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IMPACT OF FOREIGN INSTITUTIONAL INVESTMENTS ON INDIAN
CAPITAL MARKET
DR.K.MALLIKARJUNA RAO*; H.RANJEETA RANI**
* ASSISTANT PROFESSOR OF COMMERCE, DEPARTMENT OF COMMERCE,
GOVT.DEGREE COLLEGE, ZAHEERABAD, DIST-MEDAK (AP)
** STUDENT OF MASTER OF BUSINESS ADMINISTRATION, ICBM-SCHOOL OF BUSINESS EXCELLENCE,
HYDERABAD
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ABSTRACT
The Foreign Institutional Investors (FIIs) have emerged as noteworthy players in the Indian stock market and their growing contribution adds as an important feature of the development of stock market in India. To facilitate foreign capital flows, developing countries have been advised to strengthen their stock market. As a result, the Indian stock markets have reached new heights and became more volatile making the research work in this dimension of establishing the link between FIIs and stock market volatility. This paper makes an attempt to develop an understanding of the dynamics of the trading behaviour of FIIs and effect on the Indian equity market especially in selected sectors, in addition to comparative analysis of preferred investment stock of FII.
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INTRODUCTION:
FII is defined as an institution organized outside of India for the purpose of making investments into the Indian securities market under the regulations prescribed by SEBI. „FII‟ include “Overseas pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or investments on behalf of a broad-based fund. FIIs can invest their own funds as well as invest on behalf of their overseas clients registered as such with SEBI. These client accounts that the FII manages are known as „sub-accounts‟. A domestic portfolio manager can also register itself as an FII to manage the funds of sub-accounts foreign institutional investor means an entity established or incorporated outside India which proposes to make investment in India. Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for foreign institutional investors. FII is defined as an institution organized outside of India for the purpose of making investments into the Indian securities market under the regulations prescribed by SEBI. Entry Options For FII -A foreign company planning to set up business operations in India has the following options: Incorporated Entity i.e. by incorporating a company under the Companies Act, 1956, through Joint Ventures; or Wholly Owned Subsidiaries. Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject
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to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy.
Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can actively engage in corporate governance. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under influencing the conduct of listed companies, and providing them with capital are all part of the job of management. One of the most important features of the development of stock market in India in the last 20 years has been the growing participation of FIIs. Since September, 1992 when FIIs were allowed to invest in India, the no. of FIIs has grown over a period of time. At end-march 2012, there were 1765 FIIs registered with SEBI.
REVIEW OF LITERATURE:
In India, the purchase of domestic securities by FIIs first allowed in September 1992 as part of the liberalisation process that followed the balance of payment crisis in 1990-91. Now days, a significant portion of Indian corporate sector‟s securities are held by Foreign Institutional Investors, such as pension funds, mutual funds and insurance companies. Chakrabarti (2001) conducted the pair-wise Granger Causality tests between FII inflows and returns on the BSE National Index. He found that portfolio investment from FIIs was more an effect than a cause of market returns in India
Stanley Morgan (2002) has examined that FIIs have played a very important role in building up India‟s forex reserves, which have enabled a host of economic reforms. The study notes that FII strongly influence short term market movements during bear markets. However, the correlation between returns and flows reduces during bull markets as other market participants raise their involvement reducing the influences of FIIs. The study shows that the correlation between foreign inflows and market returns is high during bear and weakens with strengthening equity prices due to increased participation by other players.
Mukherjee, Bose and Coondoo (2002) studied the cause-and-effect relationship between FII flows and returns on the Indian equity market. They found that FII flows to and from the Indian market tend to be caused by returns in the domestic equity market and not the other way round. Gordon and Gupta, (2003) found causation running from FII inflows to return in BSE. They observed that FIIs act as market makers and book profits by investing when prices are low and selling when they are high. Hence, there are contradictory findings by various researchers regarding the causal relationship between FII net inflows and stock market capitalization and returns of BSE/ NSE. Therefore, there is a need to investigate whether FIIs are the cause or effect of stock market fluctuations in India.
