1. Executive Summary The major impact during the recessionary period was mainly due to the negative flow of FII in India while the FDI remained moderately unaffected with the global slowdown. The attractiveness of India for FDI is far from receding and can surely be expected to sustain over the next decade as well. The single most important parameter that is driving FDI into the country is the rapid growth of India’s GDP and the huge potential returns for the foreign investors. Moreover, FDI into India is focused on industries and sectors which can be considered to be recession- proof. In contrasts, the FDI flows into India were primarily into the services sector and were used for establishing BPO’s. The businesses setup with the FDI money in India remained active during and after the recession The recession had an impact on the total foreign investments in India, as in the year 2007-08:Q4 the net FI was $ 4760 million which fell from $ 16892 million in 2007-08:Q3.This stagnant growth continued till 2008-09:Q3 where this further fell to $ -5376 million and in 2008-09:Q4 $ 492.However there are signs of recovery as the results of 2009-10:Q1 shows positive growth of $ 15101 million. 1
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
1. Executive Summary
The major impact during the recessionary period was mainly due to the negative flow of
FII in India while the FDI remained moderately unaffected with the global slowdown.
The attractiveness of India for FDI is far from receding and can surely be expected to
sustain over the next decade as well. The single most important parameter that is driving
FDI into the country is the rapid growth of India’s GDP and the huge potential returns for
the foreign investors. Moreover, FDI into India is focused on industries and sectors which
can be considered to be recession- proof. In contrasts, the FDI flows into India were
primarily into the services sector and were used for establishing BPO’s. The businesses
setup with the FDI money in India remained active during and after the recession
The recession had an impact on the total foreign investments in India, as in the year
2007-08:Q4 the net FI was $ 4760 million which fell from $ 16892 million in 2007-
08:Q3.This stagnant growth continued till 2008-09:Q3 where this further fell to $ -5376
million and in 2008-09:Q4 $ 492.However there are signs of recovery as the results of
2009-10:Q1 shows positive growth of $ 15101 million.
According to findings and results, we have concluded that FII did have significant impact
on BSE and NSE turnover but there is less co-relation with Bankex and IT.
1
2. Introduction
The report of the project “Foreign direct investment (FDI) and foreign institutional
investors (FII) in India” mainly focused on the following areas:
A) FOREIGN DIRECT INVESTMENT (FDI)
FDI is treated as a main engine of economic growth and technological development
which provides ample opportunities in accelerating economic development.Net foreign
direct investment (FDI) flows into India reached 161481 Rs crore in India’s 2008–09
fiscal year, means increase of 2% of the 138276 crore recorded during 2007–08, with the
largest share of FDI flows from Mauritius, followed by the United States and the United
Kingdom. This study examines FDI in India, in the context of the Indian economic and
regulatory environment. This study present FDI trends in India, by country and by sectors
during the post liberalization period that is 1991 to 2010 year, using official government
data from Indian official government internet site like that of RBI, SEBI. To illustrate the
driving forces behind these trends, the study also discusses the investment climate in
India, Indian government incentives to foreign investors, the Indian regulatory
environment as it affects investment, and the effect of India’s global, regional, and
bilateral trade agreements on investment from top 10 FDI investing countries. Finally, the
study examines global FDI in India’s in top 10 sectors of industry.
B) FOREIGN INSTITUTIONAL INVESTORS (FII)
Institutional Investor is any investor or investment fund that is from or registered in a
country outside of the one in which it is currently investing. Institutional investors
include hedge funds, insurance companies, pension funds and mutual funds. The growing
Indian market had attracted the foreign investors, which are called Foreign Institutional
Investors (FII) to Indian equity market, and this study present try to explain the impact
and extent of foreign institutional investors in Indian stock market and examining
whether market movement can be explained by these investors. It is often hear that
2
whenever there is a rise in market, it is explained that it is due to foreign investors' money
and a decline in market is termed as withdrawal of money from FIIs. This study tries to
examine the influence of FII on movement of Indian stock exchange during the post
liberalization period that is 1991 to 2010. Indian economy Portfolio investment mainly
comprising foreign institutional investors’ (FIIs) investments and American depository
receipts (ADRs)/global depository receipts (GDRs) witnessed large net inflows (US $
17.9 billion) in April-September 2009 (net outflows of US $ 5.5 billion in April-
September 2008) due to large purchases by FIIs in the Indian capital market reflecting
revival in growth prospects of the economy and improvement in global investors’
sentiment.
Foreign investment refers to investments made by the residents of a country in the
financial assets and production processes of another country. 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: foreign direct investment (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 foreign direct investment (FDI) and foreign
institutional investment (FII). Until recently, however, India has attracted only a small
3
share of global foreign direct investment (FDI) and foreign institutional investment (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.
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 foreign direct investment
(FDI) and foreign institutional investment (FII)) has played an important role in the
process of development of many economies. Further many developing countries consider
foreign direct investment (FDI) and foreign institutional investment (FII) as an important
element in their development strategy among the various forms of foreign assistance.
