Sneha Neha Cp.

A
COMPREHENSIVE PROJECT REPORT

ON
FOREIGN INSTITUTIONAL INVESTORS AND INDIAN STOCK MARKET:
A CAUSALITY STUDY
Submitted to
C.K.SHAH VIJAPURWALA INSTITUTE OF MANAGEMENT
IN PARTIAL FULFILLMENT OF THE
REQUIREMENT OF THE AWARD FOR THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION
Under
Gujarat Technological University
UNDER THE GUIDENCE OF

Faculty guide
Mr.Nirav Majmudar
Submitted by
Patel Neha A. Ahmedabadkar Sneha S.
Enrollment No.09705059202 Enrollment No.097050592034
M.B.A - SEMESTER IV
C.K.SHAH VIJAPURWALA INSTITUTE OF MANAGEMENT
M.B.A PROGRAMME
Affiliated to Gujarat Technological University
Ahmedabad
April 2011
1
PREFACE
Comprehensive Project is an integral part of the MBA program at C.K.SHAH
VIJAPURWALA INSTITUTE OF MANAGEMENT. An exercise like this helps us
to have a firsthand experience as to what an academic Research project entails.
It exposes us to the process of identifying, systematizing and exploring specific
problems or issues. This process fosters creation of new knowledge and
expansion of existing framework of knowledge. To get acquainted with the
theoretical aspects of management and the practical implications of theory is
greatly valuable for us.
An analysis of the direction of causality to understand the possible devastating
effect of volatility of FII flows on the Indian Stock Market is important. The
present empirical study has been undertaken to throw some light on the cause
and effect relationship between FII flows and Indian stock market returns.
We felt that the utility of the report could further enhance by widening its
coverage and updating its contents wherever necessary. We hope this report will
provide necessary information. Comprehensive project is the golden
opportunities for the every student of the management
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ACKNOWLEDGEMENT
No one who achieves success does so without acknowledging the help of
others.
Here its an immense opportunity for us to articulate our Vote of Thanks
towards all those persons who not only helped but inspire us making research
project with great learning.
First of all, we would like to Thank Dr.Rajesh Khajuria, Dr. Kunjal Sinha and
Ms.Ishita Ashra for providing us initial guidance regarding the framework of
project.
We would like to express our thanks to Mr. Nirav Majmudar who has not just
continuously guided us but taught us new concepts and made our journey of
preparing for project more interesting. His invaluable and significant guidelines
improved our outlook in making our project a real learning experience. He also
encouraged us to put in our best efforts and bring out the best of our abilities.
We are also thankful to the whole staff of CKSVIM and other faculties to whom
we approach during our project.
At last but not the least, we take an opportunity to appeal our profound gratitude
to our adorable and beloved parents for their everlasting love, strong moral
support, encouragement without which we were unable to reach the present
status of education.
3
DECLARATION
We, Patel Neha A. and Ahmedabadkar Sneha S, hereby declare that the report
for Comprehensive project entitled FII AND INDIAN STOCK MARKET:
CAUSALITY STUDY is a result of our own work and our indebtedness to other
work publications, if any, have been duly acknowledged.
Place: Vadodara (signature)
Date: Patel Neha A.
(Signature)
Ahmedabadkar Sneha S.
4
Executive Summary
Foreign Institutional Investor means an institution established or

incorporated outside India, which proposes to make investment in India in
securities. (Regulation 2(f) of the FII regulation)
The issue of whether FII flow affects stock market returns or the other way round
is a matter of some controversy. It has been perceived in some quarters that FII
flows are the major drivers of stock markets in India and hence a sudden reversal
of such flows may harm the stability of its markets. Contrary to this belief, it is
viewed by others that FII flows react to the existing crisis in the stock market,
possibly exacerbating it rather than causing it.
In light of these events, Grand Project taken up dealt with three objectives. One
objective is to find out the cause and effect relationship between the FII and S &
P CNX Nifty .Second, objective is to know how much FII and S & P CNX NIFTY
affect each other through VAR (Variance Decomposition Model). Third objective
is to assess the growth and development of the Indian stock Market. Fourth,
objective is to develop an understanding about the concept and role of Foreign
Institutional Investors (FIIs) in India.
Correlations between the two estimated variables' series are determined to have
a preliminary understanding of the nature of relationship between stock market
returns and FII flows. But, if found, do not shed much light on the direction of
causality, pair-wise Granger causality tests are conducted between daily net
Equity FII flows and daily S & P CNX NIFTY to know the causality between the
FII and S & P CNX NIFTY.
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TABLE OF CONTENTS
PART I GENERAL INFORMATION ................................................................ 10

CHAPTER-1 ABOUT THE INDUSTRY ........................................................... 10
1.1 FOREIGN INVESTMENTS IN INDIA ................................................. 11
1.2 ABOUT FOREIGN INSTITUTIONAL INVESTOR .................................. 11
CHAPTER-2 WORLD ECONOMY .................................................................. 19
2.1 INSIGHTS FROM THE GLOBAL COMPETITIVENESS INDEX ............ 20
2.2 THE FINANCIAL DEVELOPMENT REPORT 2010 ............................... 21
2.3 EMERGING MARKETS ATTRACT GLOBAL INVESTORS ................... 23
CHAPTER-3 FOREIGN INSTITUTIONAL INVESTORS IN INDIAN CAPITAL
MARKET ......................................................................................................... 24
3.1THE ELIGIBILITY CRITERIA FOR APPLICANT SEEKING FII
REGISTRATION .......................................................................................... 25
3.2SUPPORTING DOCUMENTS REQUIRED ............................................ 25
3.3 LIMITS ON FOREIGN INSTITUTIONAL INVESTORS ......................... 26
3.4 INVESTMENT RESTRICTION ............................................................... 28
3.5 FII INVESTMENT IN SECONDARY MARKETS .................................... 29
3.6 GENERAL OBLIGATIONS AND RESPONSIBILITIES .......................... 30
3.7 MONITORING OF INVESTMENT POSITION BY RBI ........................... 31
3.8 MARGIN REQUIREMENTS ................................................................... 32
3.9 HISTORICAL EVOLUTION OF FII POLICY IN INDIA............................ 32
CHAPTER-4 GROWTH OF FII IN INDIA ........................................................ 35
CHAPTER-5 INDIA A EMERGING DESTINATION FOR FIIs ...................... 44
PART II PRIMARY STUDY ................................................................................ 49
CHAPTER-6 LITERATURE REVIEW .............................................................. 50
CHAPTER-7 BACKGROUND OF THE STUDY .............................................. 54
CHAPTER-8 .................................................................................................... 56
8.1 PROBLEM STATEMENT AND IMPORTANCE OF THE STUDY .......... 56
8.2 OBJECTIVES OF THE STUDY ............................................................. 56
CHAPTER-9 RESEARCH METHODOLOGY .................................................. 57
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9.1 RESEARCH METHODOLOGY .............................................................. 57
9.2 SOURCES OF DATA ............................................................................. 58
9.3 DATA COLLECTION METHOD ............................................................. 59
9.4 STATISTICAL TOOLS ........................................................................... 60
PART Ill DATA ANALYSIS AND INTERPRETATION ...................................... 61
IMPULSE RESPONSES .................................................................................... 79
FIGURE-11 ......................................................................................................... 79
For a one unit pulse shock to one variable , what are the expected dynamic
consequences in the system. ............................................................................. 79
FII TO FII ............................................................................................................ 79
RESULTS AND FINDINGS ................................................................................ 80
LIMITATION OF THE STUDY ............................................................................ 83
CONCLUSION.................................................................................................... 84
REFERENCES ................................................................................................... 85
GLOSSARY OF TERMS .................................................................................... 88
7
LIST OF FIGURES
FIGURE PAGE
SR.NO. PARTICULARS
NO. NO.
1 Foreign Investment in India 1 11
2 No of FII registered in India 2 37
3 Net equity FII and S & P CNX Nifty during the
3 39
year 2008
4 Net equity FII and S & P CNX Nifty during the 4 40
year 2009
year 2010
year 2011
7 Average of net equity FII and S & P CNX Nifty 7 43
from Jan 2003 to March 2011
8 Graph of FII from JAN 2000 to March 2011 8 66
9 Graph of S & P CNX Nifty for non stationary 9 68
data From JAN 2000 to MARCH 2011
10 S & P CNX NIFTY FOR STATIONARY DATA 10 71
FROM JAN 2000 TO MARCH 2011
11 Impulse Responses 11 79
8
LIST OF TABLE
PARTICULARS TABLE PAGE
The Ranking of BRIC Countries On The Twelve Pillars of GCI 1 21
The rankings of BRIC countries 2 23
Net foreign investment in emerging market economies 3 24
Evolution of FII policy in India 4 33
Growth of FIIs and sub-accounts 5 38
FII shareholding pattern as on march 31, 2010 6 38

Increasing FII stake in nifty firms 7 44
List of nifty firms that have seen a continuous rise in the FII
8 45
stake in the four quarters during the year 2009
No. Of nifty/ SENSEX firms that have seen a rise in FII stakes 9 46
FII portfolio sector trend 10 47
Descriptive Statistics of daily returns on S & P CNX NIFTY 11 62
Descriptive Statistics of daily net FII equity 12 63

