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Chapter – VII

COMPARATIVE ANALYSIS OF BSE WITH INTERNATIONAL STOCK MARKETS & ROLE OF FII

INVESTMENT IN INDIAN STOCK MARKET

7.1 Introduction

An important element of globalization trend has now been that exchanges

are crossing national boundaries to extend their service, which has led to cross

border integration; exchanges have begun to offer cross border trading to facilitate

overseas investment options for investment. This has not only increased the

appeal of the exchange for investment, but has also attracted more volume. It is

also seen that international financial markets have changed drastically over the

past several decades. The major driving forces are: liberalization and

deregulation, ground breaking technological and financial innovations and a

growing dedicated investors base. The Indian stock exchanges hold a place of

prominence not only in Asia but also at the global stage. The Bombay Stock

Exchange (BSE) is one of the oldest stock exchange across the world, while the

NSE is among the best, in term of sophistication and advancement of technology.

In this chapter, an attempt has been made to study:

• The comparative place of India's stock market in world scenario.

• Descriptive statistics for daily market return for various stock market.

• Yearwise percentage average return of various stock markets.

• Annualize return and volatility for various stock markets.

• Correlation coefficient of the daily market returns for various stock

markets.

At this backdrop, the objectives of the present chapter are enumerated as:

• To study the movement of Bombay Stock Exchange in comparison

to its international counter parts.

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• To study whether Indian stock market (BSE's) prices and returns are

correlated to the stock market returns and prices of other selected

economy

For the comparative analysis of the BSE and other stock exchanges some

stock exchanges have been selected from developed market i.e. NASDAQ (USA),

NIKKEI (Japan) and from emerging markets HKSE (China) and NIFTY (India). To

study the correlation of India's stock prices (Returns) with other selected

countries’ stock prices (Returns), Karl Pearson's correlation coefficient method

has been used. Besides, for the comparative analysis of BSE and other stock

exchanges, the period chosen for the study is from 1991 to 2009.

7.2 Internationalization of Stock Exchange

Indian securities market is getting increasingly integrated with the rest of

the world. Indian companies have been permitted to raise resources from abroad

through issue of American Depository Receipts (ADRs), Global Depository

Receipts (GDRs), Foreign Currency Convertible Bonds (FCCBs) and European

Convertible Bonds (ECBs). Further, foreign companies are allowed to tap the

domestic stock markets.

Indian companies are permitted to list their securities on foreign stock

exchanges by sponsoring ADR/GDR issues against block shareholding. NRIs and

OCBs (Overseas Corporate Bodies) are allowed to invest in Indian companies.

FIIs have been permitted to invest in all types of securities, including government

securities. The investments by FIIs enjoy full capital account convertibility. They

can invest in a company under portfolio investment route up to 24% of the paid up

capital of the company. This can be increased up to the sectoral cap/statutory

ceiling, as applicable to the Indian companies concerned, by passing a resolution

through Board of Directors followed by a special resolution to that effect by its

general body. The Indian Stock Exchanges have been permitted to setup trading

terminals abroad. The trading platform of Indian exchanges is now accessed

through the internet from anywhere in the world.1

RBI permitted two-way fungibility for ADRs/GDRs, which meant that the

investors (foreign institutional or domestic) who hold ADRs/ GDRs can cancel

1 Introduction of Financial Markets, Module workbook,NSE (2010), P.73.

193

them with the depository and sell the underlying shares in the market. The

company can then issue fresh ADRs to the extent of the shares cancelled.

Indices

Sr. No.

Parameters

Name of the Stock Exchange

BSE NSE NASDAQ Tokyo Stock

Exchange

Hong Kong Stock

Exchange

1 Country India India USA Japan Hong Kong

(China)

2 Name of Indices

SENSEX BSE-100 BSE-200 BSE-500

NIFTY NASDAQ NIKKEI HKSE

3 Number of Companies Included

SENSEX-30 BSE-100 BSE-200 BSE-500

50 100 225 33

4 Method of Calculation of Indices

Free Float Market

Capitalization Method

Weighted Average

Weighted Average

Price Weighted Average

Weighted Capitalization

Method

5 Settlement Cycle

T+2 T+2 T+3 T+3 T+2

Source : Compiled by Researcher

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7.3 World Stock Markets:

Table No. 7.1 : World Stock Markets

(as on 2009)

S. N.

Country

Market Capitalization (US $

Mn)

% of World

Turnover (US $ Mn)

% of World

No. of Listed

Companies

% of World

1 Australia 675619 2.48 1013937 1.5 1924 5.89 2 France 1492327 5.47 3257667 4.82 966 2.96 3 Germany 1107957 4.06 3093750 4.58 638 1.95 4 Hong Kong 468595 1.72 621649 0.92 1017 3.11

5 Japan 3220485 11.8 5886404 8.71 3299 10.1 6 Singapore 180021 0.66 270909 0.4 455 1.39 7 UK 1851954 6.79 6484292 9.59 2415 7.39 8 USA 11737646 43.01 36467431 53.93 5603 17.15 9 China 2793613 10.24 5470529 8.09 1604 4.91 10 India * 455478 1.67 1049748 1.55 4921 15.06 11 Russia 1321833 4.84 562230 0.83 314 0.96

12 Brazil 589384 2.16 727793 1.08 432 1.32 13 Indonesia 98761 0.36 110678 0.16 4921 15.06 14 Korea 494631 1.81 1465999 2.17 1798 5.5 15 Malaysia 187066 0.69 85214 0.13 977 2.99 16 Taiwan 380923 1.4 944023 1.4 1260 3.86 17 Mexico 232581 0.85 108202 0.16 125 0.38

Total 27288874 100 67620455 100 32669 100 Source : Indian Security Market : A Review, Vol. XII, 2009, p. 4 Note : Listed Companies in India pertains to BSE.

