INTRODUCTION

These three letters stand for foreign direct investment. The simplest explanation of FDI

would be a direct investment by a corporation in a commercial venture in another country. A

key to separating this action from involvement in other ventures in a foreign country is that

the business enterprise operates completely outside the economy of the corporation’s home

country. The investing corporation must control 10 percent or more of the voting power of

the new venture.

According to history the United States was the leader in the FDI activity dating back as far as

the end of World War II. Businesses from other nations have taken up the flag of FDI,

including many who were not in a financial position to do so just a few years ago.

The practice has grown significantly in the last couple of decades, to the point that FDI has

generated quite a bit of opposition from groups such as labor unions. These organizations

have expressed concern that investing at such a level in another country eliminates jobs.

Legislation was introduced in the early 1970s that would have put an end to the tax incentives

of FDI. But members of the Nixon administration, Congress and business interests rallied to

make sure that this attack on their expansion plans was not successful. One key to

understanding FDI is to get a mental picture of the global scale of corporations able to make

such investment. A carefully planned FDI can provide a huge new market for the company,

perhaps introducing products and services to an area where they have never been available.

Not only that, but such an investment may also be more profitable if construction costs and

labor costs are less in the host country.

The definition of FDI originally meant that the investing corporation gained a significant

number of shares (10 percent or more) of the new venture. In recent years, however,

companies have been able to make a foreign direct investment that is actually long-term

management control as opposed to direct investment in buildings and equipment.

FDI growth has been a key factor in the “international” nature of business that many are

familiar with in the 21st century. This growth has been facilitated by changes in regulations

both in the originating country and in the country where the new installation is to be built.

Corporations from some of the countries that lead the world’s economy have found fertile

soil for FDI in nations where commercial development was limited, if it existed at all. The

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dollars invested in such developing-country projects increased 40 times over in less than 30

years. The financial strength of the investing corporations has sometimes meant failure for

smaller competitors in the target country. One of the reasons is that foreign direct investment

in buildings and equipment still accounts for a vast majority of FDI activity. Corporations

from the originating country gain a significant financial foothold in the host country. Even

with this factor, host countries may welcome FDI because of the positive impact it has on the

smaller economy.

Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such

as factories, mines and land. Increasing foreign investment can be used as one measure of

growing economic globalization. Figure below shows net inflows of foreign direct investment

as a percentage of gross domestic product (GDP). The largest flows of foreign investment

occur between the industrialized countries. But flows to non-industrialized countries are

increasing sharply.Foreign direct investment (FDI) refers to long term participation by

country A into country B.

It usually involves participation in management, joint-venture, transfer of

technology and expertise. There are two types of FDI: inward foreign direct investment and

outward foreign direct investment, resulting in a net FDI inflow (positive or

negative) .Foreign direct investment reflects the objective of obtaining a lasting interest by a

resident entity in one economy (‘‘direct investor’’) in an entity resident in an economy other

than that of the investor (‘‘direct investment enterprise’’).The lasting interest implies the

existence of a long-term relationship between the direct investor and the enterprise and a

significant degree of influence on the management of the enterprise. Direct investment

involves both the initial transaction between the two entities and all subsequent capital

transactions between them and among affiliated enterprises, both incorporated and

unincorporated.

• Foreign Direct Investment – when a firm invests directly in production or other

facilities, over which it has effective control, in a foreign country.

• Manufacturing FDI requires the establishment of production facilities.

• Service FDI requires building service facilities or an investment foothold via capital

contributions or building office facilities.

• Foreign subsidiaries – overseas units or entities.

• Host country – the country in which a foreign subsidiary operates.

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• Flow of FDI – the amount of FDI undertaken over a given time.

• Stock of FDI – total accumulated value of foreign-owned assets.

• Outflows/Inflows of FDI – the flow of FDI out of or into a country.

• Foreign Portfolio Investment – the investment by individuals, firms, or public

bodies in foreign financial instruments.

• Stocks, bonds, other forms of debt.

• Differs from FDI, which is the investment in physical assets.

Portfolio theory – the behavior of individuals or firms administering large amounts of

financial assets.

Product Life-Cycle Theory :

• Ray Vernon asserted that product moves to lower income countries as products move

through their product life cycle.

• The FDI impact is similar: FDI flows to developed countries for innovation, and from

developed countries as products evolve from being innovative to being mass-

produced.

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OBJECTIVE OF STUDY

To know the flow of investment in India .

To know how can India Grow by Investment.

To Examine the trends and patterns in the FDI across different sectors and from

different countries in India .

To know in which sector we can get more foreign currency in terms of investment in

India.

To know which country s safe to invest.

To know how much to invest in a developed country or in a developing.

To know Which sector is good for investment.

To know which country in investing in which country .

To know the reason for investment in India.

Influence of FII on movement of Indian stock exchange .

To understand the FII & FDI policy in India.

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LITERATURE REVIEW

Gulshan Akhtar (2013), in his paper “Inflows of Foreign Direct Investment in India”

focuses on potential impact of FDI in the growth and development of Indian

economy. FDI acts as a catalyst for domestic industrial development and considered

to be an important vehicle for economic development. The study finds out that during

pre liberalization period FDI increased at CAGR of 19.05% while during post

liberalization period it has grown 24.28%. Since 1991 FDI inflows in India has

increased approximately by more than 165 times.

K.R. Kaushik & Dr. Kapil Kumar Bansal (2012), in their research article “Foreign

Direct Investment in Indian Retail Sector” highlights division of retail industry in

India, FDI policy with regard to retailing, foreign investor’s concern regarding FDI in

retail sector and Government viewpoint. The article highlights the mixed response

about FDI in retail sector with major reason to oppose is FDI in retail can be harmful

to local retailers in India. The article concludes that FDI in retail sector may boost the

socio economic development of the entire country if implemented wisely carefully

while signing the agreements with the Foreign Investors.

Dr. Jasbir Singh, Ms. Sumita Chadha & Dr. Anupama Sharma (2012), in their

research paper “Role of FDI in India” focus on how Foreign Direct Investment helps

in reducing the defect of BOP. Foreign Direct Investment is one and only major

instrument of attracting International Economic Integration in any economy. It serves

as a link between investment and saving. Many developing countries like India are

facing the deficit of savings. This problem can be solved with the help of Foreign

Direct Investment. The analytical study in this paper concludes that we should

welcome inflow of foreign investment in such way that it should be convenient and

favorable for Indian economy and enable us to achieve our cherished goal like rapid

economic development, removal of poverty, internal personal disparity in the

development and making our Balance of Payment favorable.

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Pankaj Sinha and AnushreeSinghal (2013), in their research article “FDI in Retail in

India” focuses on the relationship between FDI in retail and seven macroeconomic

factors – Exchange

SIMSR Project Report DiptiPatil Foreign Direct Investment in India - An Analytical

Study Page 13/42 rate (yoy%), Inflation (CPI), GDP growth, Index of Industrial

Production, Trade Openness, Unemployment rate and Tax as a percentage of nominal

GDP. This research also recommends the government of India to shift focus and not

rely much on FDI in retail to act as a game changer. Indian Government should

emphasize on building infrastructural facilities especially developing transportation

systems like roadways and railways, setting up economic zones for warehousing

facility, streamlining labour laws, planning urbanization to ensure adequate

availability of quality real estate, high street and implementing GST to give new

dimensions to modern organized retail in India.

Parekh, Paresh (2010) states that it is worth debating whether it is really necessary to

putconditions such as mandatoryrural employment creation and mandatory investment

inbackendinfrastructure, etc while permitting FDI. One needs to be mindful that the

conditions do notbecome a burden, making investment commercially unattractive start

with, in which case thepotential benefits of permitting FDI in retail will not be

realized in the absence of scale ofinvestments.

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RESEARCH METHODO LOGY

Research methodology is simple framework or plan for the study that is as guide in collection

and analyzing the data. It is the blue print that is followed in completes the study. Thus, good

research methodology ensures the completion of project efficiency and affectivity. Since

there are many aspect of research methodology, the line of action has to be chosen from the

variety of alternatives, to choose the suitable method through the assessment from various

alternatives.

