THESIS ON :STUDY ON THE IMPACT OF INDIAN FINANCIAL

MARKET POLICIES ON FII INVESTMENT

PRESENTED BY:

KINJAL JAINHELI DESAI

Content:

Introduction

Objective of study

FII And Regulatory Framework

Research methodology

Finding and result discussion

Conclusion

Recommendations

Limitations

References

Introduction

NSE/BSE

Derivatives

FII inflow and relation with Indian stock exchange.

Objectives of Study

To gain knowledge of stock market.

To find out the relationship between FIIs investment and Indian financial market.

Influence of FII in decision making of Indian investors.

To know the volatility of BSE\ NSE due to FIIs

FIIs & Regulatory Framework

FIIs

FIIs are Foreign Institutional Investors. A term that is commonly found whenever there’s a discussion on stock markets. FIIs are entities (banks, insurance companies, mutual funds etc) registered in a country other than in which they are investing. For e.g. a US Mutual Fund which invests in the Indian Stock Market. FIIs usually pool large sums of money and invest those in securities; real property and other investment assets, the inflow or outflow of money by FIIs affect the stock market movement significantly.

FII’sPros leads to increase in demands on

companies to become more transparent and more authentic.

Increase in more trade opportunities because of this class investment.

Inflow of foreign capital.

Becomes key indicator for healthy market.

Professionalism increases .

Cons

increases volatility in market & price fluctuations.

Firms losing domestic control.

FII flows leading to appreciation of the currency may lead to the exports industry becoming uncompetitive

Evolution of FIIs in India: 14th September,1992 coming in of

FII in India.

The government guidelines of 1992 also provided the eligibility conditions for registration, such as track record, professional competence, financial soundness, and other relevant criteria, including registration with a regulatory organization in the home country and incorporated in 1995.

2000 FEMA came into force after that FII were allowed to invest in all securities.

Building up of FIIs policy.

Building up of FIIs policy.

Regulatory Framework Entities eligible to invest under FII route As FII:

An institution established or incorporated outside India as a pension fund, mutual fund, investment trust, insurance company, or reinsurance company.

An international or multilateral organization or an agency thereof, or a foreign governmental agency, sovereign wealth fund, or a foreign central bank.  

An asset management company, investment manager or advisor, bank, or institutional portfolio manager that is established or incorporated outside India and proposes to make investments in India on behalf of broad-based funds and its proprietary funds, if any;

A trustee of a trust established outside India who proposes to make investments in India on behalf of broad-based funds and its proprietary funds, if any;

University funds, endowments, foundations, charitable trusts, or charitable societies. Broad-based fund means a fund that is established or incorporated outside India, which has at least 20 investors with no single individual investor holding more than 49 percent of the shares or units of the fund. If the broad-based fund has institutional investor(s), then it is not necessary for the fund to have 20 investors. Further, if the broad-based fund has an institutional investor who holds more than 49 percent of the shares or units in the fund, then the institutional investor must itself be a broad-based fund.

Sub-Account: - refers to any person who is resident outside India on whose behalf investments are proposed to be made in India by a foreign institutional investor, and who is registered as a sub-account under the SEBI (FII) Regulations, 1995.

The applicant for a sub-account can fall into any of the following categories:

 

Broad-based fund or portfolio that is broad-based, incorporated, or established outside India. 

Proprietary fund of a registered foreign institutional investor.

Foreign individual who has a net worth of not less than US $ 50 million, holds a valid passport of a foreign country for a period of at least five years, holds a certificate of good standing from a bank, and is the client of the FII for a period of at least three years

Foreign corporate that has its securities listed on a stock exchange outside India, having an asset base of not less than US $ 2 billion and having an average net profit of not less than US $ 50 million during the three financial years preceding the date of application. A non-resident Indian shall not be eligible to invest as a sub-account.

Investment Restrictions

An FII can invest only in the following:

Securities in the primary and secondary markets including shares, debentures, and warrants of companies, unlisted, listed, or to be listed on a recognized stock exchange in India

Units of schemes floated by domestic mutual funds including the Unit Trust of India, whether listed or not listed on a recognized stock exchange, or units of schemes floated by a Collective Investment Scheme

Dated government securities

Derivatives traded on a recognized stock exchange

Commercial papers

Security receipts 

Indian Depository Receipts

Securities in Which FII Commonly Trade In

DEBT SECUTRIES

EQUITY

OFFSHORE DERIVATIVE INSTRUMENTS (ODIS)

I. P-Notes

II. F&O

Debt

Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount borrowed), interest rate and maturity/renewal date. Debt securities include government bonds, corporate bonds, CDs, municipal bonds, preferred stock, collateralized securities (such as CDOs, CMOs, GNMAs) and zero-coupon securities. 

Equity

A stock or any other security representing an ownership interest. On company's balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as "shareholders' equity".

ODIs

Participatory notes are the most common type of ODIs. The PNs are instruments used by foreign funds that are not registered in SEBI in the country for trading in the domestic market.

ODIs means any instrument issued outside India by a FII against underlying securities held by it that are listed or proposed to be listed on any recognized stock exchange in India.

Futures - A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. If you buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set price.

Options-A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date)

ODIs Continued..

FII Investment RouteIntroduction to GAAR

It was proposed by the then finance minister, introduced to chapter X-A to the income tax Act 1961. It directly targets the tax evaders from routing investments through tax havens like Mauritius, Luxemburg, Switzerland. In India Law, GAAR is an acronym for General Anti-Avoidance Rules which are framed to minimize tax avoidance, for example by siphoning of profits to Tax Haven. GAAR could be termed as a general set of rules enacted limit tax avoidance. It was proposed by the Union Budget 2012-13.

Research Methodology

The scope of the research comprises of information derived from secondary data from various sources. The various information and statistics were derived from the different sources

The study period covered under this is for the years 2004-2013 and in some cases on availability of data as India is still forming norms for financial markets.

The type of research is Causality research . It is descriptive report.

The analysis has been made by, correlating the FII purchases, sales and net investment with equity market returns to identify whether a relation exists between them

Use of excel ,word , internet and PowerPoint has been done.

Findings and Result Discussion

FII equity

2005

2006

2007

2008

2009

2010

2011

2012

 201

3

-60,000

-20,000

20,000

60,000

100,000

140,000

Equity

years

INR

cro

res

From the year 2005 and onwards low investment due to recession in US and European countries. A major downfall in the year 2008 due to the recession in euro zone and due to that India had to change its policies causing market crash down. Due to fall in equity a complete opposite pattern was seen in debt securities and people started investing in it considering to be more safe and trustworthy.

FII Debt Worst performance in

2013 as foreign investors pulled out more money than invested.

The behind this was an announcement made by Ben Bemanke regarding US federal going for tapering QE by end of the year leading to fall in rupee and arbitration. Rupee hit the record of lowest to 68. -60,000

-40,000

-20,000

0

20,000

40,000

60,000 

Debt

years

INR

cro

res

P-notes

The rules related to pnotes have been strengthened by the regulatory body.

Initially most of the foreign investment was through pnotes which was unaccounted.

Now the regulatory has divided into 3 categories based on the risk to keep a narrow check.

2004

2006

2008

2010

2012

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

PNotes Value

in c

rore

s

Increase in their investment

pattern and there is decrease in banks by 0.2,foreign cooperates by 0.7,institutional portfolio manager by 0.4,insurance by 0.1,investment manager by0.3 and other(unspecified ) by 1.

The pnotes policy has become supportive for sectors like pension and welfare funds.

0.0

3.0

6.0

Change In Investment Segment Due To Change

In P-notes Policy.

2013 2012

The main reason for rise is higher returns.

The FII also has the freedom of not to buy stocks in heavy cash.

It was low during 2008 due to the economic crisis.

It gradually picked up as the economy revived and was at peak during 2011.

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

100000

200000

300000

400000

500000

600000

700000

F&O Investment Pattern

Buy Amount(Rs. Cr.) Sell Amount(RS. cr.)

The stock indices show that it is at high when FII investment is high and goes down with fall in investment.

The movement of both of these are closely correlated.

The major downfall was in year 2008 but now over past few years it has increased pulling the market up.

2005

2006

2007

2008

2009

2010

2011

2012

2013

-100,000

-50,000

0

50,000

100,000

150,000

200,000

0

1000

2000

3000

4000

5000

6000

7000

trend of market

total fii investment in Debt and eqity (in cr.)(LHS)stock exchange trend(RHS)

Until 2012 the investment brought in India was mainly by Mauritius but in 2013 US has topped the list.

It has been suspected that it must be because of the Double tax avoidance agreement policy changes.

Total asset 14.65 lakhs crore which was 13.35 lakhs crore in 2012.

Total equity market is 5.13 lakhs crores and total debt market is 78000 lakhs crore.

0

100,000

200,000

300,000

400,000

500,000

Graph 8 Country investent inflow

2013

FII investment in Indian sector (in per.)

