DISSERTATION

“IMPACT OF FII AND FDI ON INDIAN

STOCK MARKET”

School Of Management Sciences

Batch (2009-11)

Submitted under the partial fulfillment of the requirements

for the two year PGDM Programme

SUBMITTED TO:- SUBMITTED BY;-

Mr. Arindo Bhattacharjee Swati Singh

LECTURER PG/15/106
SMS, VARANASI Finance
 DECLARATION

I hereby declare that the information presented in the project

entitled “Impact of FII and FDI’s on Indian Stock Market” is correct to

best of My Knowledge.

DATE…………………….

PLACE……………………

2
 ACKNOWLEDGEMENT

I expressed my profound gratitude to School of Management

Sciences, VNS for giving me this opportunity to work on this project.

I take this opportunity to express my gratitude and sense of

indebtness to Prof. P.N. Jha (Director SMS) for providing me with an
opportunity to carry out with this survey.

I would like to acknowledge my profound thanks to Mr. A.

Bhattacharjee (Lecturer, SMS) under whose supervision I did this project.
At every step his advice and expert guidance helped me to proceed in right
direction. He had always been a source of inspiration and support for me.

Last but not least I will like to thank my family members and
friends, without whose cooperation the completion of project not have
been possible.

Thank you

Swati Singh

3
 PREFACE

To develop good skills one should have vast practical exposure

along with the theoretical knowledge. The project makes the student fully
aware with the intricacies of project in the field of management and also
offers the real exposure of the various attributes associated with this
project.

As part of the Academic syllabus of the two years Post Graduation

Diploma in Management, we get the opportunity to do a Dissertation
Project on a topic which is specified by the faculty members. This project
is completely based on the secondary data.

4
CONTENTS

5
 Table of Contents

Content Page no.

 Introduction
 Objective
 Research Methodology
 Data analysis
 Findings
 Suggestion
 Conclusion
 Limitation
 Bibliography

6
Introduction

7
 INTRODUCTION

A STOCK EXCHANGE

It is a platform where buyers and sellers of securities issued

by governments, finance institutions, corporate houses etc., meet
and where trading of these corporate securities take place. This is
a market of speculation. If speculation of investors become
wrong than the investors loss. Nobody knows what will happen
even after a second. A Stock Exchange refers to the segments of
the capital market where the securities issued by corporate are
trade. It is open auction market where buyers and sellers meet
and involve competitive prices of the securities. It reflects hopes
aspiration fair of people regarding the performance of the
economy. I t provides necessary mobility to capital and direct
flow of the capital into possible and successful enterprise.

Since buying and selling of the different of securities take

place on exchange. The prices of particular securities reflect their
demand and supply. In fact, stock exchange is said to be a
barometer of economy and financial health.

The stock market in India, Securities and Exchange Board

of India (SEBI) is on the issue of acceptance of hedge funds into
Indian financial market. At the some time world wide trade
shows that hedge funds are important force to the reckoned with
us. The impact of hedge funds activity is new to the Indian
financial investors (FII) flows volatility of the stock market. This
is so because hedge funds activity in Indian primary through
participatory notes (PN) and the some is reflected under FII
inflows. Large stock operators and investment arms certain large
corporate in India in the period consideration used to use
oversees body (OCB) as a mechanism to take exposure to the
India n market. OCB activity in the Indian context is pretty
similar to funds trading historically OCB flows also used to

8
appear under the head of FII flows traditionally a large chuck of
the PN and OCB activity in India use to happen through the
Mauritius route due to taxation benefits. With the latest budget
presented by the Indian government .(will become effective from
1st September 2004 ) reducing long term capital gains to zero and
short term capital gains to 10 % the taxation to Mauritious to
exist .

9
STOCK EXCHANGE

A” STOCK EXCHANGE “is a platform where buyers and

sellers of securities issued by governments, finance institutions,
corporate houses etc., meet and where trading of

These corporate securities take place. This is a market of

speculation. If speculation of investors become wrong than the
investors loss. Nobody knows what will happen even after a
second.

A Stock Exchange refers to the segments of the capital

market where the securities issued by corporate are trade. It is
open auction market where buyers and sellers meet and involve
competitive prices of the securities. It reflects hopes aspiration
fair of people regarding the performance of the economy. I t
provides necessary mobility to capital and direct flow of the
capital into possible and successful enterprise.

Since buying and selling of the different of securities take

place ion stock exchange. The prices of particularly securities
reflect their demand and supply. In fact, stock exchange is said to
be a barometer of economy and financial health.