Regression statistics of non stationary data 13 64
ADF TEST of FII 14 66

ADF TEST of S & P CNX NIFTY 15 67
ADF TEST of LD_S & P CNX OF NIFTY 16 69
Regression Statistics For stationary data 17 70
VAR TABLE 18 73
Granger causality 19 76
Decomposition of variance for FII__X_ 20 77
Decomposition of variance for ld_s_p_cnx_nifty
21 78
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PART I GENERAL INFORMATION
CHAPTER-1 ABOUT THE INDUSTRY
10
1.1 FOREIGN INVESTMENTS IN INDIA
Foreign investments in the country can take the form of investments in listed
companies (i.e FII investments); investments in listed/unlisted companies other
than through stock exchanges (i.e Foreign Direct Investment, Private Equity /
Foreign Venture Capital Investment route); investments through American
Depository Receipts / Global Depository Receipts (ADR/GDR) or investments by
Non Resident Indians (NRIs) and Persons of Indian Origin (PIO) in various forms.
Foreign Investment in India
Figure-1
1.2 ABOUT FOREIGN INSTITUTIONAL INVESTOR
11
Foreign Institutional Investor means an institution established or
incorporated outside India, which proposes to make investment in India in
securities (Regulation 2(f) of the FII regulation).
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.
A) Foreign Institutional Investors Registration
Currently, entities eligible to invest under FII route are as follows
(A.1) As FII
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
(i.e., fund having more than 20 investors with no single investor holding more
than 10 per cent of the shares or units of the fund).
12
(A.2) As Sub-accounts
The sub account is generally the underlying fund on whose behalf the FII invests.
The following entities are eligible to be registered as sub-accounts, viz.
partnership firms, private company, public company, pension fund, investment
trust, and individuals.
(A.3) Domestic entity
A domestic portfolio manager or a domestic asset management company shall
also be Eligible to be registered as FII to manage the funds of sub-accounts.
(B) FIIS REGISTERED WITH SEBI FALL UNDER THE FOLLOWING
CATEGORIES
(B.1) Regular FIIs those who are required to invest not less than 70 Per cent
of their investment in equity -related instruments and up to 30 per cent in non-
equity instruments.
(B.2) 100 per cent debt-fund FIIs those who are permitted to invest only in
debt instruments.
(C) MECHANISM OF FOREIGN INSTITUTIONAL INVESTORS
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FII flows help supplement the domestic savings and augment domestic
investments without increasing the foreign debt of the recipient countries,
correct current account deficits in the external balance of payments'
position, reduce the required rate of return for equity, and enhance stock
prices of the host countries, yet there are worries about the vulnerability of
recipient countries' capital markets to such flows.
FII flows, often referred to as 'hot money' (i.e., short-term and overly
speculative), are extremely volatile in character compared to other forms
of capital flows. Foreign portfolio investors are regarded as 'fair weather
friends' who come in when there is money to be made and leave at the
first sign of impending trouble in the host country thereby destabilizing the
domestic economy of the recipient country.
Often, they have been blamed for exacerbating small economic problems
in the host nation by making large and concerted withdrawals at the
slightest hint of economic weakness.
It is also alleged that as they make frequent marginal adjustments to their
portfolios on the basis of a change in their perceptions of a country's
solvency rather than variations in underlying asset value, they tend to
spread crisis even to countries with strong fundamentals thereby causing
'contagion' in international financial markets.
14
Further, it is feared that too much of FII inflows may build up sizeable
surpluses on a country's balance of payments, create excess liquidity and
hence exert upward pressure on the exchange rate of the domestic
currency or on domestic prices.
The fear of foreigners capturing a large part of the securities' market is
also associated with FII flows. Accordingly, it is viewed that as securities
markets in developing countries like India are narrow and shallow and as
the foreign investors have command over considerable funds and occupy
a dominant position in the capital market, FII flows have the potential for
major capital flight out of India driving the prices down sharply and hence
inducing considerable instability in the Indian stock market.
(D) SEVERAL REASONS ON FIIs SELLING
It is always good to keep an eye on what the big movers are doing and plan
individual strategy accordingly. There are several reasons on FIIs selling, but
there are three predominant factors that are cited as being largely responsible.
The swings in the market forced several FIIs to withdraw from India and
invest their dollars in other emerging markets. Some of the other markets
include Uruguay, Russia, the Ukraine, and several other former Soviet
15
countries. Though there have been swings in the past too but FII
response this time was different because of margin pressures back home
as even they have to provide regular returns to their investors.
. The Indian markets are not seen as a good short-term bet any more.
India is seen as a good investment for the medium to long term. FIIs seem
to fear the pace of growth and the fundamentals of the markets.
Most FIIs are looking at corporate governance and execution abilities,
which could be significant drivers in creating a strong portfolio of Indian
stocks. Recent action taken by the market regulator indicates that the
Indian government would like to moderate the inflow of FII money.
(E) BENEFITS OF ENCOURAGING FIIS
(E.1) Reduced cost of equity capital
FII inflows augment the sources of funds in the Indian capital markets. In a
common sense way, the impact of FIIs upon the cost of equity capital may be
visualised by asking what stock prices would be if there were no FIIs operating in
India. FII investment reduces the required rate of return for equity, enhances
stock prices, and fosters investment by Indian firms in the country.
16
(E.2) Imparting stability to India's Balance of Payments
For promoting growth in a developing country such as India, there is need to
augment domestic investment, over and beyond domestic saving, through capital
flows. The excess of domestic investment over domestic savings result in a
current account deficit and this deficit is financed by capital flows in the balance
of payments.
(E.3) Knowledge flows
The activities of international institutional investors help strengthen Indian
finance. FIIs advocate modern ideas in market design, promote innovation,
development of sophisticated products such as financial derivatives, enhance
competition in financial intermediation, and lead to pullovers of human capital by
exposing Indian participants to modern financial techniques, and international
best practices and systems
(E.4) Strengthening corporate governance
17
Domestic institutional and individual investors, used as they are to the ongoing
practices of Indian corporate, often accept such practices, even when these do
not measure up to the international benchmarks of best practices. FIIs, with their
vast experience with modern corporate governance practices, are less tolerant of
malpractice by corporate managers and owners (dominant shareholder). FII
participation in domestic capital markets often lead to vigorous advocacy of
sound corporate governance practices, improved efficiency and better
shareholder value.
(E.5) Improvements to market efficiency
A significant presence of FIIs in India can improve market efficiency through two
channels. First, when adverse macroeconomic news, such as a bad monsoon,
unsettles many domestic investors, it may be easier for a globally diversified
portfolio manager to be more dispassionate about India's prospects, and engage
in stabilising trades. Second, at the level of individual stocks and industries, FIIs
may act as a channel through which knowledge and ideas about valuation of a
firm or an industry can more rapidly propagate into India.
For example, foreign investors were rapidly able to assess the potential of firms
like Infosys, which are primarily export-oriented, applying valuation principles that
prevailed outside India for software services companies.
(F) Rationale for encouraging FII flows
18
Foreign investment both portfolio and direct varieties can supplement
domestic savings and augment domestic investment without increasing the
foreign debt of the country. Such investment constitutes non-debt creating
financing instruments for the current account deficits in the external balance of
payments. Capital inflows into the equity market give higher stock prices, lower
cost of equity capital, and encourage investment by Indian firms. Foreign
investors often help spur domestic reforms aimed at improving the market design
of the securities markets, and help strengthen corporate governance. These
benefits do require concomitant policy effort in terms of improving financial
regulation and corporate governance.
CHAPTER-2 WORLD ECONOMY
ECONOMIC INDICATORS RELEVANT TO FINANCIAL INSTITUTIONAL

INVESTORS
19
2.1 INSIGHTS FROM THE GLOBAL COMPETITIVENESS INDEX
World Economic Forum came out with The Global Competitiveness Report 2010-
2011 as per which Switzerland continues to top the overall ranking in Global
Competitive Index (GCI), characterized by an excellent capacity for innovation
and a very sophisticated business culture. Sweden has moved ahead of
Singapore and United States to claim 2nd position this year. Singapore, United
States and Germany round out the top five. European economies continue to
prevail in the top 10 with Japan, Finland, Netherlands, Denmark and Canada
following suit. After having fallen four positions over the past two years, the
United Kingdom moves up one spot to 12th place this year, with a stable
performance.
India ranks 51st out of 139 economies in the GCI for the year 2010-2011, down
two ranks from the previous edition. Indias performance remains quite stable but
with a small improvement in score. Indias competitiveness is based on its large
market size and good results in more complex areas including financial markets,
business sophistication and innovation. Up two positions to 27th place, China
reinforced its position within the top 30. It is the only BRIC country to improve its
rankings this year, thus increasing the gap with the other three. Brazil is at 58th
and Russian Federation is at 63rd positions respectively. The ranking of BRIC
countries on the twelve pillars of GCI is extracted hereunder.
20
The Ranking of BRIC Countries On The Twelve Pillars of GCI
Table - 1
(Source World Economic Forum Report from RBI website)
2.2 THE FINANCIAL DEVELOPMENT REPORT 2010
The Financial Development Report 2010 and the Financial Development Index
(FDI) on which it is based provide a score and rank for 57 of the worlds leading
21
financial systems and capital markets. It analyzes the drivers of financial system
development that support economic growth in advanced and emerging
economies to serve as a tool for countries to benchmark themselves and
prioritize areas for reform.
The Report defines financial development as the factors, policies, and institutions
that lead to effective financial intermediation and markets, as well as deep and
broad access to capital and financial services. In accordance with this definition,
measures of financial development are captured across seven pillars.
The top-ranked countries within the Index do not change significantly, although
the United States does take the top spot from the United Kingdom (2nd); the US
score remains essentially unchanged from last year, while the United Kingdoms
drops the most of any country within the top 10. It is only very minor score
differentials that separate the United Kingdom from the next five countries that
score below itHong Kong, Singapore, Australia, Canada, and the Netherlands.
All of the BRIC country rankings either improve slightly or stay the same. China
shows the biggest advance, moving up four spots to 22 nd place. Brazil (34th)
moves up two spots, India (37th) one spot, and Russia stays the same at 40th
place.
THE RANKINGS OF BRIC COUNTRIES
TABLE-2
22
(Source World Economic Forum Report from RBI website)
This all together we can say that India is the emerging destination for FIIs as
Indian Economy is growing.
2.3 EMERGING MARKETS ATTRACT GLOBAL INVESTORS
Emerging markets, which have been growing much faster than advanced
economies, are increasingly being seen as more fundamentally safe investment
destinations. The pattern of inflows in the first half of 2010 points to further
momentum in net foreign investment in equities in many emerging markets as
these economies are leading the economic recovery and will remain major
destinations for equity investment.
NET FOREIGN INVESTMENT IN EMERGING MARKET ECONOMIESI

Table 3
23
(Source Markets for motion article from FTKMC, Vol 1 No. 23 August 23, 2010)
The following table reveals that net foreign investment in emerging market
economies during the first half of 2010 is uneven. While Japan, India, Indonesia
and Philippines have witnessed a YoY spurt in investments in 2010 (till August
11), the inflows are lower in countries like Brazil and South Africa.
CHAPTER-3 FOREIGN INSTITUTIONAL INVESTORS IN INDIAN CAPITAL

MARKET
The scope and the trading mechanism of Foreign Institutional investors in India
24
3.1THE ELIGIBILITY CRITERIA FOR APPLICANT SEEKING FII
REGISTRATION
As per Regulation 6 of SEBI (FII) Regulations 1995, Foreign Institutional

