PHASE 2

FII

Submitted To

Prof. Ramana Rao

Submitted By

Bantu (B503)

Saketh Raj(B520)

Sindhur(B523)

Sriya Sha(B528)

Tejaswi(B530)

Vinod (B532)

1.Name of the article: India trumps rest of Asia in FII inflows

BL Research Bureau, July 29, 2012

Author: Arvind Jayaram,

Indian equities are seen as a better bet for parking foreign funds than their peers in emerging Asia. Foreign institutional investors have pumped $10 billion into Indian stocks so far in 2012. This translates into a 336 per cent rise in net FII investment compared with the first seven months of 2011.

According to Bloomberg, Indian equities top the table of net FII inflows in Asian emerging markets in 2012. South Korea is the other country in the group that has received substantial inflows of $4.9 billion.Net FII flows into the Philippines also shot up by 267.7 per cent to $2.1 billion, while net FII investment in Thailand rose by 161.8 per cent to almost $2 billion. Indonesia, on the other hand, witnessed an 82.1 per cent dip in net FII investment to $498.2 million during the period under review. Taiwan also saw net outflows of $2.8 billion, but this was still a 92.8 per cent improvement compared with the previous year, when the FIIs pulled out even more money.

India’s neighbors Pakistan saw net outflows of $2.1 million Which caused concern among the policy makers in Pakistan, while Sri Lanka saw net FII investment of $189 million in the January-July 27 period of 2012.

Impact on market

It appears that domestic investors and FIIs do not always see eye-to-eye on market potential. The BSE Sensex rose by 11.2 per cent in January, but despite higher FII inflows in the subsequent month, it rose by just 2.6 per cent.

In March, the Sensex shed two per cent even as FIIs pumped in more money. But when FIIs reduced their exposure to the market in June, domestic investors pushed the Sensex up by 7.5 per cent. The Sensex is down 3.2 per cent so far in July despite robust net FII inflows. The impact of FII flows on the rupee also brings fortune. In January, the rupee gained 6.8 per cent against the dollar, but in February, it lost 0.8 per cent despite higher inflows. In March, the rupee slid further by 3.8 per cent. It fell by 3.7 per cent and then 6.4 per cent over the next two months, but gained 0.9 per cent in June despite net FII outflows. In July, the rupee has gained 0.5 per cent against the dollar.

2. Name of the Article: FIIs warm up to infra bonds, help firm up rupee

Live mint.com, The Wall Street Journal,

Author: Arup Roy, July 4th,2012

Foreign institutional investors (FIIs) expressed their eagerness to invest in Indian bonds by lapping up the new bond investment limit on offer, auctioned by market regulator Securities Exchange Board of India (SEBI). They committed to buy up to Rs. 20,469 crore of government bonds and up to Rs. 19,777 crore of infrastructure bonds. Thus, FIIs now can invest up to $20 billion in government bonds, up to $25 billion in infrastructure corporate bonds and up to $20 billion in other corporate bonds.

Reserve Bank of India (RBI) allowed FIIs to invest an additional $5 billion in government bonds and relaxed the guidelines regarding the lock-in period in infrastructure bonds to one year from three years earlier. While FIIs have always been enthusiastic about investing in government bonds, they shied away from increasing their exposures in infrastructure bonds due to the lock-in period. Bond dealers termed the latest auction results as impressive, given that FIIs bid for more than half of what was offered in the infrastructure segment. This has resulted in strengthening the rupee.

In spite of the decrease in yield of bonds, FIIs are interested in investing in India despite whatever rating agencies forecast. For foreign investors, although India’s economic growth slowed considerably, it’s still doing better than many other countries in the west and emerging markets in terms of growth. Also, because of the extreme pessimism over policy paralysis and twin deficits, valuations had become more reasonable. This caused foreign banks such as UBS AG, Deutsche Bank AG and JP Morgan Chase and Co. to turn overweight on In

The above graph depicts the shift in sentiment of foreign investors in Indian Market.

3.Name of the Article: Foreign Institutional Investment in Indian Capital Market: A Study of Last One Decade

International Research Journal of Finance and Economics

Author: Narendra Singh Bohra, Akash Dutt

Since the beginning of liberalization(1991) FII flows to India have steadily grown in importance, any economy in the world is major affected by the foreign investment and the movement of its capital market, as an indicator of performance of its various companies in a particular industry. The dawn of 21st century has shown the real dynamism of stock market and the various benchmarking of sensitivity index (Sensex) in terms of its highest peaks and sudden falls. This article attempts to understand the behavioral pattern of FII in India and figure out the reason for indifferent responses of BSE Sensex due to FII inflows.

Research Objective• To study the behavioral pattern of FII in India with special reference to 2000 to 2009.• To establish a relationship between FII and different groups of shares in BSE India.

Research MethodologyThe study describes the behavioral pattern and correlation between FII investments in India with special reference to BSE Sensex and also with groups of shares in BSE Sensex. It is based on secondary data obtained from websites, newspaper and journals. The main objective of the present paper is to determine impact and relationship between the Indian stock market, net foreign institutional investment.

Section - 01Exploring the behavioral pattern of FII in India with special reference to BSE Sensex.

FII in India (2000 – 2009)Foreign institutional investors have gained a significant role in Indian capital markets. Availability of foreign capital depends on many firm specific factors other than economic development of the country. The relationship between foreign institutional investment and firm specific characteristics in terms of ownership

structure, financial performance and stock performance is examined here. It is observed that foreign investors invested more in companies with a higher volume of shares owned by the general public. The promoters’ holdings and the foreign investments are inversely related. Foreign investors choose the companies where family shareholding of promoters is not substantial. Among the financial performance variables the share returns and earnings per share are significant factors influencing their investment decision.

FII in India was maximum in 2004 then it starts declining, then it faced the challenge of global crisis, in 2007 the net sale of shares by foreign investors is mare then net purchases.

FII and BSE Sensex IndiaIt has been found by the study that BSE Sensex and foreign institutional investment has followed a closed relationship, when net Sensex was moved up than the FII was also increased and when net Sensex was down the total FII also goes down.

Section – 02Attempts to establish the correlation between FII and individual group’s securities in BSE Sensex. FII and Individual Group Securities in BSEIt has been found that some group of shares attract the attention of FII at larger, some at very low and some group of shares are completely unable to attract the attention of foreign investors these groups are negatively co-related with the total FII in India.

FII & Group-A SharesThese are companies with fairly good growth record in terms of dividend and capital appreciation. The scrip’s in this group are classified on the basis of equity capital, market capitalization, number of years of listing on the exchange, public shareholding, floating stock, trading volume etc. This group of shares in the stock market attracts the high interest of foreign institutional investors in India.

FII & Group-B1 & B2B1, B2’ Group is a subset of the other listed shares that enjoy higher market Capitalization and liquidity than the rest. It is another group of shares which hold high market capital. As per the study it has been observed that this group of shares attracts the attention of investors quiet well till 2007-08 but after the global crisis this group of shares unable to attract the attention of foreign institutional investors.

FII & Group-SThe “S” Group represents scripts forming part of the “BSE-Indonext” segment. “S” group consists of scripts from “B1” & “B2” group on BSE and companies exclusively listed on regional stock exchanges having capital of 3 crores to 30 crores. All trades in this segment are done through BOLT system under S group. This group of shares attract the highest attention of investors in 2007 after that it has been decreased substantially, as far as the correlation of total FII and S – Group share is concern it has shown substantially correlated.

FII & T Group Shares‘T’’ Also termed as the trade to trade group this category comprises of shares which have to be settled in delivery for all buys and sells and square off of bought and sold positions during the day is not permitted. This is a part of the surveillance from the BSE to counter any backward unwarranted movements in such scrip’. In 2007 there is maximum FII in T – Group shares and lowest in 2008, year 2008 was

the year when Indian economy faced impact of global crises and FII was directly by correlated, but one interesting fact has been found that, in 2008 the total FII in India Rs 220568 crore and Rs 1773.1 crore that is minimum after 2005.

GROUP-Z: ‘Z’ Group category comprises of shares of the companies which does not comply with the rules and regulations of the Stock Exchange and are at times suspended from trading. This group of shares does not shown any co relation with the total FII in India but it has attract the small attention of foreign portfolio invest.

GROUP-F: ‘F’ Group represents the debt market segment or represents the Fixed Income Securities. FII are always interested in high return that is the main reasons behind the slow attention of FII in this group of shares.

Group-G": G" group consist Trading in Govt. Securities for retail investors. This group of shares unable to attract the attention of foreign institutional investors. Because the investment in government security is tighten by strong regulations in India

GROUP-B2: ‘B’ Group is a subset of the other listed shares that enjoy higher marketcapitalization and liquidity than the rest. This group of shares was unable to find the attention of foreign investors till 2007. In 2008 this group of shares has attract the attention of FII in India.

Findings This study found that the behavior of FII in last decade was opportunistic;

profit accumulation was prime objective behind the portfolio investments in India.

Year 2007 – 08 is the witness the world global crises and its impact in India, inflow of foreign capital (FDI/FII) decreased/ stopped in the year 2011.

A good co – relation was found in the total FII turnovers and A group shares turnover, as well as this has been attracted the highest attention of portfolio investors in India.

There were certain groups of shares like G-group, B-group, ST-group, which do not find the substantial place in the investment basket of portfolio investors in India.

The lack of proper regulation has been found in the stock market for guiding the movement of foreign portfolio investors in India.

ConclusionThe result shown a positive correlation between stock market and investment of FII’s in a relation that Sensex follows the investment behavior of FII’s, but there are some exception seen in year 2005 and 2008.The net foreign institutional investment, thus implying that the market informational efficiency hypothesis can be rejected for BSE Sensitive Index with respect to the FII. It also shows that positive or negative movement of FII’s leads to a major change/shift in the sentiments of domestic or related investors in market. It suggests the policy implication that the authorities can focus on domestic economic policies to stabilize the stock market. Where as in the case of individual group securities FII’s had shown a positive correlation in less regulated and high capitalized securities in the market to earn high equity yield. Investors can therefore apply profitable trading rules to earn supernormal profits. Under the circumstances, the Indian stock market seems to be bearing the underlying strain not currently visible at the surface. The implementation of profitable trading strategy may at any point of time generate over-enthused investment and this, if coupled with market overreaction, may result in a destabilized system. A point also to be noted here is the heavy investment and selling attitude of FII’s causing a major hurdle in stabilization of market sentiments.

4.Name of the Article: FDI v/s FII. Which is good for India & stock market?

Equity Desk, 25th oct 2008

Author: - Muralimohan

There is too much liquidity across the globe that rich people looking for markets that are growing like US. Too much liquidity of those consumer economies is chasing Indian stocks. Their money is welcomed in India but the risk of withdrawal comes along with that. In the last five years, $45 billion investment has come to the Indian markets from FII. Today, the market value of their money should be around $120 billion.

Japan has invested $5 billion in the Indian market. These days, as soon as new public issue opens, it gets filled up within the first few hours. Because Japan has saved money for years. Investors there get zero or negligible interest. At some places, bank charges them for keeping deposits. In our banks, on the contrary, we get four per cent, at least. The Japanese are tired of dead investment. So they are looking out. In the last one year, the Japanese have got return of 48 per cent in the Indian stock exchange. They had started with $1 billion. Now it has reached $5 billion.

Politics can make India to go against realizing its dream. If something happens to this government and there is instability at the Centre, it can affect our growth. Example In 2004, between May 13 and 18, the stock index plunged when Sonia Gandhi delayed her decision to announce (Dr. Manmohan Singh's name as the prime minister).

China has not grown with the help of FII investment because China has grown with the help of bank money, or people's money. China has got four prime banks owned by the government and non-performing assets is approximately above 30 per cent. They have issued loans to whoever came to the bank. To build infrastructure, they were fast to disburse money.

FDI is not needed in India because we are getting more money from the FIIs and need infrastructure to manage incoming FDI. We are getting around $12 billion from them (FII). India gets around FDI worth $5 billion; China gets around $50 billion. In India, when FIIs pump in $12 billion, it means a few Indians have sold their shares to FIIs, so that free cash gets invested somewhere within India by Indians. That money goes into land, buying of new stocks and into banks. Mittal Steel, Reliance, Tata, Vedanta and other Indian companies are going to invest more than Rs 2 lakh crore in the coming years.

Thus, FDI is not a big issue because Indians are in now a position to raise big money.

5. Name of the Article: Analytical Study of Impact of FII on Indian

Stock Market with Special Reference to BSE SENSEX

Author: Vikram K. Joshi & Miss Richa Saxena

The article on “Analytical Study of Impact of FII on Indian Stock Market with

Special Reference to BSE SENSEX” focusses on the impact of variation in FII on

SENSEX and how FIIs are allowed to enter in India only through stock exchanges

either in the form of equity or debt which makes an impact on the rise or fall of

SENSEX as FIIs are allowed to be purchased or sold daily. The volatility in the

stock markets are caused mainly by the daily transactions of FIIs and also has a

strong impact on the various macro- economic variables and the economy as a

whole.

Despite a shortage of investments in under developed countries because of low

level of income and capital accumulation there has been a drastic improvement in

industrialization and economic development. Shortage of domestic demand and

other reasons lead to increase in foreign capital inflows. FII inflows plays a

prominent role in the improvement of liquidity of stock prices of both NSE and

BSE. A strong correlation exists between FIIs investments and market

capitalization, FIIs investments and BSE & NSE indices. High level of FII inflows

are influences by volatility and liquidity which we were mainly determined or

capital market prices by FII investments.

The investment limit of registered FIIs or sub-accounts in primary or secondary

markets under Portfolio Investment Scheme (PIS) is subject to a ceiling of 24% of

issued share capital of a company. The limit can be extended to 49% per sectoral

cap if the general body of the company approves it.

The need for the foreign capital/ foreign investments arises due to the following

reasons:

Development of basic infrastructure,

Rapid industrialization

To undertake the initial risk

Global imperatives

Competitive advantage

To remove the technological gap

Foreign investors are initiated in Indian Capital markets from 1991 and under the

new industrial policy of the government there has been measures to attract foreign

capital. The no. of registered FIIs are increasing every year from 2006 and in the

past four years there has been more than $41 trillion worth of FII funds invested in

India and the increased by more than 100%. FIIs have earmarked their presence

irrespective of the situation in Indian Stock markets but also there has been a

decline in FIIs inflows recently i.e., during 2010-11 because of the economic

position such as increasing inflation, rupee depreciation etc.,

Source: www.sebi.gov.in

Bombay Stock Exchange (BSE):

The Bombay Stock Exchange Ltd. (BSE) was originally established in 1875 and is

the oldest exchange in Asia and in the year 1986 it came up with an index known

as SENSEX . Approximately more than 4500 companies are traded in the index

and is one of the largest exchange in the world.

Bombay Stock Exchange Sensitive Index:

A value - weighted stock market index, which tracks the performance of the 30

largest stocks on the Bombay Stock Exchange and the index comprises of one-fifth

of the market capitalization of the entire stock exchange.

BSE is a de-mutualized and was registered as a corporate entity under the

provisions of the Companies Act, 1956.

Data collection:

The data is collected for values of Sensex, FII in terms of total

investment( Equity+Debt) & FII in terms of total turnover( Purchase & sales of

equity& debt)

Statistical tools used:

Hypothesis

t-test

f-test

Regression

Data analysis:

The regression equation indicates that as FII increases by 1 unit, Sensex decreases

by 0.1707 units. Sensex is an index measured in hundreds, the co-efficient of

Sensex implies that Sensex decreases by 100 for every Rs.17.07 FII turnover

increase. The t-test statistics indicates there is a relationship between Sensex & FII

and f-test statistics indicates that the variation between FII & Sensex is significant.

Findings:

The relationship between Sensex and FII total turnover is tested and there

exists a relationship between the two. Reason for such trend in Sensex due to

FII is that on account of high purchase and sales figures of FII.

The relationship between Sensex and FII net investment is tested and the net

investment was very low causing the SENSEX to remain relatively stable

and the variation between FII and SENSEX was not very significant.

Conclusion:

FII turnover is relatively a weak measure of Sensex as it explains 32%

influence on the fluctuation in the Sensex and is unable to determine 68%

influence of the other extraneous variables.

The short and long term investors were not very optimistic about the

macroeconomic conditions of India when there was a comparison between

SENSEX vs. Total turnover & SENSEX vs.Net investment. European

countries invested huge amount of money in the form of FII and also

withdrew in almost same proportion immediately from the Indian capital

market. This resulted into the strong impact of total turnover on SENSEX.

6.Name of the Article: Impact of FIIs on Stock Market Instability

Source: shodhganga.inflibnet.ac.in

The main objective of the article is to measure the impact of foreign investors

portfolio investments on volatility of Indian stock market.

Domestic, external economic conditions and short run expectations also known as

market sentiment motivate the FIIs investments and speculation, high mobility can

increase the volatility of stock return in emerging markets. The Price or return

indices in equity 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 has adverse implications to the effective allocation of resources and

investment and make investors averse to hold stock because of uncertainty in turn

demand higher premium. A high risk premium implies a high cost of capital, low

physical investment and great volatility increases the “option to wait” which results

in delaying investment.

Scope of the study:

The scope of the study focusses on attraction for FIIs in recent years where the

emerging markets of many developing countries have been attracting large private

capital inflows in recent years. There has been an increasing importance of foreign

portfolio investments(FPI) which is a buying and selling of stocks on a daily basis.

Post economic reforms there has been a significant improvement relating to the

flow of foreign capital. A major change in capital flows especially in Foreign

institutional investors(FIIs) investments took place after the changes in trade and

industrial policy.

Statistical tools used:

ARCH and GARCH models,

Fisher F-test

Data Analysis

ARCH and GARCH models were used for the time varying nature of the volatility.

Return and volatility increase much better compared to pre-liberalization period

and the volatility has declined in indian stock market after year 2000 as the second

generation reforms brought much better things in the capital markets as risk

has decreased but stock return has went up during the period. The variation in

Indian stock market returns reduced considerably after introduction of foreign

institutional investors.

There has been a positive and significant impact on the share market volatility

through coefficient of GARCH whereas its impact is higher in comparison to

ARCH which implies that the past volatility affect is more on the future volatility.

The impact of the dummy variable, which is net investment by foreign institutional

investors is negative.

The total of ARCH and GARCH model in coefficient is less than 1 which shows it

is perfect.

Impact of FIIs on stock market instability:

A correlation exists between the FIIs inflows and stock returns. And recent years

the foreign financial inflows have been increasing and along with this the other

parameters of the economy lead SENSEX crosses 20000- mark in Dec 2007. The

profits of the firm lead to the high return on investment including other factors

such as favourable tax laws and relaxation on the caps of various kinds of

investments.

There were many developments like compulsory rolling settlement,

dematerialization of securities, emphasis on free trading practices and strict

corporate governance practices adopted by the SEBI etc. took place in the market

leading to bringing efficiency and reduction in the volatility in the market. The

reduction in the volatility of the market is linked to introduction of FIIs is really

ambiguous.

FII investments behavior during some events affect the investments of foreign

institutional investors for short term. For example East Asian Crisis, Stock market

scam 2001, Black Monday 2004 FIIs were net sellers and there was a decline in

BSE Sensex, there was a net outgo of capital but there used to be a positive inflow

during the following months.

Conclusion:

FIIs tend to support stock market purely to ensure stability and safety of their own

investments and supports the broad base hypotheses which also suggests that FIIs

should add liquidity to the local market and reduce volatility.

7.Name of the Article: GAAR and its Implications

Article from CARE Ratings on May 12th 2012

Mauritius has been used as a holding company jurisdiction for making investments in India, with the investors in the holding companies being tax residents of other countries. Because of Article 13 of the Indo-Mauritian tax treaty, which provides for attribution of taxation rights among the two countries for capital gains? Article 13 (4) provides that gains derived by a resident of a contracting State shall be taxable only in that State and for other DTAA countries.

This has made Mauritius an attractive route for the purpose of investment in India.A Foreign enterprise can set up a subsidiary in Mauritius, and use it to derive capital gains from acquisition and sale of shares. Although India follows the source rule for taxation of non-residents, which makes this transaction taxable under the Income Tax Act, 1961, Article 13(4) of the DTAA gives Mauritius the right to tax this transaction. Since such gains are exempt from tax in Mauritius, the transaction becomes completely tax exempt, resulting in double non-taxation. As a result, much of the Mauritian investment into India is actually round tripping by Indian companies setting up a Mauritian entity to avoid capital gains tax in India.Mauritius mostly depend on import of capital so when India tried to renegotiate and on DTAA, not able to achieve that. So, more than 30 countries have introduced GAAR provisions in their respective tax codes to check evasion.GAAR has been in force in Australia (1981), Canada (1988), Singapore (1988), South Africa (2006) and China (2008) according to a study compiled by Deloitte. UK is considering it in 2013 while USA is also working towards it.The Budget sought to make an amendment to section 90 and Section 90A of the income tax law, a clause which says that just by “submission of a tax Residency Certificate containing prescribed particulars” a firm or an individual which carries on some real business in a tax haven cannot claim the benefits of a tax avoidance treaty signed with that country.Net FIIs have been illustrating an inflow since December, 2011. Net FII inflows peaked to $7 bn in February, 2012. However, foreign institutional investments

have declined post the announcement of GAAR on 16th March, 2012. March saw a net inflow of mere $0.4 bn while April registered an outflow of $8 bn. This clearly indicates that the adoption of GAAR by India was not found to be favorable by foreign investors.GAAR will now be applicable from April 1st , 2013. The rupee should be driven more by fundamentals of which FII inflows are an integral part. In FY11, FIIs were around 72% of the current account deficit and 56% of net capital inflows. In the first 9 months of FY12, however, as the current account deficit widened and the FII flows slowed down, the coverage level was just 11%. Also FIIs contributed to just 12.5% of net capital flows. Therefore, any reduction in these inflows could impact the fundamentals.Since government have clarified over may issues on GAAR implementation, FII are seemed to be coming back. Economic activities are expected to pick up with the Indian economy seen to grow at around 7-7.2% during 2012-13. Inflation is also believed to moderate and hover around 6% by the end of March 2013. Therefore, it can be deduced by March 2013 when the GAAR is likely to be re-implemented the investor sentiment and confidence in the Indian economy would have improved.