Impact of FIIs on National Stock Exchange of India

(DR.B.J. Queensly Jeyanthi, Associate Professor of Commerce, Jayaraj Annapackiam College for Women,
Periyakulam, Tamil Nadu)

Introduction

Capital is considered to be the back bone of any economy. Developing countries like India, domestic capital is not
sufficient to fulfil the requirement of economy. Foreign capital plays a very important role. Foreign Capital flow in
India through two channels. They are Foreign Direct Investment and Foreign Institutional Investment. FDI is
considered as a more stable form of foreign capital as compared to FII. But, FIIs inflows and outflows have a direct
impact on the stock market. The Foreign Institutional Investors (FIIs) contributions have brought tremendous
changes in the development of stock markets in India. One of the most important features of the development of
stock market in India in the last 20 years has been the growing participation of FIIs. Until the 1980s debts and other
development funds were used to settle the financial deficit. Foreign investment and private commercial inflows were
not much encouraged. From the beginning of the reform process in the early 1990s, India's policy has changed
substantially, aiming the growing global foreign direct investment (FDI) and portfolio flows. Since 1992-93, when
FIIs were allowed to invest in Indian financial markets, foreign institutional investment has increased over the years
except in 2008-09. Investments by FIIs into India depends on market performance and it was quite high quite high
in last few years, particularly since 2003-04. FIIs made a record investment in the Indian equity market in 2009,
surpassing the 2007 inflows. In India, FIIs have a positive impact on the stock market, business transparency and
governance norms.

Developing countries have strengthened their stock market to attract foreign capital flows. FII is a short term
investment by foreign institutions, in the financial markets of other countries. These institutions are generally mutual
funds, investment companies, pension funds and insurance houses. FIIs strengthen and sustain the stock
exchanges and provide a better price for the scripts but at the same time, heavy withdrawal of FIIs will create an
adverse effect in the share price and in the Indian rupee. In this paper FIIs flow to India and the relationship
between FIIs and National Stock Exchange of India and the impact of FIIs on NSE are examined.

Objectives of Study
a) To study the growth trend of FIIs.

b) To analyse the relation and impact of Foreign Institutional Investment (FII) on Indian stock market

Review of Literature
Choe et. al., 1998 examined the influence of FIIs on equity returns in Korea before and during the 1997 Asian crisis
and they found that stock price was not affected because of a withdrawal of foreign equity investment. Also, it is not
necessary that inviting FIIs to the stock market would increase its volatility as argued by (Rene and Stultz, 1997).

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 Douma, Kabir and Rejie 2006 investigated the impact of foreign institutional investment on the performance of
emerging market firms and found that there is a positive effect of foreign ownership on firm performance. They also
found the impact of foreign investment on the business group affiliation of firms.

Mukherjee (2002) examined the various probable determinants of FII and concluded that (1) Foreign investment
flows to the Indian markets tend to be caused by return in the domestic equity market; (2 Indian equity market
return has an impact on FII flows; (3) performance of the Indian equity market are influenced by the FIIs sale and
FIIs purchase, (4) FII investors do not consider Indian equity market for the purpose of diversification of their
investment; (5) returns from the exchange rate variation and the fundamentals of the economy may have an impact
on FII decisions, but such influence do not prove to be strong enough.

Gordon and Gupta, (2003) confirmed causal effect from FII inflows to return in BSE. They observed that FIIs act as
market makers and book profits by investing when prices are low and selling when they are high. Hence, there are
contradictory findings by various researchers regarding the causal relationship between FII net inflows and stock
market capitalization and returns of BSE/ NSE. Therefore, there is a need to investigate whether FIIs are the cause
or effect of stock market fluctuations in India.

Pal, P. (2004) found that FIIs are the major players in the Indian stock market and their impact on the domestic
market is increasing. Trading activities of FIIs and the domestic stock market turnover indicate that FII‟s are
becoming more important at the margin as an increasingly higher share of stock market turnover is accounted for
by FII trading in India.

Data and Period of study

This study is based on secondary data. FIIs data have been collected from various sources i.e. SEBI Handbook of
Statistics, Govt. of India. NSE data is downloaded from the websites of NSE. Daily closing index values are taken
for return and volatility. The current study considers 15 years data starting from 2000- 2001- to 2014 – 2015. The
study takes 15 years data into consideration.

