INTRODUCTION

These three letters stand for foreign direct investment. The simplest explanation of FDI
would be a direct investment by a corporation in a commercial venture in another country. A
key to separating this action from involvement in other ventures in a foreign country is that
the business enterprise operates completely outside the economy of the corporations home
country. The investing corporation must control 10 percent or more of the voting power of the
new venture.
According to history the United States was the leader in the FDI activity dating back as far as
the end of World War II. Businesses from other nations have taken up the flag of FDI,
including many who were not in a financial position to do so just a few years ago.
The practice has grown significantly in the last couple of decades, to the point that FDI has
generated quite a bit of opposition from groups such as labor unions. These organizations
have expressed concern that investing at such a level in another country eliminates jobs.
Legislation was introduced in the early 1970s that would have put an end to the tax incentives
of FDI. But members of the Nixon administration, Congress and business interests rallied to
make sure that this attack on their expansion plans was not successful. One key to
understanding FDI is to get a mental picture of the global scale of corporations able to make
such investment. A carefully planned FDI can provide a huge new market for the company,
perhaps introducing products and services to an area where they have never been available.
Not only that, but such an investment may also be more profitable if construction costs and
labor costs are less in the host country.
The definition of FDI originally meant that the investing corporation gained a significant
number of shares (10 percent or more) of the new venture. In recent years, however,
companies have been able to make a foreign direct investment that is actually long-term
management control as opposed to direct investment in buildings and equipment.
FDI growth has been a key factor in the international nature of business that many are
familiar with in the 21st century. This growth has been facilitated by changes in regulations
both in the originating country and in the country where the new installation is to be built.
Corporations from some of the countries that lead the worlds economy have found fertile soil
for FDI in nations where commercial development was limited, if it existed at all. The dollars
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invested in such developing-country projects increased 40 times over in less than 30 years.
The financial strength of the investing corporations has sometimes meant failure for smaller
competitors in the target country. One of the reasons is that foreign direct investment in
buildings and equipment still accounts for a vast majority of FDI activity. Corporations from
the originating country gain a significant financial foothold in the host country. Even with
this factor, host countries may welcome FDI because of the positive impact it has on the
smaller economy.
Foreign direct investment (FDI) is a measure of foreign ownership of
productive assets, such as factories, mines and land. Increasing foreign
investment can be used as one measure of growing economic
globalization. Figure below shows net inflows of foreign direct investment
as a percentage of gross domestic product (GDP). The largest flows of
foreign investment occur between the industrialized countries. But flows
to non-industrialized countries are increasing sharply.Foreign direct
investment (FDI) refers to long term participation by country A into
country B.
It usually involves participation in management, joint-venture, transfer of
technology and expertise. There are two types of FDI: inward foreign
direct investment and outward foreign direct investment, resulting in
a net FDI inflow (positive or negative) .Foreign direct investment reflects
the objective of obtaining a lasting interest by a resident entity in one
economy (direct investor) in an entity resident in an economy other
than that of the investor (direct investment enterprise).The lasting
interest implies the existence of a long-term relationship between the
direct investor and the enterprise and a significant degree of influence on
the management of the enterprise. Direct investment involves both the
initial transaction between the two entities and all subsequent capital
transactions between them and among affiliated enterprises, both
incorporated and unincorporated.

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

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

Manufacturing FDI requires the establishment of production facilities.

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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.

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 massproduced.

OBJECTIVE OF STUDY
To know the flow of investment in India .
To know how can India Grow by Investment.
To Examine the trends and patterns in the FDI across different sectors and from
different countries in India .
To know in which sector we can get more foreign currency in terms of investment in

India.
To know which country s safe to invest.
To know how much to invest in a developed country or in a developing.
To know Which sector is good for investment.
To know which country in investing in which country .
To know the reason for investment in India.
Influence of FII on movement of Indian stock exchange .
To understand the FII & FDI policy in India.

