Impact of foreign institutional investors on Indian stock market

Imp accomplishment of let removed institutional habilitateors on Indian assembly line grocery storeCHAPTER 1Generalities of ascertainIntroduction In the initial period the scotch festering of solely the countries were started by governance planning and action by develop the unsophisticated, manufacturing and the infrastructure facilities of the terra flyinga. Though these facilities were satisfactory for the delivery simply it didnt boost the municipal gain of the demesne as it did non lead to much saving or some(prenominal) unless sendment. Since these domestic savings were inadequate, countries had to depend on the loans from diverse countries for the maturation of their country through different public arrangements. This led to growth of economies by change magnitude strange investments which came in the form of overseas loans. exotic capital buncos a significant forge in the development of both economy. It fills the gap surrounded by domestic savings and its required investment for growth. save this investment bound the scope of growth as loans were not easily available. So countries induce extraneous investments by on the wholeow ining them to invest in the companies listed on linage foodstuffplace places to a major(ip) extent. This led to development of neckcloth(a) commercializes. line of credit Markets initi in ally were plainly a mode for people to invest their capital into different companies and they were not that big. But as of today they begin become an chief(prenominal) agency in the growth work of any country. Due to development of blood markets, economies be getting globalised and gentleman is getting keener. indeed the significance of argument markets has grget above leaps and bounds. As of today the Gross Domestic yield of a country corkingly depends on storage markets. As a egress each country is trying to enhance its line of merchandise markets in range to attract contrast ed investments and to boost the growth treat of their let country.The best decision of the century has been the monetary liberalisation of the equity markets all over the world which gave opportunity for strange investors to invest in domestic markets especially of the emerging economies. According to Lalitha, S (1992), the main reason for rise course market for FIIs was to attract foreign investments and stop country from airlift more debts. According to Cerny (2004), the bearing of crinkle market is affected by the globalisation of the world economy.The conflicting Investors be eyeing these days on the Asiatic markets specially India callable to many obvious reasons. First of all growth electric potential in Asian Markets is higher(prenominal)(prenominal), secondly its cheaper in countries like India to invest as the costs are low, thirdly at that place is a higher investor base and quartetthly to the highest degreely the Asian economies are developing and thus the Governments are welcoming to unlike investors as they play a major usage in boosting the growth of the country. Now the question that arises is who are abroad institutional Investors? According to SEBI, FII means an entity which is established or incorpo charge per unitd out-of-door India and which proposes to bewilder investments in India. According to Sehgal and Tripathi (2009) FIIs are speculators alternatively of investors as they lean to invest in stock for laconic border and by and by attaining short term gains they be to move a trend to different company and this power lead to unpredictability in stock prices and may lead to monetary crisis. FIIs investments in stock market increases unpredictability in market profitsable to excessive liquidity unless it in like manner leads improvement in cheer of stocks.According to Choe et al., (1999) Froot et al., (2001) Griffins et al., (2002), Foreign Investors run after returns from stocks, in a way they vol ition buy shares in those companies whose returns they expect to be high. According to Syste et al. (2003), Foreign Investors invest in large liquid companies which enable them to swoon rapidly at lower cost. Another question by Prasana (2008) Foreign institutional Investors pick up been eyeing on Indian Markets because of the positive fundamentals of the economy and potential to grow unfluctuating. Since foreign investors are freely available and are unpredictable, thusly FIIs are always on look out for lettuce. FIIs move their investments on a regular basis and because of these swings on that point is a bunkency to be fluctuations in prices and hence increase irritability in the market. Another landing field by Clark and Berko (1997) prevails that stock prices rises collectible to increase in capital hightail its by foreign institutional investors scarce they could not conclude that the rise in prices are for short term or for long term. Another seting which indica tes positivity of presence of FIIs was produced by Banaji (2000). According to him, collectible to presence of FIIs in Indian market on that point has been improved transparency in the procedures, automation and regulations regarding disclosure and reporting standards were initiated. So it becomes the necessity to study the Impact Foreign institutional Investors take a leak on Indian buy in Market.Background of Indian EconomyIndia was regulationd for roughly 200 years by British rule and in 1947 it gained its independence.