IMPACT OF FOREIGN INSTITUTIONAL INVESTMENTS ON INDIAN CAPITAL MARKET

Transcription

1 IMPACT OF FOREIGN INSTITUTIONAL INVESTMENTS ON INDIAN CAPITAL MARKET DR.K.MALLIKARJUNA RAO*; H.RANJEETA RANI** * ASSISTANT PROFESSOR OF COMMERCE, DEPARTMENT OF COMMERCE, GOVT.DEGREE COLLEGE, ZAHEERABAD, DIST-MEDAK (AP) ** STUDENT OF MASTER OF BUSINESS ADMINISTRATION, ICBM-SCHOOL OF BUSINESS EXCELLENCE, HYDERABAD ABSTRACT The Foreign Institutional Investors (FIIs) have emerged as noteworthy players in the Indian stock market and their growing contribution adds as an important feature of the development of stock market in India. To facilitate foreign capital flows, developing countries have been advised to strengthen their stock market. As a result, the Indian stock markets have reached new heights and became more volatile making the research work in this dimension of establishing the link between FIIs and stock market volatility. This paper makes an attempt to develop an understanding of the dynamics of the trading behaviour of FIIs and effect on the Indian equity market especially in selected sectors, in addition to comparative analysis of preferred investment stock of FII. INTRODUCTION: FII is defined as an institution organized outside of India for the purpose of making investments into the Indian securities market under the regulations prescribed by SEBI. FII include Overseas pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or investments on behalf of a broad-based fund. FIIs can invest their own funds as well as invest on behalf of their overseas clients registered as such with SEBI. These client accounts that the FII manages are known as sub-accounts. A domestic portfolio manager can also register itself as an FII to manage the funds of sub-accounts foreign institutional investor means an entity established or incorporated outside India which proposes to make investment in India. Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for foreign institutional investors. FII is defined as an institution organized outside of India for the purpose of making investments into the Indian securities market under the regulations prescribed by SEBI. Entry Options For FII -A foreign company planning to set up business operations in India has the following options: Incorporated Entity i.e. by incorporating a company under the Companies Act, 1956, through Joint Ventures; or Wholly Owned Subsidiaries. Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject 94

2 to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy. Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can actively engage in corporate governance. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under influencing the conduct of listed companies, and providing them with capital are all part of the job of management. One of the most important features of the development of stock market in India in the last 20 years has been the growing participation of FIIs. Since September, 1992 when FIIs were allowed to invest in India, the no. of FIIs has grown over a period of time. At endmarch 2012, there were 1765 FIIs registered with SEBI. REVIEW OF LITERATURE: In India, the purchase of domestic securities by FIIs first allowed in September 1992 as part of the liberalisation process that followed the balance of payment crisis in Now days, a significant portion of Indian corporate sector s securities are held by Foreign Institutional Investors, such as pension funds, mutual funds and insurance companies. Chakrabarti (2001) conducted the pair-wise Granger Causality tests between FII inflows and returns on the BSE National Index. He found that portfolio investment from FIIs was more an effect than a cause of market returns in India Stanley Morgan (2002) has examined that FIIs have played a very important role in building up India s forex reserves, which have enabled a host of economic reforms. The study notes that FII strongly influence short term market movements during bear markets. However, the correlation between returns and flows reduces during bull markets as other market participants raise their involvement reducing the influences of FIIs. The study shows that the correlation between foreign inflows and market returns is high during bear and weakens with strengthening equity prices due to increased participation by other players. Mukherjee, Bose and Coondoo (2002) studied the cause-and-effect relationship between FII flows and returns on the Indian equity market. They found that FII flows to and from the Indian market tend to be caused by returns in the domestic equity market and not the other way round. Gordon and Gupta, (2003) found causation running from FII inflows to return in BSE. They observed that FIIs act as market makers and book profits by investing when prices are low and selling when they are high. Hence, there are contradictory findings by various researchers regarding the causal relationship between FII net inflows and stock market capitalization and returns of BSE/ NSE. Therefore, there is a need to investigate whether FIIs are the cause or effect of stock market fluctuations in India. Sivakumar S (2003) has analyzed the net flows of foreign institutional investment over the years, it also briefly analyses the nature of FII flows based on research, explores some determinants of FII flows and examines if the overall experience has been stabilizing or destabilizing for the Indian capital market. The Impact of FII in equity investment behaviour in stock market was examined by Karimullah ( ). He attempted to find out two way causes between behaviour and performance of Indian stock market. He researched about the idea, that financial liberalization increases the 95