Sivakumar S (2003) has analyzed the net flows of foreign institutional investment over the years, it also briefly analyses the nature of FII flows based on research, explores some determinants of FII flows and examines if the overall experience has been stabilizing or destabilizing for the Indian capital market.
The Impact of FII in equity investment behaviour in stock market was examined by Karimullah (1997-2007). He attempted to find out two way causes between behaviour and performance of Indian stock market. He researched about the idea, that financial liberalization increases the
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efficiency of financial market and permission of FIIs equity investment are an important example of financial liberalization. Apart from net investment of FII's the purchase and sale behaviour of FIIs were also analyzed in the study.
Agarwal, Chakrabarti et al (2003) have found in their research that the equity return has a significant and positive impact on the FII. But given the huge volume of investments, foreign investors could play a role of market makers and book their profits, i.e., they can buy financial assets when the prices are declining thereby jacking-up the asset prices and sell when the asset prices are increasing. Hence, there is a possibility of bi-directional relationship between FII and the equity return.
Mazumdar Tanushree (2004) examined two consequences i.e. liquidity (positives) and volatility (negative) in the past decade on the Indian stock market. The results showed that FII flow have enhanced liquidity of the Indian stock market. FII investments improve liquidity in the stock markets for two reasons; they invest a large quantum of funds in the stock market and FII are known to be active traders.
Dey Subarna & Mishra Bishnupriya (2004) in their study examined the casual relationship between net FII investment & the Indian stock market represented by market capitalization of BSE & NSE. The study also inferred that whenever market capitalization was high, FIIs were more attracted for investing. They gave importance to the policy makers as the Indian stock market was susceptible to changing investment patterns of foreign portfolio investors.
Roy (2007) explored the basic motives behind foreign portfolio capital flows into India. He found that they are primarily driven by capital gains, and in the Indian case, by the change in stock prices. The study further revealed that stock prices are causing net foreign portfolio inflows and not vice-versa. Further, he found bi-directional causality between the exchange rate and net foreign portfolio inflows.
Verma and Prakash (2011) found that the interest rate sensitivity of FII flows is not statistically significant and concluded that the BSE Sensex is a major pull factor for these flows into the domestic financial markets.
Gupta Ambuj (2011) have studied the role of FII in volatility of the market and stock prices of individual securities, he found a high degree of relationship between the factors.
OBJECTIVES OF THE STUDY
• To find out the relationship between the FIIs investment and Indian stock market • To analyse the sector wise investment pattern of FII during 2007-2012
• To make a comparative study among companies of different sectors attracting FIIs
Research Methodology
The study carried out is analytical and empirical in nature in which it explores the relationship between the Inflows of FII and their impact on Indian Capital Market. Further, in order to show the position of FIIs in different sectors, we selected 10 companies comprising of five major sectors i.e., Real estate, Banking, IT, FMGC and Iron and Steel.
Data Collection
Data for the study is collected from Secondary sources. For this various literatures, books, journals, magazines, websites likes www.nseindia.com, www.sebi.gov.in were used.
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Empirical analysis
The table 1 shows the number of Foreign Institutional Investors (FIIs) registered with SEBI. It is clearly observed that there was a tremendous increase in the number (322) of FIIs registered with SEBI in the year 2007-08. Where as in the year 2009-10 there was decline in the number of FIIs registered with SEBI. This was due to the fact that the impact of international recession had started affecting the FIIs registration.
The table also reveals that there were 1.765 FIIs registered with SEBI in the year 2011-12 as compared to 1722 a year ago, showing an increase of 2.5 per cent during the year.
