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Table of contents
1. Introduction......02
1.1 Objective of project.....041.2 Research Methodology....05
2. Main text (FDI)....06
2.1 About foreign direct investment 07
2.2 FDI Indian scenario.08
2.3 FDI in India approval route.10
2.4 Analysis of sector specific policy of FDI11
2.5 Analysis of share of top ten investing countries in India.....16
2.6 Analysis of sectors attracting highest FDI equity in flows..20
3. Main text (FII)..22
3.1 Introduction to FII....27
3.2 Market design in India for FIIs....28
3.3 Registration process of FIIs.29
3.4 Prohibition on investment31
3.5 Trends of FIIs in India.32
3.6 Analysis of trends in FIIs investment..33
3.7 Details of indices taken36
3.8 Framing of hypothesis.38
3.9 Recording of observation.39
4. Key findings.40
5. Limitation. 42
6. Conclusion ...43
7. Bibliography44
7.1 Internet sites....44
7.2 Journal.44
7.3 Books..44
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1 . INTRODUCTION
Foreign investment refers to investments made by the residents of a country in the
financial assets and production processes of another country. The effect of foreign
investment, however, varies from country to country. It can affect the factor productivityof the recipient country and can also affect the balance of payments. Foreign investment
provides a channel through which countries can gain access to foreign capital. It can
come in two forms: foreign direct investment (FDI) and foreign institutional investment
(FII). Foreign direct investment involves in direct production activities and is also of a
medium- to long-term nature. But foreign institutional investment is a short-term
investment, mostly in the financial markets. FII, given its short-term nature, can have
bidirectional causation with the returns of other domestic financial markets such as
money markets, stock markets, and foreign exchange markets. Hence, understanding the
determinants of FII is very important for any emerging economy as FII exerts a larger
impact on the domestic financial markets in the short run and a real impact in the long
run. India, being a capital scarce country, has taken many measures to attract foreign
investment since the beginning of reforms in 1991.
India is the second largest country in the world, with a population of over 1 billion
people. As a developing country, Indias economy is characterized by wage rates that are
significantly lower than those in most developed countries. These two traits combine to
make India a natural destination for foreign direct investment (FDI) and foreign
institutional investment (FII). Until recently, however, India has attracted only a small
share of global foreign direct investment (FDI) and foreign institutional investment (FII),
primarily due to government restrictions on foreign involvement in the economy. But
beginning in 1991 and accelerating rapidly since 2000, India has liberalized its
investment regulations and actively encouraged new foreign investment, a sharp reversal
from decades of discouraging economic integration with the global economy.
The world is increasingly becoming interdependent. In fact, the world has become a
borderless world. With the globalization of the various markets, international financial
flows have so far been in excess for the goods and services among the trading countries
of the world. Of the different types of financial inflows, the foreign direct investment
(FDI) and foreign institutional investment (FII)) has played an important role in the
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process of development of many economies. Further many developing countries consider
foreign direct investment (FDI) and foreign institutional investment (FII) as an important
element in their development strategy among the various forms of foreign assistance.
The Foreign direct investment (FDI) and foreign institutional investment (FII) flows are
usually preferred over the other form of external finance, because they are not debt
creating, nonvolatile in nature and their returns depend upon the projects financed by the
investor. The Foreign direct investment (FDI) and foreign institutional investment (FII)
would also facilitate international trade and transfer of knowledge, skills and technology.
The Foreign direct investment (FDI) and foreign institutional investment (FII) is the
process by which the resident of one country(the source country) acquire the ownership
of assets for the purpose of controlling the production, distribution and other productive
activities of a firm in another country(the host country).
According to the international monetary fund (IMF), foreign direct investment (FDI) and
foreign institutional investment (FII) is defined as an investment that is made to acquire
a lasting interest in an enterprise operating in an economy other than that of investor.
The government of India (GOI) has also recognized the key role of the foreign direct
investment (FDI) and foreign institutional investment (FII) in its process of economic
development, not only as an addition to its own domestic capital but also as an important
source of technology and other global trade practices. In order to attract the required
amount of foreign direct investment (FDI) and foreign institutional investment (FII), it
has bought about a number of changes in its economic policies and has put in its practice
a liberal and more transparent foreign direct investment (FDI) and foreign institutional
investment (FII) policy with a view to attract more foreign direct investment (FDI) and
foreign institutional investment (FII) inflows into its economy. These changes have
heralded the liberalization era of the foreign direct investment (FDI) and foreign
institutional investment (FII) policy regime into India and have brought about a structural
breakthrough in the volume of foreign direct investment (FDI) and foreign institutional
investment (FII) inflows in the economy. In this context, this report is going to analyze
the trends and patterns of foreign direct investment (FDI) and foreign institutional
investment (FII) flows into India during the post liberalization period that is 1991 to 2007
year.
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1.1 Objective of the project
Objective 1 pertaining to FDI: examines the trends and patterns in the foreign direct
investment (FDI) across different sectors and from different countries in India during
1991-2007 period means during post liberalization period. Objective 2 pertaining to FII:
influence of FII on movement of Indian stock exchange during the post liberalization
period that is 1991 to 2007.
