FII – Overview

An institution that is a legal entity established or

incorporated outside india proposing to make
investments in india only in securities.
An investor or investment fund that is from or registered
in a country outside of the one in which it is
currently investing. Institutional investors include hedge
funds, insurance companies, pension funds and mutual
funds.
INVESTMENT IN INDIAN MARKET

India is believed to be a good investment despite political

uncertainty, bureaucratic hassles, shortages of power and
infrastructure deficiencies. India presents a vast potential for
overseas investment and is actively encouraging the entrance of
foreign players into the market. No company, of any size, aspiring to
be a global player can, for long ignore this country, which is
expected to become one of the top three emerging economies.

SUCCESS IN INDIA

Success in India will depend on the correct estimation of the

country's potential; underestimation of its complexity or
overestimation of its possibilities can lead to failure. While
calculating, due consideration should be given to the factor of the
inherent difficulties and uncertainties of functioning in the Indian
system. Entering India's marketplace requires a well-designed plan
backed by serious thought and careful research. For those who take
the time and look to India as an opportunity for long-term growth,
not short-term profit- the trip will be well worth the effort.

MARKET POTENTIAL

India is the fifth largest economy in the world (ranking above

France, Italy, the United Kingdom, and Russia) and has the third
largest GDP in the entire continent of Asia. It is also the second
largest among emerging nations. (These indicators are based on
purchasing power parity). India is also one of the few markets in the
world, which offers high prospects for growth and earning potential
in practically all areas of business. Despite the practically unlimited
possibilities in India for overseas businesses, the world's most
populous democracy has, until fairly recently, failed to get the kind
of enthusiastic attention generated by other emerging economies
such as China.

LACK OF ENTHISIASM AMONG INVESTORS

The reason being, after independence from Britain 50 years ago,

India developed a highly protected, semi-socialist autarkic economy.
Structural and bureaucratic impediments were vigorously fostered,
along with a distrust of foreign business. Even as today the climate
in India has seen a sea change, smashing barriers and actively
seeking foreign investment, many companies still see it as a difficult
market. India is rightfully quoted to be an incomparable country and
is both frustrating and challenging at the same time. Foreign
investors should be prepared to take India as it is with all of its
difficulties, contradictions and challenges.
Developing a basic understanding or potential of the Indian market

Envisaging and developing a Market Entry Strategy and

implementing these strategies when actually entering the market
are three basic steps to make a successful entry into India. The
Indian middle class is large and growing; wages are low; many
workers are well educated and speak English; investors are
optimistic and local stocks are up; despite political turmoil, the
country presses on with economic reforms. But there is still cause
for worries- Infrastructure hassles.

The rapid economic growth of the last few years has put heavy
stress on India's infrastructure facilities. The projections of further
expansion in key areas could snap the already strained lines of
transportation unless massive programs of expansion and
modernization are put in place. Problems include power demand
shortfall, port traffic capacity mismatch, poor road conditions (only
half of the country's roads are surfaced) and low telephone
penetration.

INDIAN BUREAUCRACY

Although the Indian government is well aware of the need for reform
and is pushing ahead in this area, business still has to deal with an
inefficient and sometimes still slow-moving bureaucracy.

Diverse Market
The Indian market is widely diverse. The country has 17 official
languages, 6 major religions, and ethnic diversity as wide as all of
Europe. Thus, tastes and preferences differ greatly among sections
of consumers. Therefore, it is advisable to develop a good
understanding of the Indian market and overall economy before
taking the plunge.

INTERNATIONAL PORTFOLIO FLOWS:

International portfolio flows, as opposed to foreign direct investment

(FDI) flows, refer to capital flows made by individuals or investors
seeking to create an internationally diversified portfolio rather than
to acquire management control over foreign companies. Diversifying
internationally has long been known as a way to reduce the overall
portfolio risk and even earn higher returns. Investors in developed
countries can effectively enhance their portfolio performance by
adding foreign stocks particularly those from emerging market
countries where stock markets have relatively low correlations with
those in developed countries.

International portfolio flows are largely determined by the

performance of the stock markets of the host countries relative to
world markets. With the opening of stock markets in various
emerging economies to foreign investors, investors in industrial
countries have increasingly sought to realize the potential for
portfolio diversification that these markets present.

