An Analytical Study of Foreign Institutional Investors Investment in India and Its Future Scenario

Project Report

SUBMITTED FOR THE FULFILMENT OF THE MASTER OF BUSINESS ADMINISTRATION

UNDER THE SUPERVISION OF: DR. SANJAY BHUSHAN

SUBMITTED BY: HEMANT AGRAWAL MBA (INTEGRATED) 107660

DAYALBAGH EDUCATIONAL INSTITUTE (DEEMED UNIVERSITY) DAYALBAGH, AGRA

PREFACE

Being a part of the Master of Business Administration (MBA) at Dayalbagh Educational Institute, I am submitting a project report which has been done for fulfillment of this course. This project has a study of An Analytical Study of Foreign Institutional Investors Investment in India and Its Future Scenario. This study has a comprehensive picture of the FIIs investment in India, decision-making models & trading strategies used by them and the future capital market scenario.

( Hemant Agrawal)

ACKNOWLDGEMENT

I am very thankful to my guide Dr. Sanjay Bhushan who, selflessly, has helped me a lot in completing my project. Without him, it would be unable for me to complete my project on time.

( Hemant Agrawal)

Contents
Introduction- an overview

 Indian Economy- An Opportunity unlimited BRIC Countries Foreign Investment in India Overall view Sector-wise contribution Top countries contribution Foreign investment guidelines Government regulations regarding FIIs investment Decisions by FIIs Based on firm specific characteristics Analytics of decision for investment Future capital market scenario Trading strategies used by FIIs Pros & Cons of FII investment Three myths about FIIs Analysis & Findings Review of Literature References Conclusion Appendix: Questionnaire

NEED OF STUDY
The FIIs have been playing a significant role in the process of capital formation and economic Growth of the country. There has been a dramatic increase in net FII flows to India over the period 2003-2007. FIIs invested US$17 billion in Indian

stocks in 2007 only. However, the onset of the recent global financial crisis saw FIIs pulling out a record $13 billion (Rs 67,470) in 2008, the largest outflows since India opened its doors to FIIs 15 years ago. The Economic Times has just reported that FII investment is up, with the Indian Stock Market taking in $13 billion so far in 2009 from foreign institutions. This is in stark contrast to the scenario in 2008. FIIs such as pension managers, investment houses and sovereign wealth funds have been both a growth driver and a beneficiary of this growth, with stocks now worth more than double what they were at their March lows. One of the main reasons for the FII flows has been an increased recognition of the long-term growth potential of Indian economy. Due to this reason, I have taken this topic for detailed study.

OBJECTIVES OF STUDY
1. To study the dynamism of foreign investment in India: Products/Sectors &

Government Regulation.

2. To study the decision-making models used by Foreign Institutional Investors to maximize their returns.
3. To study the future capital market scenario and strategies to increase their

returns.

INTRODUCTION
The less well known Foreign Institutional Investors (FIIs) have been a key part of India's growth story this decade. The term FIIs is most commonly used to refer the companies that are established or incorporated outside India and are investing in the financial markets of India by registering themselves with the Securities & Exchange Board of India (SEBI). FIIs include

overseas pension funds, mutual funds, investment trusts, asset management companies, nominee companies, banks, institutional portfolio managers, 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 on behalf of a broad-based fund (i.e., fund having more than 20 investors with no single investor holding more than 10% of the shares or units of the fund). Foreign Institutional Investment is basically short-term in nature and mostly made in the financial markets. One of the outstanding features of globalization in the financial services industry is the increased access provided to non-local investors in several major stock markets of the world. Increasingly, stock markets from emerging markets permit institutional investors to trade in their domestic markets. This opening up of capital markets in emerging market countries has been perceived as beneficial by some researchers while others are concerned about possible adverse consequences such as contagion. Clark and Berko (1997) emphasize the beneficial effects of allowing foreigners to trade in stock markets and outline the base-broadening hypothesis. The perceived advantages of basebroadening arise from an increase in the investor base and the consequent reduction in risk premium due to risk sharing. Other researchers and policy makers are more concerned about the attendant risks associated with the trading activities of foreign investors. They are particularly concerned about the herding behavior of foreign institutions and the potential destabilization of emerging stock markets. India liberalized its financial markets and allowed FIIs to participate in their domestic markets in 1992. This event represents a landmark event since it resulted in effectively globalizing its financial services industry. Initially, pension funds, mutual funds, investment trusts, Asset Management Companies, nominee companies and incorporated/institutional portfolio managers were permitted to invest directly in the Indian stock markets. Beginning 1996-97, the group was expanded to include registered university funds, endowment, foundations, charitable trusts and charitable. Since then, FII flows which form a part of foreign portfolio investments have been steadily growing in importance in India. Ostensibly, this opening up resulted in a number of positive effects. First, the stock exchanges were forced to improve the quality of their trading and settlement procedures in accordance with the best practices of the world. Second, the information environment in India improved with the advent of major international financial institutional investors in India. On the negative side we need to consider potential destabilization as a result of the trading activity of foreign institutional investors. This is especially important in an emerging country that has embarked upon reforms to open up its market. Foreign Institutional Investors (FIIs) are allowed to invest in the primary and secondary capital markets in India through the Portfolio Investment Scheme (PIS) administered by the Reserve Bank of India (RBI). Under this scheme, FIIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The ceiling for overall investment by FIIs is 24 per cent of the paid up capital of the Indian company (20 per cent in the case of public sector banks, including the State Bank of India). The ceiling of 24 per cent for FII investment can be raised subject to (i) approval by the companys board and the passing of a special shareholder resolution to that effect (ii) certain sector caps imposed by RBI and the Government of India. The RBI monitors the ceilings on FII investments in Indian companies on a daily basis and publishes a list of companies allowed to attract investments from FIIs with their respective ceilings. So, Foreign Institutional investors (FIIs) are entities established or incorporated outside India and make proposals for investments in India.

These investment proposals by the FIIs are made on behalf of sub accounts, which may include foreign corporate, individuals, funds etc. In order to act as a banker to the FIIs, the RBI has designated banks that are authorized to deal with them. The biggest source through which FIIs invest is the issuance of Participatory Notes (P-Notes), which are also known as Offshore Derivatives. Participatory Notes (PNs) are instruments used by foreign funds, and foreign institutional investors for trading in the domestic market, who are not registered with SEBI, but are interested in taking exposures in Indian securities market. PNs are basically contract notes and are issued by foreign institutional investors, registered in India, to their overseas clients who may not be eligible to invest in the Indian stock markets. Such foreign institutional investors (FIIs) invest funds in Indian stock market, on the behalf of such investors, who prefer to avoid making disclosures required by various regulators. The associates of these FIIs generally issue these notes overseas. Thus, we can say PNs are issued where the underlying assets are securities listed on the Indian stock exchanges. And this route is mainly used by FIIs not registered with the SEBI. AGAINST THE ODDS
In a year when the Bombay Stock Exchanges Sensex plunged 53%, a record number of new Total no. of FIIs entered the country.

new FIIs registered 454

Country US UK Mauritius Hong Kong Singapore Australia Luxembourg Ireland Cayman Islands Canada Others

No. of Registered 155 67 33 22 21 21 17 16 14 13 75

FIIs

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009

No. of FIIs Registered 556 482 489 517 639 822 993 1219 1594

Indian Economy An Opportunity Unlimited India: Fastest Growing Free Market Democracy

GDP Growth 1990 2008* 4.9 percent 8.7 percent

Forex < USD 1 billion USD 309 billion as on Mar 28, 2008

FII Flow USD 1 million (1993) USD 16.1 billion in 2007-08

FDI USD 97 million USD 12.7 billion in 2007-08 till December (USD 16 billion in 2006-07)

India: Among the Top-15 Countries in terms of GDP at constant prices

The Indian economy has witnessed unprecedented growth. Booming services and industry sectors are providing the required impetus to economic growth. Fastest GDP growth of 9.4 percent in 2006-07, since last 18 years (at constant prices) Indias GDP has witnessed high growth, and is the second fastest growing GDP after China. The sound performance of each industry segment is leading to the overall robust performance of the Indian economy Growth in sectors at Current Prices (2009-10): Industry: 10.7% Services: 8.9% Agriculture: 2.6%

U ( 2 0 1 8 7 6 5 4 I S A 2 0 1 9 8 7 n D E 0 9 5 d ) 9 8 7 5 4 0 6 i B a i 1 0 ' l 0 9 8 7 6 5 s l i G o D n P a t C u r r e n t P r i c e s : 2 0 0 4 0 9

S I A U 8 6 0 4 3 5 2 1 e n g S , 5 9 6 2 7 4 3 0 d r D 9 2 8 7 0 1 4 3 6 5 v u i 8 7 2 9 0 i s c B 0 c t u i 1 0 e r l 9 8 3 0 s y t l u i r o e n

India: Robust Economic Platform:

U M ( 2 0 3 1 7 5 I S a T 0 9 1 5 4 n D r i 0 9 1 2 d c l 9 8 7 6 5 4 3 i B h l a i ) 1 0 ' l 2 0 9 8 7 6 5 4 s l 8 i F o n r e x R e s e r v e s : 2 0 0 2 0 9 ( T i l l 2 8 M a r c h 2 0 0 9 )

R 1 2 E a 2 9 3 6 5 7 0 1 x 0 . t i 7 6 5 3 8 4 1 e o r 0 n 9 8 7 6 5 4 a l D e b t t o G D P R a t i o

India: Surging Exports

Services sector has been a major contributor to increased exports from India. Acceptance of Indian products along with the cost advantage has provided an edge to Indian companies. Quality and cost advantage is the two important parameters leveraged by the Indian producers to increasingly market products and services.

