FII’s & DII’s Impact on Indian stock Market.

By

BLITZKRIEG

STOCK MARKET

STOCK MARKET

A public market for the trading of company stock and derivatives at an agreed price.

A place where people can buy and sell portions of businesses called stocks.

The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization.

Though a number of other exchanges exist, NSE and BSE are the two most significant stock exchanges in India.

BSE: BOMBAY STOCK EXCHANGE

The oldest stock exchange in Asia with a rich heritage.

The Sensex is an "index". An index is basically an indicator.

The BSE Sensex is a value-weighted index composed of 30 stocks.

NSE: NATIONAL STOCK EXCHANGE.

•Mumbai-based stock exchange.

•Largest stock exchange in India in terms of daily turnover and number of trades

•The NSE's key index is the S&P CNX Nifty, known as the Nifty.

•Consists of 50 companies representing 24 sectors of the economy

FII AND DII. Institutional Investor is any investor that is registered in a

country or outside of the one in which it is currently investing.

The term “Foreign Institutional Investors” refers to outside investors investing in the financial markets of India.

There are 1484 FIIs and 38 foreign brokers registered to Securities & Exchange Board of India.

The term “Domestic Institutional Investors” is used to refer to the Indian investors investing in the Indian financial market.

How FII started in India?

India opened its stock market to foreign investors in september 1992.

since 1993,received portfolio investment from foreigners in the form FII in equities

In order to trade in Indian equity market foreign corporation need to register with SEBI as FII and shall comply with the Exchange Control Regulations of RBI.

Objectives of SEBI

>To protect the interest of the investors in securities

>To promote the development of securities market

>To regulate the securities market .

SEBI regulates:

Primary market secondary market mutual funds FII's

WHO CAN BE REGISTERED AS AN FII?

1. Pension Funds 2. Mutual Funds 3. Insurance Companies 4. Investment Trusts 5. Banks 6. University Funds 7. Foundations 8. Charitable Trusts / Charitable Societies

The fees for registration :

The fees for registration : US$5,000 for an FII account US$1,000 for each sub account. SEBI targets a timeline of 10 to 12 days for

processing of FII applications. Valid for 5 years.

In 1993, 12 FIIs got registered At the end of 1996-97, 439 FIIs were

registered In 2001, there were 482 foreign investors

registered with Sebi. The number increased to 489 in 2002 and to

517 and 637 in 2003 and 2004 respectively. The total number should be around 1540.

Where FII can invest?

Securities in primary and secondary markets including shares, unlisted, listed or to be listed on a recognized stock exchange in India;

FIIs Investments. Appreciation of the rupee : Higher forex reserves . Creating wealth . Direct effect on Inflation.

Appreciation of the Rupee: Taking a closer look at the funds flow, FIIs bring dollars to India which get converted into rupees in the inter-bank foreign exchange market. As the supply of dollars increase, the law of demand-supply starts operating and the rupee appreciates vis-à-vis the dollar .

Higher forex reserves :So, higher foreign (dollar) inflows into India usually translate into more rupee liquidity in the system. This increases the money supply and facilitates

easy availability of credit (loans) from banks

Creating wealth: FII flows also aid in lowering the cost of borrowings. The easy availability of credit and the lower borrowing costs increase consumption demand for housing, durables, cars and real-estate. This higher demand often leads to greater public and corporate investments, resulting in higher economic growth .

Direct effect on Inflation :This positive wealth effect also often leads to higher consumption and greater demand for other asset classes such as gold, real-estate etc., which, in turn, fuels economic growth and inflation. Higher FII flows can, thus, be seen to help create wealth through higher asset prices

Why there is need of FII ?

FII flows supplements and augmented domestic savings and domestic investment without increasing the foreign debt of our country

Capital inflows to the equity market increase stock prices, lower the cost of equity capital and encourage the investment by Indian firms

The expert group opines that FII inflows have some savings like features

Impact Of FIIs On Indian Markets

In the past four years there has been more than $41 trillion worth of FII funds invested in India.

