. In the renewable

energy sector, wind energy has emerged as the fastest growing category,

according to Dr Farooq Abdullah, Union Minister for New and Renewable

Energy

Furthermore, the Indian Railways has generated Rs 37,392.88 crore (US$ 7.12 billion)

of revenue earnings from commodity-wise freight traffic during April-October 2011

as compared to Rs 34,337.11 crore (US$ 6.54 billion) during the corresponding period

last year, registering an increase of 8.90 per cent. Railways carried 536.92 million tons

(MT) of commodity-wise freight traffic during April-October 2011 as compared to

516.89 MT carried during the corresponding period last year, registering an increase

of 3.88 per cent.


Growth Potential Story:

• India's exports grew by 36.3 per cent in September 2011, demonstrating impressive growth. Exports stood at US$ 24.8 billion compared to US$ 18.2 billion in the same period last year, while imports grew by 17.2 per cent to record US$ 34.5 billion.

• Exports from special economic zones (SEZs) during April-September 2011 increased by 26.2 per cent to Rs 176,479.69 crore (US$ 33.62 billion), as per a statement by the Export Promotion Council for EOUs and SEZs (EPCES).

• Andhra Pradesh (AP) with 75 notified special economic zones (SEZs), which is the highest number of SEZs in any State in India, has attracted investment of approximately Rs 15,000 crore (US$ 2.86 billion)

• The July-September 2011 quarter observed an increase in foreign institutional investor (FII) stakes in major automakers as compared to the previous quarter of 2011

• Information technology (IT) spending in India by enterprises will rise by 9.1 per cent in 2012, according to a report by research firm Gartner. IT spending in India is projected to touch US$ 79.8 billion in 2012 as compared to US$ 73.1 billion in 2011. The telecommunications market is the largest IT segment in India with IT spending forecast to reach US$ 54.7 billion in 2012, followed by the IT services market with spending of US$ 11.1 billion. The computing hardware market in India is projected to reach US$ 10.7 billion in 2012, while software spending will total to US$ 3.2 billion, reported Gartner

• The Government plans to set up an Rs 2,500 crore (US$ 476.19 million) development fund for the auto component sector. The industry, which aims to almost triple its size to US$ 115 billion by 2020, envisages annual capital investment of up to US$ 3 billion

• India is the 9th or 10th largest car maker in the world, but given its very ambitious production plans, in the next five to ten years it will jump to the third or fourth spot, according to Diane H Gulyas, President, DuPont Performance


Polymers. The firm's Innovation Centre will focus on automobile trends working towards making vehicles faster, lighter, safer and fuel efficient

• The Rs 15,000 crore (US$ 2.86 billion) Indian forging industry is poised to grow over 20 per cent per year and see investments of about US$ 3 billion by 2015 for capacity expansion, according to the Association of Indian Forging Industry.

• A public-private partnership (PPP) fund worth Rs 5,000 crore (US$ 952.38 million) is being set up to support research and development efforts-especially in the field of vaccines, drugs and pharmaceuticals, supercomputing, solar energy and electronic hardware-as well as commercialization of products and services, according to Mr. Ashwani Kumar, Minister of State for Science & Technology.

• In addition, the Indian banking sector is poised to become the world's third-largest in terms of assets over the next 14 years—with its assets poised to touch US$ 28,500 billion by 2025—according to a report titled ‘Being five-star in productivity — Roadmap for excellence in Indian banking', prepared for the Indian Banks' Association (IBA) by The Boston Consultancy Group (BCG), IBA and an industry body.

• Investment in logistics sector in India is projected to grow annually at 10 per cent. India's logistics market achieved revenues of US$ 82.1 billion in 2010 and is expected to reach revenue worth US$ 90 billion in 2011. The logistics industry forecasts to generate revenues worth US$ 200 billion by 2020, as per Eredene Capital PLC's 2010-11 annual report.

• India's engineering research and development (ER&D) providers is estimated to capture about 40 per cent share of global offshore revenues in 11 key verticals by 2020, according to a new report titled 'The Futures Report 2011', by Global Futures and Foresight (GFF).


• India's power sector will generate revenue of Rs 1,300,000 crore (US$ 247.62 billion) during the Twelfth Five Year Plan (2012-17), as per Mr. P Uma Shankar, Secretary, Ministry of Power. The plan is to generate 17,000 MW power during the referred period

• The food processing industry is set to triple to reach US$ 900 billion by 2020, provided the key issues are addressed, as per a study by Boston Consulting Group (BCG) and an industry body.

• The National Agricultural Innovation Programme (NAIP) will spend Rs 500 crore (US$ 95.24 million) more in the next two years on different projects to add value to agriculture and allied sectors. This programme aims at developing technology-based innovations to improve the income of farmers and those living on allied sectors.

• Gaining momentum from fashion trends, many Indian consumers now spend an equivalent amount on footwear as on their apparels, as they associate variety of shoes to different occasions. The footwear industry in India has almost doubled in the past five years to an estimated Rs 20,000 crore (US$ 3.81 billion).


CHAPTER- II

THEORETICAL FRAMEWORK


2.1 STOCK EXCHANGE:

Stock Exchange is an organized marketplace where securities are traded. These

securities are by the government, semi-government Bodies, Public sector undertakings

and companies for borrowing funds and raising resources. Securities are defined as

monetary claims and include stock, shares, debentures, bonds etc. If these securities

are marketable as in the case of Government stock, they are transferable by

endorsement and are like movable property. Under the securities Contract Regulation

Act of 1956, securities trading are regulated by the Central Government and such

trading can take place only in Stock Exchange recognized by the Government under

this Act. At present there are 23 recognized stock Exchanges in India.

Indian Stock Markets are one of the oldest in Asia. Its history dates back to

nearly 200 years ago.

BOMBAY STOCK EXCHANGE :

Bombay Stock Exchange is the oldest stock exchange in Asian with a rich

heritage, now spanning three centuries in its 133 years of existence. What is now

popularly known as BSE was established as “The Native Share & Stock Brokers’

Association” in 1875. BSE is the first stock exchange in the country which obtained

permanent recognition (in 1956) from the government of India under the Securities

Countracts (Regulation) Act 1956. BSE’s pivotal and pre-eminent role in the

development of the Indian capital market is widely recognized. It migrated from the

open outcry system to an online screen- based order driven trading system in 1955.

Earlier an Association Of Persons (AOP), BSE is now a corporatized and

demutualised entity incorporated under the provisions of the companies Act, 1956,

pursuant to the BSE (Corporatization and Demutualization) Scheme, 2005 notified by

the Securities and Exchange Board of India (SEBI). With demutualization, BSE has

two of world’s best exchanges, Deutsche Borse and Singapore Exchange, as its

strategic partners. Over the past 133 years, BSE has facilitated the growth of the


Indian corporate sector by providing it with an efficient access to resources. There is

perhaps no major corporate in India which has not sourced BSE’s services in raising

resources from the capital market.

Today, BSE is the world’s number 1 exchange in terms of the number of listed

companies and the world’s 5th in transaction numbers. The market capitalization as on

December 31, 2007 stood at USD 1.79 trillion. An inventor can choose from more

than 4700 listed companies, which for easy reference, are classified into A, B, S, T

and Z groups.The BSE Index, SENSEX, is Indian’s first stock market index that

enjoys an iconic stature, and is tracked worldwide. It is an index of 30 stocks

representing 12 malor sectors. The SENSEX is constructed on a ‘free-float’

methodology, and is sensitive to market sentiments and market realities. Apart from

the SENSEX, BSE offers 21 indices, including 12 sectoral indicates. BSE has entered

into an index cooperation agreement with Deutsche Borse. This agreement has made

SENSEEX and other BSE indices available to investors in Europe and America.