Research methodology gives the researcher an opportunity to put forward

his argument for having opted for certain alternatives and also at the same time he can justify

his ruling out some other possibility likes. Why research study has been undertaken, how the

research problem has been formulated what data has been collected, what particular

technique if analyzing the data has been used and lot of similar type question are usually

answered when we talk of research problem in study.

Data collection

This study is based on secondary data. The required data have been collected from various

sources i.e. World Investment Reports, Asian Development Bank’s Reports, various Bulletins

of Reserve Bank of India, publications from Ministry of Commerce, Govt. of India,

Economic and Social Survey of Asia and the Pacific, United Nations, Asian Development

Outlook, Country Reports on Economic Policy and Trade Practice- Bureau of Economic and

Business Affairs, U.S. Department of State and from websites of World Bank, IMF, WTO,

RBI, UNCTAD, EXIM Bank etc.. It is a time series data and the relevant data have been

collected for the period 1991 to 2015.

Data collection:

Secondary Data:

Internet, Books, newspapers, journals and books, other reports and projects, literatures

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Tools and techniques of analyzing data-

FII:

Correlation: We have used the Correlation tool to determine whether two ranges of

data move together — that is, how the Sensex, Bankex, IT, Power and Capital Goods

are related to the FII which may be positive relation, negative relation or no relation.

We will use this model for understanding the relationship between FII and stock

indices returns. FII is taken as independent variable. Stock indices are taken as

dependent variable

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Types of Foreign Direct Investment:

An Overview

FDIs can be broadly classified into two types:

1 Outward FDIs

2 Inward FDIs

This classification is based on the types of restrictions imposed, and the various prerequisites

required for these investments. 

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Outward FDI: An outward-bound FDI is backed by the government against all types of

associated risks. This form of FDI is subject to tax incentives as well as disincentives of

various forms. Risk coverage provided to the domestic industries and subsidies granted to the

local firms stand in the way of outward FDIs, which are also known as 'direct investments

abroad.' 

Inward FDIs: Different economic factors encourage inward FDIs. These include interest

loans, tax   breaks , grants, subsidies, and the removal of restrictions and limitations. Factors

detrimental to the growth of FDIs include necessities of differential performance and

limitations related with ownership patterns. 

Other categorizations of FDI 

Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when

a multinational corporation owns some shares of a foreign enterprise, which supplies input for it

or uses the output produced by the MNC. 

Horizontal foreign direct investments happen when a multinational company carries out a

similar business operation in different nations.

• Horizontal FDI – the MNE enters a foreign country to produce the same products

product at home.

• Conglomerate FDI – the MNE produces products not manufactured at home.

• Vertical FDI – the MNE produces intermediate goods either forward or backward in

the supply stream.

• Liability of foreignness – the costs of doing business abroad resulting in a competitive

disadvantage.

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Methods of Foreign Direct Investments :

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in

an economy through any of the following methods:

by incorporating a wholly owned subsidiary or company

by acquiring shares in an associated enterprise

through a merger or an acquisition of an unrelated enterprise

participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:

lowcorporate tax and income tax rates

tax holidays

other types of tax concessions

preferential tariffs

special economic zones

investment financial subsidies

soft loan or loan guarantees

free land or land subsidies

relocation & expatriation subsidies

job training & employment subsidies

infrastructure subsidies

R&D support

derogation from regulations (usually for very large projects)

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Entry Mode

• The manner in which a firm chooses to enter a foreign market through FDI.

– International franchising

– Branches

– Contractual alliances

– Equity joint ventures

– Wholly foreign-owned subsidiaries

• Investment approaches:

– Greenfield investment (building a new facility)

– Cross-border mergers

– Cross-border acquisitions

– Sharing existing facilities

FDI Impact on Domestic Enterprises

Foreign invested companies are likely more productive than local competitors.

– The result is uneven competition in the short run, and competency building

efforts in the longer term.

– It is likely that FDI developed enterprises will gradually develop local

supporting industries, supplier relationships in the host country.

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FOREIGN DIRECT INVESTMENT IN INDIA

The economy of India is the third largest in the world as measured by purchasing power

parity (PPP), with a gross domestic product (GDP) of US $3.611 trillion. When measured in

USD exchange-rate terms, it is the tenth largest in the world, with a GDP of US $800.8

billion (2006). is the second fastest growing major economy in the world, with a GDP growth

rate of 8.9% at the end of the first quarter of 2006-2007. However, India's huge population

results in a per capita income of $3,300 at PPP and $714 at nominal.

The economy is diverse and encompasses agriculture, handicrafts, textile, manufacturing, and

a multitude of services. Although two-thirds of the Indian workforce still earn their livelihood

directly or indirectly through agriculture, services are a growing sector and are playing an

increasingly important role of India's economy. The advent of the digital age, and the large

number of young and educated populace fluent in English, is gradually transforming India as

an important 'back office' destination for global companies for the outsourcing of their

customer services and technical support.

India is a major exporter of highly-skilled workers in software and financial services, and

software engineering. India followed a socialist-inspired approach for most of its independent

history, with strict government control over private sector participation, foreign trade, and

foreign direct investment. However, since the early 1990s, India has gradually opened up its

markets through economic reforms by reducing government controls on foreign trade and

investment. The privatization of publicly owned industries and the opening up of certain

sectors to private and foreign interests has proceeded slowly amid political debate. India faces

a burgeoning population and the challenge of reducing economic and social inequality.

Poverty remains a serious problem, although it has declined significantly since independence,

mainly due to the green revolution and economic reforms. FDI up to 100% is allowed under

the automatic route in all activities/sectors except the following which will require approval

of the Government: Activities/items that require an Industrial License; Proposals in which the

foreign collaborator has a previous/existing venture/tie up in India

FDI in India includes, FDI inflows as well as FDI outflow from India. Also FDI foreign

direct investment and FII foreign institutional investors are a separate case study while

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preparing a report on FDI and economic growth in India. FDI and FII in India have registered

growth in terms of both FDI flows in India and outflow from India. The FDI statistics and

data are evident of the emergence of India as both a potential investment market and

investing country.  FDI has helped the Indian economy grow, and the government continues

to encourage more investments of this sort - but with $5.3 billion in FDI . India gets less than

10% of the FDI of China. Foreign direct investment (FDI) in India has played an important

role in the development of the Indian economy. FDI in India has - in a lot of ways - enabled

India to achieve a certain degree of financial stability, growth and development. This money

has allowed India to focus on the areas that may have needed economic attention, and address

the various problems that continue to challenge the country.  India has continually sought to

attract FDI from the world’s major investors.

In 1998 and 1999, the Indian national government announced a number of reforms designed

to encourage FDI and present a favorable scenario for investors. FDI investments are

permitted through financial collaborations, through private equity or preferential allotments,

by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in

the arms, nuclear, railway, coal & lignite or mining industries. A number of projects have

been announced in areas such as electricity generation, distribution and transmission, as well

as the development of roads and highways, with opportunities for foreign investors. The

Indian national government also provided permission to FDIs to provide up to 100% of the

financing required for the construction of bridges and tunnels, but with a limit on foreign

equity of INR 1,500 crores, approximately $352.5m. Currently, FDI is allowed in financial

services, including the growing credit card business.

These services include the non-banking financial services sector. Foreign investors can buy

up to 40% of the equity in private banks, although there is condition that stipulates that these

banks must be multilateral financial organizations. Up to 45% of the shares of companies in

the global mobile personal communication by satellite services (GMPCSS) sector can also be

purchased. By 2004, India received $5.3 billion in FDI, big growth compared to previous

years, but less than 10% of the $60.6 billion that flowed into China. Why does India, with a

stable democracy and a smoother approval process, lag so far behind China in FDI amounts? 

Although the Chinese approval process is complex, it includes both national and regional

approval in the same process. Federal democracy is perversely an impediment for India.