The present downfall of the market too is influenced as these FIIs are taking out some of their invested money.

For long-term value investors, there’s little because for worry but short term traders are adversely getting affected by the role of FIIs are playing at the present.

Why FII called good friend for good time – volatile in nature In the Indian stock markets movement of the

stock depends on the limited no of stocks As FIIs purchase and sell these stocks there

is a high degree of volatility in the stock market

If any set of development encourages outflow of capital that will increase the vulnerability of the situation in the stock market

In India there have been five such incidents in the recent past

How they perform

The degree of volatility can be attributed to the following reasons:

The increase in investment by FIIs increases stock indices the stock prices and encourages further investment . In this event when any correction takes place the stock prices decline and there will be pull out by the FIIs in a large numbers as earning per share declines

The FIIs manipulate the situation of boom in such a manner that they wait till the index rises up to a certain height and exit at an appropriate time. This tendency increases the volatility further

FIIs as major cause of market crash( Jan 21 to Jan 29 2008)

The Indian capital markets have been left reeling under the impact of liquidity crunch

caused by multiple factors It began with two mega issues of reliance

power and future capital holdings, which drew out huge amounts of money from the market

FIIs bowed out from the capital market with more than Rs 10000 crore

Total inflow and outflow of FII during Jan. 21 to 29

Date Investment

21 Jan. - 2425.7

22 Jan - 2256.2

23 Jan - 2499.

24 Jan - 1351.2

25 Jan - 669.1

28 Jan - 1513.4

29 Jan - 285.1

Total - - 9662

In the past four years there has been more than $41 trillion worth of FII funds invested in India. This has been one of the major reasons on the bull market witnessing unprecedented growth with the BSE Sensex rising 221% in absolute terms in this span

Though there is a lot of value in this market and fundamentally there is a lot of upside in it. For long-term value investors, there’s little because for worry but short term traders are adversely getting affected by the role of FIIs are playing at the present

There are several reasons on FIIs selling The swings in the market forced several FIIs to withdraw from India and

invest their dollars in other emerging markets. Some of the other markets include Uruguay, Russia, the Ukraine, and several other former Soviet countries. Though there have been swing’s in the past too but FII response this time was different because of margin pressures back home as even they have to provide regular returns to their investors.

The Indian markets are not seen as a good short-term bet any more. India is seen as a good investment for the medium to long term. FIIs seem to fear the pace of growth and the fundamentals of the markets.

Most FIIs are looking at corporate governance and execution abilities, which could be significant drivers in creating a strong portfolio of Indian stocks. Recent action taken by the market regulator indicates that the Indian government would like to moderate the inflow of FII money. 

Day (Points Loss in Sensex) Gross Purchases (Rs. Crores) Gross Sales (Rs. Crores) Net Investments (Rs. Crores)

21/01/2008 (1408) 3062.00    1060.30    2001.80   

22/01/2008 (875) 2813.30    1618.20    1195.10   

18/05/2006 (856) 761.80    527.40    234.40   

17/12/2007 (826) 670.00    869.00    -199.00   

18/10/2007 (717) 1107.00    1372.50    -265.50   

18/01/2008 (687) 1077.20    1348.40    -271.20   

21/11/2007 (678) 640.70    791.80    -151.10   

16/08/2007 (643) 989.50    750.30    239.20   

02/08/2007 (617) 534.50    542.00    -7.50   

01/08/2007 (615) 809.40    956.90    -147.50   

Year Net Investment

2003    30458.7   

2004    38965.1   

2005    47181.2   

2006    36539.7   

2007    71486.5   

2008 (10/08/08)    -29169   

The Indian stock markets have really come of age therewere so many developments in the last 15 years thatmake the markets on par with the developed markets.

Theforeign capital is free and unpredictable and is alwayson the look out of profits Flls frequently moveinvestments, and those swings can be expected to bringsevere price fluctuations resulting in increasingvolatility.

Thegrowth of institutional investors in the market is havingits own advantages as well as its own share of problemson the brighter side almost always purchase stocks onthe basis of fundamentals.