The stock exchange is the nerve center of capital market. The

stock exchange discharges three essential functions in the process
of capital formation not in raising resources for the corporate
sector.

It provides places for sale and purchase of securities i.e.

share, bonds etc. . . . It provides linkage between the saving of
household sector and investment in corporate sector of economy.

It provides market quotation for shares debenture and bonds

and serves as a role of barometer, not only of the state of health
of individual companies but also of the economy as a whole.

Therefore, by providing market place quotation of the

prices of shares and bonds or sort of collective judgment.

10
Simultaneously reached by many buyers and sellers in the
market stock exchange serve the role of barometer, not only of
the state of health of individual companies but also of the nation’s
economy as a whole.

FEATURES OF STOCK EXCHANGE

 It is the place where listed securities are bought and sold.

 It is an association of persons known as members.

 Trading in securities is allowed under rules and regulations

of stock exchange.

 Membership is must for transacting business.

 Investors and speculators, who want to buy and sell

securities, can do so through members of stock exchange
i.e. brokers

11
 INVESTMENT IN INDIAN MARKET

India is believed to be a good investment despite political

uncertainty, bureaucratic hassles, and shortages of power and
infrastructure deficiencies. India presents a vast potential for
overseas investment and is actively encouraging the entrance of
foreign players into the market. No company, of any size,
aspiring to be a global player can, for long ignores this country,
which is expected to become one of the top three emerging
economies.

Success in India

Success in India will depend on the correct estimation of the

country's potential; underestimation of its complexity or
overestimation of its possibilities can lead to failure. While
calculating, due consideration should be given to the factor of the
inherent difficulties and uncertainties of functioning in the Indian
system. Entering India's marketplace requires a well-designed
plan backed by serious thought and careful research. For those
who take the time and look to India as an opportunity for long-
term growth, not short-term profit- the trip will be well worth the
effort.

Market potential

India is the fifth largest economy in the world (ranking above

France, Italy, the United Kingdom, and Russia) and has the third
largest GDP in the entire continent of Asia. It is also the second
largest among emerging nations. (These indicators are based on
purchasing power parity). India is also one of the few markets in
the world, which offers high prospects for growth and earning
potential in practically all areas of business. Despite the
practically unlimited possibilities in India for overseas

12
businesses, the world's most populous democracy has, until fairly
recently, failed to get the kind of enthusiastic attention generated
by other emerging economies such as China.

Lack of enthusiasm among investors

The reason being, after independence from Britain 50 years ago,

India developed a highly protected, semi-socialist autarkic
economy. Structural and bureaucratic impediments were
vigorously fostered, along with a distrust of foreign business.
Even as today the climate in India has seen a sea change,
smashing barriers and actively seeking foreign investment, many
companies still see it as a difficult market. India is rightfully
quoted to be an incomparable country and is both frustrating and
challenging at the same time. Foreign investors should be
prepared to take India as it is with all of its difficulties,
contradictions and challenges. Developing a basic understanding
or potential of the Indian market Envisaging and developing a
Market Entry Strategy and implementing these strategies when
actually entering the market are three basic steps to make a
successful entry into India. The Indian middle class is large and
growing; wages are low; many workers are well educated and
speak English; investors are optimistic and local stocks are up;
despite political turmoil, the country presses on with economic
reforms. But there is still cause for worries- Infrastructure
hassles. The rapid economic growth of the last few years has put
heavy stress on India's infrastructure facilities. The projections of
further expansion in key areas could snap the already strained
lines of transportation unless massive programs of expansion and
modernization are put in place. Problems include power demand
shortfall, port traffic capacity mismatch, poor road conditions
(only half of the country's roads are surfaced) and low telephone
penetration.

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Indian Bureaucracy
Although the Indian government is well aware of the need for
reform and is pushing ahead in this area, business still has to deal
with an inefficient and sometimes still slow-moving bureaucracy.

Diverse Market
The Indian market is widely diverse. The country has 17 official
languages, 6 major religions, and ethnic diversity as wide as all of
Europe. Thus, tastes and preferences differ greatly among
sections of consumers. Therefore, it is advisable to develop a
good understanding of the Indian market and overall economy
before taking the plunge.

