Foreign institutional investors and the Indian capital market

Foreign investment refers to investments made by the residents of a country in the financial assets and production processes of another country. After the opening up of the borders for capital movement, these investments have grown in leaps and bounds. The effect of foreign investment, however, varies from country to country. It can affect the factor productivity of the recipient country and can also affect the balance of payments. In developing countries there has been a great need for foreign capital, not only to increase the productivity of labor but also because foreign capital helps to build up the foreign exchange reserves needed to meet trade deficits. Foreign investment provides a channel through which developing countries can gain access to foreign capital. It can come in two forms: foreign direct investment (FDI) and foreign institutional investment (FII). Foreign direct investment involves in direct production activities and is also of a medium- to long-term nature. But foreign institutional investment is a short-term investment, mostly in the financial markets. FII, given its short-term nature, can have bidirectional causation with the returns of other domestic financial markets such as money markets, stock markets, and foreign exchange markets. Hence, understanding the determinants of FII is very important for any emerging economy as FII exerts a larger impact on the domestic financial markets in the short run and a real impact in the long run. The present study examines the role, impact and relationship of FII’s and Indian capital market, and also determinants of foreign institutional investment in India, a country that opened its economy to foreign capital following a foreign exchange crisis. India, being a capital scarce country, has taken many measures to attract foreign investment since the beginning of reforms in 1991. Up to the end of January 2003, India succeeded in attracting a total foreign investment of around U.S.$48 billion out of which U.S.$12 billion was in the form of FII. These figures show the importance of FII in the overall foreign investment program. India is in the process of liberalizing its capital account, and this has a significant impact on foreign investment and particularly on FII, which affects short-term stability in the financial markets.

Tags: Indian foreign institutional investors, Role of foreign institutional investors, Impact of foreign institutional investors, Duties of foreign institutional investors

[...] The present study examines the role, impact and relationship of FII’s and Indian capital market, and also determinants of foreign institutional investment in India, a country that opened its economy to foreign capital following a foreign exchange crisis. India, being a capital scarce country, has taken many measures to attract foreign investment since the beginning of reforms in 1991. Up to the end of January 2003, India succeeded in attracting a total foreign investment of around U.S.$48 billion out of which U.S.$12 billion was in the form of FII. [...]

[...] FOREIGN INSTITUTIONAL INVESTMENT IN INDIA India opened its stock market to foreign investors in September 1992 and since then has received portfolio investment from foreigners in the form of foreign institutional investment in equities. This has become one of the main channels of FII in India. In order to trade in the Indian equity market, foreign corporations need to register with the Securities and Exchange Board of India (SEBI) as foreign institutional investors. India allows only authorized foreign investors to invest in pension funds, investment trusts, asset management companies, university funds, endowments, foundations, charitable interests and charitable societies that have a track record of five years and which are registered with a statutory authority in their own country of incorporation or settlement. [...]

[...] In this research the problem that I have formulated is ‘role and impact of foreign institutional investor on Indian capital market.’ Extensive literature survey Once the problem is formulated, a brief summary of it should be written down. At this juncture I have undertaken extensive literature survey connected with the problem. The earlier studies, which are similar to the study in hand have been carefully studied. Development of the working hypothesis After extensive literature survey, researcher should state in clear terms the working hypothesis or hypotheses. [...]