LITERATURE REVIEW

 Gulshan Akhtar (2013), in his paper Inflows of Foreign Direct Investment in India
focuses on potential impact of FDI in the growth and development of Indian economy.
FDI acts as a catalyst for domestic industrial development and considered to be an
important vehicle for economic development. The study finds out that during pre
liberalization period FDI increased at CAGR of 19.05% while during post
liberalization period it has grown 24.28%. Since 1991 FDI inflows in India has
increased approximately by more than 165 times.

K.R. Kaushik & Dr. Kapil Kumar Bansal (2012), in their research article Foreign
Direct Investment in Indian Retail Sector highlights division of retail industry in
India, FDI policy with regard to retailing, foreign investors concern regarding FDI in
retail sector and Government viewpoint. The article highlights the mixed response
about FDI in retail sector with major reason to oppose is FDI in retail can be harmful
to local retailers in India. The article concludes that FDI in retail sector may boost the
socio economic development of the entire country if implemented wisely carefully
while signing the agreements with the Foreign Investors.

Dr. Jasbir Singh, Ms. Sumita Chadha & Dr. Anupama Sharma (2012), in their research
paper Role of FDI in India focus on how Foreign Direct Investment helps in
reducing the defect of BOP. Foreign Direct Investment is one and only major
instrument of attracting International Economic Integration in any economy. It serves
as a link between investment and saving. Many developing countries like India are
facing the deficit of savings. This problem can be solved with the help of Foreign
Direct Investment. The analytical study in this paper concludes that we should
welcome inflow of foreign investment in such way that it should be convenient and
favorable for Indian economy and enable us to achieve our cherished goal like rapid
economic development, removal of poverty, internal personal disparity in the
development and making our Balance of Payment favorable.

 Pankaj Sinha and AnushreeSinghal (2013), in their research article FDI in Retail in
India focuses on the relationship between FDI in retail and seven macroeconomic
factors Exchange

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

Study Page 13/42 rate (yoy%), Inflation (CPI), GDP growth, Index of Industrial
Production, Trade Openness, Unemployment rate and Tax as a percentage of nominal
GDP. This research also recommends the government of India to shift focus and not
rely much on FDI in retail to act as a game changer. Indian Government should
emphasize on building infrastructural facilities especially developing transportation
systems like roadways and railways, setting up economic zones for warehousing
facility, streamlining labour laws, planning urbanization to ensure adequate
availability of quality real estate, high street and implementing GST to give new
dimensions to modern organized retail in India.

Parekh, Paresh (2010) states that it is worth debating whether it is really necessary to
putconditions such as mandatoryrural employment creation and mandatory investment
inbackendinfrastructure, etc while permitting FDI. One needs to be mindful that the
conditions do notbecome a burden, making investment commercially unattractive start
with, in which case thepotential benefits of permitting FDI in retail will not be
realized in the absence of scale ofinvestments.

RESEARCH METHODOLOGY

Research methodology is simple framework or plan for the study that is as guide in collection
and analyzing the data. It is the blue print that is followed in completes the study. Thus, good
research methodology ensures the completion of project efficiency and affectivity. Since there
are many aspect of research methodology, the line of action has to be chosen from the variety
of alternatives, to choose the suitable method through the assessment from various
alternatives.
Research methodology gives the researcher an opportunity to put forward
his argument for having opted for certain alternatives and also at the same time he can justify
his ruling out some other possibility likes. Why research study has been undertaken, how the
research problem has been formulated what data has been collected, what particular
technique if analyzing the data has been used and lot of similar type question are usually
answered when we talk of research problem in study.

Data collection
This study is based on secondary data. The required data have been collected from various
sources i.e. World Investment Reports, Asian Development Banks Reports, various Bulletins
of Reserve Bank of India, publications from Ministry of Commerce, Govt. of India,
Economic and Social Survey of Asia and the Pacific, United Nations, Asian Development
Outlook, Country Reports on Economic Policy and Trade Practice- Bureau of Economic and
Business Affairs, U.S. Department of State and from websites of World Bank, IMF, WTO,
RBI, UNCTAD, EXIM Bank etc.. It is a time series data and the relevant data have been
collected for the period 1991 to 2015.