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1.2 Research Methodology
The lifeblood of business and commerce in the modern world is information. The ability
to gather, analyze, evaluate, present and utilize information is therefore is a vital skill for
the manager of today.In order to accomplish this project successfully I will take following steps.
1) Data Collection:
The analysis will be done with the help Secondary data (from internet site and
journals).
The data is collected mainly from websites, annual reports, World Bank reports,
research reports, already conducted survey analysis, database available etc.
2) Analysis:
Appropriate Statistical tools like correlation and regression will be used to analyze the
data like to analyze the growth and patterns of the FDI and FII flows in India during the
post liberalization period, the liner trend model will be used. Further the percentage
analysis will be used to measure the share of each investing countries and the share of
each sectors in the overall flow of FDI and FII into India.
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2.MAIN TEXT (FDI)
In this section I am going to discuss or describe the main business of the report i.e.
analysis of secondary data. It includes data in an organized form, discussion on its
significance and analyzing the results. For this I had divided this section in further twosubsections i.e. the first subsection fulfill the requirement of first objective which is
pertaining to FDI. The objective for FDI is to examine the trends and patterns in the
foreign direct investment (FDI) across different sectors and from different countries in
India during 1991-2007 period means during post liberalization period. And the second
subsection fulfills the analysis of second objective which is pertaining to FII. The
objective for FII is to examine the influence of FII on movement of Indian stock
exchange during the post liberalization period that is 1991 to 2007.
Subsection I: objective 1: Examine the trends and patterns in the
foreign direct investment (FDI) across different sectors and from
different countries in India during 1991-2007 period means during post
liberalization period.
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2.1 About foreign direct investment
Is the process whereby residents of one country (the source country) acquire ownership
of assets for the purpose of controlling the production, distribution, and other activities of
a firm in another country (the host country). The international monetary funds balance of
payment manual defines FDI as an investment that is made to acquire a lasting interest in
an enterprise operating in an economy other than that of the investor. The investors
purpose being to have an effective voice in the management of the enterprise. The
united nations 1999 world investment report defines FDI as an investment involving a
long term relationship and reflecting a lasting interest and control of a resident entity in
one economy (foreign direct investor or parent enterprise) in an enterprise resident in an
economy other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise
or foreign affiliate).
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2.2 Foreign direct investment: Indian scenario
Foreign Direct Investment (FDI) is permitted as under the following forms of
investments
Through financial collaborations.
Through joint ventures and technical collaborations.
Through capital markets via Euro issues.
Through private placements or preferential allotments.
Forbidden Territories
FDI is not permitted in the following industrial sectors:
Arms and ammunition.
Atomic Energy.
Railway Transport.
Coal and lignite.
Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper,
zinc.
Retail Trading (except single brand product retailing).
Lottery Business
Gambling and Betting
Business of chit fund
Nidhi Company
Trading in Transferable Development Rights (TDRs).
Activity/sector not opened to private sector investment.
Foreign Investment through GDRs (Euro Issues)
Indian companies are allowed to raise equity capital in the international market through
the issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI and
are designated in dollars and are not subject to any ceilings on investment. An applicant
company seeking Government's approval in this regard should have consistent track
record for good performance (financial or otherwise) for a minimum period of 3 years.
This condition would be relaxed for infrastructure projects such as power generation,
telecommunication, petroleum exploration and refining, ports, airports and roads.
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1. Clearance from FIPB
There is no restriction on the number of Euro-issue to be floated by a company or a group
of companies in the financial year. A company engaged in the manufacture of items
covered under Annex-III of the New Industrial Policy whose direct foreign investment
after a proposed Euro issue is likely to exceed 51% or which is implementing a project
not contained in Annex-III, would need to obtain prior FIPB clearance before seeking
final approval from Ministry of Finance.
2. Use of GDRs
The proceeds of the GDRs can be used for financing capital goods imports, capital
expenditure including domestic purchase/installation of plant, equipment and building
and investment in software development, prepayment or scheduled repayment of earlier
external borrowings, and equity investment in JV/WOSs in India.
3. Restrictions
However, investment in stock markets and real estate will not be permitted. Companies
may retain the proceeds abroad or may remit funds into India in anticipation of the use of
funds for approved end uses. Any investment from a foreign firm into India requires the
prior approval of the Government of India.
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2.3 Foreign direct investments in India are approved through two
routes
1. Automatic approval by RBI
The Reserve Bank of India accords automatic approval within a period of two weeks(subject to compliance of norms) to all proposals and permits foreign equity up to 24%;
50%; 51%; 74% and 100% is allowed depending on the category of industries and the
sectoral caps applicable. The lists are comprehensive and cover most industries of interest
to foreign companies. Investments in highpriority industries or for trading companies
primarily engaged in exporting are given almost automatic approval by the RBI.
2. The FIPB Route Processing of non-automatic approval cases
FIPB stands for Foreign Investment Promotion Board which approves all other cases
where the parameters of automatic approval are not met. Normal processing time is 4 to 6
weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are
few. It is not necessary for foreign investors to have a local partner, even when the
foreign investor wishes to hold less than the entire equity of the company. The portion of
the equity not proposed to be held by the foreign investor can be offered to the public.