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Investment Risks in India:

SovereignRisk

India is an effervescent parliamentary democracy since its political freedom from British rule

more than 50 years ago. The country does not face any real threat of a serious revolutionary

movement which might lead to a collapse of state machinery. Sovereign risk in India is hence

nil for both "foreign direct investment" and "foreign portfolio investment." Many Industrial

and Business houses have restrained themselves from investing in the North-Eastern part of

the country due to unstable conditions. Nonetheless investing in these parts is lucrative due to

the rich mineral reserves here and high level of literacy. Kashmir on the northern tip is a

militancy affected area and hence investment in the state of Kashmir are restricted by law

Political Risk

India has enjoyed successive years of elected representative government at the Union as well

as federal level. India suffered political instability for a few years in the sense there was no

single party which won clear majority and hence it led to the formation of coalition

governments. However, political stability has firmly returned since the general elections in

1999, with strong and healthy coalition governments emerging. Nonetheless, political

instability did not change India's bright economic course though it delayed certain decisions

relating to the economy. Economic liberalization which mostly interested foreign investors

has been accepted as essential by all political parties including the Communist Party of India

Though there are bleak chances of political instability in the future, even if such a situation

arises the economic policy of India would hardly be affected.. Being a strong democratic

nation the chances of an army coup or foreign dictatorship are minimal. Hence, political risk

in India is practically absent.

Commercial Risk

Commercial risk exists in any business ventures of a country. Not each and every product or

service is profitably accepted in the market. Hence it is advisable to study the demand /

supply condition for a particular product or service before making any major investment. In

India one can avail the facilities of a large number of market research firms in exchange for a

professional fee to study the state of demand / supply for any product. As it is, entering the

consumer market involves some kind of gamble and hence involves commercial risk

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Risk Due To Terrorism

In the recent past, India has witnessed several terrorist attacks on its soil which could have a

negative impact on investor confidence. Not only business environment and return on

investment, but also the overall security conditions in a nation have an effect on FDI's.

Though some of the financial experts think otherwise. They believe the negative impact of

terrorist attacks would be a short term phenomenon. In the long run, it is the micro and macro

economic conditions of the Indian economy that would decide the flow of foreign investment

and in this regard India would continue to be a favorable investment destinat

FDI POLICY IN INDIA

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FDI policy is reviewed on an ongoing basis and measures for its further liberalization are

taken. Change in sectoral policy/sectoral equity cap is notified from time to time through

Press Notes by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial

Policy announcement by SIA are subsequently notified by RBI under FEMA. All Press Notes

are available at the website of Department of Industrial Policy & Promotion. FDI Policy

permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the

sectors including the services sector under automatic route. FDI in sectors/activities under

automatic route does not require any prior approval either by the Government or the RBI. The

investors are required to notify the Regional office concerned of RBI of receipt of inward

remittances within 30 days of such receipt and will have to file the required documents with

that office within 30 days after issue of shares to foreign investors.

The Foreign direct investment scheme and strategy depends on the respective FDI norms and

policies in India. The FDI policy of India has imposed certain foreign direct investment

regulations as per the FDI theory of the Government of India . These include FDI limits in

India for example:

o Foreign direct investment in India in infrastructure development projects excluding

arms and ammunitions, atomic energy sector, railways system , extraction of coal and

lignite and mining industry is allowed upto 100% equity participation with the capping

amount as Rs. 1500 crores.

o FDI figures in equity contribution in the finance sector cannot exceed more than 40%

in banking services including credit card operations and in insurance sector only in

joint ventures with local insurance companies.

o FDI limit of maximum 49% in telecom industry especially in the GSM services

Government Approvals for Foreign Companies Doing Business in India

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Government Approvals for Foreign Companies Doing Business in India or Investment Routes

for Investing in India, Entry Strategies for Foreign Investors India's foreign trade policy has

been formulated with a view to invite and encourage FDI in India.  The Reserve Bank of

India has prescribed the administrative and compliance aspects of FDI. A foreign company

planning to set up business operations in India has the following options:

Investment under automatic route; and

Investment through prior approval of Government.

Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require any

prior approval either by the Government or RBI. The investors are only required to notify the

Regional office concerned of RBI within 30 days of receipt of inward remittances and file the

required documents with that office within 30 days of issue of shares to foreign investors.

List of activities or items for which automatic route for foreign investment is not available,

include the following:

Banking

NBFC's Activities in Financial Services Sector

Civil Aviation

Petroleum Including Exploration/Refinery/Marketing

Housing & Real Estate Development Sector for Investment from Persons other

than NRIs/OCBs.

Venture Capital Fund and Venture Capital Company

Investing Companies in Infrastructure & Service Sector

Atomic Energy & Related Projects

Defense and Strategic Industries

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Agriculture (Including Plantation)

Print Media

Broadcasting

Postal Services

Procedure under Government approval

FDI in activities not covered under the automatic route, requires prior Government approval

and are considered by the Foreign Investment Promotion Board (FIPB). Approvals of

composite proposals involving foreign investment/foreign technical collaboration are also

granted on the recommendations of the FIPB. Application for all FDI cases, except Non-

Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be

submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance.

Application for NRI and 100% EOU cases should be presented to SIA in Department of

Industrial Policy & Promotion.

Investment by way of Share Acquisition

A foreign investing company is entitled to acquire the shares of an Indian company without

obtaining any prior permission of the FIPB subject to prescribed parameters/ guidelines. If

the acquisition of shares directly or indirectly results in the acquisition of a company listed on

the stock exchange, it would require the approval of the Security Exchange Board of India.

New investment by an existing collaborator in India

A foreign investor with an existing venture or collaboration (technical and financial) with an

Indian partner in particular field proposes to invest in another area, such type of additional

investment is subject to a prior approval from the FIPB, wherein both the parties are required

to participate to demonstrate that the new venture does not prejudice the old one.

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General Permission of RBI under FEMA

Indian companies having foreign investment approval through FIPB route do not require any

further clearance from RBI for receiving inward remittance and issue of shares to the foreign

investors. The companies are required to notify the concerned Regional office of the RBI of

receipt of inward remittances within 30 days of such receipt and within 30 days of issue of

shares to the foreign investors or NRIs.

Participation by International Financial Institutions

Equity participation by international financial institutions such as ADB, IFC, CDC, DEG,

etc., in domestic companies is permitted through automatic route, subject to SEBI/RBI

regulations and sector specific cap on FDI.

FDI in Small Scale Sector (SSI) Units

A small-scale unit cannot have more than 24 per cent equity in its paid up capital from any

industrial undertaking, either foreign or domestic.

If the equity from another company (including foreign equity) exceeds 24 per cent, even if

the investment in plant and machinery in the unit does not exceed Rs 10 million, the unit

loses its small-scale status and shall require an industrial license to manufacture items

reserved for small-scale sector. See also FDI in Small Scale Sector in India Further

Liberalized country. The international monetary fund’s balance of payment manual defines

FDI as an investment that is made to acquire a lasting interest in an enterprise operating in an

economy other than that of the investor. The investors’ purpose being to have an effective

voice in the management of the enterprise’. The united nations 1999 world investment report

defines FDI as ‘an investment involving a long term relationship and reflecting a lasting

interest and control of a resident entity in one economy (foreign direct investor or parent

enterprise) in an enterprise resident in an economy other than that of the foreign direct

investor ( FDI enterprise, affiliate enterprise or foreign affiliate).

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Foreign direct investment:

Indian scenario

FDI is permitted as under the following forms of investments –

· Through financial collaborations.

· Through joint ventures and technical collaborations.

· Through capital markets via Euro issues.

· Through private placements or preferential allotments.

Sector Specific Foreign Direct Investment in India

Hotel & Tourism: FDI in Hotel & Tourism sector in India

100% FDI is permissible in the sector on the automatic route,

The term hotels include restaurants, beach resorts, and other tourist complexes providing

accommodation and/or catering and food facilities to tourists. Tourism related industry

include travel agencies, tour operating agencies and tourist transport operating agencies, units

providing facilities for cultural, adventure and wild life experience to tourists, surface, air and

water transport facilities to tourists, leisure, entertainment, amusement, sports, and health

units for tourists and Convention/Seminar units and organizations.

