impact of fii and fdi on indian stock market

A

SUMMER TRAINING PROJECT REPORT

ON

“IMPACT OF FII’S & FDI’S ON INDIAN STOCK MARKET”

SUBMITTED

TO:-KURUKSHETRA UNIVERSITY, TO:-KURUKSHETRA

IN THE PARTIAL FULFILLMENT OF DEGREE OF

“MASTER OF BUSINESS ADMINISTRATION”

2008-2010

UNDER THE GUIDENCE OF: SUBMITTED BY: MR. SANDEEP SAINI SUNIL KUMAR BRANCH MANAGER, MBA

RELIANCE MONEY AMBALA ROLLNO……….

MAHARAJA AGRASEN INSTITUTE OF MANAGEMENT AND TECHNOLOGY

DECLARATION

I, SUNIL KUMAR of MBA III Semester, studying at MAHARAJA AGRESAIN INSTITUTE OF MANAGEMENT &TECHNOLOGY, JAGADHARI, hereby declare that this project titled “Impact of FII and FDI’s On Indian Stock Market.

” has been prepared by me in partial fulfilment of the requirements of the KURUKSHETRA UNIVERISITY KURUKSHETRA MBA programme during 2008-2010.

I further declare that this project has not been submitted earlier in any other university or institution for the award of any degree or diploma.

ACKNOWLEDGEMENT

The satiation and euphonies that accompany the success completion of a task would be incomplete without a mention of people who made it possible. So, with immense gratitude, I acknowledge all those, whose guidance and encouragement served as a beacon light and crowned my effort with success.

I thank Mr. ABHISHEK SIR, Faculty of MAHARAJA AGRESAIN INSTITUTE OF MANAGEMENT & TECHNOLOGY, JAGADHARI and my project guide for his valuable guidance and suggestions, and external guide Mr. Sandeep Saini center manager at reliance money Amballa which were vital inputs towards the completion of the project. Lastly, I would like to thank all those who have directly or indirectly helped me complete the project successfully.

EXECUTIVE SUMMARY

Management ideas without any action based on them mean nothing. That is why practical experience is vital for any management studies. Theoretical studies in the class room are not sufficient to understand the functioning climate and the real problems coming in the way of management. So, practical exposures are indispensable to such courses. Thus, practical experience acts as a supplement to the classroom studies. This report deals with Impact of FII’s And FDI’s On Indian Stock Market. has been completed. I have learnt a lot of new things which could never been learnt from theory classes. The next part include whole of research process used for the project. It contains research methodology, research objective, scope analysis and interpretation of the data, collected from secondary resources. It also consists limitations of the study.

In this study I have collected data from secondary source. In this study in used descriptive research design is used. This part includes observations analysis and discussion on collected data then suggestions are given these are based are on the usefulness of the study, applicability in the business industry, in decision making, in system development so far.

CONTENTS

INTRODUCTION

 FEATURES OF STOCK MARKET

 OPERATIONAL DEFINITIONS LITERATURE REVIEW RESERCH METHODOLOGY  OBJECTIVES  RESEARCH DESIGN  DATA COLLECTION  DATA ANALYSIS  SAMPLING PLAN  SAMPLING DESIGN  SCOPE OF STUDY

 LIMITATIONS OF THE STUDY

INDUSTRY PROFILE

 FOREIGN INSTITUTIONAL INVESTMENT IN INDIA:

 MILESTONE

 ACTS AND RULE

 INVESTMENT OPPORTUNITIES FOR FIIs

 BRIEF PROFILE OF IMORTANT INSTITUTIONS

COMPANY PROFILE

FINDINGS AND DATA ANALYSIS CONCLUSION

SUGGESTIONS & RECOMENDATIONS BIBLIOGRAPHY

INTRODUCTION

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 on stock exchange. The prices of particular securities reflect there 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 appear under the head of FII flows traditionally a large chunck 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 .

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 particularl securities reflect there 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. 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

OPERATIONAL DEFINITIONS

STOCK MARKET:-

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.

MUTUAL FUNDS: - A Mutual fund is a trust that pools the saving of a number of investors who share a common financial goal.

FOREIGN DIRECT MARKET (FDI): - This category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. FOREIGN INSTITUTIONAL INVESTOR (FII):- An investor or investment fund that is from of or registered in a country outside of the one in which it is currently investing. Foreign institutional investors have made a sizable investment in Indian financial markets. There are currently about 1324 FIIs registered in India.

FOREIGN PORTFOLIO INVESTMENT (FPI):- FPI is a category of investment instruments that are more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise. These include investments via equity instruments (stocks) or debt (bonds) of a foreign enterprise that does not necessarily represent a long-term interest.