It is likely that for quite a few years to come, FII flows would
increase with global integration. The main question is whether
capital flew in to these countries primarily as a result of changes in
global (largely US) factors or in response to events and indicators in
the recipient countries like its credit rating and domestic stock
market return. The answer is mixed – both global and country-
specific factors seem to matter, with the latter being particularly
important in the case of Asian countries and for debt flows rather
than equity flows.

FOREIGN INSTITUTIONAL INVESTMENT IN INDIA:

MILESTONES

✔ India embarked on a programme of economic reforms in the

early 1990s to tie over its balance of payment crisis and also
as a step towards globalisation.
✔ An important milestone in the history of Indian economic
reforms happened on September 14, 1992, when the FIIs
(Foreign Institutional Investors) were allowed to invest in all the
securities traded on the primary and secondary markets,
including shares, debentures and warrants issued by
companies which were listed or were to be listed the stock
exchanges in India and in the schemes floated by domestic
mutual funds.
✔ Initially, the holding of a single FII and of all FIIs, NRIs (Non-

Resident Indians) and OCBs (Overseas Corporate Bodies) in

 any company were subject to a limit of 5% and 24% of the
company's total issued capital respectively.
✔ ( In order to broad base the FII investment and to ensure that

such an investment would not become a camouflage for

individual investment in the nature of FDI (Foreign Direct
Investment), a condition was laid down that the funds invested
by FIIs had to have at least 50 participants with no one holding
more than 5%. Ever since this day, the regulations on FII
investment have gone through enormous changes and have
become more liberal over time.
✔ ( From November 1996, FIIs were allowed to make 100%

investment in debt securities subject to specific approval from

SEBI as a separate category of FIIs or sub-accounts as 100%
debt funds. Such investments were, of course, subjected to the
fund-specific ceiling prescribed by SEBI and had to be within
an overall ceiling of US $ 1.5 billion. The investments were,
however, restricted to the debt instruments of companies listed
or to be listed on the stock exchanges.
✔ In 1997, the aggregate limit on investment by all FIIs was
allowed to be raised from 24% to 30% by the Board of
Directors of individual companies by passing a resolution in
their meeting and by a special resolution to that effect in the
company's General Body meeting.
✔ ( From the year 1998, the FII investments were also allowed in

the dated government securities, treasury bills and money

market instruments.
✔ ( In 2000, the foreign corporates and high net worth individuals

were also allowed to invest as sub-accounts of SEBI-

registered FIIs. FIIs were also permitted to seek SEBI
 registration in respect of sub-accounts. This was made more
liberal to include the domestic portfolio managers or domestic
asset management companies.
✔ ( 40% became the ceiling on aggregate FII portfolio investment
in March 2000.
✔ ( This was subsequently raised to 49% on March 8, 2001 and
to the specific sectoral cap in September 2001.
✔ ( As a move towards further liberalization a committee was set
up on March 13, 2002 to identify the sectors in which FIIs
portfolio investments will not be subject to the sectoral limits
for FDI.
✔ ( Later, on December 27, 2002 the committee was
reconstituted and came out with recommendations in June
2004. The committee had proposed that, 'In general, FII
investment ceilings, if any, may be reckoned over and above
prescribed FDI sectoral caps. The 24 per cent limit on FII
investment imposed in 1992 when allowing FII inflows was
exclusive of the FDI limit. The suggested measure will be in
conformity with this original stipulation.' The committee also
has recommended that the special procedure for raising FII
investments beyond 24 per cent up to the FDI limit in a
company may be dispensed with by amending the relevant
regulations.
✔ ( Meanwhile, the increase in investment ceiling for FIIs in debt
funds from US $ 1 billion to US $ 1.75 billion has been notified
in 2004. The SEBI also has reduced the turnaround time for
processing of FII applications for registrations from 13 working
days to 7 working days except in the case of banks and
subsidiaries.
 ✔ All these are indications for the country's continuous efforts to
mobilize more foreign investment through portfolio investment
by FIIs. The FII portfolio flows have also been on the rise since
September 1992. Their investments have always been net
positive, but for 1998-99, when their sales were more than
their purchase

ACTS AND RULES

FII registration and investment are mainly governed by SEBI (FII)

Regulations, 1995.