( http//www.iloveindia.com/ write up/modern-history/british-india.html) So the growth of India has come in the last 60 years in which Indian economy has been thriving to set its foothold in the world. Under the British rule India was mainly dependent on its agricultural production and few sanctioned industries were in existence as in textile industry which was raw materialally for the benefit of the British colony to weather them in their distribute for European goods by exporting Indian basic agricultural goods and textile manufactures.After Independence, India carried on with its policy of attaining self adequateness and closed the doors for the foreign investors. But this policy of government limited the growth of economy. So in order to finance the needs to economy of providing basic necessities to its citizens and for getting over with the burden of loans as the foreign reserves were at their all season low, Government of India took support from World Bank and planetary Monetary Fund to get the country on to revival path. These organisations concord to help Indian economy on the condition that they will allow foreign investors to enter India.So basically a reform process was initiated in India after balance of payment crisis of 1991 which was recommended by M. Narsimham, chairman of perpetration of financial system. This became starting point of deregulation of financial sector and development of various sectors of finan cial markets. This resulted in significant changes in Indian market from dull to highly buoyant stock market. As a result Indian markets were opened to foreign institutional investors in September 1992 and this offspring led to effective globalising of the financial services and since because the Foreign institutional Investments throw off been rising positively year on year. These investments helped India in developing infrastructural facilities which were necessary for the growth of the country. These investments were led collect to increasing confidence in Indian stock markets which were based on strong macro-economic fundamentals of the economy, abolishment of long term capital gain tax, improved deed of Indian companies and transparency in the regulatory system.The opening up of markets for foreign investors had its own pros and cons. Pros of financial liberalisation are that firstly stock markets had to improve its business mechanism and match up to world standards and s econdly with the presence of foreign investors, culture system saw a drastic change. Con of financial liberalisation was that it brought destabilisation in the economy and increased more excitability in stock movements. But overall it increased confidence of foreign investors in Indian stock market. The last two decades has led to ontogeny participation of institutional Investors which holds not only the foreign Institutional investments but also investments by domestic institutional investors.Indian economy has been an personable avenue for foreign investors as nearly 16% of the world race lives in India and also India has joined the elite club of 12 countries to flummox million dollar economy. Other countries which control in past breached this trillion dollar economy mark in the past includes countries like U.S, Japan, Germany, China, France, U.K, Italy, Spain, Canada, brazil nut and Russia. Besides this countrys stock Market capitalisation has also risen to $944 gazilli on which is close to trillion dollar level. As per Credit Suisse Report, stock markets have risen in eight out of ten countries after hit this mark.Foreign Institutions have played a major role in Foreign Investments in India which resulted in changing the face of Indian germinate Market. According to M Puri, ICICI Securities Chief, ( 2009) India has been looked upon as the safest destination for foreign investors. Foreign Institutional Investors are the companies which are registered outside India. They are registered with Securities and central Board of India and they are guided by SEBI in participating in stock market through limits placed by it. The major source of their investment in Indian line of merchandise market is through Participatory notes which are almost 50% of the money invested in markets. The disadvantage of participatory notes is that the investor is anonymous and hence it could be an investment by any organisation including terrorist organisations. Foreign In stitutional Investors have invested more than $41trillion of pecuniary resource in India in the past four years which resulted in bull market witnessing unprecedented growth with mad cow disease Sensex rising in absolute terms. India has witnessed over a decade of FIIs portfolio flows and these flows have gained significance and have played a key role in the overall Indian Economy.The conflict of foreign investments in India is significant. The increasing role of Institutional investors led to both qualitative and quantitative developments in Indian have a bun in the oven Markets. The Foreign institutional investors has also impacted the domestic investors to a large extent in the brain that if FIIs sell the stocks whence(prenominal) in that military position is a situation of panic created among the domestic investors and they guide to sell as well. Hence there is a need to study its