BULL MARKET: - A Bull market is a market that is consistently going up. It is a market where there is optimism of further rise batter, business results and other positive factors. Bull Market can sometimes continue for years, for investors this is the preferred market trend. However no bull market can continue for very long.

BEAR MARKET: - Bear Market is a market that is showing a persistent downtrend. A 15-20% downward movement of the market generally termed as a bear market.

DIVERSIFICATION: - diversification is the technique of investing in unrelated business sectors simultaneous so that risk that affects a particular sector does not affect your overall investment. For example your portfolio of share includes sectors like Information Technology, Real estate capital Goods, Autos etc.

Exchange rate of a nation's currency- Currency like other commodities rises or falls in "price" with demand. When investors leave, they sell their holdings in a country's currency and as demand falls, the "price" of that currency will also fall

ECONOMIES OF SCALE: - Produces are often able to enjoy considerable production cost savings by buying inputs in bulk, mass-producing or retailing their end product. These lower costs achieved through expanded production are called Economies of Scale. DEBT/EQUITY RATIO-The debt/equity ratio measures the extent to which a firm's capital is provided by lenders (through debt instruments such as fixed-return bonds) or owners (through variable-return stocks). A greater reliance on financing through debt can mean greater profitability for shareholders, but also greater risk in the event things go sour.

INTERNATIONAL MONETARY FUND-The IMF is an international organization of 186 member countries, established in 1947 to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment.

INSTITUTIONAL INVESTOR An organization whose primary purpose is to invest its own assets or those held in trust by it for others. Includes pension funds, investment companies, insurance companies, universities and banks.

INTEREST RATES-Interest rates have a powerful effect on the volume of a nation's money supply. By raising interest rates, i.e., making the cost of borrowing money more expensive, governments or banks can decrease the money supply. A decrease in the money supply tends to be counter-inflationary, which makes a currency more valuable compared to other currencies.

MOST FAVORED NATION TREATMENT-The phrase "most favored nation" refers to the obligation of the country receiving the investment to give that investment the same treatment as it gives to investments from its "most favored" trading partner.

BALANCE OF PAYMENT-The Balance of Payments (BOP) is a statistical statement that summarizes, for a specific period (typically a year or quarter), the economic transactions of an economy with the rest of the world. It covers:

All the goods, services, factor income and current transfers an economy receives from or provides to the rest of the world

Capital transfers and changes in an economy's external financial claims and liabilities PORTFOLIO INVESTMENT – covers the acquisition and disposal of equity and debt securities that cannot be classified under direct investment or reserve asset transactions. These securities are tradable in organized financial markets.

FDI FLOWS AND STOCKS – Through direct investment flows the investors builds up a direct investment stock (position), making part of the investor’s balance sheet. The FDI stock (position) normally differs from accumulated flows because of revaluation (changes in prices or exchange rates) and other adjustments like rescheduling or cancellation of loans, debt forgiveness or debt-equity swaps with different values.

MULTINATIONAL COMPANIES (MNCs) – are incorporated or unincorporated enterprises comprising parent enterprises and their foreign affiliates.

FOREIGN DIRECT INVESTOR – A foreign direct investor is an individual, an incorporated or unincorporated public or private enterprise, a government, a group of related individuals, or a group of related incorporated and/or unincorporated enterprises which have a direct investment enterprise that is a subsidiary, associate or branch – operating in a country other than the country or countries of residence of the direct investor or investors.

HOST ECONOMY – is the country that receives FDI or FPI from the foreign investor(s).

HOME ECONOMY – is the country of origin/residence of the company that invests in the foreign economy/host economy.

SUBSIDIARY– is an incorporated enterprise in the host country in which the foreign investor owns more than 50 per cent of the shareholder’s voting power or has the right to appoint or remove a majority of the members of this enterprise’s administrative, management or supervisory body.

EQUITY CAPITAL – comprises of equity in branches and ordinary shares in subsidiaries and associates.

Reinvested earnings – consist of the direct investor’s share of earnings not distributed as dividends by subsidiaries or associates and earnings of branches not remitted to the direct investor.

OTHER CAPITAL – covers inter-company debt (including short-term loans such as trade credits) between direct investors and subsidiaries, branches and associates.

LITERATURE REVIEW

Bruce A. Blonigen

This paper surveys the recent burgeoning literature that empirically examines the foreign direct investment (FDI) decisions of multinational enterprises (MNEs) and the resulting aggregate location of FDI across the world. The contribution of the paper is to evaluate what we can say with relative confidence about FDI as a profession, given the evidence, and what we cannot have much confidence in at this point. Suggestions are made for future research directions.

