Role of fii in indian market

Role of F.I.I’s in Indian
Capital Markets
BUSINESS LAW PROJECT
DHEERAJJOSHI
GAURAV SHARMA
HARISHSHAW
KARANT PATEL
MANISHA SHARMA

Table of Contents
I. ACKNOWLEDGEMENT .............................................................................................. 2
II. INTRODUCTION ........................................................................................................... 3
III. FII IN INDIA .................................................................................................................... 5
FOREIGN INVESTMENTS
IV. FII POLICIES IN INDIA............................................................................................... 6
INVESTMENT BY FII’s
MARKET DESIGN FOR FII’s
PROHIBITIONS ON INVESTMENTS
ELEGIBILITY TO REGISTER AS FII
SEBI tightens P-note rule to curb black money via FII route
V. FII REGULATIONS.......................................................................................................11
WITH REGARD TO INVESTMENT IN SECONDARY
MARKET-
FII POSITION LIMIT IN INDIVIDUAL STOCKS
VI. FII ACTIVITY IN INDIA .............................................................................................14
1992-1997
1998-2002
2003-2007
2008-2014
Secret of SENSEX: Biggest FII turn-on since 2000
VII. FII & CAPITAL MARKET ANALYSIS......................................................................19
OBSERVATION
ANALYSIS & INTERPRETATION
RESULTS & FINDINGS
SUMMARY OF THE RESEARCH
VIII. ANNEXURES ................................................................................................................. 23

ROLE OF F.I.I’S IN INDIAN CAPITAL MARKETS - [SELECT DATE] 2
ACKNOWLEDGEMENT
Completion of a project and writing of the report is a satisfying and pleasing part of
the opportunity, for those who contributed towards it. While doing this project we
were guided in a way that not only showed us the right direction but also helped us
to grow more rational in our thinking and approach.
This project has been more of teamwork and its successfulcompletion would have
been impossible without sincere cooperation of all those who have been associated
with it.
We owe enormous intellectual debttowards our professor and mentor Prof. Jagdish
Shettigar whosesuggestions and guidance was invaluable and helped us throughout
our project.
Last but not the least we would like to thank all those people and organizations who
have helped us directly or indirectly in the successfulcompletion of this study.

INTRODUCTION
The changes in economic scenario (after the liberalization) and the economic growth have raised
the interest of Indian as well as Foreign Institutional Investors (FII’s) in the Indian capital market.
The recent massive structural reforms on the economic and industry front in the form of de-
licensing rupee convertibility, tapping of foreign funds, allowing foreign investors to come to
India, have resulted, on one hand, in the quantum leap in activities/volume in the Indian capital
market, and on the other hand and more importantly, that the Indian capital market has undergone
a metamorphosis in terms of institutions, instruments, etc. The capital market in India is rightly
termed as an emerging and promising capital market. During last 20 years or so, the Indian capital
market has witnessed growth in volume of funds raised as well as of.
The buoyancy in the capital market has appeared as a result of increasing industrialisation, growing
awareness globalisation of the capital market, etc. Several financial institutions, financial
instruments and financial services have emerged as a result of economic liberalisation policy of
the Government of India.
The capital market has two interdependent segments: the primary market and the secondary
market. The primary market is the channel for creation of new securities. These securities are
issued by public limited companies or by government agencies’ in the primary market, the
resources are mobilized either through the public issue or through private placement route. It is a
public issue if anybody and everybody can subscribe for it, whereas if the issue is made available
to a selected group of persons it is termed as private placement. There are two major types of
issuers of securities, the corporate entities who issue mainly debt and equity instruments and the
Government (Central as well as State) who issue debt securities. These new securities issued in
the primary market are traded in the secondary market. The secondary market enables participants
who hold securities to adjust their holdings in response to changes in their assessment of risks and
returns.
An FII stands for an institution which is incorporated outside India looking for an investment in
India only in securities. These can invest their own funds or invest funds on behalf of their overseas
clients registered with SEBI. The client accounts are known as ‘sub-accounts’. A domestic
portfolio manager can also register as FII to manage the funds of the sub-accounts. A foreign
investor can either come into India as a FII or as a sub-account. As on March 31, 2011, there were
1,722 FIIs registered with SEBI and 5,686 sub-accounts registered with SEBI as on March 31,
2011.

The FIIs have huge financial strength and invest for the purpose of income and capital appreciation.
They are not interested in taking control of the company. But what are the benefits of having
foreign exchange inflow as the funds from the multilateral finance institutions and FDI are
insufficient.
 It lowers the cost of capital, access to cheap global credit.
 It supplements domestic savings and investments.
 It leads to higher asset price and in the Indian market.

FII IN INDIA
In India most of the market entities are interested in attracting foreign capitals it not only helps in
creating liquidity for the stock of the firms and the stock market but also leads to lowering of the
cost of the capital for the firms and allows them to compete more effectively in the global market
place.
FOREIGN INVESTMENTS
It has been defined as “a transfer of funds or materials from one country (called capital exporting
country) to another country (called host country) in return for a direct or indirect participation in
the earnings of that enterprise.”
Foreign investment can be made through the following routes-
 Foreign Direct investment (FDI) - FDI pertains to international investment in which
the investor obtains a lasting interest in an enterprise in another country. Mostly it takes
the form of buying or constructing a factory in a foreign country or adding improvements
to such a facility in form of property, plants or equipments and thus is generally long term
in nature.
 Foreign Portfolio Investment (FPI)- FPIis a short-term to medium- term investment
mostly in the financial markets and is commonly made through foreign Institutional
Investors (FIIs), non-resident Indian (NRI) and persons of Indian origin (PIO).
 Foreign Venture Capital Investor (FVCI) - FVCI is one made by foreign investors
in Indian Venture Capital Undertakings (VCU) and Venture Capital Funds (VCF).
FOREIGN
INVESTMENT
Foreign Direct
Investment(FDI)
Foreign Portfolia
Investment(FPI)
Foreign Venture Capital
Investor(FVCI)