The Foreign direct investment (FDI) and foreign institutional investment (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 Foreign direct investment (FDI) and foreign institutional investment (FII)
would also facilitate international trade and transfer of knowledge, skills and technology.
The Foreign direct investment (FDI) and foreign institutional investment (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), foreign direct investment (FDI) and
foreign institutional investment (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”.
4
The government of India(GOI) has also recognized the key role of the foreign direct
investment (FDI) and foreign institutional investment (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 foreign direct investment (FDI) and foreign institutional investment (FII), it
has bought about a number of changes in its economic policies and has put in its practice
a liberal and more transparent foreign direct investment (FDI) and foreign institutional
investment (FII) policy with a view to attract more foreign direct investment (FDI) and
foreign institutional investment (FII) inflows into its economy. These changes have
heralded the liberalization era of the foreign direct investment (FDI) and foreign
institutional investment (FII) policy regime into India and have brought about a structural
breakthrough in the volume of foreign direct investment (FDI) and foreign institutional
investment (FII) inflows in the economy. In this context, this report is going to analyze
the trends and patterns of foreign direct investment (FDI) and foreign institutional
investment (FII) flows into India during the post liberalization period that is 1991 to 2010
year.
5
3. Research Methodology
3.1 Objective of the project
Objective 1: Examines the trends and patterns in the foreign direct investment (FDI)
across different sectors and from different countries in India during 1991-2010 period
means during post liberalization period.
Objective 2: Influence of recession on FII and FDI.
3.2 Hypothesis
H0-The NSE and BSE indexes do not rise with the increase in FIIs investments in India
means FIIs have no influence on Indian stock exchange.
H1-The NSE and BSE indexes results in a rise with the increase in FIIs investment in
India means FIIs have an influence on Indian stock exchange.
H0- FDI has a negative impact on the investments in India
H1- FDI has a positive impact on the investments in India
The data regarding indices of NSE and BSE is taken from “HANDBOOK OF
STATISTICS ON THE INDIAN SECURITIES MARKET 2008-09”.
3.3 Methodology
The lifeblood of business and commerce in the modern world is information. The ability
to gather, analyze, evaluate, present and utilize information is therefore is a vital skill for
the manager of today.
In order to accomplish this project successfully I will take following steps.
6
1) Sampling: The study is limited to a sample of top 10 investing countries e.g.
Mauritius, USA etc. and top 10 sectors e.g. electrical instruments,
telecommunications etc. which had attracted larger inflow of FDI and data of
NSE and BSE stock exchanges will be taken to know the impact of FII.
2) Data Collection:
The research will be done with the help Secondary data (from internet
site and journals).
The data is collected mainly from websites, annual reports, World Bank
reports, research reports, already conducted survey analysis, database
available etc.
3) Analysis: Appropriate Statistical tools like correlation and regression has been
used to analyze the data like to analyze the growth and patterns of the FDI and FII
flows in India during the post liberalization period, the liner trend model will be used.
Further the percentage analysis will be used to measure the share of each investing
countries and the share of each sectors in the overall flow of FDI and FII into India.
3.4 Limitations of the study
A) The study has limited itself to a sample of top ten investing countries and
top ten level sectors which have attracted higher inflow of FDI.
B) The data for analysis of impact of FII on stock exchange is limited to
National stock exchange (NSE) and Bombay stock exchange (BSE) only.
7
4. Foreign Direct Investments
In this section I am 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 I had divided this section in further two
subsections i.e. the first subsection fulfill the requirement of first objective which is
pertaining to FDI. The objective for FDI is to examine the trends and patterns in the
foreign direct investment (FDI) across different sectors and from different countries in
India during 1991-2010 period means during post liberalization period. And the second
subsection fulfills the analysis of second objective which is pertaining to FII.
Objective 1: Examine the trends and patterns in the foreign direct investment (FDI)
across different sectors and from different countries in India during 1991-2010
period means during post liberalization period.
4.1 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 investor’s
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).
8
4.2 Foreign direct investment: Indian scenario
Foreign Direct Investment (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 –
FDI is not permitted in the following industrial sectors:
Arms and ammunition.
Atomic Energy.
Railway Transport.
Coal and lignite.
Mining of iron, manganese, chrome, gypsum, gold, diamonds, copper, zinc.
Retail Trading (except single brand product retailing).
Lottery Business
Gambling and Betting
Business of chit fund
Nidhi Company
Trading in Transferable Development Rights (TDRs).
Activity/sector not opened to private sector investment.
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.
9
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.
3. Restrictions –
However, investment in stock markets and real estate will not be permitted. Companies
may retain the proceeds abroad or may remit funds into India in anticipation of the use of
funds for approved end uses. Any investment from a foreign firm into India requires the
prior approval of the Government of India.
10
4.3 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 –
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.
4.4 Analysis of sector specific policy for FDI
Table no. 1: Sector-specific policy for FDI
Sr.
No
Sector/Activity FDI Entry/Route
1. Hotel & Tourism 100% Automatic
2. NBFC 49% Automatic
3. Insurance 26% Automatic
4. Telecommunication:
cellular, VAS, ISPs with gateways, radio-paging, Electronic