Page - 1

Abstract

Institutional Investor is any 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. The growing Indian market had attracted the foreign investors, which are called Foreign Institutional Investors (FII) to Indian equity market, and in this paper, we are trying a simple attempt to explain the impact and extent of foreign institutional investors in Indian stock market.

What does the name FII means? It is the abbreviation of Foreign Institutional Investors. The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities & Exchange Board of India (SEBI) to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies. They actually evaluate the shares and deposits in a portfolio. The major source (almost 50%) of money the FIIs invest is from the issue of Participatory Notes (P-Notes) or what are sometimes called Offshore Derivatives.

As on September 5, there are over 1484 FIIs and 38 foreign brokers registered to Securities & Exchange Board of India (SEBI). We are also examining whether market movement can be explained by these investors. We often hear that whenever there is a rise in market, it is explained that it is due to foreign investors' money and a decline in market is termed as withdrawl of money from FIIs.

After 1991, due to our liberalization process, there was large flow of foreign funds from abroad. Current investments by FII is Rs. 2,55,464.40 Crores as compared to Rs. 2,83,468.40 Crores by the end of 31 December 2007. That implies that they had withdrawn almost 9% of money they had deposited till December 2007. The amount was much in the months of 2008 as compared to corresponding months of 2007, and that is a reason for the volatility of the stock market. In 2008, the net buying is only Rs. 5,603 Crores compared to Rs. 36,869 Crores in 2007. From all this, we can analyze prime facia that the FII's influence market.

A more investments by FIIs indicate that they are confident in Indian market. Usually, the mode of operations of FIIs was taking loans from countries where interest is low (like Japan) and invest in booming markets like India.

Next

* Contributed by: -
T. N. Aravind, V. Venkata Raghavendra & Suby Philip,
Engineering graduates currently pursuing PGDBM from Institute of Public Enterprise (IPE), Hyderabad.
Article posted on October 18, 2008.