For foreign technology agreements, automatic approval is granted if

i. up to 3% of the capital cost of the project is proposed to be paid for technical and

consultancy services including fees for architects, design, supervision, etc.

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ii. up to 3% of  net turnover is payable for franchising and marketing/publicity support

fee, and up to 10% of gross operating profit is payable for management fee, including

incentive fee.

Private Sector Banking:

Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route subject to guidelines issued from

RBI from time to time.

a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as

per levels indicated below:

i. Merchant banking

ii. Underwriting

iii. Portfolio Management Services

iv. Investment Advisory Services

v. Financial Consultancy

vi. Stock Broking

vii. Asset Management

viii. Venture Capital

ix. Custodial Services

x. Factoring

xi. Credit Reference Agencies

xii. Credit rating Agencies

xiii. Leasing & Finance

xiv. Housing Finance

xv. Foreign Exchange Brokering

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xvi. Credit card business

xvii. Money changing Business

xviii. Micro Credit

xix. Rural Credit

b. Minimum Capitalization Norms for fund based NBFCs:

i) For FDI up to 51% - US$ 0.5 million to be brought upfront

ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront

iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5

million to be brought up front and the balance in 24 months

c. Minimum capitalization norms for non-fund based activities:

Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted

non-fund based NBFCs with foreign investment.

    d.   Foreign investors can set up 100% operating subsidiaries without the condition to

disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50

million as at b) (iii) above (without any restriction on number of operating subsidiaries

without bringing in additional capital)

    e.  Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will

also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the

subsidiaries also complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii)

above.

   f.   FDI in the NBFC sector is put on automatic route subject to compliance with guidelines

of the Reserve Bank of India.  RBI would issue appropriate guidelines in this regard.

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Insurance Sector:

FDI in Insurance sector in India

FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining

license from Insurance Regulatory & Development Authority (IRDA)

 

Telecommunication:

FDI in Telecommunication sector

i. In basic, cellular, value added services and global mobile personal communications

by satellite, FDI is limited to 49% subject to  licensing and security requirements and

adherence by the companies  (who are investing and the companies in which

investment is being made) to the license conditions for foreign equity cap and lock- in

period for transfer and addition of equity and other license provisions.

ii. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to

74% with FDI, beyond 49% requiring Government approval. These services would be

subject to licensing and security requirements.

iii. No equity cap is applicable to manufacturing activities.

iv. FDI up to 100% is allowed for the following activities in the telecom sector :

a. ISPs not providing gateways (both for satellite and submarine cables);

b. Infrastructure Providers providing dark fiber (IP Category 1);

c. Electronic Mail; and

d. Voice Mail

The above would be subject to the following conditions:

e. FDI up to 100% is allowed subject to the condition that such companies would

divest 26% of their equity in favor of Indian public in 5 years, if these

companies are listed in other parts of the world.

24

f. The above services would be subject to licensing and security requirements,

wherever required.

Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.

Trading:

FDI in Trading Companies in India

Trading is permitted under automatic route with FDI up to 51% provided it is primarily

export activities, and the undertaking is an export house/trading house/super trading

house/star trading house. However, under the FIPB route:-

i. 100% FDI is permitted in case of trading companies for the following activities:

exports;

bulk imports with ex-port/ex-bonded warehouse sales;

cash and carry wholesale trading;

other import of goods or services provided at least 75% is for procurement and sale of

goods and services among the companies of the same group and not for third party

use or onward transfer/distribution/sales.

ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy:

a. Companies for providing after sales services (that is not trading per se)

b. Domestic trading of products of JVs is permitted at the wholesale level for such

trading companies who wish to market manufactured products on behalf of their joint

ventures in which they have equity participation in India.

c. Trading of hi-tech items/items requiring specialized after sales service

d. Trading of items for social sector

e. Trading of hi-tech, medical and diagnostic items.

f. Trading of items sourced from the small scale sector under which, based on

technology provided and laid down quality specifications, a company can market that

item under its brand name.

g. Domestic sourcing of products for exports.

25

h. Test marketing of such items for which a company has approval for manufacture

provided such test marketing facility will be for a period of two years, and investment

in setting up manufacturing facilities commences simultaneously with test marketing

Power:

FDI In Power Sector in India

Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission

and distribution, other than atomic reactor power plants. There is no limit on the project cost

and quantum of foreign direct investment.

Drugs & Pharmaceuticals

FDI up to 100% is permitted on the automatic route for manufacture of drugs and

pharmaceutical, provided the activity does not attract compulsory licensing or involve use of

recombinant DNA technology, and specific cell / tissue targeted formulations.

FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs

produced by recombinant DNA technology, and specific cell / tissue targeted formulations

will require prior Government approval.

Roads, Highways, Ports and Harbors

FDI up to 100% under automatic route is permitted in projects for construction and

maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and

harbors. 

Pollution Control and Management

FDI up to 100% in both manufacture of pollution control equipment and consultancy for

integration of pollution control systems is permitted on the automatic route.

 

26

Call Centers in India / Call Centre’s in India

FDI up to 100% is allowed subject to certain conditions. 

   Business Process Outsourcing BPO in India

Special Facilities and Rules for NRI's and OCB's

NRI's and OCB's  are allowed the following special facilities:

1. Direct investment in industry, trade, infrastructure etc.

2. Up to 100% equity with full repatriation facility for capital and dividends in the

following sectors  

i. 34 High Priority Industry Groups

ii. Export Trading Companies

iii. Hotels and Tourism-related Projects

iv. Hospitals, Diagnostic Centers

v. Shipping

vi. Deep Sea Fishing

vii. Oil Exploration

viii. Power

ix. Housing and Real Estate Development

x. Highways, Bridges and Ports

xi. Sick Industrial Units

xii. Industries Requiring Compulsory Licensing

3. Up to 40% Equity with full repatriation: New Issues of Existing Companies raising

Capital through Public Issue up to 40% of the new Capital Issue.

4. On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership

engaged in Industrial, Commercial or Trading Activity.

5. Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of the

equity Capital or Convertible Debentures of the Company by each NRI. Investment in

Government Securities, Units of UTI, National Plan/Saving Certificates.

6. On Non-Repatriation Basis: Acquisition of shares of an Indian Company, through a

General Body Resolution, up to 24% of the Paid Up Value of the Company.

27

DATA ANALYSIS & INTERPRETATION

India Further Opens up Key Sectors for Foreign Investment

India has liberalized foreign investment regulations in key sectors, opening up commodity

exchanges, credit information services and aircraft maintenance operations. The foreign

investment limit in Public Sector Units (PSU) refineries has been raised from 26% to 49%.

An additional sweetener is that the mandatory disinvestment clause within five years has

been done away with. FDI in Civil aviation up to 74% will now be allowed through the

automatic route for non-scheduled and cargo airlines, as also for ground handling

activities. 100% FDI in aircraft maintenance and repair operations has also been allowed.

But the big one, allowing foreign airlines to pick up a stake in domestic carriers has been

given a miss again. India has decided to allow 26% FDI and 23% FII investments in

commodity exchanges, subject to the proviso that no single entity will hold more than 5% of

the stake. 

Sectors like credit information companies, industrial parks and construction and development

projects have also been opened up to more foreign investment. Also keeping India's civilian

nuclear ambitions in mind, India has also allowed 100% FDI in mining of titanium, a mineral

which is abundant in India.

Sources say the government wants to send out a signal that it is not done with reforms yet. At

the same time, critics say contentious issues like FDI and multi-brand retail are out of the

policy radar because of political compulsions.