FII POLICIES IN INDIA
The policy framework for permitting FII investment was provided under the Government of India
guidelines, which enjoined upon FIIs to obtain an initial registration with SEBI and also RBI’s
general permission under FERA. The Government guidelines of 1992 also provided for eligibility
conditions for registration, such as track record, professional competence, financial soundness and
other relevant criteria, including registration with a regulatory organisation in the home country.
The guidelines were suitably incorporated under the SEBI (FIIs) Regulations, 1995.With coming
into force of the Foreign Exchange Management Act, (FEMA), 1999 foreign exchange related
transactions of FIIs were permitted by RBI. Right from 1992, FIIs have been allowed to invest in
all securities traded on the primary and secondary markets, including shares, debentures and
warrants issued by companies which were listed or were to be listed on the Stock Exchanges in
India and in schemes floated by domestic mutual funds. The holding of a single FII, and of all FIIs,
NRIs and OCBs together in any company were initially subject to the limit of 5 per cent and 24
per cent of the company’s total issued capital, respectively. Furthermore, to ensure a broad base
and prevent such investment acting as a camouflage for individual investment in the nature of FDI
and requiring Government approval, funds invested by FIIs have to have at least 50 participants
(changed to 20 investors in August, 1999) with no single participant holding more than 5 per cent
(revised to 10 per cent in February, 2000).
The ceiling limit under special procedure was enhanced in stages as follows:
 to 30 per cent from April 4, 1997
 to 40 per cent from March 1, 2000,
 to 49 per cent from March 8, 2001,and
 To sectorial cap/statutory ceiling from September 20, 2001.
Under eligibility conditions, the definition of broad based funds was relaxed in August, 1999 and
in February, 2000 and newer entities, such as foreign firms were allowed to invest as sub-accounts.
In order to have a level playing field in intermediation, domestic portfolio managers were allowed
in February, 2000 to manage the funds of sub-accounts, so as to give end-customers a greater
choice about the identity of their fund manager in India. FIIs were initially allowed to only invest
in listed securities of companies. Gradually, they were allowed to invest in unlisted securities,
rated government securities, commercial paper and derivatives traded on a recognised stock
exchange.
From November 1996, any registered FII willing to make 100 per cent investment in debt securities
were permitted to do so subject to specific approval from SEBI as a separate category of FIIs or
sub-accounts as 100 per cent debt funds In order to increase transparency, SEBI issued a circular
on October 31, 2001 to all FIIs and their custodians advising the FIIs to report as and when any

derivative instruments with Indian underlying securities are issued/renewed/redeemed by them,
either on their own account or on behalf of sub-accounts registered under them. In 2003 this
circular was further revised to include disclosure of more details about terms, nature and
contracting parties.
The overall cap on investments in Government securities, both through the normal route and the
100 per cent debt fund route, was revised from US$1 billion to US$1.75 billion in November,
2004. Moreover, investments were allowed only in debt securities of companies listed or to be
listed in stock exchanges. Investments were free from maturity limitations. From April 1998, FII
investments were also allowed in dated Government securities. Treasury bills, being money market
instruments, were originally outside the ambit of such investments, but were included subsequently
from May, 1998.In April 2006 there was a rise in the cumulative debt investment limits from US
$1.75 billion to US $2 billion and US $0.5 billion to US $1.5 billion for FII/Sub Account
investments in Government securities and Corporate Debt, respectively.
INVESTMENT BY FII’s
A FII may invest through 2 routes-
 EQUITY INVESTMENT ROUTE- In case of Equity route the FIIs can invest in the
following instruments:
1. Securities in the primary and secondary market including shares which are unlisted,
listed or to be listed on a recognized stock exchange in India.
2. Units of schemes floated by the Unit Trust of India and other domestic mutual
funds, whether listed or not.
3. Warrants.
 100% Debt route: In case of Debt Route the FIIs can invest in the following instruments:
1. Debentures (Non-Convertible Debentures, Partly Convertible Debentures etc.)
2. Bonds
INVESTMENT
BY FII's
EQUITY
INVESTMENTS
100% DEBT

3. Dated government securities
4. Treasury Bills
5. Other Debt Market Instruments
*It should be noted that foreign companies and individuals are not be eligible to invest through
the 100% debt route.
The evolution of FII policy in India has displayed a steady and cautious approach to liberalisation
of a system of quantitative restrictions (QRs). The policy liberalization has taken the form of,
 Relaxation of investment limits for FIIs.
 Relaxation of eligibility conditions.
 Liberalisation of investment instruments accessible for FII’s.
MARKET DESIGN FOR FII’s
Foreign Institutional Investors means an institution established or incorporated outside India which
proposes to make investment in India in securities. A Working Group for Streamlining of the
Procedures relating to Foreign Institutional Investors, constituted in April, 2003, inter alia,
recommended streamlining of SEBI registration procedure, and suggested that dual approval
process of SEBI and RBI be changed to a single approval process of SEBI. This recommendation
was implemented in December 2003.
Currently, entities eligible to invest under the FII route are as follows:
 As FII: Overseas pension funds, mutual funds, investment trust, asset management
company, nominee company, bank, institutional portfolio manager, university funds,
endowments, foundations, charitable trusts, charitable societies, a trustee or power of
attorney holder incorporated or established outside India proposing to make proprietary
investments or with no single investor holding more than 10 per cent of the shares or units
of the fund.
 As Sub-accounts: The sub account is generally the underlying fund on whose behalf the
FII invests. The following entities are eligible to be registered as sub-accounts, viz.
partnership firms, private company, public company, pension fund, investment trust, and
individuals.
FIIs registered with SEBI fall under the following categories:
 Regular FIIs- those who are required to invest not less than 70 % of their investment in
equity-related instruments and 30 % in non-equity instruments.
 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

