amit tiwari fii

8/7/2019 Amit Tiwari FII

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Amit Tiwari09BM8078

AMRP Guide : Prof. C.S.Mishra

FII Investment analysis acrossdifferent sectors of Indian

Economy


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Ag enday Introductiony Literature surveyy Methodologyy Data collectiony Expected Resultsy Findingsy Scope for future worky Suggestions


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Introductiony Indian economy has been booming since the advent of

liberalization policy during the nineties.y The growth has been under-pinned by not just the Government

expenditure and productivity of the local businesses and industries

but considerably also by the funds flow from foreign countriesparticularly through the route of FDI and FII. It has been cited inmany research works that FDI look for long term growthprospects besides others in the country and FIIs for short termgains.

y This work focuses on the reasons in variations of FII flows in thevarious industry sectors in India keeping in view the variousfactors influencing their decisions.


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Obj ective

y To work out the investment patterns and underlying factorsfor the inflow of FII since 2003 to 2010 and assigning reasons

for variations in the same in the context of leading industrialsectors in India based upon S&P CNX Nifty Fifty of NSE.


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Literature surveyy Research Paper 1: Foreign Institutional Investors: Investment

Preferences in Indiay Availability of foreign capital depends on many firm specific

factors other than economic development of the country. Thepaper examines the contribution of FII in BSE Sensex.y The relationship between FII and firm specific characteristics

in terms of ownership structure, financial performance and

stockperformance.


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R esearch Paper 2: Inter-firm differences in FIIportfolio investment in Indiay To analyse the determinants of FII investments in firms in

high-tech corporate sectors like automobiles, drugs andpharmaceuticals,IT software and IT hardware for theperiod2000 to 2004. Section II, focuses on the analytics of transnational holding of equity and motivation for the study.

y The focus is the determinants of inter firm differences in FIIportfolio investments. In other words, motivated by theobjectives of risk reduction and return enhancement andhaving decided to have an internationally diversifiedportfolio, on which criteria does the foreign institutionalinvestor choose the firms in which to invest.


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R esearch Paper 3: FII Flows to India:Nature and Causesy FII flows and their relationship with other economic variables and

arrive at the following major conclusions:y While the flows are highly correlated with equity returns in India,

they are more likely to be the effect than the cause of these returns;y The FIIs do not seem to be at an informational disadvantage in India

compared to the local investorsy The Asian Crisis marked a regime shift in the determinants of FII

flows to India with the domestic equity returns becoming the soledriver of these flows since the crisis.

y Given the thinness of the Indian market and its susceptibility tomanipulations, FII flows can aggravate the equity market bubbles,though they donot actually start them.


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R esearch Paper 4: Forei g n and Domestic InstitutionalInvestment in Indias Private Corporate Sector: Do theyhave a Dependence?

y H ardly any effort is made to understand whether there is anylag-lead relationship between FII and DII.

y Given the more stringent conditions of the FIIs for investing

in the private corporate sector, it is likely that investment byFII in any corporate entity in India sends a signal that it is asafe investment. Does this then trigger an investment on thepart of the Domestic Institutional Investors? This has aserious implication in case the FIIs withdraw their moneyfrom the private corporate sector as is witnessed in times of global crisis we observenow.


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R esearch Paper 5: FII share and bank performance: anempirical analysis of Indian banks

y This paper investigates the relationship between the FIIpresence and firm performance of 25 listed banks of theIndian banking industry.

y

The results indicate that the FII share plays a significant andpositive role in determining the performance of public sector but not necessarilyprivate sector banks. This is explained bythe critical role that FII plays in public sector banks inimproving managerial efficiency by avoiding issues relating tomoral hazard. Private banks suffer less fromproblems of moral hazard, and therefore, the role of FII in such banks isnot as critical as in the case of public sector banks.