impact on Indian companies and economy in general taking into consideration all the facto rs affecting movement of stocks on Indian tired Market.Significance of debateIndian economy is growing at a very fast pace. Most of the FIIs are investing in India due to its significant growth. These FIIs though they are investing in the country, they not only invest for profit they also are affecting the movement of stocks in stock markets. Hence they are impacting the stock market in a large way which is an important perimeter of the Indian economy as it contributes to the growth process of Indian Economy. So it is significant to study the impact of Foreign Institutional Investments on Indian Stock Market.Objectives of StudyThe main objectives of study areTo analyze the impact of FIIs investments on the shareholding pattern of Stock exchange companies.To find way to reduce find associated with investing in stock market and to know when to exit.To look for investment opportunitiesCHAPTER 2Review of Literature and StudiesDeterminants of FIIsForeign Institutional Investors play a major role in the economic growth of India. Their impact is significant redden though their market capitalisation is not much and is improving year on year. Several attempts have been made to understand the impact FIIs have on Indian Stock markets. According to Aggarwal 1997, Chakrabarti 2001 and Trivedi and Nair 2003(cited in Rai and Bhanumurthy) equity returns have positive impact on FIIs. But Gordon and Gupta,2003 ( as citied in Rai and Bhanumurthy) contradict by saying that foreign investors are here for earning profits, they invest in a company and make the price go up as other investors personify and then book their profits and leave. So it can be said that there is a bi pedagogyal relationship between FIIs and equity return.After the bursting of infotech guggle in 1998 and Asian crisis, Chakrabarti (2001) analysed and free-base a shift in political science in the determinants of FIIs. He analysed that before the Asian crisis, any change in investment pattern by FIIs ha d a positive impact on equity returns but after Asian Crisis he be that if there is a change in equity return then the behaviour of FIIs change. But Trivedi and Nair (2003) are of a different view point, they feel that any investments made depend a lot on the peril associated with it. They set ahead divide realised risk into two factors, ex-ante and un pass judgment risk. According to them, ex-ante risk is negatively impactd to FIIs whereas the relation of FII with unexpected risk is not certain. This is because mutable activities can bring unimaginable loss or gain depending on the situation. Take for example U.S sub outpouring crisis. Those crises were unexpected and they led to unexpected movement in stock markets and FIIs activity.Studies in the past have reason that the return in source country and inflation in that country doesnt exert compress on FII. But this theory has been contradicted by the recent subprime recession in US which led to most of FIIs with stooling the ir investments in order to cope up with crisis in their own country. Hence if stock markets of foreign investors home country are doing well and there is stability in their economy then it leads to a positive impact on the investments by FIIs.According to Aggarwal 1997 (as cited in Rai and Bhanumurthy 2004) world stock market capitalisation has a positive impact on growth of FIIs in India. According to literature survey shows that most of the existing studies do not reflect the effect of stock excitability and also they do not account for realised risks in foreign and domestic markets.Another observation by Ahmadjian and Robbins (2005) after analysing incorruptibles in Japanese economy showed that foreign investors are more inclined towards profit devising than going in for long term willpower. They tend to make money and move away towards other company.Investment Preferences of FIIsAccording to Douma, Pallathiatta and Kabir (2006) there is a positive impact of foreign ownership on firm performance and especially on the emerging economies. They also found the impact on business group affiliations of FIIs But FIIs dont invest in any firm, they invest in those firms which have good corporate governance as the firms with pitiable corporate governance are least protective about the investors and instead they are concerned about their own interest only, this was observed by Aggarwal, Klapper and Wysocki (2005). According to them companies which are controlled by stave off of shareholders they find it sticky to find external investors as they are derived by private benefits and may garble things accordingly. This was already concluded by Cho and Padmanabhan 2001 (as cited in Prasana 2008) that block shareholders influence firm performance. They also said that corporate governance of listed companies play an important role in attracting foreign investments. They also clarified that block shareholders mean basically businesses run by family groups and distingu ished them from times when government acts as block shareholders they act quiet differently from private investors. Bhanumurthy and Rai (2003) made an attempt to examine the determinants of FIIs by apply the monthly data from January 1994- November 2002 by analyzing the effect of return, risk and inflation in domestic and foreign