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 INTERNATIONAL PORTFOLIO
FLOWS:
International portfolio flows, as opposed to foreign direct
investment (FDI) flows, refer to capital flows made by
individuals or investors seeking to create an internationally
diversified portfolio rather than to acquire management control
over foreign companies. Diversifying internationally has long
been known as a way to reduce the overall portfolio risk and even
earn higher returns. Investors in developed countries can
effectively enhance their portfolio performance by adding foreign
stocks particularly those from emerging market countries where
stock markets have relatively low correlations with those in
developed countries. International portfolio flows are largely
determined by the performance of the stock markets of the host
countries relative to world markets. With the opening of stock
markets in various emerging economies to foreign investors,
investors in industrial countries have increasingly sought to
realize the potential for portfolio diversification that these
markets present. It is likely that for quite a few years to come, FII
flows would increase with global integration. The main question
is whether capital flew in to these countries primarily as a result
of changes in global (largely US) factors or in response to events
and indicators in the recipient countries like its credit rating and
domestic stock market return. The answer is mixed – both global
and country-specific factors seem to matter, with the latter being
particularly important in the case of Asian countries and for debt
flows rather than equity flows.

15
 FOREIGN INSTITUTIONAL INVESTMENT
IN INDIA:
MILESTONES

 India embarked on a programmed of economic reforms in

the early 1990s to tie over its balance of payment crisis and
also as a step towards globalization.
 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 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

16
 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 also allowed
in the 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.
 ( 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.

17
 ( 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, when their sales
were more than their purchase

18
 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 Fund s
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:
1. Asset Management Companies
2. Institutional Portfolio Managers
3. Trustees
4. Power of Attorney Holders

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 INVESTMENT OPPORTUNITIES
FOR FIIs
The following financial instruments are available for FII
investments:

 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;
 Units of mutual funds;
 Dated Government Securities;
 Derivatives traded on a recognized stock exchange;
 Commercial papers.
 Investment limits on equity investments
 FII, on its own behalf, shall not invest in equity more than
10% of total issued capital of an Indian company.
 Investment on behalf of each sub-account shall not exceed
10% of total issued capital of an India company.
 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.

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 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 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.

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 BRIEF PROFILE OF IMPORTANT
INSTITUTIONS:
A brief profile of important institutions included in the study is
given below.

RESERVE BANK OF INDIA

India's Central Bank - the RBI - was established on 1 April 1935
and was nationalized on 1 January 1949. Some of its main
objectives are regulating the issue of bank notes, managing
India's foreign exchange reserves, operating India's currency and
credit system with a view to securing monetary stability and
developing India's financial structure in line with national socio-
economic objectives and policies.
The RBI acts as a banker to Central/State governments,
commercial banks, state cooperative banks and some financial
institutions. It formulates and administers monetary policy with a
view to promoting stability of prices while encouraging higher
production through appropriate deployment of credit. The RBI
plays an important role in maintaining the exchange value of the
Rupee and acts as an agent of the government in respect of India's
membership of IMF. The RBI also performs a variety of
developmental and promotional functions.
The first concern of a central bank is the maintenance of a
soundly based commercial banking structure. While this concern
has grown to comprehend the operations of all financial
institutions, including the several groups of non-bank financial
intermediaries, the commercial banks remain the core of the
banking system. A central bank must also cooperate closely with
the national government. Indeed, most governments and central
banks have become intimately associated in the formulation of
policy.
They are often responsible for formulating and implementing
monetary and credit policies, usually in cooperation with the
government. they have been established specifically to lead or
regulate the banking system.

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SECURITUIES AND EXCHANGE BOARD OF INDIA

In 1988 the Securities and Exchange Board of India (SEBI) was

established by the Government of India through an executive
resolution, and was subsequently upgraded as a fully autonomous
body (a statutory Board) in the year 1992 with the passing of the
Securities and Exchange Board of India Act (SEBI Act) on 30th
January 1992. In place of Government Control, a statutory and
autonomous regulatory board with defined responsibilities, to
cover both development & regulation of the market, and
independent powers has been set up.

The basic objectives of the Board were identified as:

 To protect the interests of investors in securities;
 To promote the development of Securities Market;
 To regulate the securities market and

Since its inception SEBI has been working targeting the securities
and is attending to the fulfillment of its objectives with
commendable zeal and dexterity. The improvements in the
securities markets like capitalization requirements, margining,
establishment of clearing corporations etc. reduced the risk of
credit and also reduced the market.
SEBI has introduced the comprehensive regulatory measures,
prescribed registration norms, the eligibility criteria, the code of
obligations and the code of conduct for different intermediaries
like, bankers to issue, merchant bankers, brokers and sub-brokers,
registrars, portfolio managers, credit rating agencies, underwriters
and others. It has framed bye-laws, risk identification and risk
management systems for Clearing houses of stock exchanges,
surveillance system etc. which has made dealing in securities
both safe and transparent to the end investor.
Another significant event is the approval of trading in stock
indices (like S&P CNX Nifty & Sensex) in 2000.