Hugo Rojas-Romagosa

Foreign Direct Investment (FDI) flows have increased substantially in the past two decades. These developments have motivated the appearance of a large number of empirical papers that test the expected benefits that FDI inflows are assumed to bring to the host countries. We survey the recent theoretical and empirical literature, but restrict our attention to the productivity changes that are induced by increased FDI inflows. We review both the aggregate productivity effects, as well as the spillover effects of FDI on local firms.

Giorgio De Saints

This paper study the dynamics of expected stock return and volatility in emerging financial market. We find clustering predict ability and persistence in conditional volatility and others have documented for mature market. However, emerging market exhibit higher volatility and conditional probability of large price changes then mature market exposure to high country specific risk does not appear to be rewarded with higher expected return. We deduct a risk reward relation in Latin America but not in Asia.

Karimullah:

The article examines the impact of foreign institutional investor s FII equity investment behavior in the Indian stock market. It attempts to find out the two-way causality between foreign institutional investors (FIIs) behavior and performance of Indian stock market for the period of January 1997 to June 2007.this article seeks to examine the idea that financial liberalization induces increased efficiency in the financial market as permission of FIIs equity investment is an important example of financial liberalization. Return in the stock market is used as proxy for the efficiency of the stock market in India .granger causality test has been applied to test the bidirectional causality. Apart from net investment of FIIs, the purchase and sales behavior of FIIs are analyzed separately. The results indicate that stock market performance is a major determinant of both the FIIs purchase and sales behavior. But we did not find strong evidence that the variations in the stock market indices are determined by FIIs investment behavior.

Blockholder, Market efficiency and managerial myopia:

This paper shows holders can add value even if they cannot interview in a firm’s operations. Blockholders have strong incentive to monitor the firm’s fundamental value, since they can sell their stakes upon bad news. By trading on their private information (following the “Wall Street rule”) they cause prices to reflect fundamental value rather than current earnings. This in turn encourages managers to invest for long term growth rather than short term profits. Contrary to the view that the U.S.’s liquid markets and transient shareholders exacerbate myopia, this paper shows that they can encourage investment.

Robert Lensink and Oliver Morrissey

This paper contributes to the literature on FDI and economic growth. We deviate from previous studies by introducing measures of the volatility of FDI Inflows. As introduced into the model, these are predicted to have a negative effect on growth. We estimate the standard model using cross-section, panel data and instrumental variable techniques. Whilst all results are not entirely robust, there is a consistent finding that FDI has a

positive effect on growth whereas volatility of FDI has a negative impact. The evidence for a positive effect of FDI is not sensitive to which other explanatory variables are included. In particular, it is not conditional on the level of human capital (as found in some previous studies). There is a suggestion that it is not the volatility of FDI per se that retards growth but that such volatility captures the growth-retarding effects of unobserved variables.

Foreign direct investment in Bangladesh; an analysis of perception of prospective investors:

Bangladesh had gone through several major policy changes regarding the ownership and control of industries with a view of promoting economic growth . one of the strategies the government of Bangladesh (GOB) followed to accelerate economic growth was to attract foreign direct investment (FDI) into country

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.

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.

Research Design:

The research design is a pattern or an outline of a research project . It is a statement only the essential of a study those provide the basic guidelines for the detail of the project. The present study being conducted follows a descriptive research design has the data would be responses from a simple containing g a large numbers of sources .It is a cross section of the situation design of the descriptive studies including the nature and the analytical method.

Data Collection

After the research problem has been defied and the research design has been chalked out, the task of date collection begins. Data can be collected from other primary or secondary sources.

The main source of obtaining necessary data for the study was Secondary Data. This study is empirical in nature and hence secondary data is used to conduct the research. The data was collected from the Internet by exploring the Secondary sources available on websites. Secondary Data: The secondary data constitutes of daily FII flows data which was collected from Money Control and Equity Master, the daily returns of SENSEX and NIFTY from BSE and NSE websites respectively. The trends in FII flow from the RBI website and information on FII from SEBI.

Magazines and Bulletins: - NSE News Bulletins etc. INTERNET: - www.sebi.gov.in wwwnse.co.in www.moneycontrol.com etc. SAMPLING PLANNING

Sampling is an effective step in collection of primary and secondary data and has a great influence on the quality of the results. The sampling plan includes population, sample size and sample design.

DATA ANALYSIS:-PLAN OF ANALYSIS

The data gathered from various sources were primarily studied and necessary data was sorted out sequentially keeping in mind the procedure of the study. 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. Findings are included which transmits the important points, which were gathered from the study.

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.

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;

INDUSTRY PROFILE

INVESTMENT IN INDIAN MARKET

India is believed to be a good investment despite political uncertainty, bureaucratic hassles, 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 ignore 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 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.

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.

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.

