CHAPTER-II A major development in our country post 1991 has been liberalization of the financial sector, especially that of capital markets. Our country today has one of the most prominent and followed stock exchanges in the world. Further, India has also been consistently gaining prominence in various international forums, though we still have a long way to go. Developing countries like India are generally capital scarce. This is because levels of income are lower in comparison to other developed countries, which in turn means savings and investments are also lower.
The most of FIIs portfolio is concentrated is top large cap stocks which was their bearish phase strategy, ,now with the recovery in the equity market and valuations turning attractive they are likely to widen their exposure in Indian stock market . FIIs are the major source of liquidity for the Indian market . If FIIs are investing huge amount in the Indian stock markets then it reflects their high confidence and a healthy investors sentiments for the market . The entry of FIIs in India has brought mixed consequences for the market. They have improved the breadth and depth of the Indian market.
There are two type of investments in India one is FIIs And other one is FDI. The FIIs are invested in stock market while the FDI is invested in anywhere of the country. Foreign Direct Investment (FDI) of Portfolio Investment (better known as Institutional Investment ). The difference between the two is subtle. Let’s look into FDI first. FDI is defined as “investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. ” Examples of FDI would include POSCO setting up a steel plant in Orissa (in-bound FDI), Tata buying Arcelor (out-bound FDI) and so on.
On the other hand, FII is used to denote an investor, who invests money in the financial markets of a country different from the one in which that investor is incorporated. So, if you as an Indian decide to invest in the US stock markets, it is an out-bound foreign institutional investment. Similarly, suppose a rich American millionaire invests in the Indian stock markets, it would be termed as in-ward FII. The FIIs Shows in the stock market ,firstly the spectacular rise of the Sensex over the past few months! Secondly, we can see how volatile FII flows are.
It is almost impossible to predict whether FIIs will be net sellers or net buyers tomorrow! What is more important is that there is no rigid relationship between the Sensex and FII flows. Statisticians use a measure known as the correlation coefficient, which is used to depict a relationship between two variables mathematically. This coefficient ranges from minus 1 to plus 1. So, if we consider two variables, and the coefficient is -1, it means that when one moves up, the other moves down in the same proportion.
When it is 1, it means when one moves up or down, the other also moves in the same manner, and when it is zero, it means there is no correlation. So when one moves up (or down), there’s no way to figure out how the other variable will behave. So basically, one can compute the correlation coefficient between the Sensex and FII flows. I found it to be 0. 13 over a 21 month period. This is a very weak correlation, though it cannot be ignored entirely. But if they are so weakly correlated, then why do they grab the headlines. Well, that’s because we need to “look beyond the numbers”!
In any kind of market, financial or real, investor sentiment and psychology play a crucial role. This is something that just cannot be captured in a few numbers. Now an in-depth explanation of investor psychology is not possible here, but I can give a few examples of it. For instance, when the stock markets rise, they just seem to be rising. Experts and academicians have studied the behavior of investors, and found that frenzy and greed drive investors during a bull run, and especially when a bull run is at its full momentum, investors tend to “follow the band-wagon” and overlook economic fundamentals while investing.
In fact, stock market crashes too occur in similar ways. One major investor may begin selling his stocks suddenly. Looking at him, others may panic, and they too follow suit. Such panic spreads like wild fire in the markets, and ultimately leads to a major crash. This was similar to what happened during the times of Harshad Mehta and Ketan Parikh. It is because of the volatile nature of investors’ sentiments that FIIs are tracked so closely. It would not be prudent to drive away foreign investors from investing in our country.
I had mentioned the importance of foreign capital in the context of a developing economy, and that is precisely why the government has been so keen on liberalizing the external financial sector since 1991. If one foreign investor has had a good experience investing in our country, it builds up our reputation in the international community, and encourages more foreign investors to invest in our economy. However, a crisis of any kind will create panic among foreign investors as well, and regaining their trust and confidence in our economy will entail another mammoth task!
After 1993-94, SEBI stopped giving a category-wise break up of the registered FIIs in India. From an examination of the registration numbers, available from the SEBI web site, it appears that most FIIs fall under two categories: `FA’ and `FD’. FA appears to stand for fund advisers and asset management companies implying that most FIIs (56. 57 per cent) work as representatives of others. From a similar deduction it appears that FD stands for investment funds. These two categories account for 93 per cent of the FIIs. There are 9 FIIs under the category `FC’ which are most likely pension funds.