PROHIBITIONS ON INVESTMENTS
Foreign Institutional Investors are not permitted to invest in equity issued by an Asset
Reconstruction Company. They are also not allowed to invest in any company which is engaged
or proposes to engage in the following activities:
 Business of chit fund
 Nidhi Company
 Agricultural or plantation activities
 Real estate business or construction of farm houses (real estate business does not include
development of townships, construction of residential/commercial premises, roads or
bridges).
 Trading in Transferable Development Rights (TDRs).
ELEGIBILITY TO REGISTER AS FII
Entities who propose to invest their proprietary funds or on behalf of “broad based” funds (fund
having more than twenty investors with no single investor holding more than 10 per cent of the
shares or units of the fund) or of foreign corporate and individuals and belong to any of the under
given categories can be registered for Foreign Institutional Investors (FII’s)
 Pension Funds
 Mutual Funds
 Investment Trust
 Insurance or reinsurance companies
 Endowment Funds
 University Funds
 Foundations or Charitable Trusts or Charitable Societies who propose to invest on their
own behalf
 Asset Management Companies
 Nominee Companies
 Institutional Portfolio Managers
 Trustees
 Power of Attorney Holders
 Banks
 Foreign Government Agency
 Foreign Central Bank
 International or Multilateral Organization
 or an Agency thereof

SEBI tightens P-note rule to curb black money via FII route
With FII inflows through the participatory note (P-note) route hitting an 80-month high of Rs 2.65
lakh crore in October, SEBI has tightened rules relating to issuance of P-notes, also known as
offshore derivative instruments. It is widely suspected P-notes are a conduit for bringing black
money parked abroad, back into India. P-notes are offshore derivative instruments issued by SEBI-
registered FIIs to overseas investors who do want to register with SEBI for reasons legitimate or
devious. The registered FII buys shares/derivatives on behalf of the unregistered players, and issues
P-notes (a receipt of sorts) since the ownership of those shares/derivatives cannot be transferred to
the unregistered players Under the new rules, a SEBI-registered foreign portfolio investor (FPI) can
now issue P-notes only to those entities based in countries where the securities regulator and central
bank are members of globally recognized bodies like IOSCO and Bank for International Settlements
(BIS). Also, P-notes cannot be issued to entities residing in a country not compliant with Anti Money
Laundering and Combating Financial Terrorism regulations. Entities with opaque structures too will
be ineligible for subscribing to P-notes. SEBI regulation defines "opaque structure" as one in which
the details of the ultimate beneficial owners are not accessible or where the beneficial owners are
ring fenced from each other or where the beneficial owners are ring fenced with regard to
enforcement. Protected cell company (PCC) or multi class structure is one example of an opaque
structure. It is somewhat similar to the structure of a mutual fund offering different schemes
depending on the risk profile of the investors. A PCC will have different pools of investments, each
managed by a different fund manager. Corporates looking to bring back their illegal money stashed
abroad usually subscribe to one cell of a PCC, and direct the fund manager on the trades to be done.
Under the new rules, two or more P-note subscribers having common Beneficial Owner (BO) shall
be considered together as a single P-note subscriber. No FII is allowed to hold more than a 10 percent
in a listed company. In cases where a SEBI-registered FII holds positions through P-notes, the
investment cap will be applicable on the aggregate of the positions held as an FII as well as a P-note
subscriber.
RECENT DEVELOPMENTS: SEBI is attempting to address the misuse by tightening the norms
regarding issuance by FIIs. Any new P-notes issued will have to comply with the Foreign
Portfolio Investors Regulations to ensure better identification and clarity. Also, P-notes can’t be
issued by a resident of a country identified by Financial Action Task Force as a “jurisdiction
having a strategic Anti Money Laundering or Combating the Financing of Terrorism deficiencies
to which counter measures apply”. Additionally, the market regulator has said that fund
structures need to be transparent, else they won’t be allowed. Two or more P-note subscribers
with the same beneficiary will be considered as one subscriber. Many other provisions have been
laid down with the objective of controlling this investment route more effectively. According to
SEBI data, the total investments through P-notes stood at roughly $43 billion in October 2014,
the highest in seven years. P-notes account for 10-12% of total FII inflows; this proportion has