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A market Index is a convenient and effective product because of
the following reasons:
 It acts as a barometer for market behavior;
 It is used to benchmark portfolio performance;
 It is used in derivative instruments like index futures and
index options;
 It can be used for passive fund management as in case of
Index Funds.
Two broad approaches of SEBI is to integrate the securities
market at the national level, and also to diversify the trading
products, so that there is an increase in number of traders
including banks, financial institutions, insurance companies,
mutual funds, primary dealers etc. to transact through the
Exchanges. In this context the introduction of derivatives trading
through Indian Stock Exchanges permitted by SEBI in 2000 AD
is a real landmark.

BOMBAY STOCK EXCHANGE:

Of the 22 stock exchanges in the country, Mumbai's (earlier

known as Bombay), Bombay Stock Exchange is the largest, with
over 6,000 stocks listed. The BSE accounts for over two thirds of
the total trading volume in the country. Established in 1875, the
exchange is also the oldest in Asia. Among the twenty-two Stock
Exchanges recognized by the Government of India under the
Securities Contracts (Regulation) Act, 1956, it was the first one
to be recognized and it is the only one that had the privilege of
getting permanent recognition abs-initio. Approximately 70,000
deals are executed on a daily basis, giving it one of the highest
per hour rates of trading in the world. There are around 3,500
companies in the country which are listed and have a serious
trading volume. The market capitalization of the BSE is Rs.5
trillion.
The main aims and objectives of the BSE are to provide a market
place for the purchase and sale of security evidencing the
ownership of business property or of a public or business debt.

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BSE Sensex
The BSE Sensex is a value-weighted index composed of 30
companies with the base April 1979 = 100. It has grown by more
than four times from January 1990 till date. The set of companies
in the index is essentially fixed. These companies account for
around one-fifth of the market capitalization of the BSE.

NATIONAL STOCK EXCHANGE OF INDIA

The National Stock Exchange of India Limited has genesis in the
report of the High Powered Study Group on Establishment of
New Stock Exchanges, which recommended promotion of a
National Stock Exchange by financial institutions (FIs) to provide
access to investors from all across the country on an equal
footing. Based on the recommendations, NSE was promoted by
leading Financial Institutions at the behest of the Government of
India and was incorporated in November 1992 as a tax-paying
company unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities
Contracts (Regulation) Act, 1956 in April 1993, NSE
commenced operations in the Wholesale Debt Market (WDM)
segment in June 1994. The Capital Market (Equities) segment
commenced operations in November 1994 and operations in
Derivatives segment commenced in June 2000.

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OBJECTIVE

26
 OBJECTIVES OF THE STUDY

 To know the performance of Indian stock market.

 To know the impact of FIIs on Indian stock market.

 To know the impact of FDIs on Indian stock market.

27
 RESEARCH
METHODOLOGY

28
 Research Methodology

Research Methodology has many dimensions, it include not only

research methods but also considers the logic behind the methods
used in the context of the study and explains why only a
particular method of technique had been used so that research
lend themselves to proper evaluations. Thus in a way it is a
written game plan for concluding research therefore in order to
solve research problem it is necessary to design a research
methodology for the problem as the same differ from problem to
problem.

Type of Research:
Type of research is Descriptive Research that involves study of
variables as it is without having control over them.

Type Of Data Collected:

Secondary data collection is used under this project. Under this
method of data collection, data that are collected are second hand.

Source of Data Collection:

Internet
Magazine
News paper
Books

29
 DATA
ANALYSIS

30
 Findings of Some Surveys
 India has been ranked at the second place in global foreign
direct investments in 2010 and will continue to remain
among the top five attractive destinations for international
investors during 2010-12 period, according to United
Nations Conference on Trade and Development
(UNCTAD) in a report on world investment prospects
titled, 'World Investment Prospects Survey 2009-2012'.

 The 2010 survey of the Japan Bank for International

Cooperation released in December 2010, conducted among
Japanese investors, continues to rank India as the second
most promising country for overseas business operations.

 A report released in February 2010 by Leeds University

Business School, commissioned by UK Trade & Investment
(UKTI), ranks India among the top three countries where
British companies can do better business during 2012-14.

 According to Ernst and Young's 2010 European

Attractiveness Survey, India is ranked as the 4th most
attractive foreign direct investment (FDI) destination in
2010. However, it is ranked the 2nd most attractive
destination following China in the next three years.