Data collection:
Secondary Data:
Internet, Books, newspapers, journals and books, other reports and projects, literatures

Tools and techniques of analyzing data7

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

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
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various forms. Risk coverage provided to the domestic industries and subsidies granted to the
local firms stand in the way of outward FDIs, which are also known as 'direct investments
abroad.'
Inward FDIs: Different economic factors encourage inward FDIs. These include interest
loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors
detrimental to the growth of FDIs include necessities of differential performance and
limitations related with ownership patterns.
Other categorizations of FDI
Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when
a multinational corporation owns some shares of a foreign enterprise, which supplies input for it
or uses the output produced by the MNC.
Horizontal foreign direct investments happen when a multinational company carries out a
similar business operation in different nations.
Horizontal FDI the MNE enters a foreign country to produce the same products

product at home.
Conglomerate FDI the MNE produces products not manufactured at home.
Vertical FDI the MNE produces intermediate goods either forward or backward in

the supply stream.

Liability of foreignness the costs of doing business abroad resulting in a competitive
disadvantage.

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

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through a merger or an acquisition of an unrelated enterprise

participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:

lowcorporate tax and income tax rates

tax holidays

other types of tax concessions

preferential tariffs

special economic zones

investment financial subsidies

soft loan or loan guarantees

free land or land subsidies

relocation & expatriation subsidies

job training & employment subsidies

infrastructure subsidies

R&D support

derogation from regulations (usually for very large projects)

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Entry Mode

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

International franchising

Branches

Contractual alliances

Equity joint ventures

Wholly foreign-owned subsidiaries

Investment approaches:

Greenfield investment (building a new facility)

Cross-border mergers

Cross-border acquisitions

Sharing existing facilities

FDI Impact on Domestic Enterprises

Foreign invested companies are likely more productive than local competitors.

The result is uneven competition in the short run, and competency building
efforts in the longer term.

It is likely that FDI developed enterprises will gradually develop local

supporting industries, supplier relationships in the host country.

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FOREIGN DIRECT INVESTMENT IN INDIA

The economy of India is the third largest in the world as measured by purchasing power
parity (PPP), with a gross domestic product (GDP) of US $3.611 trillion. When measured in
USD exchange-rate terms, it is the tenth largest in the world, with a GDP of US $800.8
billion (2006). is the second fastest growing major economy in the world, with a GDP growth
rate of 8.9% at the end of the first quarter of 2006-2007. However, India's huge population
results in a per capita income of $3,300 at PPP and $714 at nominal.
The economy is diverse and encompasses agriculture, handicrafts, textile, manufacturing, and
a multitude of services. Although two-thirds of the Indian workforce still earn their livelihood
directly or indirectly through agriculture, services are a growing sector and are playing an
increasingly important role of India's economy. The advent of the digital age, and the large
number of young and educated populace fluent in English, is gradually transforming India as
an important 'back office' destination for global companies for the outsourcing of their
customer services and technical support.
India is a major exporter of highly-skilled workers in software and financial services, and
software engineering. India followed a socialist-inspired approach for most of its independent
history, with strict government control over private sector participation, foreign trade, and
foreign direct investment. However, since the early 1990s, India has gradually opened up its
markets through economic reforms by reducing government controls on foreign trade and
investment. The privatization of publicly owned industries and the opening up of certain
sectors to private and foreign interests has proceeded slowly amid political debate. India faces
a burgeoning population and the challenge of reducing economic and social inequality.
Poverty remains a serious problem, although it has declined significantly since independence,
mainly due to the green revolution and economic reforms. FDI up to 100% is allowed under
the automatic route in all activities/sectors except the following which will require approval
of the Government: Activities/items that require an Industrial License; Proposals in which the
foreign collaborator has a previous/existing venture/tie up in India
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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 worlds major investors.
In 1998 and 1999, the Indian national government announced a number of reforms designed
to encourage FDI and present a favorable scenario for investors. FDI investments are
permitted through financial collaborations, through private equity or preferential allotments,
by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in
the arms, nuclear, railway, coal & lignite or mining industries. A number of projects have
been announced in areas such as electricity generation, distribution and transmission, as well
as the development of roads and highways, with opportunities for foreign investors. The
Indian national government also provided permission to FDIs to provide up to 100% of the
financing required for the construction of bridges and tunnels, but with a limit on foreign
equity of INR 1,500 crores, approximately $352.5m. Currently, FDI is allowed in financial
services, including the growing credit card business.
These services include the non-banking financial services sector. Foreign investors can buy
up to 40% of the equity in private banks, although there is condition that stipulates that these
banks must be multilateral financial organizations. Up to 45% of the shares of companies in
the global mobile personal communication by satellite services (GMPCSS) sector can also be
purchased. By 2004, India received $5.3 billion in FDI, big growth compared to previous
years, but less than 10% of the $60.6 billion that flowed into China. Why does India, with a
stable democracy and a smoother approval process, lag so far behind China in FDI amounts?
Although the Chinese approval process is complex, it includes both national and regional
approval in the same process. Federal democracy is perversely an impediment for India.
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Investment Risks in India:

SovereignRisk
India is an effervescent parliamentary democracy since its political freedom from British rule
more than 50 years ago. The country does not face any real threat of a serious revolutionary
movement which might lead to a collapse of state machinery. Sovereign risk in India is hence
nil for both "foreign direct investment" and "foreign portfolio investment." Many Industrial
and Business houses have restrained themselves from investing in the North-Eastern part of
the country due to unstable conditions. Nonetheless investing in these parts is lucrative due to
the rich mineral reserves here and high level of literacy. Kashmir on the northern tip is a
militancy affected area and hence investment in the state of Kashmir are restricted by law
Political Risk
India has enjoyed successive years of elected representative government at the Union as well
as federal level. India suffered political instability for a few years in the sense there was no
single party which won clear majority and hence it led to the formation of coalition
governments. However, political stability has firmly returned since the general elections in
1999, with strong and healthy coalition governments emerging. Nonetheless, political
instability did not change India's bright economic course though it delayed certain decisions
relating to the economy. Economic liberalization which mostly interested foreign investors
has been accepted as essential by all political parties including the Communist Party of India
Though there are bleak chances of political instability in the future, even if such a situation
arises the economic policy of India would hardly be affected.. Being a strong democratic
nation the chances of an army coup or foreign dictatorship are minimal. Hence, political risk
in India is practically absent.
Commercial Risk
Commercial risk exists in any business ventures of a country. Not each and every product or
service is profitably accepted in the market. Hence it is advisable to study the demand /
supply condition for a particular product or service before making any major investment. In
India one can avail the facilities of a large number of market research firms in exchange for a

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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 destinat

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FDI POLICY IN INDIA

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

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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

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.

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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 NonResident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be
submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance.
Application for NRI and 100% EOU cases should be presented to SIA in Department of
Industrial Policy & Promotion.
Investment by way of Share Acquisition
A foreign investing company is entitled to acquire the shares of an Indian company without
obtaining any prior permission of the FIPB subject to prescribed parameters/ guidelines. If
the acquisition of shares directly or indirectly results in the acquisition of a company listed on
the stock exchange, it would require the approval of the Security Exchange Board of India.
New investment by an existing collaborator in India
A foreign investor with an existing venture or collaboration (technical and financial) with an
Indian partner in particular field proposes to invest in another area, such type of additional

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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 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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Foreign direct investment:

Indian scenario
FDI is permitted as under the following forms of investments
Through financial collaborations.
Through joint ventures and technical collaborations.
Through capital markets via Euro issues.
Through private placements or preferential allotments.

Sector Specific Foreign Direct Investment in India

Hotel & Tourism: FDI in Hotel & Tourism sector in India
100% FDI is permissible in the sector on the automatic route,
The term hotels include restaurants, beach resorts, and other tourist complexes providing
accommodation and/or catering and food facilities to tourists. Tourism related industry
include travel agencies, tour operating agencies and tourist transport operating agencies, units
providing facilities for cultural, adventure and wild life experience to tourists, surface, air and
water transport facilities to tourists, leisure, entertainment, amusement, sports, and health
units for tourists and Convention/Seminar units and organizations.
For foreign technology agreements, automatic approval is granted if

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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

vii.