Sectors 2012 2013

Automobiles & Auto Components 5 5

Total  Financial Services 29 24

Capital Goods 6 5

Oil & Gas 6 6

Pharmaceuticals & Biotechnology 5 6

Software & Services 9 15

Others 40 38

For automobile sector and oil & gas sector there has been no change. Downfall by 1% in financial service and pharmaceuticals sector and major fall in software service. Increase in 1% in capital and other undefined sectors.

The data shown is of past 3 years.

Here most attractive companies by FII are listed.

The most preferred being the other company not from banking sector and which may fall in infrastructure sector the second best is Tata consultancy service.

01020304050

Top FIIs Attracting Companies in India

Conclusions

Global market and political influence, Changes in Rules and Regulation and Internal political scenario

Risk

Inflation

Interest rates

Sensitivity towards events/news

Equity Returns

Balance of payment

Fluctuating Rupee

Stock Market

Recommendations

There are following policy implications, which come forward from this analysis.

India should move to influence both the size and composition of capital flows.

India should focus on strengthening their banking system rather than promoting financial markets.

Banks can provide the surest vehicle for promoting long-term growth and industrialization. Since financial markets in India are here to stay, Government should try to shield the real economy from their queries.

The new code which has been brought that categorizes the securities is not up to the mark and the capital flow has reduced due to this so the government should either make necessary changes or remove the new codes and retrieve the old ones.

Government should set a minimum limit as well as maximum limit, within which FII invest in India , in order to avoid volatility in Indian stock market ( Sensex & nifty)

Implementation of act is must & imperative in order to eschew from seasonal variation, Rules & regulation are made, but follow up is not there.

Limitations

The new policy changes for GAAR were not available and so it restricted our analysis and its counter effect on FII.

Due to lack of information and non availability of past data for various factors that involved FII investment further analysis could not be done and it compeled us to restrict our findings and analysis.

Details of PN, equity, and debt and derivatives data compilation were changed and which caused hindrance while doing analysis.

The data available for the entire study is purely secondary data and so the actual accuracy cannot be measured

ReferencesWeb links

http://www.rbi.org.in/,5th Feb 2014,9:00pm

http://www.business-standard.com/article/markets/mauritius-slips-to-2nd-place-on-fund-flows-into-indian-markets-114042700283_1.html,5th Feb 2014,9:00pm

http://www.business-standard.com/article/markets/why-fii-play-is-crucial-for-the-f-o-market-112040700072_1.html,5th Feb 2014,9:00pm

http://www.nseindia.com/products/content/equities/indices/homepage_indices.htm,5th Feb 2014,9:00pm

http://businesstoday.intoday.in/story/2013-invest-in-debt-to-gain-from-fall-in-interest-rates/1/191111.html,5th Feb 2014,9:00pm

http://www.business-standard.com/article/markets/fiis-pull-8-bn-out-of-debt-market-in-2013-114010300824_1.html, 20th Feb 2014,9:00pm

http://www.thehindubusinessline.com/markets/sebi-tightens-norms-for-issue-of-participatory-notes/article5573856.ece, 5th Mar 2014 ,8:00am

http://www.indiainfoline.com/PersonalFinance/Articles/What-are-participatory-notes/45892077, 10th March 2014 ,6:00pm

http://economictimes.indiatimes.com/topic/FIIhttp://www.jstor.org/discover/10.2307/4405983?uid=3738256&uid=2&uid=4&sid=21103937883977 , 10th March 2014 ,6:00pm

http://www.moneycontrol.com/india/stockmarket/foreigninstitutionalinvestors/13/50/activity/FII , 10th March 2014 ,6:00pm

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http://www.bseindia.com/indices/IndicesWatch_sector.aspx?iname=BSE30&index_Code=16 , 10th March 2014 ,6:00pm

http://www.moneycontrol.com/investor-education/#mfiqtest , 10th March 2014 ,6:00pm

http://www.rbi.org.in/advt/FIINRI.html , 10th March 2014 ,6:00pm

http://www.sebi.gov.in/sebiweb/investment/statistics.jsp?s=fii ,22nd March 2014 ,8:00pm

http://blogs.reuters.com/india-expertzone/2013/04/15/why-fiis-are-dumping-india/ ,3rd April 2014 , 2:00pm

http://blogs.reuters.com/india-expertzone/tag/stock-market/ 3rd April 2014 , 2:00pm

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Journals 

Gyanpratha – Accman Journal Of Management, Volume 5 Issue 1 2013, 23rd April 2014 ,12:00am

Kothri,C.R. ,(2007),Research Methodology Methods And Techques,1, 10 th March 2014 ,6:00pm

Data ,Devangshu,(2-3-2014),Business Standard ,A Scenario Of FII Selling Is Possible , 10 th March 2014 ,6:00pm

THANK YOU