Determinants of Fii in India

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“IMPACT OF FOREIGN INSTITUTIONAL INVESTMENT ON STOCK MARKET” ----------------------------------------------------------------------------------------------------------------* Karan Walia **Dr. Rimpi Walia *** Monika Jain * ** *** Research Scholar, M.M. Institute of Management, Maharishi Markandeshwar University, Mullana- Ambala. Associate Professor, M.M. Institute of Management, Maharishi Markandeshwar University, Mullana- Ambala. Research Scholar, M.M. Institute of Management, Maharishi Markandeshwar University, Mullana- Ambala. ABSTRACT Foreign institutional investors have gained a significant role in Indian stock markets. The dawn of 21st century has shown the real dynamism of stock market and the various benchmarking of sensitivity index (Sensex) in terms of its highest peaks and sudden falls. In this context present paper examines the contribution of foreign institutional investment in sensitivity index (Sensex). Also attempts to understand the behavioral pattern of FII during the period of 2001 to 2010 and examine the volatility of BSE Sensex due to FII. The data for the study uses the information obtained from the secondary resources like website of BSE sensex. We attempted to explain the impact of foreign institutional investment on stock market and Indian economy. Also attempts to present the correlation between FII and BSE sensex by the Karl Pearson’ Coefficient of correlation test. KEYWORDS: FII (Foreign Institutional Investment), BSE Sensex, Correlation Between FII & BSE Sensex, Regulation Relating to FII Operation, Effect of FII on Indian Economy.

INTRODUCTION

FOREIGN INSTITUTIONAL INVESTOR: The term Foreign Institutional Investor is defined by SEBI as under: "Means an institution established or incorporated outside India which proposes to make investment in India in securities. Provided that a domestic asset management company or domestic portfolio manager who manages funds raised or collected or brought from outside India for investment in India on behalf of a sub-account, shall be deemed to be a Foreign Institutional Investor." Foreign Investment refers to investments made by residents of a country in financial assets and production process of another country. Entities covered by the term ‘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 etc.(fund having more than 20 investors with no single investor holding more than 10 per cent of the shares or units of the fund)” (GOI (2005)). 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’. The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with Securities & Exchange Board of India (SEBI) to participate in the market. One of the major market regulations pertaining to FII involves placing limits on FII ownership in Indian companies. They actually evaluate the shares and deposits in a portfolio. WHY FIIS REQUIRED? FIIs contribute to the foreign exchange inflow as the funds from multilateral finance institutions and FDI (Foreign direct investment) are insufficient. Following are the some advantages of FIIs. • It lowers cost of capital, access to cheap global credit. • It supplements domestic savings and investments. • It leads to higher asset prices in the Indian market. • And has also led to considerable amount of reforms in capital market and financial sector.

INVESTMENTS BY FIIS There are generally two ways to invest for FIIs. • EQUITY INVESTMENT 100% investments could be in equity related instruments or up to 30% could be invested in debt instruments i.e.70 (Equity Instruments): 30 (Debt Instruments) • 100% DEBT 100%...
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