economy. They firstly calculate the domestic and foreign returns from daily returns on mad cow disease Sensex and SP 500. After the analyses they find out that FIIs inflow depend on stock market returns, inflation rate and Ex-ante risk.According to Yin-Hua and Woidtke 2005 (cited in Prasana 2008) investors protection is weak when company board is prevail by members of controlling family and it gets difficult to separate the ownership from management then firm value is inversely related to family ownership firms. Their view was support by Choe, Kho, Stulz (2005) who analysed US investors and concluded that they hold fewer shares in companies where owners hip structure is more conducive to insiders. Another observation by LI (2005) was that if there was paltry corporate governance then foreign investors tend to prefer other route of Foreign Direct Investment instead as Foreign Institutional Investors. Going further in accessing the information on firm ownership, Leuz, Nanda and Wyoscki (2003) assessed the firm level characteristics and found family control increases insider job which gives less benefit to foreign investors. They were supported by Haw, Hu, Hwang and Wu (2004) who concluded that firm level characteristics cause information asymmetry problems for FIIs.In order to analyse the investment discernments of FIIs, Dahlquist et al (2003) analysed the foreign ownership and firm characteristics of Swedish Stock Market and they concluded that FIIs prefer firms which are large, pay low dividends and have a huge cash holdings. Whereas Covirg et al (2007) were of the view that foreign managers have comparatively less information t han domestic managers and hence they concern FIIs preference to be based on size of sales and stocks which are listed on foreign soil.According to Li and Jeong-Bon 2004 (as cited in Prasana 2008), FIIs are in a better position to analyse the public information and hence they tend to avoid stocks with high cross-corporate holdings whereas according to Morin 2000 (as cited in Prasana 2008) as they analysed the French flummox of shareholding and management of FII pattern concluded that France has under bygone a rapid change and has gone away with the traditional system of FII holding and facilitated with new techniques which demands corporate management.Stock Market VolatilityResearch by Forbes and Rigobon (2002), Bekaert, Harvey and Lumsdaine (2002a,b) , Edwards (2000) and others focussed on stock market volatility concentrating on moving of volatilities among different economies and also of the financial crisis which happened thereafter. Bakaert and Harvey 2000 (as cited in Batra 20 04) analysed equity returns of a group of emerging markets before and after financial reforms. According to Aggarwal, Inclan and Leal 1999 (as cited in Batra 2004) local events and happenings make the stock markets to turn volatile in emerging economies. In order to draw this conclusion they analysed emerging stock markets for volatility for period of 1985-95 and by development ICSS algorithm they identified points of sudden change when some event occurred or when there was large movement in stock market volatility. They reckon the variance at each point. According to De Santis and Imrohoroglu 1997 (cited in Ranjan Kumar Dash and Sumanjeet Singh) canvas the behaviour of volatility in emerging markets and the effect of liberalisation on financial markets and concluded that volatility decreased after liberalisation. Their study was contradicted by Singh (1993), Grabel (1995), Levine and Zervous (1998), Kamminsky and Schmickler (2001 and 2003), Nission (2002) and Edwards et al. 2003 (cited in Ranjan Kumar Dash and Sumanjeet Singh) by saying that financial liberalisation increases stock market volatility. In Indian context, Samal 1997 and Pal 1998 (cited in Ranjan Kumar Dash and Sumanjeet Singh) found that FIIs investment is the major source of volatility whereas stock market volatility was lower in liberalized economy. This view was supported by Richards 1996 who took three different methodologies and two different sets of data to calculate the volatility in emerging markets and came with the conclusion that there was no empirical evidence which supports that liberalization of economy increases volatility in stock markets.Hamao and Mei 2001(as cited in Batra 2004) examined Japanese market at a time when foreign portfolio investments in Japan were belittled and found no proper evidence to prove that foreign investments tend to increase volatility more than increase in volatility due to domestic investors. Folkerts Landau and Ito 1995 (as cited in Batra 2004) computed market volatility in emerging economies at different periods in which there was a difference in flow of portfolio and found in case of Mexico that stock prices were less volatile when Foreign flows were more volatile and vice versa for Hong Kong. According to Nilsson (2002) by using Markov regime switching poseur in Nordic Stock markets, liberalisation in stock markets leads to increase in volatility. Nilsson also evidenced that higher volatility and higher expected returns have strong links with inter topic stock markets.Considerable attention has been paid these days to stock market volatility and especially after global recession. Stock Markets had been highly volatile in emerging markets like India and its study becomes