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R esearch Paper 6: Forei g n InstitutionalInvestmenty International capital flows and capital controls have emerged as

important policy issues in the Indian context as well. The dangerof abrupt reversals and their destabilizing consequences on equityand foreign exchange markets are always a concern. Nevertheless,in recent years, the government has been making strong efforts toincrease FII flows in India. Others have argued that, far from beinghealthy for the economy, FII inflows have actually imposed certain burdens on the Indian economy.

y Understanding the determinants and effects of FII flows anddevising appropriate regulation therefore constitute an importantpart of eco

nomic

policy maki

ng i

n India.y FII flows should be viewednot in isolation but as part of an

integrated policy package for all capital receipts keeping in mindtheir role in the overall macroeconomic structure.


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R esearch Paper 9: The Impact of FII R e g ulations in India :A Time-Series Intervention Analysis of Equity Flowsy The paper assesses the impact on FII flows of severalpolicy revisions related to FII

investment during the period January 1999 to January 2004, through a multivariate GARCHregression model.

y Using techniques of time series intervention analyses author incorporates the effect of eachindividualpolicy intervention in a model that includes the two most important covariates of FII flows toIndia, namely stock market (BSE) returns and past FII flows. The range of policiesconsidered encompasses liberalisation policies as well as restrictive ones taken to assurestability of flows.

y Results strongly suggest that liberalisation policies have had the desired expansionary effectand have either increased the mean level of FII inflows and/or the se nsitivity of these flows toa change in BSE return and/or the i nertia of these flows.

y On the other hand, interestingly, the restrictive measures aimed at achieving greater controlover FII flows also donot show any significant negative impact on the net inflows; we find thatthese policies mostly render FII investments more sensitive to the domestic market returnsand raise the inertia of the FII flows.


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R esearch Paper 10:InstitutionalInvestors and Executive Compensationy We find that institutional ownership concentration is

positively related to thepay-for-performance sensitivity of executive compensation and negatively related to the level of compensation, even after controlling for firm size, industry,

investment opportunities, and performance.y These results suggest that the institutions serve a monitoring

role in mitigating the agency problem between shareholdersand managers.

y

clientele effects exist among institutions for firms withcertain compensation structures, suggesting that institutionsalso influence compensation structures through theirpreferences.


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R esearch Paper 11: Herdin g and Feed back Tradin g byInstitutional and Individual Investorsy Strong positive correlation between changes in institutional

ownership and returns measured over the sameperiod. The resultsuggests that either institutional investors positive-feedback trademore than individual investors or institutional herding impactsprices more than herding by individual investors.

y Both factorsplay a role in explaining the relation. Authors find noevidence, however, of return mean-reversion in the year followinglarge changes in institutional ownership stocks institutional

investors purchase subsequently outperform those they sell.Moreover, institutional herding is positively correlated with lagreturns and appears to be related to stock return momentum.


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R esearch Paper 12: The colours of investors money: Therole of institutional investors around the world

y Study the role of institutional investors around the worldusing a comprehensive data set of equity holdings from 27countries. all institutional investors have a strong preferencefor the stock of large firms and firms with good governance,while FIIs tend to overweight firms that are cross-listed in theU.S. and members of the Morgan Stanley CapitalInternationalWorld Index.

y Firms with higher ownership by foreign and independentinstitutions have higher firm valuations, better operatingperformance,and lower capital expenditures.


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R esearch Paper 13: The Influence of InstitutionalInvestors on Myopic R& D Investmenty This paper examines whether institutional investors create or reduce incentives for corporate

managers to reduce investment in research and development (R&D) to meet short-term earningsgoals. Many critics argue that the frequent trading and short-term focus of institutional investorsencourages managers to engage in such myopic investment behavior. Others argue that the largestockholdings and sophistication of institutions allow managers to focus on long-term value ratherthan on short-term earnings. I examine these competing views by testing whether institutionalownership affects R&D spending for firms that could reverse a decline in earnings with a reductionin R&D.

y Managers are less likely to cut R&D to reverse an earnings decline when institutional ownership ishigh, implying that institutions are sophisticated investors who typically serve a monitoring role inreducing pressures for myopic behavior.

y H owever, a large proportion of ownership by institutions that have highportfolio turnover andengage in momentum trading significantly increases theprobability that managers reduce R&D toreverse an earnings decline.

y These results indicate that high turnover and momentum trading by institutional investors

encourages myopic investment behavior when such institutional investors have extremely high levelsof ownership in a firmy Otherwise, institutional ownership serves to reducepressures on managers for myopic investment

behavior.


