Final

Impact Of Currency Fluctuation on FII, SENSEX, DIIS
Navnirman Institute Of Management Page 1

1.1 Exchange rate
In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, FX
rate or Agio) between two currencies is the rate at which one currency will be exchanged
for another. It is also regarded as the value of one countrys currency in terms of another
currency. For example, an interbank exchange rate of 91 Japanese yen (JPY, ) to the
United States dollar (US$) means that 91 will be exchanged for each US$1 or that US$1
will be exchanged for each 91. Exchange rates are determined in the foreign exchange
market, which is open to a wide range of different types of buyers and sellers where
currency trading is continuous: 24 hours a day except weekends, i.e. trading from 20:15
GMT on Sunday until 22:00 GMT Friday. The spot exchange rate refers to the current
exchange rate. The forward exchange rate refers to an exchange rate that is quoted and
traded today but for delivery and payment on a specific future date.
In the retail currency exchange market, a different buying rate and selling rate will be
quoted by money dealers. Most trades are to or from the local currency. The buying rate
is the rate at which money dealers will buy foreign currency, and the selling rate is the
rate at which they will sell the currency. The quoted rates will incorporate an allowance
for a dealer's margin (or profit) in trading, or else the margin may be recovered in the
form of a "commission" or in some other way. Different rates may also be quoted for cash
(usually notes only), a documentary form (such as traveler's cheques) or electronically
(such as a debit card purchase). The higher rate on documentary transactions is due to the
additional time and cost of clearing the document, while the cash is available for resale
immediately. Some dealers on the other hand prefer documentary transactions because of
the security concerns with cash.
Like most other rates in economics, the exchange rate is essentially a price and can be
analyzed in the same way we would a price. Take a typical supermarket price, say lemons
are selling at the price of 3 for a dollar or 33 cents each. Then we can think of the dollar-
to-lemon exchange rate as being 3 lemons because if we give up one dollar, we can get
three lemons in return. Similarly, the lemon-to-dollar exchange rate is 1/3 of a dollar or
33 cents, because if you sell a lemon, you will get 33 cents in return.


So when we speak of an X-to-Y exchange rate of Z, this means that if we give up 1 unit
of X, we get Z units of Y in return. If we want to know the Y-to-X exchange rate, we
calculate it using the simple exchange rate formula:
Y-to-X exchange rate = 1 / X-to-Y exchange rate
Of course, the exchange rates we read in the paper or hear on radio or TV are not prices
for X and Y or for oranges and lemons. Instead they're relative prices for different
currencies, but they work in the same fashion. On February 26, 2003 the U.S.-to-Japan
exchange rate was 117 yen, so this means that you can purchase 117 Japanese yen in
exchange for 1 U.S. dollar. To figure out how many U.S. dollars you can get for 1
Japanese yen, we can just use the formula:

So this tells us that one Japanese yen is worth .00854 U.S. dollars, which is less than a
penny.
a) Why would the supply of a currency increase?
Currencies are traded on the foreign exchange market, and the supply of a currency on
that market will change over time. There are a few different organizations whose actions
will cause a rise in the supply of the foreign exchange market:
1. Export Companies
Suppose a South African farm sells the cashews it produces to a large Japanese
firm. It is likely that the contract will be negotiated in Japanese yen, so the farm
will receive its revenue in a currency with limited use outside of Japan. Since the
company needs to pay its employees in the local currency, namely the South
African rand, the company would sell its yen on a foreign exchange market and
buy rands. The supply of Japanese yen on the foreign exchange market will
increase, and the supply of South African rands will decrease. This will cause the


rand to appreciate in value (become more valuable) relative to other currencies
and the yen to depreciate.
2. Foreign Investors
A German automobile manufacturer wants to build a new plant in Windsor, ON,
Canada. To purchase the land, hire construction workers, etc., the firm will need
Canadian dollars. However most of their cash reserves are held in euros. The
company will be forced to go to the foreign exchange market, sell some of its
euros, and buy Canadian dollars. The supply of euros on the foreign exchange
market goes up, and the supply of Canadian dollars goes down. This will cause
Canadian dollars to appreciate and euros to depreciate.
Foreign investment does not have to be in tangible goods such as land. If German
investors buy Canadian stocks, such as stocks listed on the Toronto Stock
Exchange or purchase Canadian dollar bonds, we will have the same situation as
above.
3. Speculators
Like the stock market, there are investors who try to make a fortune (or at least a
living) by buying and selling currencies. Suppose a currency investor thinks that
the Mexican peso will depreciate in the future, so it will be less valuable than
other currencies than it is now. In that case, she is likely to sell her pesos on the
foreign exchange market and buy a different currency instead, such as the South
Korean won. The supply of pesos goes up and the supply of won goes down. This
causes pesos to depreciate, and won to appreciate.
Note the self-fulfilling nature of the beliefs investors hold. If investors feel that a
currency will depreciate in the future, they will try to sell it today. Since the
currency is being sold by investors, the supply of it will go up, and the price of it
will decrease. The investor thought that the currency would depreciate, she acted
on that belief and sold her currency, and the act of selling caused the depreciation
to take place. Self-fulfilling prophecies such as this one are quite common in
economics.


4. Central Bankers
The central bank of the United States is the Federal Reserve, more commonly
known as "The Fed". One of the responsibilities of the Fed is to control the
supply, or the amount, of currency in a country. The most obvious way to increase
the supply of money is to simply print more currency, though there are much more
sophisticated ways of changing the money supply. If the Fed prints more 10 and
20 dollar bills, the money supply will increase. When the government increases
the money supply, it is likely some of this new money will make its way to the
foreign exchange market, so the supply of U.S. dollars will increase there as well.
b) Why would the demand for a currency increase?
Not surprisingly pretty much the same organizations who caused supply changes will
cause demand changes. They are as follows:
1. Import Companies
A British retailer specializing in Chinese merchandise will often have to pay for
that merchandise in Chinese yuan. So if the popularity of Chinese goods goes up
in other countries the demand for Chinese yuan will go up as retailers purchase
yuan to make purchases from Chinese wholesalers and manufacturers.
2. Foreign Investors
As before a German automobile manufacturer wants to build a new plant in
Windsor, ON, Canada. To purchase the land, hire construction workers, etc., the
firm will need Canadian dollars. So the demand for Canadian dollars will rise.
3. Speculators
If an investor feels that the price of Mexican pesos will rise in the future, she will
demand more pesos today. This increased demand leads to an increased price for
pesos.



4. Central Bankers
A central bank might decide that its holdings of a particular currency are too low,
so they decide to buy that currency on the open market. They might also want to
have the exchange rate for their currency decline relative to another currency. So
they put their currency on the open market and use it to buy another currency. So
Central Banks can play a role in the demand for currency.
c) Fluctuations in exchange rates
A market-based exchange rate will change whenever the values of either of the two
component currencies change. A currency will tend to become more valuable whenever
demand for it is greater than the available supply. It will become less valuable whenever
demand is less than available supply (this does not mean people no longer want money, it
just means they prefer holding their wealth in some other form, possibly another
currency).
Increased demand for a currency can be due to either an increased transaction demand for
money or an increased speculative demand for money. The transaction demand is highly
correlated to a country's level of business activity, gross domestic product (GDP), and
employment levels. The more people that are unemployed, the less the public as a whole
will spend on goods and services. Central banks typically have little difficulty adjusting
the available money supply to accommodate changes in the demand for money due to
business transactions.
Speculative demand is much harder for central banks to accommodate, which they
influence by adjusting interest rates. A speculator may buy a currency if the return (that is
the interest rate) is high enough. In general, the higher a country's interest rates, the
greater will be the demand for that currency. It has been arguedthat such speculation can
undermine real economic growth, in particular since large currency speculators may
deliberately create downward pressure on a currency by shorting in order to force that
central bank to buy their own currency to keep it stable. (When that happens, the
speculator can buy the currency back after it depreciates, close out their position, and
thereby take a profit.)


For carrier companies shipping goods from one nation to another, exchange rates can
often impact them severely. Therefore, most carriers have a CAF charge to account for
these fluctuations
d) Purchasing power of currency
The real exchange rate (RER) is the purchasing power of a currency relative to another
at current exchange rates and prices. It is the ratio of the number of units of a given
country's currency necessary to buy a market basket of goods in the other country, after
acquiring the other country's currency in the foreign exchange market, to the number of
units of the given country's currency that would be necessary to buy that market basket
directly in the given country.
Thus the real exchange rate is the exchange rate times the relative prices of a market
basket of goods in the two countries. For example, the purchasing power of the US dollar
relative to that of the euro is the dollar price of a euro (dollars per euro) times the euro
price of one unit of the market basket (euros/goods unit) divided by the dollar price of the
market basket (dollars per goods unit), and hence is dimensionless. This is the exchange
rate (expressed as dollars per euro) times the relative price of the two currencies in terms
of their ability to purchase units of the market basket (euros per goods unit divided by
dollars per goods unit). If all goods were freely tradable, and foreign and domestic
residents purchased identical baskets of goods, purchasing power parity (PPP) would hold
for the exchange rate and GDP deflators (price levels) of the two countries, and the real
exchange rate would always equal 1.
The rate of change of this real exchange rate over time equals the rate of appreciation of
the euro (the positive or negative percentage rate of change of the dollars-per-euro
exchange rate) plus the inflation rate of the euro minus the inflation rate of the dollar.
e) Uncovered interest rate parity
Uncovered interest rate parity (UIRP) states that an appreciation or depreciation of one
currency against another currency might be neutralized by a change in the interest rate
differential. If US interest rates increase while Japanese interest rates remain unchanged
then the US dollar should depreciate against the Japanese yen by an amount that prevents


arbitrage (in reality the opposite, appreciation, quite frequently happens in the short-term,
as explained below). The future exchange rate is reflected into the forward exchange rate
stated today. In our example, the forward exchange rate of the dollar is said to be at a
discount because it buys fewer Japanese yen in the forward rate than it does in the spot
rate. The yen is said to be at a premium.
UIRP showed no proof of working after the 1990s. Contrary to the theory, currencies with
high interest rates characteristically appreciated rather than depreciated on the reward of
the containment of inflation and a higher-yielding currency.
f) Balance of payments model
The balance of payments model holds that foreign exchange rates are at an equilibrium
level if they produce a stable current account balance. A nation with a trade deficit will
experience a reduction in its foreign exchange reserves, which ultimately lowers
(depreciates) the value of its currency. A cheaper (undervalued) currency renders the
nation's goods (exports) more affordable in the global market while making imports more
expensive. After an intermediate period, imports will be forced down and exports to rise,
thus stabilizing the trade balance and bring the currency towards equilibrium.
Like purchasing power parity, the balance of payments model focuses largely on trade-
able goods and services, ignoring the increasing role of global capital flows. In other
words, money is not only chasing goods and services, but to a larger extent, financial
assets such as stocks and bonds. Their flows go into the capital account item of the
balance of payments, thus balancing the deficit in the current account. The increase in
capital flows has given rise to the asset market model effectively.
g) Asset market model
The increasing volume of trading of financial assets (stocks and bonds) has required a
rethink of its impact on exchange rates. Economic variables such as economic growth,
inflation and productivity are no longer the only drivers of currency movements. The
proportion of foreign exchange transactions stemming from cross border-trading of
financial assets has dwarfed the extent of currency transactions generated from trading in
goods and services.