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2.4 Analysis of sector specific policy for FDI
Table no. 1: Sector-specific policy for FDI: (source of following table is
http://dipp.nic.in/fdi_statistics/india_fdi_index.htm)
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2.5 Analysis of share of top ten investing countries FDI equity in flows
Table no. 2: Share of top investing countries FDI equity inflows.
(Source: http://dipp.nic.in/fdi_statistics/india_fdi_index.htm)
Cumulative amount of FDI inflows (From Aug. 1991 to march 2007): Rs. 2,32,041
crore and US$ 54,628 million.
Foreign investors have begun to take a more active role in the Indian economy in recent
years. By country, the largest direct investor in India is Mauritius; largely because of the
India-Mauritius double-taxation treaty. Firms based in Mauritius invested 79162 crores in
India between Aug. 1991 and March 2007, equal to 34.11 percent of total FDI inflows.
The second largest investor in India is the United States, with total capital flows of 24536
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crore during the 19912007 periods, followed by the United Kingdom, the Netherlands,
and Japan.
Mauritius
According to Indian government statistics, Mauritius accounts for the largest share of
cumulative FDI inflows to India from 1991 to 2007, nearly 34.11 percent. 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. The existence of the treaty makes it difficult to clearly understand the
pattern of FDI flows, and likely leads to reduced tax revenues collected by the Indian
government.
United States
The United States is the second largest source of FDI in India (10.57 % of the total),
valued at 24536 crore in cumulative inflows between August 1991 and March 2007.
According to the Indian government, the top sectors attracting FDI from the United States
to India during 19912007 (latest available) are fuel (36 percent), telecommunications
(11 percent), electrical equipment (10 percent), food processing (9 percent), and services
(8 percent). 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. Since 2002, many of the major U.S. software and computer brands, such
as Microsoft, Honeywell, Cisco Systems, Adobe Systems, McAfee, and Intel have
established R&D operations in India, primarily in Hyderabad or Bangalore. The majority
of U.S. electronics companies that have announced greenfield projects in India are
concentrated in the semiconductor sector. By far the largest such project is AMDs chip
manufacturing facility in Hyderabad, Andhra Pradesh. The largest share (36 percent) was
found in the manufacturing sector, most prominently in the machinery, chemicals, and
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transportation equipment manufacturing segments. Other important categories of
employment are professional, scientific, and technical services; and wholesale trade, with
29 percent and 18 percent of U.S. affiliate employment, respectively.
European Union
Within the European Union, the largest country investors were the United Kingdom and
the Netherlands, with 16660 crore and 11402 crore, respectively, of cumulative FDI
inflows between Aug. 1991 and March 2007. The United Kingdom, the Netherlands, and
Germany together accounted for almost 75 percent of all FDI flows from the EU to India.
All EU countries together accounted for approximately 25 percent of all FDI inflows to
India between August 1991 and March 2007. FDI from the EU to India is primarily
concentrated in the power/energy, telecommunications, and transportation sectors. The
top sectors attracting FDI from the European Union are similar to FDI from the United
States. Manufacturing; information services; and professional, scientific, and technical
services have attracted the largest shares of FDI inflows from the EU to India since 2000.
Unilever, Reuters Group, P&O Ports Ltd, Vodafone, and Barclays are examples of EU
companies investing in India by means of mergers and acquisitions. European companies
accounted for 31 percent of the total number and 43 percent of the total value for all
reported Greenfield FDI projects. The number of EU Greenfield projects was distributed
among four major clusters: ICT (17 percent), heavy industry (16 percent), business and
financial services (15 percent), and transport (11 percent). However, the heavy industry
cluster accounted for the majority (68 percent) of the total value of these projects.
Japan
Japan was the Fifth largest source of cumulative FDI inflows in India between August
1991 and March 2007, i.e. the cumulative flow is 9313 crore and it is 4.01% of total
inflow. FDI inflows to India from most other principal source countries have steadily
increased since 2000, but inflows from Japan to India have decreased during this time
period. There does not appear to be a single factor that explains the recent decline in FDI
inflows from Japan to India. India is, however, one of the largest recipients of Japanese
Official Development Assistance (ODA), through which Japan has assisted India in
building infrastructure, including electricity generation, transportation, and water supply.
It is possible that this Japanese government assistance may crowd out some private sector
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Japanese investment. The top sectors attracting FDI inflows from Japan to India are
transportation (54 percent), electrical equipment (7 percent), telecommunications, and
services (3 percent). The available M&A data corresponds with the overall FDI trends in
sectors attracting inflows from Japan to India. Companies dealing in the transportation
industry, specifically automobiles, and the auto component/peripheral industries
dominate M&A activity from Japan to India, including Yamaha Motors, Toyota,
Kirloskar Auto Parts Ltd., and Mitsubishi Heavy Industries Ltd. Japanese companies
have also invested in an estimated 148 Greenfield FDI projects valued at least at $3.7
billion between 2002 and 2006. In April 2007, Japanese and Indian officials announced a
major new collaboration between the two countries to build a new Delhi-Mumbai
industrial corridor, to be funded through a public-private partnership and private-sector
FDI, primarily from Japanese companies. The project was begun in January 2008 with
initial investment of $2 billion from the two countries. The corridor will cross 6 states
and extend for 1,483 km, in an area inhabited by 180 million people. At completion in
2015, the corridor is expected to include total FDI of $4550 billion. A large share of that
total is destined for infrastructure, including a 4,000 MW power plant, 3 ports, and 6
airports, along with additional connections to existing ports. Private investment is
expected to fund 10-12 new industrial zones, upgrade 56 existing airports, and set up 10
logistics parks. The Indian government expects that by 2020, the industrial corridor will
contribute to employment growth of 15 percent in the region, 28 percent growth in
industrial output, and 38 percent growth in exports.