FOREIGN INSTITUTIONAL INVESTMENT IN INDIA:

MILESTONES

 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 were 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 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.

 ( 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

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

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;

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.

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 is 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.

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.

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

For matters connected therewith or incidental thereto.

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. 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 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 ab-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 BSE `Sensex' is a widely used market index for the BSE. 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. It aims to promote, develop and maintain a well-regulated market for dealing in securities and to safeguard the interest of members and the investing public having dealings on the Exchange. It helps industrial development of the country through efficient resource mobilization. To establish and promote honorable and just practices in securities transactions

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.

S&P CNX Nifty

S&P CNX Nifty is a well-diversified 50 stock index accounting for 23 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds.

S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL. IISL is India's first specialized company focused upon the index as a core product. IISL have a consulting and licensing agreement with Standard & Poor's (S&P), who are world leaders in index services.

The average total traded value for the last six months of all Nifty stocks is approximately 58% of the traded value of all stocks on the NSE

Nifty stocks represent about 60% of the total market capitalization as on March 31, 2005. Impact cost of the S&P CNX Nifty for a portfolio size of Rs.5 million is 0.07%

The Reliance – Anil Dhirubhai Ambani Group is among India’s top three private sector business houses on all major financial parameters, with a market capitalisation of Rs 100,000 crore (US$ 22 billion), net assets in excess of Rs 31,500 crore (US$ 7 billion), and net worth to the tune of Rs 27,500 crore (US$ 6 billion).

Reliance Money Limited has been promoted by Reliance Capital Limited a part of Anil Dhirubhai Ambani Group with the Net-worth – Rs. 4500 cr., amongst the top 3 banking & financial services companies in the private sector.

BOARD OF DIRECTORS

Anil DhiruBhai Ambani, Chairman

Amitabh Jhunjhunwala, Vice-Chairman

Rajendra Chitale, Independent Director

Shri C. P. Jain

Reliance money is a part of the reliance Anil Dhirubai Ambani Group and is promoted by Reliance capital, the fastest growing private sector financial services company in India, ranked amongst the top 3 private sector financial companies in terms of net worth.

Reliance money is a comprehensive financial solution provider that enables you to carry out trading and investment activities in a secure, cost-effective and convenient manner. Through reliance money, you can invest in a wide range of asset classes from Equity,

Reliance Capital

Equity and commodity Derivatives, Mutual Funds, insurance products, IPO’s to availing services of Money Transfer & Money changing.

Reliance Money offers the convenience of on-line and offline transactions through a variety of means, including its Portal, Call & Transact, Transaction Kiosks and at it’s network of affiliates.

Some key steps of the company that are as…..

“Success is a journey, not a destination.” If we look for examples to prove this quote then we can find many but there is none like that of Reliance Money. The company which is today known as the largest financial service provider of India.

Success sutras of Reliance Money:

The success story of the company is driven by 8 success sutras adopted by it namely trust, integrity, dedication, commitment, enterprise, hard work and team play, learning and innovation, empathy and humility. These are the values that bind success with Reliance Money.

Vision of Reliance Money

To achieve & sustain market leadership, Reliance Money shall aim for complete customer satisfaction, by combining its human and technological resources, to provide world class quality services. In the process Reliance Money shall strive to meet and exceed customer's satisfaction and set industry standards.

Mission statement:

“Our mission is to be a leading and preferred service provider to our customers, and we aim to achieve this leadership position by building an innovative, enterprising , and technology driven organization which will set the highest standards of service and business ethics.”

Reliance Capital has interests in asset management and mutual funds, life and general insurance, private equity and proprietary investments, stock broking, depository services, distribution of financial products, consumer finance and other activities in financial services.

Reliance Mutual Fund is India's no.1 Mutual Fund. Reliance Life Insurance is India's fastest growing life insurance company and among the top 4 private sector insurers. Reliance General Insurance is India's fastest growing general insurance company and the top 3 private sector insurers. Reliance Money is the largest brokerage and distributor of financial products in India with more than 2.5 million customers and the largest distribution network. Reliance Consumer finance has a loan book of over Rs. 8,000

crores at the end of June 2008.

Reliance Capital has a net worth of Rs.6,862 crores (US$ 1.6 billion) and total assets of Rs. 19,940 crores (US$ 4.6 billion) as of June 30, 2008 and over 26,000 employees. Money has increased its market share among private financial companies to nearly Convenient & effective – Anytime & anywhere financial transaction capability. Launched in April 2007. It provides the Flat fees system. It has 2.2 million customers in 1 year of official launch. It has over 5,000 outlets across 700 towns/cities. Average daily turnover – in excess of Rs 2,000 crores.