The asset market approach views currencies as asset prices traded in an efficient financial
market. Consequently, currencies are increasingly demonstrating a strong correlation with
other markets, particularly equities.
Like the stock exchange, money can be made (or lost) on trading by investors and
speculators in the foreign exchange market. Currencies can be traded at spot and foreign
exchange options markets. The spot market represents current exchange rates, whereas
options are derivatives of exchange rates.
h) Manipulation of exchange rates
A country may gain an advantage in international trade if it controls the market for its
currency to keep its value low, typically by the national central bank engaging in open
market operations. The People's Republic of China has been acting this way over a long
period of time.
Other nations, including Iceland, Japan, Brazil, and so on also devalue their currencies in
the hopes of reducing the cost of exports and thus bolstering their economies. A lower
exchange rate lowers the price of a country's goods for consumers in other countries, but
raises the price of imported goods and services, for consumers in the low value currency
country.
In general, a country that exported goods and services will prefer a lower value on their
currencies. While a country that imported goods and services will prefer a higher value on
their currencies.



1.2 Foreign Institutional investors
Foreign Institutional investors (FIIs) are entities established or incorporated outside India
and make proposals for investments in India. These investment proposals by the FIIs are
made on behalf of sub accounts, which may include foreign corporates, individuals, and
funds etcetera. In order to act as a banker to the FIIs, the RBI has designated banks that
are authorized to deal with them. The biggest source through which FIIs invest is the
issuance of Participatory Notes (P-Notes), which are also known as Offshore Derivatives.
Institutional investors are organizations which pool large sums of money and invest those
sums in securities, real property and other investment assets. They can also include
operating companies which decide to invest their profits to some degree in these types of
assets.
Typical investors include banks, insurance companies, retirement or pension funds, hedge
funds, investment advisors and mutual funds. Their role in the economy is to act as highly
specialized investors on behalf of others. For instance, an ordinary person will have a
pension from his employer. The employer gives that person's pension contributions to a
fund. The fund will buy shares in a company, or some other financial product. Funds are
useful because they will hold a broad portfolio of investments in many companies. This
spreads risk, so if one company fails, it will be only a small part of the whole fund's
investment.
An institutional investor can have some influence in the management of corporations
because it will be entitled to exercise the voting rights in a company. Thus, it can actively
engage in corporate governance. Furthermore, because institutional investors have the
freedom to buy and sell shares, they can play a large part in which companies stay
solvent, and which go under. Influencing the conduct of listed companies, and providing
them with capital are all part of the job of investment management.
The term Foreign Institutional Investor is defined by SEBI as under:
"Means an institution established or incorporated outside India which proposes to make investment
in India in securities. Provided that a domestic asset management company or domestic portfolio
manager who manages funds raised or collected or brought from outside India for investment in
India on behalf of a sub-account, shall be deemed to be a Foreign Institutional Investor." Foreign


Investment refers to investments made by residents of a country in financial assets and production
process of another country.
Foreign Institutional investors (FIIs) are entities established or incorporated outside India
and make proposals for investments in India. These investment proposals by the FIIs are
made on behalf of sub accounts, which may include foreign corporates, individuals, and
funds etcetera. In order to act as a banker to the FIIs, the RBI has designated banks that
are authorized to deal with them. The biggest source through which FIIs invest is the
issuance of Participatory Notes (P-Notes), which are also known as Offshore Derivatives.
It is impossible to ignore the effect of foreign players and fund houses on the domestic
markets. When foreign institutional investors (FIIs) indulge in selling, the index plunges.
When FIIs buy aggressively, it pushes the markets up. SEBI provides information about
FII investments in equity and debt markets on a daily basis. This information is used by
market players to comprehend the FII trends. FII investments in the month of April alone
in the domestic markets were to the tune of Rs 6,500 crores.
FII reactions, sentiments and behavior against global developments, political
developments, economic growth and industry performance hence garner more
importance. So strong is the FII influence that domestic players and local fund houses can
do little to negate a powerful FII trend. Since they have emerged as one of the key index
movers, investors should study their movements to get a comprehensive picture.
A) INFLUENCE OF FII ON INDIAN MARKET

Positive fundamentals combined with fast growing markets have made India an attractive
destination for foreign institutional investors (FIIs). Portfolio investments brought in by
FIIs have been the most dynamic source of capital to emerging markets in 1990s. At the
same time there is unease over the volatility in foreign institutional investment flows and
its impact on the stock market and the Indian economy.
Apart from the impact they create on the market, their holdings will influence firm
performance.
For instance, when foreign institutional investors reduced their holdings in Dr.Reddys
Lab by
7% to less than 18%, the company dropped from a high of around US$30 to the current
level of


Below US$15. This 50% drop is apparently because of concerns about shrinking profit
margins
And financial performance. These instances made analysts to generally claim that foreign
Portfolio investment has a short term investment horizon. Growth is the only inclination
for their
Investment.
Some major impact of FII on stock market:
They increased depth and breadth of the market.
They played major role in expanding securities business.
Their policy on focusing on fundamentals of share had caused efficient pricing of share.

B) EFFECTTS OF FII ON INDIANN ECONOMY

POSITIVE IMPACT:
It has been emphasized upon the fact that the stock market reforms like
Improved market transparency, automation, dematerialization and regulations on
reporting and
Disclosure standards were initiated because of the presence of the FIIs. But FII flows can
be
Considered both as the cause and the effect of the stock market r forms. The market
reforms
Were initiated because of the presence of them and this in turn has led to increased flows.

ENHANCED FLOWS OF EQUITY CAPITAL

FIIs are well known for as greater appetite
For equity than debt in their asset structure. For example e, pension funds in the United
Kingdom
And United States had 68 per cent and 64 paper cent, respectively, off their portfolios in
equity in 1998. Not only it can help in supplementing the domestic savings for the
purpose of development Projects like building economic and social infrastructure but can
also help in growth of rate of Investment, it boosts the production, employment and
income of the host country.


MANNAGING UNNCERTAINNTY AND CONTROLLLING RISSKS

FIIs promote financial Innovation and development of hedging instruments. These
because of their interest in hedging risks, are known to have contributed to the
development of zero-coupon bonds and index futures.FIIs not only enhance competition
in financial markets, but also improve the alignment of asset prices to fundamentals. FIIs
in particular are known to have good information and low transaction costs. By aligning
asset prices closer to fundamentals, they stabilize markets. In addition, a variety of FIIs
with a variety of risk-return preferences also help in dampening volatility.

IMPROVING CAPITAL MARKETS

FIIs as professional bodies of asset managers and financial analysts enhance competition
and efficiency of financial markets. By increasing the availability of riskier long term
capital for projects, and increasing firms incentives to supply more information about
them, the FIIs can help in the process of economic development.

IMPROVED CORPORATE GOVERNANCE

Good corporate governance is essential to overcome the principal-agent problem between
share-holders and management. Information asymmetries and incomplete contracts
between share-holders and management are at the root of the agency costs. Bad corporate
governance makes equity finance a costly option. With boards often captured by
managers or passive, ensuring the rights of shareholders is a problem that needs to be
addressed efficiently in any economy. Incentives for shareholders to monitor firms and
enforce their legal rights are limited and individuals with small share-holdings often do
not address the issue since others can free-ride on their endeavor. FIIs constitute
professional bodies of asset managers and financial analysts, who, by contributing to
better understanding of firms operations, improve corporate governance. Among the
four models of corporate control - takeover or market control via equity, leveraged
control or market control via debt, direct control via equity, and direct control via debt or
relationship banking-the third model, which is known as corporate governance


movement, has institutional investors at its core. In this third model, board representation
is supplemented by direct contacts by institutional investors.

NEGATIVE IMPACT
If we see the market trends of past few recent years it is quite evident that Indian equity
markets have become slaves of FIIs inflow and are dancing to their tune. And this
dependence has to a great extent caused a lot of trouble for the Indian economy. Some of
the factors are:

POTENTIAL CAPITAL OUTFLOWS

Hot money refers to funds that are controlled by investors who actively seek short-term
returns. These investors scan the market for short-term, high interest rate investment
opportunities. Hot money can have economic and financial repercussions on countries
and banks. When money is injected into a country, the exchange rate for the country
gaining the money strengthens, while the exchange rate for the country losing the money
weakens. If money is withdrawn on short notice, the banking institution will experience a
shortage of funds.

INFLATION

Huge amounts of FII fund inflow into the country creates a lot of demand for rupee, and
the RBI pumps the amount of Rupee in the market as a result of demand created. This
situation leads to excess liquidity thereby leading to inflation where too much money
chases too few goods.

PROBLEM TO SMALL INVESTORS

The FIIs profit from investing in emerging financial stock markets. If the cap on FII is
high then they can bring in huge amounts of funds in the countrys stock markets and thus
have great influence on the way the stock markets behaves, going up or down. The FII
buying pushes the stocks up and their selling shows the stock market the downward path.


This creates problems for the small retail investor, whose fortunes get driven by the
actions of the large FIIs.

ADVERSE IMPACT ON EXPORTS

FII flows leading to appreciation of the currency may lead to the exports industry
becoming uncompetitive due to the appreciation of the rupee.