Table no. 7.1 gives the snapshot of market capitalization, turnover and

number of listed companies and their percentage to the total of stock market in the

world. It can be observed that as on 2009, USA is the 1st in the world ranking of

market capitalization and turnover, while India is 5th in the world ranking of market

capitalization and turnover.

Listing in stock exchange refers to the admission of securities of the

company for dealing in recognized stock exchange. The security may be any

public limited company or state government, quasi government and other financial

institutions/corporations, municipalities etc. It is seen from the table no. 7.1 that

India has a second place (next to USA) about number of companies listed and of

15.06% of total world's listing. Thus, after USA, India has the highest number of

companies listed on stock exchanges. At domestic level about 72% companies

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are listed with Bombay Stock Exchange only.2 As compared to Asian stock

market, India's share in market capitalization is only 1.67%, which is lesser than

China (10.25%). About turnover also, China's share in total world is 8.09% while

India accounted only 1.55%.3

It is also seen that as on 2009, Singapore stock market accounted only

0.66% of world's market capitalization and only 0.4% of world's total turnover,

which is lowest in the world stock market scenario.

7.4 Descriptive Statistics Market Returns

Table No. 7.2 : Descriptive Statistics for Daily Market Returns for Various Stock Markets (1991-2009)

Particulars SENSEX BSE 100

BSE 200

BSE 500

HKSE NAS-DAQ

NIKKEI NIFTY

Mean 0.001 0.001 0.001 0.001 0.000 0.000 0.000 0.000

Standard Error

0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Median 0.001 0.001 0.001 0.002 0.001 0.001 -9.762 0.001

Standard Deviation

0.018 0.018 0.018 0.018 0.018 0.016 0.016 0.017

Sample Variance

0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Kurtosis 5.376 6.297 7.005 5.392 8.622 5.791 5.008 6.065

Skewness -0.041 -0.057 -

0.134 -

0.484 -0.004

-0.049

-0.105 -0.153

Range 0.297 0.282 0.290 0.271 0.320 0.234 0.253 0.294

Minimum -0.137 -0.127 -

0.134 -

0.124 -0.147

-0.102

-0.121 -0.131

Maximum 0.160 0.155 0.156 0.146 0.172 0.133 0.132 0.163

Sum 2.861 2.902 2.811 1.612 1.976 1.808 -0.825 1.482

Count 4541 4541 4540 2594 4493 4789 4671 3729

Largest(1) 0.160 0.155 0.156 0.146 0.172 0.133 0.132 0.163

Smallest(1) -0.137 -0.127 -

0.134 -

0.124 -0.147

-0.102

-0.121 -0.131

Confidence Level

(95.0%) 0.001 0.001 0.001 0.001 0.001 0.000 0.000 0.001

Note : values are calculated from the data

2 Indian Securities Market – A Review, Vol. XII, 2009, p. 4.

3 Mukherjee Debjban (2007): Comparative Analysis of Indian Stock Market with International

Market, Great Lakes Herald, April , Vol. 1, by Great Lakes Institute of Management, Chennai, pp. 40-67.

196

Table no. 7.2 depicts the descriptive statistics for daily market returns of

BSE, NSE, NASDAQ, NIKKEI and HKSE for the period 1991 to 2009. The daily

data had about 4000 observations of different stock exchanges (except NSE) and

closing prices of respective indices are used to represent the market.

The mean of daily market returns of all exchange is observed to be

between 0.00037% to 0.00063% of all stock exchanges.

The median of daily market returns of all markets observed to be near to

zero and it remains between 0.0010% to 0.0090%.

Volatility is measured by standard deviation and its square. All the indices

shows similar volatility in the range of 0.0002% to 0.0003%. The minimum

volatility among the indices is observe in NIKKEI and whereas maximum is

observed in BSE-SENSEX.

Kurtosis measures the peak endness of the distribution. The Kurtosis of all

the indices are away from three therefore the weekly return are away from their

respective means.

A minimum return was lowest in NASDAQ i.e.-0.10%. The maximum return

was highest in HKSE i.e. 0.16% during the study period 1991 to 2009.