Table 1: FIIs REGISTEREDWITH SEBI
YEAR FII at the end of March Net Additions in FIIs in During the Year
1993-94 3 3 1994-95 156 153 1995-96 353 197 1996-97 439 86 1997-98 496 57 1998-99 450 -46 1999-00 506 56 2000-01 527 21 2001-02 490 -37 2002-03 502 12 2003-04 540 38 2004-05 685 145 2005-06 882 197 2006-07 997 115 2007-08 1,319 322 2008-09 1,635 316 2009-10 1713 78 2010-11 1722 9 2011-12 1765 43
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Table 2
FII INVESTMENTS IN INDIA YEAR Gross Purchase (Rs.Crores) Gross Sales (Rs.Crore) Net Investments (Rs.in Crores) Net Investments (USD mm) Cumulative Net Investment 1 2 3 4 5 6 1992-93 18 4 13 4 4 1993-94 5,593 467 5,127 1,634 1,638 1994-95 7,631 2,835 4,796 1,528 3,167 1995-96 9,694 2,752 6,942 2,036 5,202 1996-97 15,554 6,980 8,575 2,432 7,635 1997-98 18,695 12,737 5,958 1,650 9,285 1998-99 16.116 17,699 -1,584 -386 8,899 1999-00 56.857 46.735 10,122 2,474 11,373 2000-01 74,051 64,118 9,933 2,160 13,532 2001-02 50,071 41,308 8,763 1,839 15,372 2002-03 47,062 44,372 2,689 566 15,937 2003-04 1,44,855 99,091 45,764 10,005 25,943 2004-05 2,16,951 1,71,071 45,880 10,352 36,294 2005-06 3.46,976 3,05,509 41,467 9,363 45,657 2006-07 5,20,506 4,89,665 30,841 6,821 52,478 2007-08 9,48,018 8,81,839 66,179 16,442 68,919 2008-09 6.14,576 6,60,386 -45,811 -9,837 59,082 2009-10 8,46,438 7.03.780 1,42,658 30,253 89,335 2010-11 9,92,599 8,46,161 1,46,438 32,226 1,21,559 2011-12 9,21,285 8,27,562 93,725 18,923 1,40,482 Source: SEBI annual reports
From the above table 2 it is observed that the FIIs showed huge investments in the gross purchases of Debt and Equity by 82.13 per cent to Rs. 9,48,018 crores in 2007-08 from 5,20,506 crores in 2006-07. The combined gross sales by FIIs increased by 80 per cent to 8,81,839 crore from 4,89,665. FIIs turned towards net selling in equity and debt for profit booking and seeing the massive sell out of shares in global markets including India during the period 2008-09. The analysis of the above table depicts a negative view of the FIIs investment in India during 1998-99 and 2008-09. The active reason could be tremendous selling in these two years. It is also clear from the table that the gross purchase of debt and equity by FIIs declined by 7.2 per cent to Rs. 9,21,285 crores in 2011-12 from 9,92,559 crores in 2010-11. The combined gross sales by FIIs declined by 2.2 per cent to 8,27,562 crore from 8,46,161 crores during the same period.
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TABLE: 3
Share of FII in different sectors of Companies listed on NSE
Sector Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Banks 18.41 19.15 14.27 16.02 17.62 15.9 Engineering 11.45 10.63 7.34 8.28 9.36 5.1 Finance 18.18 17.44 13.01 16.53 23.35 8.4 FMCG 11.91 14.07 12.72 14.09 16.34 9.4 IT 14.53 16.00 12.44 11.68 21.16 7.3 Infrastructure 7.15 8.86 7.31 8.90 7.87 5.9 Manufacturing 9.57 9.46 7.28 8.79 9.41 4.8 Media & Entertainment 15.20 11.71 11.42 7.06 10.97 5.8 Petrochemicals 5.83 4.73 4.77 6.08 6.52 4.5 Pharmaceuticals 11.17 10.69 7.88 8.78 10.19 6.2 Services 13.09 10.70 8.39 8.05 7.41 5.4 Telecommunication 11.17 9.12 6.85 8.64 8.44 5.7 Miscellaneous 8.19 9.30 8.39 8.10 13.65 6.1 Total stake of FIIs in the sectors 10.78 10.62 8.40 9.58 10.32 6.0
Source: www. nseindia.com
Table 3 reveals that share of FII in different sectors of companies listed on NSE, at the end of March, 2007 the FII held the five highest stake of banks (18.41 per cent), followed by Finance (18.18 per cent ), Media & Entertainment (15.20 per cent ), Information Technology ( 14.53 per cent ) and Service sector (13.09 percent). The total percentage of share held by FII across different sectors was 10.78 percent of the total shares of the companies listed on the NSE at the end of March, 2007.