D ( 2 U 4 2 0 1 8 6 5 I e A 0 S 2 0 4 3 n c p 0 D 0 4 6 3 e r 9 8 7 5 d m i i b l 1 0 B e 0 9 8 7 6 5 a r i ' ) l * s

l i E o x n

p o r t s : 2 0 0 4 0 9

Product imports by India mainly include petroleum products and minerals. Petroleum products are the major contributors towards Indias growing imports.
D ( 2 U 2 5 0 1 7 6 I e A 0 S 0 9 5 1 8 2 n c p 0 D 1 0 2 e r 9 8 7 6 5 4 d m i i b l 1 0 B e 0 9 8 7 6 5 a r i ' ) l * s

l i I o m n

p o r t s : 2 0 0 4 0 9

India: Attractive Investment Destination

With improved performance on PE ratio and ROE, Indian markets have attracted large investments; India is ranked second in AT Kearneys FDI confidence index (2007). Electronic equipment, manufacturing and telecom have witnessed significant FDI inflow. FDI inflow for the period 2006-07 witnessed a growth of 185 percent over the same period last year. Large FII activity in India has led to an upsurge in the Sensex.
Net FII into India: 2001-07 18 16 14 USD Billion 12 10 8 6 4 2 0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

16.1

10.0

10.2

9.4 6.7

1.8

0.6

India: Vibrant Capital Market:

Sensex The Bombay Stock Exchange index rise 20 times from 1990s to reach 20,000 mark in November 2007. India is among the major destinations across the globe for inflow of US Dollar. Emergence of industry and confidence of local investors along with the FIIs has led to upsurge of the Sensex.

25000

11 December 2007 Crossed 20,000 mark

20000

1 5000

30 December 1999 Crossed 5,000 mark

1 0000

07 February 2006 Crossed 10,000 mark

5000

India: Vibrant Economy Driving M&A Activities

In 2007, there were a total of 676 M&A deals and 405 private equity deals. In 2007, the total value of M&A and PE deals was USD 70 billion. Total M&A deal value was close to USD 51 billion. Private equity deals value increased to USD 19 billion. Growth Drivers: Globalisation and increased competition Concentration of companies to achieve economies of scale Cash Reserves with corporate Trends: Cross-border deals are growing faster than domestic deals Private Equity (PE) houses have funded projects as well as made a few acquisitions in India

1Ju 1- l -97 Ja n1- 98 Ju 1- l -9 Ja 8 n1- 99 Ju 1- l -99 Ja n1- 00 Ju 1- l -0 Ja 0 n1- 01 Ju 1- l -01 Ja n 1- -02 Ju 1- l -02 Ja n1- 03 Ju 1- l -03 Ja n 1- -04 Ju 1- l -04 Ja n1- 05 Ju 1- l -05 Ja n 1- -06 Ju 1- l -06 Ja n1- 07 Ju 1- l -07 Ja n08

Number of Deals and Value

80 70 60 USD Billion 50 40 30 20 10 0 2004 2005 Deal Value 2006 2007 No. of Deals 12.3
467 306 782 1,081

1,200 Number of deals 1,000 800 600 400 200 0

70

28.2

18.3

India: Pacing Ahead to Emerge as a Major Economy in the World

100 80 GRDI Score 60 40 20 0 India Russia Vietnam Ukraine China Chile Latvia

India is the top destination in the AT Kearney Global Retail Development Index (2007).

2007 Global Services Location Index India China Malaysia Thailand Brazil Indonesia 3.2 2.9 2.8 3.2 2.6 3.3 1.3 1.2 1.8 1.5 2.3 2.3 2 1.6 1.5 1.1 1.4 1.4

Financial structure Business environment

People and skill availablity

Services sector attracted interest of major global players and large investments are pumped in it

P r o je c t e d G D P G r o w t h R a t e s f o r S e le c t U p c o m in g E c o n o m ie s

6 GDP Growth Rate (%)

0 2 0 0 5 -1 0 2 0 1 0 -1 5 2 0 1 5 -2 0 2 0 2 0 -2 5 2 0 2 5 -3 0 2 0 3 0 -3 5 2 0 3 5 -4 0 2 0 4 0 -4 5 2 0 4 5 -5 0 B r a zil C h in a In d i a R u s s ia

India is expected to outperform its rivals in the BRIC, in terms of GDP growth rate, from 2015 onwards.

BRIC Countries

In economics, BRIC (typically rendered as "the BRICs" or "the BRIC countries" or known as the "Big Four") is a grouping acronym that refers to the countries of Brazil, Russia, India, and China that are deemed to all be at a similar stage of newly advanced economic development.

The BRIC thesis:

Goldman Sachs argues that the economic potential of Brazil, Russia, India, and China is such that they could become among the four most dominant economies by the year 2050. The thesis was proposed by Jim O'Neill, global economist at Goldman Sachs. These countries encompass over 25% of the world's land coverage and 40% of the world's population and hold a combined GDP (PPP) of 15.435 trillion dollars. On almost every scale, they would be the largest entity on the global stage. These four countries are among the biggest and fastest growing emerging markets. However, it is not the intent of Goldman Sachs to argue that these four countries are a political alliance (such as the European Union) or any formal trading association, like ASEAN. Nevertheless, they have taken steps to increase their political cooperation, mainly as a way of influencing the United States position on major trade accords, or, through the implicit threat of political cooperation, as a way of extracting political concessions from the United States, such as the proposed nuclear cooperation with India.

Performance of Countries

Foreign Investment In India

I.

FDI EQUITY INFLOWS:

A. CUMULATIVE FDI FLOWS INTO INDIA (1991-2010): CUMULATIVE AMOUNT OF FDI FLOWS INTO US$ INDIA 175,941 (from April 2000 to August 2010) million (Equity inflows + including data on Re-invested earnings & Other capital, which is available from April 2000 onwards. These are the estimates on an average basis, based upon data for the previous two years, published by RBI in their Monthly Bulletin) CUMULATIVE AMOUNT OF FDI EQUITY INFLOWS Rs. US$ 6,03,119 1,37,960 (from August 1991 to August 2010)* crore million

1 .

2 .

B. FDI EQUITY INFLOWS (WITH COMPANY-WISE DETAILS) AVAILABLE FROM 2000-2010: 1. AMOUNT OF FDI EQUITY INFLOWS (from April 2000 to August 2010) (excluding, amount remitted through RBIs-NRI Schemes & advances pending for issue of shares) FDI inflows do not include data on Re-invested earnings & Other capital, as company-wise details are not maintained by RBI. AMOUNT OF FDI EQUITY INFLOWS DURING FINANCIAL YEAR 2010-11 (from April 2010 to August 2010)* Rs. US$ 5,33,019 1,19,177 crore million

2.

Rs.40,816 crore

US$ 8,887 million

C. FDI EQUITY INFLOWS (MONTH-WISE) DURING THE FINANCIAL YEAR 2010-11:

Financial Year 2010-11 April-March April 2010 May 2010 June2010 July 2010 August2010 2010-11( upto August 2010)

Amount of FDI inflows In Rs. Crore In $US mn 9697 2179 10135 2213 6429 1380 8359 1785 6196 1330 40816 8887

2009-10 ( upto August 2009)

66857

13760

D: SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial years): Amount Rupees in crores (US$ in million) Ranks Country 2008-09 (AprilMarch) 2009-10 (AprilMarch) 2010-11 ( AprilAugust) Cumulati ve Inflows (April 00 August 10) 224,367 (50,164) 50,080 (11,275) 40,134 %age to total Inflows (in terms of US $) 42 % 9% 7%

1. 2. 3.

MAURITIUS SINGAPORE U.S.A.

50,899 (11,229) 15,727 (3,454) 8,002

49,633 (10,376) 11,295 (2,379) 9,230

13,461 (2,924) 4,934 (1,085) 2,944

(636) 4. 5. 6. 7. 8. 9 10. U.K. NETHERLAND S JAPAN CYPRUS GERMANY FRANCE U.A.E. (1,802) 3,840 (864) 3,922 (883) 1,889 (405) 5,983 (1,287) 2,750 (629) 2,098 (467) 1,133 (257) 123,025 (27,331) (1,943) 3,094 (657) 4,283 (899) 5,670 (1,183) 7,728 (1,627) 2,980 (626) 1,437 (303) 3,017 (629) 123,120 (25,834) 1,263 (274) 2,213 (481) 2,330 (515) 1,437 (310) 315 (69) 1,178 (254) 1,042 (224) 40,816 (8,887)

(8,914) 27,261 (6,158) 22,339 (4,968) 19,225 (4,230) 19,214 (4,209) 12,783 (2,868) 8,097 (1,784) 8,065 (1,773) 542,514 (121,261) 5% 4% 4% 4% 2% 2% 1% -

TOTAL FDI INFLOWS *

Note: (i) *Includes inflows under NRI Schemes of RBI and advances pending for issue of shares. (ii) Cumulative country-wise FDI equity inflows (from April 2000 to August 2010) Annex-A. (iii) %age worked out in US$ terms & FDI inflows received through FIPB/SIA+ RBIs Automatic Route+ acquisition of existing shares only.

E: SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS:

Rank s Sector 2008-09 (AprilMarch) Amount Rupees in crores (US$ in million) 2009-10 2010-11 Cumulat % age ive to total (April( AprilInflow March) August) Inflows s (April (In 00 terms August of 10) US$) 20,776 5,793 111,023 21 % (4,353) (1,260) (24,862) 4,351 2,090 45,937 9% (919) (458) (10,330) 12,338 (2,554) 4,789 (1,054) 45,495 (9,985) 8%

1. 2.

3.

SERVICES SECTOR (financial & non-financial) COMPUTER SOFTWARE & HARDWARE TELECOMMUNICATIO NS (radio paging, cellular mobile, basic telephone services)

28,516 (6,138) 7,329 (1,677) 11,727 (2,558)

4. 5.

6. 7. 8. 9. 10.