ELIGIBILITY FOR REGISTRATION AS FII: Following entities /

funds are eligible to get registered as FII:

1. Pension Funds

2. Mutual Funds

3. Insurance Companies

4. Investment Trusts

5. Banks

6. University Fund s

7. Endowments

8. Foundations

9. Charitable Trusts / Charitable Societies

Further, following entities proposing to invest on behalf of broad
based funds(a fund established or incorporated outside India, which
has at least twenty investors with no single individual investor
holding more than 10% shares or units of the fund) , are also
eligible to be registered as FIIs:

1. Asset Management Companies

2. Institutional Portfolio Managers

3. Trustees

4. Power of Attorney Holders

INVESTMENT OPPORTUNITIES FOR FIIs

The following financial instruments are available for FII investments

a) Securities in primary and secondary markets including shares,

debentures and warrants of companies, unlisted, listed or to be
listed on a recognized stock exchange in India;

b) Units of mutual funds;

c) Dated Government Securities;

d) Derivatives traded on a recognized stock exchange;

e) Commercial papers.

Investment limits on equity investments

a) FII, on its own behalf, shall not invest in equity more than 10% of
total issued capital of an Indian company.
b) Investment on behalf of each sub-account shall not exceed 10%
of total issued capital of an India company.

c) For the sub-account registered under Foreign

Companies/Individual category, the investment limit is fixed at 5% of
issued capital.

These limits are within overall limit of 24% / 49 % / or the sectoral

caps a prescribed by Government of India / Reserve Bank of India.

Investment limits on debt investments

The FII investments in debt securities are governed by the policy if

the Government of India. Currently following limits are in effect:

For FII investments in Government debt, currently following limits

are applicable:

For corporate debt the investment limit is fixed at US $ 500 million.

TAXATION

The taxation norms available to a FII is shown in the table below.

Nature of Income Tax Rate

Long-term capital gains 10%

Short-term capital gains 30%

Dividend Income Nil

Interest Income 20%

Long term capital gain: Capital gain on sale of securities held for a
period of more than one year.

Short term capital gain: Capital gain on sale of securities held for a
period of less than one year.
BRIEF PROFILE OF IMPORTANT INSTITUTIONS:

A brief profile of important institutions included in the study is given

below.
RESERVE BANK OF INDIA

India's Central Bank - the RBI - was established on 1 April 1935 and
was nationalized on 1 January 1949. Some of its main objectives
are regulating the issue of bank notes, managing India's foreign
exchange reserves, operating India's currency and credit system
with a view to securing monetary stability and developing India's
financial structure in line with national socio-economic objectives
and policies.

The RBI acts as a banker to Central/State governments,

commercial banks, state cooperative banks and some financial
institutions. It formulates and administers monetary policy with a
view to promoting stability of prices while encouraging higher
production through appropriate deployment of credit. The RBI plays
an important role in maintaining the exchange value of the Rupee
and acts as an agent of the government in respect of India's
membership of IMF. The RBI also performs a variety of
developmental and promotional functions.
The first concern of a central bank is the maintenance of a soundly
based commercial banking structure. While this concern has grown
to comprehend the operations of all financial institutions, including
the several groups of non-bank financial intermediaries, the
commercial banks remain the core of the banking system. A central
bank must also cooperate closely with the national government.
Indeed, most governments and central banks have become
intimately associated in the formulation of policy.
They are often responsible for formulating and implementing
monetary and credit policies, usually in cooperation with the
government. they have been established specifically to lead or
regulate the banking system.

SECURITUIES AND EXCHANGE BOARD OF INDIA

In 1988 the Securities and Exchange Board of India (SEBI) was

established by the Government of India through an executive
resolution, and was subsequently upgraded as a fully autonomous
body (a statutory Board) in the year 1992 with the passing of the
Securities and Exchange Board of India Act (SEBI Act) on 30th
January 1992. In place of Government Control, a statutory and
autonomous regulatory board with defined responsibilities, to cover
both development & regulation of the market, and independent
powers has been set up.

The basic objectives of the Board were identified as:

To protect the interests of investors in securities;

To promote the development of Securities Market;

To regulate the securities market and

For matters connected therewith or incidental thereto.