28

Sector-wise FDI Inflows ( From April 2000 to January 2010)

SECTOR

 

AMOUNT OF FDI

INFLOWS PERCENT OF TOTAL FDI

INFLOWS (In terms of Rs)

 

In Rs Million In US$

Million

Services Sector 787420.81 18118.40 22.39

Computer Software &

hardware

391109.74 8876.43 11.12

Telecommunications 275441.38 6215.55 7.83

Construction Activities 213595.12 5029.01 6.07

Automobile 146799.41 3310.23 4.17

Housing & Real estate 217936.02 5118.85 6.20

Power 137089.37 3129.66 3.90

Chemicals (Other than

Fertilizers)

87008.07 1964.06 2.47

Ports 63290.50 1551.88 1.80

Metallurgical

industries

109563.20 2612.85 3.11

Electrical Equipments 57379.63 1324.92 1.63

Cement & Gypsum

Products

70781.19 1621.03 2.01

Petroleum & Natural

Gas

94417.17 2244.17 2.68

Trading 62416.85 1480.94 1.77

Consultancy Services 48647.43 1112.92 1.38

Hotel and Tourism 52500.05 1217.50 1.49

Food Processing

Industries

34362.49 760.32 0.98

Electronics 33914.75 748.57 0.96

Misc. Mechanical &

Engineering industries

28310.13 648.86 0.80

29

Information &

Broadcasting (Incl.

Print media)

52115.90 1194.20 1.48

Mining 21204.94 522.86 0.60

Textiles (Incl. Dyed,

Printed)

26736.94 611.03 0.76

Sea Transport 17653.81 402.59 0.50

Hospital & Diagnostic

Centers

27241.42 644.73 0.77

Fermentation

Industries

27743.46 658.04 0.79

Machine Tools 10955.32 247.88 0.31

Air Transport ( Incl.

air freight)

10552.19 240.71 0.30

Ceramics 17462.43 409.92 0.50

Rubber Goods 11392.76 247.60 0.32

Agriculture Services 7937.13 188.39 0.23

Industrial Machinery 13748.27 316.97 0.39

Paper & Pulp 18612.76 429.06 0.53

Diamond & Gold

Ornaments

11014.62 248.15 0.31

Agricultural

Machinery

6649.12 148.37 0.19

Earth Moving

Machinery

5749.34 134.22 0.16

Commercial, Office &

Household Equipments

5798.71 132.74 0.16

Glass 5683.60 126.51 0.16

Printing of Books

(Incl. Litho printing

industry)

6066.23 135.80 0.17

Soaps, Cosmetics and

Toilet Preparations

4984.88 114.54 0.14

Medical & Surgical 8087.87 177.42 0.23

30

Appliances

Education 14374.11 309.09 0.41

Fertilizers 4282.17 96.59 0.12

Photographic raw Film

& Paper

2580.20 63.90 0.07

Railway related

components

3281.85 75.11 0.09

Vegetable oils and

Vanaspati

3769.18 83.69 0.11

Sugar 1836.64 41.58 0.05

Tea & Coffee 3774.81 84.28 0.11

Leather, Leather goods

&Piackers

1621.56 36.74 0.05

Non-conventional

energy

3640.58 86.84 0.10

Industrial instruments 1368.36 29.47 0.04

Scientific instruments 511.44 11.64 0.01

Glue and Gelatine 385.80 8.44 0.01

Boilers & steam

generating plants

238.67 5.40 0.01

Dye-Stuffs 406.48 9.52 0.01

Retail Trading (Single

brand)

1074.67 25.18 0.03

Coal Production 614.10 15.42 0.02

Coir 50.17 1.12 0.00

Timber products 139.59 3.10 0.00

Prime Mover (Other

than electrical

generators

178.30 3.72 0.01

Defence Industries 6.87 0.15 0.00

Mathematical,

Surveying & drawing

instruments

50.35 1.27 0.00

Misc. industries 180561.54 4162.55 5.19

31

Sub Total 3517310.79 81010.63 100.00

Stock Swapped (from

2002 to 2008)

145466.35 3391.07 -

Advance of Inflows

(from 2000 to 2004)

89622.22 1962.82 -

RBI's NRI Schemes 5330.60 121.33 -

Grand Total 3757729.96 86395.85 -

Sector wise FDI inflows

 

SOURCE: DIPP, Federal Ministry of Commerce and Industry, Government of

India

Forbidden Territories:

Arms and ammunition

Atomic Energy

Coal and lignite

Rail Transport

Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds,

copper, zinc.

Foreign Investment through GDRs (Euro Issues) –

Indian companies are allowed to raise equity capital in the international market through the

issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI and are

designated in dollars and are not subject to any ceilings on investment. An applicant company

seeking Government's approval in this regard should have consistent track record for good

performance (financial or otherwise) for a minimum period of 3 years. This condition would

be relaxed for infrastructure projects such as power generation, telecommunication,

petroleum exploration and refining, ports, airports and roads.

32

1. Clearance from FIPB –

There is no restriction on the number of Euro-issue to be floated by a company or a group of

companies in the financial year. A company engaged in the manufacture of items covered

under Annex-III of the New Industrial Policy whose direct foreign investment after a

proposed Euro issue is likely to exceed 51% or which is implementing a project not contained

in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from

Ministry of Finance.

2. Use of GDRs –

The proceeds of the GDRs can be used for financing capital goods imports, capital

expenditure including domestic purchase/installation of plant, equipment and building and

investment in software development, prepayment or scheduled repayment of earlier external

borrowings, and equity investment in JV/WOSs in India.

Foreign direct investments in India are approved through two routes –

1. Automatic approval by RBI –

The Reserve Bank of India accords automatic approval within a period of two weeks (subject

to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%;

74% and 100% is allowed depending on the category of industries and the sectoral caps

applicable. The lists are comprehensive and cover most industries of interest to foreign

companies. Investments in high priority industries or for trading companies primarily

engaged in exporting are given almost automatic

approval by the RBI.

2. The FIPB Route – Processing of non-automatic approval cases –

33

FIPB stands for Foreign Investment Promotion Board which approves all other cases where

the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its

approach is liberal for all sectors and all types of proposals, and rejections are few. It is not

necessary for foreign investors to have a local partner, even when the foreign investor wishes

to hold less than the entire equity of the company. The portion of the equity not proposed to

be held by the foreign investor can be offered to the public.

iii. Analysis of sector specific policy for FDI

Sr. No. Sector/Activity FDI cap/Equity Entry/Route

1. Hotel & Tourism 100% Automatic

2. NBFC 49% Automatic

3. Insurance 26% Automatic

4. Telecommunication:

cellular, value added services

ISPs with gateways, radio-

paging

Electronic Mail & Voice Mail

49%

74%

100%

Automatic

Above 49% need Govt. licence

5. Trading companies:

primarily export activities

bulk imports, cash and carry

wholesale trading

51%

100%

Automatic

Automatic

6. Power(other than atomic reactor

power plants) 100% Automatic

7. Drugs & Pharmaceuticals  100% Automatic

8. Roads, Highways, Ports and

Harbors

100% Automatic

9. Pollution Control and

Management

100% Automatic

10 Call Centers 100% Automatic

11. BPO 100% Automatic

34

12. For NRI's and OCB's: 

i. 34 High Priority Industry

Groups

ii. Export Trading

Companies

iii. Hotels and Tourism-

related Projects

iv. Hospitals, Diagnostic

Centers

v. Shipping

vi. Deep Sea Fishing

vii. Oil Exploration

viii. Power

ix. Housing and Real Estate

Development

x. Highways, Bridges and

Ports

xi. Sick Industrial Units

xii. Industries Requiring

Compulsory Licensing

xiii. Industries Reserved for

Small Scale Sector

100% Automatic

13. Airports:

Greenfield projects

Existing projects

100%

100%

Automatic

Beyond 74% FIPB

14 Assets reconstruction company 49% FIPB

15. Cigars and cigarettes 100% FIPB

35

16. Courier services 100% FIPB

17. Investing companies in

infrastructure (other than

telecom sector)

49% FIPB

iv. Analysis of FDI inflow in India

From April 2000 to August 2 (Amount US$ in Millions)

S.No Financial Year Total FDI Inflows % Growth Over Previous Year

1. 2000-01 4,029 ----

2. 2001-02 6,130 (+) 52

3. 2002-03 5,035 (-) 18

4. 2003-04 4,322 (-) 14

36

5. 2004-05 6,051 (+) 40

6. 2005-06 8,961 (+) 48

7. 2006-07 22,826 (+) 146

8. 2007-08 34,362 (+) 51

9. 2008-09 35,168 (+) 02

10. 2009-10 16,232 ----

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

4,0296,130

5,035 4,3226,051

8,961

22,826

34,362 35,168

16,232

TOTAL FDI INFLOWS IN INDIA

TOTAL FDI INFLOWS

37

v. Analysis of share of top ten investing countries FDI equity in flows

From April 2000 to January 2010

(Amount in Millions)