Considering the entire life market, including the Rs. 12,890 crores booked by life insurance Corporation, Reliance life insurance market share works out to around 6.25% . The life insurance market continuous to be dominated by LIC which has about 67% share this only a marginal dip from its 73% share in end-July. These comparisons are only for first year or new business premium.

The gap between Reliance life insurance and the second-in-line private insurer is vast. In fact, this scenario has led some analysts to wonder if the company is not a trifle too aggressive. But others say this has more to do with the companies’ customer-centric focus, its pan-India presence and superior risk management and investment strategies. Reliance Money is not, however, resting on its laurels.

Company’s customer centric approach will be studied during the training period and the finding of the research work will definitely focus on the present condition & future requirement (if any) relating to products of company.

Thus, Reliance Money provides a comprehensive platform, offering an investment avenue for a wide range of asset classes. Its endeavor is to change the way India transacts in financial market and avails financial services. Reliance Money offers a single window facility, enabling you to access amongst others, Equities, Equity and Commodity

derivatives, Offshore Investments, IPO’s, Mutual Funds, Life Insurance and General Insurance products.

Advantages offered by Reliance money over other companies: Cost Effective

Convenience Security

Single Window for Multiple Products 3 in 1 Integrated Access

Demat Account with Reliance Capital

PRODUCT OFFERING

Trading Portal (with almost negligible brokerage ) Equity Broking

Commodity Broking

Derivatives ( Futures & Options )

Offshore Investments (Contract For Differences) D-Mat Account.

Financial Products Mutual Funds Life Insurance ULIP plan

Money Back Plan General Insurance Vehicle/Motor Insurance Health Insurance House insurance IPO’s Value-Added Services

ORGANIZATIONAL STRUCTURE

National Level : National Head

Zonal Level : Zonal Head

Regional Level : Regional head

Divisional level : Cluster Head

Branch Level : Center Manager

Area Level : Business Development Executives & Freelancers

PERFORMANCE OF INDIAN STOCK MARKET

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

year Open High low close Price/earnings Price/book

value Dividend yield 199 1 1027.38 19554.81.2 9 947.14 1908.85 22.30 3.58 1.24 199 2 1957.33 4546.58 1945.48 2615.37 36.19 6.35 .80 199 3 2617.78 3459.07 1980.6 3346.06 31.78 4.81 .98 199 4 3436.87 4643.31 3405.88 3926.90 45.45 6.07 .68 199 5 3910.16 3943.66 2891.45 3110.49 23.63 3.81 1.13

199 6 3114.08 4131.22 2713.12 3085.20 16.07 3.02 1.50 199 7 3096.65 4605.41 3096.65 3658.98 14.45 2.80 1.52 199 8 3658.34 4322.00 2741.22 3055.41 13.00 2.25 1.80 199 9 3064.95 5150.99 3042.25 5005.82 17.35 3.07 1.38 200 0 9209.54 6150.69 3491.55 3972.12 24.48 3.81 1.14 200 1 3990.65 4462.11 2594.87 3262.33 17.60 2.51 1.83 200 2 3262.01 3758.27 2828.48 3377.28 15.22 2.30 2.14 200 3 3383.85 5920.76 2904.44 5838.96 15.02 2.49 2.14 200 4 5872.48 6617.15 4227.50 6602.69 17.26 3.28 2.01 200 5 6626.8 9442.98 6069.33 9397.93 16.21 3.94 1.58 200 6 9422.49 14035.30 8799.01 13786.9 1 20.18 4.75 1.35 200 7 83827.7 7 20498.11 12316.1 0 20286.9 9 22.25 5.32 1.10 200 8 20325.2 7 21206.77 14677.2 4 16481.2 0 22.44 5.71 .98

Indices: AUTO For the period :From year 2000 to 2008

year Open High Low close

2000 0.00 0.00 0.00 21.12 2001 0.00 0.00 0.00 755.55 2002 0.00 0.00 0.00 1015.62 2003 0.00 0.00 0.00 2533.79 2004 -- 2871.63 0.00 2836.39 2005 2852.05 4299.07 2525.72 4256.45 2006 4251.97 5843.51 3959.66 5518.50 2007 5604.44 5881.83 4435.21 5667.45 2008 5671.41 5796.87 4063.38 4548.08

PERFORMANCE OF POWER SECTOR

Indices: POWER For the period :From year 2005 to 2008

Year Open High low close Price/earnings Price/book

value Dividend yield 2005 -- 0.00 0.00 1457.9 1 0.00 0.00 0.00 2006 -- 0.00 0.00 2048.4 3 0.00 0.00 0.00 2007 4395.76 4729.00 4023.09 4548.8 5 6.35 1.08 .10 2008 4584.38 4929.34 2896.47 3281.2 9 34.40 5.90 .73

FOREIGN INVESTMENT FLOWS IN INDIA:

One of the most important distinctions between Portfolio and Direct investment to have emerged from this young era of globalisation is that portfolio investment can be much more volatile.

