Foreign Institutional Investment on Indian Capital Market: An Empirical Analysis Tom Jacob 1 & Thomas Paul Kattookaran 2 1 Assistant Professor, Dept. of Commerce, Christ College, Irinjalakuda, Kerala, India, 2 Associate Professor and H.O.D, Research Department of Commerce, St. Thomas College, Autonomous, Thrissur, Kerala, India. Abstract Since the 1990s one of the major forces changing the face and structure of international capital markets has been the flow of cross-border portfolio investments, especially by Foreign Institutional Investors (FIIs) from developed countries to the developing economies. FIIs are considered as the crucial factor for influencing the performance of Indian capital market. These capital flows leads a significant driving force in the Indian capital market and their growing presence marks the development of the capital market of India. Foreign Institutional Investors plays an important role in the capital market because of their heavy investment capacity. They are generally cash rich and look for good avenues to put their money. India has come out as one of the most preferred destinations for global investors. There is no question that the liberalization of FIIs flows into the Indian capital market since 1992 has accepted a considerable impact on Indian stock market. This study is an effort to explore the FIIs investment pattern and its impact on the Indian capital market. As a result of which Indian capital markets return have significant impact on the performance of FIIs investment in India. Introduction Keywords: FIIs, Sensex, Nifty,Volatility. In 1992 India opened up its economy and allow FIIs in its domestic market. In order to trade in Indian equity market foreign corporates need to register with securities and exchange broad of India (SEBI).RBI has granted permission to SEBI registered FIIs invest in Indian capital market under portfolio investment scheme. Foreign Institutional Investor (FIIs) means an entity constituted or incorporated outside India, which proposes to create investment in India. FIIs does not provide the investor with direct ownership of financial assets and thus no direct management of the company. FIIs flows supplements and augment domestic saving and domestic investment without increasing the foreign debt of our country. This creates non debt creating capital for the development of an economy. These capital flows to equity market increases stock price, lower the cost of equity capital and encourage investment by Indian firms. As FIIs purchase and sell these stocks there is a high degree of volatility in stock market. FIIs buying pushes the stock market up and their selling shows the stock market downward. FIIs can individually purchase up to ten percent and collectively up to 24 percent of the paid up share capital of an Indian company. The limit of twenty four percent can be increased to statutory limit applicable to the Indian company by passing a broad resolution. Capital market is essentially a market used for buying and selling of long term debt or equity and other securities. It is one of the type of financial market and a part of the overall financial system of a country. Capital market plays an extremely important role in promoting and sustaining the growth of an economy. It is an important and essential conduit to channel and mobilize funds to enterprise both private and government. It provide an effective source of investment in the economy. It plays a critical role in mobilizing saving for investment in productive assets with a view to enhancing a country s long term growth prospects and thus acts as a major catalyst in transforming the economy into more efficient, innovative and competitive 119 The research journal of social sciences October 2018 volume 9 number 10
market place with in the global arena. The existence of deep and broad capital market is absolutely crucial in spurring the growth of our economy. The reforms process was initiated with the establishment of SEBI. An index is basically an indicator. It gives a general idea about whether most of the stocks have gone up or most of the stocks have gone down. The Sensex is an indicator of all the prices of the major companies of BSE.It is based on thirty stocks. They represent well established and financially sound companies. The base value of Sensex is 100 and the base year is 1978-79.The Sensex is the benchmark index of the Indian capital market with wide acceptance among individual investors, institutional investors, foreign investors and fund managers. Sensex is widely used to despite the mood in the Indian capital market. Nifty is an indicator of all the major companies of NSE. Nifty index is a composite of the top fifty stocks listed in National Stock Exchange. At present every country to have its own foreign policy and regulation related to capital market. India also has a foreign policy right from the pre-independence period till now. Review of Literature Bohra and Dutt (2011) examined the investment behaviour of FIIs in India and to analyse the impact