3 efficiency of financial market and permission of FIIs equity investment are an important example of financial liberalization. Apart from net investment of FII's the purchase and sale behaviour of FIIs were also analyzed in the study. Agarwal, Chakrabarti et al (2003) have found in their research that the equity return has a significant and positive impact on the FII. But given the huge volume of investments, foreign investors could play a role of market makers and book their profits, i.e., they can buy financial assets when the prices are declining thereby jacking-up the asset prices and sell when the asset prices are increasing. Hence, there is a possibility of bi-directional relationship between FII and the equity return. Mazumdar Tanushree (2004) examined two consequences i.e. liquidity (positives) and volatility (negative) in the past decade on the Indian stock market. The results showed that FII flow have enhanced liquidity of the Indian stock market. FII investments improve liquidity in the stock markets for two reasons; they invest a large quantum of funds in the stock market and FII are known to be active traders. Dey Subarna & Mishra Bishnupriya (2004) in their study examined the casual relationship between net FII investment & the Indian stock market represented by market capitalization of BSE & NSE. The study also inferred that whenever market capitalization was high, FIIs were more attracted for investing. They gave importance to the policy makers as the Indian stock market was susceptible to changing investment patterns of foreign portfolio investors. Roy (2007) explored the basic motives behind foreign portfolio capital flows into India. He found that they are primarily driven by capital gains, and in the Indian case, by the change in stock prices. The study further revealed that stock prices are causing net foreign portfolio inflows and not vice-versa. Further, he found bi-directional causality between the exchange rate and net foreign portfolio inflows. Verma and Prakash (2011) found that the interest rate sensitivity of FII flows is not statistically significant and concluded that the BSE Sensex is a major pull factor for these flows into the domestic financial markets. Gupta Ambuj (2011) have studied the role of FII in volatility of the market and stock prices of individual securities, he found a high degree of relationship between the factors. OBJECTIVES OF THE STUDY To find out the relationship between the FIIs investment and Indian stock market To analyse the sector wise investment pattern of FII during To make a comparative study among companies of different sectors attracting FIIs Research Methodology The study carried out is analytical and empirical in nature in which it explores the relationship between the Inflows of FII and their impact on Indian Capital Market. Further, in order to show the position of FIIs in different sectors, we selected 10 companies comprising of five major sectors i.e., Real estate, Banking, IT, FMGC and Iron and Steel. Data Collection Data for the study is collected from Secondary sources. For this various literatures, books, journals, magazines, websites likes were used. 96

4 Empirical analysis The table 1 shows the number of Foreign Institutional Investors (FIIs) registered with SEBI. It is clearly observed that there was a tremendous increase in the number (322) of FIIs registered with SEBI in the year Where as in the year there was decline in the number of FIIs registered with SEBI. This was due to the fact that the impact of international recession had started affecting the FIIs registration. The table also reveals that there were FIIs registered with SEBI in the year as compared to 1722 a year ago, showing an increase of 2.5 per cent during the year. Table 1: FIIs REGISTEREDWITH SEBI YEAR FII at the end of March Net Additions in , , Source: SEBI annual reports FIIs in During the Year 97