TABLE: Foreign Investment Flows in India Year A. Direct Investment B. Portfolio Investment Total (A + B)

(US $ million) (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.

CHART: FOREIGN INVESTMENT FLOWS 0 2000 4000 6000 8000 10000 12000 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Y EAR FPI FDI

FOREIGN PORTFOLIO FLOWS TO INDIA

Foreign portfolio investments have been allowed in India on the basis of the recommendations of the Narasimham committee which stated:

The committee would also suggest that the capital markets should be gradually opened up to foreign portfolio investments and simultaneously efforts should be initiated to improve the depth of the market by facilitating the issue of new types of equities and innovative debt instruments.’ (Narasimham committee report)

Prior to 1992, only non-resident Indians (NRIs) and Overseas corporate bodies (OCBs) were allowed to undertake portfolio investment in India. Only on September 14, 1992 the Government of India issued guidelines on FII investments in India which was followed by a notification by Securities and Exchange Board of India (SEBI) three years later in November 1995.

TRENDS IN FII INVESTMENT IN INDIA

TABLE: Trends in FII investment

Year FII PURCHASEFII SALES FII NET FII NET CUM FII NET

in crores in crores in crores US$ million US$ million

1993-94 5593 466 5126 1634 1638 1994-95 7631 2835 4796 1528 3167 1995-96 9694 2752 6942 2036 5202 1996-97 15554 6979 8575 2432 7634 1997-98 18695 12737 5958 1649 9284 1998-99 16115 17699 -1584 -386 8898 1999-00 56856 46734 10122 2339 11237 2000-01 74051 64116 9934 2160 13396 2001-02 49920 41165 8755 1846 15242 2002-03 47060 44371 2689 562 15804 2003-04 144858 99094 45765 9949 25754

Source: Reserve Bank of India Annual Report 2004

INFERENCE: The investments by FIIs have been registering a steady growth since the

opening of the Indian capital markets in September 1992. Their investments have always been net positive, but for 1998-99, when their sales were more than their purchases. It can be observed from the above table that the portfolio investment inflows have always been on the increase. But the years 2001-02 and 2002-03 saw some reversal in the trend. From a net inflow of US $ 2.1 billion in 2000-01, such inflows declined to US $ 1.8 billion in 2001-02, and further dropped to US $ 0.562 billion in 2002-03. The decline is because of the lower portfolio inflows, as a result of which the net investment has dropped in these years. However, this decline witnessed a sharp reversal in the year 2003-04. FIIs have made a net investment of Rs. 45,764 crores during this year registering a growth of 1602% over the previous year, creating a record in the history of FII investment in India. Gross purchases in this year amounted to Rs.144,857 crores, a growth rate of 208% compared to the year before. This trend continued in April 2004, only to suffer reversal again during May and June 2004, when the net investment became negative. Fortunately, the year from July 2004 has been seeing a net positive portfolio flows by FIIs. As of September 2004, the net FII portfolio investment stands at US $ 27,637 million. If it is so, then increasing the FII investment cap per se will not be helpful. The country has to work on specific measures to encourage more FII investments. The analysis of data indicates that there has been substantial divestment by the FIIs during the year 1998-99. The maximum outflow was during the months of May and June 1998 (almost US$430 millions).

TABLE: Monthly Trends of FIIs for the Year 1998-99

Month Purchases Sales Net Net

(Rs mn) (Rs mn) (Rs mn) (US$ mn) Apr-98 11422 11756 -335 -8.4 May-98 8253 13284 -5031 -124.3 Jun-98 8023 16072 -8049 -190.5 Jul-98 13098 12154 944 22.2 Aug-98 7932 11783 -3851 -90.1 Sep-98 14381 12458 1923 45.2 Oct-98 10737 16470 -5733 -135.4 Nov-98 10391 9845 546 12.9 Dec-98 11089 8789 2300 104.8 Jan-99 16355 11894 4462 104.8 Feb-99 16477 13084 3393 79.8 Mar-99 25207 23973 1233 29

A major factor which led to continuous outflow of funds during the middle and end of the year 1998 was the worsening outlook on the emerging markets. Credit worthiness of almost all the South-east Asian nations was severely damaged by the crises which started in July 1997. As a result, the FIIs were facing heavy redemption pressures from the Emerging Markets Funds. The stock markets in all these countries fell continuously from March 1998 till about September 1998. The integration of the Indian capital markets with the international markets thus spilled over to Indian markets as well. However, the net outflow from the Indian markets was much lower than the other Asian countries. A further indication of the integration of the Indian markets can be seen from the upsurge in the valuations and funds inflows during the first quarter of 1999, when all the other Asian countries have also seen rising trend in stocks indices.