of BSE Sensex due to FII inflows. They pointed out that there is high degree of positive correlation between FIIs investment and Sensex return in Indian capital market. They also argue that the FIIs investment have some positive impact on market capitalization and liquidity of Indian capital market. Shukla et al, (2011) investigated the impact of Foreign Institutional Investors on Indian stock market indices. Many Indians working in foreign countries now divert their savings to the capital market. They concluded that FIIs have significant impact on the return of large cap and mid cap companies. Kaur and Dhillon,(2010) analysed the various the determinants of Foreign Institutional investment in India. Market capitalization and stock market turnover of India have significant positive influence only in short-run, but Stock market risk has negative influence on FIIs inflows to India. Among macroeconomic determinants, economic growth of India has a positive impact on FIIs investment in both long run and short run, but all other macroeconomic factors have significant influence only in the long run. They concluded that host country stock market returns (returns on the Sensex) have a positive and significant impact, whereas home country returns (returns on the S&P 500 Index) have a negative, but insignificant influence on FIIs investment inflows in long-run as well as in short-run. Sethi and Sucharita (2009) attempted to explain the effects of private Foreign Capital inflows on some macroeconomic variables in India using the time series data between 1995 to 2007. They found that Foreign Direct Investment (FDI) is positively affecting the economic growth, while Foreign Institutional Investment (FII) is negatively affecting the economic development. Prasanna (2008) discussed the role of FIIs in Indian Capital market and analysed the contribution of Foreign Institutional Investment, particularly among companies included in sensitivity index (Sensex) of Bombay Stock Exchange. She found that higher Sensex indices and high price earnings ratio are the country level factors attracting more Foreign Investment in India and the Foreign Investment is more in the companies with higher volume of publicly held shares. The promoter holdings and the Foreign Investments are inversely linked. Objective of the Study To examine the investment behaviour of Foreign Institutional Investment in capital market. To analyse the impact of Foreign Institutional Investment on BSE Sensex. 120 The research journal of social sciences October 2018 volume 9 number 10
To analyse the impact of Foreign Institutional Investment on CNX Nifty. Research Methodology Data Collection This study is based on secondary data. The required information related to FIIs investment, Sensex and Nifty return are gathered from various sources i.e. RBI Bulletin, Publications from Ministry of Commerce, SEBI Handbook, Handbook of statistic of Indian economy etc. The current study considers 10 years data starting from 2007 to 2017. Data Analysis The statistical tools such as correlation and regression analysis are used for capturing the relationship between FIIs investment and market return in India. Correlation analysis is mainly used for determining the relationship between FIIs investment on Sensex and Nifty return. Regression analysis can be used for analysing the impact of FIIs investment on BSE Sensex and NSE Nifty return. Limitations of the study The major limitation of the study is that other elements involving the market return are not accepted into account such as risk, wholesale price inflation, exchange rate, index of industrial production, etc. Further research can be performed on the other international macro-economic indicators and FIIs are taken into account. Growth and magnitude of FIIs flows in India FIIs flow into India have developed remarkably in recent years. FIIs flows have a direct impact of India s balance of payment status, increasing foreign exchange reserve, stability of exchange rate and volatility of capital flows. When the Government of India relaxes the rules and regulations of FIIs investment for the overall development of the Indian financial system. The Figure 1 indicate that monthly average flow of FIIs investment in India during the entire period is Rs.1589.26 billion. Foreign Institutional Investment: Equity and Debt Though FIIs were allowed to invest in the Indian Capital Market from September 1992, till December, 1998 investments were related to equity only. Investments in debt were created from January 1999 onwards. The separation of Foreign Institutional Investment in equity and debt is presented in the Figure 2. FIIs have been permitted to invest in Indian debt and equity markets based on the recommendations of the High-Level Committee on Balance of Payments headed by Dr. C. Rangarajan in 1993. The Committee on Capital Account Convertibility (CAC) headed by Mr. S. S. Tarapore, in its Report (May 1997), also suggested relaxation of Foreign Investment flows into India. Out of the total cumulative investment of FIIs 83 percent of investment concentrate on equity market and only 17 percent invested in debt market. 121 The research journal of social sciences October 2018 volume 9 number 10