Moreover, Barclays Global Investors (BGI), the global leader in ETF’S through its

Trader which tracks the SENSEX. The ETF enables investors in Hong Kong to take

an exposure to the Indian equity market. BSE provides an efficient and transparent

market for trading in equity, debt instruments and derivatives. It has a nationwide

reach with a pressure in more than 450 cities and towns of India. BSE has always been

at par with the international standards. The systems and processes are designed to

safeguard market integrity and enhance transparency in operations.BSE is the first

exchange in India and the second is the world to obtain an ISO 9001:2000

certification. It is also the first exchange in India and the second in the world to

receive Information Security Management System Standard BS 7799-2-2002

certification for its BSE On-line Trading System (BOLT).BSE continues to innovate.

In recent times, it has become the first national level stock exchange to launch its

website in Gujarati and Hindi to reach out to a large number of investors. It has

successfully launched a reporting platform for corporate bonds in India christened the

ICDM or Indian Corporate Dept Market and a unique ticker screen aptly named ‘BSE

Broadcast’ which enables information dissemination to the common man on the street.

In 2006, BSE launched the Directors Database and ICERS (India Corporate Electronic


Reporting System) to facilitate information flow and increase transparency in Indian

capital market. While the Directors database provides a single-point access to

information in the boards of directors of listed companies, the ICERS facilities the

corporate in sharing with BSE their corporate announcements. BSE also has a wide

range of services to empower investors and facilitate smooth transactions:

Investors Services: The Department of Investor Services redresses grievances of

investors. BSE was the first exchange in the country to provide an amount of Rs.1

million towards the investor protection fund; it is an amount higher than that of any

exchange in the country. BSE launched a nationwide investor awareness programme-

‘safe investing in the Stock Market’ under which 264vprogrammes were held in more

than 200 cities. The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT)

facilitates on-line screen based trading in securities. BOLT is currently operating in

25,000 Trader Workstations located across over 450 cities in India.

BSEWEBX.com: In February 2001, BSE introduced the world’s first centralized

exchange-based Internet trading system, BSEWEBX.com. This initiative enables

investors anywhere in the world to trade on the BSE platform.

Surveillance: BSE’s On-line Surveillance System (BOSS) monitors on a real-time

basis the price movements, volume positions and members’ positions an real-time

measurement of default risk, market reconstruction and generation of cross market

alerts.

BSE Trading Institution: BTI imparts capital market trading and certification, in

collaboration with reputed management institutes and universities. It offers over 40

courses on various aspects of the capital market and financial sector. More than

20,000 people have attended the BTI programmes.


Companies in the Sensex

List of BSE Sensex companies provides the full list of companies that have been part

of the BSE Sensex since its inception in 1986 (base lined to 1979).

Code Name Sector Adj.

Factor

Weight in

Index(%)

500410 ACC Housing Related 0.55 0.77

500103 BHEL Capital Goods 0.35 3.26

532454 Bharti Airtel Telecom 0.35 3

532868 DLF Universal Limited Housing related 0.25 1.02

500300 Grasim Industries Diversified 0.75 1.5

500010 HDFC Finance 0.90 5.21

500180 HDFC Bank Finance 0.85 5.03

500182 Hero Honda Motors Ltd. Transport Equipments 0.50 1.43

500440 Hindalco Industries Ltd.

Metal,Metal Products &

Mining 0.7 1.75

500696 Hindustan Lever

Limited

FMCG 0.50 2.08

532174 ICICI Bank Finance 1.00 7.86

500209 Infosys Information Technology 0.85 10.26

500875 ITC Limited FMCG 0.70 4.99

532532 Jaiprakash Associates Housing Related 0.55 1.25

500510 Larsen & Toubro Capital Goods 0.90 6.85

500520 Mahindra & Mahindra

Limited

Transport Equipments 0.75 1.71

532500 Maruti Suzuki Transport Equipments 0.50 1.71

532541 NIIT Technologies Information Technology 0.15 2.03

532555 NTPC Power 0.15 2.03

500304 NIIT Information Technology 0.15 2.03


500312 ONGC Oil & Gas 0.20 3.87

532712 Reliance

Communications

Telecom 0.35 0.92

500325 Reliance Industries Oil & Gas 0.50 12.94

500390 Reliance Infrastructure Power 0.65 1.19

500112 State Bank of India Finance 0.45 4.57

500900 Sterlite Industries

Metal, Metal Products,

and Mining 0.45 2.39

524715 Sun Pharmaceutical

Industries

Healthcare 0.40 1.03

532540 Tata Consultancy

Services Information Technology 0.25 3.61

500570 Tata Motors Transport Equipments 0.55 1.66

500400 Tata Power Power 0.70 1.63

500470 Tata Steel

Metal, Metal Products &

Mining 0.70 2.88

507685 Wipro Information Technology 0.20 1.61

TABLE NO 4.1

• DLF replaced Dr. Reddy's Lab on November 19, 2007.

• Jaiprakash Associates Ltd replaced Bajaj Auto Ltd on March 14, 2008.

• Sterlite Industries replaced Ambuja Cements on July 28, 2008.

• Tata Power Company replaced Cipla Ltd. on July 28, 2008.

• Sun Pharmaceutical Industries replaced Satyam Computer Services on January

8, 2009

• Hero Honda Motors Ltd. replaced Ranbaxy on June 29, 2009

• Cipla to replace Sun Pharma from May 3, 2010

• Grasim replaced JSPL in 2010


13. SECTORS OF BSE

• HC (health care)

• REALITY

• AUTO

• METAL

• IT

• CG (capital goods)

• ONG (oil and gas)

• POWER

• PSU

• CD (consumer durables)

• BANK

• TECH

• FMCG

NAME OF BSE 30 COMPANIES

ACC, BHARTI AIRTEL, BHEL, DLF, GRASIM, HDFC, HDFC BANK,

HINDALCO, HUL, ICICI BANK, INFOSYS, ITC, JAIPRAKASH

ASSOCIATES, L&T, MAHINDRA & MAHINDRA, MARUTI SUZUKI, ONGC,

NTPC, RANABAXY LAB, RELIENCE, RELIENCE COMM, RELIENCE

INFRASTRUCTURE, SATYAM, SBI, STERLITE INDUSTRY, TATA MOTORS,

TATA POWER, TATA STEEL. TCS, WIPRO.

(AS ON- FEB 15,2011)


NATIONAL STOCK EXCHANGE (NSE):

With the liberalization of the Indian economy, it was found inevitable to lift the

Indian stock market trading system on par with the international standards. On the

basis of the recommendations of high-powered Pherwani Committee, Industrial

Development Bank of India, Industrial Credit and Investment Corporation of India,

Industrial Finance Corporation of India, all Insurance Corporations, selected

commercial banks and others incorporated the National Stock Exchange in 1992.

Trading at NSE can be classified under two broad categories:

(a) Wholesale debt market and

(b) Capital market.

There are two kinds of players in NSE:

(a) Trading members and

(b) Participants.

Trading at NSE takes place through a fully automated screen-based trading

mechanism, which adopts the principle of an order-driven market. Trading members

can stay at their offices and execute the trading, since they are linked through a

communication network. The prices at which the buyer and seller are willing to

transact will appear on the screen. When the prices match the transaction will be

completed and a confirmation slip will be printed at the office of the trading member.

NSE has several advantages over the traditional trading exchanges. They are as

follows:

� NSE brings an integrated stock market trading network across the nation.