Investors are required to fulfill the following conditions to qualify for grant of
registration:
Applicant should have track record, professional competence, financial

soundness, experience, general reputation of fairness and integrity.
The applicant should be regulated by an appropriate foreign regulatory authority

in the same capacity/category where registration is sought from SEBI.
Registration with authorities, which are responsible for incorporation, is not
adequate to qualify as Foreign Institutional Investor.
The applicant is required to have the permission under the provisions of the
Foreign Exchange Management Act, 1999 from the Reserve Bank of India enter
into an agreement with the custodian. Besides it also has to appoint a designated
bank to route its transactions.
Payment of registration fee of US $ 5,000.00

"Form A" as prescribed in SEBI (FII) Regulations, 1995 is to be filled before
applying for FII registration.
3.2SUPPORTING DOCUMENTS REQUIRED
Application in Form A duly signed by the authorized signatory of the
applicant.
25
Certified copy of the relevant clauses or articles of the Memorandum and
Articles of Association or the agreement authorizing the applicant to invest on
behalf of its clients.
Audited financial statements and annual reports for the last one year,
provided that the period covered shall not be less than twelve months.
A declaration by the applicant with registration number and other particulars
in support of its registration or regulation by a Securities Commission or Self
Regulatory Organization or any other appropriate regulatory authority with
whom the applicant is registered in its home country.
A declaration by the applicant that it has entered into a custodian agreement
with a domestic custodian together with particulars of the domestic custodian.
A signed declaration statement that appears at the end of the Form.
Declaration regarding fit & proper entity.
The fee for registration as FII is US $ 5,000. The mode of payment is Demand
Draft in favor of "Securities and Exchange Board of India" payable at New York.
SEBI generally takes 7 working days in granting FII registration
3.3 LIMITS ON FOREIGN INSTITUTIONAL INVESTORS
Each FII (investing on its own) or sub-account cannot hold more than 10
per cent of the paid-up capital of a company.
26
A sub-account under the foreign corporate/individual category cannot
hold more than 5 per cent of the paid up capital of the company.
The maximum permissible investment in the shares of a company, jointly
by all FIIs together is 24 per cent of the paid-up capital of that company.
The limit is 20 per cent of the paid-up capital in the case of public sector
banks.
The ceiling of 24 per cent for FII investment can be raised up to sect oral
cap/statutory ceiling, subject to the approval of the board and the general
body of the company passing a special resolution to that effect.
A cap of US $1.75 billion is applicable to FII investment in dated
Government securities and treasury bills under 100 per cent and the
70:30route. Within this ceiling of US $1.75 billion, a sub-ceiling of US $200
million is applicable for the 70:30 route. (FIIs are required to allocate their
investment between equity and debt instruments in the ratio of
70:30.However, it is also possible for an FII to declare itself a 100 per cent
debt FII in which case it can make its entire investment in debt
instruments.)
A cumulative sub-ceiling of US $500 million outstanding has been fixed on
FII investments in corporate debt and this is over and above the sub-
ceiling of US $1.75 billion for Government debt.
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3.4 INVESTMENT RESTRICTION
An FII can invest only in the following
Securities in the primary and secondary markets including shares,
debentures and warrants of companies, unlisted, listed or to be listed on a
recognized stock exchange in India.
Units of schemes floated by domestic mutual funds including Unit Trust of
India Whether listed or not listed on a recognized stock exchange; units of
scheme floated by a Collective Investment Scheme.
Dated Government securities
Derivatives traded on a recognized stock exchange
Commercial paper
Security receipts
Indian Depository Receipts
In case foreign institutional investor or sub-account holds equity shares in a
company whose shares are not listed on any recognized stock exchange, and
continues to hold the shares after initial public offering and listing, then such
shares would be subject to lock-in for the same period, if any is applicable to
shares held by a foreign direct investor placed in similar position, under the policy
of the Central Government relating to foreign direct investment for the time being
in force.
The total investments in equity and equity related instruments (including fully
convertible debentures, convertible portion of partially convertible debentures

28
and tradable warrants) made by a FII in India, whether on his own account or on
account of his sub- accounts, should not be less than seventy per cent of the
aggregate of all the investments of the Foreign Institutional Investor in India,
made on his own account and on account of his sub-accounts.
However, this is not applicable to any investment of the foreign institutional
investor either on its own account or on behalf of its sub-accounts in debt
securities which are unlisted or listed or to be listed on any stock exchange if the
prior approval of the SEBI has been obtained for such investments. Further,
SEBI while granting approval for the investments may impose conditions as are
necessary with respect to the maximum amount which can be invested in the
debt securities by the foreign institutional investor on its own account or through
its sub-accounts. A foreign corporate or individual is not eligible to invest through
the hundred percent debt route.
Investments made by FIIs in security receipts issued by securitization companies
or asset reconstruction companies under the Securitization and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002 are not
eligible for the investment limits mentioned above. No foreign institutional can
invest in security receipts on behalf of its sub-account.
3.5 FII INVESTMENT IN SECONDARY MARKETS
29
SEBI regulations provide that a foreign institutional investor or sub-account can
transact in the Indian securities market only on the basis of taking and giving
delivery of securities purchased or sold. However, this does not apply to any
transactions in derivatives on a recognised stock exchange.
Further, SEBI has, in December, 2007 permitted FIIs and sub-accounts to enter
into short selling transactions only in accordance with the framework specified by
SEBI in this regard.
No transaction on the stock exchange would be carried forward and the
transaction in securities would be only through stock broker who has been
granted a certificate by SEBI.
They have also been allowed to lend or borrow securities in accordance with the
framework specified by SEBI in this regard.
A Foreign institutional investor can issue, or otherwise deal in offshore derivative
instruments, directly or indirectly wherein the offshore derivative instruments are
issued only to persons who are regulated by an appropriate foreign regulatory
authority and the ODIs are issued after compliance with know your client norms.
3.6 GENERAL OBLIGATIONS AND RESPONSIBILITIES
30
Certain general obligations and responsibilities relating to appointment of
domestic custodians, designated bank, investment advice in publicly accessible
media etc. have been laid down on the FIIs operating in the country in the SEBI,
FII Regulations 1995.
3.7 MONITORING OF INVESTMENT POSITION BY RBI
The Reserve Bank of India (RBI) monitors the investment position of FIIs in listed
Indian Companies, reported by Custodian Banks on a daily basis in Form LEC
(FII).
Caution List
When the total holdings of FIIs/NRIs under the Scheme reach the trigger limit,
which is 2 % below the applicable limit, Reserve Bank issues a notice to all the
designated branches of an Authorised Dealer banks stating that any further
purchases of shares of the particular Indian company will require prior approval
of Reserve Bank. RBI gives case-by case approvals to FIIs for purchase of
shares of companies included in the Caution List. This is done on first-come-first
served basis.
Ban List
Once the shareholding by FIIs/NRIs reaches the overall ceiling/sect oral
cap/statutory limit, Reserve Bank puts the company in the Ban List. Once a
company is placed on the Ban List, no FII or NRI can purchase the shares of the
company under the Portfolio Investment Scheme.
31
3.8 MARGIN REQUIREMENTS
SEBI registered FIIs/sub-accounts are allowed to keep with the trading
member/clearing member amount sufficient to cover the margins prescribed by
the exchange/Clearing House and such amounts as may be considered to meet
the immediate needs.
3.9 HISTORICAL EVOLUTION OF FII POLICY IN INDIA
Until the 1980s, Indias development strategy was focused on self-reliance and
import substitution. Current account deficits were financed largely through debt
flows and official development assistance. There was a general disinclination
towards foreign investment or private commercial flows. After the launch of the
reforms in the early 1990s, there was a gradual shift towards capital account
convertibility. From September 14, 1992, with suitable restrictions, FIIs and
Overseas Corporate Bodies (OCBs) were permitted to invest in financial
instruments. The evolution of FII policy in India has displayed a steady and
cautious approach to liberalisation of a system of quantitative restrictions
(QRs).The policy liberalisation has taken the form of (I) relaxation of investment
limits for FIIs; (ii) relaxation of eligibility conditions; and (iii) liberalisation of
investment instruments accessible for FIIs.
EVOLUTION OF FII POLICY IN INDIA
32
TABLE 4
Date Policy change

September 1992 FIIs allowed to invest by the Government Guidelines in all
securities in both primary and secondary markets and schemes
floated by mutual funds. Single FIIs to invest 5 per cent and all
FIIs allowed to invest 24 per cent of a companys issued capital.
Broad based funds to have 50 investors with no one holding
more than 5 per cent
The objective was to have reputed foreign investors, such as,