Research Methodology
Cross-correlation, regression and trend analysis is used to analyse the data. The regression analysis is a statistical
technique used to evaluate the effects of independent variables on a single dependent variable. In the current
paper attempt is made to study the impact of FII on NSE. It is estimated by ordinary least squares under the
following formula:
X t = β 1 + δ Yt + µ t
X = NSE variable
Y= FIIs Investment
The specific hypotheses are :
H0 : δ = 0
H1 : δ ≠ 0

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 Null hypothesis is that there is no significant impact of FIIs on NSE. Variables namely Market Capitalisation, demat
trading, trading value, average daily turnover and internet trading are used.

Cross Correlation
In the current study to study the linear relationship between variables such as FII and NSE cross- correlation is
applied. The cross - correlation between the time series are tested by using the following formula:

T K  

t 1
( xt - x ) ( y t  k - y )

 xy yt (k) =

1/ 2
 T  T 

 ( x  x) 2
( yt  y) 
2
 t  
 t 1 t 1

Where k is greater than, equal to, or less than zero. The significance of estimated cross – correlation is assessed
by using approximate standard error, T-½, (Bartlet, 1966), of the sample of cross – correlation. This helps to identify
the causality patterns associated with, γ xt yt (k).

Empirical Results
Table 1 presents the data about the business growth of the capital market segment of NSE. Table 2 gives the
details of Internet trading; Demat trading and FIIs investment in equity. Market capitalization from 2002 -2003 to
2007 – 2008 experienced increasing trend in the market. Again 2011 onwards it was steadily increasing. In the year
2008 – 2009 it was very low due to global financial crisis. Trading value, the Average trading value was very was
very low in 2008-2009 because of global financial crisis and it was high in the year 2014- 2015.

Table 1: Business growth of Capital Market segment of NSE (2000 - 2015)

Market Capitalization Traded Quantity Trading value Average Daily Trading Value
Year
(in cr) (in cr) (in cr) (in cr)
2000 - 2001 657,847 329,536 1,339,510 5,337
2001-2002 636,861 278,408 513,167 2,078
2002-2003 537,133 364,066 617,989 2,462
2003-2004 1,120,976 713,301 1,099,534 4,329
2004-2005 1,585,585 797,685 1,140,072 4,506
2005-2006 2,813,201 844,486 1,569,558 6,253
2006-2007 3,367,350 855,456 1,945,287 7,812
2007-2008 4,858,122 1,498,469 3,551,038 14,148
2008-2009 2,896,194 1,426,355 2,752,023 11,325
2009-2010 6,009,173 2,215,530 4,138,023 16,959
2010 -2011 6,702,616 1,824,515 3,577,410 14,029

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 2011- 2012 6,096,518 1,616,978 2,810,893 11,289
2012 - 2013 6,239,035 1,659,160 2,708,279 10,833
2013 - 2014 7,277,720 1,533,716 2,808,488 11,189
2014- 2015 9,930,122 2,361,779 4,329,655 17,818
Source : NSE Factbook.2015

. Table 2: Year wise Internet and Demat Trading of NSE, and FIIs investment (2000 – 2015)

Internet Trading Demat Trading Value FIIs investment in Equity FIIS Registered with SEBI
Year
(in cr) (in cr) (in cr) (in cr)
2000 - 2001 7,287.81 1,264,337 10,207 527.00
2001-2002 8,138.81 512,866 8072 490.00
2002-2003 15,360.76 617,984 2527.00 502.00
2003-2004 37,945.08 1,099,534 39960.00 540.00
2004-2005 81,033.81 1,140,072 44123.00 685.00
2005-2006 1,83,428.52 1,569,558 48801.00 882.00
2006-2007 337,524.00 1,945,287 25236.00 997.00
2007-2008 668,399.00 3,551,038 53404.00 1319.00
2008-2009 692,789.00 2,752,023 -47706.00 1635.00
2009-2010 921,380.00 4,138,023 110221.00 1713.00
2010 -2011 765,271.00 3,577,410 110121.00 1722.00
2011- 2012 597,430.00 2,810,893 43738.00 1765.00
2012 - 2013 583,073.00 2,708,279 140033.00 1757.00
2013 - 2014 627,478.00 2,808,488 79709.00 1710.00
2014- 2015 1,005,984.00 4,329,655 111333.00 1444.00
Source : NSE Factbook.2015

Internet trading was steadily increased from 2000 to 2010. FIIs withdrawal was very high in the year 2008-2009.
This has affected market capitalisation, trading value, demat trading adversely.