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2.6 Analysis of sectors attracting highest FDI equity inflows
Table no. 3: Sectors attracting highest FDI equity inflows :( source:
http://dipp.nic.in/fdi_statistics/india_fdi_index.htm)
The sectors receiving the largest shares of total FDI inflows between August 1991 and
March 2007 were the electrical equipment sector and the services sector, each accounting
for 18.77 and 17.84 percent respectively. These were followed by the
telecommunications, transportation, fuels, and chemicals 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. ICT and electronics have been the largest industry recipients of Greenfield FDI
into India in recent years, but have seen the number of new Greenfield projects plateau
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since 2004. Rather, the size of the projects in these industries has increased substantially.
For example, global semiconductor manufacturers Advanced Micro Devices (AMD -
United States) and Flextronics (Singapore) have entered into separate joint ventures with
SemIndia to build semiconductor manufacturing facilities in Hyderabad. The $3 billion
AMD-SemIndia joint venture will produce semiconductor chips which can then be used
to manufacture electronic products in the Flextronics-SemIndia $3 billion joint venture.
The chip fabrication facility will manufacture chips for cell phones, set-top boxes,
personal computers, and similar products. The heavy industry and transport equipment
sectors together attracted over FDI of 15427 crore in Greenfield FDI projects during 1991
to 2007. The cluster with the highest reported value during 200206 is heavy industry.
Projects in this sector tend to be highly capital intensive, with single projects frequently
requiring upwards of $6 billion in startup investment costs. The largest recent examples
include the POSCO and Arcelor-Mittal Steel projects, and Vedanta Resources (United
Kingdom) aluminum smelter project, all planned for the state of Orissa.
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3. MAIN TEXT (FIIS)
Subsection II: objective 2: Pertaining to FII: influence of FII on
movement of Indian stock exchange during the post
liberalization period that is 1991 to 2007.
3.1 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. To operationalise this policy
announcement, it had become necessary to evolve guidelines for such investments by
Foreign Institutional Investors (FIIs).
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The policy framework for permitting FII investment was provided under the
Government of India guidelines vide Press Note date September 14, 1992. The
guidelines formulated in this regard were as follows:
1) Foreign Institutional Investors (FIIs) including institutions such as Pension Funds,
Mutual Funds, Investment Trusts, Asset Management Companies, Nominee Companies
and Incorporated/Institutional Portfolio Managers or their power of attorney holders
(providing discretionary and non-discretionary portfolio management services) would be
welcome to make investments under these guidelines.
2) FIIs would be welcome to invest in all the securities traded on the Primary and
Secondary markets, including the equity and other securities/instruments of companies
which are listed/to be listed on the Stock Exchanges in India including the OTC
Exchange of India. These would include shares, debentures, warrants, and the schemes
floated by domestic Mutual Funds Government would even like to add further categories
of securities later from time to time
3) FIIs would be required to obtain an initial registration with Securities and Exchange
Board of India (SEBI), the nodal regulatory agency for securities markets, before any
investment is made by them in the Securities of companies listed on the Stock Exchanges
in India, in accordance with these guidelines. Nominee companies, affiliates and
subsidiary companies of a FII would be treated as separate FIIs for registration, and may
seek separate registration with SEBI.
4) Since there were foreign exchanges controls in force, for various permissions under
exchange control, along with their application for initial registration, FIIs were also
supposed to file with SEBI another application addressed to RBI for seeking various
permissions under FERA, in a format that would be specified by RBI for the purpose.
RBI's general permission would be obtained by SEBI before granting initial registration
and RBI's FERA permission together by EBI, under a single window approach.
5) For granting registration to the FII, SEBI should take into account the track record of
the FII, ts professional competence, financial soundness, experience and such other
criteria that may e considered by SEBI to be relevant. Besides, FII seeking initial
registration with SEBI were required to hold a registration from the Securities
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Commission, or the regulatory rganization for the stock market in the country of
domicile/incorporation of the FII.
6) SEBI's initial registration would be valid for five years. RBI's general permission nder
FERA o the FII would also hold good for five years. Both would be renewable for similar
five year eriods later on.
7) RBI's general permission under FERA would enable the registered FII to buy, sell and
realize apital gains on investments made through initial corpus remitted to India,
subscribe/renounce ights offerings of shares, invest on all recognized stock exchanges
through a designated bank ranch, and to appoint a domestic Custodian for custody of
investments held.