pension funds, mutual fund or investment trusts and other broad
based institutional investors in the capital market.
November 1996 100 per cent debt FIIs were permitted to give operational
flexibility to FIIs.
April 1997 Aggregated limit for all FIIs increased to 30 per cent subject to
special procedure and resolution.
The objective was to increase the participation by FIIs.
April 1998 FIIs permitted to invest in dated Government securities subject
to a ceiling. Consistent with the Government policy to limit the
short-term debt, a ceiling of USD 1 billion was assigned which
was increased to USD 1.75 billion in 2004.
June 1998 Aggregate portfolio investment limit of FIIs and
NRIs/PIOs/OCBs enhanced from 5 per cent to 10 per cent and
the ceilings made mutually exclusive. Common ceilings would
have negated the permission to FIIs. Therefore, separate
ceilings were prescribed.
June 1998 Forward cover allowed in equity.
FIIs permitted to invest in equity derivatives. The objective was
to make hedging instruments available.
33
February 2000 Foreign firms and high net-worth individuals permitted to invest
as sub-accounts of FIIs. Domestic portfolio manager allowed to
be registered as FIIs to manage the funds of sub-accounts. The
objective was to allow operational flexibility and also give
access to domestic asset management capability.
March 2001 FII ceiling under special procedure enhanced to 49 per cent.
The objective was to increase FII Participation
September 2001 FII ceiling under special procedure rose to sect oral cap.
December 2003 FII dual approval process of SEBI and RBI changed to single
approval process of SEBI. The objective was to streamline the
registration process and reduce the time taken for registration.
November 2004 Outstanding corporate debt limit of USD 0.5 billion prescribed.
The objective was to limit short term debt flows.
April 2006 Outstanding corporate debt limit increased to USD 1.5 billion
prescribed. The limit on investment in Government securities
was enhanced to USD 2 bn. This was an announcement in the
Budget of 2006-07.
November, 2006 FII investment up to 23% permitted in infrastructure companies
in the securities markets, via stock exchanges, depositories and
clearing corporations. This is a decision taken by Government
following the mandating of demutualization and corporatization
of stock exchanges.
January and FIIs allowed to invest USD 3.2 billion in Government Securities
October, 2007 (limits were raised from USD 2 billion in two phases of USD 0.6
billion each in January and October).
June, 2008 While reviewing the External Commercial Borrowing policy, the
Government increased the cumulative debt investment limits
from US $3.2 billion to US $5 billion and US $1.5 billion to US
$3 billion for FII investments in Government Securities and
Corporate Debt, respectively.
October 2008 While reviewing the External Commercial Borrowing policy, the
34
Government increased the cumulative debt investment limits
from US $3 billion to US $6 billion for FII investments in
Corporate Debt.
October 2008 Removal of regulation for FIIs pertaining to restriction of 70:30
ratio of investment in equity and debt respectively.
October 2008 Removal of Restrictions on Overseas Derivatives Instruments
(ODIs)
E-bids platform for FIIs to bid for allotments under over all FII
March 2009 debt limits.
August 2009 FIIs allowed to participate in interest rate futures
CHAPTER-4 GROWTH OF FII IN INDIA
Consequent to the liberalization of registration norms, the number of foreign
institutional investors (FIIs) registered with the Securities and Exchange Board of
India (SEBI) has increased to 1,514 (Figure 1) which includes Pension Funds,
Mutual Funds, Investment Trust, Insurance and Reinsurance Companies,
35
Endowment Funds, University Funds, Foundation or Charitable Trusts or
Charitable Societies who propose to invest on their own behalf, Assets
Management Companies10 (AMCs), Nominee Companies, Institutional Portfolio
Managers, Trustees, Power of Attorney Holders and Banks. In 2001, there were
482 foreign investors registered with SEBI (Securities and Exchange Board of
India). The number increased to 489 in 2002 and to 517 and 637 in 2003 and
2004 respectively. With the increase in the number of FIIs, the number of sub-
accounts registered with FIIs has also hit an all-time high. The number of FII sub-
accounts11 has reached 5,325 as on December 2009
No of FII registered in India

Figure 2
36
SOURCE: SEBI
Growth of FIIs and Sub-accounts from year 2008-2009 to 2010-2011
There has been a marginal growth in the number of FIIs and Sub-accounts
registered during the year 2010-11. The FIIs have been net buyers in the Indian
equity and debt market activity during 2010-11, however there is a decline of
10.5% in the amount invested in 2010-11. The following table depicts the growth
in the FII and their transaction value during the year.
The following table depicts the growth in the FII and their transaction value during
the year.
GROWTH OF FIIS AND SUB-ACCOUNTS
37
TABLE 5
(Source: SEBI)
Notes: * As on 31 December 2010
FII SHAREHOLDING PATTERN AS ON MARCH 31, 2010
TABLE 6
(Source: RCML Research, CMIE)
38
FIIs share in the market capitalization is roughly 14 percent and portfolio
investments brought in by FIIs have been the most dynamic source of capital to
India.
Net equity FII and S & P CNX Nifty during the year 2008
Figure 3
10000.00 6000.00
5000.00 5000.00
S & P CNX NIFTY

FII NET EQUITY
0.00 4000.00
-5000.00 3000.00
-10000.00 2000.00
-15000.00 1000.00
-20000.00 0.00
MONTH
fii Equity (Rs.crore) net purchase/sale S & P CNX nifty Close
Above figure depicts the trend of net equity FII and S & P CNX NIFTY during the
calendar year Jan 08 to Dec 08.
From above figure, we can see that in this year FII inflow were much volatile and
its impact on S& P Nifty was also seen. Due to the global financial crisis in
September 2008, FII had shown a huge pull out during that period. And then
gradually it has shown improvement.
39
Figure 4
25000.00 6000.00
20000.00 5000.00
S & P CNX NIFTY

FII NET EQUITY
15000.00 4000.00
10000.00 3000.00
5000.00 2000.00
0.00 1000.00
-5000.00 0.00
MONTH
From the above figure, we can see that FII flow were maximum during the month
of May 2009 and Sept 2009.In between, it has shown many fluctuation .But from
the figure it is clear that S&P Nifty was almost continuously increasing.
Up to March 2009, Indian Equity Market was low but afterwards it has shown
improvement and the same effect has been seen in FII inflows. Afterwards
because of the positive growth outlook, consumer confidence, good corporate
earnings, better reforms prospect might be a reason for improvement in FII and
Indian Equity Market.
40
During Sept 2009, the overall economic recovery has taken place as the global
leaders were committed to monitor the situation and decision which were taken in
G-20 Summit, London which may have shown increase in FII flow during Sept
2009.
Figure 5
35000.00 7000.00
30000.00
6000.00
S & P CNX NIFTY

25000.00
5000.00
FII NET EQUITY
20000.00
15000.00 4000.00
10000.00
5000.00 3000.00
0.00 2000.00
-5000.00
1000.00
-10000.00
-15000.00 0.00
MONTH
India saw one of the highest FII inflows, in absolute terms as well as in terms of
the share of total flows in this year which we can see in the figure during the
month of September. (Source Business Standard, 20 April 2011)
41
The biggest reason for the fall in FII net equity flow is the fear of rising inflation
and interest rates and the way it will affect our markets and economy in coming
days.
Figure 6
8000.00 5900.00
6000.00 5800.00
4000.00 5700.00
S & P CNX NIFTY

FII NET EQUITY
5600.00
2000.00
5500.00
0.00
5400.00
-2000.00 Jan-11 Feb-11 Mar-11
5300.00
-4000.00 5200.00
-6000.00 5100.00
-8000.00 5000.00
MONTH
calendar year Jan 11 to March 11.
Due to The Egyptian political turmoil during January 2011, FII had pulled out
huge amount of money and afterwards improvement has shown. Reason for
improving FII flows might be the favourable Budget.
Overall flows to India will be lesser due to rising oil prices, high inflation and
slowing growth, India cannot command as high a market share as last year.
42
Average of net equity FII and S & P CNX Nifty from Jan 2003 to March 2011
Figure 7
AVG OF FII VS S & P CNX NIFTY

14000.00 6000.00
12000.00
10000.00 5000.00
S & P CNX NIFTY

8000.00
FII NET EQUITY
4000.00
6000.00
4000.00 3000.00
2000.00
0.00 2000.00
-2000.00 2003 2004 2005 2006 2007 2008 2009 2010 1000.00
-4000.00
-6000.00 0.00
YEAR
Average of fii net equity Average of S & P CNX Nifty
Figure 7 shows trend of FII net equity and S & P CNX NIFTY monthly average
of particular year.FII trend shows initially more or less constant but in year 2008
due to global melt down FIIs out flow has gone much negative.
43
CHAPTER-5 INDIA A EMERGING DESTINATION FOR FIIs
INCREASING FII STAKE IN NIFTY FIRMS
TABLE-7
44
Above Table shows the FII % stake in Nifty firms during December Quarter 2008
and December Quarter 2009 and increase in percentage terms. It has been seen
that FII stake rising at least 1%.And there is more increasing trend in
infrastructure and automobile sector.
LIST OF NIFTY FIRMS THAT HAVE SEEN A CONTINUOUS RISE IN THE FII
STAKE IN THE FOUR QUARTERS DURING THE YEAR 2009
TABLE-8
From the above table we can see that FII stake in above companies has
continuously being increasing. The highest FII stake in Dec 09 is highest i.e.
36.52%, 22.82 % in Maruti Suzuki and 16.87% in Tata Steel.
45
NO. OF NIFTY/ SENSEX FIRMS THAT HAVE SEEN A RISE IN FII STAKES IN
THE DECEMBER QUARTER
TABLE-9
SENSEX
Out of 30 companies 21 companies had declared their shareholding pattern.

Now, out of 21 companies 14 companies have increased FII stakes.
Nifty
Out of 50 firms 36 companies had declared their shareholding pattern .And out of
36 nifty firms 24 firms have increased FII stakes.
BSE 500
Out of 500 companies 326 companies have declared their shareholding pattern.
And out of 326 firms 174 firms have increased FII stake.
The above data shows increased FII stake in Indian listed firms year by year.
46
FII PORTFOLIO SECTOR TREND
TABLE-10
Dec09
In Dec09 Quarter, Maximum FII stake was in financial, materials and consumer
staples.
March 09
In March09 Quarter, Maximum FII stake was in financials, materials, energy and
consumer staples and industrials.
June 10
In June 10 Quarter, Maximum FII stake was in financials, materials and