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R esearch Paper 14: Volatility and theInstitutional Investory Inconsistent with the relationship predicted by most

academic theory, apositive contemporaneous association isdocumented between the level of institutional ownership andsecurity return volatility after accounting for capitalization.

y This relationship is consistent with two stories:Either riskiersecurities attract institutional investors, or an increase ininstitutional holdings results in an increase in volatility. Theseempirical results are consistent with the latter interpretation.


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R esearch Paper 15: Direct forei g n ownership,institutional investors, and firm characteristicsy In this paper, characterize foreign ownership using a dataset of

ownership and attributes of Swedish firms. The analysis revealsthat foreigners show apreference for large firms, firmspaying lowdividends, and firms with large cashpositions on their balance

sheets.y Further, the preference for large firms, market liquidity andpresence in international markets, measured through export salesor listings on other exchanges, seem to characterize foreignholdings better than firm size alone. Foreigners also tend to

underweight firms with a dominant owner.y H ence, we identify an institutional investor bias rather than aforeign investor bias.


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R esearch Paper 16:The Day-of-the Week Anomaly: TheR ole of Institutional Investors

y Studies have suggested that individual investor behavior is theprimary cause of the weekend effect. This examination of differences in the daily returns of securities heldprimarily byindividual investors versus securities held by institutionalinvestors indicates that institutional behavior is theprimarysource of day-of-the-week return differences. Day-of-the-week patterns in returns and volumes are morepronouncedin securities in which institutional investorsplay a greaterrole.


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R esearch Paper 17: Share holdin g Pattern and Firm Performancey Corporate Governance deals with the issue of how suppliers of finance to

corporations assure themselves of getting a return on their investment. SeveralStudies have examined the relationship between ownership structure and firmperformance. Using different data samples most of the studiesprovide generalsupport for the argument that increase in managerial ownership increases firmperformance. H owever, these results have been questioned recently.

y This study examines empirically the effects of ownership structure on the firmperformance for a large sample of Indian Corporate Firms, from an `agencyperspective'. We examine the effect of interactions between corporate, foreign,financial institutions, and managerial ownership on firm performance. Weprovide empirical evidence, which suggests that firm size and age in positivelyrelated to the firm performance. Using panel data framework, we show that alarge fraction of cross-sectional variation, in firm performance, found in severalstudies, is explained by unobserved firm heterogeneity, rather than theownership structure. We do not find any evidence that the differences inownership structure, affect firm performance; after controlling for observedfirm characteristics and firm fixed effects.


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Methodolo g yy For the investments from FII to be attracted by a firm in a

particular sector, the corporate performance is a majorinfluencing factor. The study concentrates on impact of fivefirm level variables on portfolio investment of fundcompanies. The variables are: P/E multiple, P/Bmultiple, Yield, Average Returns and EPS. The effectof the level of Nifty Index is also taken into account.

y All these variables are collected for each quarter for eightyears from 2003 to 2010 for CNX Nifty Fifty listedcompanies across different sectors.


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Methodolo g y continuedy Thus there are two kinds of information available for analysis -

cross sectional information reflected in between thecompanies, and time series with in company information overtime. Panel data regression technique will be used to

understand the relationship between this two-way information.y The dependent variable is thepercentage of Foreign Investors

shareholding in the sample unit. Company is unit variable andquarter is time variable.The analysis will be given in three partsy

measuring time series effect, cross sectional effect and random effect.y Multi-variate Regression Analysis


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Data collectiony Data on FII holdings in companies listed on S&P CNX Nifty

fifty from 2003-2010.y Independent factors being

y

P/ E ratioy P/B ratioy EPSy Yieldy

Annual returnsy Level of S&P CNX Nifty Fifty of NSE


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R esults of Multi-variate R e g ressionAnalysisy R2 values for the years 2003-2010 are varying from 0.05 to 0.15

which reflect that a very smallportion of the predicted is data is being explained by the model.

y P-values are seen to very high, ranging from 0.4 to 0.9y The coefficients of the independent variables are coming too less

for P/ E (of the order of 0.01 or so)y In some instances, the coefficient for Annual returns is coming out

to be negative, which shouldnt have been the case. It means FIIholding increase when returns decrease, which doesnot seemplausible asper earlier findings.

y On preliminary analysis, this model doesnot provide a robustframe-work to catch all the underlying complexities of thisproject.