Since its inception SEBI has been working targeting the securities
and is attending to the fulfillment of its objectives with commendable
zeal and dexterity. The improvements in the securities markets like
capitalization requirements, margining, establishment of clearing
corporations etc. reduced the risk of credit and also reduced the
market.

SEBI has introduced the comprehensive regulatory measures,

prescribed registration norms, the eligibility criteria, the code of
obligations and the code of conduct for different intermediaries like,
bankers to issue, merchant bankers, brokers and sub-brokers,
registrars, portfolio managers, credit rating agencies, underwriters
and others. It has framed bye-laws, risk identification and risk
management systems for Clearing houses of stock exchanges,
surveillance system etc. which has made dealing in securities both
safe and transparent to the end investor.

Another significant event is the approval of trading in stock indices

(like S&P CNX Nifty & Sensex) in 2000. A market Index is a
convenient and effective product because of the following reasons:

It acts as a barometer for market behavior;

It is used to benchmark portfolio performance;

It is used in derivative instruments like index futures and index

options;
It can be used for passive fund management as in case of Index
Funds.

Two broad approaches of SEBI is to integrate the securities market

at the national level, and also to diversify the trading products, so
that there is an increase in number of traders including banks,
financial institutions, insurance companies, mutual funds, primary
dealers etc. to transact through the Exchanges. In this context the
introduction of derivatives trading through Indian Stock Exchanges
permitted by SEBI in 2000 AD is a real landmark.

BOMBAY STOCK EXCHANGE:

Of the 22 stock exchanges in the country, Mumbai's (earlier known

as Bombay), Bombay Stock Exchange is the largest, with over
6,000 stocks listed. The BSE accounts for over two thirds of the
total trading volume in the country. Established in 1875, the
exchange is also the oldest in Asia. Among the twenty-two Stock
Exchanges recognized by the Government of India under the
Securities Contracts (Regulation) Act, 1956, it was the first one to
be recognized and it is the only one that had the privilege of getting
permanent recognition ab-initio.

Approximately 70,000 deals are executed on a daily basis, giving it

one of the highest per hour rates of trading in the world. There are
around 3,500 companies in the country which are listed and have a
serious trading volume. The market capitalization of the BSE is Rs.5
trillion. The BSE `Sensex' is a widely used market index for the
BSE.
The main aims and objectives of the BSE are to provide a market
place for the purchase and sale of security evidencing the
ownership of business property or of a public or business debt. It
aims to promote, develop and maintain a well-regulated market for
dealing in securities and to safeguard the interest of members and
the investing public having dealings on the Exchange. It helps
industrial development of the country through efficient resource
mobilization. To establish and promote honorable and just practices
in securities transactions
BSE Sensex

The BSE Sensex is a value-weighted index composed of 30

companies with the base April 1979 = 100. It has grown by more
than four times from January 1990 till date. The set of companies in
the index is essentially fixed. These companies account for around
one-fifth of the market capitalization of the BSE.

NATIONAL STOCK EXCHANGE OF INDIA

The National Stock Exchange of India Limited has genesis in the

report of the High Powered Study Group on Establishment of New
Stock Exchanges, which recommended promotion of a National
Stock Exchange by financial institutions (FIs) to provide access to
investors from all across the country on an equal footing. Based on
the recommendations, NSE was promoted by leading Financial
Institutions at the behest of the Government of India and was
incorporated in November 1992 as a tax-paying company unlike
other stock exchanges in the country.

On its recognition as a stock exchange under the Securities

Contracts (Regulation) Act, 1956 in April 1993, NSE commenced
operations in the Wholesale Debt Market (WDM) segment in June
1994. The Capital Market (Equities) segment commenced
operations in November 1994 and operations in Derivatives
segment commenced in June 2000.

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
funds.

S&P CNX Nifty is owned and managed by India Index Services and
Products Ltd. (IISL), which is a joint venture between NSE and
CRISIL. IISL is India's first specialized company focused upon the
index as a core product. IISL have a consulting and licensing
agreement with Standard & Poor's (S&P), who are world leaders in
index services.

The average total traded value for the last six months of all Nifty
stocks is approximately 58% of the traded value of all stocks on the
NSE

Nifty stocks represent about 60% of the total market capitalization

as on March 31, 2005.
Impact cost of the S&P CNX Nifty for a portfolio size of Rs.5 million
is 0.07%

S&P CNX Nifty is professionally maintained and is ideal for

derivatives trading.

