AN IMPACT OF FII FLOWS IN INDIAN STOCK MARKET INDICES.

MASTER OF BUSINESS ADMINISTRATION IN ANNA UNIVERSITY - TRICHY

SUBMITTED BY SARANYA.K (REG NO.81909601045)

DEPARTMENT OF MANAGEMENT STUDIES SARANATHAN COLLEGE OF ENGINEERING (AFFILIATED TO ANNA UNIVERSITY TRICHY)

ACKNOWLEDGEMENT A project of this magnitude and nature requires cooperation and support from many, for successful completion. I would like to bring forth my sincere thanks our Principal Dr.Y.Venkataramani, Saranatahan College of Engineering Trichy for allowing me to do this project work. I express my deep sense of gratitude to Prof. V. Nagarajan Director Academics of Saranathan College of Engineering, Trichy for providing me an opportunity to persuade with this work. I would like to express my gratitude to Mr. S. Devanathan., Professor and Head Department of Management Studies, Saranathan College of Engineering Trichy, for his valuable support and keen interest with appropriate suggestions which enabled me to do my project wit great interest. With pleasure, I express my sincere thanks to my project guide, Mr.B.S. Chandra Mouli, professor of Management Studies, for her consistent encouragement and guidance during my project work and for critically reviewing the manuscript of the work. I also owe my thanks to everyone who all had given valuable suggestions and impeccable guidelines for accomplishing this project work, without which successful completion of his project would not have been possible.

DECLARATION I here by declare that the mini project entitled AN IMPACT OF FII FLOWS IN INDIAN STOCK MARKET INDICES. Submitted to Saranathan college of engineering (Affiliated to Anna university), Trichy, in partial fulfillment of the requirement for the degree of master business administration is a record of original work done by me under the supervision and guidance of PROF. B .S. CHANDRA MOULI , DEPARTMENT OF MANAGEMENT STUDIES.

STATON: DATE:

SARANYA.K REG NO. 81909601045

CHAPTER 1 2 3 4 5 6 7 8 INTRODUCTION

CONTENTS

PAGE NO.

REVIEW OF LITERATURE RESEARCH METHODOLOGY ANALYSIS AND INTERPRETATION OF DATA SUGGESTIONS CONCLUSION BIBLIOGRAPHY APPENDIX

ABSRACT As part of its initiative to liberalize its financial markets, India opened her doors to foreign institutional investors in September, 1992 which represented a land mark event since it resulted in effectively globalizing its financial services industry. The study is carried out in order to ascertain how the FII purchases affect the Indian stock market indices. The research has been carried out by using the ex-post facto type of research design. The objective of the study is that to study and analyze the impact of foreign institutional investment on BSE and NSE indices. To study the variations in the foreign investment flows during the two year period ranging from 2009-2010 The data set for our study comprises of FII purchases in BSE and NSE, BSE 100 ,SENSEX, NIFTY and NIFTY JUNIOR and the market capitalization and turnover of BSE and NSE and the period of study is for two years ranging from 2009 2010. Calculations are done based upon the monthly average calculated on the daily data. The study also exemplifies the comparative analysis of BSE and NSE flows with regard to the FII flows. The following are the statistical tools that are used for such purpose Mean T-test Correlation

INTRODUCTION FII is defined as an institution organized outside of India for the purpose of making investments into the Indian securities market under the regulations prescribed by SEBI. FII include Overseas pension funds Mutual funds investment trust Asset management company Nominee company Bank Institutional portfolio manager University funds Endowments Foundations Charitable trusts Charitable societies A trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or investments on behalf of a broad-based fund. FIIs can invest their own funds as well as invest on behalf of their overseas clients registered as such with SEBI. These client accounts that the FII manages are known as sub-accounts. A

domestic portfolio manager can also register itself as an FII to manage the. Funds of subaccounts Foreign institutional investor means an entity established or incorporated outside India which proposes to make investment in India. Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for foreign institutional investors. FII is defined as an institution organized outside of India for the purpose of making investments into the Indian securities market under the regulations prescribed by SEBI. REGISTRATION WITH SEBI:

Application in Form A duly signed by the authorized signatory of the applicant. Certified copy of the relevant clauses or articles of the Memorandum and Articles of Association or the agreement authorizing the applicant to invest on behalf of its clients Audited financial statements and annual reports for the last one year, provided that the period covered shall not be less than twelve months. A declaration by the applicant with registration number and other particulars in support of its registration or regulation by a Securities Commission or Self Regulatory Organization or any other appropriate regulatory authority with whom the applicant is registered in its home country. A declaration by the applicant that it has entered into a custodian agreement with a domestic custodian together with particulars of the domestic custodian. A signed declaration statement that appears at the end of the Form. Declaration regarding fit & proper entity.

The eligibility criteria for applicant seeking FII registration: As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required to fulfill the following conditions to qualify for grant of registration: Applicant should have track record, professional competence, financial soundness, experience, general reputation of fairness and integrity;

 The applicant should be regulated by an appropriate foreign regulatory authority in the same capacity/category where registration is sought from SEBI. Registration with authorities, which are responsible for incorporation, is not adequate to qualify as Foreign Institutional Investor. The applicant is required to have the permission under the provisions of the Foreign Exchange Management Act, 1999 from the Reserve Bank of India. Applicant must be legally permitted to invest in securities outside the country or its incorporation / establishment. The applicant must be a "fit and proper" person. The applicant has to appoint a local custodian and enter into an agreement with the custodian. Besides it also has to appoint a designated bank to route its transactions. Payment of registration fee of US $ 5,000.00 The procedure for the registration of sub- account: Annexure B of the Regulations duly filled and signed by the FII and Sub-Account has to be submitted by FII on behalf of the proposed sub-account. With if DD of US$ 1000 favoring "Securities and Exchange Board of India" as fees is to be submitted and payable at New York. No proprietary, foreign corporate and foreign individuals need not be broad based. The duration required to register the sub-accounts. For registered Foreign Institutional Investor, it takes 3 working days from the date of receipt of complete application and fees. Investment limits: The sub-account which is not a foreign individual/ corporate can individually invest up to 10%. The limit for each foreign corporate/ individual is 5%. These limits are within the overall limit of 24% / 49% or the sectoral caps as the case may be. Investment limit by all registered FIIs or sub accounts in primary or secondary markets under Portfolio Investment Scheme is subject to a ceiling of 24% of issued share capital of a

company. The limit can be extended up to 49% per sectoral cap if the general body of the company approves it.

NSE
The National Stock Exchange (NSE) is a stock exchange located at Mumbai, India.

It is the largest stock exchange in India in terms of daily turnover and number of trades, for both equities and derivative trading.NSE has a market capitalization of around 7,262,507 crore (US$ 1,605.01 billion) (October 2010) and was expected to become the biggest stock exchange in India in terms of market capitalization by 2009 end, although this has not yet occurred.
Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the

two most significant stock exchanges in India and between them are responsible for the vast majority of share transactions. The NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange fifty), an index of fifty major stocks weighted by market capitalization. NSE is mutually-owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. There are at least 2 foreign investors NYSE Euro next and Goldman Sachs who have taken a stake in the NSE. As of 2006, the NSE VSAT terminals, 2799 in total, cover more than 1500 cities across India .In October 2007, the equity market capitalization of the companies listed on the NSE was US$ 1.46 trillion, making it the second largest stock exchange in South Asia. NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities. It is the second fastest growing stock exchange in the world with a recorded growth of 16.6%. BSE

 The Bombay Stock Exchange (BSE) is a stock exchange located in Dalal Street, Mumbai and is the oldest stock exchange in Asia. The Bombay Stock Exchange has the largest number of listed companies in the world, with 4990 listed as of August 2010. As of August 2010, the equity market capitalization of the companies listed on the BSE was US$1.78 trillion, making it the 4th largest stock exchange in Asia and the 11th largest in the world It has also been cited as the world's best performing stock market. With over 4,900 Indian companies listed and over 7700 scrips on the stock exchange the Bombay Stock Exchange has a significant trading volume. The BSE SENSEX (Sensitive index), also called the "BSE 30", is a widely used market index in India and Asia. Though many other exchanges exist, BSE and the National Stock Exchange of India account for the majority of the trading in shares in India.