fallen significantly since 2007, when it formed almost 50% of FII inflows. While domestic
investors have to comply with a number of know-your-client requirements for trading in shares,
at present, P-note holders have no such restrictions.
FII REGULATIONS
Investment by FIIs is regulated under SEBI (FII) Regulations, 1995. Following are some of
important regulations by SEBI and RBI:
1. A Foreign Institutional Investor may invest only in the instruments mentioned earlier.
2. The total investments in equity and equity related instruments (including fully convertible
debentures, convertible portion of partially convertible debentures and tradable warrants) made by
a FII in India, whether on his own account or on account of his sub- accounts, should be at least
70% of the aggregate of all the investments of the FII in India, made on his own account and
through his sub-accounts.
3. The cumulative debt investment limit for FII investments in Corporate Debt is US $15 billion.
The amount was increased from US $6 billion to USD 15 billion in March 2009.
4. US $8 billion will be allocated to the FIIs and Sub-Accounts through an open bidding platform
while the remaining amount is allocated on a ‘first come first served’ basis subject to a ceiling of
Rs.249 cr. per registered entity.
5. The debt investment limit for FIIs in government debt is currently capped at $5 billion and
cumulative investments under 2% of the outstanding stock and no single entity can be allocated
more than Rs. 1000 crores of the government debt limits.
Further, in 2008 amendments were made to attract more foreign investors to register with
SEBI, these amendments are:
1. The definition of “broad based fund” under the regulations was substantially widened allowing
several more sub accounts and FIIs to register with SEBI.
2. Several new categories of registration viz. sovereign wealth funds, foreign individual, foreign
corporate etc. were introduced,
3. Registration once granted to foreign investors was made permanent without a need to apply for
renewal from time to time thereby substantially reducing the administrative burden,

4. Also the application fee for foreign investors applying for registration has recently been reduced
by 50% for FIIs and sub accounts
5. Also, institutional investors including FIIs and their sub-accounts have been allowed to
undertake short-selling, lending and borrowing of Indian securities from February 1, 2008.
6. Also the rigid criteria of requiring FIIs and sub-account to register as a 70:30 FII/ sub-account
or 100% debt FII/sub-account has recently been done away with(as has been discussed above in
the essay).
WITH REGARD TO INVESTMENT IN SECONDARY MARKET-
With regard to investment in secondary market, SEBI states that,
 The Foreign Institutional Investor is allowed to transact business only on the basis of taking
and giving deliveries of securities bought and sold.
 Short selling in securities is not allowed. However, in December 2007, abroad regulatory
framework enabling short selling by FIIs was put in place. Which stipulated that naked
short selling was not permitted and settlement of securities sold short would be through a
mechanism for borrowing of securities.
 FIIs are not permitted to short sell equity shares which are in the caution list of RBI.
 Equity shares can be borrowed by FIIs only for the purpose of delivery into short sale.
 No transactions on the stock exchange can be carried forward.
 Transaction of business in securities can be carried out only through stock brokers who has
been granted a certificate by the Board.
 A Foreign institutional Investor or a sub-account having an aggregate of securities worth
rupees ten crore or more, as on the latest balance sheet date, can settle their only through
dematerialised securities.
 Securities have to be registered in the name of the Foreign Institutional Investor, if he is
making investments on his own behalf or in his name on account of his sub-account, or in
the name of the sub-account, in case he is investing on behalf of the sub-account.
 The purchase of equity shares of each company by a Foreign Institutional Investor
investing on his own account cannot exceed ten percent of the total issued capital of that
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. All FIIs and their
subaccounts taken together cannot acquire more than 24% of the paid up capital of an
Indian Company. An Indian Company can raise the 24% ceiling to the Sectorial Cap /
Statutory Ceiling by passing a resolution by its Board of Directors followed by passing a
Special Resolution to that effect by their General Body.

 For FIIs investing in the equity shares of a company on behalf of his sub-accounts, the
investment on behalf of each such sub-account cannot exceed ten percent of the total issued
capital of that company.
FII POSITION LIMIT IN INDIVIDUAL STOCKS
 The FII position limits in a derivative contract on a particular underlying stock i.e. stock
option contracts and single stock futures contracts are:
 For stocks in which the market wide position limit is less than or equal to Rs. 250 Cr,
the FII position limit in such stock is 20% of the market wide limit.
 For stocks in which the market wide position limit is greater than Rs. 250 Cr, the FII
position limit in such stock is Rs. 50 Cr.

FII ACTIVITY IN INDIA
1992-1997
In a major step towards globalization of our markets, the government allowed Foreign Institutional
Investors such as Mutual funds, Pension funds, Investment trusts, Asset management companies
to invest in tradable securities in the primary and secondary’s market under the guidelines issued
by government in September 1992. In 1993 FIIs investing in India were affected by a severe
shortage of custodial capacity. In order to ease this bottleneck, institutional investors were allowed
to use jumbo transfer deeds. Investments had slowed down from their peaks in January 1994.
Though in 1995 there had been a notable upsurge in FII investment signifying the attractiveness
of the Indian market relative to other emerging markets which was depicted by cumulative
investment of Rs. 16877.66 Crore in 1996. In 1997 several changes were made to the SEBI
regulations to diversify the foreign institutional investor base and to further facilitate inflow of
foreign portfolio investment. The changes had also aimed at facilitating investment in debt
securities through FII route. The impact of these changes was felt as several endowment funds,
proprietary funds and 100% debt funds obtained registrations.
Table- FII Investments from 1992-1997
Year Gross Purchases
(Rs. Crore)
Gross Sales (Rs.
Crore)
Net Investment
(Rs. Crore)
Net Investment
at monthly ex
rate (US$)
1992-1993 17.4 4 13.4 4.2
1993-1994 5592.5 466.3 5126.2 1634
1994-1995 7630.9 2834.7 4796.2 1528.3
1995-1996 9693.5 2751.6 6941.9 2035.7
1996-1997 15,382.9 6960.4 8422.4 2389.7
Source- Annual Reports SEBI different years
1998-2002
During 1998-1999SEBI registered a total of 60 FIIs taking the total registered FIIs to 450. A major
factor that led to continuous outflow of funds during the year 1998 was the worsening outlook of
emerging markets. Credit worthiness of almost all South-east Asian nations was severely damaged
by the crisis which started in July 1997. A further indication of the integration of the Indian markets
could be seen from the upsurge in the valuations and funds inflows during the first quarter of 1999.
As regard transaction activities of FIIs, they made gross purchases of Rs. 74.050.6 Crore during
2000-01 as compared to Rs. 56855.5 crore in 1999-2000. Recording an increase of 30.2 %. In spite
of very large increase in gross purchases, net investment declined during the year under review