8) This General Permission from RBI would also enable the FII to:
a. Open foreign currency denominated accounts in a designated bank. (There could even
be more than one account in the same bank branch each designated in different foreign
currencies, if it is so required by FII for its operational purposes);
b. Open a special non-resident rupee account to which could be credited all receipts from
the capital inflows, sale proceeds of shares, dividends and interests;
c. Transfer sums from the foreign currency accounts to the rupee account and vice versa,
at the market rate of exchange;
d. Make investments in the securities in India out of the balances in the rupee account;
e. Transfer repairable (after tax) proceeds from the rupee account to the foreign currency
account(s);
f. Repatriate the capital, capital gains, dividends, incomes received by way of interest,
etc. and any compensation received towards sale/renouncement of rights offerings of
shares subject to the designated branch of a bank/the custodian being authorized to
deduct withholding tax on capital gains and arranging to pay such tax and remitting the
net proceeds at market rates of exchange;
g. Register FII's holdings without any further clearance under FERA.
9) There would be no restriction on the volume of investment minimum or maximum-for
the purpose of entry of FIIs, in the primary/secondary market. Also, there would be no
lock-in period prescribed for the purposes of such investments made by FIIs. It was
expected that the differential in the rates of taxation of the long term capital gains and
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short term capital gains would automatically induce the FIIs to retain their investments as
long term investments.
10) Portfolio investments in primary or secondary markets were subject to a ceiling of
30% of issued share capital for the total holdings of all registered FIIs, in any one
company. The ceiling was made applicable to all holdings taking into account the
conversions out of the fully and partly convertible debentures issued by the company.
The holding of a single FII in any company would also be subject to a ceiling of 10% of
total issued capital. For this purpose, the holdings of an FII group would be counted as
holdings of a single FII.
11) The maximum holdings of 24% for all non-resident portfolio investments, including
those of the registered FIIs, were to include NRI corporate and non-corporate
investments, but did not include the following:
a. Foreign investments under financial collaborations (direct foreign investments), which
are permitted up to 51% in all priority areas.
b. Investments by FIIs through the following alternative routes:
i. Offshore single/regional funds;
ii. Global Depository Receipts;
iii. Euro convertibles.
12) Disinvestment would be allowed only through stock exchange in India, including the
OTC Exchange. In exceptional cases, SEBI may permit sales other than through stock
exchanges, provided the sale price is not significantly different from the stock market
quotations, where available.
13) All secondary market operations would be only through the recognized
intermediaries on the Indian Stock Exchange, including OTC Exchange of India. A
registered FII would be expected not to engage in any short selling in securities and to
take delivery of purchased and give delivery of sold securities.
14)A registered FII can appoint as Custodian an agency approved by SEBI to act as
custodian of Securities and for confirmation of transactions in Securities, settlement of
purchase and sale, and for information reporting. Such custodian should establish
separate accounts for detailing on a daily basis the investment capital utilization and
securities held by each FII for which it is acting as custodian. The custodian was
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supposing to report to the RBI and SEBI semi-annually as part of its disclosure and
reporting guidelines.
15) The RBI should make available to the designated bank branches a list of companies
where no investment will be allowed on the basis of the upper prescribed ceiling of 30%
having been reached under the portfolio investment scheme.
16) Reserve Bank of India may at any time request by an order a registered FII to submit
information regarding the records of utilization of the inward remittances of investment
capital and the statement of securities transactions. Reserve Bank of India and/or SEBI
may also at any time conduct a direct inspection of the records and accounting books of a
registered FII.
17) FIIs investing under this scheme will benefit from a concessional tax regime of a flat
rate tax of 20% on dividend and interest income and a tax rate of 10% on long term (one
year or more) capital gains.
These guidelines were suitably incorporated under the SEBI (FIIs) Regulations, 1995.
These regulations continue to maintain the link with the government guidelines through
an inserted clause that the investment by FIIs should also be subject to Government
guidelines. This linkage has allowed the Government to indicate various investment
limits including in specific sectors.
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3.2 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. 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
quity-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
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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 '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.
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3.3 Registration Process of FIIs
A FII is required to obtain a certificate by SEBI for dealing in securities. SEBI grants the
certificate SEBI by taking into account the following criteria:
i) The applicant's track record, professional competence, financial soundness, experience,
general reputation of fairness and integrity.
ii) Whether the applicant is regulated by an appropriate foreign regulatory authority.
iii) Whether the applicant has been granted permission under the provisions of the
Foreign Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for
making investments in India as a Foreign Institutional Investor.
iv) Whether the applicant is
a) an institution established or incorporated outside India as a pension fund, mutual fund,
investment trust, insurance company or reinsurance company.
b) an International or Multilateral Organization or an agency thereof or a Foreign
Governmental Agency or a Foreign Central Bank. c) an asset management company,
investment manager or advisor, nominee company, bank or institutional portfolio
manager, established or incorporated outside India and proposing to make investments in
India on behalf of broad based funds and its proprietary funds in if any or
d) university fund, endowments, foundations or charitable trusts or charitable societies.
v) Whether the grant of certificate to the applicant is in the interest of the development ofthe securities market.
vi) Whether the applicant is a fit and proper person.