HOUSING & REAL ESTATE CONSTRUCTION ACTIVITIES (including roads & highways) POWER AUTOMOBILE INDUSTRY METALLURGICAL INDUSTRIES PETROLEUM & NATURAL GAS CHEMICALS (other than fertilizers)

12,621 (2,801) 8,792 (2,028)

13,586 (2,844) 13,516 (2,862)

2,492 (539) 1,352 (294)

39,861 (8,895) 37,045 (8,347)

7% 7%

4,382 (985) 5,212 (1,152) 4,157 (961) 1,931 (412) 3,427 (749)

6,908 (1,437) 5,754 (1,208) 1,935 (407) 1,328 (272) 1,707 (362)

3,121 (677) 519 (114) 2,807 (613) 987 (218) 675 (146)

24,040 (5,305) 21,341 (4,710) 16,247 (3,743) 12,491 (2,883) 11,949 (2,642)

4% 4% 3% 2% 2%

II. FINANCIAL YEAR-WISE FII INFLOWS DATA:

(Amount US$ million)

S.No. 1 2 3 4 5 6 7 8 9 10 11

Financial Year ( April-March) 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 ( upto Aug 2010)

Investment by FIIs (net) 1847 1505 377 10918 8686 9926 3225 20328 (-) 15017 29047 11849

Indias Foreign Investment Policy: Sector-Specific Guidelines and Conditions

Foreign Investment None Industry Atomic Energy Gambling & betting Lottery business Retail trading (except single brand) Activities/sectors closed to private investment Broadcasting services Condition

Foreign equity up to a maximum of 26%

FM radio

Up-linking of news and current affairs TV channels

Foreign equity up to a maximum of 49%

Print services Publishing newspapers and periodicals on current affairs Defence industries Requires FIPB Approval Insurance Equity limit is FDI & FII Combined. Broadcasting services Hardware facilities Equity limit is FDI & FII Combined. Requires FIPB approval and is subject to guidelines of Ministry of Information and Broadcasting -Same as above -Same as above. FDI limited to 20% Automatic route. No direct/indirect participation of foreign carriers No FII investment. Requires FIPB approval Equity limit is FDI & FII Combined. FII limit capped at 24% in listed CICs. Investment Subject to CIC (Regulation) Act, 2005. Equity limit is FDI & FII Combined. FDI and FII limits capped at 26% and 23% respectively. Equity limit is FDI & FII combined. FDI and FII limit capped at 26% and 23% respectively. FII purchases limited to secondary markets with no foreign

Equity limit is FDI & FII Combined. Requires FIPB approval and subject to guidelines of Ministry of Information and Broadcasting Equity limit is FDI & FII Combined. Requires FIPB approval Requires FIPB approval

is

Cable network Direct-to-Home (DTH) Aviation services Domestic passenger airline Financial services Asset Reconstruction Companies (ARCs) Credit Information Companies (CICs)

Stock Exchanges

Commodity Exchanges

Foreign equity up to a maximum of 51%

Foreign equity up to a maximum of 74%

investor/entity holding more than 5% equity. Refining services Subject to guidelines of the petroleum and natural gas Ministry of Petroleum and public sector enterprises no dilution of equity in public enterprises Distribution services Covers products branded at single brand retailing Manufacturing point. Products should belong to a single brand and sold under that brand globally. Requires FIPB approval Telecommunication services Basic & Cellular Foreign equity between 49%-74% with up to 49% under automatic route and FIPB approval thereafter. Internet service providers -Same as above(ISPs) with gateways, radio paging & end-to-end bandwidth. Satellite establishment & Requires FIPB approval. operation Financial services Equity limit is FDI & FII private banks combined.Under automatic route. Aviation services Under automatic route. non-scheduled, cargo & Direct/ indirect participation chartered airlines, ground of foreign airlines only in handling services48 cargo services. Subject to guidelines of civil aviation ministry. Ground handling subject to security clearance. Aviation services Up to 74% under automatic airport development route and FIPB approval thereafter. Mining services Coal Under automatic route and lignite for captive subject to provisions of consumption Coal Mines Nationalization Act (1973) Distribution services Trading of items sourced Requires FIPB approval. from small scale industries Test marketing of items Requires FIPB approval. with approval for Test marketing approval

Foreign equity up to 100% with conditions

manufacture

should be available for minimum two years. Investment in manufacturing should commence simultaneously with marketing. Courier services Requires FIPB approval. Carrying packages, parcels Activities exclude and distribution of items not covered under the Letters. Indian Post Office Act (1898). Financial services management, investment Non-banking financial Under automatic route activities like merchant subject to minimum banking, underwriting capitalization norms : portfolio management, a.Fund- based activities: investment advice, financial US$0.5 million upfront for consultancy, stock broking, FDI up to 51% equity; US$5 asset management, venture million upfront for FDI capital, custodial between 51%- 74%; US$50 operations, factoring, credit million (US$7.5 million rating, leasing and finance, upfront and the balance housing finance, foreign over 24 months) for FDI exchange broking, credit between 75%-100%. card, money changing, b. Non-fund based micro credit and rural credit. activities: US$0.5 million c.100% operating subsidiaries can be established if 25% equity is divested to Indian entities over a period of time. However, this is exempted if US$50 million is brought in. Applies for joint venture companies with 75% or less than 75% foreign equity. Capital for minimum capitalization shall comprise ordinary shares. Investment process must comply with RBI guidelines. Construction Under automatic route; development services subject to: housing, commercial a.Minimum capitalization of premises, resorts,education US$10 million for WOSs institutions, recreational and US$5 million for joint facilities, city infrastructure, ventures with funds to be

brought in within six months of commencement of business. b. Minimum area of 10 hectares for serviced housing plots and built-up area of 50,000 sq m for construction development project and any of the above in case of combination of projects. Original investment cannot be repatriated before 3 years from minimum capitalization. However investor may exit early by FIPB approval. Telecommunication Automatic route up to 49%. services a) ISPs without FIPB approval beyond gateways, b) Infrastructure 49%. Companies must provider of dark fibre, right divest 26% equity in favour of way, duct space and c) of Indian public if they are electronic mail & voice mail listed in other parts of the world. Also subject to licensing and security requirements. Energy services Under automatic route power trading subject to provisions of Electricity Act (2003). Manufacture of cigars & Requires FIPB approval cigarettes and industrial license. Alcohol distillation and Requires FIPB approval brewing and industrial license. Tea industry, including Requires FIPB approval Plantations. subject to divestment of 26% equity in favour of Indian entities within five years. Source: compiled from a) Foreign Direct Investment in India: Policies and Procedures, Government of India, available at: http://www.dipp.nic.in/ manual/FDI_Manual_Latset.pdf [Accessed on June 2, 2009] and b) Press Note 7 (2008,) dated June 16, issued by DIPP, Government of India, available at: http://siadipp.nic.in/policy/changes.htm [Accessed on June 3,2009].

townships50

Government Regulation Regarding FIIs Investment

RBI has granted permission to SEBI registered (FIIs) invest in India under Portfolio investment scheme. All FIIs and their sub-accounts taken together cannot acquire more than24% of the paid up capital of an Indian company. Investment by individual FIIs cannot exceed 10% of paid up capital. Investment by foreign registered as sub accounts of FII cannot exceed 5% of paid up capital. Non Resident Indian (NRIs) and Persons of Indian Origin (PIOs) can purchase/sell shares/convertible debentures of Indian companies on Stock Exchanges under Portfolio Investment Scheme. For this purpose, the NRI/PIO has to apply to a designated branch of a bank, which deals in Portfolio Investment. All sale/purchase transactions are to be routed through the designated branch. An NRI or a PIO can purchase shares up to 5% of the paid up capital of an Indian company. All NRIs/PIOs taken together cannot purchase more than 10% of the paid up value of the company. This limit can be increased by the Indian company to 24% by passing a General Body resolution. The sale proceeds of the repatriable investments can be credited to the accounts of the NRI/PIO whereas the sale proceeds of non-repatriable investment can be credited only to NRO accounts. The sale of shares will be subject to payment of applicable taxes.

PORTFOLIO INVESTMENT SCHEME PIS is a scheme of Reserve Bank of India defined in schedule 3 of Foreign Exchange Management Act 2000. It allows NRIs to purchase or sell shares/debentures of Indian companies on a recognized stock exchange by routing such purchase/sale transactions through their account with Bank Branch. An NRI/PIO can purchase share up to 5% of the paid up capital of the Indian company. All NRIs/PIOs taken together cannot purchase more than 10% of the paid up value of the company. It can be increased up to 24% by passing a general body resolution. Investment can be repatriable or non-repatriable in nature. In order to invest on a repatriable basis, investor must have an NRI or FCNR bank account in India The amount representing investment should be received by inward remittance through normal banking channels or by debit to NRE Account/FCNR account of the NRI. The dividend/interest of units may be remitted through normal banking channels or credited to NCR/FCNR account of the investor.

Sale of shares
Through private arrangements with the approval of the RBI. Sale or transfer of shares and debentures of Indian companies to other NRIs. No permission is required from RBI; however transferee would require permission for purchase of the shares. Short-selling or selling the shares bought by NRI investors before delivery is prohibited.

Tax Obligations
Investors under the PIS are liable to pay Capital Gains Tax on their investments which depends on the tenure of their stocks. Prevailing rates are deducted at source by the designated bank.

Application for the PIS

A NRI can operate the PIS through only one selected branch. To operate from more than one branch, special permission from the RBI is required. Documents required by designated banks to apply for the PIS. PIS application form RPI or NRI Form, with details of shares bought from the primary market Tariff Sheet of the PIS Demat Account opening form

Procedure for opening of PIS Account

PIS (NRE) Account Application for PIS Letter of Authority for operating the account Acceptance of Fee Schedule for PIS Form RPI (with Repatriation benefits) Annexure-I (For shares purchased through Primary Market as NRI on Repatriable basis) Nomination Form DA-1 PIS (NRO) Account Application for PIS Letter of Authority for operating the account Acceptance of Fee Schedule for PIS Form NPI (without Repatriation benefits) Annexure-II (Shares purchased as NRI through Primary Market on nonrepatriation basis) Annexure-III (Shares purchased through Primary/Secondary Market during resident status/received in inheritance) Nomination Form DA-1. Government Initiatives Indias foreign investment policies allow FDI up to 26 per cent and FII of (an additional) 23 per cent in stock exchanges. Under the regulation. FIIs and the NRIs are allowed to invest in Indian Depository Receipts (IDRs) FPI have been allowed to trade in IRFs, but limits have been put in place to keep their influence under check Portfolio flows as a non-debt creating investment flow has increased its share in the total foreign investment flows. During the year 2003-04 these flows share in the capital flows touched an all time high of about 67.8 percent

Decision by FIIs based on Firm Specific Characteristics

Ownership structure A firms ownership structure influences its performance for several reasons. Differences in identity & concentration among owners determine their relative power, incentives and Ability to monitor managers. Shareholders such as family groups, financial institutions, government, and individuals have their own divergent goals. It is examined whether the Ownership has any influence on the investment decision of foreign institutional investors. Corporate performance It is important to understand the factors that can cause investors to stay away from providing capital to foreign firms. Prior research observed that more foreign funds were invested in firms with larges market capitalization, higher dividend yield and higher leverage. Share Returns Ahmadjian and Robbins (2005) observed foreign portfolio investment in the Japanese economy during the 1990s. Their analysis of 1108 firms between 1991 and 2000 showed that foreign investors were more interested in investment returns than in long-term relationships. They also found that contribution and influence of foreign funds was weak in closely-knit companies with close ties to domestic financial institutions and corporate groups. Stock market performance indicates the investors perceptions about the company. Market prices reflect not only the performance but also investors expectations about the future performance. Earnings per Share The investors will assess the performance of the company and one significant indicator of financial performance often used is earning per share. Price Earnings ratio

Price earning ratio indicates the growth of market price in relation to the earnings of the company. It establishes the relationship between the earnings and the market price. Price to book value Over 80% of the reporting parameters used to manage the company are designed to gauge returns to shareholders. Most management decisions are therefore biased towards delivering short-term value to them. An income statement or balance sheet does not reveal the companys ability to create value for customers, employees or shareholders. According to the OECD, most companies are well aware that the facts and figures contained in the financial reports fail to capture fully the essence of their operations. This fact is particularity evident in the case of companies whose book value is markedly different from the market value. The book value of the equity measures approximately the capital contributed by the shareholders, where as market price of the equity reflects how productively the firm has employed the capital contributed by the shareholders as assessed by stock market. The ratio of price to book value gauges whether the market valuation of the company is relative its worth or not.