FOREIGN INVESTMENT FLOWS IN INDIA:

One of the most important distinctions between Portfolio and Direct

investment to have emerged from this young era of globalisation is
that portfolio investment can be much more volatile.
TABLE: Foreign Investment Flows in India

A. DirectB. Portfolio
Year Investment Investment Total (A + B)

(US $
(US $ million) (US $ million) million)

1990-91 97 6 103

1991-92 129 4 133

1992-93 315 244 559

1993-94 586 3567 4153

1994-95 1314 3824 5138

1995-96 2144 2748 4892

1996-97 2821 3312 6133

1997-98 3557 1828 5385

 1998-99 2462 61 2523

1999-00 2155 3026 5181

2000-01 4029 2760 6789

2001-02 6131 2021 8152

2002-03 4660 979 5639

2003-04 4675 11377 16052

From a net foreign investment inflow of US $ 5.3 billion in 1997-98,

such inflows declined to US $ 2.4 billion in 1998-99. This is because
of the lower portfolio inflows, as a result of which the net investment
has dropped. The changes in the investment conditions in a country
or region can lead to dramatic swings in portfolio investment. For a
country on the rise, in other words for developing countries, FPI can
bring about rapid development, helping an emerging economy move
quickly to take advantage of economic opportunity, creating many
new jobs and significant wealth. However, when a country's
economic situation takes a downturn, sometimes just by failing to
meet the expectations of international investors, the large flow of
money into a country can turn into a stampede away from it.
 CHART: FOREIGN INVESTMENT FLOWS

FOREIGN PORTFOLIO FLOWS TO INDIA

Foreign portfolio investments have been allowed in India on the

basis of the recommendations of the Narasimham committee which
stated:

The committee would also suggest that the capital markets should
be gradually opened up to foreign portfolio investments and
simultaneously efforts should be initiated to improve the depth of the
market by facilitating the issue of new types of equities and
innovative debt instruments.’ (Narasimham committee report)

Prior to 1992, only non-resident Indians (NRIs) and Overseas

corporate bodies (OCBs) were allowed to undertake portfolio
investment in India. Only on September 14, 1992 the Government
of India issued guidelines on FII investments in India which was
followed by a notification by Securities and Exchange Board of India
(SEBI) three years later in November 1995.

TRENDS IN FII INVESTMENT IN INDIA

TABLE: Trends in FII investment

Year FII FII FII NET FII NET CUM FII

 PURCHAS
E SALES NET

US$ US$
in crores in crores in crores million million

1993-
94 5593 466 5126 1634 1638

1994-
95 7631 2835 4796 1528 3167

1995-
96 9694 2752 6942 2036 5202

1996-
97 15554 6979 8575 2432 7634

1997-
98 18695 12737 5958 1649 9284

1998-
99 16115 17699 -1584 -386 8898

1999-
00 56856 46734 10122 2339 11237

2000-
01 74051 64116 9934 2160 13396

2001-
02 49920 41165 8755 1846 15242
2002-
03 47060 44371 2689 562 15804

2003-
04 144858 99094 45765 9949 25754

Source: Reserve Bank of India Annual Report 2004

INFERENCE: The investments by FIIs have been registering a

steady growth since the opening of the Indian capital markets in
September 1992. Their investments have always been net positive,
but for 1998-99, when their sales were more than their purchases.

It can be observed from the above table that the portfolio investment
inflows have always been on the increase. But the years 2001-02
and 2002-03 saw some reversal in the trend. From a net inflow of
US $ 2.1 billion in 2000-01, such inflows declined to US $ 1.8 billion
in 2001-02, and further dropped to US $ 0.562 billion in 2002-03.
The decline is because of the lower portfolio inflows, as a result of
which the net investment has dropped in these years. However, this
decline witnessed a sharp reversal in the year 2003-04. FIIs have
made a net investment of Rs. 45,764 crores during this year
registering a growth of 1602% over the previous year, creating a
record in the history of FII investment in India. Gross purchases in
this year amounted to Rs.144,857 crores, a growth rate of 208%
compared to the year before. This trend continued in April 2004,
only to suffer reversal again during May and June 2004, when the
net investment became negative. Fortunately, the year from July
2004 has been seeing a net positive portfolio flows by FIIs. As of
September 2004, the net FII portfolio investment stands at US $
27,637 million. If it is so, then increasing the FII investment cap per
se will not be helpful. The country has to work on specific measures
to encourage more FII investments. The analysis of data indicates
that there has been substantial divestment by the FIIs during the
year 1998-99. The maximum outflow was during the months of May
and June 1998 (almost US$430 millions).