5 Table 2 FII INVESTMENTS IN INDIA YEAR Gross Purchase (Rs.Crores) Gross Sales (Rs.Crore) Net Investments (Rs.in Crores) Net Investments (USD mm) Cumulative Net Investment , ,127 1,634 1, ,631 2,835 4,796 1,528 3, ,694 2,752 6,942 2,036 5, ,554 6,980 8,575 2,432 7, ,695 12,737 5,958 1,650 9, ,699-1, , ,122 2,474 11, ,051 64,118 9,933 2,160 13, ,071 41,308 8,763 1,839 15, ,062 44,372 2, , ,44,855 99,091 45,764 10,005 25, ,16,951 1,71,071 45,880 10,352 36, ,976 3,05,509 41,467 9,363 45, ,20,506 4,89,665 30,841 6,821 52, ,48,018 8,81,839 66,179 16,442 68, ,576 6,60,386-45,811-9,837 59, ,46, ,42,658 30,253 89, ,92,599 8,46,161 1,46,438 32,226 1,21, ,21,285 8,27,562 93,725 18,923 1,40,482 Source: SEBI annual reports From the above table 2 it is observed that the FIIs showed huge investments in the gross purchases of Debt and Equity by per cent to Rs. 9,48,018 crores in from 5,20,506 crores in The combined gross sales by FIIs increased by 80 per cent to 8,81,839 crore from 4,89,665. FIIs turned towards net selling in equity and debt for profit booking and seeing the massive sell out of shares in global markets including India during the period The analysis of the above table depicts a negative view of the FIIs investment in India during and The active reason could be tremendous selling in these two years. It is also clear from the table that the gross purchase of debt and equity by FIIs declined by 7.2 per cent to Rs. 9,21,285 crores in from 9,92,559 crores in The combined gross sales by FIIs declined by 2.2 per cent to 8,27,562 crore from 8,46,161 crores during the same period. 98

6 TABLE: 3 Share of FII in different sectors of Companies listed on NSE Sector Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Banks Engineering Finance FMCG IT Infrastructure Manufacturing Media & Entertainment Petrochemicals Pharmaceuticals Services Telecommunication Miscellaneous Total stake of FIIs in the sectors Source: www. nseindia.com Table 3 reveals that share of FII in different sectors of companies listed on NSE, at the end of March, 2007 the FII held the five highest stake of banks (18.41 per cent), followed by Finance (18.18 per cent ), Media & Entertainment (15.20 per cent ), Information Technology ( per cent ) and Service sector (13.09 percent). The total percentage of share held by FII across different sectors was percent of the total shares of the companies listed on the NSE at the end of March, At the end of March, 2008, the FII held the highest stake in banking sector per cent followed by finance, Information Technology, Media & Entertainment and service sector percent, per cent, percent and percent respectively. In the year 2009, FII held the highest in banking sector percent. The total percentage of share held by FII across different sectors was 8.40 percent of the total shares of the companies listed on the NSE at the of March, In the year March, 2010 invested highest in the Finance sector (16.53 percent) and lowest in petrochemicals (6.08 percent). It could be observed from the table 4 that FII investments are highest in finance sector (20.35 percent) followed by Information Technology (21.16 percent) and banking (17.62 percent) at end of March, However in the year 2012 majority of the investments of FII were in banking sector (15.09 percent) and lowest in petrochemicals (4.5 percent). On the whole, FII investments in petrochemicals were lowest during the year 2007 to Sector wise analysis In order to find out the impact of FIIs on Indian Stock Market, five major sectors have been selected for the detailed study namely; Real Estate, Iron & Steel, Banking, Information Technology and FMCG. 99

