FDI

DISSERTATION ON

ANALYTICAL STUDY OF FOREIGN DIRECT INVESTMENT

IN INDIA

A Report Submitted to Delhi Business School, New Delhi as a part fulfillment of

MBA+PGP Graduate Program (Industry Integrated) in Entrepreneurship and Business.

Submitted to: Submitted by:Miss. Setuma Rawal, Vivek KumarDirector, Academics Roll No. DBS/08-10/S-293Delhi Business School Batch: 2008-10New Delhi Semester 4

Punjab Technical University, Jalandhar

Internal guide:

Mr. lokhnath Mishra

Delhi Business School,

dbs

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Delhi Business School, New Delhi

B-II/58, M.C.I.E., Mathura Road, New Delhi Website: www.dbs.edu.in

ACKNOWLEDGEMENTS

I feel the pleasure to have an opportunity to express my deep and sincere feelings of gratitude towards all the personalities who have helped me to convert my dreams into the reality.

Express my sincerest gratitude to Mr. Vijay Kumar, who spared his precious time and helped to solve the problem that I faced in the processing and analysis of this project.

Sincere thanks to our Director Academics, Setuma Rawal, for making this experience of summer training in an esteemed organization like Standard Chartered Bank possible. The learning from this experience has been immense and would be cherished throughout life.

Thankful to my Project Mentor Mr. Lokhnath Mishra for her guidance and support at every step while completing this project and providing me the accurate and detailed information to complete this report as part of my curriculum. Without her continuous help and enthusiasm the project would not have been materialized in the present form.

I pay my sincere regards to my parents and friends who always encouraged and helped me in the preparation of this project.

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VIVEK KUMAR

DECLARATION

I, Vivek Kumar, hereby declare that the dissertation entitled COMPRATIVE

STUDY- RETURN OF MUTUAL FUND AND INSURANCE ULIPS IN INDIAN

CONTEXT submitted for the Post-Graduate Programe in Management is my

original work and the dissertation has not formed the basis for the award of

any degree, diploma, associate ship, fellowship or similar other titles. It has

not been submitted to any other university or Institution of higher learning for

award of any degree or diploma.

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Place: NEW DELHI Signature of Student

Date: 20-07-09 Name: VIVEK KUMAR

Enrolment No: DBS/08 -10/S-293

PREFACE

MBA is the stepping-stone to management career. In order to achieve practical,

positive and concrete result, the classroom learning has to be effectively supplemented

in relation to the situation existing outside the classroom for developing healthy

managerial and administrative skills in a potential manager. It is necessary that the

theoretical knowledge must be supplemented with exposure to the real environment.

This Project provided me with an opportunity to do an in depth study of the

recent trends in market and investors . Starting from consulting books, management

journals, surfing internet for latest details, carrying out a research study and survey,

at the end of this research dissertation I have gained a considerable understanding of

the topic of my study- “COMPARATIVE STUDY- RETURN OF MUTUAL FUNDS

AND INSURANCE ULIPS IN INDIAN CONTEXT”

A sincere effort has been made in the report to present my viewpoints on the

project report and enough literature has been derived from various sources, which

have been acknowledged in the Bibliography.

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TABLE OF CONTENTS

.

Introduction

Meaning

Definition

History

Objective of the study

Research methodology

Conclusion

Recommendations & suggestions

Limitations of research

Bibliography

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Annexure

Introduction and overview

What is Foreign Direct Investment?

Meaning:

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

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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 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 (North America, Western Europe and Japan).But flows to non-

industrialized countries are increasing sharply. Foreign direct investment (FDI) refers

to long term participation by country A into country B.

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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.

• 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.

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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.

The Eclectic Paradigm

• Distinguishes between:

– Structural market failure – external condition that gives rise to

monopoly advantages as a result of entry barriers

– Transactional market failure – failure of intermediate product markets

to transact goods and services at a lower cost than internationalization

The Dynamic Capability Perspective

• A firm’s ability to diffuse, deploy, utilize and rebuild firm-specific resources for

a competitive advantage.

• Ownership specific resources or knowledge are necessary but not sufficient

for international investment or production success.

• It is necessary to effectively use and build dynamic capabilities for quantity

and/or quality based deployment that is transferable to the multinational

environment.

• Firms develop centers of excellence to concentrate core competencies to the

host environment.

Monopolistic Advantage Theory

• An MNE has and/or creates monopolistic advantages that enable it to operate

subsidiaries abroad more profitably than local competitors.

• Monopolistic Advantage comes from:

– Superior knowledge – production technologies, managerial skills,

industrial organization, knowledge of product.

– Economies of scale – through horizontal or vertical FDI

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Internationalization Theory

• When external markets for supplies, production, or distribution fails to provide

efficiency, companies can invest FDI to create their own supply, production, or

distribution streams.