C) Entities registered as FIIs
There is a long list of entities that are eligible to get registered as FIIs such as pension
funds, mutual funds, insurance companies, investment trusts, banks, university funds,
endowments, foundations, sovereign wealth funds, hedge funds and charitable trusts. In
fact, asset management companies, investment managers, advisors or institutional
portfolio managers set up and/or owned by NRIs are also eligible to be registered as FIIs.
The nodal point for FII registrations is Sebi and hence all FIIs must register themselves
with Sebi and should also comply with the exchange control regulations of the central
bank. Apart from being allowed to invest in securities in primary and secondary markets,
FIIs can also invest in mutual funds, dated government securities, derivatives traded on a
recognized stock exchange and commercial papers.
D) Who all can get registered as FIIs?

There is a long list of entities that are eligible to get registered as FIIs such as pension
funds, mutual funds, insurance companies, investment trusts, banks, university funds,
endowments, foundations, sovereign wealth funds, hedge funds and charitable trusts. In
fact, asset management companies, investment managers, advisors or institutional
portfolio managers set up and/or owned by NRIs are also eligible to be registered as FIIs.
The nodal point for FII registrations is Sebi and hence all FIIs must register themselves
with Sebi and should also comply with the exchange control regulations of the central
bank. Apart from being allowed to invest in securities in primary and secondary markets,
FIIs can also invest in mutual funds, dated government securities, derivatives traded on a
recognized stock exchange and commercial papers.


E) Why are FIIs important for Indian markets?
FIIs are among the major sources of liquidity for the Indian markets. If FIIs are
investing huge amounts in the Indian stock exchanges then it reflects their high
confidence and a healthy investor sentiment for our markets. But with the current global
financial turmoil and a liquidity and credit freeze in the international markets, FIIs have
become net sellers (on a day to day basis). The entry of FIIs in India has brought mixed
consequences for our markets, on one hand they have improved the breadth and depth of
Indian markets and on the other hand they have also become the major sources of
speculation in testing times like these.
F) Can FIIs invest in Indian companies?
Yes, FIIs can invest in the stocks and debentures of the Indian companies. In order to
invest in the primary and secondary capital markets in India, they have to venture through
the portfolio investment scheme (PIS). According to RBI regulations, the ceiling for
overall investment for FIIs is 24% of the paid up capital of the Indian company. The
limit is 20% of the paid up capital in the case of public sector banks. However, if the
board and the general body approves and passes a special resolution, then the ceiling of
24% for FII investment can be raised up to sectoral cap for that particular segment. In
fact, recently Sebi allowed FIIs to invest in unlisted exchanges as well, which means
both BSE and NSE (the unlisted bourses) can now allot shares to FIIs also.
G) Financial instruments available for FII investments.
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.
H) When FIIs buy
What happens when FII inflows increase? One can expect an appreciation in the Real
Effective Exchange Rate (REER). This is the weighted average of nominal exchange
rates adjusted for inflation differential against domestic and foreign countries. This
exchange rate is used to determine a country's currency value relative to the other major


currencies in the index, as adjusted for the effects of inflation. This determines the value
that an individual will pay for imported goods at the consumer level.
Increase in inflows simply translates into appreciation of the rupee against its trading
partners. This hits domestic exports hard as their products become expensive in the
foreign markets.
Increase in capital inflows can also lead to increased liquidity and spark off inflation. The
chain reaction could seriously hamper the economic stability.
I) When FII sell
Sudden FII outflows are not uncommon either. The volatile behaviour of FIIs can
seriously impact economic stability at the grassroot level. When FIIs withdraw suddenly,
the stock markets come crashing down wiping away small investors' wealth.
The high volume of FII purchases or sales and their extreme volatile behaviour can
plunge the stock markets into an inexplicable crisis. Investors must spend time to pick up
FII trends and study global developments before investing in the domestic markets.
J) THE ELIGIBILITY CRITERIA FOR APPLICANT SEEKING FII
Good track record, professional competence and financial soundness.
Regulated by appropriate foreign regulatory authority in the same
capacity/categorywhere registration is sought from SEBI.
Permission under the provisions of the Foreign Exchange Management Act,
1999(FEMA) from the RBI.
Legally permitted to invest in securities outside country or its
incorporation/establishment.
The applicant must be a fit and proper person.
Local custodian and designated bank to route its transactions.
K) PROCEDURE OF FII
I. REGISTRATION REQUIREMENTS FOR FII AND SUB-ACCOUNT
REGISTRATIONS
Eligibility criteria for FII registration
The FII Regulations provides for the following, which are eligible to apply for
registration as a FII:


An institution established/incorporated outside India as a pension fund, mutual
fund, investment trust, insurance company or reinsurance company;
Foreign governmental agencies, sovereign wealth funds, foreign central banks,
international / multilateral organizations or their agencies;
An asset management company, investment advisor / manager, bank, institutional
portfolio manager established and incorporated outside India and proposing to
make investments in India on behalf of broad based funds and proprietary funds, if
any;
A trustee of a trust established outside India and proposing to make investments
in India on behalf of broad based funds and proprietary funds.
University funds, endowments, foundations, charitable trusts or charitable
societies.
Factors considered by SEBI in granting FII registration
Track record, professional competence, financial soundness, experience, general,
reputation of fairness and integrity.
If the applicant is a newly established fund, the track record of the investment
manager of the fund who has promoted it may be taken into consideration and
such investment manager shall furnish the details in respect of disciplinary action,
if any, taken against it.
Foreign regulatory authority regulating the applicant provided that university
funds, endowments, foundations, charitable trusts and charitable societies may be
considered even though they are not regulated by a foreign regulatory authority.
The legal form of the applicant
While considering the application from University funds, endowments,
foundations, charitable trusts or charitable societies, SEBI shall additionally
consider the following:
(a) Whether the applicant has been in existence for atleast 5 years;
(b) Whether it is legally permissible for the applicant to invest in securities outside
the country of its incorporation or establishment;
(c) Whether the applicant has been registered with any statutory authority in the
country of its incorporation or establishment;
(d) Whether any legal proceeding has been initiated by any statutory authority against
the applicant; and


(e) Whether the applicant has been serving public interest;
(f) Whether the grant of certificate to the applicant is in the interest of the
development of the securities market;
(g) Whether the applicant is a fit and proper person. The criteria which may be
considered include integrity, reputation and character, absence of convictions and
restraint orders and competence including financial solvency and networth.
Eligibility criteria for sub-account registration
The FII regulations provide for the following, which are eligible to apply for a sub
account registration.
A board based fund or portfolio which is board based, incorporated or established
outside India.
Proprietary fund of a registered FII.
A foreign corporate.
A foreign individual.
University fund, endowment, foundation, charitable trust or charitable society that
are eligible to registered as FII9.
5. Factors considered by SEBI in granting registration to sub-account
Give importance to the following in relation to the applicant:
Whether the applicant falls in any of the categories specified in Paragraph 3
above.
Whether the applicant is a fit and proper person. The criteria which may be
considered include integrity, reputation and character, absence of convictions and
restraint orders and competence including financial solvency and net worth.
The FII through whom the sub-account is applying for registration must (a) hold a
valid license with SEBI; and (b) be authorized to invest on behalf of the sub-
account.
Whether the applicant and the FII through whom the application is made, have
submitted joint undertakings in the prescribed Form AA of the FII Regulations.
The sub-account has paid the prescribed registration fees.
II. REGISTRATION FORM, TIME AND FEE
FII Registration: Documents, Form, Registration Fees and Time
Form A (as attached) must be filled and submitted by the applicant seeking
registration as an FII.


Documents required to be submitted with the FII application include:
a) Certified copy of the relevant clause of the organizational documents or the
agreement authorizing the applicant to invest on behalf of its clients; and
b) audited financial statements / annual report for the previous financial year,
(period covered shall not be less than 12 months)
c) A fee of USD 5,000 payable by a Draft drawn in favor of Securities and
Exchange Board of India payable in New York, is required to be paid. Please
note that a fee of USD 5,000 is required to be paid by the FII for every block
of 3 years after grant of registration during which the registration subsists.
The fee shall be paid at least one month before expiry of the period of 3 years.
d) The outer limit of time taken by SEBI to grant registration is prescribed as 3
months.
Sub-account Registration: Documents, Form, Registration Fees and Time
Form AA (as attached) must be filled and submitted by the applicant seeking
registration as a sub-account.
Documents required to be submitted with the sub-account application include
documents in relation to sub-paragraphs 3.1, 3.3, 3.4 or 4.3 above (as applicable).
A fee of USD 1,000 is required to be paid along with the application for
registration of the sub-account. A registered sub-account must pay USD 1,000 for
every block of 3 years for which the FII, through whom it makes investment in the
Indian securities market, pays its fees.
Prior to making an application for registration on behalf of a proposed sub-
account being a foreign corporate, it is the FIIs responsibility to verify and satisfy
itself about the identity of the proposed sub-account through a know-your-client
procedure.
The outer limit of time taken by SEBI to grant registration is prescribed as 3
months.
III. TYPES OF SECURITIES IN WHICH THE FIIs CAN INVEST
The SEBI registered FIIs may invest in the following form of securities in India:
Primary and secondary market securities including shares, debentures and
warrants of companies unlisted, listed or to be listed on a recognized stock
exchange in India


Units of schemes floated by domestic mutual funds, whether listed or not, units of
scheme
Floated by a Collective Investment Scheme
Dated Government Securities
Derivatives traded on recognized stock exchanges
Commercial paper
Security receipts (issued under the SARFAESI Act)
Indian Depository Receipts.
IV. INVESTMENT RESTRICTIONS:
As per FEMA (Transfer and Issue of Security) Regulations, 2000 as amended
from time to time, a registered FII may purchase shares and convertible
debentures of an Indian Company under the Portfolio Investment Scheme, subject
to the terms and conditions specified in Schedule 2 of the said regulations.
The total holding by each FII/SEBI approved sub-account of FII shall not exceed
10% of the total paid-up equity capital or 10% of the paid-up value of each series
of convertible debentures issued by an Indian company and the total holdings of
all FIIs/sub-accounts of FIIs put together shall not exceed 24% of paid-up equity
capital or paid up value of each series of convertible debentures.
A domestic asset management company or portfolio manager, who is registered
with SEBI as a FII for managing the fund of a sub-account may make investment
under the Scheme on behalf of:
(a) A person resident outside India who is a citizen of a foreign state, or
(b) A body corporate registered outside India;
Provided such investment is made out of funds raised or collected or brought from
Outside through normal banking channel.
Investments permitted to be made under sub-paragraph 3 shall not exceed 5%
(five per cent) of the total paid-up equity capital or 5% of the paid-up value of
each series of convertible debentures issued by an Indian company, and shall also
not exceed the over-all ceiling specified .