The other important category is `FE’ which includes an assortment of insurance companies, investment trusts and government bodies. Out of the 502 FIIs, as many as 200 were from USA and another 121 have UK addresses. A few FIIs are reported to be from Hong Kong, Singapore, Luxembourg, etc. , but some of them, It is our assessment, had their origin in USA and UK. For instance, those registered from Singapore include: Citicorp Investment Bank (Singapore) Ltd. , Templeton Asset Management Ltd. , and J. P. Morgan Securities Asia Pvt. Ltd.
The registrants from Hong Kong include Jardine Fleming Intl. Mgt. Inc. , Merril Lynch Far East Ltd. , and ABN Amro Asia Ltd. One of the registrants from Bahrain is Citicorp Banking Corp. Very few FIIs had their addresses in tax havens like Bahamas and Cayman Islands. Only one FII has given a Mauritius address. It thus appears that the phenomenon of FIIs is essentially a domain of funds from USA and UK. The larger FIIs have multiple associates in India including locally incorporated companies which operate either as brokers, managers or mutual fund operators.
Some of the FIIs floated joint ventures with Indian companies: either belonging to the brokbusiness groups. Coupled with the fact that the FIIs can invest through the GDR route, it appears that the operations of FIIs cannot be understood if investments by FIIs registered with SEBI are examined in isolation. The network of entities belonging to the Jardine Fleming Group may provide a concrete example in this regard . We shall discuss the involvement of FIIs in the Indian mutual funds industry a little latter to further provide evidence in this regard.
From the available information it appears that FIIs do not play a major role in the primary market. According to SEBI, in 1995-96, out of the 1,426 public issues involving an issue amount of Rs 14,240 crore, in 79 issues Rs 212 crore were reserved for FIIs. In the following year Rs 549 crore were reserved in 23 issues out of a total amount of Rs 11,557 crore issued by 751 companies. In 1997-98 the amount reserved was Rs 12 crore in 3 issues [SEBI, 1996-97 and 1997-98; 1998-99, ]. The following exercise will, therefore, be concentrating on the FII operations in the secondary market.
In the secondary market also, going by the values, FIIs are more active on the equity market than in the debt segment [BSE, 2000,]. At the Bombay Stock Exchange, which accounts for about half of the FII sales and purchases, against the total market turnover of Rs 5,27,960 crore in 1999, FII purchases were Rs 17,165 crore and sales, Rs 13,174 crore. The total turnover for 1998 stood at Rs 2,65,995 crore; FII purchases at Rs 6,684 crore and their sales, Rs 6,940 crore. Thus, in comparison to total trading values on the BSE, FII sales and purchases appear to be quite small.
For understanding the investment pattern of FIIs we tried to examine the N-30D filings of investment funds with the US capital market regulatory body, namely, the Securities and Exchange Commission (SEC). Form N-30D is required to be filed by registered investmeing community or India’s Net Investment By FIIs In India since1991-2008 Table 2. 1 YEARNET INVESTMENT BY FIIs (Rs Cr) 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-084. 27 5444. 60 4776. 60 6720. 90 7386. 20 5908. 45 729. 11 9765. 13 9682. 52 8272. 0 2668. 90 30458. 7 38965. 1 47,181. 2 36,539. 7 42,3176. 5 Source:-www. coolavenues. com Number of Foreign Institutional Investors (FIIs) As of March 2008, there were 1,319 FIIs registered with SEBI, as against 997 in March 2007. FIIs REGISTERED IN INDIA India had 528 FIIs were registered with SEBI by end of 2001 and by end of Feb-2008 the number increased to1303. The trend in the number of registered FIIs has been consistently on the rise as can be seen from the table; showing the significant amount of confidence that Indian Capital market has developed in the last few years.
Not only has been the number increasing on a consistent basis, but the amount of inflow into Indian market has also seen a manifold increased. The gross purchase, sales and net investment figure on an annual basis gives a fair idea about the consistency of their investments in our country. As we can see in the investment trends table, except for 1998, the net investment by the FIIs in the Indian market has always been positive since liberalization which to a large extent tells about the consistency of their presence in Indian market.