 Moreover, according to the Asian Investment Intentions

survey released by the Asia Pacific Foundation in Canada,
more and more Canadian firms are now focusing on India
as an investment destination. From 8 per cent in 2005, the
percentage of Canadian companies showing interest in India
has gone up to 13.4 per cent in 2010.

 India attracted FDI equity inflows of US$ 2,014 million in

December 2010. The cumulative amount of FDI equity

31
 inflows from April 2000 to December 2010 stood at US$
186.79 billion, according to the data released by the
Department of Industrial Policy and Promotion (DIPP).

 The services sector comprising financial and non-financial

services attracted 21 per cent of the total FDI equity inflow
into India, with FDI worth US$ 2,853 million during April-
December 2010, while telecommunications including radio
paging, cellular mobile and basic telephone services
attracted second largest amount of FDI worth US$ 1,327
million during the same period. Automobile industry was
the third highest sector attracting FDI worth US$ 1,066
million followed by power sector which garnered US$
1,028 million during the financial year April-December
2010. The Housing and Real Estate sector received FDI
worth US$ 1,024 million.

 During April-December 2010, Mauritius has led investors

into India with US$ 5,746 million worth of FDI comprising
42 per cent of the total FDI equity inflows into the country.
The FDI equity inflows in Mauritius is followed by
Singapore at US$ 1,449 million and the US with US$ 1,055
million, according to data released by DIPP.

Investment Scenario
 In the year 2010, India has assumed a notable position on
the world canvas as a key international trading partner,
majorly because of the implementation of its

32
 consolidated FDI policy. The consolidation, first
undertaken in March 2010, pulls together in one
document all previous acts, regulations, press notes,
press releases and clarifications issued either by the
DIPP or the Reserve Bank of India (RBI) where they
relate to FDI into India.
 According to the modified policy, foreign investors can
inject their funds though the automatic route in the
Indian economy. Such investments do not mandate any
prior government permission. However, the Indian
company receiving such investment would be required to
intimate the RBI of any such investment.

The FDI rules applicable to such sectors are, therefore, fairly

clear and unambiguous.

In May 2010, the government cleared 24 foreign investment

proposals, worth US$ 304.7 million. These include:

 Asianet's proposal worth US$ 91.7 million to undertake the

business of broadcasting non-news and current affairs
television channels.
 Global media magnate Rupert Murdoch-controlled Star
India holdings' investment of US$ 70 million to acquire
shares of direct-to-home (DTH) provider Tata Sky.
 AIP Power will set up power plants either directly or
indirectly by promotion of joint ventures at an investment
of US$ 24.4 million.

Policy Initiatives
The Government of India has released a comprehensive FDI
policy document effective from April 1, 2010. The Circular 1 of

33
2010 consolidates into one document all the prior
policies/regulations on FDI which are contained in FEMA, 1999;
RBI Regulations under FEMA, 1999 and Press Notes/Press
Releases/Clarifications issued by DIPP and reflect the current
'policy framework' on FDI.

The consolidation initiative is highly meritorious on part of DIPP.

The regulator also endorsed the practice of making bi-annual
amendments to the policy (as against the previous practice of
implementing ongoing notifications) and hence, the most recent
policy came into effect on October 1, 2010.

Furthermore, the government has allowed the Foreign Investment

Promotion Board (FIPB), under the Ministry of Commerce and
Industry, to clear FDI proposals of up to US$ 258.3 million.
Earlier all project proposals that involved investment of above
US$ 129.2 million were put up before the Cabinet Committee of
Economic Affairs (CCEA) for approval. The relaxation would
expedite FDI inflow, according to Mr P Chidambaram, Union
Home Minister.

SECTOR ATTRACTING HIGHEST

FDI EQITY INFLOWS
Amount ` in` crores (US$ in millions)

34
RANK Sector 2 008- 2009- 2010- Cumulative % age
09 10 11 Inflows to
(April- (April- ( April (April ’00 - total
March) March) - Jan. ‘11) Inflows
Jan.) (In
terms
of
US$)
1- SERVICES SECTOR 28,516 20,776 13,652 118,923 21%
(financial & non-financial) (6,138) (4,353) (2,987) (26,597)
2- COMPUTER SOFTWARE & 7,329 4,351 3,225 47,340 8%
HARDWARE (1,677) (919) (708) (10,644)
3- TELECOMMUNICATIONS 11,727 12,338 6,041 46,746 8%
(2,558) (2,554) (1,332) (10,262)
4- HOUSING & REAL 12,621 13,586 4,791 42,163 7%
ESTATE (2,801) (2,844) (1,048) (9,405)
5- CONSTRUCTION 8,792 13,516 4,540 40,233 7%
ACTIVITIES (2,028) (2,862) (1,006) (9,059)
(including roads & highways)
6- AUTOMOBILE INDUSTRY 5,212 5,754 5,375 26,198 5%
(1,152) (1,208) (1,191) (5,788)
7- POWER 4,382 6,908 4,711 25,715 4%
(985) (1,437) (1,033) (5,680)
8- METALLURGICAL 4,157 1,935 4,632 18,073 3%
INDUSTRIES (961) (407) (1,011) (4,141)
9- PETROLEUM & NATURAL 1,931 1,328 2,471 13,585 2%
GAS (412) (272) (541) (3,120)
10- CHEMICALS 3,427 1,707 1,739 13,007 2%
(other than fertilizers) (749) (362) (382) (2,876)