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 Table - 3 Cross-correlations on FIIs and NSE (2000 - 2015)

Lags FIIs-Market FIIs-Trading FIIs-Average FIIs-Internet FIIs-Demat

Captn Value Daily Value Trading Trading
-5 .321 .440 .346 .198 .439
-4 .381 .475 .384 .233 .474
-3 .504 .612* .523 .364 .612*
-2 .569* .525 .471 .531 .531
-1 .654* .619* .615* .660* .623*
0 .904* .843* .885* .877* .846*
1 .708* .618* .653* .677* .619*
2 .649* .595* .644* .617* .596*
3 .408 .377 .411 .392 .377
4 .347 .334 .373 .311 .334
5 .184 .152 .173 .147 .152
* Significant at 1% level.

Cross-correlation results show that there is a significant relationship between FIIs and NSE variables. The entire
variables selected for the study has correlated with FIIs investment in equity.

Table 4
Regression analysis between FIIs and NSE

Dependant Variable β1 δ (FIIs) R2

Internet Trading 230583.735 3.942 0.314

(2.00) (2.44)*
Demat Trading 1532517.31 15.181 0.374
(3.940) (2.785) *
Market Capitalization 1815632.467 42.953 0.556
(2.391) (4.037) *
Trading Value 1542119.731 15.093 0.372
(3.973) (2.775) *
Average Daily Trading Value 6212.863 .060 0.360
(3.890) (2.70) *

Relationship between FIIs and NSE has been analysed by simple regression. R-square value is more than 35%. P
value is less than 0.05 which means the null hypothesis that there is no significant impact of FIIS on NSE is
rejected and concluded that there is significant impact of FII on NSE.

Table 5: Growth Trend in FIIs Investment in Equity

Particulars Growth α β1 R2
function
FIIs investment Linear -7678.676 7457.993 .434
(-.358) (3.158)
t values are significant at 5% level. Figures in the parenthesis are t value.
FIIs investment has experienced linear growth trend during the study period.

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 Conclusion
FIIs contribution to the Indian stock market has great influence on the market. But their investment is fluctuating
from time to time from 2000 - 2015. FIIs withdrawal has plummeted down the share price. Apart from FIIs
investment there are other major factors that influence the bourses in the stock market, but FII is definitely one of
the factors. There has been a correlation between FIIs investment in equity and NSE Capital market segment. But
the relationship is significant at 1% level. Our results prove that FIIs did have a moderate significant impact on the
Indian capital market. Therefore, the alternate hypothesis is accepted. FII'S have a positive impact on NSE.

References
Choe, Y., Kho, B.C. and Stulz, R.M. (1998). “Do Foreign Investors Destabilize Stock Markets? The Korean
Experience in 1997”, NBER Working Paper 6661, NBER Cambridge M A.

Douma, S., Kabir, R. and Rejie, G. (2006). “Foreign and domestic ownership, business groups and firm
performance-Evidence from large emerging market”, Strategic Management Journal, Vol. 27, No. 7, pp. 637-657.
Gordon, J. and Gupta, P. (2003). “Portfolio Flows into India : Do Domestic Fundamentals Matter?” IMF Working
Paper, Number WP/03/02.

Mukherjee (2002) “Taking Stock of Foreign Institutional Investors.” Economic and Political Weekly. June 11, 2005.
<www.rbi.ord.in>,www.sebi.gov.in

Pal, P. (2004),” Foreign Institutional Investment in India”, Research on Indian Stock Volatility. Vol 12. Publisher:
Emerald Group Publishing Limited

Anubha Shrivastav (2013) “A Study of Influence of FII Flows on Indian Stock Market”
*GYANPRATHA – ACCMAN Journal of Management, Volume 5 Issue 1 2013

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