7 The 4 shows the comparative figures in DLF and JAI PRAKASH. It is evident from the table that FIIs share holdings in DLF drastically increased that is percent in the year to percent in the year While in Jai Prakash associates the share holdings of FIIs decreased over the years i.e., from with percent to percent. Table 4: Percentage of FII shareholding in total shares in selected infrastructure companies. DLF JAIPRAKESH ASSOCIATES June June Sept Sept December December March March Avg Avg www. nseindia.com The 5 given below reveals a detailed account of the quarterly FII inflows during the last five years. It is evident from the table that during the study period Jindal Steel has outperformed TATA Steel in FII inflows. Another significant observation from the table is that the FIIs share in TATA Steel is lowest during the While in the Jindal Steel it is lowest during the year Table 5: Percentage of FII shareholding in total shares in selected steel companies TATA STELL JINDAL STEEL June June Sept Sept December December March March Avg Avg www. nseindia.com The table 6 clearly show the comparative study of the largest public (SBI) and private (ICICI) sector banks of India. The one significant observation from the table is that the ICICI bank has attracted more FII inflow than the public sector bank (SBI). FIIs are showing interest in private sector banks as they are secular growth stores and are relatively better investment options as compared with public sector banks in an environment where asset quality is the reason for stress on banking. 100

8 Table 6: Percentage of FII shareholding in total shares in selected BANKING companies SBI ICICI BANK June June Sept Sept December December March March Avg Avg The table 7 given below presents a comparative study of the largest IT companies in attracting FII investments. The table makes it evident that of the selected two companies, FIIs have invested more funds into equity shares of Infosys than TCS. Further, it is also quite evident that the two companies Infosys and TCS have faced the global showdown of Table 7: Percentage of FII shareholding in total shares in selected IT companies. INFOSYS TCS June June Sept Sept December December March March Avg Avg The table 8 below presents a comparative analysis between the two FMGC companies of India. It is evident from the table that there has not been any difference in both the companies, attracting FII investment. But Hindustan Unilever has outperformed than ITC during the study period. Table8: Percentage of FII shareholding in total shares in selected FMCG companies. ITC HINDUSTAN UNILEVER June June Sept Sept December December March March Avg Avg www. nseindia.com 101

9 Conclusion: FII is a vital component which helps in the development of financial market and the overall financial development thereby allowing the capital flows available in a country to pursue its trajectory of economic growth. Form all the above discussions and data analysis of the study it is inferred that there has been growing presence of the FII inflows in the Indian stock markets which is evident through the net cumulative investments and at times of recession there has been a decline in the inflows. It is also clear from the study that there is an increase in the number of FII registered with SEBI. Further the study shows the share of FII in different sectors of companies listed on NSE from 2007 to FII held the five highest stake of banks, followed by finance, Media & Entertainment, Information Technology and service sector. However, the FII share in Petro chemicals showed the least during From all the discussions of the study, it is also visible that there has been no decline in FII inflows in IT & FMCG sector even during global recession of 2008 whereas as in all the other selected sectors, impact of recessions is quite visible. Reference 1) Chakrabarti, Rajesh FII Flows to India: Nature and Causes. Money and Finance 2 (7): Pp ) Stanley Morgan (2002) :"FII's influence on Stock Market", Journal: Journal of impact of Institutional Investors on ism. Vol 17. Publisher: Emerald Group Publishing Limited 3) Mukherjee, Paramita, Suchismita Bose and Dipankar Coondoo Foreign Institutional Investment in the Indian Equity Market: An Analysis of Daily Flows during January 1999 May Money and Finance 2 (9 10): ) Gordon, J. and Gupta, P. (2003). Portfolio Flows into India : Do Domestic Fundamentals Matter? IMF Working Paper, Number WP/03/02 5) Sivakumar S (October 2003) : "FIIs: Bane or boon?",journal : Journal of stock market volatility, Vol: 34. Publisher: MCB UP Ltd. 6) Roy, Nirmal An Analysis of Foreign Portfolio Flows in the Context of Capital Account Convertibility in India. Chapter from the MPhil dissertation on An Analysis of Foreign Portfolio Flows in the Context of Capital Account Convertibility in India, Centre for Development Studies (CDS), Trivandrum. 7) Verma, Radheshyam, and Anand Prakash Sensitivity of Capital Flows to Interest Rate Differentials: An Empirical Assessment for India. RBI Working Paper Series: 7/ 2011, Dept. of Economic and Policy Research (DEPR), May. 8) 9) 102