Sr. No Country Amount of FDI Inflows % As To

Total FDI

Inflow

1. Mauritius 19,18,633.61 44.01

2. Singapore 3,80,142.56 8.72

3. U.S.A. 3,32,935.60 7.64

4. U.K. 2,40,974.98 5.53

5. Netherlands 1,78,047.76 4.08

6. Japan 1,50,129.05 3.44

7. Cyprus 1,32,448.04 3.04

8. Germany 1,12,242.06 2.57

9. France 61,686.39 1.42

10. U.A.E. 50,915.59 1.17

38

Mauritius

Mauritius invested Rs.19,18,633 million in India Up to the January 2010, equal to 44.01

percent of total FDI inflows. Many companies based outside of India utilize Mauritian

holding companies to take advantage of the India- Mauritius Double Taxation Avoidance

Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains taxes,

and may allow some India-based firms to avoid paying certain taxes through a process known

as “round tripping.”

The extent of round tripping by Indian companies through Mauritius is unknown. However,

the Indian government is concerned enough about this problem to have asked the government

of Mauritius to set up a joint monitoring mechanism to study these investment flows. The

39

potential loss of tax revenue is of particular concern to the Indian government. These are the

sectors which attracting more FDI from Mauritius Electrical equipment Gypsum and cement

products Telecommunications Services sector that includes both non- financial and financial

Fuels.

Singapore

Singapore continues to be the single largest investor in India amongst the Singapore with FDI

inflows into Rs. 3,80,142 crores up to January 2010

Sector-wise distribution of FDI inflows received from Singapore the highest inflows have

been in the services sector (financial and non financial), which accounts for about 30% of

FDI inflows from Singapore. Petroleum and natural gas occupies the second place followed

by computer software and hardware, mining and construction.

U.S.A.

The United States is the third largest source of FDI in India (7.64 % of the total), valued at

732335 crore in cumulative inflows up to January 2010. According to the Indian government,

the top sectors attracting FDI from the United States to India are fuel, telecommunications,

electrical equipment, food processing, and services. According to the available M&A data,

the two top sectors attracting FDI inflows from the United States are computer systems

design and programming and manufacturing

U.K.

The United Kingdom is the fourth largest source of FDI in India (5.53 % of the total), valued

at 2,40,974 crores in cumulative inflows up to January 2010

Over 17 UK companies under the aegis of the Nuclear Industry Association of UK have tied

up with Ficci to identify joint venture and FDI possibilities in the civil nuclear energy sector.

UK companies and policy makers the focus sectors for joint ventures, partnerships, and trade

are non-conventional energy, IT, precision engineering, medical equipment, infrastructure

equipment, and creative industries.

40

Netherlands

FDI from Netherlands to India has increased at a very fast pace over the last few years.

Netherlands ranks fifth among all the countries that make investments in India. The total flow

of FDI from Netherlands to India came to Rs. 1, 78,047 crores between 1991 and 2002. The

total percentage of FDI from Netherlands to India stood at 4.08% out of the total foreign

direct investment in the country up to August 2009.

Following Various industries attracting FDI from Netherlands to India are:

Food processing industries

Telecommunications that includes services of cellular mobile, basic telephone, and

radio paging

Horticulture

Electrical equipment that includes computer software and electronics

Service sector that includes non- financial and financial services

vi. Analysis of sectors attracting highest FDI equity inflows

From April 2000 to March 2010

(Amount in Millions)

Sr. No Country Amount of FDI

Inflows

% As To

Total FDI

Inflow

1. Service Sector

(Financial &Non Financial)

9,65,210.77 22.14

2. Computer Software & Hardware 4,13,419.03 9.48

3. Telecommunication 3,68,899.62 8.46

4. Housing & Real Estate 3,25,021.36 7.46

41

5. Construction Activities 2,65,492.96 6.09

6. Automobile Industry 1,90,172.22 4.36

7. Power 1,79,849.92 4.13

8. Metallurgical Industries 1,25,785.57 2.89

9. Petroleum & Natural Gas 1,11,957.00 2.57

10. Chemical 1,01,680.18 2.33

The sectors receiving the largest shares of total FDI inflows up to march 2010 were

the service sector and computer software and hardware sector, each accounting for

22.14 and 9.48 percent respectively. These were followed by the telecommunications,

real estate, construction and automobile sectors. The top sectors attracting FDI into

India via M&A activity were manufacturing; information; and professional, scientific,

and technical services. These sectors correspond closely with the sectors identified by

the Indian government as attracting the largest shares of FDI inflows overall.

The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers) registered

maximum growth of 227 per cent during April 2008 – March 2009 as compared to 11.71 per

cent during the last fiscal. The sector attracted USD 749 million FDI in FY ‘09 as compared

to USD 229 million in FY ’08.

During the year 2009 government had raised the FDI limit in telecom sector from 49 per cent

to 74 per, which has contributed to the robust growth of FDI. The telecom sector registered a

growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal. The sector

attracted USD 2558 million FDI in FY ‘09 as compared to the USD 1261 million in FY ’08,

acquired 9.37 per cent share in total FDI inflow.

India automobile sector has been able to record 70 per cent growth in foreign investment. The

FDI inflow in automobile sector has increased from USD 675 million to 1,152 million in FY

’09 over FY ’08. The other sectors which registered growth in highest FDI inflow during

April – March 2009 were housing & real estate (28.55 per cent), computer software &

42

hardware (18.94 per cent), construction activities including road & highways (16.35 per cent)

and power (1.86 per cent).

Foreign Investment Promotion Board

The FIPB (Foreign Investment Promotion Board) is a government body that offers a single

window clearance for proposals on foreign direct investment in the country that are not

allowed access through the automatic route. Consisting of Senior Secretaries drawn from

different ministries with Secretary ,Economic Affairs in the chair, this high powered body

discusses and examines proposals for foreign investment in the country for restricted sectors (

as laid out in the Press notes and extant foreign investment policy) on a regular basis.

Currently proposals for investment beyond 600 crores require the concurrence of the CCEA

(Cabinet Committee on Economic Affairs). The threshold limit is likely to be raised to 1200

crore soon.The Board thus plays an important role in the administration and implementation

of the Government’s FDI policy. In circumstances where there is ambiguity or a conflict of

interpretation, the FIPB has stepped in to provide solutions. Through its fast track working it

has established its reputation as a body that does not unreasonably delay and is objective in

its decision making. It therefore has a strong record of actively encouraging the flow of FDI

into the country. The FIPB is assisted in this task by a FIPB Secretariat. The launch of e-

filing facility is an important initiative of the Secretariat to further the cause of enhanced

accessibility and transparency .

43

Low Income Countries in Global FDI Race

The situation of foreign direct   investment  has been relatively good in the recent times with an

increase of 38%. Normally, the foreign direct investment is made mostly into the extractive

industries. However, now the foreign direct investors are also looking to pump money into

the manufacturing industry that has garnered 47% of the total foreign direct investment made

in 1992. However, the situation has not been the same in the countries with a middle income

range.

The middle income countries have not received a steady inflow of foreign direct income

coming their way. The situation is comparatively better in the low   income  countries. They

have had an uninterrupted and continually increasing flow of foreign   direct   investment . It has

been observed that the various debt crises, as well as, other forms of economic crises have

had less effect on these countries. 

These countries had lesser amounts of commercial bank obligations, which again had been

caused by the absence of proper financial   markets , as well as the fact that their economies

were not open to foreign direct investment. During the later phases of the decade of 70s the

Asian countries started encouraging foreign direct investments in their economies. China has

received the most of the foreign direct investment that was pumped into the countries 

with low income. It accounted for as much as 86% of the total foreign direct investment made

in the lower income countries in with low income. It accounted for as much as 86% of the

total foreign direct investment made in the lower income countries in 1995. 

The economic liberalization in China started in 1979. This led to an increase in the foreign

direct investment in China. In the years between 1982 and 1991 the average foreign direct

investment in China was US$ 2.5 billion. This average increased by seven times to become

US$ 37.5 billion during 1995. A significant amount of the foreign direct investment in China

was provided in the industrial sector.

It was as much as 68%. Around 20% of the foreign direct investment of China was made in

the real estate sector. During the same period Nigeria had been the second best in terms of

receiving foreign direct investment. In the recent times India has

44

Risen to be the third major foreign direct investment destination in the recent years. Foreign

direct investment started in India in 1991 with the initiation of the economic liberation.

There were more initiatives that enabled India to garner foreign direct investments worth US$

2.9 billion from 1991 to 1995. This was a significant increase from the previous twenty years

when the total foreign direct investment in India was US$1 billion. Most of the foreign direct

investment made in India has been in the infrastructural areas like telecommunications and

power. In the manufacturing industry the emphasis has been on petroleum refining, vehicles

and petrochemicals Vietnam is a low income country, which is supposed to have the same

potential as China to generate foreign direct investment.

The foreign direct investment laws were introduced in Vietnam in 1987-88. This led to an

increase in the foreign direct investment made in the country. The amount stood at US$ 25

million in 1993 compared to US$ 8 million in 1993. This amount increased by 3 times after

the USA removed its economic sanctions in 1994. The gas and petroleum   industries  were the

biggest beneficiaries of the foreign direct investment. Bangladesh started receiving increasing

foreign direct investment after 1991, when the economic reforms took place in the country.

After 1991 it was possible for foreign companies to set up companies in Bangladesh without

taking permission beforehand. The foreign direct investment rose from US$ 11 million in

1994 to US$ 125 million in 1995. As per the available statistics the manufacturing industry,

comprising of clothing and textiles took up 20% of the total approved foreign direct

investment. Food processing, chemicals and electric machinery were also important in this

regard. The increase in the foreign direct investment in Ghana was remarkable as well. The

figures increased from US$11.7 million, on an average, from 1986 to 1992 to US$ 201

million, on an average, from 1993 to 1995. This improvement was brought about by the

privatization of the Ashanti Goldfields.

45

FOREIGN INSTITUTIONAL INVESTMENT

I. Introduction to FII

Since 1990-91, the Government of India embarked on liberalization and economic reforms

with a view of bringing about rapid and substantial economic growth and move towards

globalization of the economy. As a part of the reforms process, the Government under its

New Industrial Policy revamped its foreign investment policy recognizing the growing

importance of foreign direct investment as an instrument of technology transfer,

augmentation of foreign exchange reserves and globalization of the Indian economy.

Simultaneously, the Government, for the first time, permitted portfolio investments from

abroad by foreign institutional investors in the Indian capital market. The entry of FIIs seems

to be a follow up of the recommendation of the Narsimhan Committee Report on Financial

System. While recommending their entry, the Committee, however did not elaborate on the

objectives of the suggested policy. The committee only suggested that the capital market

should be gradually opened up to foreign portfolio investments.

From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all the

securities traded on the primary and secondary markets, including shares, debentures and

warrants issued by companies which were listed or were to be listed on the Stock Exchanges

in India. While presenting the Budget for 1992-93, the then Finance Minister Dr. Manmohan

Singh had announced a proposal to allow reputed foreign investors, such as Pension Funds

etc., to invest in Indian capital market.

II. Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside India

which proposes to make investment in India in securities. A Working Group for Streamlining

of the Procedures relating to FIIs, constituted in April, 2003, inter alia, recommended

streamlining of SEBI registration procedure, and suggested that dual approval process of

SEBI and RBI be changed to a single approval process of SEBI. This recommendation was

implemented in December 2003.

46

Currently, entities eligible to invest under the FII route are as follows:

i) As FII: Overseas pension funds, mutual funds, investment trust, asset management

company, nominee company, bank, institutional portfolio manager, university

funds, endowments, foundations, charitable trusts, charitable societies, a trustee or

power of attorney holder incorporated or established outside India proposing to

make proprietary investments or with no single investor holding more than 10 per

cent of the shares or units of the fund.

ii) As Sub-accounts: The sub account is generally the underlying fund on whose

behalf the FII invests. The following entities are eligible to be registered as sub-

accounts, viz. partnership firms, private company, public company, pension fund,

investment trust, and individuals.

FIIs registered with SEBI fall under the following categories:

a) Regular FIIs- those who are required to invest not less than 70 % of their investment in

equity-related instruments and 30 % in non-equity instruments.

b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset

management companies, nominee companies and incorporated/institutional portfolio

managers or their power of attorney holders (providing discretionary and non-discretionary

portfolio management services) to be registered as FIIs. While the guidelines did not have a

specific provision regarding clients, in the application form the details of clients on whose

behalf investments were being made were sought.

While granting registration to the FII, permission was also granted for making investments in

the names of such clients. Asset management companies/portfolio managers are basically in

the business of managing funds and investing them on behalf of their funds/clients. Hence,

the intention of the guidelines was to allow these categories of investors to invest funds in

India on behalf of their 'clients'. These

47

'clients' later came to be known as sub-accounts. The broad strategy consisted of having a

wide variety of clients, including individuals, intermediated through institutional investors,

who would be registered as FIIs in India. FIIs are eligible to purchase shares and convertible

debentures issued by Indian companies under the Portfolio Investment Scheme.

iii. Prohibitions on Investments:

FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They

are also not allowed to invest in any company which is engaged or proposes to engage in the

following activities:

1) Business of chit fund

2) Nidhi Company

3) Agricultural or plantation activities

4) Real estate business or construction of farm houses (real estate business does not include

development of townships, construction of residential/commercial premises, roads or

bridges).

5) Trading in Transferable Development Rights (TDRs).

iv. Trends of Foreign Institutional Investments in India.

Portfolio investments in India include investments in American Depository Receipts (ADRs)/

Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in

offshore funds. Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate

Bodies were allowed to undertake portfolio investments in India. Thereafter, the Indian stock

markets were opened up for direct participation by FIIs. They were allowed to invest in all

the securities traded on the primary and the secondary market including the equity and other

securities/instruments of companies listed/to be listed on stock exchanges in India. It can be

observed from the table below that India is one of the preferred investment destinations for

FIIs over the years. As of March 2009, there were 1609 FIIs registered with SEBI.

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SEBI Registered FIIs in India

Year End of March

1992-93 0

1993-94 3

1994-95 156

1995-96 353

1996-97 439

1997-98 496

1998-99 450

1999-00 506

2000-01 527

2001-02 490

2002-03 502

2003-04 540

2004-05 685

2005-06 882

2006-07 996

2007-08 1279

2008-09 1609

2009-10 1805

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v. FII trend in India

Year Gross

Purchases

(a) (Rs. crore)

Gross Sales (b)

(Rs.crore)

Net

Investment

(a-b)

(Rs. crore)

% increase in

FII inflow

1992-93 17 4 13 -

1993-94 5593 466 5127 39338.46

1994-95 7631 2835 4796 -6.45

1995-96 9694 2752 6942 44.75

1996-97 15554 6979 8575 23.52

1997-98 18695 12737 5958 -30.52

1998-99 16115 17699 1584 126.59

1999-00 56856 46734 10122 739.02

2000-01 74051 64116 9935 -1.85

2001-02 49920 41165 8755 -11.88

2002-03 47061 44373 2688 69.30

2003-04 144858 99094 45764 1602.53

2004-05 16953 171072 45881 0.26

2005-06 346978 305512 41466 -9.62

2006-07 520508 489667 30841 -25.62

2007-08 896686 844504 52182 69.20

2008-09 548876 594608 -45732 187.64

2009-10 - - - -

2010 data was not available

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1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

-200000

0

200000

400000

600000

800000

1000000FII INFLOW

Gross Purchases (a) (Rs.crore)Gross Sales (b) (Rs.crore)

Net In-vestment (a-b) (Rs.crore)

There may be many other factors on which a stock index may depend i.e. Government

policies, budgets, bullion market, inflation, economic and political condition of the country,

FDI, Re./Dollar exchange rate etc. But for my study I have selected only one independent

variable i.e. FII and dependent variable is indices of nifty.

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vi. Co – relation with Indices

Indices Co-relation with FII

Sensex 0.80

Bankex 0.18

Power 0.33

IT 0.13

Capital Goods 0.44

From the above table we can say that FII has a positive impact on all the indices which means

that if FIIs come in India then it is goods for the Indian economy. FIIs have more co-relation

with Sensex so we can say that they are mostly invest in big and reputed companies which

are included in Sensex.

Power and Capital Goods sector have more co-relation with FII investment which shows

more interest of FIIs in those sectors.

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Difference Between FDI and FII

FDI v/s FII :

Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct

Investment is an investment that a parent company makes in a foreign country. On the

contrary, FII or Foreign Institutional Investor is an investment made by an investor in the

markets of a foreign nation.InFII, the companies only need to get registered in the stock

exchange to make investments. But FDI is quite different from it as they invest in a foreign

nation. The Foreign Institutional Investor is also known as hot money as the investors have

the liberty to sell it and take it back. But in Foreign Direct Investment, this is not possible. In

simple words, FII can enter the stock market easily and also withdraw from it easily. But

FDIcannot enter and exit that easily. This difference is what makes nations to choose FDI’s

more than then FIIs.

FDI is more preferred to the FII as they are considered to be the most beneficial kind of

foreign investment for the whole economy.specific enterprise. It aims to increase the

enterprises capacity or productivity or change its management control. In an FDI, the capital

inflow is translated into additional production. The FII investment flows only into the

secondary market. It helps in increasing capital availability in general rather than enhancing

the capital of a specific enterprise. The Foreign Direct Investment is considered to be more

stable than Foreign Institutional Investor. FDI not only brings in capital but also helps in

good governance practices and better management skills and even technology transfer.

Though the Foreign Institutional Investor helps in promoting good governance and improving

accounting, it does not come out with any other benefits of the FDI. While the FDI flows into

the primary market, the FII flows into secondary market. While FIIs are short-term

investments, the FDI’s are long term.

.

53

FINDINGS

It is found that during 1990s the composition of capital flows changed notably and the

emphasis shifted from private debt flows to private non-debt flow particularly Foreign

Portfolio Investment (FPI) and Foreign Direct Investment (FDI). FDI responded most

vigorously and became the single largest source of external finance

FDI benefits domestic industry and provides opportunities for technological

upgradation, access to global managerial skills and practices, optimal utilisation of

natural and human resources, making host country's industry internationally

competitive, providing backward and forward linkages and access to

international quality goods and services.

It is seen from the analysis that large amount of FDI flows are confined to the

developed economies. But there is a marked increase in the FDI inflows to

developing economies from 1990 onwards.

India received large amount of FDI from Mauritius (nearly 40 percent of the total

FDI inflows) apart from USA (8.8 percent), Singapore (7.2 percent), U.K (6.1

percent), Netherlands (4.4 percent) and Japan (3.4 percent).

Among the sectors in India, services sector received the highest percentage of FDI

inflows. Other major sectors that received the large inflows of FDI, apart from services

sector, are electrical and electronics, telecommunications, transportations and

construction activities. It is found that nearly 41 percent of FDI inflows are in high

priority areas like services, electrical equipments, telecommunications, etc.

FDI has a significant effect on exports in India.

It is found that GDP growth rate of India is a pull factor in attracting FDI.

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It is found that there is a positive correlation between FDI and variables like,

total export, GDP and employment

It is found that FDI has not created much employment in India which can be due

to sectoral distribution of FDI in the country. Since service sector is attracting

most of the FDI in India and it employs the maximum manpower which

unfortunately has less employment elasticity than other sectors.

The results show that FDI has played a very strategic and critical role in the

economic growth of India.

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RECOMMENDATIONS

It is found that FDI as a strategic component of investment needed by India for its sustained

economic growth and development. FDI is necessary for creation of jobs, expansion of

existing manufacturing industries and development of the new one. Indeed, it is also needed

in the healthcare, education, R&D, infrastructure, retailing and in long- term financial

projects. So, the study recommends the following suggestions:

1. This study states that policy makers should focus more on attracting diverse types of FDI.

Like the policy makers should design policies where foreign investment can be utilized as

means of enhancing domestic production, savings, and exports; as medium of

technological learning and technology diffusion and also in providing access to the

external market.

2. Indian economy is largely agriculture based. There is plenty of scope in food processing,

agriculture services and agriculture machinery. FDI in this sector should be encouraged.

3. India has a huge pool of working population. However, due to poor quality primary

education and higher there is still an acute shortage of talent. This factor has negative

repercussion on domestic and foreign business. FDI in Education Sector is less than 1%.

Given the status of primary and higher education in the country, FDI in this sector must

be encouraged. However, appropriate measure must be taken to ensure quality. The issues

of commercialization of education, regional gap and structural gap have to be addressed

on priority.

4. It can also be suggested that the government should invest more for improvement of

infrastructure sectors, R&D activities, human capital, education sector, technological

advancement to attract more of FDI.

5. Government should ensure the equitable distribution of FDI inflows among states. The

central government must give more freedom to states, so that they can attract FDI inflows

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at their own level. The government should also provide additional incentives to foreign

investors to invest in states where the level of FDI inflows is quite low.

6. India has a well developed equity market but does not have a well developed debt market.

Steps should be taken to improve the depth and liquidity of debt market as many

companies may prefer leveraged investment rather than investing their own cash.

7. Though service sector is one of the major sources of mobilizing FDI to India, plenty of

scope exists. Still we find the financial inclusion is missing. Large part of population still

doesn’t have bank accounts, insurance of any kind, underinsurance etc. These problems

could be addressed by making service sector more competitive. Removal of sectoral cap

in insurance is still awaited.

8. FDI should be guided so as to establish deeper linkages with the economy, which would

stabilize the economy (e.g. improves the financial position, facilitates exports, stabilize

the exchange rates, supplement domestic savings and foreign reserves, stimulates R&D

activities and decrease interest rates and inflation etc.) and providing to investors a sound

and reliable macroeconomic environment.

9. FDI can be instrumental in developing rural economy. There is abundant opportunity in

Greenfield Projects. But the issue of land acquisition and steps taken to protect local

interests by the various state governments are not encouraging.

10. It is also suggested that the government while pursuing prudent policies must also

exercise strict control over inefficient bureaucracy and the rampant corruption, so that

investor’s confidence can be maintained for attracting more FDI inflows to India.

(According to JP Morgan risk index of India).

57

CONCLUSION

A large number of changes that were introduced in the country’s regulatory economic

policies heralded the liberalization era of the FDI policy regime in India and brought about a

structural breakthrough in the volume of the FDI inflows into the economy maintained a

fluctuating and unsteady trend during the study period. It might be of interest to note that

more than 50% of the total FDI inflows received by India , came from Mauritius, Singapore

and the USA.

The main reason for higher levels of investment from Mauritius was that the fact that India

entered into a double taxation avoidance agreement (DTAA) with Mauritius were protected

from taxation in India. Among the different sectors, the service sector had received the larger

proportion followed by computer software and hardware sector and telecommunication

sector.

According to findings and results, we have concluded that FII did have significant impact on

Sensex but there is less co-relation with Bankex and IT. One of the reasons for high degree of

any linear relation can also be due to the sample data. The data was taken on monthly basis.

The data on daily basis can give more positive results (may be). Also FII is not the only

factor affecting the stock indices. There are other major factors that influence the bourses in

the stock market.

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Bibliography

www.rbi.org

www.fin.in.nic

www.sebi.org

www.indiahousing.com/fdi-foreign-direct-investment.html

www.answers.com/topic/foreign-direct-investment#History

www.unctad.org/sections/dite_iiab/docs/diteiiab20041_en.pdf

www.economywatch.com/foreign-direct-investment/

www.legalserviceindia.com/articles/fdi_india.html

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