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7.5 Market returns Analysis of various Stock Indices

Table No. 7.3 : Year wise Average Return for Various Stock Markets (Percentage)

Year BSE-

SENSEX BSE 100

BSE-200

BSE-500

NASDAQ HKSE NIKKEI NIFTY

1991 0.316 0.277 0.283 - 0.180 0.141 -0.019 -

1992 0.167 0.142 0.158 - 0.057 0.100 -0.124 -

1993 0.115 0.163 0.121 - 0.054 0.309 0.012 -

1994 0.069 0.049 0.036 - -0.013 -0.150 0.050 -

1995 -0.101 -

0.116 -0.149 - 0.133 0.084 0.003 -0.112

1996 -0.003 -

0.017 -0.011 - 0.081 0.116 -0.010 -0.004

1997 0.069 0.062 0.060 - 0.077 -0.093 -0.097 0.075

1998 -0.074 -

0.063 -0.050 - 0.132 -0.026 -0.040 -0.080

1999 0.199 0.265 0.256 - 0.245 0.212 0.128 0.203

2000 -0.093 -

0.102 -0.122 -0.127 -0.198 -0.047 -0.128 -0.063

2001 -0.079 -

0.107 -0.100 -0.105 -0.095 -0.126 -0.158 -0.071

2002 0.014 0.027 0.057 0.063 -0.150 -0.090 -0.084 0.013

2003 0.216 0.243 0.263 0.276 0.161 0.134 0.089 0.213

2004 0.048 0.060 0.057 0.063 0.033 0.057 0.030 0.040

2005 0.141 0.129 0.116 0.124 0.005 0.020 0.138 0.123

2006 0.153 0.137 0.133 0.131 0.036 0.131 0.027 0.134

2007 0.155 0.188 0.190 0.196 0.037 0.138 -0.048 0.175

2008 -0.302 -

0.327 -0.338 -0.354 -0.205 -0.292 -0.224 -0.297

2009 0.244 0.253 0.261 0.265 0.144 0.178 0.072 0.232

Note : Values are calculated from the data

Table No. 7.3 reveals the year wise average daily return for various indices

selected for study. It can be seen that for each indices separately the percentage

daily average return of BSE Sensex was in the range of – 0.003% to 0.31%, BSE-

100 ranges from-0.01% to 0.27%, BSE-200 ranges between -0.011% to 0.28%

and BSE-500 indices ranging from – 0.10% to 0.26%, while NASDAQ recorded

from – 0.01% to 0.18%, HKSE recorded percentage average returns between –

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0.04% to 0.14%, NIKKEI percentage average daily return ranges between –

0.01% to 0.15% whereas NIFTY accounted – 0.00417% to 0.23% during study

period of 1991 to 2009.

It can be also seen that, among all the individual observations the highest

average daily return was earned by the BSE-Sensex in the year 1991. All

ordinaries earned negative income in the years 2000, 2001, 2008 and the

negative return was very high in BSE i.e. -0.35% in 2008 and it was very low i.e. –

0.0129% in the year 1999 in NASDAQ.

NASDAQ, HKSE, NIKKEI had negative returns for the three consecutive

i.e. in the year 2000, 2001, 2002, &in 2008.

It is also seen that average daily return of BSE and NSE moved in tandem

with little difference.

7.6 Correlation among BSE and International Stock Markets

Table No. 7.4 : Correlation Coefficients of the Daily Market Returns for Various Stock Markets (1995-2009)

Indices SENSEX BSE-100 BSE-200 BSE-500

HKSE NASDAQ NIKKEI NIFTY

BSE-SENSEX

1*

BSE 100 0.998* 1*

BSE 200 0.997* 0.999* 1*

BSE 500 0.997* 0.998* 1.000* 1*

HKSE 0.879* 0.878* 0.864* 0.894* 1*

NASDAQ 0.438* 0.446* 0.426* 0.096* 0.716* 1*

NIKKEI -0.278* -0.291* -0.292* 0.253* 0.896* -0.136* 1*

NIFTY 0.999* 0.999* 0.998* 0.997* 0.896* 0.303* -0.136* 1*

Note : Coefficient are calculated from the data. *significant at 5% level

Table no. 7.4 depicts the correlation matrix of BSE indices with other stock

exchanges. It is found that, there exists a positive correlation among all indices of

BSE and NASDAQ and HKSE during study the period of 1991 to 2009. NIKKEI is

negatively correlated with BSE-Sensex, BSE-100 and BSE-200, but there exists a

positive correlation between NIKKEI and BSE-500 during the same period. Nifty is

positively correlated with all indices selected for study except NIKKEI.

It is concluded that, there is a significant correlation between all the indices

selected for study & BSE. Therefore, present study accepts the hypothesis that

199

prices & returns of Bombay stock exchange are significantly correlated to the

prices &returns of other selected stock exchanges.

7.7 Returns & Volatility of Stock Exchanges

Table No. 7.5 : Year wise Average returns and Volatility of Different

Stock Exchanges

Year

NASDAQ HKSE NIKKI NIFTY SENSEX

Annualized

Return (%)

Annualized

Volatility (%)

Annualized Return (%)

Annualized

Volatility (%)

Annualized

Return (%)

Annualized

Volatility (%)

Annualized

Return (%)

Annualized

Volatility (%)

Annualized

Return (%)

Annualized Volatility (%)