consumer staples sector.
47
In an all, from the above tables we can say that financials, materials and
consumer staples are the sectors in which FII stake are continuously increasing.
NOTE- Consumer Discretionary sector includes retailers, media companies,
consumer services companies, consumer durables and apparel companies and
automobiles and component companies.
Consumer Staple Sector includes industries that manufacture and sell
food/beverages, tobacco and household products.
48
PART II PRIMARY STUDY
49
CHAPTER-6 LITERATURE REVIEW
(1) P. Krishna Prasanna (2008) held that availability of foreign capital depends
on many firm specific factors other than economic development of the country. In
this context this paper examines the contribution of foreign institutional
investment particularly among companies included in sensitivity index (SENSEX)
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 decision.
(2) Hardeep Impact of Foreign Institutional Investors on Indian Stock
Market Concluded that FII do have any significant impact on the Indian Stock
Market but there are other factors like government policies, budgets, bullion
market, inflation, economical and political condition, etc. do also have an impact
on the Indian stock market. There is a positive correlation between stock indices
and FIIs but FIIs didnt have any significant impact on Indian Stock Market. The
null hypothesis is rejected Nifty showed some positive correlation with FII in 2007
and 2008 but rest of the indices showed very less positive correlation with FII.
Also the coefficient of determination is less in all the case. It shows the absence
50
of linear relation between FII and stock index. This does not mean that there is
no relation between them. One of the reasons for absence of any linear relation
can also be due to the sample data. The data was taken on monthly basis. The
data on daily basis can give more positive results (may be)
(3) P.K.MISHRA (2009) Role of FIIs in Indian Capital Market has made an
effort to examine the performance of the Indian capital market by empirically
studying the impact of net equity investment by FIIs on stock returns. The study
using monthly data on Sensex based stock return and net FII flows over a period
of 17 years spanning from Jan 1993 to May 2009, provides the evidence of
positive correlation between FII net flows into India and stock market return. And,
the analysis finds that the movements in the Indian capital market are fairly
explained by the FII net inflows.
(4) Role of Institutional Investors in Indian Stock Market research paper
by S S S KUMAR, states that whether our markets have also being dominated by
institutional investors. and The regression results show that the combined might
of the Flls and mutual funds are a potent force, and they actually direction can
forecast market direction using the direction of the flow of funds from Flls and
mutual funds, the Granger causality test has showed that the mutual funds in fact
lead the market rise or fall and Flls follow suit. This may actually raise questions
on the market efficiency but on the contrary, markets become more efficient with
the growing presence of institutional investors who predominantly go by
fundamentals.
51
(5) SUCHISMITA BOSE AND DIPANKOR COONDOO held the impact of the
FII policy reforms on FII portfolio flows to the Indian stock markets. In this paper,
they have attempted to estimate the quantitative impact of certain regulatory
policy decisions relating to FII investment in India using the technique of
intervention analysis of time series econometrics. The analysis is essentially
based on a multivariate GARCH regression model estimated on a set of daily
data on domestic stock returns and FII investment flows. Ten policy interventions
made at different time points in the period January 1999 through January 2004
have been considered in the analysis. We have examined whether or not these
interventions had any significant effect on the average level of FII flows, their
sensitivity to Indian stock market return and their own inertia. The analysis is
performed in two steps. The effect of individual policy has been examined
separately in the first step. In the second step, the effects of these policies have
been examined. Sequentially in six stages, adding one new policy to the analysis
at every stage.
(6) Foreign Institutional Investors and Security Returns: Evidence from
Indian Stock Exchanges given by (Sandhya Ananthanarayanan,
Chandrasekhar Krishnamurti , Nilanjan Sen) had studied the impact of trading
of Foreign Institutional Investors on the major stock indices of India. For this
purpose they divide foreign inflows in two fold. First, they separate the flows into
expected and unexpected and find that unexpected flows have a greater impact
than expected flows. Second, they identify the specific flows of foreign
institutional investors flowing into each exchange and examine the impact on the
52
specific stock market indices. Finally conclusions for research are, they find
strong evidence consistent with the base-broadening hypothesis consistent with
prior work. The theory behind the base-broadening hypothesis suggests that the
expansion of investor base to include foreign investors leads to increased
diversification followed by reduced risk and consequently lowering the required
risk premium. Findings support the price pressure hypothesis. The theory of price
pressure hypothesis suggests that the rise in prices is associated with increased
inflows. They do not find any substantiation to the claim that foreigners
destabilize the market.
53
CHAPTER-7 BACKGROUND OF THE STUDY
FII inflows and control have emerged as important policy issue in India. Among
the Indian policymakers, FIIs flows are believed to have a positive impact on the
countrys development. FII flows supplement and augment domestic savings and
domestic investment without increasing the foreign debt of country. Added to this,
FII inflows to the equity market increase stock prices, lower cost of equity capital
and encourage the investment by Indian firms and lead to improvements in
securities market design and corporate governance. The foreign institutional
investment inflows have the potential of influencing the process of economic
development of India through the positive impacts on macro-economic
fundamentals of the country. Therefore, the outlook is that the policy makers of
India should provide the FIIs with more opportunities and reasons to invest in
Indian markets by suggesting and implementing prudential norms (P. K. Mishra,
K. B. Das, B. B. Pradhan, 2010). A biggest issue of concern is capital flight and
its impact on stock market (Sumanjeet, 2010). The FII manipulate the situation of
boom in such a manner that they wait till the index rises up to a certain height
and exit at an appropriate time. This tendency increases the volatility further. But,
volatility is too good for the market as it helps in keeping the economy cycle
moving and it will again help the values of the stocks at a fair price for
investments to again keep flowing and so will the FIIs too. The FIIs investment
has significant impact on Indian Capital Market and the Indian Capital Market is
Semi-strong form efficient in relation to the impact of FIIs investment on Indian
54
Capital Market (International Journal of Trade, Economics and Finance, Vol.1,
No.4, December, 2010). FII flows are caused by rather than causing the national
stock market returns during the time period April 1997- March 2005 (DR.
TANUPA CHAKRABORTY,2007). Unexpected flows (FII) have a greater impact
than expected flows and further some researchers claim that foreigners do not
destabilize the market (Ananthanarayanan, Chandrasekhar, Sen).
Thus, there are many different opinions related to the impact of FII flows on
Indian capital market and that is why for the same reason we have done a
research.
55
CHAPTER-8
8.1 PROBLEM STATEMENT AND IMPORTANCE OF THE STUDY
The issue of whether FII flows affects stock market returns or the other way
round is a matter of some controversy. It has been perceived in some quarters
that FII flows are the major drivers of stock markets in India and hence a sudden
reversal of such flows may harm the stability of its markets. Contrary to this
belief, it is viewed by others that FII flows react to the existing crisis in the stock
market, possibly exacerbating it rather than causing it. An analysis of the
direction of causality to understand the possible devastating effect of volatility of
FII flows on the Indian economy is important from the viewpoint of Indian policy
makers especially when such flows have recorded a sharp rise over the last
decade. But, as very few studies have been done so far in this regard, the
present empirical study has been undertaken to throw some light on the cause
and effect relationship between FII flows and Indian stock market returns.
8.2 OBJECTIVES OF THE STUDY
1. To find out the cause and effect relationship between the FII and S & P CNX
Nifty.
2. To know how much FII and S & P CNX NIFTY affect each other through VAR
(Variance Decomposition Model).
3. To assess the growth and development of the Indian stock Market
4. To develop an understanding about the concept and role of Foreign
Institutional Investors (FIIs) in India.
56
CHAPTER-9 RESEARCH METHODOLOGY
9.1 RESEARCH METHODOLOGY
There have been quite a few episodes of volatility in the Indian stock market over
the past decade induced by several adverse exogenous developments like East
Asian Crisis in mid - 1997, imposition of economic sanctions subsequent to
Pokhran Nuclear explosion in May 1998, Kargil War in June 1999, Stock Market
Scam of early 2001 and the Black Monday of May 17, 2004 when the market was
halted for the first time in the wake of a sharp fall in the index, Global meltdown in
Sept 2008,Egypt Turmoil in Jan 2011. A sharp decline in FII flows coincided with
the above events and this has prompted the Indian policy makers to announce a
number of changes in FII regulation in order to regenerate the foreign investors
interests in the Indian capital market. So, to facilitate a better understanding of
the causal linkage between FII flows and contemporaneous stock market returns,
a period of ten consecutive calendar years ranging from Jan 2000 to March 2011
is selected for the empirical study.
Daily net FII equity flows (i.e., gross purchases gross sales by foreign
investors) into the Indian equity market and Daily S & P CNX NIFTY closing
prices constitute the two key variables in the study. Since the market for equity
shares is subject to much larger fluctuations than the bond market, the emphasis
is on equity market in the present study.
57
A descriptive statistics like maximum value, minimum value, mean, median,
standard deviation, skewness and kurtosis are shown for each of the two time
series in order to depict the trend in the two estimated variables over the sample
period. Then correlations between the two estimated variables' series are
determined to have a preliminary understanding of the nature of relationship
between stock market returns and FII flows. But, if found, do not shed much light
on the direction of causality, pair-wise Granger causality tests are conducted
between daily net Equity FII flows and daily S & P CNX NIFTY . This has been
done by using the GRETL statistical software.
9.2 SOURCES OF DATA
The Data on FII Investment
The FII inflow data used for our analysis are taken from the website of MONEY
CONTROL, which is reliable source. It may be noted that since variation of FII
flows is essentially a short run phenomenon, ideally a high frequency data set
(say, daily data) on FII flows should be used for studying the impact of policy
changes. As daily data on FII flows to India are available only for the period from
January 2000 onwards, we have limited many of our analysis to post-2000 years.
58
The Data on S&P CNX NIFTY
S&P CNX Nifty is a well diversified 50 stock index accounting for 23 sectors of
the economy. It is used for a variety of purposes such as benchmarking fund
portfolios, index based derivatives and index fund. S&P CNX Nifty is computed
based on free float methodology. S&P CNX Nifty is computed using market
capitalization weighted method, wherein the level of the index reflects the total
market value of all the stocks in the index relative to a particular base
period.(This data has been taken from NSE Nifty: The 50 share NSE stock price
index; daily closing values. Source: website of the National Stock Exchange,
www.nseindia.com.)
9.3 DATA COLLECTION METHOD
We have limited our study on this report to the secondary data collection method
itself. The Secondary data analyzed in this report has been collected from
various websites, books, journals and newspaper.
59
9.4 STATISTICAL TOOLS
1. Mean
2. Median
3. Mode
4. Skeweness
5. Kurtosis
6. Correlation
7. Standard Error
8. OLS regression
9. Unit root test (ADF)
10. Durbin-Watson statistic
11. Granger causality test
9.5 STATISTICAL PACKAGES USED
1. Ms Office excel 2007
2. Gretl
3. E-views
60
PART Ill DATA ANALYSIS AND INTERPRETATION
Descriptive Statistics of daily returns on S & P CNX NIFTY from Calendar