Yield Yield has been computed to measure the shareholders returns. It is computed based on dividends and share price appreciation to reflect the overall return to the shareholders. All these ratios are computed quarterly.

Analytics of Decisions for Foreign Investment

As per the theory of international portfolio investment (Solnik 1991; Sharpe et al. 1999) the basic motivation for any investor including the FIIs for investing in foreign equity is to diversify their portfolio, reduce the diversifiable risk and earn higher returns. Essentially this is a two-step decision. The first step is the choice of the country. Having decided on the host country, the FII has to decide about the portfolio composition or portfolio choice within the country concerned. In taking the first step, since international investments involve returns in foreign currency, the same have to be factored in the analysis. Consider an American investor buying stock of an Indian company. Let P0 and P1 be the stock prices at the beginning and end of the investing period respectively. The domestic return in India on this stock can be labeled Rd, which would be as follows: Rd = (P1-P0) /P0 (1)

For the foreign investor, the return would be Rf derived as follows: Rf = (X1P1- X0P0) /X0P0 (2) Where, X0, X1 denote the Rupee-Dollar exchange rates at the beginning and end of the investing period. Any foreign equity investor simultaneously invests in the currency of the country whose stock is purchased and returns on currency Rc would be as follows:

Rc = (X1-X0)/X0 From equations (1), (2) and (3) it can be shown that 1 + Rf = (1+Rd)(1+Rc) and Rf = Rd + Rc + RdRc

(3)

Since the product of Rd and Rc would be small, both being percentages and less than 1.0, it can be concluded that Rf approximates to (Rd+Rc). Taking variance of this approximation as a measure of risk to an international investor in domestic stock we have VarRf = VarRd + VarRc + 2(Correlation of Rd and Rc) (Std.Deviation of Rd) (Std.Dev.of Rc) Where, Var stands for variance of expected returns, as measure of risk. Now, risk for a foreign investor would be determined among other things by correlation between domestic returns in the host country and returns on its currency, which can be very low or even negative. More importantly, since correlations between stock returns in different countries are lower than correlations among stock returns in the same country, investment in foreign assets can reduce the overall risk for an investor holding an internationally diversified portfolio. In taking the second step of his decision namely, the choice of investment portfolio within the host country, the FII is guided by the well-known Markowitz theory of portfolio choice (Markowitz 1952, 1959) rooted in the mean-variance approach. This approach translates into expected return cum risk analysis. While expected returns can be inferred from current stock returns and current profits, along with these we list the factors which shape up the risk perceptions of a typical Foreign Institutional Investor after choice of the country has been made.

Expected Returns

Risk Perception of FII

Current Stock Returns

Current Profit Margins

Company Profile Currency Profile Firm Characteristics

Salience

Extent of Modernization

International Exposure

Sales

FDI

Adv. Intensity

Payments for Technology

Foreign Exp. Export Import Intensity Intensity

Salience: In an inter-firm study of a given industry, the capacity of the firm to attract investment through the equity market can be explained by using the salience approach (Tversky and Kahneman 1974; Shiller 1989). As per this approach, judgements of investors are likely to be influenced by the degree of salience or vividness with which a firm is perceived by them. We capture salience through three variables: Firm size as represented by sales turnover, equity participation by foreign

promoters/partners (FDI), and advertisement intensity representing product differentiation and sales promotion. Foreign Direct Investment and Joint Ventures: We suggest that multinational affiliation as seen from FDI and joint ventures is an important feature that influences both the salience and unique risk characteristics of the firms. It has been argued in literature that multinational enterprises and their affiliates (MNEs) form a separate strategic group within an industry (Caves 1996, pp 94-95; Dunning 1993; Kumar 1990). This is because they control and own proprietary assets like technology, brand names, managerial skills, goodwill and product and process patents which give them an advantage over the local firms (Caves 1971, 1974; Dunning 1981; Buckley and Casson 1976; Lall and Siddharthan 1982). The ownership of proprietary intangible assets gives them monopolistic advantages over domestic firms. In other words they internalise several of the advantages (Rugman and Verbeke 1992). As a result of the ownership and internalisation advantages enjoyed by them, MNEs have been experiencing higher profit margins as compared to other firms. Several studies show higher profit margins enjoyed by MNEs after controlling for other variables that are likely to influence profits. For example Connor (1977) for Mexico and Brazil, Lacraws (1983) for Southeast Asian countries, Kumar (1990) for India. Firm Size: Larger firms have several options to choose from with regard to the decisions on product mix, markets to serve, international diversification, technology acquisition and foreign partners that smaller firms do not have. In all these cases smaller firms have severe size and resource constraints that they could be at a disadvantage. In addition large firms have better visibility in terms of brand names and other intangible assets. Several studies have used firm size to analyze its impact on firms performance like exports, growth and profits. Numerous studies have introduced firm size as a determinant of firm growth and profits (Buckley, Dunning & Pearce 1978; Rowthorn 1971; Siddharthan & Lall, 1982; Siddharthan, Pandit & Agarwal 1994; Cabral 1995; Das 1995; Variyam & Kraybill 1992; Shanmugam & Bhaduri 2002). Likewise quite a lot of studies have also reported a positive relationship between exports and firm size (Krugman 1990; With regard to the influence of firm size on FII inflows, Dahlquist and Robertsson (2001), Covrig, Lau and Ng (2002), Kang and Stulz (1994), and Aggarwal, R., Klapper, L., Wysocki, P., (2005) found firm size important in explaining FII. Advertisement Intensity Advertisement intensity is used to represent two features, namely, product differentiation and sales promotion, including promotion of brand names. Both these features influence salience positively. Product differentiation and brand names go together as brand names are less important for homogeneous products. In addition, product differentiation and brand names also contribute to market segmentation and there is evidence that it promotes FII inflows.

International Orientation: Earlier studies (Kang and Stulz 1994; Aggarwal, Klapper and Wysocki 2005) have shown that managers of foreign institutions prefer to invest in firms about which they are familiar. Some studies also show that fund managers invest in firms that have exports or foreign sales (Covrig and Ng 2002; Kang and Stulz 1994).

Foreign Expenditures, expenditures abroad as a percentage of total sales turnover. They are mainly incurred to establish branches and selling units abroad. Acquisitions of foreign firms are also included under this category. These expenditures contribute to the visibility of the Indian firm in the international market and increase its familiarity to foreign institutions Export Intensity, exports to sales ratio. This variable yet again contributes to international visibility and increases familiarity. Import Intensity, imports to sales ratio.

Extent of Modernization: FIIs are likely to favour firms that have an active modernization and technological up-gradation programme. Some technology is transferred intra-firm through FDI. Technology can also be transferred through the market to unaffiliated third parties. Proprietary technology like patents, designs and drawings, etc., can be licensed against lump-sum and royalty payments. We have already FDI under the salience section and we propose to introduce inter-firm transfer of technology here. Technology transfer against royalty and other payments will also cover long term non-equity strategic alliances entered into by the Indian firms with foreign firms. These are more enduring than arms length purchase of technology. The non-equity strategic alliances also contribute to the exposure of Indian firms in the international arena. As in the case of other variables, payment for technology is also considered as a ratio of sales turnover.

Two variables have been considered to indicate expected returns: annual stock returns and profit margins. Stock returns include dividends and changes in equity prices. Profit margins are gross profits as a ratio of sales turnover. Rai and Bhanumurthy (2004) for a study based on monthly FII flows into India (at an aggregate level) found stock returns an important determinant. Coondoo, and Mukherjee (2004) based on a time series of daily observations of aggregate FII flows into India found stock returns important. Aggarwal, Klapper and Wysocki (2005) have also introduced stock returns as an explanatory variable and found it important. In addition to annual stock returns we have also introduced profit margins as an additional indicator of returns. Higher profit margins could indicate market concentration and a more dominant role of the firm. All the variables are at the firm level. FIIit = 1SRit + 2FDIit + 3SALESit + 4ADSit + 5XSit + 6MSit + 7TPSit + 8FPSit + 9PRMit +

Where, i refers to the firmi and t to time. FII is foreign institutional investments, foreign institutional equity as a percentage of total equity (paid-up) capital of the firm. SR is the stock return FDI is foreign direct investments, is a dummy variables that takes the value 1 for firms where foreign promoters equity is more than 25 per cent of the total equity and 0 otherwise. SALES is the total sales turnover of the firm. ADS is advertisement expenditures as a ratio of sales turnover. XS is exports to sales turnover ratio. MS is imports to sales turnover ratio.

TP is technology payments to sales ratio, it refers to payments made to purchase technology and royalty payments. FPS is payments made in foreign exchange excluding imports and technology payments. They mainly refer to expenditures relating to setting-up of sales offices, branches, acquisitions of foreign firms and other related expenditures made overseas. PRM is the profit margin, gross profits to sales ratio.