1991 0.47 0.15 0.35 0.18 -0.05 0.21 -- -- 0.32 1.91

1992 0.14 0.13 0.25 0.23 -0.31 0.30 -- -- 0.17 3.36

1993 0.14 0.12 0.77 0.22 0.06 0.20 -- -- 0.12 1.85

1994 -0.04 0.12 -0.37 0.30 0.09 0.18 -- -- 0.07 1.44

1995 0.35 0.13 0.21 0.20 0.06 0.23 -0.26 0.19 -0.10 1.26

1996 0.19 0.16 0.29 0.17 -0.13 0.16 -0.01 0.24 0.00 1.52

1997 0.21 0.19 -0.22 0.40 -0.19 0.27 0.18 0.28 0.07 1.64

1998 0.33 0.27 -0.06 0.44 -0.10 0.27 -0.20 0.28 -0.07 1.90

1999 0.63 0.27 0.52 0.26 0.30 0.20 0.51 0.29 0.20 1.82

2000 -0.59 0.49 -0.12 0.31 -0.30 0.23 -0.16 0.32 -0.09 2.20

2001 -0.15 0.42 -0.28 0.28 -0.23 0.29 -0.18 0.26 -0.08 1.71

2002 -0.36 0.35 -0.20 0.19 -0.23 0.25 0.03 0.17 0.01 1.10

2003 0.37 0.22 0.30 0.17 0.26 0.23 0.54 0.20 0.22 1.18

2004 0.07 0.17 0.12 0.16 0.05 0.18 0.10 0.28 0.05 1.61

2005 0.04 0.13 0.04 0.11 0.35 0.14 0.31 0.18 0.14 1.08

2006 0.08 0.14 0.29 0.15 0.03 0.20 0.34 0.26 0.15 1.63

2007 0.07 0.17 0.32 0.25 -0.18 0.19 0.44 0.25 0.16 1.54

2008 -0.47 0.41 -0.65 0.50 -0.52 0.46 -0.73 0.44 -0.30 2.85

2009 0.33 0.28 0.42 0.34 0.23 0.27 0.56 0.33 0.24 2.19

Note: Values are calculated from the data

Table No. 7.5 exhibits annualized returns and volatility of different indices

selected for study. It is seen that, from the return prospective, NASDAQ yielded

negative returns in 1994, 2000, 2001, 2002 and 2008. During 1991 to 2009 its

annual returns were ranging from – 0.04% to 0.47%. From the volatility

prospective NASDAQ shows highest annual volatility in 2000 i.e. 0.49% whereas

lowest volatility in 1993 i.e. 0.12%. Thus, the annual returns and volatility of

NASDAQ ranged from – 0.03% to 0.46% and 0.11% to 0.49% respectively.

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HKSE's annual returns recorded negative in 1994, 1997, 1998, 2000, 2001,

2002 and in 2008. It yielded highest annualized returns i.e. 0.42% in 2009 and

lowest annualized returns i.e. – 0.11% in 2000. From volatility prospective the

annualized volatility ranging from 0.11% to 0.50% during the study period.

NIKKEI recorded negative returns in 1991, 1992, 1996, 1997, 1998 (except

1999), thereafter from 2000-2002, &in 2007& 2008. It recorded highest returns i.e.

0.26% in 2003 whereas lowest returns i.e. – 0.05% in 1991. The annualized

volatility of NIKKEI ranging from 0.15% to 0.46% during the study period.

It is seen that the annualized return of NIFTY was negative in 1995, 1996,

1998 & thereafter in 2008. The annualized average return of NIFTY ranging from

– 0.01% to 0.56% whereas annualized volatility of NIFTY ranging between 0.19%

to 0.44% during study period.

The Sensex recorded negative returns in 1995, 1998, 2000, 2001 and

2008. The annual average returns of BSE-Sensex ranging from 0.01 % to 0.32

% whereas annualized volatility of Sensex ranged between 1.08% to 3.36%

during the same study period.

It is concluded that range of annualized returns and volatility does not

remain same in all indices selected for study. It is also seen that in the year 2001,

2002 and in 2008 all selected indices yielded negative returns.

It is observed that, the USA is 1st in the world ranking of market

capitalization and turnover while India is 5th in the world ranking of market

capitalization and turnover. USA has the highest number of companies listed on

stock exchanges. After USA, India has the highest number of companies listed on

stock exchanges.

Conclusion :

It is seen that yearwise average daily return of BSE indices is higher than

NASDAQ, HKSE and NIKKEI. Whereas average daily return of BSE indices and

NSE/Nifty moved in tandem with little difference.

There exists a positive correlation among all the indices of BSE and

NASDAQ and HKSE. It is observed that NIKKEI is negatively correlated with BSE-

Sensex but there is positive correlation between NIKKEI and BSE-500. Nifty is

positively correlated with all indices selected for study.

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Annualized Returns and Volatility does not remain same in all indices

selected for study. It is also seen that in the year 2001, 2002 and 2008, all

selected indices yielded negative returns.

7.08 FII Investment and Indian Stock Market

The era of foreign institutional investors (FIIs) in India originated in 1993 as

a consequence of the major policy initiatives towards globalization of economy by

Government of India. For a country, that embraced free market model after having

remained closed to the outside world for long, foreign capital whether in the form

of foreign direct investment (FDI) or portfolio investment by FII is being considered

imperative to rebuild India. Domestic markets are no longer able to meet the

growing capital requirement of the industry, therefore foreign capital is a sine que

non whether it comes in the form of FDI or portfolio investment (FIIs : Foreign

Institutional Investors). FII or the Foreign Institutional Investors are basically

referred to investors who are organised in the form of an institution or entity and

indulge in investing funds in the financial market of a foreign country, i.e. different

from where the entity was originally registered or incorporated.4

Earlier, FIIs could invest in Indian securities only through the purchase of

GDR Foreign Convertible Bonds (FCBs) and foreign currency bonds issued by

Indian issuers. FIIs commenced their operations in the Indian stock market with a

token investment of Rs. 0.6 crores in January 1993. They have become active

investors since August 1993. FII such as mutual funds, pension funds, country

funds and so on are operating in the Indian capital market. Thus, foreign

investment may invest in a particular share issue of an Indian company under

either FDI scheme or the portfolio investment schemes (i.e. FII, GDRs/ADRs,

offshore investment and other).

