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Impact of Fiis

This document analyzes the impact of foreign institutional investor (FII) regulations in India from 1993 to 2004. It finds that liberalizing FII policies, such as expanding membership categories and investment scope, increasing sectoral and individual investment caps, and reducing fees, led to significant increases in FII equity inflows. In contrast, restrictive policies aimed at improving regulatory control did not negatively impact inflows and made FII investments more sensitive to domestic market returns. The analysis concludes that liberalization policies enhanced FII flows to India's stock market, while stricter oversight policies stabilized flows.

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63 views3 pages

Impact of Fiis

This document analyzes the impact of foreign institutional investor (FII) regulations in India from 1993 to 2004. It finds that liberalizing FII policies, such as expanding membership categories and investment scope, increasing sectoral and individual investment caps, and reducing fees, led to significant increases in FII equity inflows. In contrast, restrictive policies aimed at improving regulatory control did not negatively impact inflows and made FII investments more sensitive to domestic market returns. The analysis concludes that liberalization policies enhanced FII flows to India's stock market, while stricter oversight policies stabilized flows.

Uploaded by

finance24
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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The Impact of FII Regulations in India: A

Time-Series Intervention Analysis ofEquity


Flows
The impact of reforms of the foreign institutional investors' (FIIs) investment policy, on
FII portfolio flows to the Indian stock markets, an aspect, studies on determinants of FII
flows to India so far have not taken into consideration. FIIs have been allowed to invest
in the domestic financial market since 1992; the decision to open up the Indian financial
market to FII portfolio flows was influenced by several factors such as the disarray in
India's external finances in 1991 and a disorder in the country's capital market. Aimed
primarily at ensuring non-debt creating capital inflows at a time of an extreme
balance of payment crisis and at developing and disciplining the nascent capital market,
foreign investment funds were welcomed to the country. FII inflow to India grew
manifold from US $0.18 million (net, monthly) in January 1993 to about US $400 million
within a year's time. Given the volatile nature of capital flows to emerging markets seen
in the early 1990s and the nature and growth of such flows to India, FII investment
in India, obviously called for special regulatory attention. Investment by FIIs in India is
jointly regulated by Securities and Exchange Board of India (SEBI) through the SEBI
(Foreign Institutional Investors) Regulations, 1995 and by the Reserve
Bank of India through Regulation 5(2) of the Foreign Exchange Management Act
(FEMA), 1999.

The promulgation of legislation pertaining to foreign investment by SEBI, in 1995


marked a watershed for FII flows to India, as this paper shows that it led to a significant
increase in the level of FII equity inflows in the pre-Asian crisis period. Our analysis also
helps to evaluate the impact of liberalization policies as well as measures for
strengthening of policy framework for FII flows, in the post-Asian crisis period. The
SEBI FII Regulations and RBI policies are amended and modified from time to
time in response to the gradual maturing of the Indian financial market and changes
taking place in the global economic scenario. We try to assess the impact on FII
flows of several of these policy revisions during the period January 1999 to January
2004, through a multivariate GARCH regression model. Using techniques of time series
intervention analyses we incorporate the effect ofeach individual policy intervention in a
model, which includes the two most important covariates of FII, flows to India, namely
stock market (BSE) returns and past FII flows. The range of policies considered
encompasses liberalization policies as well as restrictive ones taken to assure
stability of flows. The results strongly suggest that the liberalization policies that expand
the membership of FII categories and their scope of investment in the Indian market,
enhance sectoral and individual caps, provide for hedging of risks ofinvesting in the
Indian stock markets by allowing FIIs to enter the foreign exchange and derivatives
market and policies that bring about procedural simplifications and fees reduction, seem
to have significant expansionary effect on net inflows. Each of the liberlization policies
have either increased the mean level of FII inflows and/or the sensitivity of these flows to
a change in BSE return and/or the inertia of these flows. Measures to improve
SEBI/RBI's control over the FII investments like banning ofNRIs/OCBs and mandating
stricter disclosure norms also do not show any significant negative impact on the net
inflows; on the whole, it is found that these policies mostly render FII investments more
sensitive to the domestic market returns and raise the inertiaof the FII flows to the Indian
stock market.
[OR]
[IMPACT OF FII]

FIIs are companies registered outside India. In the past four years there has been more
than $41 trillion worth of FII funds invested in India. This has been one of the major
reasons on the bull market witnessing unprecedented growth with the BSE Sensex rising
221% in absolute terms in this span. The present downfall of the market too is influenced
as these FIIs are taking out some of their invested money. Though there is a lot of value
in this market and fundamentally there is a lot of upside in it. For long-term value
investors, there’s little because for worry but short term traders are adversely getting
affected by the role of FIIs are playing at the present. Investors should not panic and
should remain invested in sectors where underlying earnings growth has little to do with
financial markets or global economy.

It is always good to keep an eye on what the big movers are doing and plan individual
strategy accordingly. There are several reasons on FIIs selling, but there are three
predominant factors that are cited as being largely responsible.

1. The swings in the market forced several FIIs to withdraw from India and invest their
dollars in other emerging markets. Some of the other markets include Uruguay, Russia,
the Ukraine, and several other former Soviet countries. Though there have been swing’s
in the past too but FII response this time was different because of margin pressures back
home as even they have to provide regular returns to their investors.
2. The Indian markets are not seen as a good short-term bet any more. India is seen as a
good investment for the medium to long term. FIIs seem to fear the pace of growth and
the fundamentals of the markets.
3. Most FIIs are looking at corporate governance and execution abilities, which could be
significant drivers in creating a strong portfolio of Indian stocks. Recent action taken by
the market regulator indicates that the Indian government would like to moderate the
inflow of FII money.

Though valuations are very attractive on a selective basis, but stock picking has to be
done based on evaluation of business fundamentals. The subprime issue and problems in
the credit markets have raised concerns about potential growth slowdown in the US and
Europe. The fear of a slowdown will likely continue to weigh on markets average FII
redemptions in India have been lower than in other Asian economics. FIIs do get affected
by it. India is among the economies less sensitive to a deceleration in US growth and one
should not be perturbed by FII flows in either direction. One need not worry much about
the volatility of the market as it is influenced by temporary factors but the Indian story is
still strong. Markets cannot go in one direction all the times (upwards) which it was
going. Volatility is too good for the market as it helps in keeping the economy cycle
moving and it will again help the values of the stocks at a fair price for investments to
again keep flowing and so will the FIIs too.

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