30,000 Figure 1: Flow of FIIs flows in India FIIs_Net_Investment 20,000 10,000 0-10,000-20,000-30,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Compiled from Handbook of statistics of Indian economy Volatility of Foreign Institutional Investor s Behaviour Volatility of FIIs investment can be analysed with the correlation coefficient. There is a high positive correlation between gross purchase and gross sale of FIIs investment in India (refer Figure 3). So FIIs investment is volatile. In short these investment are treated as hot money. Figure 2: FIIs in Equity and Debt market Source: Compiled from Handbook of statistics of Indian economy 122 The research journal of social sciences October 2018 volume 9 number 10
Figure 3: Foreign Institutional Investor Behaviour in Indian Capital Market 160,000 120,000 80,000 40,000 0-40,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 FIIs and Stock Market Return FIIs_GP FIIs_GS FIIs_Net_Investment Source: Compiled from Handbook of statistics of Indian economy Foreign Institutional Investment and movement of Sensex and Nifty are closely correlated in India. The Movement of FIIs has significant influence on the movement of stock market indices. When there is an upward trend in the FIIs due to greater buying, Sensex and Nifty also raises. Table 1: Regression Analysis of FIIs Investment and Sensex Return Dependent Variable: AVERAGE SENSEX RETURN Variable Coefficient Std. Error t-statistic Prob. C 0.292639 0.435369 0.672163 0.5028 FIIs Investment 0.000341 4.41E-05 7.731465 0.0000 R-squared 0.338144 Mean dependent var 0.834118 Adjusted R-squared 0.332487 S.D. dependent var 5.737298 S.E. of regression 4.687457 Akaike info criterion 5.944321 Sum squared resid 2570.754 Schwarz criterion 5.991029 Log likelihood -351.6871 Hannan-Quinn criter. 5.963288 F-statistic 59.77555 Durbin-Watson stat 1.329449 Prob(F-statistic) 0.000000 123 The research journal of social sciences October 2018 volume 9 number 10
Regression has been applied to find out the intensity of the relationship between FIIs investment and Sensex return. Table 1 indicate that R-square value is 0.33 which means model explains the 33% variation. In other words independent variable FIIs is able to explain 33 % variation of the dependent variable BSE Sensex. The table 1 reveals that the F-Statistics value (59.77) is moderate and the corresponding P value is highly significant. This argues that relationship between FIIs and the movement of BSE Sensex is significant. Table 2: Regression Analysis of FIIs Investment and Nifty Return Dependent Variable: AVERAGE NIFTY RETURN Variable Coefficient Std. Error t-statistic Prob. C 0.336387 0.425927 0.789774 0.4313 FIIs Investment 0.000346 4.31E-05 8.030884 0.0000 R-squared 0.355354 Mean dependent var 0.886639 Adjusted R-squared 0.349845 S.D. dependent var 5.687315 S.E. of regression 4.585808 Akaike info criterion 5.900474 Sum squared resid 2460.467 Schwarz criterion 5.947181 Log likelihood -349.0782 Hannan-Quinn criter. 5.919440 F-statistic 64.49509 Durbin-Watson stat 1.309734 Prob(F-statistic) 0.000000 Regression has been applied to find out the intensity of the relationship between FIIs and Nifty return. Table 2 indicate that R-square value is 0.35 which means model explains the 35 % variation. In other words independent variable FIIs investment is able to explain 35 % variation of the dependent variable NSE Nifty. The result reveals that the F-Statistics value (64.49) is moderate and the corresponding P value is highly significant. This argues that relationship between FIIs investment and the movement of NSE Nifty is significant. Finding FIIs are key drivers of Indian equity market and climbing stock prices in Indian market. There is a high degree of volatility of FIIs investment. So these flows are experienced as hot money. The movement of FIIs investment have significant influence of the stock market indices. Conclusion The liberalized trade policy of the Indian Government and the stable political scenario besides technology and infrastructure which have created a conducive environment for entry of FIIs investment and the growth of Indian capital market. On the basis of regression analysis FIIs investment have considerable impact on Indian capital market performance. The correlation between FIIs investment to BSE Sensex and NSE Nifty is found to be extremely positive and strong. As R-square is also found to be moderate (FIIs to Sensex 0.33 and FIIs to Nifty 0.35). FIIs would affect Sensex 33% and Nifty 35% of FIIs investment. In prospect of this, it can be concluded that FIIs are not only the cause of volatility in Indian stock markets, but there may be several other factors which influence the performance of Indian capital market. 124 The research journal of social sciences October 2018 volume 9 number 10
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