because of heavy sales of FIIs during the year 2000. Net FIIs was positive for almost all the months
during 2002 except in September due to the sudden increase in sales which exceeded purchases by
about 16% following the terrorist attacks on the USA. Another development in the transactions of
FIIs was their total turnover declined during 2001-2002 by 35.85%.
Table- FII Investments from 1998- 2002
(Rs. Crore)
Gross Sales (Rs.
Crore)
Net Investment
(Rs. Crore)
Net Investment
at monthly ex
rate (US$)
1997-1998 18694.7 12737.2 5957.5 1650.1
1998-1999 16115 17699.4 -1584.4 -386.1
1999-2000 56855.5 46733.5 10122 2339.1
2000-2001 74050.7 64116.4 9934.3 2158.8
2001-2002 59920 41165 8755.2 2159.7
2003-2007
Several factors are responsible for increasing confidence of FIIs in the Indian stock market which
include, inter alia, strong macro-economic fundamentals of the economy, transparent regulatory
system, abolition of long-term capital gains tax and encouraging corporate results. Reflecting the
congenial investment climate, the total number of FIIs registered with SEBI increased to 882 as
on March 31, 2006 compared to 685 a year ago, an increase of 197 over the year. The diversity of
FIIs has been increasing with the number of registered FIIs in India steadily rising over the years.
As on March 31, 2006, SEBI had registered FIIs from 37 countries. The highest number of FIIs,
as on March 31, 2006, was from the USA (342), followed by the UK (148). About 90 per cent FIIs
come from the top 13 countries. There has been increase in the number of FII registrations from
non-traditional countries like Malaysia, Australia, Saudi Arabia, Trinidad and Tobago, Denmark,
Italy, Belgium, Canada, Sweden, Ireland etc. These developments have helped improve the
diversity of the set of FIIs operating in India. Several factors were responsible for increasing
confidence of FIIs on the Indian stock market which include:
 Strong economic fundamentals and attractive valuations of companies.
 Improved regulatory standards, high quality of disclosure and corporate governance
requirement, accounting standards, shortening of settlement cycles, efficiency of clearing
and settlement systems and risk management mechanisms.
 Product diversification and introduction of derivatives.
 Strengthening of the rupee dollar exchange rate and low interest rates in the US

(Rs. Crore)
Gross Sales (Rs.
Crore)
Net Investment
(Rs. Crore)
Net Investment
at monthly ex
rate (US$)
2002-2003 47061 44373 2689 562
2003-2004 144858 99094 45765 10172
2004-2005 216953 171072 45881 10172
2005-2006 346978 305512 41467 9332
2006-2007 520508 489667 30840 6708
2008-2014
The Indian equity market kept on sliding in September 2008 with the S&P CNX NIFTY, showing
the second sharpest fall since January 2008, with a decline of around 10%. With all courtesy to the
US financial markets and its crisis bug, an estimated amount of Rs 2.3 trillion of shareholders'
wealth were eroded in the Indian stock markets. We hear a lot about sales and purchases made by
foreign institutional investors (FIIs) in Indian equity markets, with these numbers often making
headlines. Why are we so obsessed with FIIs? The answer, is "Indian markets are primarily driven
by FII fund flows." The market slide can be attributed to lower FII inflows in 2011. A look at stock
indices since 2006 shows that the markets peak when FII inflows are the highest and fall when
FIIs are missing in action. For instance, in 2008, the BSE Sensex fell almost 50% due to the global
financial meltdown, wiping out the gains of 2007. The year 2008 has seen the biggest ever FIIs
sell-off for the Indian markets. FIIs were allowed to invest since 1991 when the economy opened
up. FIIs sell-off of USD 13.16 billion or Rs 53,000 crores has accounted for a 20% sell-off of the
total FII's equity investment since 1991. FIIs have invested USD 53.16 billion or Rs 2.3 lakh
crores.
The number of registered FIIs have increased from 1,219 in 2007 to 1,595 in 2008, while the
number of registered sub-accounts have increased from 3644 in 2007 to 4872 in 2008. In 2008,
there were negative FIIs' flows seen for 10 months, and the longest selling streak was seen from
May to November. Since 1999, there have been 32 months of negative FIIs flows as against 88
months of positive flows. Since 2003, there have been 19 months of negative FIIs' flows as against
53 months of positive flows. October and January were two carnage months, where USD 3.8
billion and UDS 3.2 billion, respectively, were sold. The depreciation by 23% in rupee and the
51% sell-off in the markets has resulted in the deftly falling 61%, making India one of the worst
emerging market performers for 2008. The biggest sell-off was seen in March, when the FIIs sold
Rs 1,881 crore. In January, a correction bought the most at Rs 7,702 crore followed by Rs 3,179
crore in June.

(Rs. Crore)
Gross Sales (Rs.
Crore)
Net Investment
(Rs. Crore)
Net Investment
at monthly ex
rate (US$)
2008-2009 614576 660386 -45811 -9837
2009-2010 846438 703780 142658 30251
2010-2011 992599 846161 146438 32226
2011-2012 921285 827562 93725 18923
2012-2013 904845 736481 168367 31047
2013-2014 1021010 969361 51649 8876
Secret of SENSEX: Biggest FII turn-on since 2000
The Sensex crossed the 18,000 mark and closed at a six-month high. India, which was among the
worst performing markets by December 2011, is one of the best performing ones today.
Fundamentally, nothing seems to have changed, either in India or in the world. In fact, after the
December quarter corporate numbers, the outlook is even bleaker.
So what is the secret behind this sudden rally? The answer is the largest foreign inflows since the
turn of the decade.
Graph- FII Investments in 2000s
Source- SEBI Annual Report 2012
The main reason for the sharp 18 percent rise in indices is the Rs 22,000 crore FII money that has
entered the country, the highest ever, since SEBI started disclosing the data in 2000. Inflows in the
first 15 days of February, at Rs 11,681.7 crore, were higher than that for the entire month of
January 2012, which stood at Rs 10,907 crore. This means around $4 billion of money has already
flown into the country in the first 45 days of this year. It has resulted in Sensex moving from a low
of 15,358 0n 2 January 2012 to 18,231 on 15 February.

While emerging markets trade at a valuation of 12 times their reported profits, developed markets
are trading at 14 times their reported profits. Reuters
The MSCI (Morgan Stanley Capital International) Emerging Markets Index has already gained 15
percent in 2012, the best start to a year since 1991. It has outperformed the MSCI World Index by
6 percentage point.
According to a report in Bloomberg, Jonathan Garner, the chief Asia and emerging markets
strategist at Morgan Stanley, said the surge in optimism is a contrarian indicator that may signal
the rally has gone too far, too fast. Michael Hartnett, chief global equity strategist at Bank of
America Investor, says holdings in emerging markets have climbed to a level that historically
foreshadowed short-term underperformance.
From the chart below, it’s clear that the banking sector has been the favourite among sector
investments. The banking sector retained its top position for eight of the the nine quarters analysed
by the investment research firm. FIIs had an 11 percent exposure to this sector in the December
quarter. Power and metal companies also received allocations of 6.6-7.9 percent, although their
shares have declined slightly from the September quarter.
At the moment, it’s difficult to tell whether foreigners will continue to invest robustly in India’s
capital markets. Some experts believe the results could inhibit the government from taking any
bold reform measures and lower the prospects of the economy, which could dampen the appetite
of foreign investors. Indeed, the Sensex reported volatility as it closed lower at 17,173 points on

Tuesday, 500 points lower from its intra-day high on the elections results, as investors sensed more
economic policy-making delays ahead. The rupee also plunged below 50 against the dollar.
FII & CAPITAL MARKET ANALYSIS
The study carried out is analytical and empirical in nature in which it explores the relationship
between the Inflows of FII and their impact on Indian Capital Market. The study focuses on
Bombay Stock Exchange. In this research the net purchases/sales data for Equity and Debt market
was used to find the relation with Sensex.
Following hypotheses were developed for the study and tested at 5% level of significance.
Hypothesis 1
 Hypothesis (H1) There is significant relationship between Sensex and FII equity
investment.
 Null Hypothesis (Ho): There is no significant relationship between Sensex and FII
equity investment.
Hypothesis 2
 Hypothesis (H2) Sensex is significantly correlated with FII equity purchases.
 Null Hypothesis (Ho): There is no significant relationship between Sensex and FII
equity purchases.
ResearchDesign
 Exploratory Research method applied for the study. As an exploratory study is
conducted with an objective to gain familiarity with the phenomenon or to achieve new
insight into it, this study aims to find the new insights in terms of finding the
relationship between FII'S and Indian Stock Markets.
Data Collection
 Data for the study collected primarily from Secondary sources. For this various
literatures, books, journals, magazines, web links were used. Monthly closing data of
Sensex (2000-2015), Monthly data of FII flow in equity (2000-2015), Yearly data of
FII flow in equity (2000-2015), Yearly data of Sensex (2000-2015).
ResearchAnalysis Tools
The data was classified and tabulated using MS EXCEL and SPSS 12.0. Correlation
analysis used as statistical tool for data analysis. Correlation analysis measures the
relationship between two data sets that are scaled to be independent of the unit of
measurement. The population correlation calculation returns the covariance of two data
sets divided by the product of their standard deviations. We can use the Correlation tool to
determine whether two ranges of data move together - that is, whether large values of one

set are associated with large values of the other (positive correlation), whether small values
of one set are associated with large values of the other (negative correlation), or whether
values in both sets are unrelated (correlation near zero). Data were analysed with the help
of SPSS 12.
OBSERVATION
Table – 1 Correlations
Sensex
Net
Invest
Sensex 1 0.67822
Net
Invest 0.67822 1
**Correlation is significant at 0.01 level.
Table- 2 Mean and Deviations of Data
Descriptive Statistics
Mean Std. Deviation N
Equity 4232.3744 7876.89255 177
BSESensex 12590.9407 7201.74811 177
Table – 3 Correlations between Investment in Equity market and BSE SensexClosing Data
from 2000 to 2015.
Correlations
Equity
Invest BSESensex
Equity Invest Pearson Correlation 1 .668**
Sig. (2-tailed) .000
N 177 177
BSESensex Pearson Correlation .668**
1
Sig. (2-tailed) .000
N 177 177
**. Correlation is significant at the 0.01 level (2-tailed).
ANALYSIS & INTERPRETATION
Table 1
It is revealed from table 1 that performances of indices are positively correlated with FII and the
strength of correlation is very strong. It was also revealed that the performances of indices were
also highly and positively related. Degree of correlation between Net FII flows and BSE Sensex
is 0.6782 hence hypothesis H1 is accepted.
Table 2

Table 2 is the general depiction of the mean of the data and the significant standard deviation
shows that over the years there has been huge fluctuations in the investments by foreign
institutional investors one of the major reason of which is the economic position of a country and
the global crisis.
Table 3
Table 3 indicates that performance of indices is positively correlated with FII and the strength of
correlation is very strong. It was also revealed that the performances of indices were also highly
and positively related. Degree of correlation between FII purchase and BSE Sensex is 0.668 hence
hypothesis H2 is accepted. It was also revealed that the performances of indices were not affected
by the performance of gross sales.
RESULTS & FINDINGS
So for the study of data from 2000 to February 2015, FII equity investment yearly and monthly
and closing of Sensex Indices were considered. Correlation Test has been carried out to find the
degree of association between the FII net investments and Sensex and FII Gross sales and Sensex.
Firstly, correlation between Sensex and FII is carried out to verify relation between them Sensex
of Bombay Stock Exchange is considered as the barometer of Indian Capital Market. This
inference is further supported by high degree of correlation coefficient obtained between two
variables in the Table-1 and 3. This high degree of correlation further suggests that there is direct
correlation between the Midcap & Small cap Indices and FIIs investments. (FIIs gross purchases
have been taken as independent variable to find the impact of FII because net investments involve
negative values when there are more sales as compared to purchases FII invest in scripts of these
Indices because they provide higher returns as compared to large cap scripts.)
This analysis indicates the impact of FIIs on Indices. An FII driven market can impact the real
economy indirectly, when their behavior in the market exerts pressure on policy makers. Secondly,
the wealth effect' where capital gains are translated into increased consumption and investment,
can act as a more direct link between equity and physical markets. FIIs are always considered to
increase the volatility of market. Volatility is often viewed as a negative in that it represents
uncertainty and risk. However, volatility can be good in that if one shorts on the peaks, and buys
on the lows one can make money, with greater money coming with greater volatility. Foreign
institutional investment is certainly volatile in nature and its volatility has certainly posed some
threats to the Indian stock market considering its influence on the market. Increase in investment
by FIIs cause sharp price increase. Indices because only FIIs are not responsible for the fluctuations
instead there are other factors like company specific factors, speculative trading, interest rate
prevailing in the market, political factors, government policies related to specific sectors etc. which
cause a significant change in the price.

SUMMARY OF THE RESEARCH
 Growth potential of Indian Capital Market has attracted the continuous increase in the
number of registered FIIs and the Gross purchases made by them.
 The movements in Midcap & Small cap Indices and Sensex are highly correlated with FII
equity investment in Indian Capital market.
 The high degree of volatility in Indian stock market is caused by the increase in investment
by FIIs which increases stock indices that in turn increases the price and encourages further
investments. In this event when any correction takes place the stock prices decline and
there will be pull out by the FII in a large number as earning per shares declines.
 FIIs manipulate the situation of boom in such a manner that they will wait till the index
rises up to a certain height and exit at an appropriate time. This tendency increases the
volatility further.

ANNEXURES
Data for Correlation.
Year Month EQUITY BSE SENSEX CLOSING DATA
Net Purchase/Sales
2015
February -1255.85 28355.62
January 17689.09 29182.95
2014
December -864.34 27499.42
November 14302.23 28693.99
October 892.35 27865.83
September 5448.79 26630.51
August 6436.65 26638.11
July 9355.77 25894.97
June 13990.85 25413.78
May 16512.00 24217.34
April 7299.50 22417.80
March 22351.70 22386.27
February 2593.70 21120.12
January -141.30 20513.85
2013
December 15425.60 21170.68
November 7079.40 20791.93
October 18012.80 21164.52
September 12632.90 19379.77
August -6200.00 18619.72
July -7120.20 19345.70
June -9318.70 19395.81
May 21267.70 19760.30
April 5145.30 19504.18
March 11660.50 18835.77
February 21122.40 18861.54
January 22673.90 19894.98
2012
December 24299.20 19426.71
November 10967.10 20791.93
October 10272.90 21164.52
September 20769.00 19379.77
August 9729.60 18619.72
July 10346.40 19345.70
June 133.50 19395.81
May -1522.80 16218.53
April -1865.60 17318.81
March 8832.90 17404.20
February 25217.40 17752.68
January 12967.20 17193.55
2011
December -128.50 15454.92
November -3946.60 16123.46

October 2468.80 17705.01
September -1147.00 16453.76
August -10214.60 16676.75
July 7411.10 18197.20
June 3172.10 18845.87
May -5158.20 18503.28
April 7018.50 19135.96
March 6966.70 19445.22
February -3754.50 17823.40
January -6330.20 18327.76
2010
December 1476.10 20509.09
November 18519.90 19521.25
October 24770.80 20032.34
September 29195.80 19521.25
August 11185.30 17971.12
July 17120.60 17868.29
June 10244.60 17700.90
May -8629.90 16944.63
April 9764.50 17558.71
March 18833.60 17527.77
February 2113.50 16429.55
January 5902.40 16357.96
2009
December 10367.20 17464.81
November 5317.80 16926.22
October 8304.10 15896.28
September 19939.50 17126.84
August 4028.70 15666.64
July 11625.30 15670.31
June 3224.90 14493.84
May 20606.90 14625.25
April 7384.2 11403.25
March 269.00 9708.50
February -2690.50 8891.61
January -3009.50 9424.24
2008
December 1330.90 9647.31
November -2820.30 9092.72
October -14248.60 9788.06
September -7937.00 12860.43
August -2065.80 14564.53
July -1012.90 14355.75
June -10577.70 13461.60
May -4917.30 16415.57
April 979.00 17287.31
March 124.40 15644.44
February 5419.90 17578.72
January -17326.30 17648.71
2007 December 4896.70 20286.99

November -4597.40 19363.19
October 15577.60 19837.99
September 18948.50 17291.10
August -7526.80 15318.60
July 18132.80 15550.99
June 7939.60 14650.51
May 4574.50 14544.46
April 5431.80 13872.37
March 1403.30 13072.10
February 6065.00 12938.09
January 94.45 14090.92
2006
December -3410.90 13786.91
November -3410.90 13696.31
October 4578.54 12961.90
September 6231.70 12454.42
August 4774.00 11699.05
July 1447.90 10743.88
June 1418.20 10609.25
May -8247.20 10398.61
April 589.20 12042.56
March 6532.30 11279.96
February 7571.90 10370.24
January 3220.70 9919.89
2005
December 9465.20 9397.93
November 4448.60 8788.81
October -3805.60 7892.32
September 4122.60 8634.48
August 4412.60 7805.43
July 8212.20 7635.42
June 5762.10 7193.85
May -807.60 6715.11
April -1047.10 6154.44
March 7649.30 6492.82
February 7695.00 6713.86
January -281.70 6555.94
2004
December 5806.70 6602.69
November 6412.40 6234.29
October 4042.40 5672.27
September 2784.30 5583.61
August 2811.20 5192.08
July 1183.30 5170.32
June 310.60 4795.46
May -3250.50 4759.62
April 4173.00 5655.09
March 8769.00 5590.60
February 3271.90 5667.51
January 2374.10 5695.67

2003
December 5411.00 5838.96
November 3195.30 5044.82
October 6862.60 4906.87
September 3936.10 4453.24
August 2026.60 4244.73
July 2428.20 3792.61
June 2611.70 3607.13
May 1208.40 3180.75
April 549.90 2959.79
March 252.70 3048.72
February 405.20 3283.66
January 1065.50 3250.38
2002
December 440.30 3377.28
November 469.40 3228.82
October -599.60 2949.32
September 368.20 2991.36
August 221.20 3181.23
July 356.10 2991.36
June -172.00 3244.70
May -171.54 3125.73
April -101.50 3338.16
March 454.07 3469.35
February 2005.46 3562.31
January 357.15 3311.03
2001
December 315.70 3262.33
November 150.60 3287.56
October 715.70 2989.35
September -415.60 2811.60
August 437.40 3244.95
July 722.50 3329.28
June 715.30 3456.78
May 1045.60 3631.91
April 1770.00 3519.16
March 1972.90 3604.38
February 1819.10 4247.04
January 4045.50 4326.72
2000
December -576.90 3972.12
November 932.80 3997.99
October -271.70 3711.02
September 142.50 4090.38
August 1346.00 4477.31
July -1418.00 4279.86
June -959.30 4748.77

CONCLUSION
From all the discussions and data analysis, we conclude that FIIs have major impact on
Indian Capital market. Particularly, the decline on October 17, 2007, in which just a speculation
about government’s plan to control Promissory Notes had caused the biggest fall in Indian stock
market, even the market had to be closed for one hour without trade. The impact was that even
the domestic players and MFs also followed a close look on FIIs. Therefore, if FIIs are confident
in Indian markets, there is a general perception that market is on a song.
But the note of caution is the source of investment behind these FIIs which should be
crystal clear. Otherwise this can cause a negative impact on stock market as was the cause of fall
on 17th October 2007. Further money launders and even terrorists can use this facility to pump
money to Indian market and their sudden withdrawal can cause volatility in markets. Even
during the current year also, the major fall in SENSEX has been caused amidst selling of FIIs
due to reasons like increased net selling by foreign funds during January or fear of interest Rate
hike by RBI or depreciation in the value of Rupee in comparison to dollars.
From above discussion it is clear that major falls in stock market were after effects of
withdrawal of money by FIIs. So there is a direct relation between the FII's money flow and the
movement of SENSEX. The biggest fall in stock markets occurred in 2007 and 2008. This means
that the volatility of market was more because during this period there was an increase in
registration of FIIs and the investments reached almost Rs. 283468.40 Crores by the end of 2007.
The Correlation Test also establishes the degree of association between the FII and
Sensex and the analysis indicates the impact of FIIs on Indices. An FII driven market can impact
the real economy indirectly, when their behavior in the market exerts pressure on policy makers.
Secondly, the wealth effect' where capital gains are translated into increased consumption and
investment, can act as a more direct link between equity and physical markets. FIIs are always
considered to increase the volatility of market. Volatility is often viewed as a negative in that it
represents uncertainty and risk. It would provide additional incentives for FII investment and this
encourages further investment so that there is a tendency for any correction of price and when
the correction begins it would have to lead by an FII pullout and can take the form of extremely
sharp decline in the share prices Indices because only FIIs are not responsible for the fluctuations
instead there are other factors like company specific factors, speculative trading, interest rate
prevailing in the market, political factors, government policies related to specific sectors etc.
which cause a significant change in the price.

Role of fii in indian market

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