1. A PROJECT REPORT ON
VOLATILITY IN INDIAN STOCK MARKET AND FOREIGN
INSTITUTIONAL INVESTOR
SUBMITTED BY
CHOPADA PRANJAL VASANT
THIRD YEAR BACHELOR OF COMMERCE
(FINANCIAL MARKETS)
SEMESTER-V
2012-13
MODEL COLLEGE, DOMBIVALI
UNIVERSITY OF MUMBAI
OCTOBER-2012

2. A PROJECT REPORT ON
VOLATILITY IN INDIAN STOCK MARKET AND FOREIGN
INSTITUTIONAL INVESTOR
SUBMITTED TO THE
UNIVERSITY OF MUMBAI
IN PARTIAL FULFILLMENT FOR THE AWARD OF
THE DEGREE OF BACHELOR OF COMMERCE
FINANCIAL MARKETS
SEMESTER V
BY
CHOPADA PRANJAL VASANT
MODEL COLLEGE, DOMBIVALI
UNIVERSITY OF MUMBAI
OCTOBER 2012

3. TABEL OF CONTENTS
SR DESCRIPTION PAGE
NO. NO.
1. CERTIFICATE I
2. DECLARATION II
3. ACKNOWLEDGEMENT III
4. LIST OF ABBREVATIONS IV
5. LIST OF CHARTS / GRAPHS V
6. CHAPTER. 1
VOLATILITY IN INDAIN STOCK 1
MARKET AND FOREIGN INSTITUTIONAL
INVESTORS.
7. CHAPTER. 2 7
INDIAN STOCK MARKET – A
THEORETICAL VIEW
8. CHAPTER. 3 30
IMPACT OF FIIs ON STOCK MARKET
INSTABILITY
9. CHAPTER. 4 37
CONCLUSION
10. ANNEXURE MILESTONES OF FII IN 41
INDIAN STOCK MARKET
11. BIBLIOGRAPHY 44
12. WEBLIOGRAPHY 45

4. DECLARATION
I, PRANJAL CHOPDA STUDENT OF
BACHELOR OF COMMERCE, FINANCIAL
MARKETS, SEMESTER V OF KERALEEYA
SAMAJAM DOMBIVALI‘S MODEL COLLEGE,
HEREBY DECLARE THAT I HAVE
COMPLETED PROJECT REPORT ON
―VOLATILITY IN INDIAN STOCK MARKET
AND FOREIGN INSTITUTIONAL INVESTOR‖
FOR THE ACADEMIC YEAR 2012-13.
THE INFORMATION SUBMITTED IS TRUE
AND ORIGINAL TO THE BEST OF MY
KNOWLEDGE.
PRANJAL CHOPADA
BACHELOR OF COMMERCE
FINANCIAL MARKETS

5. ACKNOWLEDGEMENT
I would like to extent my sincere gratitude to all
those people who have helped in the successful
completion of my project entitled ―VOLATILITY
IN INDIAN STOCK MARKET AND FOREIGN
INSTITUTIONAL INVESTORS ―
I would also like to express my deep sense of
my gratitude to Mrs. REENA PILLAI, the faculty
member, for her help and untrying efforts
constant inspiration and stimulating guidance to
me in my academics endeavor and in my
project.
I would also like to thank the college for giving
me this opportunity for doing this project. I would
also like to thank my family for giving me the
support to do the same.
I would also like to express my sincere thanks to
all my friends who help me in finding the
information and support for the successful
completion.
PRANJAL CHOPADA

6. LIST OF ABBREVATION
BSE : Bombay Stock Exchange
CAPM : Capital Asset Pricing Model
CMR : Call Money Rate
EMEs : Emerging market economies
EMEs : Emerging Market Economies
FII : Foreign Institutional Investment
FIIN : Net Foreign Institutional Investment
FIIP : Foreign Institutional Investment-
Purchase
FIIS : Foreign Institutional Investment-Sale
FPI : Foreign Portfolio Investment
GDP : Gross Domestic Product
IIP : Index of Industrial Production
KYC : Know Your Client
NRIs : Non-Resident Indians
NSE : National Stock Exchange
OCBs : Overseas Corporate Bodies
QIPs : Qualified Institutional placements
RBI : Reserve Bank of India
SEBI : Securities and Exchange Board of
India
VAR : Vector Auto Regression

7. LIST OF TABELS / GRAPHS
Sr No. Table Particular
1. NO. OF REGISTERED FIIs IN INDIA
FIIs INFLOWS AND SENSEX
2.
MOVEMENT
FREQUENCY DISTRIBUTION OF FII
3.
HOLDINGS IN SENSEX COMPANIES
FOREIGN INVESTMENT IN VARIOUS
4. COUNTRIES IN TERMS OF THE %
OF GLOBAL INVESTMENT IN US$
VOLATILITY OF STOCK MARKET
5. RETURNS AS PER TRADITIONAL
MEASURES(DAILY DATA)
Sr No. Graph particulars
1. NUMBER OF REGISTERED FIIs
2. Debt and Equity FII flow

8. CHAPTER 1
Volatility in Indian Stock
Markets and Foreign
Institutional Investors
The safe way to double the money is to fold
it over once and put it in your pocket.

9. CHAPTER: 1
VOLATILITY IN INDAIN STOCK MARKET
AND FOREIGN INSTITUTIONAL INVESTORS
Many developing countries, including India, restricted the flow of
foreign capital till the early 1990s and depended on external aid and
official development assistance. Later, most of the developing
countries opened up their economies by dismantling capital controls
with a view to attracting foreign capital, supplementing it with
domestic capital to stimulate domestic growth and output.
Since then, portfolio flows from foreign institutional investors (FII)
have emerged as a major source of capital for emerging market
economies (EMEs) such as Brazil, Russia, India, China and South
Africa. Besides, the surge in foreign portfolio flows since 1990s can
be attributed to greater integration among international financial
markets, advancement in information technology and growing interest
in EMEs among FIIs such as private equity funds and hedge funds so
as to achieve international diversification and reduce the risk in their
portfolios.
Economic growth is a function of, among other things, capital
formation. As FII flows are a source of non-debt creating capital for
the economy, many EMEs have been competing with each other to

10. attract such flows through flexible investment norms/regulations or by
offering fiscal sops. Further, FIIs have been assured decent returns
on their investments, enabling continuous and sustainable investment
flows.
FII flows into India registered substantial growth from a meager US$4
million in 1992–93 to over US$ 32 billion in 2010–11 (SEBI, 2011:
76). FII inflows underwent a sea-saw movement in India during the
last decade. They registered spectacular growth especially since the
middle of 2003 due to the higher growth rate in Indian GDP, robust
corporate performance and an investment-friendly environment.
Portfolio investment flows into India turned negative (outflow of US$
12 billion) during 2008–09 (ibid.) mainly due to the heightened risk
aversion of foreign investors, emanating from the global financial
meltdown.
Ever since foreign portfolio investors were allowed to invest in Indian
financial markets in September 1992, there have been extensive
deliberations on the impact of such flows. It is said that portfolio flows
from FIIs inject global liquidity into the capital markets, raise the price-
to-earnings ratios, thereby reducing the cost of capital. This, in turn,
leads to further issues of equity capital and stimulates investment
growth in the host economy, apart from bringing in best international
corporate governance practices. Yet, FIIs have been targets of
criticism due to characteristics such as return chasing behaviour,

11. herd mentality, hot money flows, short-term speculative gains and
their influence on domestic policy-making.
Though numerous research studies have been conducted in respect
of FII flows into India, most of them have been confined to assessing
the impact of such flows on stock markets. Very few studies have
focused on the overall impact of FII flows on all segments of the
Indian financial markets, viz., the capital market, the foreign
exchange market, the money market and other macro-economic
variables, such as inflation, money supply and Index of Industrial
Production (IIP). Given this background, it is all the more relevant to
undertake a cause and-effect study of FII flows into Indian financial
markets in a holistic manner, by considering various macro-economic
parameters, such as IIP, interest rates, inflation, exchange rates,
apart from the BSE Sensex, so as to enable policymakers to take
informed decisions in this regard. The present study examines the
causes and effects of FII net flows into Indian financial markets with
the support of empirical data for the period April 2003–March 2011,
i.e., a time span of eight years, covering the period before, during and
after the eruption of the global financial crisis.

12. ABOUT THE REPORT
 Title of the study:
The present study is titled as A PROJECT REPORT ON ―Volatility in
India n Stock Markets and Foreign Institutional Investors‖. The study
made with special reference to Foreign Institutional Investors.
 Objectives of Study:
• To study in depth FDI & FII & its role in Indian stock market.
• To know the changing scenario of Indian stock market after FII
investment and various aspects of FII.
 Data and Methodology:
For the purpose of the present study Secondary data were used. The
data is collected from Books , Journals & websites.
 Limitations of the Study:
• The study has got all the limitations of using Secondary data
and Inferences were made based on that.

13.  SCOPE OF THE STUDY:
The report examines The Impact of Foreign Institutional Investments
and Foreign Direct Investment on Equity Stock Market in India. The
scope of the research comprises of information derived from
secondary data from various websites. The various information and
statistics were derived from the websites of BSE, NSE, Money
Control, RBI and SEBI. Sensex and Nifty was a natural choice for
inclusion in the study, as it is the most popular market indices and
widely used by market participants for benchmarking.

14. Chapter Layout:
The Present study is arranged as follows.
Chapter 1 – Gives an Introduction to volatility in Indian stock market
and foreign institutional investors.
Chapter 2 – Deals with the Theoretical view of Indian Stock Market.
Chapter 3 – Deals with the impact of FIIs on stock market instability.
Chapter 4 – Summarizes the result of study.
Chapter 5 – Annexure - milestones of foreign institutional investment
in Indian stock market

15. CHAPTER 2
DEALS WITH
INDIAN STOCK MARKET
– A THEORETICAL VIEW
If you want to rear financial blessings, you
have to sow financially.

16. CHAPTER 2.
INDIAN STOCK MARKET
- A THEORETICAL VIEW
Diversifying globally i.e., holding a well diversified portfolio of
securities from around the globe in proportion to market
capitalizations, irrespective of investor‘s country of residence, has
long been advocated as means to reduce overall portfolio risk and
maximize risk-adjusted returns by the traditional capital asset pricing
model (CAPM). Foreign investment inflow depends on returns in the
stock market, rates of inflation (both home and foreign), and extant
risk. In terms of magnitude, the impact of stock market returns and
the ex-ante risk turned out to be the key determinants of FII inflows.
An investment will always carry the consideration of risk factor in its
risk-return behaviour. In an investment friendly environment the
bullish behaviour dominates the trends and at a given huge volume of
investments, foreign investors may play a role of market makers and
book their profits, i.e., they can buy financial assets when the prices
are declining thereby jacking-up the asset prices and sell when the
asset prices are increasing (Gordon & Gupta, 2003). Hence, there is
a possibility of bi-directional relationship between FII and the equity
returns. Although FII flows help supplement the domestic surplus
resources and augment domestic investments without rising the
foreign debt of the recipient countries, helps to maintain stabilized
balance of payments particularly current account segment. Entry of

17. FII may also leads to decrease the required rate of return for equity,
and improve stock prices of the host economies / nations. However,
there are uncertainties about the defenselessness of recipient
country‘s capital markets to such flows. FII flows, often referred to as
'hot money' (i.e., short-term and overly tentative), are extremely
unstable in character compared to other forms of capital flows.
Foreign portfolio investors are regarded as 'fair weather friends' who
come in when there is money to be made and leave at the first sign of
impending trouble in the host country thereby destabilizing the
domestic economy of the recipient country. Often, they have been
blamed for exacerbating small economic problems in the host nation
by making large and concerted withdrawals at the slightest hint of
economic weakness. It is also alleged that as they make frequent
marginal adjustments to their portfolios on the basis of a change in
their perceptions of a country's solvency rather than variations in
underlying asset value, they tend to spread crisis even to countries
with strong fundamentals thereby causing 'contagion' in international
financial markets.
Several research studies on FII flows to emerging market economies
(EMEs) over the world have found that financial market infrastructure
like market size, market liquidity, trading cost, extent of informational
dissemination etc., legal mechanisms relating property rights,
harmonization of corporate governance, accounting, listing and other
rules with those followed in developed economies etc., are some of
the important determinants of foreign portfolio investments into

18. emerging markets. The Securities and Exchange Board of India
(SEBI) and Reserve Bank of India (RBI) have initiated several
measures such as allowing overseas pension funds, mutual funds,
investment trusts and asset management companies, banks,
institutional portfolio managers, universal funds, endowments, easing
the norms for registration of FIIs, reducing procedural delays,
lowering the fees of registration, mandating strict disclosure norms,
improved regulatory mechanisms etc. all these are supported by
strong fundamentals, have made India as one of the attractive
destinations for FIIs. The following table highlights the registered FIIs
in India during the period from 2006 to 2010.
From the above table it is clear that there is constant growth in the
number of registered FIIs in India. In the year 2006(January, 2006),
the number of registered FIIs were 833 only. The same number has
been increased to 1697 by the year 2010 (January 2010). The
number has been increased by more than 100 per cent. In spite of
the global financial crisis the number of registered FIIs has shown a
significant increase. Irrespective of the situation in Indian stock

19. markets these FIIs has earmarked their presence. But the investment
made by FIIs has experienced drastic decline in the recent past. This
is mainly because of the global economic meltdown. Though the
number of registered FIIs increased the net investments were not
increased proportionately. The important reasons for growth in
number of registered FIIs are easing of registration norms, lowering
the registration fees, reducing the procedural delays. The most
important is strong economical foundation of Indian economy.
Though the entire globe affected with the global financial meltdown,
India could face the global financial meltdown effectively. Compared
too many other markets Indian markets are offering attractive returns
on the investments. The growth rates of Gross Domestic Product
(GDP) even during the financial crisis was attractive than many other
economies. This resulted in increased number of registered FIIs in
the last half decade. The following table (Table 2) provides a cross
section of data on the FIIs inflow and stock market movement from
the year 2000 to 2011(31stMay). The FIIs and hedge funds had
pulled out money mainly due to higher interest rates in U.S. after
Federal Reserve increased 7interest rates to 4.5% under their new
governor. Similar changes took place many times in the history since
opening and few times in the study.

20. Additional indicators and data reflect that movements in the
SENSEX during the two years have clearly been driven by the
behaviour of foreign institutional investors (FIIs), who were
responsible for net equity purchases of as much as $6.6 and $8.5
billion respectively in 2003 and 2004. The Pearson correlation
values indicate positive correlation between the foreign
institutional investments and the movement of Sensex. (The
value of Pearson correlation is 0.570894)
The above table (Table:3) shows the proportion of investment
made by the FIIs in Sensex scrip‘s. It is observed that almost

21. half of the companies are equipped with FII investment to the
tune of 10% to 20%. Nearly 25% of the companies (Sensex 30
scrip‘s) are having the FII investment between 30% and 40%.
Another important thing is all the thirty scrip‘s are showing the
presence of foreign institutional investment. The pattern of change is
also very minimal in respect of these companies regard to FIIs are
concerned. It can be understood that the FIIs may enter and exit
frequently form the other scrip‘s but not the Sensex scrip‘s. The
above table depicts the consistency of FIIs over a period of time.
From the above table (Table:3) it can be understood that fifty percent
of the companies which are included in BSE SENSEX are having
fifteen to twenty percent of capital from the overseas. This
indicates the level of influence by the foreign institutional investment
on those companies particularly and on the stock market in general.
Any withdrawal of foreign institutional investment may result in
huge volatility in the market as well as share price movements.
Similarly, any increase in the shareholding pattern by the foreign
institutional investors may result huge rally in the market. The

22. psychology of domestic investors is also affected by the decisions of
foreign institutional investors.
Being an agricultural based economy India has faced large
number of problems while establishing industries. After
independence, to establish core industries such as Iron & Steel,
Cement, Electrical and construction of Roads, buildings etc. it took
decades. Indian economy has experienced the problem of capital in
many instances. Particularly, to start large scale industries where
capital requirement was more. While planning to start the steel
companies under government control, due to shortage of
resources it has taken the aid of foreign countries. Likewise we
have received aid from Russia, Britain and Germany for establishing
Bhiloy, Rourkela and Durgapur steel plants. The foreign
institutional investment was increased during the years 2006 and
2007. Later on, due to global financial crisis the investments by FIIs
were reduced.
ADVANTAGES OF FII IN INDIAN MARKET
• Enhanced flows of equity capital
• FIIs have a greater appetite for equity than debt in their asset
structure. The opening up the economy to FIIs has been in line with
the accepted preference for non-debt creating foreign inflows over

23. foreign debt. Enhanced flow of equity capital helps improve capital
structures and contributes towards building the investment gap.
• Managing uncertainty and controlling risks.
• FII inflows help in financial innovation and development of
hedging instruments. Also, it not only enhances competition in
financial markets, but also improves the alignment of asset prices to
fundamentals.
• 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 provide more information
about their operations, FIIs can help in the process of economic
development.
• Improved corporate governance.
• FIIs constitute professional bodies of asset managers and
financial analysts, who, by contributing to better understanding of
firms‘ operations, improve corporate governance. Bad corporate
governance makes equity finance a costly option. Also,
institutionalization increases dividend payouts, and enhances
productivity growth.

24. DISADVANTAGES OF FII IN INDAIN MARKET
• Problems of Inflation: Huge amounts of FII fund inflow into the
country creates a lot of demand for rupee, and the RBI pumps the
amount of Rupee in the market as a result of demand created.
• Problems for small investor: The FIIs profit from investing in
emerging financial stock markets. If the cap on FII is high then they
can bring in huge amounts of funds in the country‘s stock markets
and thus have great influence on the way the stock markets behaves,
going up or down. The FII buying pushes the stocks up and their
selling shows the stock market the downward path. This creates
problems for the small retail investor, whose fortunes get driven by
the actions of the large FIIs.
• Adverse impact on Exports: FII flows leading to appreciation of
the currency may lead to the exports industry becoming
uncompetitive due to the appreciation of the rupee.
• Hot Money: ―Hot money‖ refers to funds that are controlled by
investors who actively seek short-term returns. These investors scan
the market for short-term, high interest rate investment opportunities.
―Hot money‖ can have economic and financial repercussions on
countries and banks. When money is injected into a country, the
exchange rate for the country gaining the money strengthens, while
the exchange rate for the country losing the money weakens. If
money is withdrawn on short notice, the banking institution will
experience a shortage of funds.

25. FII and FDI connection:
The relationship between FII and FDI (Foreign Direct Investment) is
intertwined. In 1998 – 1999 a number of reforms were initiated, that
were designed specifically for attracting FDI. In India FDI is allowed
through FII‘s. This is done through private equity, preferential
allotment, joint ventures and capital market operations. The only
industries in which FDI isn‘t allowed are arms, railways, coal, nuclear
and mining. 100% financing by FDI is allowed in infrastructural
projects such as construction of the bridges and the tunnels. In the
financial sector, insurance and banking operations can have foreign
investors.
Differences between FII & FDI:
FDI and FIIs are two important sources of foreign financial flows into
a country. FDI (Foreign Direct Investment) the acquisition abroad of
physical assets such as plant and equipment, with operating control
residing in the parent corporation. It is an investment made to acquire
a lasting management interest (usually 10 percent of voting stock) in
an enterprise operating in a country other than that of the investor,
the investor‘s purpose being an effective voice in the management of
the enterprise. It includes equity capital, reinvestment of earnings,
other long-term capital, and short-term capital. Usually countries
regulate such investments through their periodic policies. In India
such regulation is usually done by the Finance Ministry at the Centre
through the Foreign Investment Promotion Board).

26. Types of Investments:
FDI typically brings along with the financial investment, access to
modern technologies and export market. The impact of the FDI in
India is far more than that of FII largely because the former would
generally involve setting up of production base - factories, power
plant, telecom networks, etc. that enables direct generation of
employment. There is also multiplier effect on the back of the FDI
because of further domestic investment in related downstream and
upstream projects and a host of other services. Korean Steel maker
Pasco‘s USD 8 billion steel plants in Orissa would be the largest FDI
in India once it commences. Maruti Suzuki has been an exemplary
case in the India's experience. However, the issue is that it puts
an impact on local entrepreneur as he may not be able to
always successfully compete in the face of superior technology
and financial power of the foreign investor. Therefore, it is often
regulated that Foreign Direct Investments should ensure minimum
level of local content, have export commitment from the investor and
ensure foreign technology transfer to India.FII investments into a
country are usually not associated with the direct benefits in terms of
creating real investments. However, they provide large amounts of
capital through the markets. The indirect benefits of the market
include alignment of local practices to international standards in
trading, risk management, new instruments and equities
research. These enable markets to become more deep, liquid,
feeding in more information into prices resulting in a better
allocation of capital to globally competitive sectors of the

27. economy. Foreign Institutional Investors Since, these portfolio flows
can technically reverse at any time, the need for adequate and
appropriate economic regulations are imperative.
Government Preference:
FDI is preferred over FII investments since it is considered to be the
most beneficial form of foreign investment for the economy as a
whole. Direct investment targets a specific enterprise, with the aim of
enhancing capacity and productivity or changing its management
control. Direct investment to create or augment capacity ensures
that the capital inflow translates into additional production. In the
case of FII investment that flows into the secondary market, the
effect is to increase capital availability in general, rather than
availability of capital to a particular enterprise. Translating an FII
inflow into additional production depends on production decisions
by someone other than the foreign investor — some local
investor has to draw upon the additional capital made available
via FII inflows to augment production. In the case of FDI that flows
in for acquiring an existing asset, no addition to production capacity
takes place as a direct result of the FDI inflow. Just like in the case of
FII inflows, in this case too, addition to production capacity does not
result from the action of the foreign investor – the domestic seller has
to invest the proceeds of the sale in a manner that augments
capacity or productivity for the foreign capital inflow to boost
domestic production. There is a widespread notion that FII

28. inflows are hot money — that it comes and goes, creating
volatility in the stock market and exchange rates. While this
might be true of individual funds, cumulatively, FII inflows have only
provided net inflows of capital
Stability:
FDI tends to be much more stable than FII inflows. Moreover, FDI
brings not just capital but also better management and governance
practices and, often, technology transfer. The know-how thus
transferred along with FDI is often more crucial than the capital
per se. No such benefit accrues in the case of FII inflows, although
the search by FIIs for credible investment options has tended to
improve accounting and governance practices among listed
Indian companies.
Types of FIIs:
FII investments in India can be of the TWO types:
1. Normal FIIs: FII allocation of its total investment between
equity and non-equity instruments (including dated government
securities and treasury bills in the Indian capital market) should
not exceed the ratio of 70:30. Equity related instruments would
include fully convertible debentures, convertible portion of
partially convertible debentures and tradable warrants.

29. 2. 100% Debt FIIs: FII that can invest the entire corpus in dated
government securities including treasury bills, non-convertible
debentures/bonds issued by an Indian company subject to limits,
if any. A FII needs to submit a clear statement that it wishes to be
registered as FII/sub-account under 100% debt routes.
Entities which can register as FIIs:
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 FII.
 Pension Funds
 Mutual Fund
 Investment Trust
 Insurance or reinsurance companies
 Endowment Funds
 University Funds
 Foundations or Charitable Trusts
 Charitable Societies who propose to in
 On their own behalf, and

30.  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
Trends in FIIs:
In 1993, when investments in FII s were introduced, Picket
Umbrella Trust Emerging Markets‘ Fund, an institutional investor
from Switzerland, Indian market. While in 1994, no new registrations
were reported, between 1995 and 2003, an average of 51 new FIIs
began operations in the country each year. The graph below clearly
indicates the steep increase in number of FII to the number of
registered FII‘s at the end of each calendar year). Currently, there are
1,695 registered FIIs and 5,264 registered sub accounts (As on 11th
September, 2009).

31. Since 1993 when FII‘s were first allowed to enter the India,
there has always been a preference towards investing in equity
than debt. The following graph shows the debt and equity FII flows.
FII investments through QIPs:
QIPs are private placements or issuances of certain specified
securities by Indian listed companies to qualified institutional
buyers in accordance with the provisions of SEBI guidelines.

32. Qualified Institutional placements or QIPs were introduced in mid-
2006.
Indian companies that are listed on stock exchanges having
nationwide terminals — the BSE and NSE have been raising capital
through the QIP route. Quarterly Institutional buyers are preferred
primarily because these entities have a large risk appetite,
possess the general expertise and have the experience to make an
informed decision.
In August 2008, SEBI liberalized the pricing conditions for QIPs by
reducing the period of reckoning to an average of two weeks‘
stock price, prior to the relevant date, against the earlier
requirement of taking the higher of the previous six months‘ or 15
days‘ average price. The pre-existing slowdown in the markets led to
attractive valuations for the investors.
Companies have taken advantage of this revision in pricing
guidelines .Unitech, raised Rs 1,621 cores in April 2009 at Rs
38.50 per share, and again raised Rs. 2,760 crores in July
2009 at Rs 81 per share. Other companies which successfully
raised capital through QIPs were HDIL, Shobha Developers, Network
18, Dewan Housing and Bajaj Hindustan. Most of the companies
which came out with QIPs were in the real-estate/infrastructure
sector. However, some companies like GMR Infrastructure were
not so successful and had to withdraw their issue and GVK
Power and Infrastructure had to scale down by nearly 60% due
to problems in the valuations. Domestic institutional investors,

33. especially life insurers kept away from the QIPs on valuation
concerns. However, FIIs which were net sellers had purchased Rs
9,500 crores in the same period.
This led several FIIs to pick up the target stocks via QIP before
the July 6thBudget and offload the same after the budget
session. As per a CRISIL study, 10 out of 13 QIPs are currently
quoting below the offer price. Since most of QIPs were in the
reality and infrastructure sectors, one explanation is that FIIs came in
expecting some quick gains from significant sops to the infrastructure
and housing sectors in the Budget. It is also possible that the rush
for QIPs was driven largely by short-term considerations, where
the FIIs hedged their bets by taking short positions in the issuers‘
stock even as they bought into the offers.
New sources of FII funds:
The Securities and Exchange Board of India is in talks with the
Cayman Islands Monetary Authority (Cima), over allowing funds
based in the Caribbean into the country. Cayman Islands is one
of the world‘s largest tax havens and a lot of global hedge funds are
based out of Cayman Islands Sebi has received numerous
applications from Cayman-based funds since June when Cima was
admitted as a full member of the international body of securities
market regulators, the International Organization of Securities
Commissions (Iosco).

34. Iosco's constituents regulate more than ninety percent of the world's
securities markets. Funds from Cayman Islands were usually not
favoured by SEBI owning to lack of transparency and difficulty in
establishing the owner base. Consequently, these investments were
viewed unfavorably and any Cayman fund seeking to invest in India
had to be carefully examined.
Post Cayman‘s admission to Iosco, Sebi is now determining
which grades of investment funds can be admitted expeditiously
and which should be examined more carefully. Presently, there are
19 registered foreign institutional investors from Cayman Islands,
taking the total to 19. The two recent additions have been Fir Tree
Capital Opportunity Master Fund and Fir Tree Value Master Fund.
The fund base of Cayman Islands is huge. There are about 9870
funds based there. Indian markets can expect more inflow from
Cayman Island if SEBI agrees to let them come in.
REASONS FOR FDI:
Invest by Companies Overseas
Companies choose to invest in foreign markets for a number of
reasons, often the same reasons for expanding their operations
within their home country. The economist John Dunning has identified
four primary reasons for corporate foreign investments.
Market seeking -

35. Firms may go overseas to find new buyers for goods and services.
Market-seeking may happen when producers have saturated sales in
their home market, or when they believe investments overseas will
bring higher returns than additional investments at home. This is
often the case with high technology goods.
Resource seeking -
Put simply, a company may find it cheaper to produce its production a
foreign subsidiary- for the purpose of selling it either at home or in
foreign markets. The foreign facility may be able to obtain superior or
less costly access to the inputs of production (land, labor, capital and
natural resources) than at home.
Strategic asset seeking -
Firms may seek to invest in other companies abroad to
help build strategic assets, such as distribution networks or new
technology. This may involve the establishment of partnerships
with other existing foreign firms that specialize in certain aspects of
production.
Efficiency seeking -
Multinational companies may also seek to reorganize their overseas
holdings in response to broader economic changes.
Fluctuations in exchange rates may also change the profit
calculations of a firm, leading the firm to shift the allocation of
its resources.

36. ACTS AND RULES:
FII registration and investment are mainly governed by SEBI (FII)
Regulations, 1995.
ELIGIBILITY FOR REGISTRATION AS FII: Following entities / funds
are eligible to get registered as FII:
1. Pension Funds
2. Mutual Funds
3. Insurance Companies
4. Investment Trusts
5. Banks
6. University Funds
7. Endowments
8. Foundations
9. Charitable Trusts / Charitable Societies
Further, following entities proposing to invest on behalf of broad
based funds (a fund established or incorporated outside India, which
has at least twenty investors with no single individual investor holding
more than 10% shares or units of the fund), are also eligible to be
registered as FIIs:
 Asset Management Companies
 Institutional Portfolio Managers
 Trustees
 Power of Attorney Holders

37. INVESTMENT OPPORTUNITIES FOR FIIs
The following financial instruments are available for FII investments
a) Securities in primary and secondary markets including shares,
debentures and warrants of companies, unlisted, listed or to be listed
on a recognized stock exchange in India;
b) Units of mutual funds;
c) Dated Government Securities;
d) Derivatives traded on a recognized stock exchange;
e) Commercial papers.
Investment limits on equity investments
a) FII, on its own behalf, shall not invest in equity more than 10% of
total issued capital of an Indian company.
b) Investment on behalf of each sub-account shall not exceed 10% of
total issued capital of an India company.
c) For the sub-account registered under Foreign Companies/
Individual category, the investment limit is fixed at 5% of issued
capital. These limits are within overall limit of 24% / 49 % / or the
sectoral caps a prescribed by Government of India / Reserve Bank of
India.

38. Investment limits on debt investments
The FII investments in debt securities are governed by the policy if
the Government of India. Currently following limits are in effect:
For FII investments in Government debt, currently following limits are
applicable:
For corporate debt the investment limit is fixed at US $ 500 million.
TAXATION:
The taxation norms available to a FII are shown in the table below.
Nature of Income Tax Rate
Long-term capital gains 10%
Short-term capital gains 30%
Dividend Income Nil
Interest Income 20%
Long term capital gain: Capital gain on sale of securities held for a
period of more than one year.
Short term capital gain: Capital gain on sale of securities held for a
period of less than one year.

39. CHAPTER 3
Impact of FIIs on
Stock Market Instability
The real measure of your wealth is how
much you’d be worth if you lost all your
money.

40. CHAPTER 3
IMPACT OF FIIS ON
STOCK MARKET INSTABILITY
Investment of FIIs are motivated not only by the domestic and
external economic conditions but also by short run expectations
shaped primarily by what is known as market sentiment. The
element of speculation and high mobility in FII investment can
increase the volatility of stock return in emerging markets. In
fact, a widely held perception among academicians and
practitioners about the emerging equity markets is that price or
return indices in these markets are frequently subject to extended
deviations from fundamental values with subsequent reversals and
that these swings are in large part due to the influence of highly
mobile foreign capital. Volatility is an unattractive feature that has
adverse implications for decisions pertaining to the effective
allocation of resources and therefore investment. Volatility makes
investors averse to holding stock due to increased uncertainty.
Investors in turn demand higher risk premium so as to ensure against
increased uncertainty. A greater risk premium implies higher cost
of capital and consequently lowers physical investment. In
addition, great volatility may increase the ―option to wait‖ thereby
delaying investment. Also weak regulatory system in emerging
market economies (EMEs) reduce the efficiency of market

41. signals and the processing of information, which further
magnifies the problem of volatility. But some researchers have the
opposite assumption of non-disestablishing hypothesis that says FIIs
have no adverse impact
Trading by FIIs happens on a continuous basis and therefore has a
lasting impact on the local stock market. There is, however,
surprisingly little empirical evidence on the impact of FIIs trading on
the host country‘s stock return volatility, thereby making it imperative
that this aspect of local equity markets, which is important for
both risk analysis and portfolio construction, be examined. This
chapter attempts to fill the gap. Beside the introduction, this chapter is
classified into two parts.
• Part I presents the impact of foreign institutional investors on
the Indian stock market volatility.
• Part II shows the structure of the volatility before and after
introduction of the foreign institutional investors in Indian stock
market.
The scope of the study is limited to the India which has become an
attraction for FIIs in recent years, in fact the emerging markets of
many developing countries have been attracting large inflows of
private capital in recent years. The surge in capital flows occurred
first in Latin America, then South East Asia and is now clearly visible

42. in South Asia. A significant feature of these capital flows is the
increasing importance of foreign portfolio investment (FPI), whose
buying and selling of stocks on a daily basis determines the
magnitude of such capital flows. A significant improvement has
also taken place in India relating to the flow of foreign capital
during the period of post economic reforms. The major change
in the capital flows particularly in Foreign Institutional Investors
(FIIs) investments has taken place following the changes in
trade and industrial policy. Over the past 15 years or so India
has gradually emerged an important destination of global investors‘
investments in emerging equity markets. In 2006, India had a share
of about 0.55% of global investment which is quite high in comparison
to year 2001 in which India‘s share was only 0.12%. On the other
hand some of the developed countries have shown a downward
trend.

43. The foreign financial inflows, beside other factors, helped the Indian
stock market to rise at a great height according to financial analysts.
Sensex crossed a new high. It crossed 20000- mark in December
2007, which was 13786.91 in December 2006 and
9397.93 In December 2005. This historical movement is also due to
the other parameters of the economy, which are favorable for the
investment. The returns on investment are also much favorable. The
profit performance of the firms may explain the reasons for
High return on investment. There are other factors such as
favorable tax laws and relaxation on the caps of various kinds
of investments. The policy measures and economic factors are also
the reasons for the investor‘s confidence.
during 1981-90, period of real sector reforms, were significantly
higher than those found pre-liberalization period (i.e.1961-80).
Interestingly, return and volatility increase further to 0.074 and 1.92
respectively. In era of first generation reforms financial sector reforms

44. (i.e. 1991-2000).It is appreciable to see from the table that the
second generation reforms have brought in more cheers for the
capital market as the risk (i.e. Standard Deviation of return)
decreased but the stock return went up in the period. Clearly
the volatility has declined in Indian stock market after year 2000.
Table 5 further reveals that the stock return has remained
around half (0.06%) after the arrival of FIIs as compared to that
obtained (0.15%) during 1986 to 1992 period. Simultaneously, the
standard deviation which measures the volatility has declined
from 2.1598 percent during 1986-92 to 1.59 percent during
1992-2007. Thus, both volatility and return have declined after the
opening up of domestic stock market for FIIs. Time period 1994
to 2001 gave a serious setback to stock market performance.
 Increase cap on G-Sec Bond Markets:
Currently, the cap on FII investments in the bond market is USD 6
Billion. As per the new budget, proposes to borrow Rs.4.5 lakh
crore in 2009-10 to support its infrastructure and other
developmental projects. This could be opened up to the FIIs so that
they can take part in India‘s hitherto almost closed debt market. The
Indian debt markets are not fully developed and see low volumes.
The lifting of the cap on FIIs will increase the traded volumes
and it will also help in preventing the ‗crowding out‘ of investment for
private enterprises.

45.  Allow dollar settlements in India:
The suggestion by SEBI to permit dollar settlements for FIIs would
revolutionize the way in which they invest in the country. This will help
mitigate risks of currency fluctuations for FIIs, and help in improve the
volume and liquidity of the derivatives market. With dollar
settlements, many participants, who want to take exposure to
Indian markets through index buying, will be able to participate
freely. This, in turn, will give stability to Indian markets as there will
be buying of underlying stocks by the sellers of these contracts to
FIIs.
At present, settlements in India are done in rupee denominations. As
a result, a number of FIIs, who intend to trade in Nifty futures, take
the Singapore route where CNX Nifty index futures are traded on
SGX.
About 50 per cent of the total open interest (OI) build-up in Nifty
futures takes place on the SGX, which allows settlements in US
dollar. This enables different types of FIIs to operate there. Also, low
transaction costs due to the absence of securities transaction tax,
stamp duty and P-note complications have resulted in a gradual
shift of FIIs into offshore markets. Settlements in dollar would
also help in reducing the volatility in dollar-rupee conversion
value caused due to FII flows. Each time a settlement is done, a
seller of futures contracts to an FII would buy an equivalent amount of
underlying stocks to hedge his/her exposure due to the sale. This

46. would increase the trading volume and liquidity of Indian markets,
once dollar settlement is allowed.
 Stricter implementation of regulation to curb p-notes etc.
To prevent the misuse of the participatory notes, there should
be stricter implementation of the regulations. Tough
implementation of KYC norms should be done. In the long run, the
group is of the opinion that registration procedures for FIIs
should be made simpler after which P-Notes should be done away
with.

47. CHAPTER 4
CONCLUSION
Those who start with too little money are
more likely to succeed than those who start
with too much. Energy and imagination are
the springboards to wealth creation.

48. CHAPTER 4.
CONCLUSION
A number of studies in the past have observed that investments by
FIIs and the movements of Sensex are quite closely correlated in
India and FIIs wield significant influence on the movement of Sensex
(Rangarajan 2000, Samal 1997, Pal 1998). NSE (2001) also
observes that in the Indian stock markets FIIs have a
disproportionately high level of influence on the market sentiments
and price trends. This is so because other market participants
perceive the FIIs to be infallible in their assessment of the market and
tend to follow the decisions taken by FIIs. This ‗herd instinct‘
displayed by other market participants amplifies the importance of
FIIs in the domestic stock market in India.
It is clear that the FIIs are influencing the Sensex movement to a
greater extent. Further it is evident that the Sensex has increased
when there are positive inflows of FIIs and there were decrease in
Sensex when there were negative FII inflows. It has been perceived
in some quarters that FII flows are major drivers of stock
markets in India and hence a sudden reversal of flows may harm
the stability of its markets. The nature of relationship between FII
flows and Indian stock market returns can be explained in terms of
―cumulative informational disadvantage‖ of foreign portfolio investors
vis-a-vis domestic investors. The theory says that domestic investors

49. posses better knowledge about Indian financial markets than
foreign investors and this information asymmetry leads to „positive
feedback trading‟ by the foreign portfolio investors. There is no
doubt FIIs are influencing the movement of Sensex to a greater
extent.
The whole process also highlights another disturbing feature. During
the post election period, the sudden volatility in the stock market and
the subsequent decline of Sensex was almost treated as a national
emergency in India by the financial media and to a certain extent, by
the incoming UPA government. It is very difficult to understand why
the government feels so concerned about speculative investors and
the movements in Sensex. Most studies have shown that Sensex is
neither a good barometer of economic fundamentals it is not an
indicator of future growth prospects of the economy. Moreover, this
study also shows that even sharp changes in Sensex do not
necessarily indicate a significant alteration of actual shareholding
pattern of different investor groups even in the Sensex companies. As
far as the real economy is concerned, the stock market has a very
limited role to play. In India, for the year 2002-03, new capital issues
by non- government public limited companies raised a combined
capital of Rs 1,878 crores from ordinary shares, preference share and
debentures. This amount is only 0. 33 percent of gross domestic
capital formation of the economy and about 1. 6 percent of gross
domestic capital formation by private corporate sector for that year.
This is not surprising because even in developed stock market s like

50. USA, the stock market has not been a significant source of finance
for new investments. Also, stock markets mobilize a very s mall
fraction of household financial saving in India. As the recent RBI
Handbook of Statistics shows, investment in shares and
debentures10 and units of UTI account for only 1.37 percent of total
household financial savings for t h e y ear 2003- 04. In comparison,
bank deposits account for about 42 .8 percent of household financial
savings for the same year. Under this circumstance s, it is not clear
why so much importance is given to the stock market and portfolio
investors by policy makers in India. It is high time to realize that in
spite of the impression given by the financial media, movements of
stock markets and Sensex do not necessarily imply any
fundamental changes in the economy and these movements affect a
very small minority of the country ‘s population. It will be
unfortunate if movements of speculative capital and the resultant
stock market gyrations are allowed to influence macro-economic
policy making in India.
Results of this study show that not only the FIIs are the major players
in the domestic stock market in India, but their influence on the
domestic markets is also growing. Data on trading activity of FIIs and
domestic stock market turnover suggest that FII‘s are becoming more
important at the margin as an increasingly higher share of stock
market turnover is accounted for by FII trading. Moreover, the
findings of this study also indicate that Foreign Institutional Investors
have emerged as the most dominant investor group in the domestic
stock market in India. Particularly, in the companies that constitute

51. the Bombay Stock Market Sensitivity Index (Sensex) and NSE Nifty,
their level of control is very high. Dominant position of FIIs in the
Sensex companies, it is not surprising that FIIs are in a position to
influence the movement of Sensex and Nifty in a significant way.
Since FIIs are dominating the Indian Market, individual investors are
forced to accept the dictates of major FIIs and hence join the group
by entering the Mutual Fund group. Many Mutual Funds floated
specific funds for the sectors favored by the FIIs. An implication of
MFs gaining strength in the Indian stock market could be that unlike
individual investors, whose monies they manage, MFs can create
market trends whereas the small individual investors can only follow
the trends. The situation becomes quite difficult if the funds gain a
vested interest in certain sectors by floating sector specific funds.
One can even venture to say that the behaviour of MFs in India has
turned the very logic that mutual funds invest wisely on the basis of
well-researched strategies and individual investors do not have the
time and resources to study and monitor corporate performance,
upside down. Thus, the entry of FIIs has not resulted in greater depth
in Indian stock market; instead it led to focusing on only a few
sectors. Ultimately to provide a level playing field, even the domestic
investors had to be offered lower rates of capital gains tax.

52. CHAPTER 5
ANNEXURE
Fortune knocks once, but misfortune has
much more patience.

53. ANNEXURE
MILESTONES OF FOREIGN INSTITUTIONAL
INVESTMENT IN INDIAN STOCK MARKET
 India embarked on a programme of economic reforms in the early
1990s to tie over its balance of payment crisis and also as a step
towards globalisation.
 An important milestone in the history of Indian economic reforms
happened on September 14, 1992, when the FIIs (Foreign
Institutional Investors) were allowed to invest in all the securities
traded on the primary and secondary markets, including shares,
debentures and warrants issued by companies which were listed or
were to be listed the stock exchanges in India and in the schemes
floated by domestic mutual funds.
 Initially, the holding of a single FII and of all FIIs, NRIs (Non-
Resident Indians) and OCBs (Overseas Corporate Bodies) in any
company was subject to a limit of 5% and 24% of the company's total
issued capital respectively.
 ( In order to broad base the FII investment and to ensure that such
an investment would not become a camouflage for individual
investment in the nature of FDI (Foreign Direct Investment), a
condition was laid down that the funds invested by FIIs had to have at
least 50 participants with no one holding more than 5%. Ever since

54. this day, the regulations on FII investment have gone through
enormous changes and have become more liberal over time.
 ( From November 1996, FIIs were allowed to make 100%
investment in debt securities subject to specific approval from SEBI
as a separate category of FIIs or sub-accounts as 100% debt funds.
Such investments were, of course, subjected to the fund-specific
ceiling prescribed by SEBI and had to be within an overall ceiling of
US $ 1.5 billion. The investments were, however, restricted to the
debt instruments of companies listed or to be listed on the stock
exchanges.
 In 1997, the aggregate limit on investment by all FIIs was allowed
to be raised from 24% to 30% by the Board of Directors of individual
companies by passing a resolution in their meeting and by a special
resolution to that effect in the company's General Body meeting.
 (From the year 1998, the FII investments were als allowed in the
o
dated government securities, treasury bills and money market
instruments.
 (In 2000, the foreign corporates and high net worth individuals
were also allowed to invest as sub-accounts of SEBI-registered FIIs.
FIIs were also permitted to seek SEBI registration in respect of sub-
accounts. This was made more liberal to include the domestic
portfolio managers or domestic asset management companies.
 (40% became the ceiling on aggregate FII portfolio investment in
March 2000.

55.  (This was subsequently raised to 49% on March 8, 2001 and to the
specific sectoral cap in September 2001.
 (As a move towards further liberalization a committee was set up
on March 13, 2002 to identify the sectors in which FIIs portfolio
investments will not be subject to the sectoral limits for FDI.
 (Later, on December 27, 2002 the committee was reconstituted
and came out with recommendations in June 2004. The committee
had proposed that, 'In general, FII investment ceilings, if any,
may be reckoned over and above prescribed FDI sectoral
caps. The 24 per cent limit on FII investment imposed in 1992 when
allowing FII inflows was exclusive of the FDI limit. The suggested
measure will be in conformity with this original stipulation.' The
committee also has recommended that the special procedure for
raising FII investments beyond 24 per cent up to the FDI limit in a
company may be dispensed with by amending the relevant
regulations.
 (Meanwhile, the increase in investment ceiling for FIIs in debt funds
from US $ 1 billion to US $ 1.75 billion has been notified in 2004. The
SEBI also has reduced the turnaround time for processing of FII
applications for registrations from 13 working days to 7 working days
except in the case of banks and subsidiaries.
 All these are indications for the country's continuous efforts to
mobilize more foreign investment through portfolio investment by FIIs.
The FII portfolio flows have also been on the rise since September
1992. Their investments have always been net positive, but for 1998-
99, their sales were more than their purchase.

56. CHAPTER 6
BIBLIOGRAPHY
No matter how hard you hug your money, it
never hugs back.

57. BIBLIOGRAPHY
BOOKS: FOREIGN DIRECT INVESTMENT
BY- M. SORNARAJAH
FOREIGN INSTITUTIONAL INVESTORS
BY- VIJAYCHANDRA KUMAR C
MAGAZINE: INDAIN JOURNALS OF MARKETING MARCH 10, MAY
12.
NEWS PAPER: ECONOMICS TIMES
TIMES OF INDIA
DNA

58. CHAPTER 7
WEBLIOGRAPHY
I don’t think about financial success as the
measurement of my success.

59. WEBLIOGRAPHY
http://www.moneycontrol.com/
http://www.rbi.org.in/
http://www.sebi.gov.in/
http://www.nseindia.com/