Stock market
The term Foreign Institutional Investor defined y SIB 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 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 include “Overseas pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional oratorio 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)” (GO (2005)).
Falls can invest their own funds as well as invest on behalf of their overseas clients registered as such with SIB. These client accounts that the FL 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 (SIB) to participate in the market. One of the major market regulations pertaining to FL involves placing limits on FL ownership in Indian companies. They actually evaluate the shares and deposits in a portfolio.
Following are the some advantages of Falls. 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. 32 sector. INVESTMENTS BY Flies There are generally two ways to invest for Ells.
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% investment has to be made in debt securities only EQUITY INVESTMENT ROUTE: In case of Equity route the Fills can invest the following instruments: A.
Securities in the primary and secondary market including shares which are enlisted, listed or to be listed on a recognized stock exchange in India. B.
Units of schemes floated by the Unit Trust of India and other domestic mutual funds, whether listed or not. C. Warrants 100% DEBT ROUTE: In case of Debt Route the Ells can invest in the following instruments: A. Debentures (Non Convertible Debentures, Partly Convertible Debentures etc. ) B.
Bonds C. Dated government securities D. Treasury Bills E. Other Debt Market Instruments It should be noted that foreign companies and individuals are not be eligible to invest through the 100% debt route.
HISTORY OF Flip achieved portfolio investment from foreigners in the form of foreign institutional investment in equities.
This has become one of the main channels of FL in India for foreigners. Initially, there were terms and conditions which restricted many Falls to invest in India. But in the course of time, in order to attract more investors, SIB has simplified many terms such as: The ceiling for overall investment of FL was increased 24% of the paid up capital of Indian company. Allowed foreign individuals and hedge funds to directly register as Ell.
Investment in government securities was increased to IIS$5 billion.
Simplified registration norms. PROCEDURE FOR REGISTRATION: The procedure for registration of has been given by SIB regulations. It states- “no person shall buy, sell or otherwise deal in securities as a Foreign Institutional Investor unless he holds a certificate granted by the Board under these regulations”. An application for grant of registration has to be made in Form A, the format of which is provided in the SIB (F”) Regulations, 1995.
THE ELIGIBILITY CRITERIA FOR APPLICANT SEEKING Flip REGISTRATION IS AS FOLLOWS: Good track record, professional competence and financial soundness. Regulated by appropriate foreign regulatory authority in the same capacity/category where registration is sought from SIB.
(FEM..) from the RIB. Legally permitted to invest in securities outside country or its incorporation/ establishment. The applicant must be a fit and proper’ person. Local custodian and designated bank to route its transactions.
ELIGIBLE SECURITIES A FL can make investments only in the following types of securities: Securities in the primary and secondary markets including shares, debentures and warrants of unlisted, to- be-listed companies or companies listed on a recognized stock exchange. Units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed on a recognized stock exchange or not, and units of scheme floated by a Collective Investment Scheme. Government Securities Derivatives traded on a recognized stock exchange – like futures and options.
Ells can now invest in interest rate futures that were launched at the National Stock Exchange (NOSE) on 31 SST August, 2009. Security receipts REGULATION RELATING TO Flip OPERATION Investment by Ells is regulated under SIB (F”) Regulations, 1995 and Regulation 5(2) of FEM.
. Notification No. 0 dated May 3, 2000. SIB acts as the nodal point in the entire process of FL registration. Falls are required to apply to SIB in a common application form in duplicate. A copy of the application form is sent by SIB to RIB along with their ‘No Objection’ so as to enable RIB to grant necessary permission under FEM.
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RIB approval under FEM.. Enables a VII to buy/sell securities on stock exchanges and open foreign currency and Indian Rupee accounts with a designated bank branch.
Falls are required to allocate their investment between equity and debt instruments in the ratio of 70:30. However, it is also possible for an FL to declare itself a 100% debt FL in which case it can make its entire investment in debt instruments. All Ells and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company.
Indian Companies can raise the above mentioned 24% ceiling to the Sector Cap / Statutory Ceiling as applicable by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by its General Body. With SIB, these amendments are: The definition of “broad based fund” under the regulations was substantially dinned allowing several more sub accounts and Ells to register with SIB. Several new categories of registration biz.
Sovereign wealth funds, foreign individual, foreign corporate etc. Ere introduced, 35 Registration once granted to foreign investors was made permanent without a need to apply for renewal from time to time thereby substantially reducing the administrative burden, Also the application fee for foreign investors applying for registration has recently been reduced by 50% for Ells and sub accounts Also, institutional investors including Falls and their sub-accounts have been allowed o undertake short-selling, lending and borrowing of Indian securities from February 1, 2008. OBJECTIVES To find out the relationship between the Ells investment and stock market.
To know the volatility of BASE Senses due to Falls. To get the knowledge of stock market. HYPOTHESIS There is close correlation between BASE Senses volatility and Ells.
REVIEW OF LITERATURE 1 . Stanley Morgan (2002) has examined that Ells have played a very important role in building up Indian’s force reserves, which have enabled a host of economic reforms. Secondly, Ells are now important investors in the country’s economic growth despite lugging domestic sentiment. The Morgan Stanley report notes that FL 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 influence of Ells.
Research by Morgan Stanley 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. 2. Augural, Charitable et al (2003) have found in their research that the equity turn has a significant and positive impact on the Ell.
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 FL and the equity returns. 3. P. Krishna Parmesan (2008) has examined the contribution of foreign institutional investment particularly among companies included in sensitivity index (Senses) of Bombay Stock Exchange.
Also examined is the relationship between foreign institutional investment and firm specific characteristics in terms of ownership structure, financial performance and stock performance. It is observed that foreign investors invested more in companies with a higher volume of shares owned by the general public. The promoters’ holdings and the foreign investments are inversely related. Foreign investors choose the companies where family shareholding of promoters is not substantial.
Among the financial performance variables the share returns and earnings per share are significant factors influencing their investment session.
Long way in terms of infrastructure, adoption of best international practices and introduction of competition. Today, there is a need to review stock exchanges and improve the liquidity position of various Scripps listed on them. A study conducted by the World Bank (1997) reports that stock market liquidity improved in those emerging economies that received higher foreign investments. . And Bananas and J. S.
Pastiche (2009) studied the impact of market opening to Falls on Indian stock market behavior. They empirically analyze the change of market return ND volatility after the entry of Falls to Indian capital market and found that while there is no significant change in the Indian stock market average returns; volatility is significantly reduced after India unlocked its stock market to foreign investors. In the next section we are discussing the data sources and methodology of the study. 6.
Kumar (2001) investigated the effects of FL inflows on the Indian stock market represented by the Senses using monthly data from January 1993 to December 1997.
Kumar (2001) inferred that FL investments are more driven by Fundamentals and hey do not respond to short-term changes or technical position of the market. In testing whether Net FL Investment (NFG) has any impact on Senses, a regression of NFG was estimated on lagged values of the first difference of NFG, first difference of Senses and one lagged value of the error correction term (the residual obtained by estimating the regression between NFG and Senses).
The study concluded that Senses causes NFG. Similarly, regression with Senses as dependent variable showed that one month lag of NFG is significant, meaning that there is causality from FL to Senses. This ending is in contradiction with the findings of Aria and Bankruptcy (2003) who did not find any causation from FL to return in BASE using similar data between 1994 and 2002. However, Aria and Bankruptcy have also found significant impact of return in BASE on NH.