important.Investment strategies of FIIs There has been a huge amount of interrogation done on the investment strategies of FIIs which show the substantiating feedback and herding strategies being followed by FIIs. Research done by Lakonishok, Shleife r and Vishny (LSV) 1992(cited in Sehgal and Tripathi 2009) looked at the investment behaviour of 769 US tax exempt equity bullion managed by 341 money managers for the period of 1985 to 1989. They concluded that there was no herding by money managers but it was prevailing in the behaviour of stock prices of base companies than in large companies. The reason given by LSV is that information on large stocks is easily available whereas small companies do not offer much information to public, so money managers look at the investments by other big investors into small stock and follow them. According to LSV, it is difficult to find the effect of herding as at times a small amount of herding can bring significant movement in stock prices. An argument was put forward by Dornbusch and Park (1995) that foreign investors follow positive feedback strategy which leads to stock unusual movement in stock prices. Wermers 1998 (cited in Sehgal and Tripathi 2009) used LSV measures to check the pr esence of herding among common pecuniary resource. He took the every quarter data of common funds from 1975 till 1994 and concluded that mutual funds showed existence of herding. He also analysed stocks and concluded that herding among those stocks tend to be higher which had reported higher amounts stock returns in the previous quarter. He concluded that investors buy those stocks which had good returns in the previous quarter and sell those stocks which had poor quarterly results. After computing average level of herding by Wermers model it was concluded that herding is more in mutual funds than in stocks. But after epitome of art behaviour of large pool of mutual funds it was found that the herding behaviour in fact reduces in mutual funds and it was justified as large pool of mutual funds carry stock which have large amount of capitalisation and companies with large capitalisation tend not to do any herding. Another abstract by Bonser- Neal et al 2002 (cited in Sehgal and Tripathi 2009) analysed the foreign trading behaviour on Jakarta Stock exchange between 1995 and 2000 and found positive feedback trading and herding by foreign investors but they didnt find any evidence indicating destabilising of markets due to foreign investors during Asian crisis. Richards 2002 (cited in Sehgal and Tripathi 2009) used data pertaining to net purchases by foreign investors in six Asian emerging markets over 1999-2001 and found an evidence of positive feedback trading. According to Kim and Wei (2002) foreign investors who live outside Korea are more likely to indulge in positive feedback trading and herding strategies as compared to their branches and subsidiaries who are living in Korea or any foreign national staying in Korea. According to them this difference in trading behaviour arises due to different kind of processing of information by those living outside Korea than those living inside.CHAPTER 3Data and MethodologyResearch Methodology and figureAccording to Collis and Hussey (2003), Methodology refers to overall approach to look for process which includes underpinning of theory, battle array of data and analysing it. However the enquiry process adopted depends to a great extent on the approach taken by the researcher. Research design is the general plan of how to go about answering the research question. It gives the logical system behind every interpretation. Due to nature of research carried out the prime focus has been on gathering the secondary data which is relevant to analysis being carried out. According to Collis and Hussey (2003), there are two main paradigms of research that is qualitative and quantitative. Qualitative research is followed by those people who have phenomenological dead set(p) as it deals with mind the behaviour of human beings. Therefore it is also cognize as Phenomenological Paradigm. On the other hand Quantitative research refers to those who relate to positive view of the world and therefore this kind of research is also called as Positivistic Paradigm. Positivistic paradigm is used basically in natural sciences as this approach gathers facts with subjectivity of the nature of research and single(a) bias.For the purpose of research both qualitative and quantitative data will form part.Qualitative Data this data has been collected by canvas into the certain days on which markets fluctuated in upside or downside direction to a great extentStudying the changes in regulations by the Securities and Exchange Board of India in relation to foreign institutional investors.Studying the look of domestic investors and other factors affecting the market.Studying the basis on which the foreign institutional investors entered Indian Stock Market and there enter and exit strategy and its impact on Indian economy.Quantitative Data this data has been collected byStudying the market capitalization of foreign institutional investors and their cumulative effect on stock marketLooking in the gr owth of number of institutional investors and the share of their investments year on year.The research onion below in the diagram gives an overview, how to achieve the objectives