Literature of review
David A. Carpenter et al (2005) has examined that the Indian government has established

a regulatory framework for three separate investment avenues: foreign direct investment; investment by foreign institutional investors; and investment by foreign venture capital investors. While these investment alternatives have created clear avenues for foreign investment in India, they remain subject to many conditions and restrictions which continue to hamper foreign investment in India.
Bose Suchismita et al (2005) has examined the impact of reforms of the foreign

institutional investors' (FIIs)investment policy, on FII portfolio flows to the Indian stock markets, an aspect, studies on determinants of FII flows to India so far have not taken into consideration. FIIs have been allowed to invest in the domestic financial market since 1992; the decision to open up the Indian financial market to FII portfolio flows was influenced by several factors such as the disarray in India's external finances in 1991 and a disorder in the country's capital market. Aimed primarily at ensuring on-debt creating capital inflows at a time of an extreme balance of payment crisis and at developing and

disciplining the nascent capital market, foreign investment funds were welcomed to the country. Analysis also helps to evaluate the impact of liberalization policies as well as measures for strengthening of policy framework for FII flows, in the post-Asian crisis period
Samy Dr. P. Chella et al (2006) held that Investors can pick up stocks at these levels for a

growth story for long term i.e. for equities a 5 years holding period is reasonable to give a very above average return. Caution may be exercised to buy only good, well established market movers and never, to buy on margins or play intraday or dabble in derivatives market, which is high risk.
Sikdar Soumyen (2006) held that the surge in inflows has not been matched by a

corresponding growth in the absorptive capacity of the Indian economy. The major reason is the persistent slowdown of industrial activity since 1997. At the same time, the Reserve Bank of India (RBI) has been reluctant to let the rupee find its market-clearing level under the circumstances. This has resulted in steady accretion to our foreign exchange reserves (FER) over the last few years. Problems of Foreign Capital are widening of current account deficit, monetization, appreciation of real exchange, etc.
Andy Lin Chih-Yuan Chen (2006) has explored the relationship between qualified

foreign institutional investors (QFIIs) and Taiwans stock market and evaluates the effect of FIIs investment transactions on Taiwans stock market. Bytaking the date of easing regulatory restrictions on foreigners stock investment holdings as a cutoff point, the research uses the highest and lowest 10 stocks of FII holdings in three industry sectors as sample portfolios to study the prior- and post-event returns.
Dhamija Nidhi (2007) held that the increase in the volume of foreign institutional

investment (FII) inflows in recent years has led to concerns regarding the volatility of these flows, threat of capital flight, its impact on the stock markets and influence of changes in regulatory regimes. The determinants and destinations of these flows and how are they influencing economic development in the country have also been debated. This paper examines the role of various factors relating to individual firm-level characteristics and macroeconomic-level conditions influencing FII investment. The regulatory

environment of the host country has an important impact on FII inflows. As the pace of foreign investment began to accelerate, regulatory policies have changed to keep up with changed domestic scenarios. The paper also provides are view of these changes.
P. Krishna Prasanna (2008) has examined 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.

RESEARCH METHODOLOGY: Identifying and defining the problem The study is carried out in order to ascertain how the FII purchases affect the Indian stock market indices. Research design The research has been carried out by using the ex-post facto type of research design. Objective of the study
To study and analyze the impact of foreign institutional investment on BSE and NSE

indices To study the variations in the foreign investment flows during the two year period ranging from 2009-2010

Data sources In order to check the reliability and the validity of the data, secondary method of data collection has been used from the websites like SEBI, BSE, NSE, and RBI. Sampling technique The type of sampling used is convenient sampling. The indices taken for the study is BSE30 BSE100 NIFTY NIFTY JUNIOR

Analysis and interpretation The following statistical tools have been used Mean
T-test.

