Analytical Study of Impact of FII on Indian Stock Market With Special Reference to BSE SENSEX

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Analytical Study of Impact of FII on Indian Stock Market with Special Reference

to BSE SENSEX

-Vikram K. Joshi & Miss Richa Saxena

Scope of the Study:

The article on Analytical Study of Impact of FII on Indian Stock Market with Special Reference

to BSE SENSEX focusses on the impact of variation in FII on SENSEX and how FIIs are

allowed to enter in India only through stock exchanges either in the form of equity or debt which

makes an impact on the rise or fall of SENSEX as FIIs are allowed to be purchased or sold daily.

The volatility in the stock markets are caused mainly by the daily transactions of FIIs and also

has a strong impact on the various macro- economic variables and the economy as a whole.

Despite a shortage of investments in under developed countries because of low level of income

and capital accumulation there has been a drastic improvement in industrialization and economic

development. Shortage of domestic demand and other reasons lead to increase in foreign capital

inflows. FII inflows plays a prominent role in the improvement of liquidity of stock prices of

both NSE and BSE. A strong correlation exists between FIIs investments and market

capitalization, FIIs investments and BSE & NSE indices. High level of FII inflows are influences

by volatility and liquidity which we were mainly determined or capital market prices by FII

investments.

The investment limit of registered FIIs or sub-accounts in primary or secondary markets under

portfolio investment scheme(PIS) is subject to a ceiling of 24% of issued share capital of a

company. The limit can be extended to 49% per sectoral cap if the general body of the company

approves it.

The need for the foreign capital/ foreign investments arises due to the following reasons:

Development of basic infrastructure,

Rapid industrialization

To undertake the initial risk


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Global imperatives

Competitive advantage

To remove the technological gap

Foreign investors are initiated in Indian Capital markets from 1991 and under the new industrial

policy of the government there has been measures to attract foreign capital. The no. of registered

FIIs are increasing every year from 2006 and in the past four years there has been more than $41

trillion worth of FII funds invested in India and the increased by more than 100%. FIIs have

earmarked their presence irrespective of the situation in Indian Stock markets but also there has

been a decline in FIIs inflows recently i.e., during 2010-11 because of the economic position

such as increasing inflation, rupee depreciation etc.,

Source:www.sebi.gov.in
http://www.sebi.gov.in/http://www.sebi.gov.in/http://www.sebi.gov.in/http://www.sebi.gov.in/


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Bombay Stock Exchange (BSE):

The Bombay Stock Exchange Ltd. (BSE) was originally established in 1875 and is the oldest

exchange in Asia and in the year 1986 it came up with an index known as SENSEX .

Approximately more than 4500 companies are traded in the index and is one of the largest

exchange in the world.

Bombay Stock Exchange Sensitive Index:

A value - weighted stock market index, which tracks the performance of the 30 largest stocks on

the Bombay Stock Exchange and the index comprises of one-fifth of the market capitalization of

the entire stock exchange.

BSE is a de-mutualized and was registered as a corporate entity under the provisions of the

Companies Act, 1956.

Data collection:

The data is collected for values of Sensex, FII in terms of total investment( Equity+Debt) & FII

in terms of total turnover( Purchase & sales of equity& debt)


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Statistical tools used:

Hypothesist-test

f-test

Regression


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Data analysis:

The regression equation indicates that as FII increases by 1 unit, Sensex decreases by 0.1707

units. Sensex is an index measured in hundreds, the co-efficient of Sensex implies that Sensex

decreases by 100 for every Rs.17.07 FII turnover increase. The t-test statistics indicates there is a

relationship between Sensex & FII and f-test statistics indicates that the variation between FII &

Sensex is significant.

Findings:

The relationship between Sensex and FII total turnover is tested and there exists arelationship between the two. Reason for such trend in Sensex due to FII is that on

account of high purchase and sales figures of FII. The relationship between Sensex and FII net investment is tested and the net investment

was very low causing the SENSEX to remain relatively stable and the variation between

FII and SENSEX was not very significant.

Conclusion:

FII turnover is relatively a weak measure of Sensex as it explains 32% influence on thefluctuation in the Sensex and is unable to determine 68% influence of the other

extraneous variables.

The short and long term investors were not very optimistic about the macroeconomicconditions of India when there was a comparison between SENSEX vs. Total turnover &

SENSEX vs.Net investment. European countries invested huge amount of money in the

form of FII and also withdrew in almost the

same proportion immediately from the Indian capital market. This resulted into the strongimpact of total turnover on SENSEX.


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Impact of FIIs on Stock Market Instability

Source: shodhganga.inflibnet.ac.in

Objective:

The main objective of the article is to measure the impact of foreign investors portfolio

investments on volatility of Indian stock market.

Background:

Domestic, external economic conditions and short run expectations also known as market

sentiment motivate the FIIs investments and speculation, high mobility can increase the volatility

of stock return in emerging markets. The Price or return indices in equity markets are frequently

subject to extended deviations from fundamental values with subsequent reversals and that these

swings are in large part due to the influence of highly mobile foreign capital.

Volatility has adverse implications to the effective allocation of resources and investment and

make investors averse to hold stock because of uncertainty in turn demand higher premium. A

high risk premium implies a high cost of capital, low physical investment and great volatility

increases the option to wait which results in delaying investment.

Scope of the study:

The scope of the study focusses on attraction for FIIs in recent years where the emerging markets

of many developing countries have been attracting large private capital inflows in recent years.