In this chapter, an attempt has been made to study the role of foreign

institutional investment in Indian stock market.

7.8.1 FII Investment Restrictions

An FII can invest only in the following:

4 Khan A. Q. & Sana Ikram (2010): Testing Semi-Strong Form of EMH in Relation to the Impact of

FII, International Journal of Trade, Economics and Finance, Vol. No. 1, No. 4, December, p. 273.

202

Investment in Listed/Unlisted Companies (Except the rout of Stock Exchange)

Institutional Investment in Listed Companies through Stock Exchange

American Depository Receipts (ADR) and Global Depository Receipts (GDR)

Investment by NRIs/Persons of Indian Origin

FIIs

Private Equity/ Foreign Venture Capital Investors (FVCI)

FDI

Foreign Investment in India

i) Securities in the primary and secondary markets including shares, debentures and warrants of companies unlisted, listed, to be listed on recognised stock exchanges in India.

ii) Units of schemes floated by domestic mutual funds including UTI, whether listed or non-listed on a recognised stock exchange

iii) Derivatives traded on recognised stock exchanges.

iv) Commercial papers and securities receipts.

v) Indian Depository Receipts.

7.8.2 FII Investment in Secondary Markets

SEBI regulations provides that a foreign institutional investor or a sub-

account can transact in the Indian securities market only on the basis of taking

and giving delivery of securities purchased or sale. However, this does not apply

to any transactions in derivatives on a recognized stock exchange. Further, SEBI

has in December 2007 permitted FIIs and sub-accounts to enter into short selling

transactions only in accordance with framework specified by SEBI in this regards.

No transactions in securities would be only through stockbrokers who have been

granted a certificate by SEBI. Foreign institutional investors can issue, or

otherwise deal in offshore derivatives investments, directly or indirectly wherein

the offshore derivative instruments are used only to persons who are regulated by

203

an appropriate foreign regulators authority and the ODIs (Overseas Derivatives

Instruments) are issued after compliance of 'Know Your Client' (KYC) norms.

7.8.3 Investment by FIIs under Portfolio Investment Scheme

RBI has given general permission to SEBI registered FIIs/Sub-accounts to

invest under the portfolio investment scheme (PIS).

Total holding of each FII/Sub-account under this scheme should not

exceed 10% of the total paid up capital or 10% of the paid up value of each series

of convertible debentures issued by the Indian company.5

Total holding of all the FIIs/Sub-accounts put together should not exceed

24% of the paid up capital or paid up value of each series of convertible

debentures. This limit of 24% can be increased to the sectoral capital/statutory

limit as applicable to the Indian company concerned by passing a resolution of its

Board of Directors followed by a special resolution to that effect by its General

Body.

7.8.4 Role of FIIs in Development of Capital Market

"The FII investment has always been the subject of debate in term of

desirability. This is because FII money is known to be 'hot money' that would flee

at the first sign of trouble."6

FIIs have become integral part of Indian capital market. Their entry has led

to greater institutionalization of the market and their activities have provided depth

to it. Institutionalization has also helped in lending better price discovery

mechanism in the capital market.

It has been observed that the companies that have been generally

preferred by FIIs are those that are professionally managed and focus on creating

wealth for shareholders. When FIIs acquire stake in a company, its valuation goes

up in the market. To that extent, the FII tag makes it easier for the companies to

tap the capital market. Therefore, companies with global ambition would do well to

catch the attraction of FIIs at home before venturing out to tap financial markets

abroad.

5 ISMR, Vol. XII, 2009, p.193.

6 Pasricha J. S., U Singh mesh C. (2001): FIIs and Stock Market Volatility, The Indian Journal of

Commerce, Vol. 54, No. 3, July-Sept, p. 29.

204

FIIs have also played a catalytic role in nurturing nascent venture capital

culture in India. A new entrepreneurial class has been created in the country who

have created a lot of wealth in the market. These are the sort of industries in

which traditional lending would have been difficult or would have less forthcoming.

These companies have blossomed and prospered on account of equity support

from new class of investors, which include inter-alia FIIs.

In policy circles, FII flows are considered to increase the domestic

investment without increase in foreign debt. FII flows can raise prices, lower cost

of equity and stimulate investment by Indian firms and lead to improvement in

securities market design and corporate governance. Thus, FIIs increase the depth

and breadth of the market; expand securities business and their policy of focusing

on fundamentals of the shares cause efficient pricing of shares. However, FIIs are

known to rush out at the slightest hit trouble in the host country leaving an

economic crisis, like Mexico in 1994 and India in 2008.7

7.9 Trends in FIIs investment in India

Table No. 7.6 : Yearly Trends in FIIs Investment in Capital Market

Year Gross

Purchases(Rs.Cr) Gross

Sales(Rs.Cr) Net

Investment(Rs.Cr) Cumulative

Investment(Rs.Cr) 1992-93 17 4 13 13 1993-94 5593 467 5126(39338) 5139 1994-95 7631 2835 4796(-6.4) 9935 1995-96 9694 2752 69424(44.7) 16877 1996-97 15554 6980 85742(23.5) 25451 1997-98 18695 12737 5958(30.5) 31409 1998-99 16116 17699 -1583(-126.5) 29826 1999-00 56857 46735 10122(739.01) 39948 2000-01 74051 64118 9933(1.84) 49881 2001-02 50071 41308 8763(-11.87) 58644 2002-03 47062 44372 2690(-69.29) 61334 2003-04 144855 90091 54764(1602) 116098 2004-05 216951 171071 45880(0.25) 161978 2005-06 346976 305509 41467(-9.6) 203445 2006-07 520506 489665 30841(-25.6) 234286 2007-08 948016 881839 66177(69.2) 300463 2008-09 614576 660386 -45810(-30.7) 254653