At the end of March, 2008, the FII held the highest stake in banking sector 19.15 per cent followed by finance, Information Technology, Media & Entertainment and service sector 17.44 percent, 16.00 per cent, 11.71 percent and 10.70 percent respectively.
In the year 2009, FII held the highest in banking sector 14.27 percent. The total percentage of share held by FII across different sectors was 8.40 percent of the total shares of the companies listed on the NSE at the of March, 2009. In the year March, 2010 invested highest in the Finance sector (16.53 percent) and lowest in petrochemicals (6.08 percent). It could be observed from the table 4 that FII investments are highest in finance sector (20.35 percent) followed by Information Technology (21.16 percent) and banking (17.62 percent) at end of March, 2011.
However in the year 2012 majority of the investments of FII were in banking sector (15.09 percent) and lowest in petrochemicals (4.5 percent). On the whole, FII investments in petrochemicals were lowest during the year 2007 to 2012.
Sector wise analysis
In order to find out the impact of FIIs on Indian Stock Market, five major sectors have been selected for the detailed study namely; Real Estate, Iron & Steel, Banking, Information Technology and FMCG.
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The 4 shows the comparative figures in DLF and JAI PRAKASH. It is evident from the table that FIIs share holdings in DLF drastically increased that is 7. 17 percent in the year 2007-08 to 15.46 percent in the year 2011-12. While in Jai Prakash associates the share holdings of FIIs decreased over the years i.e., from 2007-12 with 26.12 percent to 18.93 percent.
Table 4: Percentage of FII shareholding in total shares in selected infrastructure companies. DLF JAIPRAKESH ASSOCIATES 2007-08 2008-09 2009-10 2010-11 2011-12 2007-08 2008-09 2009-10 2010-11 2011-12 June 5.92 6.55 15.4 15.05 14.92 June 25.9 24.44 23.55 23.76 19.32 Sept 7.3 6.78 15.55 15.78 15.53 Sept 26.96 21.66 26.54 24.07 18.59 December 7.9 6.85 15.23 15.86 15.93 December 26.11 22.3 26.48 23.36 18.07 March 7.56 6.24 14.7 15.74 15.47 March 25.5 23.84 25.99 20.74 19.73 Avg. 7.17 6.61 15.22 15.61 15.46 Avg. 26.12 23.06 25.64 22.98 18.93 www. nseindia.com
The 5 given below reveals a detailed account of the quarterly FII inflows during the last five years. It is evident from the table that during the study period Jindal Steel has outperformed TATA Steel in FII inflows. Another significant observation from the table is that the FIIs share in TATA Steel is lowest during the 2011-12. While in the Jindal Steel it is lowest during the year 2008-09.
Table 5: Percentage of FII shareholding in total shares in selected steel companies
TATA STELL JINDAL STEEL
2007-08 2008-09 2009-10 2010-11 2011-12 2007-08 2008-09 2009-10 2010-11 2011-12 June 22.65 19.8 14.54 15.5 17.06 June 23.31 22.71 20.53 22.71 23.03 Sept 21.35 17.65 16.34 15.77 14.61 Sept 23.76 21.68 21.53 23.72 21.48 December 20.55 12.98 16.87 16 12.87 December 23.64 18.13 22.8 23.77 21.3 March 19.48 13.2 19.5 17.36 14.36 March 22.85 18.6 23.46 23.44 22.14 Avg. 21.01 15.91 16.81 16.16 14.73 Avg. 23.39 20.28 22.08 23.41 21.99 www. nseindia.com
The table 6 clearly show the comparative study of the largest public (SBI) and private (ICICI) sector banks of India. The one significant observation from the table is that the ICICI bank has attracted more FII inflow than the public sector bank (SBI). FIIs are showing interest in private sector banks as they are secular growth stores and are relatively better investment options as compared with public sector banks in an environment where asset quality is the reason for stress on banking.