There has been an increasing importance of foreign portfolio investments(FPI) which is a buying

and selling of stocks on a daily basis. Post economic reforms there has been a significant

improvement relating to the flow of foreign capital. A major change in capital flows especially in

Foreign institutional investors(FIIs) investments took place after the changes in trade and

industrial policy.

Statistical tools used:

ARCH and GARCH models,


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Fisher F-testData Analysis

ARCH and GARCH models were used for the time varying nature of the volatility. Return and

volatility increase much better compared to pre-liberalization period and the volatility has

declined in indian stock market after year 2000 as the second generation reforms brought much

better things in the capital markets as risk has decreased but stock return has went up during the

period. The variation in Indian stock market returns reduced considerably after introduction of

foreign institutional investors.

There has been a positive and significant impact on the share market volatility throughcoefficient of GARCH whereas its impact is higher in comparison to ARCH which implies that

the past volatility affect is more on the future volatility. The impact of the dummy variable,

which is net investment by foreign institutional investors is negative.

The total of ARCH and GARCH model in coefficient is less than 1 which shows it is perfect.

Impact of FIIs on stock market instability:

A correlation exists between the FIIs inflows and stock returns. And recent years the foreign

financial inflows have been increasing and along with this the other parameters of the economy

lead SENSEX crosses 20000- mark in Dec 2007. The profits of the firm lead to the high return

on investment including other factors such as favourable tax laws and relaxation on the caps of

various kinds of investments.


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There were many developments like compulsory rolling settlement, dematerialization of

securities, emphasis on free trading practices and strict corporate governance practices adopted

by the SEBI etc. took place in the market leading to bringing efficiency and reduction in the

volatility in the market. The reduction in the volatility of the market is linked to introduction of

FIIs is really ambiguous.

FII investments behavior during some events affect the investments of foreign institutional

investors for short term. For example East Asian Crisis, Stock market scam 2001, Black

Monday 2004 FIIs were net sellers and there was a decline in BSE Sensex, there was a net outgo

of capital but there used to be a positive inflow during the following months.

Conclusion:

FIIs tend to support stock market purely to ensure stability and safety of their own investments and

supports the broad base hypotheses which also suggests that FIIs should add liquidity to the local

market and reduce volatility.


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GAAR and its Implications

Article from CARE Ratings on May 12th 2012, review by vinod Kumar (b5-32)

Background:

Mauritius has been used as a holding company jurisdiction for making investments in India, with

the investors in the holding companies being tax residents of other countries. Because of Article

13 of the Indo-Mauritian tax treaty, which provides for attribution of taxation rights among the

two countries for capital gains? Article 13 (4) provides that gains derived by a resident of a

contracting State shall be taxable only in that State and for other DTAA countries.

This has made Mauritius an attractive route for the purpose of investment in India.

A Foreign enterprise can set up a subsidiary in Mauritius, and use it to derive capital gains from

acquisition and sale of shares. Although India follows the source rule for taxation of non-

residents, which makes this transaction taxable under the Income Tax Act, 1961, Article 13(4) of

the DTAA gives Mauritius the right to tax this transaction. Since such gains are exempt from tax

in Mauritius, the transaction becomes completely tax exempt, resulting in double non-taxation.

As a result, much of the Mauritian investment into India is actually round tripping by Indian

companies setting up a Mauritian entity to avoid capital gains tax in India.

Mauritius mostly depend on import of capital so when India tried to renegotiate and on DTAA,

not able to achieve that. So, more than 30 countries have introduced GAAR provisions in their

respective tax codes to check evasion.GAAR has been in force in Australia (1981), Canada (1988), Singapore (1988), South Africa

(2006) and China (2008) according to a study compiled by Deloitte. UK is considering it in 2013

while USA is also working towards it.

The Budget sought to make an amendment to section 90 and Section 90A of the income tax law,

a clause which says thatjust by submission of a tax Residency Certificate containing prescribed

particulars a firm or an individual which carries on some real business in a tax haven cannot

claim the benefits of a tax avoidance treaty signed with that country.

Net FIIs have been illustrating an inflow since December, 2011. Net FII inflows peaked to $7 bn

in February, 2012. However, foreign institutional investments have declined post the

announcement of GAAR on 16th March, 2012. March saw a net inflow of mere $0.4 bn whileApril registered an outflow of $8 bn. This clearly indicates that the adoption of GAAR by India

was not found to be favorable by foreign investors.

GAAR will now be applicable from April 1st , 2013. The rupee should be driven more by

fundamentals of which FII inflows are an integral part. In FY11, FIIs were around 72% of the

current account deficit and 56% of net capital inflows. In the first 9 months of FY12, however, as

the current account deficit widened and the FII flows slowed down, the coverage level was just


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11%. Also FIIs contributed to just 12.5% of net capital flows. Therefore, any reduction in these

inflows could impact the fundamentals.

Since government have clarified over may issues on GAAR implementation, FII are seemed to

be coming back. Economic activities are expected to pick up with the Indian economy seen to

grow at around 7-7.2% during 2012-13. Inflation is also believed to moderate and hover around

6% by the end of March 2013. Therefore, it can be deduced by March 2013 when the GAAR is

likely to be re-implemented the investor sentiment and confidence in the Indian economy would

have improved.

Documents

Analytical Study of Impact of FII on Indian Stock Market With Special Reference to BSE SENSEX