The sluggishness in investment in the emerging markets was exacerbated by the fact that hroughout 1998-99, US and European markets showed historically high valuations, and the expectations of further rise because of the strong economic indicators there which led to reduced allocations elsewhere.

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).

TABLE: CORRELATION OF FII WITH NIFTY

MONTH GROSS PURCHASES GROSS SALES NET INVESTMENT

APRIL -0.308891015 -0.486299015 -0.122510317 MAY -0.203839618 -0.226174846 0.127555673 JUNE 0.40719847 0.013881057 0.556762421 JULY 0.231397721 -0.008199745 0.352195939 AUGUST -0.296292834 -0.009987101 -0.288696993 SEPTEMBER 0.631541276 0.478957403 0.377141924 OCTOBER -0.107835133 -0.303940405 0.118451125 NOVEMBER 0.103856902 0.232269601 -0.020576251 DECEMBER -0.689594568 -0.692805116 -0.496878284 JANUARY -0.02034654 -0.57330261 0.64885866 FEBRUARY 0.124176605 -0.056354197 0.233709555 MARCH 0.419911809 -0.255570154 0.483718703

FII flows and contemporaneous stock returns are strongly correlated in India. The correlation coefficients between different measures of FII flows and market returns on the Bombay Stock Exchange during different sample periods are shown in Table above. While the correlations are quite high throughout the sample period, they exhibit a significant rise since the beginning of the 1999-00. The calculations show that there exists a relationship between FIIs and Nifty since 6 out of 12 months show positive correlation in the case of Gross Purchass and 8 out of 12 months indicate a positive correlation in the case of Net FII Investment and Nifty.

TABLE : CORRELATION OF FII WITH SENSEX

MONTH GROSS PURCHASES GROSS SALES NET INVESTMENT

APRIL -0.267580403 -0.509025858 -0.076211493 MAY -0.184653959 -0.224809346 0.1484205 JUNE 0.405635894 -0.004710378 0.575995013 JULY 0.291205286 0.045396684 0.353391901 AUGUST -0.315900375 -0.033391574 -0.301709231 SEPTEMBER 0.661834837 0.506184274 0.389776394 OCTOBER -0.067640059 -0.311421901 0.18995454 NOVEMBER 0.083505749 0.244942636 -0.057919794 DECEMBER -0.666663184 -0.688620778 -0.46494095 JANUARY 0.02201209 -0.551509386 0.679227006 FEBRUARY 0.00689661 -0.170243004 0.149373722 MARCH 0.417854257 -0.250893125 0.479619465

The behaviour of the foreign portfolio investors matched the behaviour of Sensex during this period. Net FII investment in the Indian capital markets started fluctuating sharply during April and it turned negative. Net FII investment in the Indian stock market was positive from May to July. During this period, the Sensex and net FII investment showed very high degree of correlation. For the month of June showed a correlation as high as 0.60. The months of September, October, November and December shows a declining trend, the FII investment reversed from that day. On the whole, there exists a relationship between FIIs and Sensex since 7 out of 12 months show positive correlation in the case of Gross Purchases and 8 out of 12 months indicate a positive correlation in the case of Net FII Investment and Sensex.

TABLE: COEFFECIENT OF DETERMINATION OF FII WITH NIFTY

MONTH GROSS PURCHASES GROSS SALES NET INVESTMENT

APRIL 0.095413659 0.236486732 0.015009 MAY 0.04155059 0.051155061 0.01627 JUNE 0.165810594 0.000192684 0.309984 JULY 0.053544905 6.72358E-05 0.124042 AUGUST 0.087789444 9.97422E-05 0.083346 SEPTEMBER 0.398844383 0.229400194 0.142236 OCTOBER 0.011628416 0.09237977 0.014031 NOVEMBER 0.010786256 0.053949168 0.000423 DECEMBER 0.475540669 0.479978929 0.246888 JANUARY 0.000413982 0.328675883 0.421018 FEBRUARY 0.015419829 0.003175796 0.05462 MARCH 0.176325927 0.065316104 0.233984

Coefficient of Determination (R2), ranges from 0 - 1, is always part of the standard regression output, the important measure of goodness of fit. R2 = correlation coefficient (r) squared, since the range of r is from -1 to +1, squaring r forces R2 to fall between 0 and 1. R2 in the above table gives the percentage (%) of the total variation in Nifty that is explained by the regression equation, or explained by FIIs. During the month of January the total variation in Nifty explained by FII amounted to 42% and the remaining 58% is explained by other factors which influence Nifty.