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Panel Data Analysis R esults


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Expected R esults of Panel DataAnalysisy The expected results would provide the pattern of

investments in these sectors by FIIs and insights regardingwhich sectors have been attractive enough at different pointsof time together with the underlying reasons.

y This work is expected to reveal behaviour of FIIs and theirpriorities using the variables mentioned above.


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R eferencesy Foreign Institutional Investors:Investment Preferences in Indiay Inter-firm differences in FII portfolio investment in Indiay FII Flows to India:Nature and Causes, ICRA Bulletin, Money and Finance, Oct Dec

2001y Share holding Pattern and Firm Performancey FII share and bank performance: an empirical analysis of Indian banks, Afro-Asian J.

Finance and Accounting, Vol. 1, No. 1, 2008,Umakrishnan Kollamparambil, School of Economic andBusiness Sciences, University of Witwatersrand, Johannesburg, South Africa,Indrani Banerjee,Reserve Bank of India, Ahmedabad,India

y Foreign Institutional Investment Rajesh Chakrabartiy An Examination of H ome Advantage (Bias) Argument in the Indian Financial Markets: Domestic

FinancialInstitutional Investors (DFIIs)Vis-a-Vis Foreign Institutional Investors (FIIs) San jay Sehgal(corresponding author) Professor of Finance Department of Financial Studies University of Delhi,ESC-Pau,France NeetaTripathi Dyal Singh College, University of Delhi,India

y The Impact of FII Regulation in India : A Time-Series Intervention Analysisof Equity Flows SUCHISMITA BOSE AND DIPANKOR COONDOO, ICRA BulletinMoney and Finance, July-Dec 2004


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y TH E JOURNAL OF FINANCE _ VOL. LVIII, NO. 6 DECEMBER 2003Institutional Investors and Executive Compensation JAYC.H ARTZELL and LAURAT. STARKS

y TH E JOURNAL OF FINANCE VO L. LIV, NO. 6 D ECEMBER 1999Herding and Feedback Trading by Institutional and

Individual Investors JOH

N R. NOFSINGER and RICH

ARD W. SIASy Journal of FinancialEconomics 88 (2008) 499533 , The colors of investors money: The role of institutional investors around the world

y The Influence of Institutional Investors on Myopic R&DInvestmentBehaviorAuthor(s): Brian J. BusheeSource: The Accounting Review, Vol.73, No. 3 (Jul., 1998), pp. 305-333Published

y V olatility and the Institutional InvestorAuthor(s): Richard W.SiasSource: Financial Analysts Journal, Vol. 52, No. 2 (Mar. - Apr.,1996), pp. 13-20Published by: CFAInstituteStable


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y Journal of FinancialEconomics 59 (2001) 413}440 Direct foreign ownership, institutional investors, and firm characteristicsqMagnus Dahlquist!,* , GoK ran Robertsson"

Fuqua School of Business, Duke University, Durham, NC 27708, USAStockholm Institute for Financial Research, SE-103 68, Stockholm, Swedeny CFA Institute The Day-of-the-Week Anomaly: The Role of

Institutional InvestorsAuthor(s): Richard W. Sias and Laura T.StarksSource: Financial Analysts Journal, Vol. 51, No. 3 (May - Jun., 1995), pp. 58-67Published

y Proceedings of a Conference held at theH .C. Coombs Centre forFinancial Studies,Kirribilli on 8/9 July 1996, TH EFUTUREOFTH EFINANCIAL SYSTEM Economic GroupmReserve Bank of Australia


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