Correlation Scope of the study The study is confined for a period of two years from 2009-2010 with a special reference to FII equity purchases in BSE and NSE.

Limitation of the study The study is confined only to FII equity purchase.
The period of study is taken as two years due to time constraints

ANALYSIS AND INTERPRETATION OF DATA STATISTICAL TOOLS

T TEST: Ho: FII purchase is independent to that of the time period H1: FII purchase is dependent to that of the time period

Paired Samples Statistics Std. Std. Pair 1 Pair 2 NSE2009 NSE2010 BSE2009 BSE2010 Mean 104.70 1083.38 881.19 93.5000 N 12 12 12 12 Deviation 306.176 3216.082 1549.203 2015.22643 Error Mean 88.385 928.403 447.216 581.7457 6

Paired Samples Correlations N Pair 1 Pair 2 NSE2009 &NSE2010 BSE2009 & BSE2010 12 12 Correlation .498 -.265 Sig. .099 .406

Sig. (2Std. Mean Pair 1 Pair 2 NSE2009 NSE2010 BSE2010 BSE2010 -978.686 Deviation 3075.035 Paired Differences Std. Error 95% Confidence Interval of Mean 887.686 822.25115 the Difference Lower Upper -2932.470 -1022.07091 975.098 2597.45424 -1.103 11 .958 11 .294 .359 t df tailed)

787.69167 2848.36153

INFERENCE: Since the calculated value is less than tabulated value, Ho is accepted and hence it is concluded that the time period has no influence on the FII purchase.

CORRELATION: YEAR: 2009 BETWEEN FII PURCHASES AND BSE30

Karl Pearson correlation model is used in order to identify the relationship between the FII equity purchases on BSE30 index. Monthly FII purchases and BSE30 index for the calendar year 2009 had been taken as variables for such purpose. Table showing relationship between FII purchase and BSE 30 with special reference to year 2009 FII FII Pearson Correlation Sig. (2-tailed) N BSE30 Pearson Correlation Sig. (2-tailed) N 1 12 .369 .238 12 BSE30 .369 .238 12 1 12

INFERENCE: The association between the FII equity purchase in BSE and BSE30 index is found to be positively correlated. The correlation is 0.369. Both FII purchases and BSE30 increases in I & IV phase and decreases in II & III phase hence it is inferred that it is positively correlated.

BETWEEN FII PURCHASES AND BSE100

Karl Pearson correlation model is used in order to identify the relationship between the fii equity purchases on BSE100 index. Monthly FII purchases and BSE100 index for the calendar year 2009 had been taken as variables for such purpose. Table showing relationship between FII purchase and BSE 100 with special reference to year 2009 FII FII Pearson Correlation Sig. (2-tailed) N BSE100 Pearson Correlation Sig. (2-tailed) N 1 12 .362 .248 12 BSE100 .362 .248 12 1 12

INFERENCE: The association between the FII equity purchase in BSE and BSE100 index is found to be positively correlated. The correlation is 0.362. Both FII purchases and BSE100 increases in all the phases hence it is inferred that it is positively correlated BETWEEN FII PURCHASES AND NIFTY Karl Pearson correlation model is used in order to identify the relationship between the fii equity purchases on NIFTY index. Monthly FII purchases and NIFTY index for the calendar year 2009 had been taken as variables for such purpose

Table showing relationship between FII purchase and nifty with special reference to year 2009 FII FII Pearson 1 NIFTY .292

Correlation Sig. (2-tailed) N NIFTY Pearson Correlation Sig. (2-tailed) N

12 .292 .358 12

.358 12 1 12

INFRENCE: The association between the FII equity purchase in NSE and NIFTY is found to be positively correlated. The correlation is 0.292. Both FII purchases and NIFTY increases in I , II& IV phases and decreases in III phase hence it is inferred that it is positively correlated BETWEEN FII PURCHASES AND NIFTY JUNIOR Karl Pearson correlation model is used in order to identify the relationship between the fii equity purchases on NIFTY JUNIOR index. Monthly FII purchases and NIFTY JUNIOR index for the calendar year 2009 had been taken as variables for such purpose