Asset Management

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

non-fund based NBFCs with foreign investment.
d. Foreign investors can set up 100% operating subsidiaries without the condition to
disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50
million as at b) (iii) above (without any restriction on number of operating subsidiaries
without bringing in additional capital)
e. Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will
also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the
subsidiaries also complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii)
above.
f. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines
of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard.

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.
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ii.

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

74% with FDI, beyond 49% requiring Government approval. These services would be
subject to licensing and security requirements.

iii.

No equity cap is applicable to manufacturing activities.

iv.

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

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

b.

Infrastructure Providers providing dark fiber (IP Category 1);

c.

Electronic Mail; and

d.

Voice Mail
The above would be subject to the following conditions:

e.

FDI up to 100% is allowed subject to the condition that such companies would
divest 26% of their equity in favor of Indian public in 5 years, if these
companies are listed in other parts of the world.

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;

25

cash and carry wholesale trading;

other import of goods or services provided at least 75% is for procurement and sale of
goods and services among the companies of the same group and not for third party
use or onward transfer/distribution/sales.

ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy:
a. Companies for providing after sales services (that is not trading per se)
b. Domestic trading of products of JVs is permitted at the wholesale level for such
trading companies who wish to market manufactured products on behalf of their joint
ventures in which they have equity participation in India.
c. Trading of hi-tech items/items requiring specialized after sales service
d. Trading of items for social sector
e. Trading of hi-tech, medical and diagnostic items.
f. Trading of items sourced from the small scale sector under which, based on
technology provided and laid down quality specifications, a company can market that
item under its brand name.
g. Domestic sourcing of products for exports.
h. Test marketing of such items for which a company has approval for manufacture
provided such test marketing facility will be for a period of two years, and investment
in setting up manufacturing facilities commences simultaneously with test marketing

Power:
FDI In Power Sector in India
Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission
and distribution, other than atomic reactor power plants. There is no limit on the project cost
and quantum of foreign direct investment.

26

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 Centres in India

FDI up to 100% is allowed subject to certain conditions.
Business Process Outsourcing BPO in India

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

NRI's and OCB's are allowed the following special facilities:
1. Direct investment in industry, trade, infrastructure etc.
2. Up to 100% equity with full repatriation facility for capital and dividends in the
following sectors
27

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.

28

DATA ANALYSIS & INTERPRETATION

India Further Opens up Key Sectors for Foreign Investment

India has liberalized foreign investment regulations in key sectors, opening up commodity
exchanges, credit information services and aircraft maintenance operations. The foreign
investment limit in Public Sector Units (PSU) refineries has been raised from 26% to 49%.
An additional sweetener is that the mandatory disinvestment clause within five years has
been done away with. FDI in Civil aviation up to 74% will now be allowed through the
automatic route for non-scheduled and cargo airlines, as also for ground handling
activities. 100% FDI in aircraft maintenance and repair operations has also been allowed.
But the big one, allowing foreign airlines to pick up a stake in domestic carriers has been
given a miss again. India has decided to allow 26% FDI and 23% FII investments in
commodity exchanges, subject to the proviso that no single entity will hold more than 5% of
the stake.
Sectors like credit information companies, industrial parks and construction and development
projects have also been opened up to more foreign investment. Also keeping India's civilian
nuclear ambitions in mind, India has also allowed 100% FDI in mining of titanium, a mineral
which is abundant in India.
Sources say the government wants to send out a signal that it is not done with reforms yet. At
the same time, critics say contentious issues like FDI and multi-brand retail are out of the
policy radar because of political compulsions.