• Advantages

– Avoid search and negotiating costs

– Avoid costs of moral hazard (hidden detrimental action by external

partners)

– Avoid cost of violated contracts and litigation

– Capture economies of interdependent activities

– Avoid government intervention

– Control supplies

– Control market outlets

– Better apply cross-subsidization, predatory pricing and transfer pricing

Definition

Foreign direct investment is that investment, which is made to serve the business

interests of the investor in a company, which is in a different nation distinct from the

investor's country of origin. A parent business enterprise and its foreign affiliate are

the two sides of the FDI relationship. Together they comprise an MNC.

The parent enterprise through its foreign   direct   investment  effort seeks to exercise

substantial control over the foreign affiliate company. 'Control' as defined by the UN,

is ownership of greater than or equal to 10% of ordinary shares or access to voting

rights in an incorporated firm. For an unincorporated firm one needs to consider an

equivalent criterion. Ownership share amounting to less than that stated above is

termed as portfolio investment and is not categorized as FDI.

FDI stands for Foreign Direct Investment, a component of a country's national

financial accounts. Foreign direct investment is investment of foreign assets into

domestic structures, equipment, and organizations. It does not include foreign

investment into the stock markets. Foreign direct investment is thought to be more

useful to a country than investments in the equity of its companies because equity

investments are potentially "hot money" which can leave at the first sign of trouble,

whereas FDI is durable and generally useful whether things go well or badly.

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FDI or Foreign Direct Investment is any form of investment that earns interest in

enterprises which function outside of the domestic territory of the investor. 

FDIs require a business relationship between a parent company and its foreign

subsidiary. Foreign direct business relationships give rise to multinational

corporations. For an investment to be regarded as an FDI, the parent firm needs to

have at least 10% of the ordinary shares of its foreign affiliates. The investing firm

may also qualify for an FDI if it owns voting power in a business enterprise operating

in a foreign country.

History

In the years after the Second World War global FDI was dominated by the United States, as

much of the world recovered from the destruction brought by the conflict. The US accounted

for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960.

Since that time FDI has spread to become a truly global phenomenon, no longer the

exclusive preserve of OECD countries.

FDI has grown in importance in the global economy with FDI stocks now constituting

over 20 percent of global GDP. 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 (North America, Western

Europe and Japan). But flows to non-industrialized countries are increasing sharply.

Foreign Direct investor

A foreign direct investor is an individual, an incorporated or unincorporated public or

private enterprise, a government, a group of related individuals, or a group of related

incorporated and/or unincorporated enterprises which has a direct investment

enterprise – that is, a subsidiary, associate or branch – operating in a country other

than the country or countries of residence of the foreign direct

investor or investors.

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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. 

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.

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

competitive disadvantage.

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:

low corporate 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

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Why is FDI important for any consideration of going global?

The simple answer is that making a direct foreign investment allows companies to

accomplish several tasks:

1 .Avoiding foreign government pressure for local production.

2. Circumventing trade barriers, hidden and otherwise.

3. Making the move from domestic export sales to a locally-based national sales

office.

4. Capability to increase total production capacity.

5.Opportunities for co-production, joint ventures with local partners, joint marketing

arrangements, licensing, etc;

A more complete response might address the issue of global business partnering in

very general terms.  While it is nice that many business writers like the expression,

“think globally, act locally”, this often used cliché does not really mean very much to

the average business executive in a small and medium sized company.   The phrase

does have significant connotations for multinational corporations.  But for executives

in SME’s, it is still just another buzzword.  The simple explanation for this is the

difference in perspective between executives of multinational corporations and small

and medium sized companies.  Multinational corporations are almost always

concerned with worldwide manufacturing capacity and proximity to major

markets.  Small and medium sized companies tend to be more concerned with

selling their products in overseas markets.  The advent of the Internet has ushered in

a new and very different mindset that tends to focus more on access issues.  SME’s

in particular are now focusing on access to markets, access to expertise and most of

all access to technology.

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The Strategic Logic behind FDI

• Resources seeking – looking for resources at a lower real cost.

• Market seeking – secure market share and sales growth in target foreign

market.

• Efficiency seeking – seeks to establish efficient structure through useful

factors, cultures, policies, or markets.

• Strategic asset seeking – seeks to acquire assets in foreign firms that

promote corporate long term objectives.

Enhancing Efficiency from Location Advantages

• Location advantages - defined as the benefits arising from a host country’s

comparative advantages.- Better access to resources

– Lower real cost from operating in a host country

– Labor cost differentials

– Transportation costs, tariff and non-tariff barriers

– Governmental policies

Improving Performance from Structural Discrepancies

• Structural discrepancies are the differences in industry structure attributes

between home and host countries. Examples include areas where:

– Competition is less intense

– Products are in different stages of their life cycle

– Market demand is unsaturated

– There are differences in market sophistication

Increasing Return from Ownership Advantages

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• Ownership Advantages come from the application of proprietary tangible

and intangible assets in the host country.

– Reputation, brand image, distribution channels

– Technological expertise, organizational skills, experience

• Core competence – skills within the firm that competitors cannot easily

imitate or match.

Ensuring Growth from Organizational Learning

• MNEs exposed to multiple stimuli, developing:

– Diversity capabilities

– Broader learning opportunities

• Exposed to:

– New markets

– New practices

– New ideas

– New cultures

– New competition

The Impact of FDI on the Host Country Employment

– Firms attempt to capitalize on abundant and inexpensive labor.