Share of top investing countries FDI

equity inflows
Amount ` in crores (US$ in millions)

35
Ranks Country 2008-09 2009-10 2010-11 Cumulative %age to
(April- (April- ( April- Inflows total
March) March) Jan.) (April ’00 - Inflows
Jan. ‘11) (in terms
of
US $)
1- MAURITIUS 50,899 49,633 27,970 238,876 42
(11,229) (10,376) (6,129) (53,369)
2- SINGAPORE 15,727 11,295 6,817 51,964 9
(3,454) (2,379) (1,504) (11,694)
3- U.S.A. 8,002 9,230 5,001 42,190 7
(1,802) (1,943) (1,092) (9,371)
4- U.K. 3,840 3,094 2,300 28,298 5
(864) (657) (503) (6,387)
5- NETHERLANDS 3,922 4,283 4,752 24,877 4
(883) (899) (1,048) (5,535)
6- JAPAN 1,889 5,670 6,180 23,075 4
(405) (1,183) (1,367) (5,082)
7- CYPRUS 5,983 7,728 3,458 21,235 4
(1,287) (1,627) (755) (4,655)
8- GERMANY 2,750 2,980 545 13,013 2
(629) (626) (119) (2,918)
9- FRANCE 2,098 1,437 3,149 10,068 2
(467) (303) (690) (2,220)
10- U.A.E. 1,133 3,017 1,503 8,526 1
(257) (629) (326) (1,875)
TOTAL FDI 123,025 123,120 77,902 570,105 -
INFLOWS * (27,331) (25,834) (17,080) (127,369)

PERFORMANCE OF INDIAN STOCK

MARKET

36
 Indices : sensex For the period : from year 1991 To year 2008

Year Open High Low close Price/earnings Price/book Dividend

value yield

1991 1027.38 19554.81.29 947.14 1908.85 22.30 3.58 1.24

1992 1957.33 4546.58 1945.48 2615.37 36.19 6.35 .80

1993 2617.78 3459.07 1980.6 3346.06 31.78 4.81 .98

1994 3436.87 4643.31 3405.88 3926.90 45.45 6.07 .68

1995 3910.16 3943.66 2891.45 3110.49 23.63 3.81 1.13

1996 3114.08 4131.22 2713.12 3085.20 16.07 3.02 1.50

1997 3096.65 4605.41 3096.65 3658.98 14.45 2.80 1.52

1998 3658.34 4322.00 2741.22 3055.41 13.00 2.25 1.80

1999 3064.95 5150.99 3042.25 5005.82 17.35 3.07 1.38

2000 9209.54 6150.69 3491.55 3972.12 24.48 3.81 1.14

2001 3990.65 4462.11 2594.87 3262.33 17.60 2.51 1.83

2002 3262.01 3758.27 2828.48 3377.28 15.22 2.30 2.14

2003 3383.85 5920.76 2904.44 5838.96 15.02 2.49 2.14

2004 5872.48 6617.15 4227.50 6602.69 17.26 3.28 2.01

2005 6626.8 9442.98 6069.33 9397.93 16.21 3.94 1.58

2006 9422.49 14035.30 8799.01 13786.91 20.18 4.75 1.35

2007 83827.77 20498.11 12316.10 20286.99 22.25 5.32 1.10

2008 20325.27 21206.77 14677.24 16481.20 22.44 5.71 .98

37
FOREIGN INVESTMENT FLOWS IN INDIA:
One of the most important distinctions between Portfolio
and Direct investment to have emerged from this young era of
globalization is that portfolio investment can be much more
volatile.