Source : Annual Reports of SEBI ,SEBI :Handbook of Statistics on Securities Market in India, 2009 Note: Figures in bracket shows %change

Table no. 7.6 presents trends in net investment and cumulative investment

by FIIs in Indian stock market. It is observed that, cumulative net FII investment

has gone upto Rs. 254653 crores by the end of financial year 2008-09.

7 Mishra, P. K., Das K. B., Pradhan B. B. (2009): “Role of FIIs in Indian Capital Market”, The Research Network, Vol.4, No.2, India.

205

During the initial year 1992-93, FIIs flow started and amounted to Rs. 13

crore because in this period government was framing policy guidelines for FIIs.

However, within a year, the net FII rose to 39338% of previous year, during 1993-

94, because government had opened the door for foreign investment in India.

Thereafter, the FII inflow witnessed a dip of 6.45%. The year 1995-96 witnessed

gliding up the contribution of FII to a massive of Rs. 69424 crores. FII investment

during 1996-97 rose a little i.e. 23.52% of preceding year, this period ripe enough

for FII investment because at that time where international capital market

witnessed the phase of overheating and at the same time, the Indian economy

and its strong fundamentals, stable exchange rate expectations and incentives

climate for foreign investment.

During 1997-98, FII inflow posted of 30.5%, it was due to south east Asian

crisis and period of volatility experienced between November 1997 and February

1998. The net inflow by FIIs have always positive from the year 1992-93, only in

the year 1998-99 an outflow of Rs.1583 crores was witnessed for the first time.

This was primarily because of economic sanctions imposed on Indian by the US,

Japan and other industrialized economy. These economic sanctions were result of

testing of series of nuclear bomb in 1998. Therefore, the FII portfolio investment

quickly recovered and showed positive net investment for all subsequent years.

FII investment posted a year declining of -1.8% in 2000-01, -11.87% in

2001-02 and -69.29% in 2002-03. The major reasons for the decline in their

investment were the dismal performance of the Indian stock market,

unsatisfactory returns on their investment and the slow pace of reforms.

Investment by FIIs rebounded from depressed levels from the year 2003-04 and

witnessed massive surge. The slowdown in 2004-05 was on account of global

uncertainty caused by hardening of crude oil prices and the upturn in the interest

rate. Strong macro economic fundamentals of the Indian economy coupled with

other positive factors like good corporate results, low inflation, abolition of long

term capital gain tax, transparent regulatory system etc. were the major factors

which influenced the FII investment in India during 2004-05.

The net investment by FIIs in 2005-06 declined by -9.6% to Rs 41467

crores in 2005-06 mainly due to large net outflow from debt segment. The net

investment by FIIs in 2006-07 declined by -25.6% to Rs.30841 crores, mainly due

206

to large net outflow from the equity segment. This was because of fall in Asian

market, tightening of capital control in Thailand. But the cumulative net investment

by FIIs in India was stood at Rs. 234286 crores.

The net investment by FIIs was Rs.66177 crores in 2007-08, which was

more than double from Rs.30841 crores in 2006-07. The cumulative investment

by FIIs was increased to Rs.291465 crores during the same year. The year 2008-

09 saw the highest FII outflow in any financial year since inception. This would be

attributed to the global financial meltdown and the home bias in of FIIs in the

crisis.

Thus, there has been notable surge in FII investment since 1993-94,

signifying the attractiveness of the Indian markets and it is an expression of

confidence on the part of international investment community in the regulatory

framework for the securities market.

The net FII investment during 2007-08 stood at Rs.66177 crores. In the

year 2008-09, a net FII investment dipped to Rs.-45810 crores while net

cumulative FII investment dropped and stood at Rs. 244653 crores.

7.9.1 Distribution of FIIs Investment

Table No. 7.7 : Distribution of FIIs Investment in Equity and Debt

Year FII Net Investment in Crore

Total(Rs.Cr) Equity Debt

1991-92 - - 13.4 1992-93 - - 5,126.5 1993-94 - - 4,796.3 1994-95 - - 6,942.0 1995-96 - - 8,574.5 1997-98 5,267.0 691.1 5,957.2 1998-99 -717.2 -867.0 -1,584.0

1999-2000 9,669.5 452.6 10,122.1 2000-01 10,206.7 -273.3 9,933.4 2001-02 8,072.2 690.4 8,762.6 2002-03 2,527.2 162.1 2,689.3 2003-04 39,959.7 5,805.0 45,764.7 2004-05 44,122.7 1,758.6 45,881.3 2005-06 48,800.5 -7,333.8 41,466.7 2006-07 25,235.7 5,604.7 30,840.4 2007-08 53,403.8 12,775.3 66,179.1 2008-09 -47,706.2 1,895.2 -45,811.0

Source : CMIE Report on Capital Market 2007, ISMR Report 2009, p. 196

207

FII were allowed to invest in the Indian capital market from September

1992; however, investment by them was first made in January 1993. The Indian

gilts market was opened up for FII investment in April 1998. Till December 1998,

investments were related to equity only as investments in debt were made from

January 1999.