Future Capital Market Scenario

Well this is on the mind of every individual that what is the final outcome or the future of Indian stock market fall and how global recession is going to affect us in India. CNBC-TV18s Stocks Editor, Udayan Mukherjee caught Rakesh Jhunjhunwala in a special series called Hunt for the Bottom and same are appended below to draw conclusions from the talk. Rakesh Jhunjhunwala is of the view that Indian share market has been in a bull run since April 2003 and thus corrections are part and parcel for any market. Moreover he gave his piece of mind to the investors that corrections generally test investors patience and their sheer belief in the stock markets. He says that corrections have to be deep time-wise and only then an investor is tested on the time front as for past so many years corrections have not been deep time-wise. He has a firm conclusion that the present correction is going to be one of the deepest and the longest corrections in the present times of bull market which has been running past for so many years. He advises investors not to lose heart in case sensex do not touch the levels of 25000 as one has to happily resting with the kind of gain stock traders have made for past so many years. However, he says that pull back rallies will be seen in the market. India just keeps getting better and better. The economy is growing rapidly surpassing some of Asias biggest economies. India is now becoming the third largest country in Asia economically. It has grown so much and is expected to continue to grow like this for a long time. The Indian Government is doing everything it can do to propel the growth rates in the Indian Industry, primarily in: India Stock Market, Indian Companies, Indias manufacturing index, India Business Sector, Indias Company sector and other India investment industries The yearly salaries are rising and the command to buy is under the command to spend. The Investment GDP ratio is at a high. It is now over 30 percent and between the years 1990 and 2004 the average was only 25 percent. It has been said that, once it reaches 30 percent, it is going to take off rapidly. So India is expected to move rapidly. The down side to Indias big movement is that there is a limit to how high it can go. India has grown so much, making the costs of everything go up so frequently. It can turn into the most expensive country in the world. The companies are now working above their finest ability. A lot of professionals say that this is a problem, but that people over-exaggerate while talking about it. Their main worry about India is that the roads are so bad in India and the amount of terrible roads may increase, but the government is addressing this issue. The prices of cement, used to make good roads, have also gone up a lot with the prices of everything else. There are so many road related projects that need to be done soon. A lot of people try to People undervalue Indias accomplishment in growth. The growth rates are very good and it wouldnt be wrong for people to overvalue it. India has created the best growth story that happen over a long time. Although India is growing, there can still be corrections in the market. No matter how well a country is doing, there is always something that can be fixed. Some say that they would like to wait until the market is fixed to invest. Dont let short-term concerns put you off from Investing in India:

When things happen in the news, it affects the market. Sometimes it is good for the market and sometimes it is bad. Just remember that the things that happen in the news, are not permanent and the market will increase or decrease with the next thing. The India market is not that strong because the rupee is getting smaller and the effect oil has. Also, recently, the uncertainty of what will happen between India and Pakistan and all of the bombings have affected the market and made others not want to invest. When thinking about all of the bad things in the news that can affect the market in a negative way, think about the things that affect it in a positive way as well. The growth rates are substantial and that yearly exports are bringing in a lot of money. The export market has increased because other countries are in demand. India is not relying on just a few countries anymore. It is now dealing with the countries that are said to have the fastest growth rate within the next few years. You need to look at a market in the long-term. When seeing it in the shortterm every market will look bad due to recent news. An investor needs to look past that. It is never guaranteed that you will make a lot of money when investing in any market, including an emerging one. However, India is said to be number one in the world right now for investment opportunities. Indian Bull Story is not over in the Indias Share Market. India stocks are not happy with the celebration of Indias independence. All of the commotion brought the market down six percent. But this is just another story that will be fixed in the longterm. India has a demographic outline greater than Chinas outline and they dont have to rely on global trade. Consumption is increasing a lot and the middle class is growing as well. In India, every month about six million people get a mobile phone. This is more than China. Corporate companies and firms have a very high return as well in India. It is said that the Reserve Bank of India come up with a way that the domestic credit cycle can last for an extensive time. This credit cycle and the investment cycle, of course, will keep India in the bull market for a long time. They stopped/slowed the growth of the bank credit. The bank is taking control of the credit and loans very well so that India stays on the right track. Remember, that even with India doing so well, there are always going to be flaws in the market, just like every market. Many things can happen in which India can lose the things it relies on. Any news related event that happens in any country will affect that countries market and sometimes other countries as well. India, having a very rapid growing economy is also a very expensive country in Asia. Many have high hopes for India and if investors invest in India, they would be buying into a country that has an excellent opportunity to make money over long-term.

Implications of FII inflows

The FII inflows this year have been robust leading to euphoric conditions in the stock market. The Sensex and NIFTY crossed the psychological levels of 20,000 and 6,000 respectively on the 21st leading to further conjectures on the future direction of movement of these indices. Such increases have given rise to discussion on the impact of these inflows on the stock indices as well as exchange rates. An analysis of data from January onwards shows that the Sensex has a positive correlation with FII inflows and is statistically significant though admittedly there are several other factors that impact the indices. This holds for daily as well as fortnightly data.

 However, when juxtaposed with the exchange rate, the picture is not that clear and while it may seem that prima facie there is reason to believe that the rupee should appreciate along with the FII inflows, the relation over a longer time period shows that this is not the case. This is so because the trade deficit has been widening simultaneously thus negating the positive effect of these flows. However, the future direction will be towards an appreciation of the currency though conditions would be held stable by the RBI. The RBI may have to resort to sterilization of these funds in case they do get out of hand, though the present scenario of liquidity being scarce could defer this process. Trends in FII inflows FII inflows have been increasing quite rapidly in the last few months leading to the build-up of optimism in the economy, as reflected by the Sensex. Cumulatively there has been an inflow of nearly $ 25 bn up to September 17, 2010. Last year, the same was around half at $ 12.2 bn. In fact, there has been acceleration in the last four months starting June where $ 14.5 has come in. The profile of these FII inflows is given in . For the entire period 63% has come from equity, and this had increased to around 77% since June. An interesting observation is that FII flows into the debt market have been lower than that in equity. This indicates that the perception that higher interest rates in the country would lead to excess flows into corporate debt may not always hold. The RBI has been increasing rates since April before the Annual Policy and twice again in July followed by the recent increase this month. The impact was witnessed in July and September and was of a low order in August. Economic Impact on stock markets The perception is that stock markets are moved quite decisively by the FII inflows. In the month of August, for example, the FIIs accounted for approximately 1/3 of the transactions on the stock exchanges while mutual funds accounted for another 8%. The information on the net FII flows into the equity segment as well as movement in Sensex is juxtaposed in . It is normally held that FIIs being net purchasers results in positive impetus on the stock indices while their net selling drives them down. The Sensex, which crossed 20,000 on 21st September, after more than two years, thus registering a new high has been increasing since June. Table provides the averages for the months to even out the aberrations during any time period. FII inflows ($ mn) and Average Sensex FII inflows Equity Debt 1690 -231 1921 938 464 474 6364 4135 2229 2961 2220 740 -1456 -1989 533 2197 2099 98 5431 3777 1654 2839 2404 435 4015 2937 1078

Jan Feb Mar Apr May June July Aug Sep(17th)

Sensex 17260 16183 17303 17679 16844 17300 17848 18177 18947

Impact on exchange rate The large inflows of FII fund into the economy has been held chiefly responsible for the rapid appreciation in the value of the rupee. In the last 15 days the rupee has strengthened (though not continuously) from around Rs 47/$ on Aug 31st to Rs 45.61 as on 20th September. However, it must be pointed out that FII inflows are just one component of foreign exchange transactions in the country which could influence the exchange rate. Data on other flows are not available with high frequency. The trade deficit for instance as may be observed in below has been high at over $ 10 bn a month consistently since April. This would negate the strength of FII inflows considerably. For the period January to September 17th, the coefficient of correlation between the exchange rate and FII inflows was -0.06 (t=0.79) while on a fortnightly basis was 0.05 (t=0.194). This does not show any relation between the two which is also reinforced by the regression analysis of first order changes in exchange rate on changes in FII flows. The coefficient of determination is low at 0.045 with the coefficient for FIIs being -0.00017 (t=2.8). The Table below also shows that on account of the trade deficit, on a monthly basis, the movements in the forex reserves have been fluctuating considerably. In fact in months such as July when the forex reserves increased by nearly $ 9 bn, the rupee had declined marginally on an average basis as the trade deficit had widened further by almost $ 2.5 bn. FII inflows, forex reserves, trade balance and Exchange rate ($mn) FII inflows Rs./$ Trade balance Forex Reserve Jan 1690 45.93 -9288 256,362 Feb 938 46.33 -9461 253,991 Mar 6364 45.52 -9210 254,685 Apr 2961 44.53 -11164 254,773 May -1456 45.80 -11292 247,951 June 2197 46.56 -10554 249,628 July 5431 46.84 -12929 258,551 Aug 2839 46.57 -13600 256,648 th Sep(17 ) 4015 46.51 ---257,569

Implications for the economy: 1. Higher FII inflows have shown at times tendencies to strengthen the rupee and continued flows could make the appreciation swifter. So far this year nearly $ 16 bn has come in which in rupee terms would be around Rs 75,000 cr. The RBI will have to keep a closer watch and weigh its options here to also protect the interests of exporters. This is significant given that exports have been growing at a brisk pace this year. a. The future flow of these funds would continue to depend on global economic developments and policy stances taken by various monetary authorities. Going by the present size of flows, the aggregate net inflows could cross $ 30 bn if this momentum is maintained. 2. Growing trade deficits would provide a check on the rupee appreciation in the medium term. While exports have been growing rapidly, imports have risen at faster rates thus exacerbating the deficit. The recent restrictions put by some of the US states on outsourcing could restrict the

growth of invisibles in the form of software receipts. Therefore, this cushion may not be available to the same extent. 3. There are implications on the monetary front. As of August end, growth in deposits has been tardy with an increase of Rs 1.77 lkh crore as against Rs 2.46 lkh crore last year (over March). Money supply growth has also been sluggish between April and August at 4.1% (5.6%). The higher FII funds should impact liquidity positively by increasing deposits and credit. a. The FII inflows should be increasing money supply through the forex assets of the banking system. However, the RBI will have to monitor these flows if they continue to grow at the same rate and would have to consider sterilization of such flows through the issuance of the MSS bonds to absorb these funds. b. However, given that deposits are not rising, these funds could be used to fund credit growth. c. Currency holding up to August end had increased by Rs 54,790 cr as against Rs 13,679 cr last year. It is expected that higher deposit rates should move them into the banking system which can be deployed for credit by banks.