TABLE: Monthly Trends of FIIs for the Year 1998-99

Month Purchases Sales Net Net

(Rs mn) (Rs mn) (Rs mn) (US$ mn)

Apr-98 11422 11756 -335 -8.4

May-98 8253 13284 -5031 -124.3

Jun-98 8023 16072 -8049 -190.5

Jul-98 13098 12154 944 22.2

Aug-98 7932 11783 -3851 -90.1

Sep-98 14381 12458 1923 45.2

Oct-98 10737 16470 -5733 -135.4

Nov-98 10391 9845 546 12.9

Dec-98 11089 8789 2300 104.8

Jan-99 16355 11894 4462 104.8

Feb-99 16477 13084 3393 79.8

Mar-99 25207 23973 1233 29

A major factor which led to continuous outflow of funds during the

middle and end of the year 1998 was the worsening outlook on the
emerging markets. Credit worthiness of almost all the South-east
Asian nations was severely damaged by the crises which started in
July 1997. As a result, the FIIs were facing heavy redemption
pressures from the Emerging Markets Funds. The stock markets in
all these countries fell continuously from March 1998 till about
September 1998. The integration of the Indian capital markets with
the international markets thus spilled over to Indian markets as well.
However, the net outflow from the Indian markets was much lower
than the other Asian countries. A further indication of the integration
of the Indian markets can be seen from the upsurge in the
valuations and funds inflows during the first quarter of 1999, when
all the other Asian countries have also seen rising trend in stocks
indices.

The sluggishness in investment in the emerging markets was

exacerbated by the fact that hroughout 1998-99, US and European
markets showed historically high valuations, and the expectations of
further rise because of the strong economic indicators there which
led to reduced allocations elsewhere.
CHART : GROWTH OF FII INVESTMENTS IN INDIA
INFERENCE: The trickle of FII flows to India that began in January
1993 has gradually expanded to an average monthly inflow of close
to Rs. 1900 crores during the first six months of 2001. By June
2001, over 500 FIIs were registered with SEBI. The total amount of
FII investment in India had accumulated to a formidable sum of over
Rs.50,000 crores during this time. In terms of market capitalization
too, the share of FIIs has steadily climbed to about 9% of the total
market capitalization of BSE (which, in turn, accounts for over 90%
of the total market capitalization in India).
TABLE: CORRELATION OF FII WITH NIFTY

GROSS NET
MONTH PURCHASES GROSS SALES INVESTMENT

APRIL -0.308891015 -0.486299015 -0.122510317

MAY -0.203839618 -0.226174846 0.127555673

JUNE 0.40719847 0.013881057 0.556762421

JULY 0.231397721 -0.008199745 0.352195939

AUGUST -0.296292834 -0.009987101 -0.288696993

SEPTEMB
ER 0.631541276 0.478957403 0.377141924

OCTOBER -0.107835133 -0.303940405 0.118451125

NOVEMBE
R 0.103856902 0.232269601 -0.020576251

DECEMBE
R -0.689594568 -0.692805116 -0.496878284

JANUARY -0.02034654 -0.57330261 0.64885866

FEBRUAR
Y 0.124176605 -0.056354197 0.233709555

MARCH 0.419911809 -0.255570154 0.483718703

FII flows and contemporaneous stock returns are strongly correlated

in India. The correlation coefficients between different measures of
FII flows and market returns on the Bombay Stock Exchange during
different sample periods are shown in Table above. While the
correlations are quite high throughout the sample period, they
exhibit a significant rise since the beginning of the 1999-00. The
calculations show that there exists a relationship between FIIs and
Nifty since 6 out of 12 months show positive correlation in the case
of Gross Purchass and 8 out of 12 months indicate a positive
correlation in the case of Net FII Investment and Nifty.