M) Regulations
Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of
Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets
in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs
can acquire shares/debentures of Indian companies through the stock exchanges in India.
The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the
Indian company and 10 per cent for NRIs/PIOs. The limit is 20 per cent of the paid up
capital in the case of public sector banks, including the State Bank of India.
The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory
ceiling, subject to the approval of the board and the general body of the company passing
a special resolution to that effect. And the ceiling of 10 per cent for NRIs/PIOs can be
raised to 24 per cent subject to the approval of the general body of the company passing a
resolution to that effect.
The ceiling for FIIs is independent of the ceiling of 10/24 per cent for NRIs/PIOs.
The equity shares and convertible debentures of the companies within the prescribed
ceilings are available for purchase under PIS subject to:
- the total purchase of all NRIs/PIOs both, on repatriation and non-repatriation basis,
being within an overall ceiling limit of (a) 24 per cent of the company's total paid up
equity capital and (b) 24 per cent of the total paid up value of each series of convertible
debenture; and
- the investment made on repatriation basis by any single NRI/PIO in the equity shares
and convertible debentures not exceeding five per cent of the paid up equity capital of the
company or five per cent of the total paid up value of each series of convertible
debentures issued by the company.


n) Globalization of financial markets
When considered from a strictly local standpoint, institutional investors are sometimes
called foreign institutional investors (FIIs). This expression is mostly used in emerging
markets such as Malaysia and India.
In countries like India, statutory agencies like the Securities and Exchange Board of India
have prescribed norms to register FIIs and also to regulate such investments flowing in
through FIIs. In 2008, FIIs represented the largest institution investment category, with
an estimated US$ 751.14 billion.
0) The difference between FDI and FII
Any investment flowing from one country into another is foreign investment.
A simple and commonly-used definition says financial investment by which a person
or an entity acquires a lasting interest in, and a degree of influence over, the management
of a business enterprise in a foreign country is foreign investment. Globally, various types
of technical definitions including those from IMF and OECD are used to define
foreign investment.
How does the Indian government classify foreign investment?
The Indian government differentiates cross-border capital inflows into various
categories like foreign direct investment (FDI), foreign institutional investment (FII),
non-resident Indian (NRI) and person of Indian origin (PIO) investment. Inflow of
investment from other countries is encouraged since it complements domestic
investments in capital-scarce economies of developing countries, India opened up to
investments from abroad gradually over the past two decades, especially since the
landmark economic liberalisation of 1991. Apart from helping in creating additional
economic activity and generating employment, foreign investment also facilitates flow of
technology into the country and helps the industry to become more competitive.
Why does the government differentiate between various forms of foreign investment?


FDI is preferred over FII investments since it is considered to be the most beneficial
form of foreign investment for the economy as a whole. Direct investment targets a
specific enterprise, with the aim of increasing its capacity/productivity or changing its
management control. Direct investment to create or augment capacity ensures that the
capital inflow translates into additional production. In the case of FII investment that
flows into the secondary market, the effect is to increase capital availability in general,
rather than availability of capital to a particular enterprise. Translating an FII inflow into
additional production depends on production decisions by someone other than the foreign
investor some local investor has to draw upon the additional capital made available via
FII inflows to augment production. In the case of FDI that flows in for the purpose of
acquiring an existing asset, no addition to production capacity takes place as a direct
result of the FDI inflow. Just like in the case of FII inflows, in this case too, addition to
production capacity does not result from the action of the foreign investor the domestic
seller has to invest the proceeds of the sale in a manner that augments capacity or
productivity for the foreign capital inflow to boost domestic production. There is a
widespread notion that FII inflows are hot money that it comes and goes, creating
volatility in the stock market and exchange rates. While this might be true of individual
funds, cumulatively, FII inflows have only provided net inflows of capital.
FDI tends to be much more stable than FII inflows. Moreover, FDI brings not just
capital but also better management and governance practices and, often, technology
transfer. The know-how thus transferred along with FDI is often more crucial than the
capital per se. No such benefit accrues in the case of FII inflows, although the search by
FIIs for credible investment options has tended to improve accounting and governance
practices among listed Indian companies.
According to the Prime Ministers Economic Advisory Committee, net FDI inflows
amounted to $8.5 billion in 2006-07 and is estimated to have gone up to $15.5 billion in
07-08. The panel feels FDI inflows would increase to $19.7 billion during the current
financial year. FDI up to 100% is allowed in sectors like textiles or automobiles while the
government has put in place foreign investment ceilings in the case of sectors like
telecom (74%). In some areas like gambling or lottery, no foreign investment is allowed.


According to the governments definition, FIIs include asset management companies,
pension funds, mutual funds, investment trusts as nominee companies,
incorporated/institutional portfolio managers or their power of attorney holders,
university funds, endowment foundations, charitable trusts and charitable societies. FIIs
are required to allocate their investment between equity and debt instruments in the ratio
of 70:30. However, it is also possible for an FII to declare itself a 100% debt FII in which
case it can make its entire investment in debt instruments. The government allows greater
freedom to FDI in various sectors as compared to FII investments. However, there are
peculiar cases like airlines where foreign investment, including FII investment, is allowed
to the extent of 49%, but FDI from foreign airlines is not allowed.
P) What are the restrictions that FIIs face in India?
FIIs can buy/sell securities on Indian stock exchanges, but they have to get registered
with stock market regulator Sebi. They can also invest in listed and unlisted securities
outside stock exchanges if the price at which stake is sold has been approved by RBI. No
individual FII/sub-account can acquire more than 10% of the paid up capital of an Indian
company. All FIIs and their sub-accounts taken together cannot acquire more than 24%
of the paid up capital of an Indian Company, unless the Indian Company raises the 24%
ceiling to the sectoral cap or statutory ceiling as applicable by passing a board resolution
and a special resolution to that effect by its general body in terms of RBI press release of
September 20, 2001 and FEMA Notification No.45 of the same date. In addition, the
government also introduces new regulations from time to time to ensure that FII
investments are in order. For example, investment through participatory notes (PNs) was
curbed by Sebi recently.



1.3 OVERVIEW OF Bombay Stock Exchange

BSE Limited HJHJ
Location of Bombay Stock Exchange in India
Type Stock Exchange
Location Mumbai, Maharashtra, India
Founded 1875
Owner BSE Limited
Key people Ashish Chauhan (MD & CEO)
Currency Indian rupee ( )
No. of listings 5,163 (as of September 2012)
Market Cap US$1.203 trillion (Oct 2012)
Volume US$231 billion (Nov 2010)
Trading Trading on the BOLT System from Monday to Friday between 9:15
a.m. to 3:30 p.m. normally.
Website www.bseindia.com



Bombay Stock Exchange (BSE), (Bombay hareBzar) is a stock exchange located
on Dalal Street, Mumbai, Maharashtra, India. It is the11th largest stock exchange in the
world by market capitalisation as on 31 December 2012. Established in 1875, BSE Ltd.
(formerly known as Bombay Stock Exchange Ltd.), is the India's oldest Stock Exchange,
one of Asia's oldest stock exchange and one of Indias leading exchange groups. Over the
past 137 years, BSE has facilitated the growth of the Indian corporate sector by providing
it an efficient capital-raising platform. Popularly known as BSE, the bourse was
established as "The Native Share & Stock Brokers' Association" in 1875.
BSE is a corporatized and demutualized entity, with a broad shareholder-base which
includes two leading global exchanges, Deutsche Bourse, Fuse and Singapore
Exchange as strategic partners. BSE provides an efficient and transparent market for
trading in equity, debt instruments, derivatives, mutual funds. It also has a platform for
trading in equities of small-and-medium enterprises (SME). More than 5000 companies
are listed on BSE making it world's No. 1 exchange in terms of listed members. The
companies listed on BSE Ltd command a total market capitalization of USD Trillion 1.32
as of January 2013. BSE Ltd is world's fifth most active exchange in terms of number of
transactions handled through its electronic trading system. It is also one of the worlds
leading exchanges (3rd largest in December 2012) for Index options trading
(Source: World Federation of Exchanges).
BSE also provides a host of other services to capital market participants including risk
management, clearing, settlement, market data services and education. It has a global
reach with customers around the world and a nation-wide presence. BSE systems and
processes are designed to safeguard market integrity, drive the growth of the Indian
capital market and stimulate innovation and competition across all market segments. BSE
is the first exchange in India and second in the world to obtain an ISO 9001:2000
certification. It is also the first Exchange in the country and second in the world to
receive Information Security Management System Standard BS 7799-2-2002 certification
for its BSE On-Line trading System (BOLT).
It operates one of the most respected capital market educational institutes in the country
(the BSE Institute Ltd.). BSE also provides depository services through its Central
Depository Services Limited (CDSL) arm.


BSEs popular equity index - the S&P BSE SENSEX [Formerly SENSEX] - is India's
most widely tracked stock market benchmark index. It is traded internationally on the
EUREX as well as leading exchanges of the BRCS nations (Brazil, Russia, China and
South Africa). On Tuesday, 19 February 2013 BSE has entered into Strategic Partnership
with S&P DOW JONES INDICES and the SENSEX has been renamed as "S&P BSE
SENSEX".
HISTORY
The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history to 1855,
when four Gujarati and one Parsi stockbroker would gather under banyan trees in front of
Mumbai's Town Hall. The location of these meetings changed many times, as the number
of brokers constantly increased. The group eventually moved to Dalal Street in 1874 and
in 1875 became an official organization known as 'The Native Share & Stock Brokers
Association'.
On 31 August 1957, the BSE became the first stock exchange to be recognized by
the Indian Government under the Securities Contracts Regulation Act. In 1980 the
exchange moved to the PhirozeJeejeebhoy Towers at Dalal Street, Fort area. In 1986,it
developed the BSE SENSEX index, giving the BSE a means to measure overall
performance of the exchange. In 2000 the BSE used this index to open its derivatives
market, trading SENSEX futures contracts. The development of SENSEX options along
with equity derivatives followed in 2001 and 2002, expanding the BSE's trading platform.
Historically an open outcry floor trading exchange, the Bombay Stock Exchange switched
to an electronic trading system in 1995. It took the exchange only fifty days to make this
transition. This automated, screen-based trading platform called BSE On-line trading
(BOLT) had a capacity of 8 million orders per day. The BSE has also introduced the
world's first centralized exchange-based internet trading system, BSEWEBx.co.in to
enable investors anywhere in the world to trade on the BSE platform.