Foreign Investment Flows in India

Year A- Direct Investment B- Portfolio Total (A+B)

(US $ Million) investment (US $ Million)
(Us $ Million)
1990-91 97 6 103
1991-92 129 4 133
1992-93 315 244 559
1993-94 586 3567 4153
1994-95 1314 3824 5138
1995-96 2144 2748 4892
1996-97 2821 3312 6133
1997-98 3557 1828 5385
1998-99 2462 61 2523
1999-00 2155 3026 5181
2000-01 4029 2760 6789
2001-02 6131 2021 8152
2002-03 4660 979 5639
2003-04 4675 11377 16052

From a net foreign investment inflow of US $ 5.3 billion in 1997-

98, such inflows declined to US $ 2.4 billion in 1998-99. This is
because of the lower portfolio inflows, as a result of which the
net investment has dropped. The changes in the investment
conditions in a country or region can lead to dramatic swings in
portfolio investment. For a country on the rise, in other words for
developing countries, FPI can bring about rapid development,
helping an emerging economy move quickly to take advantage of
economic opportunity, creating many new jobs and significant
wealth. However, when a country's economic situation takes a
downturn, sometimes just by failing to meet the expectations of
international investors, the large flow of money into a country
can turn into a stampede away from it.

38
 CHART: FOREIGN INVESTMENT FLOWS

In this chart we can easily see that from 1991 flow of foreign
direct investment and foreign portfolio investment is consistently
increasing, but due to some economic policy and industrial policy
it involves lots of fluctuations.

39
 CHART : GROWTH OF FII INVESTMENTS
IN INDIA

INFERENCE

The trickle of FII flows to India that began in January 1993 has
gradually expanded to an average monthly inflow of close to Rs.
1900 crores during the first six months of 2001. By June 2001,
over 500 FIIs were registered with SEBI. The total amount of FII
investment in India had accumulated to a formidable sum of over
Rs.50, 000 crores during this time. In terms of market
capitalization too, the share of FIIs has steadily climbed to about
9% of the total market capitalization of BSE (which, in turn,
accounts for over 90% of the total market capitalization in India).

40
Foreign Institutional Investors Trading Activity
- March 2011

See if Foreign Institutional Investors(FIIs) have been net buyers or net sellers in
Equities as well as Debt. You can see the gross purchase as well as the gross
sales for each day this month. You can also see how they have invested every
month for the last few years.

LAST 12 Equity (Rs.crore) Debt (Rs.crore)

MONTHS
Net Net
Gross Purchase Gross Sales Purchase/Sale Gross Purchase Gross Sales Purchase/Sale
s s

February 2011 59,002.20 62,756.70 -3,754.50 15,604.90 17,380.10 -1,775.20

January 2011 57,949.90 64,280.10 -6,330.20 27,514.60 16,428.20 11,086.40

December 2010 61,475.30 59,999.20 1,476.10 17,779.40 15,490.90 2,288.50

November 2010 89,082.60 70,562.70 18,519.90 15,400.80 11,424.90 3,975.90

October 2010 85,490.20 60,719.40 24,770.80 15,296.80 19,817.90 -4,521.10

September 2010 81,024.80 51,829.00 29,195.80 19,440.60 11,815.30 7,625.30

August 2010 61,973.40 50,788.10 11,185.30 13,004.60 11,016.20 1,988.40

July 2010 59,332.40 42,211.80 17,120.60 19,838.40 11,701.10 8,137.30

June 2010 54,930.60 44,686.00 10,244.60 16,570.60 16,475.20 95.40

May 2010 50,614.80 59,244.70 -8,629.90 24,346.50 18,630.50 5,716.00

April 2010 61,602.90 51,838.40 9,764.50 19,879.80 14,653.70 5,226.10

March 2010 60,009.60 41,176.00 18,833.60 21,341.70 11,205.00 10,136.70

Total 782,488.70 660,092.10 122,396.60 226,018.70 176,039.00 49,979.70

NOTE:
The above report is compiled on the basis of reports submitted to SEBI by custodians and constitutes trades
conducted by FIIs on and upto the previous trading day.

41
FDI is not allowed in this sector:-

 Atomic energy
 Railway transport
 Ammunition and defense equipment
 Mineral oils
 Arms
 Minerals used in atomic energy

In the recent period, the foreign investment

procedures, especially investments by NRIs and
OCBs, are allowed to carry out on a repatriation
basis in the manufacturing sector, which means the
payments can be done outside India under the
regulations of RBI.

42
FINDINGS

43
 Findings
 It is an accepted fact now that FIIs have significant
influence on the movements of the stock market indexes in
India. If one looks at the total FII trade in equity in India
and its relationship with the stock market major indexes like
Sensex and Nifty, it shows a steadily growing influence of
FIIs in the domestic stock market.