by using the techniques in each layer of the onion.In order to carry on with the research each onion of the Research Onion has been peeled consistently so as to get in the right direction. The philosophy adopted for the purpose of research is Positivism philosophy as research has been undertaken by and large from the data already published in journals, articles, previous researches etc. entree taken by the researcher is mainly inductive as level best data is qualitative and it has been of utmost importance to cover every fount of research. investigator has taken the case study strategy to analyse the data. The Researcher has used Mixed Method research choice in the sense the data collected comprises of both qualitative and quantitative data. The time visible horizon for research has been longitudinal a s this research has been carried on after discover the behaviour of stock markets over a long period of time and on happening of any event.While carrying out the research it has been unploughed in mind that the research objectives and the characteristics of the information collected match. In order to analyse the Impact of FIIs on Indian Stock market, a constitutional research has been done from different sources which includes RBI and SEBI publications, newspaper articles, journals, previous research done on the topic and also from internet.For the purpose of our research study we are looking into the data till financial year 2008-09. Limitations of StudyThis study has been taken during the time when impact of recession has not been fully analysed and its exact nature and impact on the movement of stock markets and pecuniary Institutional Investors cannot be justified as it is a global recession. So research may miss out some of the implications of recession and may not correl ate to impact which FIIs may have during the normal market conditions.Data has been collected mostly through online source. It was not potential to conduct personnel interviews with top brokers in India due to distance barriers. Hence the findings and analysis has been derived on the basis of data available online.Summary of ResearchThe volume of this research is conducted by making use of secondary sources of data which includes journals, articles, books, magazines, newspapers, meshwork and other electronic sources. The research in this area has already been conducted but the purpose of this research is to generate new ideas and to gain further understanding into the subject by looking into each and every detail of it. This research is conducted at the time of recession, the condition which was not prevalent earlier, so it is expected to bring new concepts and theories into existent and it will also over rule some of the studies that have already been conducted.CHAPTER 4Analysis of Indian Stock MarketOverview of Indian Stock MarketStock markets were first introduced to India in 1875 as a non profit making organisation. Bombay Stock exchange is the oldest stock market in whole Asia. Stocks in India are traded on the stock exchanges which are around 23 which includes Bombay Stock Exchange and National Stock Exchange. Stock exchange is a corporation which provides its brokers to trade stocks of companies which are listed with them. The organisation of Stock Exchange, its systems and practices are set by Securities Contract, (Regulation) Act (SC(R) ACT), 1956.They are highly efficient organisations which have led to growth of securities market. Stock exchanges trade securities which include shares, unit trust, pooled investments and also bonds which are listed on them. Members of the stock exchange act as its agents as they are only allowed to trade on behalf of their customers who pay brokerage to them for the services provided by them. Stock exchanges also p rovide bay window of services as in issuing and redeeming shares and also in payment of dividends to its shareholders through its participants or members.Stock exchanges are important even though it is not necessary to issue shares via stock exchange. Shares are usually issued through Initial Public Offering (IPO). Stock exchanges play a major role in the economy as of today as they help with expansion plans of the country by mobilising the savings to investments and also by redistributing wealth among the economy.Stock exchanges maintains the records of all the shareholders at one central location but shares that are traded on stock exchange they are not dependent on that central location as the computerisation has made it easier to trade stocks. All stock exchanges have become an important part of world market for securities as global investors can invest in any market from anywhere.Importance of Stock Markets in IndiaStock markets play an important role in the economy as they a re now the financial indicators of growth in any country. They represent the crux of functioning of all the sectors of country. NSE NIFTY comprises of 50 top Indian companies from each sector and BSE SENSEX comprises of 30 companies from all the sectors. The following points describe the role stock markets play in IndiaImproving Corporate Governance Since Stock markets are regulated by SEBI, companies are bound to follow the rules and regulations in order to have a good market value of their stocks on stock markets. This is possible only if they keep their shareholders satisfied. So they