Indices

Graph of S&P BSE SENSEX monthly data
The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of
BSE National Index (Base: 1983-84 = 100). It comprised 100 stocks listed at five major
stock exchanges in India - Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The BSE
National Index was renamed BSE-100 Index from 14 October 1996 and since then, it is
being calculated taking into consideration only the prices of stocks listed at BSE. BSE
launched the dollar-linked version of BSE-100 index on 22 May 2006. BSE launched two
new index series on 27 May 1994: The 'BSE-200' and the 'DOLLEX-200'. BSE-500
Index and 5 sectoral indices were launched in 1999. In 2001, BSE launched BSE-PSU
Index, DOLLEX-30 and the country's first free-float based index - the BSE Tieck Index.
Over the years, BSE shifted all its indices to the free-float methodology (except BSE-PSU
index). BSE disseminates information on the Price-Earnings Ratio, the Price to Book
Value Ratio and the Dividend Yield Percentage on day-to-day basis of all its major
indices. The values of all BSE indices are updated on real time basis during market hours
and displayed through the BOLT system, BSE website and news wire agencies. All BSE
Indices are reviewed periodically by the BSE Index Committee. This Committee which
comprises eminent independent finance professionals frames the broad policy guidelines
for the development and maintenance of all BSE indices. The BSE Index Cell carries out


the day-to-day maintenance of all indices and conducts research on development of new
indices. Popularly known as BSE.
SENSEX is significantly correlated with the stock indices of other emerging markets
a) Market Picture Display
The following information will be disseminated to the market at regular intervals
during the order entry period pre-open session
Indicative market opening price, populated in the 'LTP' field
Match able quantity at the indicative market opening price, populated in the 'LTQ'
field
If the indicative open price/match able quantity at the indicative open price is
not available then the 'LTP'/'LTQ' field is right blank.
Total buy /sell depth of the book will be populated in the 'Buy /Sell depth' fields
Percentage change in the indicative price
High/ Low prices will be disseminated based on the indicative opening prices
The 'open' field in the BOLT system will be populated only when the actual opening
price has been determined in the order matching and confirmation period.
The 'Close' field will display issue price in case of IPO

The market depth would display:
Indicative opening price with next best 4 bids and offers. If the indicative opening price is
not determined, then the best bids and offers will be displayed
Cumulative quantities at each of these price points
Example of the market depth display

Buy Quantity Buy Price Sell Price Sell Quantity
200 96 91 100
150 95 91.5 100
50 93 93 100
100 91.5 95 100
100 91 96 200
100 90 97 50



Demand Supply Schedule

Price
Point
Cumulative
Buy
Quantity
Cumulative
Sell
Quantity
Tradable
Quantity
Absolute
Order
Imbalance
96 200 600 200 400
95 350 400 350 50
93 400 300 300 100
91.5 500 200 200 300
91 600 100 100 500

Here the opening price determined is 95.00 at which the tradable quantity is maximized.
The market depth display would be as
follows:

b) Market Wide Circuit Breakers of BSE:
Based on SEBI Circular No. SMDRPD/Policy/Cir-37/2001 dated June 28, 2001, the
Exchange implemented index-based market-wide circuit breakers with effect from July
02, 2001. SEBI vide its Circular no. CIR/MRD/DP/ 25 /2013 dated September 03, 2013
has partially modified the provisions of the it aforementioned circular and have
introduced daily calculation of circuit breaker limits for 10%, 15% and 20% based on the
previous day's closing level of the index. Additionally, a 15 minutes pre opening session
post each trading halt has been introduced.
Based on the said circular, the Exchange on a daily basis disseminates the 10%, 15% and
20% circuit breaker limits on the closing value of S & P BSE Sensex for the next trading


day. The rounding off the circuit breaker limits to nearest 25 points as prescribed in SEBI
circular dated June 28, 2001 has been done away with SEBI Circular dated September 3,
2013.
The index-based market-wide circuit breaker system applies at 3 stages of the index
movement, either way viz. at 10%, 15% and 20%. These circuit breakers when triggered
bring about a coordinated trading halt in all equity and equity derivative markets
nationwide. The market-wide circuit breakers are triggered by movement of either the S
& P BSE Sensex or the NSE CNX Nifty, whichever is breached earlier.
The Trigger Limits And The Respective Halt Duration Is Given Below:

Trigger
Limit
Trigger Time Halt duration Pre Opening Session
duration post each halt
10% Before 1 Pm 45 Minutes 15 Minutes
At or After 1 PM
to 2.30 PM
15 Minutes 15 Minutes
At or after 2.30
PM
No Halt -
15% Before 1 PM 1 Hour 45 minutes 15 Minutes
At or after 1 PM
before 2 PM
45 Minutes 15 Minutes
On or after 2 PM Trading halt for the
remainder of the day.
-
20% Any time of the
day
Trading halt for the
remainder of the day.
-

c) Hours of operation of BSE:
Session Timing
Pre-open Trading Session 09:00 - 09:15
Trading Session 09:15 - 15:30


Position Transfer Session 15:30 - 15:55
Closing Session 15:50 - 16:05
Option Exercise Session 16:07

d) S& P SENSEX
The S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also-called
the BSE 30 or simply the SENSEX, is a weighted stock of 30 well-established and
financially sound companies listed on Bombay Stock Exchange. The 30 component
companies which are some of the largest and most actively traded stocks, are
representative of various industrial sectors of the Indian economy. Published since 1
January 1986, the S&P BSE SENSEX is regarded as the pulse of the domestic stock
markets in India. The base value of the S&P BSE SENSEX is taken as 100 on 1 April
1979, and its base year as 197879. On 25 July 2001 BSE launched DOLLEX-30, a
dollar-linked version of S&P BSE SENSEX. As of 21 April 2011, the market
capitalization of S&P BSE SENSEX was about 29733 billion (US$476 billion) (47.68%
of market capitalization of BSE), while its free-float market capitalization was 15690
billion (US$251 billion). During 2008-12, Sensex 30 Index share of BSE market
capitalization fell from 49% to 25% due to the rise of sectoral indices like BSE PSU,
Bankex, BSE-Teck, etc.
The index is calculated based on a free-float capitalization method when weighting the
effect of a company on the index. This is a variation of the market cap method, but
instead of using a company's outstanding shares it uses its float, or shares that are readily
available for trading. The free-float method, therefore, does not include restricted stocks,
such as those held by company insiders that can't be readily sold.
To find the free-float capitalization of a company, first find its market cap (number of
outstanding shares x share price) then multiply its free-float factor. The free-float factor is
determined by the percentage of floated shares to outstanding. For example, if a company
has a float of 10 million shares and outstanding shares of 12 million, the percent of float
to outstanding is 83%. A company with an 83% free float falls in the 80-85% free-float
factor, or 0.85, which is then multiplied by its market cap (e.g., $120 million (12 million
shares x .$10/share) x 0.85 = $102 million free-float capitalization).



e) Objectives of S&P BSE SENSEX

The S&P BSE SENSEX is the benchmark index with wide acceptance among
individual investors, institutional investors, foreign investors and fund managers. The
objectives of the index are:
To measure Market Movements
Given its long history and its wide acceptance, no other index matches the S&P BSE
SENSEX in reflecting market movements and sentiments. S&P BSE SENSEX is
widely used to describe the mood in the Indian Stock markets.
Benchmark for Funds Performance
The inclusion of Blue chip companies and the wide and balanced industry
representation in the S&P BSE SENSEX makes it the ideal benchmark for fund
managers to compare the performance of their funds.
For Index Based Derivatives Products
Institutional investors, money managers and small investors all refer to the S&P BSE
SENSEX for their specific purposes The S&P BSE SENSEX is in effect the
proxy for the Indian stock markets. Since S&P BSE SENSEX comprises of leading
companies in all the significant sectors in the economy, we believe that it will be the
most liquid contract in the Indian market and will garner a pre-dominant market
share.
f) Criteria for selection and review of scrips for the S&P BSE
SENSEX
The scrip selection and review policy for S&P BSE SENSEX is based on the objective
of:
Transparency
Simplicity
Index Review Frequency: The Index Committee meets every quarter to review all the
BSE indices including S&P BSE SENSEX. However, every review meeting need not
necessarily result in a change in the index constituents. In case of a revision in the Index
constituents, the announcement of the incoming and outgoing scrips is made six weeks in


advance of the actual implementation of the replacements in the Index, in accordance
with SEBI requirements.
Qualification Criteria: The general guidelines for selection of constituent scrips in S&P
BSE SENSEX are as follows.
A. Quantitative Criteria:
Market Capitalization: The scrip should figure in the Top 100 companies listed by
full market capitalization. The weight of each S&P BSE SENSEX scrip based on
free-float should be at least 0.5% of the Index. (Market Capitalization would be
averaged for last six months)
Trading Frequency: The scrip should have been traded on each and every trading
day for the last one year. Exception can be made for extreme reasons like scrip
suspension etc.
Average Daily Trades: The scrip should be among the Top 150 companies listed by
average number of trades per day for the last one year.
Average Daily Turnover: The scrip should be among the Top 150 companies listed
by average value of shares traded per day for the last one year.
B. Qualitative Criteria:
Track Record: In the opinion of the Committee, the company should have an
acceptable track record.

Regulated by appropriate foreign regulatory authority in the same
capacity/category where registration is sought from SEBI.
Permission under the provisions of the Foreign Exchange Management Act,
1999(FEMA) from the RBI.
Legally permitted to invest in securities outside country or its
incorporation/establishment.
The applicant must be a fit and proper person.
Local custodian and designated bank to route its transactions.