The SEBIs initial registration is valid for a period of three years from the date of its grant
of renewal. Investment Conditions and Restrictions for FIIs: Foreign Institutional
Investor may invest only in the following:-
(a) Securities in the primary and secondary markets including shares, debentures and
warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in
India.
(b) units of schemes floated by domestic mutual funds including Unit Trust of India,
whether listed or not listed on a recognised stock exchange.
(c) Dated Government securities.
(d) Derivatives traded on a recognised stock exchange.
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(e) Commercial paper.
(f) Security receipts.
The total investments in equity and equity related instruments (including fully convertible
debentures, convertible portion of partially convertible debentures and tradable warrants)
made by a Foreign Institutional Investor in India, whether on his own account or on
account of his sub- accounts, should not be less than seventy per cent of the aggregate of
all the investments of the Foreign Institutional Investor in India, made on his own
account and on account of his sub-accounts. However, this is not applicable to any
investment of the foreign institutional investor either on its own account or on behalf of
its sub-accounts in debt securities which are unlisted or listed or to be listed on any stock
exchange if the prior approval of the SEBI has been obtained for such investments.
Further, SEBI while granting approval for the investments may impose conditions as are
necessary with respect to the maximum amount which can be invested in the debt
securities by the foreign institutional investor on its own account or through its sub-
accounts. A foreign corporate or individual is not eligible to invest through the hundred
percent debt route. Even investments made by FIIs in security receipts issued by
securitization companies or asset reconstruction companies under the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 are
not eligible for the investment limits mentioned above. No foreign institutional should
invest in security receipts on behalf of its sub-account.
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3.4 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).
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3.5 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 2007,
there were 996 FIIs registered with SEBI.
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3.6 Analysis of trends in FII investment
During the initial year 1992-93, the FII flows started in September, 1992 which amounted
to Rs. 13 crore because at this moment government was framing policy guidelines for
FIIs. However, within a year, the FIIs rose 39338.46% of 1992-93 during 1993-94
because government had opened door for investment in India. Thereafter, the FII inflows
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witnessed a dip of 6.45%. The year 1995-1996 witnessed a turnaround, gliding up the
contribution of FII to a massive of Rs. 6942 crore. Investment by FIIs during 1996-1997
rose a little i.e. 23.52% of the preceding year. This period was ripe enough for FII
Investments because at that time where international capital markets were in the phase of
overheating; the Indian economy posted strong fundamentals, stable exchange rate
expectations and offered investment incentives and congenial climate for investment of
these funds in India. During 1997-98, FII inflows posted a fall of 30.51%. This slack in
investments by FIIs was primarily due to the South-East Asian Crisis and the period of
volatility experienced between November 1997 and February 1998. The net investment
flows by FIIs have always been positive from the year of their entry. Only in the year
1998-99, an outflow to the tune of Rs. 17699 crore was witnessed for the first time. This
was primarily because of the economic sanctions imposed on India by the US, Japan and
other industrialized economies. These economic sanctions were the result of the testing of
series of nuclear bombs by India in May 1998. Thereafter, the FII portfolios investments
quickly recovered and showed positive net investments for all the subsequent years. FIIs
investments declined from Rs. 10122 crore during 1999-2000 to Rs. 9935 crore during
2000-01. FII investment posted a year-on-year decline of 1.8 % in 2000-01, 11.87 % in
2001-02 and 69.29 % in 2002-03. Investments by FII posted a fall of 80 % in 2002-03 as
compared with investments in the period of 1999-00. Investments by FIIs rebounded
from depressed levels from the year 2003-04 and witnessed an unprecedented surge. FIIs
flows were recycled to India following readjustment of global portfolios of institutional
investors, triggered by robust growth in Indian economy and attractive valuations in the
Indian equity market as compared with other emerging market economies in Asia. The
slowdown in 2004-05 was on account of global uncertainties caused by hardening of
crude oil prices and the upturn in the interest rate cycle. The resumption in the net FII
inflows to India from August 2004 continued till end 2004-05. The inflows of FIIs during
the year 2004-05 was Rs. 45881 crore. During 2006-07 the foreign institutional investors
continued to invest large funds in Indian securities market. However, due to global
developments like meltdown in global commodities markets and equity market during the
three month period between May 2006 to July 2006, fall in Asian Equity markets,
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tightening of capital controls in Thailand and its spillover effects, there was a slack in FII
investments.
As I had discussed FIIs environment in India like what is FII in India, policy
framework for FIIs, market design in India for foreign institutional investors,
registration process in India, Trends of Foreign Institutional Investments in India.
Now to fulfill the objective of this project i.e. influence of FII on movement of Indian
stock exchange (national stock exchange of India) during the post liberalization
period that is 1991 to 2007, the following research methodology is designed.
This project, in a way, reveals the influence of FIIs investment on movement of Indian
stock exchange (national stock exchange of India) during the post liberalization period
that is 1991 to 2007. I have applied a simple linear model to estimate the effect of FII on
the stock index. The data analysis tools used in the research is correlation and regression.
I have taken six indices to study the impact of FII on Indian bourses. One of these indices
is Nifty while other five are some specific index of NSE. These six indices give the close
picture of Indian stock exchanges. I have taken average monthly data of FIIs and monthly
closing index of all the indices.