It is clear from table no 7.7 that in the year 1997-98 FII's net investment in

equity segment stood at Rs. 5267 crores. It registered an outflow of Rs. -717

crores in 1998-99. Thereafter it rose continuously till 2005-06. It was stood at

Rs.488005.5 crores, which decreased to Rs.25235.7 Crores in 2006-07, it

increase to Rs 534038 crores in 2007-08. However, it declined in 2008-09 to Rs. -

47706.3 crores.

The net investment in debt segment do not hold particular pattern. In the

year 1997-98, it was Rs. 691.1 crores. In the year1998-99, 2000-2001 & 2005-06

it recorded outflow of Rs.-867 crores, Rs.-273.3 crores and Rs.-7333.8 crores

respectively. It was stood at Rs 1895.2 crores in 2008-09.

Total net FII investment was Rs.13.4 crores in 1991-92. It increase

significantly and stood at Rs.66179.1 crores in 2007-08. In the year 2008-09 total

investment declined to Rs.-45811.0 crores.

It is observed that the share of equity investment to the total investment of

FII is greater than debt investment. In the year 2008-09, FII investment declined in

equity segment while it remained positive in debt segment of Indian stock market.

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7.10 Yearly Trends in FII Investment in Secondary Market of BSE

Table No. 7.8 : Yearly Trends in FII Investment in Secondary Market of BSE

Year Net FII

Investment

Net FII Investment in

Secondary Market of BSE

% to Total Net Investment

1994-95 4796 1742 36.322

1995-96 6942 5672 81.706

1996-97 8575 3048.86 35.555

1997-98 5958 2453.57 41.181

1998-99 -1585 -117 7.382

1999-2000 10122 6067 59.939

2000-01 9933 5885 59.247

2001-02 8763 3467 39.564

2002-03 2689 1088 40.461

2003-04 45764 8686 18.980

2004-05 45880 12286 26.779

2005-06 41467 6480 15.627

2006-07 30841 1380 4.475

2007-08 66179 -6500 -9.822

2008-09 -45811 -20414 44.561

AVERAGE 33.81 Source : Data compiled from SEBI :Handbook of Statistics on Indian Securities Market,

2009 and Various Annual Reports of BSE

The relevant data of FII investment in secondary market of BSE is

summarized in table no. 7.8 taking the entire period of 1994-95 to 2008-09. Our

data warrants the following generalizations.

Percentages of net investment of FII on secondary market of BSE do not

hold any particular pattern. It is ranging from 4% to 82% during the study period.

In the year 1995-96, the percentage of FII investment on secondary market

of BSE was highest i.e. 81.706% whereas in the year 2006-07, it recorded lowest

share i.e. 4.47%.

Thus, during the study period, the percentage average share of net FII

investment in secondary market of BSE is around 33.18% to the total net FII

investment in Indian stock market.

209

7.10.1Total FII Trade as Percentage of Total Turnover in Bombay Stock

Exchange

Total FII trade includes FIIs gross purchase in plus gross sale secondary

market of BSE. The total FII trade in segment of BSE and its relationship with the

Bombay Stock Exchange's turnover is presented in the following table no. 7.9.

Table No. 7.9 : Total FII Trade as Percentage of Total Turnover in

Bombay Stock Exchange

Year FII Trade

(Rs. In crore)

Total Turnover of BSE

(Rs. In crores)

% share of FII in BSE's Turnover

1994-95 5514 67748 8.13

1995-96 6838 49418 13.83

1996-97 10556 124189 8.49

1997-98 12859 207112 6.20

1998-99 15705 310749 5.05

1999-2000 46043 685028.21 6.72

2000-01 59941 1000031.54 5.99

2001-02 35185 307292.36 11.45

2002-03 31980 314073.19 10.18

2003-04 57078 502618.41 11.35

2004-05 107534 518715.67 20.73

2005-06 221440 816074.02 27.13

2006-07 264480 956185.41 27.65

2007-08 411436 1578856.09 26.05

2008-09 220568 1100073.63 20.05

AVERAGE 14.0% Source : Data compiled from BSE’s Annual Reports

It is clear from Table No. 7.9 that, there is growing influence of FII in BSE's

turnover during study period. The percentage share of FIIs trade in total turnover

in BSE's was recorded highest in the year 2006-07 i.e. 27.65% whereas it was

lowest in the year 1998-99 i.e. 5.05%. During the last five years, the average

share of FIIs trade in total turnover of BSE was around 25.0% whereas the

average share of FIIs trade in total turnover of BSE during entire study period was

about 14.0%.

It is also concluded that, there is a steady growing influence of FIIs in the

Indian stock market.

210

7.10.2 FII and BSE Sensex

Table No. 7.10 : FII and BSE Sensex

Year Net Sensex Net FII's on BSE 1994-95 120 1742 1995-96 -500 5672 1996-97 -6 3048.86

1997-98 532 2453.57 1998-99 -153 -117

1999-2000 1261 6067 2000-01 --1397 5885 2001-02 -135 3467 2002-03 -420 188 2003-04 2542 8686

2004-05 902 12286 2005-06 4787 6480 2006-07 1792 1384 2007-08 2572 -6500 2008-09 5935 20414

Source : Values are Calculated from the data

It is found by the study (Table No. 7.10) that BSE Sensex and FII has

followed a close relationship, when net Sensex moved up the FII also increased

and when net Sensex was down, the total FII was went down.