Trading Strategies Used by FIIs

After a series of financial crises in the late 1990s, doubts have been expressed about the wisdom of promoting free cross border portfolio flows. Foreign Institutional Investors (FIIs) constituting a major proportion of these cross border capital flows are considered to be driven by animal spirits rather than rational investment decisions. The FIIs have often been blamed for large and concerted withdrawals of capital from countries in times of crisis, despite evidence showing that domestic/resident investors are often the first to exit at times of crisis, perhaps because of better information. Foreign portfolio inflows through FIIs, in India, are important from the policy perspective, especially when the country has emerged as one of the most attractive investment destinations in Asia. In this study an effort has been made

to develop an understanding of the investment decisions, trading strategies and behavior of the FIIs in the Indian equity market. The Foreign Institutional Investors (FIIs) have emerged as important players in the Indian equity market in the recent past. Through various analyses it has been found that there is strong evidence of FIIs chasing trends and adopting positive feedback trading strategies at the aggregate level on a daily basis. However there is no evidence of positive feedback trading on a monthly basis. A general perception about the FIIs is that they are speculators and their investment is motivated by short- term gains. The FIIs in pursuit of short- term gains adopt short- term trading strategies such as positive feedback trading and herding (i.e. buy or sell stocks together as a group). Such behavioural biases of FIIs, it is believed, may lead to price overreaction and contribute to the creation or exacerbation of a financial crisis.

Theoretical foundations of Trading Strategies

Positive feedback trading describes the strategy of rushing in when the markets are booming and rushing out when the markets are on the decline. Hence it predicts a relation between the past performance of the market (as indicated by the value of the market index) and the current FII investment. Positive feedback trading pattern can result from extrapolative expectations about prices, from stop loss orders i.e. automatic selling when the price falls below a certain point, from forced liquidations when an investor is unable to meet her margin calls or from portfolio insurance investment strategy which calls for selling stocks when the price falls and buying it when the price rises. Positive feedback trading tests the hypothesis that net equity demand by FIIs is driven by recent returns in the equity market of the host country. This can be viewed as a general exploration of the Brennan and Cao (1997) model that suggests that net inflows should be a linear function of returns across equity markets. This model explains why flows would depend on returns in contrast with the more often discussed and tested, mean variance model that produces no flows because of changes in asset prices. This model explains that the relation between the trades of well and poorly informed investors and price changes is critically related to the extent to which the information (dis)advantage arises from a marginal private information advantage in the current period, or from an accumulation of superior private information signals in the past.

Model Specification
NFIIPt = Rt-1 Where NFIIPt denotes net equity purchases by FIIs at time t. Rt-1 denotes returns in the previous period. >0 refers to the case of positive feedback traders. <0 indicates a case of negative feedback trading. The negative feedback trader exhibits a buy low, sell high strategy Negative feedback trading can result from profit taking as markets rise or from investment strategies that target a constant share of wealth in different assets. If indeed the trading by foreign investors is related with returns, there are several views as to whether this reflects the informational advantage or disadvantage of foreign investors. Further there are differing views on the possible creation of price pressure, herding bias and destabilizing

effects of trading by FIIs. Some theoretical rationales that have been developed to explain the herding bias in investor trading are as follows: Reputational Herding: investors may disregard their private information and trade with the crowd due to the reputational risk of acting differently from other managers (Scharfstein and Stein (1990)). Investigative Herding: managers may trade together simply because they receive correlated private information, perhaps from analyzing the same indicators (Froot, Scharfstein and Stein (1992)) and (Hershleifer, Subrahmanyam and Titman (1994)). Informational cascades: Managers may infer private information from prior trades of betterinformed managers and trade in the same direction (Bikchandani, Hershleifer and Welch (1992)). Institutional investors may share an aversion to stocks with certain characteristics, such as stocks with lower liquidity or stocks that are less risky (Falkenstein 1996).

Positive Feedback Trading: Results

There is strong evidence that FIIs have been positive feedback investors at the aggregate level on daily basis. - FIIs in India are return chasers and/or momentum traders A shock to current returns increases flows significantly but the impact is short-lived The trend chasing - momentum trading characteristic of the FIIs meets the more stringent test as well. Lagged daily returns help in predicting daily flows over and above the predictability of past flows FIIs do not follow their own daily trade. This is evident from the low predictable component FII net equity purchases by FIIs. Popular financial press hypothesis of flows impacting returns does not hold true for India The trading Horizon of FIIs is possibly a day and not a month.

Herding
Herding or correlated trading refers to a tendency for a particular investor groups trade to accumulate on one side of the market or the other without regard to direction. The results indicate that foreign investors have a tendency to herd in the Indian equity market even though they all may not do it on the same day. In times of pressure in the stock market, on account of a financial crisis in the region there is excessive sell side herding even though the extent of herding on the average and on either side of the market during a crisis may be lower than that in the immediately preceding period.

Pros of FII Investment

The advantages of having FII investments can be broadly classified under the following categories. 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. Thus, opening up the economy to FIIs is in line with the accepted preference for non-debt creating foreign inflows over foreign debt. Furthermore, because of this preference for equities over bonds, FIIs can help in compressing the yield-differential between equity and bonds and improve corporate capital structures. Further, given the existing savings-investment gap of around 1.6 per cent, FII inflows can also contribute in bridging the investment gap so that sustained high GDP growth rate of around 8 per cent targeted under the 10th Five Year Plan can materialize. B. Managing uncertainty and controlling risks

Institutional investors promote financial innovation and development of hedging instruments. Institutions, for example, because of their interest in hedging risks, are known to have contributed to the development of zero-coupon bonds and index futures. FIIs, as professional bodies of asset managers and financial analysts, not only enhance competition in financial markets, but also improve the alignment of asset prices to fundamentals. Institutions in general and FIIs in particular are known to have good information and low transaction costs. By aligning asset prices closer to fundamentals, they stabilize markets. Fundamentals are known to be sluggish in their movements. Thus, if prices are aligned to fundamentals, they should be as stable as the fundamentals themselves. Furthermore, 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. Equity market development aids economic development. By increasing the availability of riskier long term capital for projects, and increasing firms incentives to supply more information about themselves, 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 shareholders and management. Information asymmetries and incomplete contracts between shareholders and management are at the root of the agency costs. Dividend payment, for example, is discretionary. 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 endeavour. What is needed is large shareholders with leverage to complement their legal rights and overcome the free-rider problem, but shareholding beyond say 5 per cent can also lead to exploitation of minority shareholders. 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.Institutions are known for challenging excessive executive compensation, and remove under performing managers. There is some evidence that institutionalization increases dividend payouts, and enhances productivity growth.

Cons: Management Control and Risk of Hot Money Flows

The two common apprehensions about FII inflows are the fear of management takeovers and potential capital outflows. A. Management control FIIs act as agents on behalf of their principals as financial investors maximizing returns. There are domestic laws that effectively prohibit institutional investors from taking management

control. For example, US law prevents mutual funds from owning more than 5 per cent of a companys stock. According to the International Monetary Funds Balance of Payments Manual FDI is that category of international investment that reflects the objective of obtaining a lasting interest by a resident entity in one economy in an enterprise resident in another economy. The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the investor in the management of the enterprise. According to EU law, foreign investment is labelled direct investment when the investor buys more than 10 per cent of the investment target, and portfolio investment when the acquired stake is less than 10 per cent. Institutional investors on the other hand are specialized financial intermediaries managing savings collectively on behalf of investors, especially small investors, towards specific objectives in terms of risk, returns, and maturity of claims. All take-overs are governed by SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, and sub-accounts of FIIs are deemed to be persons acting in concert with other persons in the same category unless the contrary is established. In addition, reporting requirement have been imposed on FIIs and currently Participatory Notes cannot be issued to un regulated entities abroad. B. Potential capital outflows FII inflows are popularly described as hot money, because of the herding behaviour and potential for large capital outflows. Herding behaviour, with all the FIIs trying to either only buy or only sell at the same time, particularly at times of market stress, can be rational.4 With performance-related fees for fund managers, and performance judged on the basis of how other funds are doing, there is great incentive to suffer the consequences of being wrong when everyone is wrong, rather than taking the risk of being wrong when some others are right. The incentive structure highlights the danger of a contrarian bet going wrong and makes it much more severe than performing badly along with most others in the market. It not only leads to reliance on the same information as others but also reduces the planning horizon to a relatively short one. Value at Risk models followed by FIIs may destabilize markets by leading to simultaneous sale by various FIIs, as observed in Russia and Long Term Capital Management 1998 (LTCM) crisis. Extrapolative expectations or trend chasing rather than focusing on fundamentals can lead to destabilization. Movements in the weightage attached to a country by indices such as Morgan Stanley Country Index (MSCI) or International Finance Corporation (W) ( IFC) also leads to en masse shift in FII portfolios. Another source of concern are hedge funds, who, unlike pension funds, life insurance companies and mutual funds, engage in short-term trading, take short positions and borrow more aggressively, and numbered about 6,000 with $500 billion of assets under control in 1998. Some of these issues have been relevant right from 1992, when FII investments were allowed in. The issues, which continue to be relevant even today, are: (i) benchmarking with the best practices in other developing countries that compete with India for similar investments; (ii) if management control is what is to be protected, is there a reason to put a restriction on the maximum amount of shares that can be held by a foreign investor rather than the maximum that can be held by all foreigners put together; and (iii) whether the limit of 24 per cent on FII investment will be over and above the 51 per cent limit on FDI. There are some other issues such as whether the existing ceiling on the ratio between equities and debentures in an FII portfolio of 70:30 should continue or not, but this is beyond the terms of reference of the Committee. It may be noted that all emerging peer markets have some restrictions either in terms of quantitative limits across the board or in specified sectors, such as, telecom, media, banks, finance companies, retail trading medicine, and exploration of natural resources. Against this

background, further across the board relaxation by India in all sectors except a few very specific sectors to be excluded, may considerably enhance the attractiveness of India as a destination for foreign portfolio flows. It is felt that with adequate institutional safeguards now in place the special procedure mechanism for raising FII investments beyond 24 per cent may be dispensed with.

Three myths about FIIs

S N Mehta is an "informed" investor in the stock market. He knows the difference between the book value and market value of a stock and tracks the P/E (price-earnings) ratio of various sectors before investing in the market. He makes it a point to book profits before the calendar year ends and make fresh investments at the beginning of the year. Why does he do this? Mostly, because of a conventional notion about foreign institutional investor behavior. FIIs, it is thought, book profit at the year-end because US investors go on a redemption spree at that time. After booking profits, the FIIs return to the market with bags of funds in the new-year when they make fresh asset allocations for different markets in the world, including India.