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. This study uses
the concept of correlation and regression to study the relationship between FII and stock
index. The FII started investing in Indian capital market from September 1992 when the
Indian economy was opened up in the same year. Their investments include equity only.
The sample data of FIIs investments consists of monthly average from April 1992 to
March 2007 and indices value consist monthly closing value with period of study and
various observations which is given below in table.
Table no. 6: indices period of study and observations.
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3.7 Details of indices taken:
The CNX 100 tracks the behavior of combined portfolio of two indices viz. S&P CNX
Nifty and CNX Nifty Junior. It includes 100 of the 935 companies currently listed on the
NSE. CNX 100 is computed using market capitalisation weighted method, wherein the
level of the index reflects the total market value of all the stocks in the index relative to a
particular base period. The method also takes into account constituent changes in the
index and importantly corporate actions such as stock splits, rights, etc without affecting
the index value. The CNX 100 Index has a base date of Jan 1, 2003 and a base value of
1000.
The S&P CNX 500 is India's first broad-based benchmark of the Indian capital marketfor comparing portfolio returns vis--vis market returns. The S&P CNX 500 represents
about 92.66% of total market capitalization and about 86.44% of the total turnover on the
NSE. The S&P CNX 500 Equity Index is desegregated into 72 Industry sectors, which
are separately maintained by IISL. These industry indices are derived out of the S&P
CNX 500 and care is taken to see that the industry representation in the entire universe of
securities is reflected in the S&P CNX 500. e.g., if in the entire universe of securities,
banking sector has a 5% weightage then the Banking sector (as determined by the
Banking stocks in S&P CNX 500) would have a 5% weightage in the S&P CNX 500.
The Banking sector index would be derived out of the Banking stocks in the S&P CNX
500. The changes to the weightage of various sectors in the S&P CNX 500 would
dynamically reflect the changes in the entire universe of securities. The calendar year
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1994 has been selected as the base year for S&PCNX 500. The base value of the index is
set at 1000.
The CNX Bank Index is an index comprised of the most liquid and large capitalized
Indian Banking stocks. It provides investors and market intermediaries with a benchmark
that captures the capital market performance of Indian Banks. The Index has 12 stocks
from the banking sector, which trade on the National Stock Exchange. The CNX Bank
Index has a base date of Jan 1, 2000 and base value of 1000.
The CNX IT Companies in this index are those that have more than 50% of their
turnover from IT related activities like software development, hardware manufacture,
vending, support and maintenance. The CNX IT Index constituents represent about
12.80% of the total market capitalization as on September 1, 2006. The CNX IT Index
has a base date of Jan 1, 1996 and a base value of 1000. The Base Value of the index was
revised from 1000 to 100 w.e.f. May 28, 2004.
The CNX Nifty Junior Index comprises of the next rung of liquid securities after those
forming part of S&P CNX Nifty. It may be useful to think of the S&P CNX Nifty and the
CNX Nifty Junior as making up the 100 most liquid stocks in India. CNX Nifty Junior
represents about 8.98% of the total market capitalization as on September 1, 2006. The
average traded value for the last six months of all Junior Nifty stocks is approximately
9.17% of the traded value of all stocks on the NSE. Impact cost for CNX Nifty Junior for
a portfolio size of RS.2.50 million is 0.15%. The CNX Nifty Junior was introduced on
January 1, 1997, with base date and base value being November 03, 1996 and 1000
respectively and a base capital of Rs.0.43 trillion.
The S&P CNX Nifty is a well-diversified 50 stock index accounting for 22 sectors of the
economy. It is used for a variety of purposes such as benchmarking fund portfolios, index
based derivatives and index funds. S&P CNX Nifty is based upon solid economic
research and is well respected internationally as a pioneering effort in better
understanding how to make a stock market index. The average total traded value for the
last six months of all S&P CNX Nifty stocks is approximately 56.31 % of the traded
value of all stocks on the NSE. S&P CNX Nifty stocks represent about 59.91 % of the
total market capitalization as on September 1, 2006. The base period selected for S&P
CNX Nifty index is the close of prices on November 3, 1995, which marks the
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completion of one year of operations of NSE's Capital Market Segment. The base value
of the index has been set at 1000 and a base capital of RS.2.06 trillion.
3.8 Framing of hypothesis:
Null Hypothesis (Ho): The various NSE indices do not rise with the increase in FIIs
investment means FIIs have no influence on Indian stock exchange. Alternate Hypothesis
(H1): The various NSE indices rise with the increase in FIIs investment means FIIs have
influence on Indian stock exchange.
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.