This is also evident from the fact that the number of FII registering in India is increasing in spite of the fact that SEBI has declined to issue any further PN notes and also asked them to get registered. This shows that India still remains the hot spot for the foreign investors in the coming years. Table. FIIs Registered in India YEAREND OF MARCH 1992-930 1993-943 1994-95156 1995-96353 1996-97439 1997-98496 1998-99450 1999-00506 2000-01527 2001-02490 2002-03502 2003-04540 2004-05685 2005-06882 2006-07997 2007-081,319 sss Source:-www. nseindia. com MAJOR INSTITUTIONAL INVESTORS IN INDIA
The total number of Domestic institutional investors specially the mutual funds is 40 in number. Similarly insurance companies and other banks are very large in number. But out of these there are some heavy weights which solely by their investments are among the top 5 domestic institutional investors in india. Among the total FII registered i. e. 1303 by the end of feb 2008 the top 5 FII in terms of their investment in India are listed below. Top 5 FIIs in the Indian Stock Market S. No. Name of FIIsValue of Investment(Rs Crores)Value of Investment($billion) 1. Citigroup53,357. 1813. 54 . Deutsche Group51,831. 4013. 16 3. HSBC Global Investment25,255. 806. 41 4. Morgan Stanley . International Ltd. 23,407. 215. 94 5. Merrill Lynch Capital Market Espana22,493. 045. 71 Source:-capitalline, Mint research, BSE (Exchange rate of Rs 39. 40/$) Foreign Institutional Investments- Equity and Debt FIIs were allowed to invest in the Indian Capital Market securities from September 1992; however investment by them were first made in January 1993. Till December 1998, investments were related to equity only as the Indian gilts market was opened up for FII investment in April 1998.
Investments in debt were made from January 1999. Foreign Institutional Investors (FIIs) continued to invest large funds in the Indian securities market For two consecutive years in 2004-05 and2005-06, net investment in equity showed year-on-year increase of 10%.. Highest net investment in equity by FIIs 112% over the 2006-07 net investment figure of Rs 252,370 million (US $ was seen in 2007-08 of Rs. 534,038 million (US $ 13,361 million) an increase of5,790 million) During the first quarter of the fiscal 2008-09, FIIs have been net sellers in the equity market. They have sold equity worth Rs. 40,325 million US $ 3,267 million) Table (Net Investment by FII’s in Equity ) (Rs. million) Year FII’s Net Investment in EquityNet Investment in Debt 2001-0280,670 6,850 2002-0325,280 600 2003-04399,590 58,050 2004-05441,230 17,590 2005-06488,010 (73,340) 2006-07252,370 56,070 2007-08534,038127,753 Highest net investment in debt by FIIs was seen in 2007-08 of Rs. 127,753 million (US $ 3,196 million). During April 08- June 08, FIIs have been net sellers in the debt markets as well. They have sold Rs. 28,633 million (US $ 667 million) of debt over this period. Share of FIIs in NSE Listed Companies
The FII ownership of shares in various sectors of NSE listed companies is presented in. At the end of March2008 FIIs held the highest stake of 19. 15 % in the Banking sector followed by Finance and Information Technology of17. 44 % and 16. 00 % respectively. The total percentage of shares held by FIIs across different sectors was 10. 62 % of the total shares of the companies listed on NSE as at end March 2008 and 9. 94 % at the end of June 2008. Table: – FIIs Share in different sectors of companies listed on NSE SectorsPercentage Share of Foreign Institutional Investors End of March 2007End of March 2008End of June 2008
Banks18. 4 19. 1 17. 10 Engineering11. 45 10. 63 9. 24 Finance18. 18 17. 44 15. 83 FMCG11. 91 14. 07 13. 46 Information Technology14. 53 16. 00 16. 30 Infrastructure 7. 15 8. 86 8. 16 Manufacturing9. 57 9. 46 8. 51 Media & Entertainment15. 20 11. 71 11. 08 Petrochemicals5. 83 4. 73 5. 38 Pharmaceuticals11. 17 10. 69 10. 30 Services13. 09 10. 70 10. 89 Telecommunication11. 17 9. 12 9. 18 Miscellaneous8. 19 9. 30 9. 94 Total stake of FII’s in all the sectors10. 78 10. 62 9. 94 Source:-? •? www. sebi. gov. in Reference:- 1. Chakrabarti, Rajesh (2001): ‘FII Flows to India: Nature and Causes’, Money nd Finance, October-December. Reprinted in Chakrabarti, Rajesh, The Financial Sector In India: Emerging Issues, Oxford University Press, New Delhi, 2006. 2. Pal, Parthapratim (1998), “Foreign Portfolio Investment in India Equity Market: Has the Economy Benefited? ” Economic Political Weekly, 33, March 14, pp. 589-98. 3. Wang L. & Shen, C. 1999. Do foreign investments affect foreign exchange stock markets: Journal of Applied Economics, Vol. 31(11), pp1303-1317. 4. www. nseindia. com 5. www. bseindia. com ???? www. investopedia. com. 7. www. capitaline. com