Mehta is one of many investors who has been spreading this myth. Actually, FIIs can book profit at any opportune moment of the year. There is no redemption pressure by their investors at the end of the year. They exit any market whenever they smell trouble. And, finally, they don't wait till January to make fresh asset allocations. Fresh allocations (or cutbacks) can be done anytime in the year for any market. The FIIs review asset allocation on a yearly, half-yearly, quarterly, monthly, fortnightly, weekly and even daily basis! While regular reviews are done through teleconferencing, more comprehensive off-site meetings do take place periodically. What's the origin of the Myth Number One? It could possibly be tracked back to the bonus system for fund managers. Traditionally, the bonus is distributed at the beginning of the year based on the fund manager's year-end performance. Earlier, the performance was determined on the actual profit booked. But now the net asset value of a portfolio determines the quality of fund management so managers do not need to sell stocks and book actual profit to impress the company. So the year-end profit booking theory does not hold water. Of course, managers of hedge funds still get their bonus on the actual profits booked. But the Indian markets are dominated by FIIs and not hedge funds. Now let's look at Myth Number Two: FIIs are under redemption pressure during the year-end, which triggers profit booking. Nothing can be further from reality. Pension funds, provident funds and high net worth individuals are the main investors in the $ 7 trillion US mutual fund market. These investors have no compulsion to redeem units by the year-end. Corporate pension funds press for redemption only when there is a mass retirement of employees in the offing. And because employees tend to job-hop every two or three years, US companies rarely see retirement in large numbers in any industry. In a typical case, a Fortune 100 company gives the mandate for managing its few million dollars worth of pension funds to three or four fund managers. The funds' performance is reviewed every year and if the company is not happy with a particular fund, it withdraws the mandate from one fund and gives it to another. Even in this case, there is no selling pressure since it is the portfolio that changes hands, not the fund invested in the market.

Finally, let's deal with Myth Number Three: fresh asset allocations at the beginning of the year. Typically, an FIIs' asset allocation committee consists of the global asset allocator, regional or emerging market asset allocator, a country specialist and a sector specialist. The combination of country specialist and sector experts creates a model portfolio for a particular country. Once this is endorsed by the committee after hard lobbying, it gets reviewed on a continuous basis. There is often a convergence of recommendations and this has been the case with certain FIIs at this point of time. Had this been the case, the FII money would have come in at the beginning of the year and the market would not have waited till June to see foreign funds pouring in money. It is in indeed true that there is a slowdown in FII investment in November. It could get even worse in December. But the reasons for this are different: it's logical to book profits when the markets are on a roll. Where does one see FII investment in the Indian markets next year? Despite Goldman Sachs's famous BRIC report, few FIIs are over-weight on India even now (possibly Prudential, Capital International, Government of Singapore, Janus and a few others fall in this category). However, some of them are changing their India stance from under-weight to neutral. What does that mean? By a rough calculation, the emerging market asset allocation by the FIIs could be $100 billion a year. On various emerging market indices, the weight on India is around 5 per cent. In other words, around $5 billion from the $100 billion kitty could come to India when the overall stance is neutral. This is what we have seen this year. If more and more FIIs change their stance, those that were under-weight on India and had not invested in local markets earlier could rush in with funds. This will swell the kitty to much above $5 billion. In the most optimistic scenario, more and more FIIs could go overweight on India and Asia. In that case, the inflow into the equity market next year can double this year's flow. At the structural level, an increase in floating stock or free float will encourage the FIIs to tap the Indian markets more aggressively. (Free float is the amount of a company's stock that is available for trading and excludes the promoters' holding. It can be increased through initial public offers and divestment of government holdings in public sector undertakings.)

The increase in free float will encourage their bullishness on India. One must, however, remember that the FIIs don't become bulls in January and bears at the year-end. The December slumber is more to do with beer and partying

Analysis & Findings

Q-1: What is the role of FIIs (Foreign Institutional Investors) in developing the Indian Market? Rank them in order. Ans. Parameters Economic Development Stock Market Development Commercial Development Technological Development 1 1 7 2 . 2 3 3 4 . 3 4 .. 2 4 4 2 .. 2 6

Interpretation: It is evident from the table of responses that out of total 10 responses, seven persons have given 1st ranking to stock market development followed by commercial development and economic development. Nobody has given technological development 1st & 2nd ranking. Commercial development has been given 2nd ranking by four persons and same to stock market & economic

development. Nobody has given 3rd & 4th ranking to stock market development. Technological development has been given 3rd ranking by four persons and 4th ranking by six persons. So, we can say that the major role which is played by FIIs in Indian Market is for stock market development and then commercial development. Q-2: Rank these parameters of development according to their importance and influenced by FIIs. Ans. A. Economic Development Parameters 1 2 3 4 GDP . 6 4 Forex Reserve 4 6 . Export .. . 4 6 Core Sector Growth 6 4 .. . Interpretation: It can be seen from the table that ratio between Forex reserve and core sector growth under 1st ranking is 40:60 and under 2nd category it is 60:40. So, major development is in core sector growth followed by forex reserve. 3rd and 4th ranking has been given to GDP & Export in which 4th is mainly for export. B. Stock Market Development Parameters Market Capitalization No. of Listed companies Turnover Ratio Value Added ( as % of GDP) 1 5 . . 5 2 5 . . 5 3 . . 10 .. 4 . 10 . .

Interpretation: It is evident that there is a tie-up between market capitalization and Value added. They have got equal responses. 3rd ranking has been given to turnover ratio and 4th ranking has been given to no. of listed companies. C. Commercial Development Parameters Increase in Earnings Expansion Shareholders Value Regulatory Control 1 4 . 6 . 2 6 . 4 . 3 . 10 . . 4 . . . 10

Interpretation: Ratio between shareholders value and increase in earnings under 1st category is 40:60 and under 2nd category is 60:40. So, 1st category is given to shareholders value and 2nd to increase in earnings by majority of them. 3rd ranking is given to expansion and 4th is given to regulatory control.

D. Technological Development Parameters Technology in Production Information System Value Chain System Global Integrated System

1 4 6

2 . 6 . 4

3 3 7

4 7 3

Interpretation: Ratio between information system and global integrated system is 40:60 under 1st category and under 2nd category 60:40. So, global integrated system has been given 1st ranking and information syatem 2nd category. Ratio between production technology and value chain system is 30:70 under 3rd category and under 4th category it is 70:30. So, 3rd category has been given to value chain system and 4th to production technology. Q-3: Rank the factors attracting FIIs inflows. Please tick in the appropriate cell. Ans. Parameters Very high High Neutral Emerging stock market returns 9 1 Domestic stock market returns 2 8 Change in credit ratings 3 7 Interest rates 8 2 Business cycle conditions 4 6 GDP growth 7 3 Political situation 2 8 Technology level 2 8 Regulatory environment/disclosure 2 8 Taxation policy 8 2 Interpretation: The major factor attracting FIIs investment, according to the table, is emerging market returns followed by Domestic market returns. Change in credit ratings of the country also affects the returns but not very much as compared to GDP growth and interest rates. Taxation policy and disclosure rules also affect the investment but not very high. Political situation and technological level have neutral affect means may be positive or negative. Nobody has given due importance to these factors. Q-4: What would be the impact of increasing FIIs inflows in short term? Rank them in order. Ans. parameters Currency appreciation Liquidity Stock market volatility Investors confidence increases 1 6 . 4 2 4 6 . 3 . 10 4 .. 10 . .

Interpretation: Major impact would be on currency and after that stock market volatility as per the responses. After that, investors confidence increases and liquidity impact would be the last. Q-5: What would be the future capital market scenario due to growing inflow of FIIs? Ans. Everybody has said that in future, capital market scenario would be balanced because FIIs would be the major source of investment and because of the global capital markets, future correction would be possible and market will be stable. At present, market is in boom condition and no corrections have been yet which would be possible in coming years. Q-6: What are the Risk-Return strategies or techniques used by FIIs in Indian Capital market? Identify them in order of their importance. Ans. They are showing herding behavior. Besides, at that time, no strategy has been adopted by them and they are continuously showing herding or group behavior. Q-7: Is the ceiling limit i.e. 24% of paid-up capital more or less? Ans. Everybody has said that it is correct. Q-8: Is there any need for curbing the increasing FIIs inflows? Ans. Majority of them have agreed that there is a need for curbing this in, at least, in short run because they are continuously influencing the investors mood in the market and volatility has been continuously increasing.

Q-9: Why India is a hot destination among BRIC countries? Give five reasons. Ans: 1. India offers a very good safe investment avenue 2. The regulation system in India has many lenient approaches. 3. Indian political environment is relatively stable. 4. Indian capital market is relatively more efficient and less volatile. 5. The global market integration in India has many positive aspects. Q-10: Any other suggestions regarding FIIs investment dynamics in India. Ans. One person has given suggestion that FIIs investment in India keeps a correlation with the stock market development and hence with the overall economic growth of India. So, I should empirically examine the short run as well as long run dynamics of the FIIs investment using time seriesmodels.

LITERATURE REVIEW
1. The paper compares the actual inflows as well as the Performance and Potential Indices of FDI into India and selects countries of Emerging Asia. Although there are some encouraging signs for India, it is clear that the FDI inflows into India are far from adequate and that there exists a large unfulfilled potential. 2. The purpose of this paper is to examine the effects of different sources of Institutional investors both domestic and foreign on the dynamism of Indian capital market in the recent years. 3. The role of investment in promoting economic growth has received considerable attention in India since independence. But the role of foreign institutional investment in the economic development of India is a recent topic of discussion among economists and development planners. Given this growing importance of FIIs for the Indian economy, it is essential that the dynamics of such cross-border portfolio investment in the context of economic growth of the country be examined. It is with this aim an attempt has been made in this paper to test the causality between foreign institutional investments and the real economic growth in India over a period 1993:Q1 to 2009:Q2. 4. Since the beginning of liberalization FII flows to India have steadily grown in importance. In this paper we analyze these flows and their relationship with other economic variables and arrive at the major conclusions. 5. As part of its initiative to liberalize its financial markets, India opened her doors to foreign institutional investors in September, 1992. This event represents a landmark event since it resulted in effectively globalizing its financial services industry. We study the impact of trading of Foreign Institutional Investors on the major stock indices of India. Our major

findings are as follows. First, we find that unexpected flows have a greater impact than expected flows on stock indices. Second, we find strong evidence consistent with the basebroadening hypothesis. Third, we do not detect any evidence regarding momentum or contrarian strategies being employed by foreign institutional investors. Fourth, our findings support the price pressure hypothesis. Finally, we do not find any substantiation to the claim that foreigners destabilize the market.