Year Jan 2000 to March 2011
61
TABLE - 11
S&P CNX NIFTY (Y)
Mean 2834.964
Standard Error 32.74654
Median 2186.225
Mode 1070.65
Standard Deviation 1671.678
Sample Variance 2794508
Kurtosis -1.22626
Skewness 0.494762
Range 5447.35
Minimum 854.2
Maximum 6301.55
Sum 7387916
Count 2606
INTERPRETION
Average closing price of S & P CNX NIFTY is 2834.964 whereas,
Standard deviation shows that deviation from the mean is 1671.678
For the taken data middle value for the S & P CNX NIFTY is 2186.225
Mode shows that most frequent value for S & P CNX NIFTY is 1070.65
Descriptive Statistics of daily net FII equity from Calendar Year Jan 2000 to
March 2011
TABLE - 12
62
FII (X)
Mean 158.8384766
Median 64.5
Mode 51.2
Standard Deviation 670.7611396
Sample Variance 449920.5064
Kurtosis 20.05503199
Skewness 2.292412629
Range 10300.3
Minimum -3393.4
Maximum 6906.9
Sum 413933.07
Count 2606
Average closing price of FII is 158.84 Rs. corers where as Standard

deviation shows the deviation from the mean is 670.76 Rs. corers
For the taken data Median value for the FII is 64.5 Rs. corers
Mode shows that most frequent value for FII is 51.2 Rs. Corers
Interpretation
It is clear from the above table that S & P CNX NIFTY shows greater variability
than net FII flows as indicated by their respective standard deviations. Both the
distributions are asymmetric with both NET FII EQUITY AND S & P CNX NIFTY
being positively skewed. Both the distributions are lepto - kurtic with net FII flows
being steeper than S & P CNX NIFTY return distribution.
63
Regression for FII and S & P CNX NIFTY
Regression Statistics (TABLE 13)
TABLE 13.1
Regression Statistics
Multiple R 0.000224877
R Square 0.000000051
Adjusted R Square -0.000384122
Observations 2605
R square is just the square of coefficient of correlation. If r2=1 then our data fit the
regression line perfectly and the line has positive slope. If r2=-1 then our data fit
the regression line perfectly and the line has negative slope. A no fit is suggested
by r2=0. The value r2 tell us how the regressor (x variable) explains the variation
in the dependent variable (y). Thus, r2 tells us how best these data fit a linear
line.
Adjusted R square is used when you have two or more regressors (independent
or x variables).
ANOVA
TABLE 13.2
Df SS MS F Significance F
Regression 1 0.194425837 0.1944258 0.0001 0.990846836
Residual 2603 3844706.999 1477.0292
Total 2604 3844707.194
TABLE 13.3
Standard
Coefficients Error t Stat P-value
Intercept -0.881903 0.7534792 -1.170441 0.241931
X Variable 1 0.4788828 41.739461 0.0114731 0.990847
64
Here, table 13, Regression Statistics between FII and S & P CNX NIFTY shows
p-value is more than 0.05 that shows the value of F is insignificant. Moreover, R
Square i.e. 0.000000051 is also very negligible.
Hence, the need for stationary data arises by which we will be able to find the
true relationship between these variables
Augmented Dickey-Fuller tests (ADF test)
The pre-requisite of cointegration test is the stationary of each individual time

series over the sample period. In this study, we relied on Augmented Dickey-
fuller unit root test to investigate stationary of each time series as proposed by
Dickey and Fuller (1981).
In autoregressive time series models the presence of unit root causes a violation
of the assumptions of classical linear regressions. A unit root means that the
observed time series is not stationary. When non stationary time series are used
in a regression model one may obtain apparently significant relationships from
unrelated variables. This phenomenon is called spurious regression.
The hypotheses of this test are
Ho: a=1, i.e., there is a unit root the time series is non-stationary.
H1: a<1, i.e., there is no unit root the time series is stationary.
Order 1, sample size 2605
Unit-root null hypothesis: a = 1
65
ADF TABLE
TABLE-14
Variable With Constant With Constant and Trend

t-statistics p-value t-statistics p-value
FII -33.9395 0.00000 -34.5133 0.00000
Table 14 shows the estimated p value of the t-statistics for FII is less than 0.05,
so we reject the null hypothesis. Thus, FII data are stationary.
Graph of FII from JAN 2000 to March 2011
Figure 8
YEAR
Figure 8 shows FII range from the Calendar year Jan 2000 to March 2011.This
figure shows data of FII are already stationary
66
ADF TABLE
TABLE-15

S & P CNX Nifty -0.238903 0.9311 -2.56651 0.296
Table 15 shows the estimated p value of the t-statistics for S & P CNX NIFTY is
more than 0.05, so we accept the null hypothesis. Thus, data of S & P CNX
NIFTY are non-stationary.
67
Graph of S & P CNX Nifty for non stationary data
From JAN 2000 to MARCH 2011
FIGURE - 9
YEAR
Above figure 9 indicates the S & P CNX NIFTY values which shows the trend
does not give real picture for making any kind of interpretation.Hence,the need of
data stationarity arises.
Stationarity
A stochastic process whose probability distribution is unchanged by shifts in time

is said to be stationary. The mean and variance are constant over time and the
value of the covariance between the two time periods depends only on the
distance or lag between two time periods and not the actual time at which the
covariance is computed.
Stochastic process
A sequence of random variables. It is used as models of tome series.
Importance for stationarity
68
The stationarity or otherwise of a series can strongly influence its behavior and
properties -e.g. persistence of shocks will be infinite for nonstationary series
Spurious regressions. If two variables are trending over time, a regression of

one on the other could have a high R2even if the two are totally unrelated
If the variables in the regression model are not stationary, then it can be proved
that the standard assumptions for asymptotic analysis will not valid. In other
words, the usual t-ratios will not follow a t-distribution, so we cannot validly be
undertake hypothesis tests about the regression parameters.
ADF TEST
TABLE 16

LD S & P CNX
Nifty -48.601 0.00000 -48.608 0.00000
Table 16 shows the estimated p value of the t-statistics for log difference of S
& P CNX NIFTY is less than 0.05, so we reject the null hypothesis. Thus,log
difference of this is stationary.
69
For stationary data of FII and S & P CNX NIFTY
Regression Statistics (TABLE 17)
TABLE 17.1
Regression Statistics
Multiple R 0.25819237
R Square 0.0666633
Adjusted R Square 0.06630474
Observations 2605
ANOVA
TABLE 17.2
Df SS MS F Significance F
Regression 1 0.05733644 0.0573 185.92 0.0000000
Residual 2603 0.802753612 0.0003
Total 2604 0.860090052
TABLE 17.3
Standard
Coefficients Error t Stat P-value
Intercept -0.000627 0.0003535 -1.772574 0.076416
Ld S&P NIFTY 0.000007 0.00000051 13.63519 0.00000
Although R Square in Table 15.1 has improved compared to Table 14.1, the
Significance F is 0.00000 in Table 15.2 is less than 0.05 and thus is insignificant.
Which means that this regression computed with the Ordinary Least Square
Model (OLS) is not appropriate to measure the relationship between these two
variables.
70
S & P CNX NIFTY FOR STATIONARY DATA
FROM JAN 2000 TO MARCH 2011
FIGURE - 10
YEAR
Figure 10 shows real picture of S & P CNX NIFTY which is reliable for research
purpose.
VAR framework with maximum lag order 10
Meaning of Vector Auto Regression (VAR)
Multivariate auto regression is called the Vector Auto Regression. It involves N

variable on p lag of itself and p lags of every other variables. VAR allow cross
variable dynamic means each variable is not related to its own past but also to
past of other variables in the system.
Each variable depends on one lag of other variable in addition to one lag of itself:
that is one obvious source of multivariate interaction captures by VAR that is very
much useful for forecasting. In addition the disturbances may be correlated
71
Importance of VAR
VAR are very easy to estimate because one need to run only N linear
regressions and easily the forecasting can be there. VAR also gives the
magnitude of causality and it is more informative as forecasting tool.
AIC = Akaike criterion,

BIC = Schwartz Bayesian criterion and
HQC = Hannan-Quinn criterion.
OPTIMUM SELECTION OF LAG WITH THE HELP OF AIC, BIC AND HQC
The AIC, BIC and HQC are measures of the relative goodness of fit of a
statistical model. AIC, BIC and HQC provide a measure of model quality by
simulating the situation where the model is tested on a different data set. These
models will enable us in optimum selection of lag.
Goodness of fit
The goodness of fit of a statistical model describes how well it fits a set of
observations. Measures of goodness of fit typically summarize the discrepancy
between observed values and the values expected under the model in question.
Statistical model
A statistical model is a formalization of relationships between variables in the
form of mathematical equations. A statistical model describes how one or more
random variables are related to one or more random variables.
72
VAR TABLE
TABLE-18
Lags Loglik p(LR) AIC BIC HQC
1 -13523.55506 10.427403 10.440955 10.432314
2 -13482.90237 0.00000 10.399154 10.421741 10.407339
3 -13448.71388 0.00000 10.375887 10.407509 10.387346
4 -13430.04066 0.00000 10.364579 10.405235* 10.379311
5 -13418.89625 0.00018 10.359072 10.408764 10.377078
6 -13409.50724 0.00087 10.354919* 10.413645 10.376199*
7 -13408.02859 0.56500 10.356862 10.424623 10.381416
8 -13405.51511 0.28454 10.358008 10.434804 10.385836
9 -13404.62191 0.77497 10.360402 10.446233 10.391504
10 -13397.39590 0.00598 10.357916 10.452782 10.392291
The asterisks above indicate the best (that is, minimized) values of the respective
information criteria.
As per the AIC and HQC lag length is 6 whereas as per BIC optimum lag length
is 4.Hence, we will assume the lag length to be 6 for the Granger Causality Test.
GRANGER CAUSALITY TEST
This study uses Granger Causality Test proposed by C. W. J. Granger (1969) for
testing the causality between net FII investment flow to India and real economic
growth.
Granger causality is a technique of causality for determining whether one time

series is useful in forecasting another. Ordinarily, regressions reflect "mere"
correlations, but Clive Granger, who won a Nobel Prize in Economics, argued
that there is an interpretation of a set of tests as revealing something about
causality. According to Granger causality, if a signal X1 "Granger-causes" (or "G-
73
causes") a signal X2, then past values of X1 should contain information that
helps predict X2 above and beyond the information contained in past values of
X2 alone. Its mathematical equation is based upon the linear equation model.
To explain the Granger Causality in context of FII and S & P CNX NIFTY that
whether the FII causes S & P CNX NIFTY or the S & P CNX NIFTY causes FII.
The granger causality assumes that the information relevant to the prediction of
the respective variables.
Mathematical Equation
Bivariate linear autoregressive model of two variables and :
Where
and = Predicted values ( volume and volatility )
p=Lag length
E1 and E2 = Residuals (assumes uncorrelated)
A12 and A22 = Coefficients of and (volume and volatility)
(Volatility) G-causes (Volume) if the coefficients in are jointly

significantly different from zero
G- Causes (Volume) (Volatility) if the coefficient A22 are jointly

significantly different from zero.
74
= 0 the matrix contains the coefficients of the model (i.e., the contributions
of each lagged observation to the predicted values of and , G-
causes if the coefficients in are jointly significantly different from zero. This
can be tested by performing an F-test of the null hypothesis that = 0, given
assumptions of covariance stationarity on and . The magnitude of a G-

causality interaction can be estimated by the logarithm of the corresponding F-
statistic. Note that model selection criteria, such as the Bayesian Information
Criterion (BIC, (Schwartz 1978)) or the Akaike Information Criterion (AIC, (Akaike
1974)), can be used to determine the appropriate model order .
Important assumptions of the model:
1. It is assumed that there are two variables volatility and volume and they
are stationary.
2. The number of lagged terms to be introduced in the causality test is an

important practical question. The AIC and SC criteria etc. are used to
determine the lag length.
3. The error terms entering the causality test are uncorrelated.
DURBIN-WATSON STATISTIC
The Durbin-Watson test is a test for first-order serial correlation in the residuals
of a time series regression. A value of 2.0 for the Durbin-Watson statistic
indicates that there is no serial correlation
Dependent Variable (LD_S & P CNX NIFTY) - 1.99256
Dependent Variable (FII) - 2.00017
75
DURBIN-WATSON TEST should be near to 2 which shows the error terms are
uncorrelated which is the third and pre-requisite for Granger Causality Test.