2.1 EXCHANGE RATE
a) Retail exchange market
People may need to exchange currencies in a number of situations. For example, people
intending to travel to another country may buy foreign currency in a bank in their home
country, where they may buy foreign currency cash, traveler's cheques or a travel-card.
From a local money changer they can only buy foreign cash. At the destination, the
traveler can buy local currency at the airport, either from a dealer or through an ATM.
They can also buy local currency at their hotel, a local money changer, through an ATM,
or at a bank branch. When they purchase goods in a store and they do not have local
currency, they can use a credit card, which will convert to the purchaser's home currency
at its prevailing exchange rate. If they have traveler's cheques or a travel card in the local
currency, no currency exchange is necessary. Then, if a traveler has any foreign currency
left over on their return home, they may want to sell it, which they may do at their local
bank or money changer. The exchange rate as well as fees and charges can vary
significantly on each of these transactions, and the exchange rate can vary from one day
to the next.
There are variations in the quoted buying and selling rates for a currency between foreign
exchange dealers and forms of exchange, and these variations can be significant. For
example, consumer exchange rates used by Visa and MasterCard offer the most
favorable exchange rates available, according to a Currency Exchange Study conducted
by CardHub.com. This studied consumer banks in the U.S., and Travelex, showed that
the credit card networks save travelers about 8% relative to banks and roughly 15%
relative to airport companies.
b) Quotations
A currency pair is the quotation of the relative value of a currency unit against the unit of
another currency in the foreign exchange market. The quotation EUR/USD 1.3533
means that 1 Euro is able to buy 1.3533 US dollar. In other words, this is the price of a
unit of Euro in US dollar. Here, EUR is called the "Fixed currency", while USD is called


the "Variable currency".
There is a market convention that determines which is the fixed currency and which is
the variable currency. In most parts of the world, the order is: EUR GBP AUD
NZD USD others. Accordingly, a conversion from EUR to AUD, EUR is the fixed
currency, AUD is the variable currency and the exchange rate indicates how many
Australian dollars would be paid or received for 1 Euro. Cyprus and Malta which were
quoted as the base to the USD and others were recently removed from this list when they
joined the Eurozone.
In some areas of Europe and in the non-professional market in the UK, EUR and GBP
are reversed so that GBP is quoted as the base currency to the euro. In order to determine
which the base currency is where both currencies are not listed (i.e. both are "other"),
market convention is to use the base currency which gives an exchange rate greater than
1.000. This avoids rounding issues and exchange rates being quoted to more than four
decimal places. There are some exceptions to this rule, for example, the Japanese often
quote their currency as the base to other currencies.
Quotes using a country's home currency as the price currency (for example, EUR
0.735342 = USD 1.00 in the Eurozone) are known as direct quotation or price quotation
(from that country's perspective) and are used by most countries.
Quotes using a country's home currency as the unit currency (for example, USD 1.35991
= EUR 1.00 in the Eurozone) are known as indirect quotation or quantity quotationand
are used in British newspapers and are also common in Australia, New Zealand and the
Eurozone.
Using direct quotation, if the home currency is strengthening (that is, appreciating, or
becoming more valuable) then the exchange rate number decreases. Conversely, if the
foreign currency is strengthening, the exchange rate number increases and the home
currency is depreciating.
Market convention from the early 1980s to 2006 was that most currency pairs were
quoted to four decimal places for spot transactions and up to six decimal places for
forward outrights or swaps. (The fourth decimal place is usually referred to as a "pip").


An exception to this was exchange rates with a value of less than 1.000 which were
usually quoted to five or six decimal places. Although there is not any fixed rule,
exchange rates with a value greater than around 20 were usually quoted to three decimal
places and currencies with a value greater than 80 were quoted to two decimal places.
Currencies over 5000 were usually quoted with no decimal places (for example, the
former Turkish Lira). e.g. (GBPOMR : 0.765432 - : 1.4436 - EURJPY : 165.29). In
other words, quotes are given with five digits. Where rates are below 1, quotes frequently
include five decimal places.
In 2005, Barclays Capital broke with convention by offering spot exchange rates with
five or six decimal places on their electronic dealing platform.
[5]
The contraction of
spreads (the difference between the bid and offer rates) arguably necessitated finer
pricing and gave the banks the ability to try and win transaction on multibank trading
platforms where all banks may otherwise have been quoting the same price. A number of
other banks have now followed this system.
c) Exchange rate regime
Each country, through varying mechanisms, manages the value of its currency. As part of
this function, it determines the exchange rate regime that will apply to its currency. For
example, the currency may be free-floating, pegged or fixed, or a hybrid.
If a currency is free-floating, its exchange rate is allowed to vary against that of other
currencies and is determined by the market forces of supply and demand. Exchange rates
for such currencies are likely to change almost constantly as quoted on financial markets,
mainly by banks, around the world.
A movable or adjustable peg system is a system of fixed exchange rates, but with a
provision for the revaluation (usually devaluation) of a currency. For example, between
1994 and 2005, the Chinese yuanrenminbi (RMB) was pegged to the United States dollar
at RMB 8.2768 to $1. China was not the only country to do this; from the end of World
War II until 1967, Western European countries all maintained fixed exchange rates with
the US dollar based on the Bretton Woods system. But that system had to be abandoned
in favor of floating, market-based regimes due to market pressures and speculations in


the 1970s.
Still, some governments strive to keep their currency within a narrow range. As a result,
currencies become over-valued or under-valued, leading to excessive trade deficits or
surpluses.
a) Bilateral vs. effective exchange rate
Bilateral exchange rate involves a currency pair, while an effective exchange rate is a
weighted average of a basket of foreign currencies, and it can be viewed as an overall
measure of the country's external competitiveness. A nominal effective exchange rate
(NEER) is weighted with the inverse of the asymptotic trade weights. A real effective
exchange rate (REER) adjusts NEER by appropriate foreign price level and deflates by
the home country price level. Compared to NEER, a GDP weighted effective exchange
rate might be more appropriate considering the global investment phenomenon.



2.2 Foreign Institutional Investor - FII
Investopedia explains 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 and Exchange Board of India to participate in the
market. One of the major market regulations pertaining to FIIs involves placing limits
on FII ownership in Indian companies.
a) Investment in Indian Companies by FIIs/NRIs/PIOs
Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of
Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets
in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs
can acquire shares/debentures of Indian companies through the stock exchanges in India.
The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the
Indian company and 10 per centfor NRIs/PIOs. The limit is 20 per cent of the paid up
capital in the case of public sector banks, including the State Bank of India.
The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory
ceiling, subject to the approval of the board and the general body of the company passing
a special resolution to that effect. And the ceiling of 10 per cent for NRIs/PIOs can be
raised to 24 per cent subject to the approval of the general body of the company passing a
resolution to that effect.
The ceiling for FIIs is independent of the ceiling of 10/24 per cent for NRIs/PIOs.
The equity shares and convertible debentures of the companies within the prescribed
ceilings are available for purchase under PIS subject to:
- the total purchase of all NRIs/PIOs both, on repatriation and non-repatriation basis,
being within an overall ceiling limit of (a) 24 per cent of the company's total paid up
equity capital and (b) 24 per cent of the total paid up value of each series of convertibl39e
debenture; and- the investment made on repatriation basis by any single NRI/PIO in the
equity shares and convertible debentures not exceeding five per cent of the paid up equity


capital of the company or five per cent of the total paid up value of each series of
convertible debentures issued by the company.
b) Monitoring Foreign Investments
The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian
companies on a daily basis. For effective monitoring of foreign investment ceiling limits,
the Reserve Bank has fixed cut-off points that are two percentage points lower than the
actual ceilings. The cut-off point, for instance, is fixed at 8 per cent for companies in
which NRIs/ PIOs can invest up to 10 per cent of the company's paid up capital. The cut-
off limit for companies with 24 per cent ceiling is 22 per cent and for companies with 30
per cent ceiling, is 28 per cent and so on. Similarly, the cut-off limit for public sector
banks (including State Bank of India) is 18 per cent.
Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs
reach the cut-off point, which is 2% below the overall limit, the Reserve Bank cautions all
designated bank branches so as not to purchase any more equity shares of the respective
company on behalf of FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The
link offices are then required to intimate the Reserve Bank about the total number and
value of equity shares/convertible debentures of the company they propose to buy on
behalf of FIIs/NRIs/PIOs. On receipt of such proposals, the Reserve Bank gives
clearances on a first-come-first served basis till such investments in companies reach 10 /
24 / 30 / 40/ 49 per cent limit or the sectoral caps/statutory ceilings as applicable. On
reaching the aggregate ceiling limit, the Reserve Bank advises all designated bank
branches to stop purchases on behalf of their FIIs/NRIs/PIOs clients. The Reserve Bank
also informs the general public about the `caution and the `stop purchase in these
companies through a press release.



2.3 Definition of 'Domestic Institutional Investors (DIIss)

Definition: Domestic institutional investors are those institutional investors which
undertake investment in securities and other financial assets of the country they are based
in.
Description: Institutional investment is defined to be the investment done by institutions
or organizations such as banks, insurance companies, mutual fund houses, etc in the
financial or real assets of a country. Simply stated, domestic institutional investors use
pooled funds to trade in securities and assets of their country.

These investment decisions are influenced by various domestic economic as well as
political trends. In addition to the foreign institutional investors, the domestic institutional
investors also affect the net investment flows into the economy.
a) Institutional investor
Institutional investors are organizations which pool large sums of money and invest
those sums in securities, real property and other investment assets. They can also include
operating companies which decide to invest their profits to some degree in these types of
assets.
Typical investors include banks, insurance companies, retirement or pension funds, hedge
funds, investment advisors and mutual funds. Their role in the economy is to act as highly


specialized investors on behalf of others. For instance, an ordinary person will have a
pension from his employer. The employer gives that person's pension contributions to a
fund. The fund will buy shares in a company, or some other financial product. Funds are
useful because they will hold a broad portfolio of investments in many companies. This
spreads risk, so if one company fails, it will be only a small part of the whole fund's
investment.
An institutional investor can have some influence in the management of corporations
because it will be entitled to exercise the voting rights in a company. Thus, it can actively
engage in corporate governance. Furthermore, because institutional investors have the
freedom to buy and sell shares, they can play a large part in which companies stay
solvent, and which go under. Influencing the conduct of listed companies, and providing
them with capital are all part of the job of investment management.
b) Ancient Rome and medieval Islam (History)
Roman law ignored the concept of juristic person, yet at the time the practice of private
evergetism (which dates to, at least, the 4th century BC in Greece) sometimes led to the
creation of revenues-producing capital which may be interpreted as an early form of
charitable institution. In some African colonies in particular, part of the city's
entertainment was financed by the revenue generated by shops and baking-ovens
originally offered by a wealthy benefactor. In the South of Gaul, aqueducts were
sometimes financed in a similar fashion.
The legal principle of juristic person might have appeared with the rise of monasteries in
the early centuries of Christianity. The concept then might have been adopted by the
emerging Islamic law. The waqf (charitable institution) became a cornerstone of the
financing of education, waterworks, welfare and even the construction of monuments.
Alongside some Christian monasteries the waqfs created in the 10th century AD are
amongst the longest standing charities in the world (see for instance the Imam Reza
shrine).


c) Pre-industrial Europe
Following the spread of monasteries, almhouses and other hospitals, donating sometimes
large sums of money to institutions became a common practice in medieval Western
Europe. In the process, over the centuries those institutions acquired sizable estates and
large fortunes in bullion. Following the collapse of the agrarian revenues, many of these
institution moved away from rural real estate to concentrate on bonds emitted by the local
sovereign (the shift dates back to the 15th century for Venice, and the 17th century for
France and the Dutch Republic). The importance of lay and religious institutional
ownership in the pre-industrial European economy cannot be overstated, they commonly
possessed 10 to 30% of a given region arable land.
In the 18th century, private investors pool their resources to pursue lottery tickets and
tontine shares allowing them to spread risk and become some of the earliest speculative
institutions known in the West.
Before 1980
Following several waves of dissolution (mostly during the Reformation and the
Revolutionary period) the weight of the traditional charities in the economy collapsed; by
1800, institutions solely owned 2% of the arable land in England and Wales. New types
of institutions emerged (banks, insurance companies), yet despite some success stories,
they failed to attract a large share of the public's savings and, for instance, by 1950, they
owned only 7% of US equities and certainly even less in other countries.
d) Overview
Because of their sophistication, institutional investors may often participate in private
placements of securities, in which certain aspects of the securities laws may be
inapplicable. For example, in the United States, a private placement under Rule 506 of
Regulation D may be made to an "accredited investor" without registering the offering of
securities with the U.S. Securities and Exchange Commission. In essence institutional
investor, an accredited investor is defined in the rule as:


a bank, insurance company, registered investment company (generally speaking, a
mutual fund), business development company, or small business investment
company;
an employee benefit plan, within the meaning of the Employee Retirement Income
Security Act, if a bank, insurance company, or registered investment adviser
makes the investment decisions, or if the plan has total assets in excess of
$5 million;
a charitable organization, corporation, or partnership with assets exceeding
$5 million;
a natural person with income exceeding $200,000 in each of the two most recent
years or joint income with a spouse exceeding $300,000 for those years and a
reasonable expectation of the same income level in the current year; or
A trust with assets in excess of $5 million, not formed to acquire the securities
offered, whose purchases a sophisticated person makes.
g) Economic theory
By definition, institutional investors are opposed to individual actors on the financial
markets. This specificity has majors consequences in the eyes of economic theory.
Institutional investors as financial intermediaries
Numerous institutional investors act as intermediaries between lenders and borrowers. As
such, they have a critical importance in the functioning of the financial markets.
Economies of scale imply that they increase returns on investments and diminish the cost
of capital for entrepreneurs. Acting as savings pools, they also play a critical role in
guaranteeing a sufficient diversification of the investors' portfolios. Their greater ability
to monitor corporate behavior as well to select investors profiles implies that they help
diminish agency costs.
h) Life cycle
Institutional investors differ among each other but they all have in common the fact of not
sharing the same life cycle as human beings. Unlike individuals, they do not have a phase
of accumulation (active work life) followed by one of consumption (retirement), and they
do not die. Here insurance companies differ from the rest of the institutional investors; as
they cannot guess when they will have to repay their clients, they need highly liquid


assets which reduces their investment opportunities. Others like pension funds can predict
long ahead when they will have to repay their investors allowing them to invest in less
liquid assets such as private equities, hedge funds or commodities. Finally, other
institutions have an investment horizon extremely vast allowing them to invest in highly
illiquid assets since they are unlikely to be forced to sell them before term. A famous
example of this type of investors are US universities endowment funds.
i) Institutional-investor types
endowment fund
hedge fund
insurance companies
investment banking
investment trust
mutual fund
pension fund
sovereign wealth fund
unit trust
unit investment trust
Regional

In various countries different types of institutional investors may be more important. In
oil-exporting countries sovereign wealth funds are very important, while in developed
countries, pension funds may be more important.



2.4 BSE
a) Formula for Calculation of Index

All BSE indices (except BSE-PSU index) are calculated using following formula

For calculation of BSE-PSU index, full market capitalization of index constituents is
considered instead of free-float market capitalization. Dollex-30, Dollex-100 and Dollex-
200 are dollar-linked versions of SENSEX, BSE-100 and BSE-200 index. BSE IPO index
& BSE TASIS Shariah 50 Index is calculated using following formula
Capped market capitalization of index constituents/ Base Market capitalization * Base
Index Value
Where capped market capitalization for scrips in BSE IPO Index and BSE TASIS Shariah
50 Index is arrived by multiplying free-float adjusted market capitalisation of individual
scrip with its respective capping factor. Such capping factor is assigned to the index
constituent to ensure that no single scrip based on its free-float market capitalisation
exceeds weightage of 20% in case BSE IPO Index and 8% in case of BSE TASIS Shariah
50 Index at the time of rebalancing. In case, weightage of all the constituents in the index
is below 20% & 8% respectively, each company would be assigned capping factor of 1.
b) Index Closure Algorithm
The closing index value on any trading day is computed taking the weighted average of
all the trades of index constituents in the last 30 minutes of trading session. If an index
constituent has not traded in the last 30 minutes, the last traded price is taken for
computation of the index closure. If an index constituent has not traded at all in a day,
then its last day's closing price is taken for computation of index closure. The use of index
closure algorithm prevents any intentional manipulation of the closing index value.
c) Maintenance of BSE Indices
One of the important aspects of maintaining continuity with the past is to update the base
year average. The base year value adjustment ensures that replacement of stocks in Index,
additional issue of capital and other corporate announcements like 'rights issue' etc. do not
destroy the historical value of the index. The beauty of maintenance lies in the fact that
adjustments for corporate actions in the Index should not per se affect the index values.


The Department of BSE Indices does the day-to-day maintenance of the index within the
broad index policy framework set by the BSE Index Committee. Department of BSE
Indices ensures that all BSE Indices maintain their benchmark properties by striking a
delicate balance between frequent replacements in index and maintaining its historical
continuity. The BSE Index Committee comprises capital market expert, fund managers,
market participants, members of BSE Governing Board.
d) On - Line Computation of the Index
During trading hours, value of the indices is calculated and disseminated on real time
basis. This is done automatically on the basis of prices at which trades in index
constituents are executed.
e) Adjustment for Bonus, Rights and Newly Issued Capital
Index calculation needs to be adjusted for issue of bonus and rights issue. If no
adjustments were made, a discontinuity would arise between the current value of the
index and its previous value despite the non-occurrence of any economic activity of
substance. At the BSE Index Cell, the base value is adjusted, which is used to alter market
capitalization of the component stocks to arrive at the index value.
The BSE Indices Department keeps a close watch on the events that might affect the
index on a regular basis and carries out daily maintenance of all BSE Indices.
Adjustments for Rights Issues
When a company, included in the compilation of the index, issues right shares, the free-
float market capitalization of that company is increased by the number of additional
shares issued based on the theoretical (ex-right) price. An offsetting or proportionate
adjustment is then made to the Base Market capitalization.
Adjustments for Bonus Issue
When a company, included in the compilation of the index, issues bonus shares, the
market capitalization of that company does not undergo any change. Therefore, there is
no change in the Base Market capitalization; only the 'number of shares' in the formula is
updated.
Other Issues


Base Market capitalization Adjustment is required when new shares are issued by way of
conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of
buy-back of shares, corporate restructuring etc.
Base Market capitalization Adjustment
The formula for adjusting the Base Market capitalization is as follows:

To illustrate, suppose a company issues additional shares, which increases the
market capitalization of the shares of that company by say, Rs.100 crore. The
existing Base Market capitalization (Old Base Market capitalization), say, is
Rs.2450 crore and the aggregate market capitalization of all the shares included in
the index before this issue is made is, say Rs.4781 crore. The "New Base Market
capitalization" will then be:

This figure of Rs. 2501.24 crore will be used as the Base Market capitalization for
calculating the index number from then onwards till the next base change becomes
necessary.
F) Technology
Eurex Group and the Bombay Stock Exchange (BSE) announced on 13 March 2013that
they have agreed to deepen their strategic partnership through a long-term technology
alliance under which BSE will join the Eurex technology roadmap and deploy Deutsche
Bores Groups trading architecture in a first step. BSE aims to replace its derivatives
market platform in the course of 2013 and plans to subsequently replace also its cash
market plat-form. This agreement is an important step in further developing the strategic
partnership be-tween Eurex and BSE.


The new partnership in the technology sphere will allow BSE to quickly achieve the
highest global standards for speed, reliability and order-handling capacity. It will bring to
BSE state-of-the art levels of capacity and latency, already in place at the International
Securities Exchange (ISE) since summer 2011 and in roll-out at Eurex Exchange. By
aligning BSE, Eurex Exchange and ISE markets on a common trading infrastructure, IT
costs for shared customers will be significantly reduced. This will also reduce technology
development and installation efforts for Eurex and ISE members who wish to connect to
BSE and vice versa as well as strengthen the case for cross-listing.
We expect our technology alliance with Eurex will help BSE to compete more
effectively in India, to help us attract more international participants into our marketplace
and improve our market share in derivatives and equity trading, said Ashish Chauhan,
MD and CEO of BSE. It will quickly put BSE into the Premier League of exchanges in
terms of the performance of our matching engine and overall technology infrastructure.
This technology alliance strengthens our long-term partnership with BSE, and is another
milestone in our Asian strategic roadmap, in which India obviously plays an important
role. This technology alliance also contributes to growing our global liquidity network,
based on common market infrastructure, for the benefit of both our partners and our
members, said Andreas Preuss, CEO of Eurex and Deputy CEO of Deutsche Brse AG.
g) Selection stocks for Sensex
SENSEX consists of 30 top scrips from different sectors. BSE has some strict guidelines
to select scrip into SENSEX. Scrip Selection Criteria for Sensex are
Listed history Listing history of at least 3 months at BSE, preferably more than
one year
Trading frequency Should trade each and every trading day
Final rank - The scrip should figure in the top 100 companies listed by final rank.
The final rank is arrived at by assigning 75% weightage to the rank on the basis of
three-month average full market capitalization and 25% weightage to the liquidity
rank based on three-month average daily turnover & three-month average impact
cost.