6. Foreign institutional investors have gained a significant role in Indian capital

markets. Availability of foreign capital depends on many firm specific factors other than economic development of the country. In this context this paper examines the contribution of foreign institutional investment particularly among companies included in sensitivity index (Sensex) of Bombay Stock Exchange. Also examined is the relationship between foreign institutional investment and firm specific characteristics in terms of ownership structure, financial performance and stock performance. It is observed that foreign investors invested more in companies with a higher volume of shares owned by the general public. The promoters holdings and the foreign investments are inversely related. Foreign investors choose the companies where family shareholding of promoters is not substantial. Among the financial performance variables the share returns and earnings per share are significant factors influencing their investment decision. 7. In this paper we examine if Domestic Financial Institutional Investors (DFIIs) have any home advantage (Bias) compared to Foreign Institutional Investors (FIIs) for both the equity and debt segments of the Indian capital market. We find that both the DFIIs and FIIs follow a positive feedback trading mechanism chasing stock market returns. However, FIIs seem to be reacting faster compared to DFIIs in the case of the equity market. This may be owing to the fact that the former have international expertise and greater resources and play a dominant role in this segment of capital market as shown by their share in the trading volume. In contrast, the DFIIs lead the market returns which in turn attract the FIIs thus, supporting home advantage (bias) argument. Interestingly, the DFIIs unlike in the equity market, play a more important role in debt market trading activities. Our results point at greater debt market inefficiency in the Indian context which may be a reflection of the relatively underdeveloped nature of this market.

8. Since the beginning of liberalization FII flows to India have steadily grown in importance. In this paper we analyze these flows and their relationship with other economic variables and arrive at the following major conclusions: While the flows are highly correlated with equity returns in India, they are more likely to be the effect than the cause of these returns; The FIIs do not seem to be at an informational disadvantage in India compared to the local investors; The Asian Crisis marked a regime shift in the determinants of FII flows to India with the domestic equity returns becoming the sole driver of these flows since the crisis.
9. The Foreign Institutional Investors (FIIs) have emerged as important players in the Indian equity market in the recent past. This paper makes an attempt to develop an understanding of the dynamics of the trading behavior of FIIs and returns in the Indian equity market by analyzing daily and monthly data. From our analysis we find that there is strong evidence of FIIs chasing trends and adopting positive feedback trading strategies at the aggregate level on a daily basis. However there is no evidence of positive feedback trading on a monthly basis. The results of our analysis also indicate that foreign investors have a tendency to herd together in

their trading activity in India. The trading behavior and biases of the FIIs do not appear to have a destabilizing impact on the equity market.
*

RESEARCH METHODOLOGY
Research problem An Analytical Study of Foreign Institutional Investors Investment in India and Its Future Scenario Research Design A research design specifies the methods and procedure for conducting a particular study. One has to specify the approach he intends to use with respect to the proposed study. Broadly speaking, research design con be grouped into three categories. EXPLORATORY: Focuses on discovery on ideas and generally based on secondary data.
DISCRIPTIVE: It is undertaken when the research wants to know the characteristics

of certain groups such as age, sex, educational level, income, occupation etc. CASUAL: It is undertaken when the researcher is interested in knowing the cause and effect relationship between two or more variables.

The research design of my study is Exploratory & Futuristic.

DATA SOURCES There are two broad categories of sources of data: Primary Data: For primary data collection, questionnaire has been used to get the information from technical experts of stock market. Secondary Data: For secondary data collection, journals, magazines, internet and books also have been used. SAMPLE SIZE To get the primary data, sample size has been taken 10 technical experts and sampling method is judgmental sampling. SAMPLING TOOLS Likert scales, Rating scales have been used.

References
1. EMERGING ASIA INVESTMENT POLICY DIALOGUE EXPLORATORY MEETING: FDI AND THE INDIAN EXPERIENCE, Shanghai, 6 December 2002. 2. Dr. Rekha, Professor, Alliance Business School, Bangalore, India, Prof. Anirban Dutta, Sr. Research Associate, Alliance BusinessSchool, Bangalore, India Impact of FIIs and DIIs in Dynamism of Indian Capital Market 5th National Conference On Indian Capital Market: Retrospect and Prospects, 19 September, 2009. 3. P. K. Mishra & B.B. Pradhan, Siksha O Anusandhan University, Bhubaneswar, Orissa, India, K. B. Das Dept. of A&A Economics, Utkal University, Bhubaneswar, Orissa,India, Foreign Institutional Investments and Real EconomicGrowth in India: A Casuality Test, International Research Journal of Finance and Economics ISSN 1450-2887 Issue 41 (2010) Euro Journals Publishing, Inc. 2008. 4. Rajesh Chakrabarti* Dupree College of Management,Georgia Institute of Technology, FII Flows to India: Nature and Causes, 755 Ferst Drive, Atlanta GA 30332, USA. 5. Sandhya Ananthanarayanan , Chandrasekhar Krishnamurti & Nilanjan Sen , Nanyang Technological University, Foreign Institutional Investors and Security Returns: Evidence from Indian Stock Exchanges.

6. P. Krishna Prasanna, Foreign Institutional Investors: Investment Preferences in India. 7. Sanjay Sehgal (corresponding author) Professor of Finance, Department of Financial Studies University of Delhi, ESC-Pau,France , Neeta Tripathi Dyal Singh College, University of Delhi, India, An Examination of Home Advantage (Bias) Argument in the Indian Financial Markets: Domestic Financial Institutional Investors (DFIIs) Vis-a-Vis Foreign Institutional Investors (FIIs). 8. B L Pandit and N S Siddharthan, Inter-firm differences in FII portfolio investment in India. 9. Rajesh Chakrabarti*, Dupree College of Management, Georgia Institute of Technology,755 Ferst Drive, Atlanta GA 30332, USA, FII Flows to India: Nature and Causes. 10. AMITA BATRA , THE DYNAMICS OF FOREIGN PORTFOLIO INFLOWS AND EQUITY RETURNS IN INDIA, September 2003.

Websites:
1. http://www.sebi.gov.in/Index.jsp?contentDisp=Database 2. http://www.bseindia.com/histdata/categorywise_turnover.asp 3. http://www.bseindia.com/about/st_key/bus_tran_fii.asp 4. http://www.nseindia.com/content/equities/eq_dailyturnover.htm 5. http://www.nseindia.com/content/equities/eq_historicaldata.htm 6. http://www.nseindia.com/content/equities/eq_businessgrowth.htm 7. http://www.nsdl.co.in 8. http://www.ccil.com 9. http://www.emeraldinsight.com/ 10. http://www.moneycontrol.com/stocks/marketstats

Conclusion
At present, since last one year after recession, FIIs are continuously increasing their position in the Indian capital market. Due to their activities, market has crossed the limit of 20,000 mark (BSE Sensex). If we analyze, quantitatively, foreign investment, FIIs investment has increased 20 $billion as compared to 1990. During the financial year 2010-11, up to Aug 2010, net FIIs investment has reached to US $mn 11849. Major funds have been ploughed through Mauritius and US and the sectors attracting major investment are electrical equipment and manufacturing sector. From time to time, government has framed new rules & regulations to control FII inflows. To regulate this, SEBI has already tied the disclosure rules. For decision of investment, they actually analyze the firm-specific characteristics- ownership structure, share returns, corporate performance, P/E ratio, EPS etc. after that; their choice is based on two steps. First, choice of host country where to invest and second, composition of portfolio investment in that host country. As far as the future of Indian capital market is concerned, there is a lot of scope in future for boom in the market, 10 years down the line. What I have personally observed, if the current trend goes on in the market, in coming 2 years, market will be able to cross 25000 mark ( BSE Sensex). Trading strategies mainly used by FIIs is positive feedback trading and herding strategy. But they are continuously showing the herding behavior in the market. So, FIIs investment is the major source of investment in the country by overseas buyers. They are also putting their money in the form of Foreign Direct Investment. There is a lot of scope to examine in this field and empirical study can be done using time series models.

Questionnaire Respondent Profile: Name: .. Company/organization Name: Designation: Location: .. Contact No.: ..
Q-1: What is the role of FIIs (Foreign Institutional Investors) in developing the Indian Market? Rank them in order. a) Economic Development . b) Stock Market Development . c) Commercial Development . d) Technological Development . Q-2: Rank these parameters of development according to their importance and influenced by FIIs. A) Economic Development a) GDP (Gross Domestic Product) b) Forex Reserve c) Exports d) Core sector Growth ... A) Stock Market Development a) Market Capitalization b) No. of listed companies c) Turnover ratio

d) Value Traded (as % of GDP) A) Commercial Development a) Increase in Earnings b) Expansion c) Shareholders Value d) High efficiency/Regulatory Control A) Technological Development a) Technology in production b) Information System c) Value Chain system d) Global integrated system ..

Q-3: Rank the factors attracting FIIs inflows. Please tick in the appropriate cell. Factors Emerging stock market returns Domestic stock market returns Change in credit ratings Interest rates Business cycle conditions GDP growth Political situation Technology level Regulatory environment/disclosure Taxation policy Very high High Neutral

Q-4: What would be the impact of increasing FIIs inflows in short term? Rank them in order. a) Currency appreciation b) Liquidity c) Stock market volatility d) Investors confidence increases Q-5: What would be the future capital market scenario due to growing inflow of FIIs? a) Positive b) Negative c) Balanced Ans. .. Give reasons to justify your answer:

Q-6: What are the Risk-Return strategies or techniques used by FIIs in Indian Capital market? Identify them in order of their importance. Ans:

Q-7: Is the ceiling limit i.e. 24% of paid-up capital more or less? a) More b) Less c) Correct Ans. Q-8: Is there any need for curbing the increasing FIIs inflows? a) Yes b) No Ans. Reasons for your answer:

Q-9: Why India is a hot destination among BRIC countries? Give five reasons. Ans:

Q-10: Any other suggestions regarding FIIs investment dynamics in India. Ans: