Evolution of government regulations and foreign equity participation in various sectors of Indian economy since 1990: a study on the effect of globalization on domestic equity markets

Abstract

This paper seeks to changes and impact of foreign investment policies on domestic Indian markets. The paper has outlined the journey that the government has taken with respect to rules and regulations for FDI since independence in 1947. The sentiment towards liberalization of the economy has oscillated over the decades, but with 1990s being the inflection point with regulations being the most foreign investment friendly. The paper suggests that the step wise easing of regulations of firms made India a favorable destination for investment leading to a gradual increase in foreign ownership of firms. After an analysis of 40 large cap firms from the National Stock Exchange, the monthly stock returns of firms were found to be highly dependent on the overall domestic index movement. The null hypothesis of stock returns to be solely dependent on its fundamentals was rejected. The study showed statistically significant impact of foreign ownership that decreased influence of the Indian stock index on the stock returns of the firm.