A TERM PAPER ON FDI AND FII IN INDIA SUBMITTED TO: DR. SAMPADA KAPSE SUBMITTED BY: LEENA KANJANI (08080) SULABH MAHETA (08084) ANITA PARYANI (08096) AMIN PATTANI (08100) MEHUL RAKHOLIYA (08101) KRISHNA VYAS (08118) INTRODUCTION Tolani Institute of Management Studies 1
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A
TERM PAPER
ON
FDI AND FII IN INDIA
SUBMITTED TO: DR. SAMPADA KAPSE
SUBMITTED BY:
LEENA KANJANI (08080)
SULABH MAHETA (08084)
ANITA PARYANI (08096)
AMIN PATTANI (08100)
MEHUL RAKHOLIYA (08101)
KRISHNA VYAS (08118)
INTRODUCTION
Tolani Institute of Management Studies 1
The FDI and FII is the process by which the resident of one country (the source
country) acquire the ownership of assets for the purpose of controlling the production,
distribution and other productive activities of a firm in another country(the host
country).
According to the international monetary fund (IMF), FDI and FII is defined as “an
investment that is made to acquire a lasting interest in an enterprise operating in an
economy other than that of investor”.
The effect of foreign investment, however, varies from country to country. It can
affect the factor productivity of the recipient country and can also affect the balance
of payments. Foreign investment provides a channel through which countries can gain
access to foreign capital. It can come in two forms: FDI and foreign institutional
investment (FII). Foreign direct investment involves in direct production activities
and is also of a medium- to long-term nature. But foreign institutional investment is a
short-term investment, mostly in the financial markets. FII, given its short-term
nature, can have bidirectional causation with the returns of other domestic financial
markets such as money markets, stock markets, and foreign exchange markets. Hence,
understanding the determinants of FII is very important for any emerging economy as
FII exerts a larger impact on the domestic financial markets in the short run and a real
impact in the long run. India, being a capital scarce country, has taken many measures
to attract foreign investment since the beginning of reforms in 1991.
India is the second largest country in the world, with a population of over 1 billion
people. As a developing country, India’s economy is characterized by wage rates that
are significantly lower than those in most developed countries. These two traits
combine to make India a natural destination for FDI and foreign institutional
investment (FII). Until recently, however, India has attracted only a small share of
global FDI and FII primarily due to government restrictions on foreign involvement in
the economy. But beginning in 1991 and accelerating rapidly since 2000, India has
liberalized its investment regulations and actively encouraged new foreign
investment, a sharp reversal from decades of discouraging economic integration with
the global economy.
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The world is increasingly becoming interdependent. Goods and services followed by
the financial transaction are moving across the borders. In fact, the world has become
a borderless world. With the globalization of the various markets, international
financial flows have so far been in excess for the goods and services among the
trading countries of the world. Of the different types of financial inflows, the FDI and
foreign institutional investment (FII)) has played an important role in the process of
development of many economies. Further many developing countries consider FDI
and FII as an important element in their development strategy among the various
forms of foreign assistance.
The FDI and FII flows are usually preferred over the other form of external finance,
because they are not debt creating, nonvolatile in nature and their returns depend upon
the projects financed by the investor. The FDI and FII would also facilitate
international trade and transfer of knowledge, skills and technology.
The government of India (GOI) has also recognized the key role of the FDI and FII in
its process of economic development, not only as an addition to its own domestic
capital but also as an important source of technology and other global trade practices.
In order to attract the required amount of FDI and FII it has bought about a number of
changes in its economic policies and has put in its practice a liberal and more
transparent FDI and FII policy with a view to attract more FDI and FII inflows into its
economy. These changes have heralded the liberalization era of the FDI and FII
policy regime into India and have brought about a structural breakthrough in the
volume of FDI and FII inflows in the economy. In this context, this report is going to
analyze the trends and patterns of FDI and FII flows into India during the post
liberalization period that is 2006 to 2009 year.
OBJECTIVES
➢ Examines the trends and patterns in the FDI across different sectors and from
different countries in India during 2000 to 2009.
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➢ Influence of FII on movement of Indian stock exchange during period that is
September 2006 to September 2009.
➢ To understand the FII & FDI policy in India.
METHODOLOGY
In order to accomplish this project successfully we will take following steps.
Data collection:
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Secondary Data: Internet, newspapers, journals and books, other reports and projects,
literatures
FDI:
The study is limited to a sample of top 10 investing countries e.g. Mauritius,
Singapore, USA etc. and top 10 sectors e.g. service sector, computer hardware and
software, telecommunications etc. which had attracted larger inflow of FDI from
different countries.
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
• Hypothesis Test: If the hypothesis holds good then we can infer that FIIs
have significant impact on the Indian capital market. This will help the
investors to decide on their investments in stocks and shares. If the hypothesis
is rejected, or in other words if the null hypothesis is accepted, then FIIs will
have no significant impact on the Indian bourses.
FOREIGN DIRECT INVESTMENT
In this section we are going to discuss or describe the main business of the report i.e.
analysis of secondary data. It includes data in an organized form, discussion on its
significance and analyzing the results. For this we had divided this section in further
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two subsections i.e. the first subsection fulfill the requirement of first objective which
is pertaining to FDI.
Objective 1: Examine the trends and patterns in the FDI across different sectors
and from different countries in India during 2000 to 2009.
I. About foreign direct investment.
Is the process whereby residents of one country (the source country) acquire
ownership of assets for the purpose of controlling the production, distribution, and
other activities of a firm in another country (the host 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).
II. 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.
Forbidden Territories:
• Arms and ammunition
• Atomic Energy
• Coal and lignite
• Rail Transport
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• 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.
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.
I. 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
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approval by the RBI.
2. The FIPB Route – Processing of non-automatic approval cases –
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