Table showing relationship between FII purchase and nifty junior with special reference to year 2009 FII FII Pearson Correlation Sig. (2-tailed) N 1 12 NIFTYJUNIOR .211 .511 12

NIFTYJUNIOR

Pearson Correlation Sig. (2-tailed) N

.211 .511 12

1 12

INFERENCE The association between the FII equity purchase in NSE and NIFTY JUNIOR is found to be positively correlated. The correlation is 0.211. Both FII purchases and NIFTY JUNIOR increases in II & IV phase and decreases in I & III phase hence it is inferred that it is positively correlated YEAR: 2010 BETWEEN FII PURCHASES AND BSE30 Karl Pearson correlation model is used in order to identify the relationship between the fii equity purchases on BSE30 index. Monthly FII purchases and BSE30 index for the calendar year 2010 had been taken as variables for such purpose.

Table showing relationship between FII purchase and BSE 30 with special reference to year 2010 FII FII Pearson Correlation Sig. (2-tailed) N BSE30 Pearson Correlation Sig. (2-tailed) N 1 11 .634(*) .036 11 BSE30 .634(*) .036 11 1 12

INFERENCE: The association between the FII equity purchase in BSE and BSE30 index is found to be positively correlated. The correlation is 0.634. Both FII purchases and BSE30 increases in I ,II, III& IV phases hence it is inferred that it is highly correlated BETWEEN FII PURCHASES AND BSE100 Karl Pearson correlation model is used in order to identify the relationship between the fii equity purchases on BSE100 index. Monthly FII purchases and BSE100 index for the calendar year 2010 had been taken as variables for such purpose.

Table showing relationship between FII purchase and BSE 100 with special reference to year 2010

FII FII Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 11 .624(*) .040 11

BSE100 .624(*) .040 11 1 12

BSE100

INFERENCE:

The association between the FII equity purchase in BSE and BSE100 index is found to be positively correlated. The correlation is 0.624. Both FII purchases and BSE100 increases in I & III phase and decreases in II & IV phase hence it is inferred that it is highly correlated

BETWEEN FII PURCHASES AND NIFTY Karl Pearson correlation model is used in order to identify the relationship between the fii equity purchases on NIFTY index. Monthly FII purchases and NIFTY index for the calendar year 2010 had been taken as variables for such purpose.

Table showing relationship between FII purchase and nifty with special reference to year 2010 FII FII Pearson Correlation Sig. (2-tailed) N NIFTY Pearson Correlation Sig. (2-tailed) N 1 12 .424 .170 12 NIFTY .424 .170 12 1 12

INFERENCE: The association between the FII equity purchase in NSE and NIFTY index is found to be positively correlated. The correlation is 0.424. Both FII purchases and NIFTY increases in I & III phase and decreases in II & IV phase hence it is inferred that it is positively correlated

BETWEEN FII PURCHASES AND NIFTY JUNIOR Karl Pearson correlation model is used in order to identify the relationship between the fii equity purchases on NIFTY JUNIOR index. Monthly FII purchases and NIFTY JUNIOR index for the calendar year 2010 had been taken as variables for such purpose.

Table showing relationship between FII purchase and nifty junior with special reference to year 2010 FII FII Pearson Correlation Sig. (2tailed) N NIFTYJUNIOR Pearson Correlation Sig. (2tailed) N 1 NIFTYJUNIOR .477 .116 12 .477 .116 12 12 12 1

INFERENCE: The association between the FII equity purchase in NSE and NIFTY JUNIOR index is found to be positively correlated. The correlation is 0.477. Both FII purchases and NIFTY JUNIOR increases in I & III phase and decreases in II & IV phase hence it is inferred that it is positively correlated

SUGGESTIONS Proper stabilization is required in the movement in the indices with reference to the domestic stock market. The FII flows should be streamlined properly as it will have a significant reflection back on the real economy in the long term Sufficient mechanism is required towards receiving accurate information because this will have an significant impact in the FII flows The SEBI should take the active steps in attracting the foreigners towards making the significant investment in debt securities