Pairwise Granger Causality Tests
Date: 04/29/11 Time: 11:30
Sample: 1/04/2000 12/29/2009
Lags: 6
TABLE-19
Null Hypothesis: Obs F-Statistic Probability
LD_S_P_CNX_NI does not Granger Cause FII__X_ 2599 15.5881 0.0000
FII__X_ does not Granger Cause LD_S_P_CNX_NI 2509 2.32723 0.03035
Table- 19 shows the Granger Causality Test of LD_S & P CNX NIFTY and FII,
with the null hypothesis that neither FII nor LD-S&P NIFTY causes the other. The
null hypothesis is rejected for both tests, as the probability value of F-statistic is
less than 0.05. Thus we can infer that LD_S & P CNX NIFTY causes the FII as
well as FII causes LD_S & P CNX NIFTY. So we can say that there is bi-
directional causality between the FII and the LD_S & P CNX NIFTY.
Granger causality test is used to check whether one variable cause the other or
not. This gives answer to the question of presence or absence of causality. But it
does not fetch the magnitude of causality among the variables. The magnitude of
causality can be known with the help of Variance Decomposition which is
presented below.
76
VARIANCE DECOMPOSITION
Variance decomposition has an immediate link to forecasting- they answer the

question How much of h-step ahead forecast error variance i is explained by
innovations to variable j, for h=1, 2?
It gives indication of the magnitude of influence of the FII on S & P CNX NIFTY
and S & P CNX NIFTY on FII.
DECOMPOSITION OF VARIANCE FOR FII__X_
TABLE - 20
Decomposition of variance for FII__X_

A B C D
Period(lag) std. error FII__X_ ld_S_P_CNX_NIfty Total*
1 588.839 100 0 100
2 619.364 97.037 2.9629 100
3 627.921 96.624 3.3764 100
4 637.081 96.638 3.362 100
5 643.666 96.706 3.2944 100
6 650.036 96.767 3.2333 100
7 657.343 96.831 3.1695 100
8 660.794 96.857 3.1426 100
9 663.239 96.873 3.1266 100
10 665.26 96.889 3.1112 100
11 666.832 96.901 3.099 100
12 668.055 96.91 3.0899 100
13 668.996 96.917 3.083 100
14 669.665 96.922 3.0783 100
15 670.167 96.926 3.0745 100
Note - *shows total of Column B (FII__X_) and Column C (ld_S_P_CNX_Nifty).
Interpretation
The Variance decomposition of the FII to S & P CNX NIFTY indicate that the FII
is less explained by S & P CNX NIFTY as it is reported in table that in period
(lag) 1-15 the FII explains the 96% variance and where as the S & P CNX NIFTY
only explains remaining 3%, which indicates that the FII explains more volatility.
77
DECOMPOSITION OF VARIANCE FOR LD_S_P_CNX_NIFTY
TABLE 21
Decomposition of variance for ld_S_P_CNX_NIfty

A B C D
Period(lag) std. error FII__X_ ld_S_P_CNX_NIfty Total
1 0.0180517 6.8501 93.1499 100

2 0.0180869 7.069 92.931 100
3 0.0181025 7.0857 92.9143 100
4 0.0181086 7.14 92.86 100
5 0.0181101 7.1543 92.8457 100
6 0.018121 7.1639 92.8361 100
7 0.0181464 7.1884 92.8116 100
8 0.0181481 7.2051 92.7949 100
9 0.0181497 7.2153 92.7847 100
10 0.0181506 7.225 92.775 100
11 0.0181514 7.2325 92.7675 100
12 0.0181521 7.2386 92.7614 100
13 0.0181526 7.2433 92.7567 100
14 0.0181529 7.2463 92.7537 100
15 0.0181531 7.2485 92.7515 100
Note - *shows total of Column B (FII__X_) and Column C (ld_S_P_CNX_Nifty).
Interpretation
The Variance decomposition of the S & P CNX NIFTY to FII indicate that the is S
& P CNX NIFTY less explained by FII as it is reported in table that in period (lag)
1-15 the S & P CNX NIFTY explains the 92% variance and where as the FII only
explains remaining 7%, which indicates that the S & P CNX NIFTY explains more
volatility.
78
IMPULSE RESPONSES
FIGURE-11
For a one unit pulse shock to one variable , what are the
expected dynamic consequences in the system.
FII TO FII
For change in 1 unit pulse shock of FII, how much change in the FII takes place
that shows the FII to FII Impulse Response of the same graph. It was high initially
later on it is almost constant.
FII TO LD_ S & P CNX NIFTY
For change in 1 unit pulse shock of FII, how much change in the LD S & P CNX
NIFTY takes place that shows the FII to LD_ S & P CNX NIFTY Impulse
79
Response of the same graph It was high initially later on it is almost constant but
gone negative nearby at lag 5.Then again it is almost constant.
LD_ S & P CNX NIFTY TO FII
For change in 1unit pulse shock of LD_ S & P CNX NIFTY, how much change in
FII at different lags takes place that shows the LD_ S & P CNX NIFTY TO FII
Impulse Response of the same graph .It was high initially later on it is almost
constant.
LD_ S & P CNX NIFTY TO LD_ S & P CNX NIFTY
For change in 1 unit pulse shock of LD_ S & P CNX NIFTY, how much change in
the LD_ S & P CNX NIFTY takes place that shows the LD_ S & P CNX NIFTY
TO LD_ S & P CNX NIFTY Impulse Response of the same graph .It was high
initially later on it is almost constant.
80
RESULTS AND FINDINGS
Non stationary data Regression Statistics between FII and S & P CNX
NIFTY shows p-value is more than 0.05 that shows the value of F is
insignificant. Thus the OLS model used here is inappropriate or the model
specification is at fault.
Augmented Dickey-Fuller tests (ADF test) has been applied to check the
stationarity of data through which it was found that FII data are already
stationary but S & P CNX NIFTY are not stationary- which has also be
seen from the Figure 8 & Figure 9 respectively.
For making the data stationary of S & P CNX NIFTY, log difference of S &
P CNX NIFTY is used. The log difference data of S & P CNX NIFTY are
stationary, which can be verified from time series plot of Figure 10 and
through the ADF test.
Regression Statistics of Stationary data between FII and ld_S & P CNX
NIFTY shows p-value of Significance F is 0.00000 in Table 15.2 is less
than 0.05 and thus is insignificant. Which means that this regression
computed with the Ordinary Least Square Model (OLS) is not appropriate
to measure the relationship between these two variables.
Optimum selection of lag calculated with the help of AIC, BIC AND HQC.
The results of AIC and HCQ suggest lag length to be 6.
81
From GRANGER CASUALITY TEST it is proved that both FII and S & P
CNX NIFTY cause each other. That means there is a bi directional
relationship among the variables.
Variance decomposition of FII and S & P CNX NIFTY, it is proved that FII
causes more to S & P CNX NIFTY than the S& P CNX NIFTY causes FII.
82
LIMITATION OF THE STUDY
We have limited our study to the key variables FII and S & P CNX NIFTY
and not taken into consideration other macro economic variables.
We have limited our study from the calendar year Jan 2000 to March
2011.
83
CONCLUSION
The empirical investigation of causation between FII flows to India and Indian
stock market returns over the time period Jan 2000 - March 2011 has revealed
that there is bidirectional causation between FII flows and the Indian Stock
Market. Though the magnitude of causality is less amongst them that shows
other macro economic variables are also the key drivers affecting both the FII
flows and Indian Stock Market.
In other words, not only Rise or fall in S & P CNX NIFTY drives the FII flows.
Indian Stock Market and ultimately Indian Economy are more caused by FII flows
than the FII flows caused by S & P CNX NIFTY which we can also see in the
chapter - Growth of FIIs (from the figures of FII & S & P CNX NIFTY from the
year 2008 to 2011) that rise or fall in FII causes more to S& P CNX NIFTY than
S& P CNX NIFTY causes FII.
From the variance decomposition of FII and S & P CNX NIFTY, it is proved that
FII causes more to S & P CNX NIFTY than the S& P CNX NIFTY causes FII.
84
REFERENCES
Singh Sumanjeet & Minakshi Paliwal, LIBERALIZATION OF FOREIGN

INSTITUTIONAL INVESTMENTS (FIIS) IN INDIA: MAGNITUDE, IMPACT
ASSESSMENT, POLICY INITIATIVES AND ISSUES, Global Journal of
International Business Research Vol. 3. No.3. (2010).
www.globip.com/pdf_pages/globalinternational-vol3-article2.pdfvs
International Research Journal of Finance and Economics, ISSN 1450-2887
Issue 41 (2010), Foreign Institutional Investments and Real Economic Growth in
India: A Causality Test. Last retrieved on 21st MARCH 2011 from
www.eurojournals.com/IRJFE_41_16.pdf
Testing Semi-Strong Form of Efficient Market Hypothesis in Relation to the
Impact of Foreign Institutional Investors (FIIs) Investments on Indian Capital
Market, International Journal of Trade, Economics and Finance, Vol.1, No.4,
December, 2010 (2010-023X). Last retrieved on 11st April 2011 from
http://www.ijtef.org/papers/66-F490.pdf
Impact of Foreign Institutional Investors On Indian Stock Market By Hardeep.
Last retrieved on 21st April 2011 from
http://www.indiastudychannel.com/projects/4849-Impact-Foreign-Institutional-
Investors-Indian-Stock-Market.aspx.
Foreign Institutional Investors: Investment Preferences in India, Prasanna, P. K.
(2008). Foreign Institutional Investors: Investment Preferences in India, JOAAG,
85
Vol. 3. No. 2. Last retrieved on 21st April 2011 from
http://joaag.com/uploads/4_PrasannaFinal3_2_.pdf
Role of Institutional Investors in Indian Stock Market by S S S Kumar. Last

retrieved on 21st April 2011 from
http://dspace.iimk.ac.in/bitstream/2259/397/1/sss+kumar.pdf
The Impact of FII Regulations in India SUCHISMITA BOSE AND DIPANKOR