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Table 6: Percentage of FII shareholding in total shares in selected BANKING companies
SBI ICICI BANK
2007-08 2008-09 2009-10 2010-11 2011-12 2007-08 2008-09 2009-10 2010-11 2011-12 June 11.9 12.67 8.99 11.47 10.88 June 45.82 38.85 36.18 37.7 38.61 Sept 11.99 12.04 9.87 13.99 8.65 Sept 41.04 36.44 35.26 39.27 38.17 December 12.35 10.42 11.37 13.36 7.88 December 39.97 36.6 36.23 39.23 34.74 March 12.82 7.97 10.11 11.8 8.7 March 40.3 35.47 37.02 38.62 35.79 Avg. 12.27 10.78 10.09 12.66 9.03 Avg. 41.78 36.84 36.17 38.71 36.83 www.nseindia.com
The table 7 given below presents a comparative study of the largest IT companies in attracting FII investments. The table makes it evident that of the selected two companies, FIIs have invested more funds into equity shares of Infosys than TCS. Further, it is also quite evident that the two companies Infosys and TCS have faced the global showdown of 2008-09.
Table 7: Percentage of FII shareholding in total shares in selected IT companies.
INFOSYS TCS 2007-08 2008-09 2009-10 2010-11 2011-12 2007-08 2008-09 2009-10 2010-11 2011-12 June 31.82 33.57 35.66 35.84 36.88 June 7.78 11.16 11.2 12.15 12.8 Sept 32.78 32.54 36.05 35.78 36.66 Sept 8.11 11.06 11.87 12.44 12.81 December 33.25 32.99 36.52 36.6 37.36 December 10.65 10.49 12.33 12.79 13.41 March 33.36 34.86 36.36 36.12 39.02 March 10.79 10 12.43 12.64 14.02 Avg. 32.80 33.49 36.15 36.09 37.48 Avg. 9.33 10.68 11.96 12.51 13.26 www.nseindia.com
The table 8 below presents a comparative analysis between the two FMGC companies of India. It is evident from the table that there has not been any difference in both the companies, attracting FII investment. But Hindustan Unilever has outperformed than ITC during the study period.
Table8: Percentage of FII shareholding in total shares in selected FMCG companies.
ITC HINDUSTAN UNILEVER
2007-08 2008-09 2009-10 2010-11 2011-12 2007-08 2008-09 2009-10 2010-11 2011-12 June 12.9 13.54 13.74 13.48 14.56 June 12.32 14.37 14.34 16.67 18.35 Sept 13.66 13.6 13.07 14.15 15.26 Sept 13.16 13.93 14.66 17.19 17.68 December 14.06 13.97 12.75 14.1 16.31 December 14.29 14.85 15.04 17.47 18.66 March 12.12 13.64 13.4 14.04 17.4 March 15.15 14.35 14.48 17.26 19.43 Avg. 13.19 13.69 13.24 13.94 15.88 Avg. 13.73 14.38 14.63 17.15 18.53 www. nseindia.com
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Conclusion:
FII is a vital component which helps in the development of financial market and the overall financial development thereby allowing the capital flows available in a country to pursue its trajectory of economic growth. Form all the above discussions and data analysis of the study it is inferred that there has been growing presence of the FII inflows in the Indian stock markets which is evident through the net cumulative investments and at times of recession there has been a decline in the inflows. It is also clear from the study that there is an increase in the number of FII registered with SEBI.
Further the study shows the share of FII in different sectors of companies listed on NSE from 2007 to 2012. FII held the five highest stake of banks, followed by finance, Media & Entertainment, Information Technology and service sector. However, the FII share in Petro chemicals showed the least during 2007-2012.
From all the discussions of the study, it is also visible that there has been no decline in FII inflows in IT & FMCG sector even during global recession of 2008 whereas as in all the other selected sectors, impact of recessions is quite visible.
Reference
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