– Host countries seek to have firms develop labor skills and

sophistication.

– Host countries often feel like “least desirable” jobs are transplanted

from home countries.

– Home countries often face the loss of employment as jobs move.

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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.

The Impact of FDI on the Host Country Employment

– Firms attempt to capitalize on abundant and inexpensive labor.

– Host countries seek to have firms develop labor skills and

sophistication.

– Host countries often feel like “least desirable” jobs are transplanted

from home countries.

– Home countries often face the loss of employment as jobs move.

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

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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 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

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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. Local

authorities are not part of the approvals process and have their own rights, and this

often leads to projects getting bogged to projects getting bogged down in red tape

and bureaucracy. India actually receives less than half the FDI that the federal

government approves.

Sovereign Risk

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"

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Investment Risks in India

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 t involves some kind of gamble and

hence involves commercial risk

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

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would decide the flow of foreign investment and in this regard India would continue to be a favorable investment destination.

FDI Policy in India

Foreign Direct Investment Policy

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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

Government Approvals for Foreign Companies Doing Business in India or

Investment Routes for Investing in India, Entry Strategies for Foreign Investors

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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

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Investing Companies in Infrastructure & Service Sector

Atomic Energy & Related Projects

Defense and Strategic Industries

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

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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.

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

28

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

29

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 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.

30

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.

Local authorities are not part of the approvals process and have their own rights, and

this often leads to projects getting bogged down in red tape and bureaucracy. India

actually receives less than half the FDI that the federal government approves.

31

Investment Risks in India

Sovereign Risk

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

32

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

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 destination.

33

FDI Policy in India

Foreign Direct Investment Policy

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

34

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

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

35

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

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.

36

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.

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.

37

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).

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.

38

Sector Specific Foreign Direct Investment in India

Hotel & Tourism: FDI in Hotel & Tourism sector in India100% 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

39

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.

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

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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

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

41

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.

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);

42

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.

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;

43

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.

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

FDI up to 100% permitted for e-commerce activities subject to the condition that

such companies would divest 26% of their equity in favor of the Indian public in five

years, if these companies are listed in other parts of the world. Such companies

would engage only in business to business (B2B) e-commerce and not in retail

trading.

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.

44

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.

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

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

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.

45

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.

7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from

Shares or Debentures of an Indian

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%.

46

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.

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

47

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

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

48

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 Appliances

8087.87 177.42 0.23

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

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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

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

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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.

1. Clearance from FIPB –

51

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.

52

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.

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

53

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

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

100% Automatic

54

xiii. Industries Reserved for

Small Scale Sector

13. Airports:

Greenfield projects

Existing projects

100%

100%

Automatic

Beyond 74% FIPB

14 Assets reconstruction

company

49% FIPB

15. Cigars and cigarettes 100% FIPB

16. Courier services 100% FIPB

17. Investing companies in

infrastructure (other than

telecom sector)

49% FIPB

55

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

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 ----

56

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

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

57

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

58

59

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 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

60

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.

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.

61

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

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

62

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 & hardware (18.94 per cent), construction activities

including road & highways (16.35 per cent) and power (1.86 per cent).

63

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 .

64

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

65

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.

66

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.

67

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

68

'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.

69

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

70

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

71

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.

72

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.

73

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.In FII, 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 FDI cannot 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.

74

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

contrary,

FII is an investment made by an investor in the markets of a foreign nation.

2. FII can enter the stock market easily and also withdraw from it easily. But FDI

cannot enter and exit easily.

3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital

availability in general.

4. The Foreign Direct Investment is considered to be more stable than Foreign

Institutional Investor

75

Objective of the 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.

76

Research methodology

In order to accomplish this project successfully we will take following steps.

Data collection:

Secondary Data:

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

literatures

FDI:

The study is limited to a sample of investing countries e.g. Mauritius, Singapore,

USA etc. and 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.

77

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.

78

Recommendations & suggestions

1. FDI is good for growth of economy.

2. It generates employment for the country.

3. It increases standard living of the people.

4. Investment in a particular region leads to regional development.

5. The gap of regional disparity can be minimized.

6. New MNC comes with new Technology.

79

Limitations of research

1. Profit of MNC will go outside the India.2. Balance of payment can be unfavorable for India3. The Government should control on much investment.4. Government must safeguard the interest of Indian economy.

80

Bibliography

www.rbi.org

www.fin.in.nic

www.sebi.org

http://books.google.co.in/books?id=0VUafaE3pOIC&pg=PA4&dq=types+of+foreign+direct+investment&hl=en&ei=efzrS_rEAoy5rAfv34DbBg&sa=X&oi=book_result&ct=book-thumbnail&resnum=1&ved=0CDUQ6wEwAA#v=onepage&q=types%20of%20foreign%20direct%20investment&f=false

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

http://finance.indiamart.com/investment_in_india/fdi.html

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

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

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

http://www.legalserviceindia.com/articles/fdi_india.htm

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