COONDOO (J U L Y - D E C. 0 4). Last retrieved on 21st April 2011 from
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=755324
FIIs raise stakes in Nifty firms (Posted: Mon, Jan 18 2010. 11:45 PM IST). Last
retrieved on 5st April 2011 from
http://www.livemint.com/2010/01/18234512/FIIs-raise-stakes-in-Nifty-fir.html
FII SHAREHOLDING PATERN

http://www.livemint.com/2010/01/18234512/C7392EBD-2127-4245-B391-
75D31106CFB1ArtVPF.pdf
Emerging Markets Attract Global Investors (Vol 1 No. 23 August 23, 2010)
http://www.ftkmc.com/newsletter/Vol1-23-aug23-2010.pdf
For rules and regulation of FII

http://www.rbi.org.in/fiilist/index.html
Data Collection and other information
For daily data of FII
http://www.moneycontrol.com/india/stockmarket/foreigninstitutionalinvestors/16/5
9/activity/FII
86
For daily data of S & P CNX NIFTY
http://www.nseindia.com/content/indices/ind_histvalues.html
For monthly data of data
www.yahoofinance.com
Information regarding stock market of India
www.bseindia.com
Books
STATISTICS FOR MANAGEMENT (BY RICHARD I.LEVIN & DAVID S. RUBIN)
BASIC ECONOMETRICS (BY DAMODAR N. GUJARATI)
OPERATION RESEARCH (BY HARMDLY TAHA)

BUSINESS RESEARCH METHODS (BY DONALD R. COOPER AND PAMELA
S. SCHINDLER)
87
GLOSSARY OF TERMS
Mean
The mean is the mathematical average of a set of numbers. The average is

calculated by adding up two or more scores and dividing the total by the number
of scores.
Median
The median is the score located at the centre of a distribution. ... take the
average of the two middle scores to find the median.
Mode
The mode is the most frequently occurring score in a distribution.
Correlation
Correlation is a statistical measurement of the relationship between two

variables. Possible correlations range from +1 to 1.
OLS regression
OLS stands for Ordinary Least Squares, the standard linear regression
procedure. One estimates a parameter from data and applying the linear model
Unit root test (ADF)
Granger causality test
Granger causality is a technique for determining whether one time series is

useful in forecasting another.
88
VAR
VAR stands for Vector Autoregression, a kind of model of related time series. In
the simplest example, the vector of data points at each time t (y t) is thought of as
a parameter vector (say, phi1) times a previous value of the data vector, plus a
vector of errors about which some distribution is assumed. Such a model may
have autoregression going back further in time than t-1 too.
Standard Error
Standard error is a statistical term that measures the accuracy with which a
sample represents a population. In statistics, a sample mean deviates from the
actual mean of a population; this deviation is the standard error.
Skewness
Skewness describes the asymmetry of the distribution relative to the mean. A

positive skewness indicates that the distribution has a longer right-hand tail
(skewed towards more positive values). A negative skewness indicates that the
distribution is skewed to the left.
Kurtosis
A statistical measure used to describe the distribution of observed data around

the mean. It is sometimes referred to as the "volatility of volatility."
Stationarity
A stochastic process whose probability distribution is unchanged by shifts in time

is said to be stationary. The mean and variance are constant over time and the
value of the covariance between the two time periods depends only on the
distance or lag between two time periods and not the actual time at which the
covariance is computed.
89
Stochastic process
A sequence of random variables. It is used as models of tome series.
P-value
In statistical hypothesis testing, the p-value is the probability of obtaining a result
at least as extreme as the one that was actually observed, assuming that the null
hypothesis is true.
Standard Deviation
A measure of the dispersion of a set of data from its mean. The more spread
apart the data, the higher the deviation. Standard deviation is calculated as the
square root of variance.
90
APPENDIX
Model 2: OLS estimates using the 2600 observations 00/01/12-09/12/29

Dependent variable: FII__X_
Variable Coefficient Std. Error t-statistic p-value

const 55.6348 12.3748 4.4958 <0.00001 ***
ld_S_P_CNX__1 6098.45 663.049 9.1976 <0.00001 ***
ld_S_P_CNX__2 939.85 673.397 1.3957 0.16293
ld_S_P_CNX__3 187.659 672.833 0.2789 0.78034
ld_S_P_CNX__4 -1165.95 671.956 -1.7352 0.08283 *
ld_S_P_CNX__5 -586.806 670.197 -0.8756 0.38134
ld_S_P_CNX__6 -955.931 668.675 -1.4296 0.15296
FII__X__1 0.222216 0.0203255 10.9329 <0.00001 ***
FII__X__2 0.0815669 0.0207523 3.9305 0.00009 ***
FII__X__3 0.116471 0.0207344 5.6173 <0.00001 ***
FII__X__4 0.0752678 0.0207299 3.6309 0.00029 ***
FII__X__5 0.073817 0.0207098 3.5644 0.00037 ***
FII__X__6 0.0726422 0.0198012 3.6686 0.00025 ***
Mean of dependent variable = 159.381

Standard deviation of dep. var. = 671.394
Sum of squared residuals = 9.01362e+008
Standard error of residuals = 590.271
Unadjusted R2 = 0.230626
Adjusted R2 = 0.227057
F-statistic (12, 2587) = 64.6228 (p-value < 0.00001)
Durbin-Watson statistic = 2.00017
First-order autocorrelation coeff. = -0.000258974
Log-likelihood = -20272.2
Akaike information criterion = 40570.5
Schwarz Bayesian criterion = 40646.7
Hannan-Quinn criterion = 40598.1
91
Model 3: OLS estimates using the 2600 observations 00/01/12-09/12/29
Dependent variable: ld_S_P_CNX_NI
Variable Coefficient Std. Error t-statistic p-value

const 0.000117709 0.000379579 0.3101 0.75651
FII__X__1 1.21009e-06 6.23455e-07 1.9409 0.05237 *
FII__X__2 5.21767e-07 6.36546e-07 0.8197 0.41247
FII__X__3 5.48682e-07 6.35997e-07 0.8627 0.38838
FII__X__4 -8.07104e-07 6.35859e-07 -1.2693 0.20444
FII__X__5 5.82025e-07 6.35241e-07 0.9162 0.35963
FII__X__6 6.81039e-07 6.07373e-07 1.1213 0.26227
ld_S_P_CNX__1 0.0377935 0.020338 1.8583 0.06324 *
ld_S_P_CNX__2 -0.0477503 0.0206554 -2.3118 0.02087 **
ld_S_P_CNX__3 -0.0119655 0.0206381 -0.5798 0.56211
ld_S_P_CNX__4 -0.00233497 0.0206112 -0.1133 0.90981
ld_S_P_CNX__5 -0.0321858 0.0205573 -1.5657 0.11755
ld_S_P_CNX__6 -0.0502479 0.0205106 -2.4499 0.01436 **
Mean of dependent variable = 0.000501177

Standard deviation of dep. var. = 0.018165
Sum of squared residuals = 0.848058
Standard error of residuals = 0.0181057
Unadjusted R2 = 0.0111072
Adjusted R2 = 0.00652011
F-statistic (12, 2587) = 2.42141 (p-value = 0.00401)
Durbin-Watson statistic = 1.99256
First-order autocorrelation coeff. = 0.00302508
Log-likelihood = 6747.25
Akaike information criterion = -13468.5
Schwarz Bayesian criterion = -13392.3
Hannan-Quinn criterion = -13440.9
92

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A

COMPREHENSIVE PROJECT REPORT

UNDER THE GUIDENCE OF

Comprehensive Project is an integral part of the MBA program at C.K.SHAH

VIJAPURWALA INSTITUTE OF MANAGEMENT. An exercise like this helps us

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An analysis of the direction of causality to understand the possible devastating

provide necessary information. Comprehensive project is the golden

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No one who achieves success does so without acknowledging the help of

Here its an immense opportunity for us to articulate our Vote of Thanks

project with great learning.

Ms.Ishita Ashra for providing us initial guidance regarding the framework of

we approach during our project.

support, encouragement without which we were unable to reach the present

Place: Vadodara (signature)

Date: Patel Neha A.

Foreign Institutional Investor means an institution established or

objective is to develop an understanding about the concept and role of Foreign

Institutional Investors (FIIs) in India.

PART I GENERAL INFORMATION ................................................................ 10

9 Graph of S & P CNX Nifty for non stationary 9 68

data From JAN 2000 to MARCH 2011

10 S & P CNX NIFTY FOR STATIONARY DATA 10 71

FROM JAN 2000 TO MARCH 2011

The Ranking of BRIC Countries On The Twelve Pillars of GCI 1 21

The rankings of BRIC countries 2 23

Net foreign investment in emerging market economies 3 24

Evolution of FII policy in India 4 33

Growth of FIIs and sub-accounts 5 38

FII shareholding pattern as on march 31, 2010 6 38

FII portfolio sector trend 10 47

Descriptive Statistics of daily returns on S & P CNX NIFTY 11 62

Descriptive Statistics of daily net FII equity 12 63

ADF TEST of FII 14 66

CHAPTER-1 ABOUT THE INDUSTRY

companies (i.e FII investments); investments in listed/unlisted companies other

Foreign Venture Capital Investment route); investments through American

Depository Receipts / Global Depository Receipts (ADR/GDR) or investments by

Foreign Investment in India

1.2 ABOUT FOREIGN INSTITUTIONAL INVESTOR

incorporated outside India, which proposes to make investment in India in

securities (Regulation 2(f) of the FII regulation).

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-

A) Foreign Institutional Investors Registration

Currently, entities eligible to invest under FII route are as follows

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

than 10 per cent of the shares or units of the fund).

The following entities are eligible to be registered as sub-accounts, viz.

partnership firms, private company, public company, pension fund, investment

trust, and individuals.

(A.3) Domestic entity