TABLE : COEFFECIENT OF DETERMINATION OF FII WITH SENSEX

MONTH GROSS PURCHASES GROSS SALES NET INVESTMENT

APRIL 0.071599272 0.259107325 0.005808 MAY 0.034097085 0.050539242 0.022029 JUNE 0.164540479 2.21877E-05 0.33177 JULY 0.084800519 0.002060859 0.124886 AUGUST 0.099793047 0.001114997 0.091028 SEPTEMBER 0.438025352 0.256222519 0.151926 OCTOBER 0.004575178 0.0969836 0.036083 NOVEMBER 0.00697321 0.059996895 0.003355 DECEMBER 0.444439801 0.474198576 0.21617 JANUARY 0.000484532 0.304162603 0.461349 FEBRUARY 4.75632E-05 0.028982681 0.022313 MARCH 0.17460218 0.06294736 0.230035

Similarly, in the case of FII and Sensex we have R2 = .46, indicating that variation in FII explains about 46% of the variation in Sensex. 54% of the variation in Sensex is unexplained by FII, explainable by other factors, omitted variables, random variation, etc. We shouldn't put too much emphasis on R2, t-stat are more important. However, R2, or some other measure of goodness of fit is expected in reported empirical results.

Share of top investing countries in FDI Approvals

Rank Country Aug.199

1 to march20 02 %of total approval s 2002 -03 2003-04 2004-05 2005-06(April Jan.) Cumulative approvals aug 1991 to Jan 2006 % of total approvals till Jan 2006 1 U.S.A. 56,631 24.71 818 881 779 260 59394 22.92 2 Mauritius 32,919 14.37 1432 1572 2838 3565 42340 16.34 3 U.K. 21,396 9.34 1819 590 1178 1019 26011 10.04 4 Japan 10794 4.71 566 345 172 73 11955 4.61 5 SouthKore a 9,798 4.28 29 65 15 64 9975 3.85 6 Germany 8,976 3.92 292 172 177 222 9843 3.80 7 Netherlan ds 8618 3.76 315 628 76 117 9758 3.77 8 Australia 6,768 2.95 47 34 39 40 6931 2.67 9 France 6,28 2.72 323 37 71 94 6756 2.61 10 Singapore 7,943 3.47 330 369 578 164 9387 3.62 FDI appro vals 229,150 7,90 4 6,224 8,728 7112 259,118

Share of top investing countries in FDI inflow in India

Rank Country Aug.199

1 to march20 02 %of total approval s 2002-03 2003-04 2004-05 2005-06(April Jan.) Cumulativ e FDI inflows to Jan 2006 aug 1991 to Jan 2006 % of total appr ovals till Jan 2006 1 Mauritius 27446 29.64 3766 2609 5141 9120 48112 36.9 0

2 U.S.A. 12248 13.23 1504 1658 3055 1705 20183 15.4 8 3 U.K. 4263 4.60 1617 769 458 1645 8757 6.72 4 Japan 5099 5.51 1971 360 575 669 8680 6.66 5 Netherlan ds 3856 4.61 836 2247 1217 329 8489 6.51 6 Germany 3455 3.73 684 373 663 1302 6481 4.97 7 Singapore 1997 2.16 180 172 822 1013 4186 3.21 8 France 1947 2.10 534 176 537 63 3259 2.50 9 South korea 2189 2.36 188 110 157 257 2903 2.23 10 Switzerlan d 1299 1.30 437 207 353 332 2530 1.94 Total FDI inflo w 92611 14932 12117 17138 19356 156154

Sources of FDI inflows in India

Top 10 countries have accounted for more than a half of India’s FDI approvals during 1991-95, while is share increased to about 70% over 2004-05. this able shows ranking of cumulative investment approved during the period 1991 to January 2006 reveals that USA was the largest investor in India with an investment of Rs. 59394crores Netherlands , France and Singapore follows in that order . but the share of USA has been declining , whereas the shares of Mauritius has been increasing from past few years . it has b increased by more than 80% in2004-05 compared to 2003-04 , mainly due to FDI being routed through Mauritius , as it has a double Taxation avoidance treaty with India . in terms of FDI inflow into the country , Mauritius topped the list with90% share of total FDI inflows , whereas USA holds the 2nd position with 15.48% of total FDI inflows in India . thus in terms of FDI inflows Mauritius is way ahead from UK ,Japan Netherlands Germany , Singapore ,France South Korea and Switzerland follows in that order .South Korea who holds2.23%share Australia who holds 8th positioning FDI approvals with 2.65% share ,does not figure in top 10 countries in FDI inflows . O the other hand , Switzerland , which does not come in FDI approvals holds holds 10th position in FDI inflows with 1.94% share .Above table shows that FDI inflows from all countries have been increased in 2004-05