Market Capitalization - The weightage of each scrip in SENSEX based on three-
month average free-float market capitalization should be at least 0.5% of the
Index.
Industry/Sector Representation: Scrip selection would generally take into account
a balanced representation of the listed companies in the universe of BSE.
Track Record: In the opinion of the BSE Index Committee, the company should
have an acceptable track record.



3.1 Introduction:
a) Title of The project Impact of exchange rate fluctuation on stock market, FII and
DIIS
It includes the effect of currency rates changes on above mentioned factors.
3.2 Objective:
Analysis of currency rates fluctuation and to study the effect of on following factors
a) Stock Market
b) FII
c) DIIS
3.3 Importance of the study:
a) The analysis will be useful to investors of stock market for investing in securities
at appropriate time with the study of past data which will be sited in the project.
b) It will help government know the investment made by the Indian resident in the
capital market
c) It will help government know the investment made by the foreigners in the capital
market of india
3.4 Research Methodology:
a) Types of research design: Causal research will be used to study the impact of
currency fluctuation (cause) on above sited factors (effect).
b) Collection of data: secondary data.
c) Data collection technique:
Method- I will use scientific method for data collection
Sampling frame- sampling frame includes stock market, Foreign Institutional
Investment( FII) And Domestic Institutional Investment (DIIS)
3.5 Limitation:
a) Secondary data for analysis and preparation may not be reliable enough
b) Past data may not be useful for future forecast



3.6. Scope:
a) Investors in stock market will have useful information regarding their investment
b) The study can be extended to analyze the impact of exchange rate on other
economic variables like FIIs, FDIs, sectoral performance etc.
c) The study can be used by investors to study the pattern of past and thereby making
future investment.
d) The study can be used by foreign investors to get an overview of Indian economy
and thereby making future prospects for investment in the economy.
3.7 Correlation Coefficient:
Definition
Pearson's correlation coefficient between two variables is defined as the covariance of the
two variables divided by the product of their standard deviations. The form of the
definition involves a "product moment", that is, the mean (the first moment about the
origin) of the product of the mean-adjusted random variables; hence the modifier product-
moment in the name.
Mathematical properties
The absolute values of both the sample and population Pearson correlation coefficients
are less than or equal to 1. Correlations equal to 1 or 1 correspond to data points lying
exactly on a line (in the case of the sample correlation), or to a bivariate distribution
entirely supported on a line (in the case of the population correlation). The Pearson
correlation coefficient is symmetric: corr(X,Y) = corr(Y,X).
A key mathematical property of the Pearson correlation coefficient is that it is invariant
(up to a sign) to separate changes in location and scale in the two variables. That is, we
may transform X to a + bX and transform Y to c + dY, where a, b, c, and d are constants,
without changing the correlation coefficient (this fact holds for both the population and
sample Pearson correlation coefficients). Note that more general linear transformations do
change the correlation: see a later section for an application of this.


The Pearson correlation can be expressed in terms of uncentered moments. Since
X
=
E(X),
X
2
= E[(X E(X))
2
] = E(X
2
) E
2
(X) and likewise for Y, and since

The correlation can also be written as

Alternative formulae for the sample Pearson correlation coefficient are also available:

The second formula above needs to be corrected for a sample:

Interpretation
The correlation coefficient ranges from 1 to 1. A value of 1 implies that a linear
equation describes the relationship between X and Y perfectly, with all data points lying
on a line for which Y increases as X increases. A value of 1 implies that all data points
lie on a line for which Y decreases as X increases. A value of 0 implies that there is no
linear correlation between the variables.
More generally, note that (X
i
X) (Y
i
Y) is positive if and only if X
i
and Y
i
lie on the
same side of their respective means. Thus the correlation coefficient is positive if X
i
and
Y
i
tend to be simultaneously greater than, or simultaneously less than, their respective
means. The correlation coefficient is negative if X
i
and Y
i
tend to lie on opposite sides of
their respective means.



4.1 comparison between exchange rate and Sensex (2011)

The correlation coefficient between exchange rate and Sensex in the year 2011 is -
0.77135
Interpretation: - The above correlation signifies that there is high negative correlation
between exchange rate and Sensex. It means that when exchange rate goes up Sensex
reduce to a great extent in comparison to dollar

0
10
20
30
40
50
60
0
5000
10000
15000
20000
25000
E
X
C
H
A
N
G
E

R
A
T
E

S
E
N
S
E
X

DATE
SENSEX Dollar Rate


4.2 Comparison between exchange rate and Sensex (2012)

The correlation coefficient between exchange rate and Sensex in the year 2012 is -0.10143
Interpretation: - The above correlation signifies that there is low negative correlation
between exchange rate and Sensex. It means that when exchange rate goes up Sensex
reduce.

44
46
48
50
52
54
56
58
0
5000
10000
15000
20000
25000
E
X
C
H
A
N
G
E

R
A
T
E

S
E
N
S
E
X

DATE
sensex dollar rate


4.3 Comparison between exchange rate and Sensex (2013)

The correlation coefficient between exchange rate and Sensex in the year 2013 is
0.044348
Interpretation: - The above correlation signifies that there is no relation or very less
relation between exchange rate and Sensex. It means that when exchange rate goes up
Sensex there is no effect or less effect on Sensex.

0
10
20
30
40
50
60
70
80
16000
17000
18000
19000
20000
21000
22000
E
X
C
H
A
N
G
E

R
A
T
E

S
E
N
S
E
X

DATE
sensex dollar rate


4.4 Comparison between exchange rate and FIIs (2011)

The correlation coefficient between exchange rate and FII in the year 2012 is--0.09663
between exchange rate and DIIS. It means that when exchange rate goes up FII reduce.

-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
0
10
20
30
40
50
60
F
I
I
S

E
X
C
H
A
N
G
E

R
A
T
E

DATE
dollar rate fiis



The correlation coefficient between exchange rate and FII in the year 2012 is-0.20816
between exchange rate and DIIS. It means that when exchange rate goes up FII reduce.

44
46
48
50
52
54
56
58
-2000
0
2000
4000
6000
8000
10000
E
X
C
H
A
N
G
E

R
A
T
E

F
I
I
S

DATE
FIIS dollar rate



The correlation coefficient between exchange rate and FII in the year 2013 is 0.27712
Interpretation: - The above correlation signifies that there is low positive correlation
between exchange rate and DIIS. It means that when exchange rate goes up FII also goes
up.

0
10
20
30
40
50
60
70
80
-3000
-2000
-1000
0
1000
2000
3000
4000
E
X
C
H
A
N
G
E

R
A
T
E

F
I
I

DATE
Fiis dollar rate


4.7 Comparison between exchange rate and DIIs (2011)

The correlation coefficient between exchange rate and DIIS in the year 2011 is 0.175655
between exchange rate and DIIS. It means that when exchange rate goes up DIIS also
goes up.

0
10
20
30
40
50
60
-2000
-1500
-1000
-500
0
500
1000
1500
2000
E
X
C
H
A
N
G
E

R
A
T
E

D
I
I
S

DATE
DII Dollar Rate



The correlation coefficient between exchange rate and DIIS in the year 2012 is -0.23131
between exchange rate and DIIS. It means that when exchange rate goes up DIIS
reduce.

44
46
48
50
52
54
56
58
-1500
-1000
-500
0
500
1000
E
X
C
H
A
N
G
E

R
A
T
E

D
I
I
S

DATE
Chart Title
DII
DOLAR
RATE



between exchange rate and DIIS. It means that when exchange rate goes up DIIS also
goes up.

0
10
20
30
40
50
60
70
80
-2000
-1500
-1000
-500
0
500
1000
1500
D
O
L
A
L
R

R
A
T
E

D
I
I
S

DATE
DII DOLLAR RATE


4.10 Comparison between exchange rate and Sensex (3 years)



between exchange rate and DIIS. It means that when exchange rate goes up SENSEX
also goes up.






The correlation coefficient between exchange rate and FII in the 3 year is 0.125457
between exchange rate and FII. It means that when exchange rate goes up SENSEX also
goes up.






The correlation coefficient between exchange rate and DIIS in the 3 year is -0.23071
between exchange rate and DIIS. It means that when exchange rate goes up DIIS
reduce.



Conclusion

The study conducted observed that due to the fluctuation in the currency rate affects
investments by FIIs, DIISs and on Sensex are quite closely correlated in India and FIIs
yield significant influence on the Indian economy. There is little doubt that FII inflows
have significantly grown in importance over the last few years According to findings and
results, concluded that FII did have high significant impact on the Indian capital market.
FIIS have positive impact on BSE Sensex.

However there are other major factors that are influenced by fluctuation in the currency
rate such as crude oil, imports and exports the bourses in the stock market, but FIIs and
DIISs are definitely one of the factors. This signifies that as the value Indian rupee is
inflated there will be more investment from the FIIs side because of the capital market is
affected the most and on the counterpart DIISs will take hold position as market is going
vulnerably to upward direction and will not make any new investment as due to the risk in
the market. In the absence of any other substantial form of capital inflows, the potential
effects of a reduction in the FII flows into the Indian economy can be severe which can be
seen at the time of U.S subprime crisis. Data on trading activity of FIIs, that FIIs are
becoming more important at the margin as an increasingly higher share of stock market
turnover is accounted for by FII trading. Moreover, the findings of this study also indicate
that Foreign Institutional Investors have emerged as the most dominant investor group in
the domestic stock market in India. Particularly, in the companies that constitute the
Bombay Stock Market Sensitivity Index (Sensex), their level of control is very high. Data
on shareholding pattern show that the FIIs are currently the most dominant non-promoter
shareholder in most of the Sensex companies and they also control more tradable shares
of Sensex companies than any other investor groups.

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Impact Of Currency Fluctuation on FII, SENSEX, DIIS

Navnirman Institute Of Management Page 1

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