TABLE : CORRELATION OF FII WITH SENSEX

GROSS GROSS NET

MONTH PURCHASES SALES INVESTMENT

-
APRIL -0.267580403 0.509025858 -0.076211493

-
MAY -0.184653959 0.224809346 0.1484205

-
JUNE 0.405635894 0.004710378 0.575995013

JULY 0.291205286 0.045396684 0.353391901

-
AUGUST -0.315900375 0.033391574 -0.301709231

SEPTEMB
ER 0.661834837 0.506184274 0.389776394

-
OCTOBER-0.067640059 0.311421901 0.18995454

NOVEMBE
R 0.083505749 0.244942636 -0.057919794

DECEMBE -
R -0.666663184 0.688620778 -0.46494095
 -
JANUARY 0.02201209 0.551509386 0.679227006

FEBRUAR -
Y 0.00689661 0.170243004 0.149373722

-
MARCH 0.417854257 0.250893125 0.479619465

The behaviour of the foreign portfolio investors matched the

behaviour of Sensex during this period. Net FII investment in the
Indian capital markets started fluctuating sharply during April and it
turned negative. Net FII investment in the Indian stock market was
positive from May to July. During this period, the Sensex and net FII
investment showed very high degree of correlation. For the month
of June showed a correlation as high as 0.60. The months of
September, October, November and December shows a declining
trend, the FII investment reversed from that day. On the whole,
there exists a relationship between FIIs and Sensex since 7 out of
12 months show positive correlation in the case of Gross Purchases
and 8 out of 12 months indicate a positive correlation in the case of
Net FII Investment and Sensex.
 TABLE: COEFFECIENT OF DETERMINATION OF FII WITH NIFTY

MONTH GROSS PURCHASES GROSS SALES NET INVESTMENT

APRIL 0.095413659 0.236486732 0.015009

MAY 0.04155059 0.051155061 0.01627

JUNE 0.165810594 0.000192684 0.309984

JULY 0.053544905 6.72358E-05 0.124042

AUGUST 0.087789444 9.97422E-05 0.083346

SEPTEMBER 0.398844383 0.229400194 0.142236

OCTOBER 0.011628416 0.09237977 0.014031

NOVEMBER 0.010786256 0.053949168 0.000423

DECEMBER 0.475540669 0.479978929 0.246888

JANUARY 0.000413982 0.328675883 0.421018

FEBRUARY 0.015419829 0.003175796 0.05462

MARCH 0.176325927 0.065316104 0.233984

Coefficient of Determination (R2), ranges from 0 - 1, is always part of the standard regression
output, the important measure of goodness of fit. R2 = correlation coefficient (r) squared, since
the range of r is from -1 to +1, squaring r forces R2 to fall between 0 and 1. R2 in the above table
gives the percentage (%) of the total variation in Nifty that is explained by the regression
equation, or explained by FIIs. During the month of January the total variation in Nifty explained
by FII amounted to 42% and the remaining 58% is explained by other factors which influence
Nifty.

TABLE : COEFFECIENT OF DETERMINATION OF FII WITH SENSEX

GROSS GROSS NET

MONTH PURCHASES SALES INVESTMENT

APRIL 0.071599272 0.259107325 0.005808

MAY 0.034097085 0.050539242 0.022029

JUNE 0.164540479 2.21877E-05 0.33177

JULY 0.084800519 0.002060859 0.124886

AUGUST 0.099793047 0.001114997 0.091028

SEPTEMBE
R 0.438025352 0.256222519 0.151926

OCTOBER 0.004575178 0.0969836 0.036083

NOVEMBER 0.00697321 0.059996895 0.003355

DECEMBER 0.444439801 0.474198576 0.21617

JANUARY 0.000484532 0.304162603 0.461349

FEBRUARY 4.75632E-05 0.028982681 0.022313

MARCH 0.17460218 0.06294736 0.230035

Similarly, in the case of FII and Sensex we have R2 = .46, indicating

that variation in FII explains about 46% of the variation in Sensex.
54% of the variation in Sensex is unexplained by FII, explainable by
other factors, omitted variables, random variation, etc. We shouldn't
put too much emphasis on R2, t-stat are more important. However,
R2, or some other measure of goodness of fit is expected in
reported empirical results.