3.9 Recording of observation:
I have taken the monthly closing index of all the indices. For FIIs I have recorded
monthly average of the net investments made by them in the Indian capital market. Net
Investments = gross purchases gross sales (fig. is in Rs crore) Use of Model: A simple
linear relationship has been shown between two variables using correlation and
regression as the data analysis tools. One variable is dependent and the other is
independent. I have taken FII as the independent variable while the stock index has been
taken as dependent variable. The impact of FII has been separately analyzed with each of
the index. So, correlation and regression has been separately run between FII and sixindices taking one index at a time with help of Microsoft excel Inference: 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. Regression Analysis:
This analysis tool performs linear regression analysis by using the "least squares" method
to fit a line through a set of observations. I can analyze how a single dependent variable is
affected by the values of one or more independent variables for example, how an
athlete's performance is affected by such factors as age, height, and weight. Correlation:
This analysis tool and its formulas measure the relationship between two data sets that are
scaled to be independent of the unit of measurement. The population correlation
calculation returns the covariance of two data sets divided by the product of their
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standard deviations. I can use the Correlation tool to determine whether two ranges of
data move together that is, whether large values of one set are associated with large
values of the other (positive correlation), whether small values of one set are associated
with large values of the other (negative correlation), or whether values in both sets are
unrelated (correlation near zero).
4. KEY FINDING:
a) Net FDI in India was valued at $4.7 billion in the 200506 Indian fiscal year, and more
than tripled, to $15.7 billion, in the 200607 fiscal year. Almost one-half of all FDI is
invested in the Mumbai and New Delhi regions.
b) By country, the largest investors in India are Mauritius, the United States, and the
United Kingdom. Investors based in many countries have taken advantage of the India-
Mauritius bilateral tax treaty to set up holding companies in Mauritius which
subsequently invest in India, thus reducing their tax obligations.
c) By industry, the largest destinations for FDI are electrical equipment (including
computer software and electronics), services, telecommunications, and transportation.
For objective 2
1. Impact of FII on S&P CNX Nifty: The effect of FII on Nifty is positive and the co-
efficient of correlation is high so the effect is also high. The standard error comes out to
be 575.658 which are high. This does not mean the relation is false but we can say that
the error in linear relation is high.
2. Impact of FII on Bank Nifty: The effect of FII on Bank Nifty is positive. So, FII isdirectly related to Bank Nifty. But the co-efficient of correlation is high so the effect is
also high. The standard error comes out to be 1229.644 which are very high. This means
that the deviation from the mean value is high. This does not mean the relation is false
but we can say that the error in linear relation is high. The value of multiple-R is also
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high. We can say that FII have significant impact on Bank Nifty during the period of 31-
January-2000- 30-March-07.
3. Impact of FII on CNX 100: CNX 100 is inversely related to FII for the period of 31-
January- 03- 30-March-2007. But the extent of impact is low as co-efficient of correlation
is -0.159.
4. Impact of FII on CNX IT: FII has inversely little significant relation with CNX IT, as
the value of correlation is -0.191. This does not mean that there is no relation at all
between them. It shows the absence of linear relation between the two variables but not a
lack of relationship altogether.
5. Impact of FII on CNX NIFTY JUNIOR: CNX NIFTY JUNIOR directly related to
FII for the period of 31-Oct-1995- 30-March-2007. But the value of R is high so the
degree of relation is also high low. Standard error in this case is 1319.6 which is high
compared to other standard errors between FII and other stock indices.
6. Impact of FII on S&P CNX 500: S&P CNX 500 is also highly correlated with FII. In
this case again the degree of relation is high.
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5 LIMITATIONA) The study has limited itself to a sample of top ten investing countries and top ten level
sectors which have attracted higher inflow of FDI.
B) The data for analysis of impact of FII on stock exchange is limited to National stock
exchange (NSE) only
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6.CONCLUSION:For objective 1:
The process of economic reforms which was initiated in July 1991 to liberalize and
globalize the economy had gradually opened up many sectors of its economy for the
foreign investors. A large number of changes that were introduced in the countrys
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. Itmight be of interest to note that more than 50% of the total FDI inflows received by India
during the period from 1991-2007 came from Mauritius 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 electrical and equipment had received
the larger proportion followed by service sector and telecommunication sector.
For objective 2:
According to findings and results, I concluded that FII did have high significant impact
on the Indian capital market. Therefore, the alternate hypothesis is accepted. S&P CNX
NIFTY, BANK NIFTY, CNX NIFTY JUNIOR, S&P CNX 500 showed positive
correlation but CNX 100, CNX IT showed negative correlation with FII. Also the degree
of relation was high in all the case. It shows high degree of linear relation between FII
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and stock index. This shows that there is relationship between them. 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. I also analyzed that FII had significant
impact on the stock index for the period starting from January 1991 to March 2007. The
sample data available for other indices like BANK NIFTY, CNX 100, S&P CNX 500
was low with just 51, 87 and 94 respectively observations that have also hampered the
results.
7 BIBLIOGRAPHY
A number of websites, newspaper article annual reports of RBI, magazines etc.
7.1 Internet sites:
a) www.rbi.org.in/home.aspx
b) www.google.com
c) www.fdimagazine.com
d) www.members.aol.com/RTMadaan1/sectors
e) http://dipp.nic.in/fdi_statistics/india_fdi_index.htm
f) www.nseindia.com
g) www.sebi.gov.in
7.2 Journals :
a) ICFAI Journal: E.g. the ICFAI journal of public finance, issue- February, vol. VI.
b) Handbook of statistics on the Indian securities market 2008.
7.3 Books:
a) Foreign direct investment in India by Lata Chakravarthy.
b) FDI (issues in emerging economies) by K. Seethe Pathi.
c) Foreign institutional investors by G Gopal Krishna Murthy.