211

7.11 Returns of BSE Indices and its Correlation with FII

Table No. 7.11 : Returns of BSE indices & its Correlation with FII

Year

Indices BSE-30

Coefficient Correlation

BSE-100 Coefficient Correlation

BSE-200 Coefficient Correlation

BSE-500 Coefficient Correlation

1994-95 0.669 0.634 0.673 NA

1995-96 0.450 0.474 0.431 NA

1996-97 0.045 0.019 0.002 NA

1997-98 0.196 0.194 0.260 NA

1998-99 0.855 0.575 0.865 NA

1999-2000 0.404 0.500 0.408 0.879

2000-01 0.390 0.281 0.231 0.250

2001-02 0.125 0.048 0.045 0.021

2002-03 0.028 0.007 0.041 0.031

2003-04 0.635 0.527 0.480 -0.051

2004-05 0.674 0.707 0.718 0.715

2005-06 0.101 0.097 0.121 0.120

2006-07 0.798 0.792 0.802 0.795

2007-08 0.478 0.391 0.361 0.329

2008-09 0.574 0.610 0.622 0.636 Note: Values are Calculated from the data

According to results depicted in Table No. 7.11, during the year 1994 to

2009, it is found that the correlation between the BSE-30 (Sensex) and FII is

positive, and ranging between 0.02 to 0.85. There is high degree of correlation

between the Sensex and FII investment i.e. 0.85 in 1998-99 whereas low degree

of correlation found between Sensex and FII investment in 2002-2003 i.e. 0.02.

It is seen that a positive correlation between monthly returns of BSE-100

and FII investment for the entire period of study from 1994-95 to 2008-09. The

correlation between monthly returns of BSE-100 and FII investment is ranging

between 0.007 to 0.79. The table further examines the relation between the BSE-

200 and FII that gives the positive degree of correlation, ranging from 0.002 to

0.86. In the year 1996-97, there was low degree of positive correlation (0.002)

whereas high degree of positive correlation (0.86) found in the year 1998-99.

It is observed that there is positive degree of correlation coefficient (r) between BSE-500 and FII investment during study period, except in the year 2003-04, it recorded negative correlation co-efficient i.e. –0.05. The low and high degree of positive correlation between BSE-500 and FII investment is of 0.02 and 0.87 respectively.

212

7.12 Correlation between FII Investment and Monthly Turnover of BSE

Table no. 7.12 : Correlation between FII Investment and Monthly Turnover of BSE

Year Coefficient Correlation 1994-95 -0.169 1995-96 0.675 1996-97 0.627

1997-98 0.391 1998-99 0.506

1999-2000 0.200 2000-01 -0.119 2001-02 0.837 2002-03 -0.116 2003-04 0.945

2004-05 0.080 2005-06 0.140 2006-07 -0.056 2007-08 0.028 2008-09 -0.505

Source: Values are calculated from the data

Table no. 7.12 highlights the correlation between monthly turnover of BSE

and FII investment in secondary market of BSE during 1994-95 to 2008-2009. It is

seen that there is negative correlation in the year 1994-95, 2000-2001,2002-03,

2006-07 and 2008-09 i.e. –0.16, -0.11,-0.116, -0.05 and –0.50 respectively,

whereas rest of years, there is a positive degree of correlation between FII and

monthly turnover of BSE.

It is also seen, that there is high degree of correlation between BSE

turnover and FII investment i.e. 0.83 in 2001-2002, whereas low degree of

correlation found in the year 2007-2008 i.e. 0.02. Thus, the correlation between

FII investment and monthly turnover ranging between 0.02 to 0.83 degree.

Indices Coefficient of Correlation

A) Net FII & Net Sensex -0.513*

B) FII Investment & Monthly Returns of BSE

BSE-30

BSE-100

0.067NS

0.963NS

C)FII Investment & Monthly Turnover of BSE

-0.147NS

‘t’ value Significant at 5% Level, NS: Non Significant Note: Calculated & Compiled by Researcher

213

Conclusion:

The FII investment has always been the subject of debate in term of

desirability. This is because of FII money is known to be hot money that would flee

at the first sign of trouble. At present, total holding of each FII/Sub account under

the portfolio scheme should not exceeded 10% of the total paid up capital and

holding of all FII/Sub accounts put together should not exceed 24% of the paid up

capital. There has been a notable surge in FII investment since 1993-94 signifying

the attractiveness of the Indian stock market and is an expression of confidence

on the part of international investment community in the regularatory framework

for the securities market.

It is seen that during study period, the share of equity investment to the

total investment of FII is greater than Debt investment. It is also seen that average

share of net FII investment in secondary market of BSE is around 33.18% to the

total net FII investment. The percentage average share of FII trade in total

turnover of BSE is 14.0% during the study period.

The correlation analysis shows that there is a significant correlation

between FII investments with BSE Sensex. There is no significant correlation

between Return and FII investment. It is also found that, there is no significant

correlation between FII investment and monthly turnover of BSE during the study

period.