CONCLUSION This study examined the caused by the flow of foreign institutional investments on NSE and BSE for a period of 2 years from 2009- 2010. The study reveals that the FII flows have increased considerably which could have a significant impact in the stock market. From our results I conclude that the FII equity purchase creates a significant impact in the NSE and BSE indices. To say specifically the BSE indices are affected much by the inflows than the NSE indices. This is explicit in case of BSE100 index in the year 2009. On the contrary most of the NSE indices are also affected and showed a bull market during the months from September to December. The variation is high in the year 2010 in nifty and nifty junior. If we study the

relationship between the indices and the FII flows, the NSE exhibits a good relationship in the way of movement, whereas the BSE is not that much better, in another way it can be concluded that the FII flows is less during the year 2009 than that of year 2010 which ultimately reflected in the reduction of index points. To end up with the adverse or good, the FII impact can be felt in black and white terms.

BIBILIOGRAPHY The following books websites have been referred for preparing this report. BOOKS Gopalasamy N,capital market the Indian financial scene, MACMILLAN INDIA LTD., 2005. Dr.Kamalesh N Aggarwala & Deeksha Aggarwala, bulls bears & the mouse,

Macmillan India ltd., 2000. WEBSITES

www.investopedia.com

www.sebi.gov.in www.bseindia.com www.nseindia.com

YEAR 2009

FII PURCHASE YEAR MONTH BSE 2009 JAN 2009 FEB 2009 MAR 2009 APR 2009 MAY 2009 JUN 2009 JUL 2009 AUG 2009 SEP 2009 OCT 2009 NOV 2009 DEC -1745 -978 -893 -120 5267 -1245 -1066 -1502 2659 135 251 359 BSE 30 9424.24 8891.61 9708.5 11403.2 5 14625.2 5 14493.8 4 15670.3 1 15666.6 4 17126.8 4 15896.2 8 16926.2 2 17464.8 1

BSE

FII PURCHASE NIFTY -258.64 -149.12 -34.17 327.06 694.3 -3.87 -59.33 -179.38 632.15 0.021 85.4 201.94 2854.36 2816.2 2802.27 3359.82 3957.96 4436.37 4343.09 4571.1 4859.3 4994.1 4953.53 5099.74

NIFTY JUNIOR 4365.32 4098.8 3962.71 5044.73 6346.83 7803.1 7857.06 8368.67 8875.58 9554.85 9780.32 10211.32

100 NSE 4790.3 2 4516.3 8 4942.5 1 5803.9 7 7620.1 3 7571.4 9 8176.5 4 8225.5 8930.3 1 8333.1 8 8914.7 7 9229.7 1

YEAR:2010

FII PURCHASE YEAR MONTH BSE -1334 -494 3295 571 -2094 1262 931 731 1993.47 1471.17 2108 2203.52 BSE 30 BSE 100 16357.9 6 16429.5 5 17527.7 7 17558.7 1 16944.6 3 17700.9 17868.2 9 17971.1 2 20069.1 2 20032.3 4 19521.2 5 20509.0 9 8707.82 8758.51 9300.2 9379.04 9041.23 9442.58 9556.67 9627.72 10627.3 5 140640 10280.8 1 10675.0 2

FII PURCHASE NSE -343.785 -98.59 704.39 133.36 -574.81 350.63 378.2 308.04 1124.4 685.14 262.77 -29.16 NIFTY 5156.22 4839.57 5178.14 5294.75 5052.97 5187.77 5359.74 5457.23 5811.48 6096.1 6055.33 5971.32

NIFTY JUNIOR 10512.89 10032.25 10581.08 10948.48 10736.07 11011.48 11464.55 11865.72 12457.54 13073.68 12940.18 12103.73

2010 JAN 2010 FEB 2010 MAR 2010 APR 2010 MAY 2010 JUN 2010 JUL 2010 AUG 2010 SEP 2010 OCT 2010 NOV 2010 DEC