� Investors can trade at the same price from anywhere in the country since inter-

market operations are streamlined coupled with the countrywide access to the

securities.

� Delays in communication, late payments and the malpractice's prevailing in the

traditional trading mechanism can be done away with greater operational

efficiency and informational transparency in the stock market operations, with

the support of total computerized network.


List of Top 50 Companies of NSE

(National Stock Exchange)

• RELIANCE INDUSTRIES LTD, OIL AND NATURAL GAS

CORPORATION LTD, BHARTI AIRTEL LIMITED, NTPC LTD,

RELIANCE COMMUNICATIONS LTD., ICICI BANK LTD,

• INFOSYS TECHNOLOGIES LTD, TATA CONSULTANCY SERVICES

LTD, BHEL, STATE BANK OF INDIA,

• STEEL AUTHORITY OF INDIA, LARSEN & TOUBRO LTD., HERO

HONDA MOTORS LTD, ZEE ENTERTAINMENT LTD, INDIAN

PETROCHEMICALS CORPORATION LTD., CIPLA LTD, BHARAT

PETROLEUM CORPORATION LTD.,VIDESH SANCHAR NIGAM LTD,

DR. REDDY'S LABORATORIES,

• MAHANAGAR TELEPHONE NIGAM LTD, GLAXOSMITHKLINE

PHARMA LTD.,ABB LTD. POWER GRID CORPORATION OF INDIA,

RELIANCE ENERGY LTD, SIEMENS LTD, ACC LIMITED, AMBUJA

CEMENTS LTD,

• HCL TECHNOLOGIES LTD, HINDALCO INDUSTRIES LTD,

• NATIONAL ALUMINIUM CO LTD, SUN PHARMACEUTICALS IND.,

• MAHINDRA & MAHINDRA LTD, TATA POWER CO LTD, PUNJAB

NATIONAL BANK, RANBAXY LABS LTD, ITC LTD, RELIANCE

PETROLEUM LTD., HDFC LTD, WIPRO LTD, STERLITE INDUSTRIES

LTD.,

• HDFC BANK LTD, TATA STEEL LIMITED, HINDUSTAN UNILEVER

LTD., SUZLON ENERGY LIMITED, GAIL (INDIA) LTD, GRASIM

INDUSTRIES LTD, TATA MOTORS LIMITED, MARUTI UDYOG

LIMITED

(AS ON- FEB 15,2011)


INTERNATIONAL STOCK EXCHANGES ( TABLE NO 4.2)

Rank

Economy

Stock Exchange

Market Capitalization (USD Billions)

Trade Value (USD

Billions)

1 United States New York Stock Exchange

13041 1439

2 United States NASDAQ 3649 954

3 Japan Tokyo Stock Exchange

3542 311

4 United Kingdom

London Stock Exchange

3354 229

5 Hong Kong Hong Kong Stock Exchange

2696 179

6 Europe Euronext 2695 165 7 China Shanghai Stock

Exchange 2681 686

8 Canada Toronto Stock Exchange

2002 134

9 India Bombay Stock Exchange

1540 231

10 India National Stock Exchange of India

1503 791

11 Brazil BM&F Bovespa 1447 704 12 Germany Deutsche Börse 1320 123 13 Australia Australian

Securities Exchange

1309 101

14 China Shenzhen Stock Exchange

1284 548

15 Switzerland SIX Swiss Exchange

1122 674

16 Spain BME Spanish Exchanges

1077 149

Americas 21244 2617 Asia - Pacific 18287 2262 Europe - Africa - Middle East

13975 954

Total 51752 5833


2.2 INTRODUCTION TO FII

International portfolio flows, as are commonly known as Foreign Institutional

Investment (FII) flows, refer to capital flows made by individual and institutional

investors across national borders with a view to creating an internationally diversified

portfolio.

‘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.

Foreign institutional investor means an entity established or incorporated

outside India which proposes to make investment in India. Positive tidings about the

Indian economy combined with a fast-growing market have made India an attractive

destination for foreign institutional investors.

Unlike Foreign Direct Investment (FDI) flows which refer to that category of

international investment aimed at obtaining a lasting interest by a resident entity in

one economy in an enterprise resident in another economy by way of exercising

significant control over its management, FII flows are not directed at acquiring

management control over foreign companies. FII flows were almost non-existent until

1980s. Global capital flows were primarily characterized by syndicated bank loans in

1970s followed by FDI flows in 1980s.

But a strong trend towards globalization leading to widespread liberalization

and implementation of financial market reforms in many countries of the world had

actually set the pace for FII flows during 1990s.


According to Bekaert and Harvey (2000), FII investment as a proportion of a

developing country's GDP increases substantially with liberalization as such

integration of domestic financial markets with the global markets permits free flow of

capital from 'capital-rich' to 'capital-scarce' countries in pursuit of higher rate of return

and increased productivity and efficiency of capital at global level.

Diversifying internationally i.e., holding a well-diversified portfolio of

securities from around the world in proportion to market capitalizations, irrespective

of the investor's country of residence, has long been advocated as the means to reduce

overall portfolio risk and maximize risk-adjusted returns by the classical capital asset

pricing model (CAPM). But a persistent 'home bias' (i.e., the tendency to hold a

greater proportion of stocks from the home country vis-a-vis the foreign country) was

noticed in the portfolios of investors in capital-rich industrialized countries in early

1990s.

With more and more emerging market economies (EMEs) 1 deregulating their

financial markets by eliminating foreign exchange controls, reducing taxes imposed

on foreign investors, relaxing the restrictions on the purchase / sale of securities by

foreign investors in domestic markets etc., such 'home bias' has decreased over the

years. Today, EMEs, by virtue of their lower correlations in stock market returns with

the developed markets, offer greater scope to investors in developed countries to

reduce their overall portfolio risk and effectively enhance the portfolio performance

and hence have become the most preferred destinations for FII flows.

Several research studies on FII flows to EMEs over the world have highlighted

that financial market infrastructure such as the market size, market liquidity, trading

costs, extent of information dissemination etc., legal mechanisms relating to property

rights etc., harmonization of corporate governance, accounting, listing and other rules

with those followed in developed markets, and strengthening of securities markets'

enforcement are important determinants of foreign portfolio investments into

emerging markets. Of late, the Securities and Exchange Board of India (SEBI) and

Reserve Bank of India (RBI) have initiated a string of measures like allowing overseas


pension funds, mutual funds, investment trusts, asset management companies, banks,

institutional portfolio managers, university funds, endowments, foundations or

charitable trusts etc. but banning non-resident Indians (NRIs) and overseas corporate

bodies (OCBs) from trading as foreign portfolio investors, raising the caps for FII

from 24% to 49% of a non-bank company's issued capital subject to sectoral caps /

statutory ceiling as applicable, enhancing the individual investment limit from 5% to

10% of issued capital, permitting foreign investors to trade in Government securities

and derivatives, easing the norms for FII registration, reducing procedural delays,

lowering fees, mandating stricter disclosure norms, improved regulatory standards etc.

with a view to improving the scope, coverage and quality of FII flows into India. As a

result, India, also supported by her strong economic fundamentals, has become one of

the attractive destinations for FII flows in the emerging market space today. The

expansionary effect of various reform measures on FII flows over the years can be

gauged from the fact that net (i.e., gross purchases minus gross sales) FII flows into

India have risen sharply from Rs. 5126 crore in 1993-1994 2 to Rs. 46,215 crore in

2004-2005, with the number of foreign institutional investors being registered with

SEBI increasing from 3 in 1993-1994 to 685 in 2004-2005 (Source : SEBI website).

This increasing dominance of foreign investors in Indian market has necessitated

research on the implications of FII flows for the Indian stock market time and again.

Although FII flows help supplement the domestic savings and augment

domestic investments without increasing the foreign debt of the recipient countries,

correct current account deficits in the external balance of payments' position, reduce

the required rate of return for equity, and enhance stock prices of the host countries,

yet there are worries about the vulnerability of recipient countries' capital markets to

such flows. FII flows, often referred to as 'hot money' (i.e., short-term and overly

speculative), are extremely volatile in character compared to other forms of capital

flows.


Foreign portfolio investors are regarded as 'fairweather 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 (FitzGerald,1999).

TRENDS OF FOREIGN INSTITUTIONAL INVESTMENTS IN INDIA .

Portfolio investments in India include investments in American Depository Receipts

(ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and

investments in offshore funds. Before 1992, only Non-Resident Indians (NRIs) and

Overseas Corporate Bodies were allowed to undertake portfolio investments in India.

Thereafter, the Indian stock markets were opened up for direct participation by FIIs.

They were allowed to invest in all the securities traded on the primary and the

secondary market including the equity and other securities/instruments of companies

listed/to be listed on stock exchanges in India

• In 2004, FII investments crossed $9 billion, the highest in the history of Indian

capital markets.

• The total net investment for the year up to December 29 stood at US$9,072 million

while foreign investors pumped in about US$2,113 million in December.

• Korea and Taiwan have always been the biggest recipients of FII money. It was only

in 2004 that India managed to receive the second highest FII inflow at over $8.5bn.


• In 2005 FIIs invested more in Indian equities than in Korean or Taiwanese equities.

• On 9th March 2009, India's exceptional growth story and its booming economy have

made the country a favourite destination with foreign institutional investors (FIIs). It

has continued to attract investment despite the Satyam non-governance issue and the

global economic contagion impact on Indian markets.

• They are also the most successful portfolio investors in India with 102 per cent

Appreciation since September 30, 2003.

• As per SEBI, number of registered FIIs stood at 1626 and number of registered sub-

accounts stood at 4972 as on March 17, 2009

Prohibitions on Investments:

Foreign Institutional Investors are not permitted to invest in equity issued by an Asset

Reconstruction Company. They are also not allowed to invest in any company which

is engaged or proposes to engage in the following activities:

• Business of chit fund

• Nidhi Company

• Agricultural or plantation activities

• Real estate business or construction of farm houses (real estate business does

not include development of townships, construction of residential/commercial

premises, roads or bridges).

• Trading in Transferable Development Rights (TDRs).


FUTURE PROSPECTS OF FOREIGN INSTITUTIONAL INVESTMENTS :

• Sustaining the growth momentum and achieving an annual average growth of

9-10 % in the next five years.

• Simplifying procedures and relaxing entry barriers for business activities and

Providing investor friendly laws and tax system.

• Checking the growth of population; India is the second highest populated

country in the world after China. However in terms of density India exceeds

China, as India's land area is almost half of China's total land. Due to a high

population growth, GNI per capita remains very poor. It was only $ 2880 in

2003 (World Bank figures).

• Boosting agricultural growth through diversification and development of agro

processing.

• Expanding industry fast, by at least 10% per year to integrate not only the

surplus labour in agriculture but also the unprecedented number of women and

teenagers joining the labour force every year.

• Developing world-class infrastructure for sustaining growth in all the sectors

• Allowing foreign investment in more areas.

• Effecting fiscal consolidation and eliminating the revenue deficit through

revenue enhancement and expenditure management.

Market Outcome in the previous years

Foreign Portfolio investments in India come in the form of investments in American

Depository Receipts (ADRs)/ Global Depository Receipts (GDRs), Foreign

Institutional Investments and investments in Offshore funds.

However, FIIs constitute a major proportion of such portfolio. The share of FIIs in

total portfolio flows was as high as 95.97% in 2003-04 and 93.25% in 2004-05. It

declined to 46% in 2006-07. This decline in FII investment in 2006-07 can be


attributed to global developments like meltdown in global commodities markets and

equity market during the three month period between May 2006 to July 2006, fall in

Asian Equity markets, tightening of capital controls in Thailand and its spillover

effects.

The share of FII investment in total portfolio investment for 2007-08 is provisionally

estimated to be 69.15%. The large FII inflows (net) in 2007-08 at USD 16 billion as

against USD 6.7 billion in 2006-07 reflects increased participation of FIIs in the

primary market as corporates raised large resources through 85 initial public offerings

(IPOs) and 7 follow-on public offers (FPOs) aggregating to Rs 545,110 million. (US $

13,638 million).

Looking at monthly trend in FII investments during 2007-08 it can be seen that net

FII investment has been positive during most of the months. The months of August

2007, November 2007, January, 2008 and March, 2008 saw net outflows of FII

investment, with the largest pull out of US $ 2727 mn in January, 2008.

During 2008-09, till June 2008, FIIs have been net sellers to the tune of US $ 4,189

million. This can be attributed to the generally weak sentiments of investors following

the global credit crisis which has engulfed the developed countries and is seen to be

affecting the developing countries as well.


CHAPTER III

PRIMARY STUDY


INTRODUCTION OF THE STUDY

“ FII’s influence on the Sensex over the period 2000-2010 ”- is a study of the

influence of FOREIGN INSTITUTIONAL INVESTERS whose activities play a vital

role in the ups and downs of the share market. The study is conducted on the Indian

stock exchange market ( BSE SENSEX) .

There are conflicting theories on the issue of whether FII flows affect or are affected

by domestic stock market returns. So, the present empirical study has been undertaken

to throw some light on the direction of causality between FII flows and Indian stock

market returns using data on both the variables from over the period 2002-

2012.International portfolio flows, as are commonly known as Foreign Institutional



portfolio. Unlike Foreign Direct Investment (FDI) flows which refer to that category

of international investment aimed at obtaining a lasting interest by a resident entity in




1980s.

With more and more emerging market economies (EMEs), deregulating their



foreign investors in domestic markets etc. they are increasing in number. Foreign

Institutional Investment (FII) flows, i.e., capital flows across national borders, to

emerging market economies (EMEs) have risen sharply over the past one and half

decade due to globalization and India is no exception in this regard. However, there is

a lot of apprehension regarding the volatile nature of such flows thereby raising

questions about the need to encourage FII flows in a narrow and shallow stock market

like that of India.


LITERATURE REVIEW

Purendra Verma (2002) has investigated the impact of FII on Capital Market to

find the relation between FII and Stock indices. For this he has taken seven indices

into consideration, out of them five are Consumer Durables, Capital Goods, Fast

Moving Consumer Goods, Health Care, Information Technology and the other two are

Sensex and Nifty. He observed these indices during January 1993 to September 2001.

If BSE & Nifty increase with rise in FII investment, He has taken hypothesis for this

study. To find out the results he used least square method. Finally, after completing

his study he concluded that except IT sector on all other indices the impact is very low

during January 1993 to September 2001 as the correlation is negative in Consumer

Durables, Capital Goods, Fast Moving Consumer Goods, Health Care, Sensex and

Nifty. Paramita Mukherjee, Suchismita Bose and Dipankar Coondoo (2002) carried

out research on the topic Foreign Institutional Investment in The Indian Equity Market

an Analysis of daily flows during Jan 1999 - May 2002. The paper was conducted to

understand the relationship of foreign institutional investment (FII) flows to the

Indian equity market. FII flows to and from the Indian market tend to be caused by

return in the domestic equity market and not the other way round. Returns in the

equity market are very important to influence the flows of FIIs in the country. They

concluded that in India the prime focus should be on regaining investor’s confidence

in the equity market so as to strengthen the domestic investor’s base of the market.

S.S.S. Kumar (2005) of IIM-Kozhikode carried out research on the Role of

Institutional Investors in Indian Stock Market during 1992 - 2005. The paper was

conducted to examining whether the institutional investors, with their war chests of

money, set the direction to the market. He concluded with the use of Regression

analysis that the combined force of the FIIs and MF are a powerful force and in fact

their direction can forecast market direction. It gives it

constantly rise in Indian context since all their trades are delivery based and

Market become more efficient with the growing presence of institutional investors

who primarily go by fundamentals.


Anand Bansal and J.S. Pasricha (2009) in the paper titled Foreign Institutional

Investor’s Impact on Stock Prices in India for the purpose of analyzing Impact of FIIs

entry and the stock market behavior. Average return before and after the event day has

been calculated for different sub sample days, the change of volatility in the Indian

stock prices has been examined by comparing the variance of the returns of sub

sample days before and after the event day. They concluded that return declined

reasonably after the entry of FIIs, the correlation between FIIs investments and market

volatility and market return has been comparatively low. It means volatility in Indian

market is not the function of FIIs investment flows.

TIMS Batch 2008-10, Leena Kanjani, Sulabh Mehta, Anita Pariyani, Amin

Pattani, Mehul Rakholiya & Krishna Vyas conducted a research study on FII in India,

they analyzed the monthly movement of stock market from 2006 to 2009. The paper

was conducted to understand influence of FII on movement of Indian Stock market

and to understand the FII policy in India.They used Correlation and Hypothesis test

methodology and concluded that FII did have significant impact on Sensex but there is

less co-relation with Benkex and IT.

Sandhya Ananthanarayanan from CRISIL, Chandrasekhar Krishnamurti from

Department of Finance and Nilanjan Sen from Nanyang Technological University

conducted this research of Foreign Institutional Investors and Security Returns:

Evidence from Indian Stock Exchanges for understanding the impact of trading of

Foreign Institutional Investors on the major stock indices of India. Their contribution

to this growing literature pertaining to globalization is twofold. First, they separate the

flows into expected and unexpected and found that unexpected flows have a greater

impact than expected flows. Second, they identify the specific flows of foreign

institutional investors flowing into (or out of) each exchange and examine the impact

on the specific stock market indices. Their principal conclusions are as follows. They

found strong evidence consistent with the base-broadening hypothesis consistent with

prior work. They do not found compelling confirmation regarding momentum or


contrarian strategies being employed by foreign institutional investors. Their findings

supported the price pressure hypothesis. They do not found any substantiation to the

claim that foreigners’ destabilize the market.


BACKGROUND OF THE STUDY

“FII’s influence on the Sensex over the period 2000-2010”- is a study of the

influence of FOREIGN INSTITUTIONAL INVESTERS whose activities play a vital

role in the ups and downs of the share market. The study is conducted on the Indian

stock exchange market (BSE SENSEX) .

There are conflicting theories on the issue of whether FII flows affect or are affected

by domestic stock market returns. So, the present empirical study has been undertaken

to throw some light on the direction of causality between FII flows and Indian stock

market returns using data on both the variables from over the period 2000- 2010.

International portfolio flows, as are commonly known as Foreign Institutional



portfolio. Unlike Foreign Direct Investment (FDI) flows which refer to that category

of international investment aimed at obtaining a lasting interest by a resident entity in




1980s.

With more and more emerging market economies (EMEs), deregulating their



foreign investors in domestic markets etc. they are increasing in number.


Foreign Institutional Investment (FII) flows, i.e., capital flows across national borders,

to emerging market economies (EMEs) have risen sharply over the past one and half

decade due to globalization and India is no exception in this regard. However, there is

a lot of apprehension regarding the volatile nature of such flows thereby raising

questions about the need to encourage FII flows in a narrow and shallow stock market

like that of India.


INDUSTRY PROFILE

BROKERAGE INDUSTRY

The Indian retail brokerage industry consists of companies that primarily act as

agents for the buying and selling of securities (e.g. stocks, shares, and similar financial

instruments) on a commission or transaction fee basis. It has two main interdependent

segments: Primary market and the Secondary market. Now this market is extended to

fields like currency, commodity, mutual fund, insurance etc...

The Indian equity brokerage industry thrived on the back of equity markets'

sustained bull run during 2003-07. Although high competitive pressure meant

continuous compression of brokerage commissions and low electronic penetration

kept operating costs high, industry revenue was growing. Furthermore, the industry

attracted domestic and foreign investment interest at high valuations of upto 45x P/E

multiples. During this time, many of the key players started expanding their portfolio

of services to include wealth management and advisory services, sale of insurance and

mutual fund products, consumer financing and so on.

However, post-2008, the economic downturn - muted trading turnover,

relentless competitive pressure and decreasing margins, continued high operating

costs and high margining requirements - has put the industry under pressure.

Profitability is muted and the major players are under pressure to build scale.

Expansion of scale and investments into technological systems has the potential to

lead the top brokerage firms into paths of higher growth, but the current economic

climate is clearly against heavy investments.

The basic function of a brokerage firm is to execute buy and sell orders for

clients. Traditionally these firms have offered the investigation of the quality and the

possibilities of investing in a variety of investment products. It is still accustomed for

brokerage firms to offer information about possible investments free of charge. This

activity of bringing free of charge stock investment reports is one of the main tools

that are utilized by brokerage houses to compete against other firms and to investors it

continues to be an important service


The History of Stock Brokerage Firms

Stock brokerage firms have been an established feature in the financial industry

for nearly one thousand years. Dealing in debt securities, brokers employ a variety of

systems to aid investors with the purchase and sales of stocks and bonds in a variety of

markets. The firms have changed over the years, growing to massive organizations

that can affect the entire financial sector positively or negatively with their

performance. Changing with the times, the early twenty-first century saw a rise of

online trading that enabled the average investor to take part in the stock market for the

first time.

1. History

During the 11th century, the French began regulating and trading agricultural

debts on behalf of the banking community, creating the first brokerage system. In the

1300s, houses began to be set up in major cities like Flanders and Amsterdam in

which commodity traders would hold meetings. Soon, Venetian brokers began to trade

in government securities, expanding the importance of the firms.

In 1602, the Dutch East India Company became the first publicly traded company in

which shareholders could own a portion of the business. The stocks improved the size

of companies and became the standard bearer for the modern financial system.

2. Significance

The earliest brokerage firms were established in London coffee houses,

enabling individuals to purchase stocks from a variety of organizations. They formally

founded the London Stock Exchange in 1801 and created regulations and

memberships. The system was copied by brokerage firms across the world, most

notably on Chestnut Street in Philadelphia. Soon, the US exchange was moved to New

York City and various firms like Morgan Stanley and Merrill Lynch were created to

assist in the brokering of stocks and securities. The firms limited themselves to

researching and trading stocks for investment groups and individuals.


3. Considerations

During the 1900s, stock brokerage firms began to move in a direction of market

makers. They adopted the policy of quoting both the buying and selling price of a

security. This allows a firm to make a profit from establishing the immediate sale and

purchase price to an investor. The conflict with brokerage firms setting prices creates

the concern that insider trading can result from the sharing of information. Regulators

have enforced a system called Chinese Walls to prevent communication between

different departments within the brokerage company. This has resulted in increased

profits and greater interconnection within the financial industry.

4. Effects

The creation of high valued brokerage firms like Goldman Sachs and Bear

Sterns created a system of consolidation. Working with hundreds of billions of

dollars, the larger firms began to merge and take over smaller firms in the last half of

the 20th century. Firms like Smith Barney were acquired by Citigroup and other

investment banks, creating massive financial institutions that valued, held, sold,

insured and invested in securities. This conglomeration of the financial sector created

an environment of volatility that caused a chain reaction when other firms like Bear

Sterns and Lehman Brothers filed for bankruptcy. Trillions of dollars of assets were

tied together in different companies and resulted in a large economic collapse in late

2008.

5. Features

A large share of the brokerage firms have moved to an online format. Smaller

brokers such as E*Trade, TD Ameritrade and Charles Schwab have taken control of

most individual investors accounts. The added convenience and personal attention

paid to the small investor has resulted in a large influx of activity. In addition, the fact

that the online resources offer up-to-the-minute pricing and immediate trades makes

their format appealing to the modern user. Discounted commissions have lessened the

price of trades, giving access to a wider swath of people and adding liquidity to the


market. The role of the stock brokerage firm is ever-changing and proves to be a boon

for the future of the financial industry.

Full service v/s Discount brokerage houses

Full service brokerage firms continue to offer informative stock reports and a

level of service much higher than other brokerage houses. Discount brokerage houses

only dedicate themselves to execute orders for clients. Full service brokers are sellers

looking for purchasing and selling for clients and offering more customer service than

is available from discount brokers. It is many times possible that a client will not even

know who is taking care of the buy or sell order that they placed.

MARKET SIZE AND CHARACTERISTICS:

The Indian retail brokerage market is showing phenomenal growth. The total

trading volume of brokerage companies has increased from US$1239.1 billion in 2004

to US$1492.1 billion in 2005, and is expected to reach US$6535.7 billion by 2015.

Some of the main characteristics of the brokerage industry include growth in e-

broking; growing derivatives market, decline in brokerage fees etc.

Today, as per NSDL statistics, we have only 2.4 million investors with demat

accounts in the country. Considering various investor combinations that are holding

accounts, we can presume the country has roughly 5-7.5 lakh active investors now.

This figure is unbelievably small compared to the potential number of investors,

which is anything between 200 million and 250 million. When we take into

consideration the way transaction risk and cost in the Indian capital market is coming

down, there will be a massive surge in the number of investors and also in volumes.

The only way to manage this kind of potential growth is to adopt state-of-the-art

trading techniques.

The growth of Internet-based trading as a mass trading technique in the country

is unstoppable, going by the indicators available and the signals for the future. When it


ultimately gathers momentum, the biggest beneficiary will be the investor, who will

be able to trade with greater speed and transparency, and at lower costs...

Major players in Indian share broking industry are follows

� ICICI Securities Ltd. (www.icicidirect.com)

� Kotak Securities Ltd. (www.kotaksecurities.com)

� Indiabulls Financial Services Limited (www.indiabulls.com)

� IL&FS investmart Limited (www.investsmartindia.com)

� SSKI Ltd. (www.sharekhan.com)

� Motilal Oswal Securities (www.motilaloswal.com)

� Fortis Securities (Religare) (www.fortissecurities.com)

� Karvy securities (www.karvy.com)

� Geojit BNP paribas (www.geojitbnpparibas.com)

� HDFC Securities (www.hdfcsec.com)

� Hedge equities (www.hedgeequities.com)

� Jrg securities

� India infoline (www.indiainfoline.com)


CHAPTER 4

RESEARCH METHODOLOGY


4.1 Objectives of the Study

� To know the Indian stock exchange market- BSE, NSE

� To study the performance of Sensex over the period 2000-10

� To know about FII

� To study the effect of FII’s investment in BSE Sensex

� To study the relationship between FII activity and Sensex

� To find the trend in FII’s investment

1.3 Scope of the Study

� To get in touch with the industrial and organizational environment.

� To familiarize with the trends in the stock market(BSE) over the years

� To familiarize with the importance of FII in Indian stock market

1.4 Methodology of the Study

The methodology of the study is through collecting the primary and secondary

data.

Primary data refers to the data collected by the investigator directly through

primary sources. It includes;

� Direct observation.

� Interview (personal).


Secondary data refers to the data collected from;

� Books

� Journals

� Websites

� Company manuals etc.

1.5 Limitation of the study

� Time

� Analysis is conducted only on the basis of some factors therefore cent percent

accuracy is not possible.

� Lack of reliability of Secondary data


CHAPTER- V

DATA ANALYSIS AND INTERPRETATION


TYPES OF STUDY AND ANALYSIS CONDUCTED

1. THE PERFORMANCE OF SENSEX

By Sensex return

• From 2002-2013

• In 2012 ( monthly basis)

2. INFLUENCE OF FII ON SENSEX

By Sensex return V/S FII’s net inflow

• From 2002-2012

• In 2012 (monthly basis)

Number of FII’s registered and the Sensex returns

3. FII’S INFLOW V/S SENSEX RETURNS

• Coefficient of Correlation method

• Regression method

4 TRENDS IN THE FII’S INVESTMENT

• Trend analysis


5.1 SENSEX PERFORMANCE OVER THE YEARS

Indices :SENSEX

Period : ( Year 1991 to Year 2013 )

Year Open High Low Close

1991 1,027.38 1,955.29 947.14 1,908.85

1992 1957.33 4,546.58 1945.48 2,615.37

1993 2,617.78 3,459.07 1980.06 3,346.06

1994 3,436.87 4,643.31 3405.88 3,926.90

1995 3,910.16 3,943.66 2891.45 3,110.49

1996 3,114.08 4,131.22 2,713.12 3,085.20

1997 3,096.65 4,605.41 3,096.65 3,658.98

1998 3,658.34 4,322.00 2,741.22 3,055.41

1999 3,064.95 5,150.99 3,042.25 5,005.82

2000 5,209.54 6,150.69 3,491.55 3,972.12

2001 3,990.65 4,462.11 2,594.87 3,262.33

2002 3,262.01 3,758.27 2,828.48 3,377.28

2003 3,383.85 5,920.76 2,904.44 5,838.96

2004 5,872.48 6,617.15 4,227.50 6,602.69

2005 6,626.49 9,442.98 6,069.33 9,397.93

2006 9,422.49 14,035.30 8,799.01 13,786.91

2007 13,827.77 20,498.11 12,316.10 20,286.99

2008 20,325.27 21,206.77 7,697.39 9,647.31

2009 9,720.55 17,530.94 8,047.17 17,464.81

2010 17,473.45 21,108.64 15,651.99 20,509.09

2011 20,621.61 20,664.80 15,135.86 15,454.92

2012 15,534.67 19,612.18 15,358.02 19,426.71

2013 19,513.45 20,443.62 18,144.22 19,704.33


CHART NO. 5.1

INTERPRETATION

The Bombay stock exchange (BSE SENSEX) which is one of the most important

secondary market in India ,has seen many ups and downs from its years of its starting

in 1991. The market opened at 1027.38 point and closed at 1908.85 with a high value

of 1955.29 and with a low value of 947.14 in the same year.

Since then, the values in the Sensex has increased and decreased. From the table, it

can be found that the Sensex crossed the four digit number in 2006 , and at 13786.91

from the previous year value of 9397.93 (2005)

The changes in the value of Sensex depends upon many factors, like ..

• National and global issues

• Legal and political issues

• GDP growth rate of the nation

• Activities of the foreign investments Etc….


From the table it is found that in the year 2008 the Sensex closed at 9647.31 from the

previous year’s 20286.99. The reason for the huge fall in market was due to global

recession which not only caught Indian market but also the overall international

markets too

When the recession began to end in the world, the Sensex and other markets could

see increase in value. And at the end of 2010 the Sensex closed at 20509.09


FII’s INVESTMENT

TABLE OF FII’s NET INFLOW

Year Gross Purchase Gross Net (Cr) Sale Investment (Cr) (Cr)

2000 74791.5 68421.6 6370.08

2001 51761.2 38651 13128.2

2002 46479.1 42849.8 3629.6

2003 94412 63953.5 30459

2004 185672 146706.8 38965.8

2005 286021.4 238840.9 47181.9

2006 475624.9 439084.1 36540.2

2007 814877.9 743392 71486.3

2008 721607 774594.3 -52987.4

2009 624239.7 540814.7 83424.2

2010 766283.2 633017.1 133266.8

2011 611055.6 613770.8 -2714.2

2012 669184.4 540823.9 128360.7

2013 till MAY 65796.04 50791.74 15004.46

Source : moneycontrol.com

TABLE NO 5.2


FII’s NET INFLOW

CHART NO. 5.2


FII NET INFLOW VS SENSEX RETURN

Year Net INVESTMENT FLOW Return %

2000 6370.08

2001 13128.2 106.0916032

2002 3629.6 -72.35264545

2003 30459 739.1833811

2004 38965.8 27.92869103

2005 47181.9 21.08541336

2006 36540.2 -22.5546237

2007 71486.3 95.63740757

2008 -52987.4 -174.1224542

2009 83424.2 -257.4415805

2010 133266.8 59.74597299

2011 -2714.2 -102.0366663

2012 128360.7 -4829.227765

2013 till MAY 15004.46 -88.31070569

TABLE NO 5.3


SENSEX RETURN (%) V/S FII NET INFLOW


INTERPRETATION

When comparing the Sensex returns and the FII net inflow from the years , it can be

found that the Sensex gain height returns in the year 2009 (81.03%) and the FII net

inflow at that year was 85367 Cr.

And the Sensex loss maximum point (-46.522) when the net inflow was - 53051 Cr in

the year 2008. Recession and many other global and national issues were key factors

for this change.

The negative sign show that in 2008 FII’s were not investing their money. They were

sellers.

*(The Sensex return is not only depend upon FII)*


ANALYSIS OF SENSEX RETURN TO FII’s INVESTMENT 2012

TABLE OF SENSEX RETURN 2012

Month Close Return %

Jan-12 17,193.55

Feb-12 17,752.68 3.251975

Mar-12 17,404.20 -1.96297

Apr-12 17,318.81 -0.49063

May-12 16,218.53 -6.35309

Jun-12 17,429.98 7.469543

Jul-12 17,236.18 -1.11188

Aug-12 17,429.56 1.121942

Sep-12 18,762.74 7.64896

Oct-12 18,505.38 -1.37165

Nov-12 19,339.90 4.509607

Dec-12 19,426.71 0.448865

Jan-13 19,894.98 2.410444

Feb-13 18,861.54 -5.19448

Mar-13 18,835.77 -0.13663

TABLE NO 5.4

The Sensex gain maximum return 11.670% during the month of September 2010.

And loss -3.49% in May by making the Sensex to close at 16944.63


CHART OF SENSEX RETURN 2012

CHART NO 5.4


FII NET INFLOW IN 2012

TABLE OF FII NET INFLOW 2012

Month Gross Purchase(Cr) Gross Sale(Cr) Net Investment(Cr)

Jan 50,467.40 40,109.90 10,357.70

Feb 79,898.60 54,686.60 25,212.10

Mar 63,795.10 55,413.80 8,381.10

Apr 41,091.90 42,200.50 -1,109.10

May 42,443.30 42,790.70 -347.1

Jun 44,751.20 45,252.40 -501.3

Jul 49,557.40 39,284.80 10,272.70

Aug 48,136.50 37,332.50 10,803.90

Sep 66,752.50 47,491.20 19,261.50

Oct 56,832.40 45,468.20 11,364.20

Nov 51,143.80 41,567.00 9,577.20

Dec 74,314.30 49,226.30 25,087.80

Source : moneycontrol.com

TABLE NO 5.5


CHART OF NET INFLOW 2012

CHART 5.5


SENSEX GAIN VS FII NET INFLOW 2012

TABLE NO 5.6

Month Net Investment(Cr) Return %

Feb-12 25,212.10 3.251975

Mar-12 8,381.10 -1.96297

Apr-12 -1,109.10 -0.49063

May-12 -347.1 -6.35309

Jun-12 -501.3 7.469543

Jul-12 10,272.70 -1.11188

Aug-12 10,803.90 1.121942

Sep-12 19,261.50 7.64896

Oct-12 11,364.20 -1.37165

Nov-12 9,577.20 4.509607

Dec-12 25,087.80 0.448865


CHART NO 5.6

INTERPRETATION

From the given table, the Sensex gain maximum return 11.670% during the month of

September 2010 when the FII’s inflow was 29195 Cr.. And the Sensex loss -3.49% in

the month of May, where the FII net inflow was -8629.90.

That means the Sensex was changing according to the inflow and out flow of

investment during the months of 2010.

*(The Sensex return is not only depend upon FII)*


5.4 Calculation of correlation between FII investment and sensex movement

Analysis is done for finding the correlation between FII investment and the sensex

fluctuation during the period from 2000-2010. Net yearly FII investment is calculated

by subtracting the gross sell value from the gross purchase value in the particular year

by FII. And the fluctuation in sensex is calculated by subtracting previous years

closing point from the current year.

CALCULATION OF SENSEX FLUCTUATION

Years CLOSE PRICE FLUCTUATION

2000 3972.12 -1033.70

2001 3262.33 -709.79

2002 3377.28 114.95

2003 5838.96 2461.68

2004 6602.69 763.73

2005 9397.93 2795.24

2006 13786.91 4388.98

2007 20286.99 6500.08

2008 9647.31 -10639.68

2009 17464.81 7817.50

2010 20509.09 3044.28

2011 15454.92 -5054.17

2012 19426.71 3971.79

2013 20223.98 797.27

TABLE NO 5.7


Analysis-

TABLE OF CORRELATION

Years BSE FLUCTUATION(X) (Cr)(Y) n(XY) X^2 Y^2

2002 114.95 3629.6 4589447.72 13213.5025 13173996.16

2003 2461.68 30459 824783422.32 6059868.422 927750681

2004 763.73 38965.8 327352854.77 583283.5129 1518333570

2005 2795.24 47181.9 1450732075.72 7813366.658 2226131688

2006 4388.98 36540.2 1764116276.96 19263145.44 1335186216

2007 6500.08 71486.3 5111333357.94 42251040.01 5110291088

2008 -10639.68 -52987.4 6201458780.35 113202790.5 2807664559

2009 7817.50 83424.2 7173855518.50 61113306.25 6959597146

2010 3044.28 133266.8 4462715992.94 9267640.718 17760039982 2011 -5054.17 -2714.2 150898310.35 25544634.39 7366881.64 2012 3971.79 128360.7 5608039191.18 15775115.8 16476469304 ∑ 16164.38 517612.90 33079875228.76 300887405.21 55142005110.91 ∑/n 1469.49 47055.72 3007261384.43

TABLE NO 5.8

ΣX= 16164.38Cr

Mean , ΣX/11 =1469.49 Cr

ΣY = 517612.90 Cr Mean Σy/11 = 47055.72Cr


Coefficient of Correlation

Coefficient of Correlation =

r = -53596330224.069 / √32129925359.72

r= -0.17

INTERPRETATION

The Coefficient of Correlation analysis between FII’s net inflow and Sensex return

from 2002-2012 gives a correlation of -0.17 which is a low degree negative

correlation that means the Sensex movement is negatively corelated to the FII

investment during the period 2002 to 2012. Negative values indicate a relationship

between x and y such that as values for x increase, values for y decrease.

.


CORRELATION BETWEEN FII & BSE FLUCTUATIONS IN THE YEAR 2012

Month Net

Investment(Cr) (X)

FLUCTUATION (Y)

n(XY) X^2 Y^2

Jan

Feb 25,212.10 559.13 1,40,96,841.473 63,56,49,986.41 312626.3569

Mar 8,381.10 -348.48 -29,20,645.728 7,02,42,837.21 121438.3104

Apr -1,109.10 -85.39 94,706.049 12,30,102.81 7291.4521

May -347.1 -1,100.28 3,81,907.188 1,20,478.41 1210616.078

Jun -501.3 1,211.45 -6,07,299.885 2,51,301.69 1467611.103

Jul 10,272.70 -193.80 -19,90,849.260 10,55,28,365.29 37558.44

Aug 10,803.90 193.38 20,89,258.182 11,67,24,255.21 37395.8244

Sep 19,261.50 1,333.18 2,56,79,046.570 37,10,05,382.25 1777368.912

Oct 11,364.20 -257.36 -29,24,690.512 12,91,45,041.64 66234.1696

Nov 9,577.20 834.52 79,92,364.944 9,17,22,759.84 696423.6304

Dec 25,087.80 86.81 21,77,871.918 62,93,97,708.84 7535.9761

∑ 1,18,003.00 2,233.16 4,40,68,510.94 2,15,10,18,219.60 57,42,100.25

TABLE NO 5.9

∑X = 118003.00

Mean = ∑X/11 = 10727.55

∑Y = 2233.16

Mean = ∑Y/11 = 203.01


COEFFICIENT OF CORRELATION

R = 221234040.85/ √ (98673.67*7627.33)

= 5068770244.14 / 752616202.39

= 0.29

INTERPRETATION

It is a low degree positive correlation. It means that the Coefficient of Correlation

analysis between FII’s net inflow and Sensex return gives a correlation of 0.29 which

is a low degree positive correlation that means the Sensex movement is not much

related to the FII investment during the period 2012. Positive values indicate a

relationship between x and y variables such that as values for x increase, values for y

also increase. However the performance of Sensex is less dependent to Net FII Inflow

since it is indirectly proportional to the movement of FII’s Investment.


5.5 TREND ANALYSIS

TABLE OF TREND ANALYSIS

Years Net Investment (Cr) % Change 2000 6370.1 100 2001 13128 106.09 2002 3629.6 -72.35 2003 30459 739.18 2004 38966 27.929 2005 47182 21.085 2006 36540 -22.55 2007 71486 95.637 2008 -52987 -174.1 2009 83424 -257.4 2010 133267 59.746 2011 -2714 -102 2012 128361 -4829

2013 till MAY 15004 -88.31

TABLE NO 5.10

Here the base year is 2000, in which FII net inflow was 6370.50 Cr. And it is assigned

as 100 point. The trend analysis is conducted by calculating percentage change in FII

net inflow in each year in relation to the base year


INTERPRETATION

From the analysis it is known that the net inflow of money by FII during the period

from 2001-08 is fluctuating in nature. The growing Indian economy and increasing

GDP growth rate has resulted in a positive trend towards FII investment, and from the

year 2010 it shows the negative growth.


FUTURE TREND ANALYSIS

TABLE OF TREND ANALYSIS

YEARS NET FII INFLOW

2013 86338

2014 92770

2015 99202

2016 105634

2017 112065

2018 118497

2019 124929

2020 131360

TABLE NO 5.11

Based on calculation in Excel


CHART NO 5.7

INTERPRETATION

From the trend analysis (advanced) of FII net inflow to the Indian economy, it is

found that the trend is increasing in nature. That means the FII’s will increase their

inflow of money in future also.


CHAPTER VI

FINDINGS, CONCLUSION & SUGGESTIONS


6.1 FINDINGS

THE PERFORMANCE OF SENSEX

• From the study it is found that the performance of Sensex is fluctuating.

The Sensex saw many ups and downs from its opening year 1991

FII’S INFLOW TO INDIAN MARKET

• The study on the inflow of FII to the Indian equity market has shown that

the inflow is also fluctuating and it is increasing in recent years.

NUMBER OF REGISTERD FII’s V/S SENSEX RETURN

• The study on increasing number of FII registered under by SEBI, shows

that the value of Sensex is not much related to the number of FII registered

in recent years .Today ,there are 1747 FII registered in the country as

against last year number of 1706 an additional of 41. Year 2009 saw 112

FII getting registered. This means despite record inflow, the number of

registered FIIs had declined. This means that the investment that the Indian

market has received is majority through the FII registered earlier

RELATIONSHIP BETWEEN FII’S INVESTMENT AND SENSEX

RETURN

• From the correlation study between sensex movement and FII inflow ,

found that the fluctuations in sensex is not much related to the FII

investment


FINDINGS FROM TREND ANALYSIS

From the trend analysis it is observed that the trend in FII inflow to the Indian

economy is positive in nature. However it is purely based on the assumption

without involving the economic and global crisis.


6.2 CONCLUSION

Foreign Institutional Investors, who invest their money in different countries

in order to get a good portfolio of investment. And India has been in the list of

their portfolio for many years. The increasing GDP growth rate and the overall

development of India in different sectors like industrial and agricultural field and

others are the prime reason for the increasing nature of FII’s inflow.

There is a positive as well as negative correlation between stock indices and

FIIs but FIIs didn’t have any significant impact on Indian Stock Market. Also the

coefficient of determination is less in all the case. It shows the absence of linear

relation between FII and stock index. This does not mean that there is no relation

between them. One of the reasons for absence of any linear relation can also be

due to the sample data. The data was taken on yearly basis.

Also FII is not the only factor affecting the stock indices. There are other major

factors that influence the bourses in the stock market. And from the FII’s analysis

on Sensex return, it can be concluded that FII do have any significant impact on

the Indian Stock Market but there are other factors like government policies,

budgets, bullion market, inflation, economical and political condition, etc. do also

have an impact on the Indian stock market.


6.3 SUGGESTIONS & RECOMMENDATIONS

After the analysis of the project study, following recommendations can be made:

• From the analysis there could not find a good positive relationship between

FII's and sensex return (may be because of the data collected is on the yearly

basis & Sensex return is not only dependent upon FII's investment only). They

are needed to be encouraged to enter in Indian market. Because their absence

result in huge change in the market

• Number of FII's get registered is decreasing in nature. It may be because of

nature of procedure. Simplifying procedures and relaxing entry barriers for

business activities and providing investor friendly laws and tax system for

foreign investors helps them to come and invest in India

• Somewhere, a restriction related to the track record of Sub- Accounts is also to

be made on the investors who withdraw money out of the Indian stock market .

• Encourage industries to grow to make FIIs an attractive junction to invest.


BIBLIOGRAPHY

BOOKS

I.M Panday “Financial Management” , Vikas Publishing house Private ltd, New Delhi,

2009

Kothary CR “Reserch Methodology” New Age International Publishers, New Delhi

2006

Prasanna Chandra, ‘Financial Management’, Tata McGraw – Hill publishing company Ltd, New Delhi. 2001.

Uma Sekaran ,”Reserch Methodology For Business, John Wile And Sons,Inc

WEBSITES

www . bse.india..com

www . nse india. com

www. money control. com

www.hedgeequities.com

www.sebi.com

A STUDY ON FDI ON BSE STOCK MARKET

Investor Relations

Transcript of A STUDY ON FDI ON BSE STOCK MARKET