 FIIs and the movements of Sensex are quite closely

correlated in India and FIIs wield significant influence on
the movement of Sensex. NSE also observes that in the
Indian stock markets FIIs have a disproportionately high
level of influence on the market sentiments and price trends.

 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 the
Bombay Stock Market Sensitivity Index (Sensex) and NSE
Nifty, their level of control is very high.

44
 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
favoured by the FIIs.
 On the other hand if FII investments constitute a large share
of the equity capital of a financial entity, an FII pullout,
even if driven by development outside the country can have
significant implications for the financial health of what is an
important institution in the financial sector of this country?

 Similarly, if any set of developments encourages an

unusually high outflow of FII capital from the market, it can
impact adversely on the value of the rupee and set of
speculation in the currency that can in special circumstances
result in a currency crisis. There are now too many
instances of such effects worldwide for it be dismissed on
the ground that India's reserves are adequate to manage the
situation.

 FII investments seem to have influenced the Indian stock

market to a considerable extent. FIIs are interested in the
Indian stock market increases its vulnerability to
fluctuations. Analysis suggested a strong influence of FII
investment on the Sensex and Nifty index. This finding
takes quite further the general understanding that net FII
investments influences stock prices in India as it traces the
relationship.

45
SUGGESTION

46
 SUGGESTIONS AND
RECOMENDATIONS
Some of the steps that can be taken to help influence the choices
made by foreign institutional investors include:

 The Government should cut its fiscal deficits, which would

result in strengthening the economy as a whole.

 Creating infrastructure and other facilities to attract foreign

investment. As described earlier, an array of services can
help promote foreign institutional investment in India,
ranging from basic services such as the provision of
electricity and clean water, to fair and effective dispute
resolution systems.

 The ability of governments to prevent or reduce financial

crises also has a great impact on the growth of capital flows.
Steps to address these crises include strengthening banking
supervision, requiring more transparency in international
financial transactions and ensuring adequate supervision
and regulation of financial markets.

 An attempt should be made to bring down the inflation

level to attract more foreign institutional investments into
India.

 The Banking system needs to be strengthened which could

be achieved by reducing the number of Non Performing
Assets.

 The FIIs investments, though shown an increasing trend

over time, are still far below the permissible limits. One
such measure in this line could be the newly announced
INDONEXT, the platform for trading the small and mid-
cap companies, which might bring some focus on these
companies and hopefully add some liquidity and volume to

47
 their trading, which may attract some further investments in
them by FIIs.

 The fact is that developing country like India has its own
compulsions arising out of the very state of their social,
political and economic development. To attract portfolio
investments and retain their confidence, the host countries
have to follow stable macro-economic policies,

 The provision for clear procedures must be followed in the

event of disputes between investors and host governments,
to ensure that rules are adhered to and that arbitration may
be established by mutual consent.

 Countries may impose these kinds of measures like

expropriation, domestic content requirements, restrictions
on capital outflows of short term investments, etc with the
intention of protecting domestic industries from
international competition and promoting their economic
development, but this usually leads to misallocation of
resources away from the natural economic capabilities of
nations.

 There has been a significant shift in the character of global

capital flows to the developing countries in recent years in
that the predominance of private account capital transfer
and especially portfolio investments (FPI) increased
considerably. In order to attract portfolio investments which
prefer liquidity, it has been advocated to develop stock
markets.

48
CONCLUSION

49
 CONCLUSION

In this study I tried to find out the impact of FDIs and FIIs
on Indian Stock Market .the important result of this study is that
the foreign investment is determined by stock market return. But
foreign investment is not a major factor for the stock market
boom in India the FII are increasingly dominant in the stock
market. The domestic investors and domestic companies remain
not so dominant. There is therefore the fear of sudden outflows of
the foreign capital and this may be a trigger a third stock market
scam as most regulatory changes re being made only as a follow
up of an adverse event.

50
LIMITATION

51
 LIMITATIONS OF THE STUDY

 As the time available is limited and the subject is very vast.

 The study is general.

 It is mainly based on the data available in various websites

&other secondary sources ;

 The inferences made is purely from the past year’s

performance;

 There is no particular format for the study;

 Sufficient time is not available to conduct an in-depth

study;

52
BIBLIOGRAPHY

53
 BIBLIOGRAPHY

Books:-
Business environment (Suresh Bedi)

The Journal of Finance India

INTERNET:-
www.nse.india.com
www.sebi.co.in
www.en.wikipedia.org.wiki/stock_market
www.moneycontrol.com
www.indianinfoline.com
www.bse.co.in

54