29

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

SECTOR
AMOUNT OF FDI
PERCENT OF TOTAL FDI
INFLOWS
INFLOWS (In terms of Rs)
In Rs Million
In US$
Million
Services Sector
Computer Software &

787420.81
391109.74

18118.40
8876.43

22.39
11.12

hardware
Telecommunications
Construction

275441.38
213595.12

6215.55
5029.01

7.83
6.07

Activities
Automobile
Housing & Real estate
Power
Chemicals (Other than

146799.41
217936.02
137089.37
87008.07

3310.23
5118.85
3129.66
1964.06

4.17
6.20
3.90
2.47

Fertilizers)
Ports
Metallurgical

63290.50
109563.20

1551.88
2612.85

1.80
3.11

industries
Electrical Equipments
Cement & Gypsum

57379.63
70781.19

1324.92
1621.03

1.63
2.01

Products
Petroleum & Natural

94417.17

2244.17

2.68

Gas
Trading
Consultancy Services
Hotel and Tourism
Food Processing

62416.85
48647.43
52500.05
34362.49

1480.94
1112.92
1217.50
760.32

1.77
1.38
1.49
0.98

Industries
Electronics
Misc. Mechanical &

33914.75
28310.13

748.57
648.86

0.96
0.80

Engineering industries
Information &

52115.90

1194.20

1.48

Print media)
Mining
Textiles (Incl. Dyed,

21204.94
26736.94

522.86
611.03

0.60
0.76

Printed)
Sea Transport
Hospital & Diagnostic

17653.81
27241.42

402.59
644.73

0.50
0.77

Centers
Fermentation

27743.46

658.04

0.79

Industries
Machine Tools
Air Transport ( Incl.

10955.32
10552.19

247.88
240.71

0.31
0.30

air freight)
Ceramics
Rubber Goods

17462.43
11392.76

409.92
247.60

0.50
0.32

Broadcasting (Incl.

30

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
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

31

The proceeds of the GDRs can be used for financing capital goods imports, capital
expenditure including domestic purchase/installation of plant, equipment and building and
investment in software development, prepayment or scheduled repayment of earlier external
borrowings, and equity investment in JV/WOSs in India.

Foreign direct investments in India are approved through two routes

1. Automatic approval by RBI
The Reserve Bank of India accords automatic approval within a period of two weeks (subject
to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%;
74% and 100% is allowed depending on the category of industries and the sectoral caps
applicable. The lists are comprehensive and cover most industries of interest to foreign
companies. Investments in high priority industries or for trading companies primarily
engaged in exporting are given almost automatic
approval by the RBI.

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

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.
Sr. No.

Analysis of sector specific policy for FDI

Sector/Activity

FDI cap/Equity

Entry/Route
32

1.
2.
3.
4.

Hotel & Tourism

NBFC
Insurance
Telecommunication:

100%
49%
26%

cellular, value added services

49%

ISPs with gateways, radio-

5.

Automatic
Automatic
Automatic
Automatic
Above 49% need Govt. licence

paging

74%

Electronic Mail & Voice Mail

Trading companies:

100%

primarily export activities

51%

Automatic

wholesale trading
Power(other than atomic reactor

100%

Automatic

power plants)

100%
100%

Automatic
Automatic

100%

Automatic

100%

Automatic

100%
100%

Automatic
Automatic

100%

Automatic

bulk imports, cash and carry

6.
7.
Drugs & Pharmaceuticals
8.
Roads, Highways, Ports and
Harbors
9.
Pollution Control and
10
11.
12.

Management
Call Centers
BPO
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

33

vi.

Deep Sea Fishing

vii.

Oil Exploration

viii.

Power

ix.

Housing and Real

Estate Development

x.

Highways,
Bridges and Ports

xi.

Sick Industrial
Units

xii.

Industries
Requiring Compulsory
Licensing

xiii.

Industries
Reserved for Small Scale
Sector

13.

14
15.

Airports:
Greenfield projects

100%

Automatic

Existing projects
Assets reconstruction company
Cigars and cigarettes

100%
49%
100%

Beyond 74% FIPB

FIPB
FIPB

34

16.

Courier services

100%

FIPB

17.

Investing companies in

49%

FIPB

infrastructure (other than

telecom sector)

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
35

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

----

TOTAL FDI INFLOWS IN INDIA

34,362

22,826

35,168

TOTAL FDI INFLOWS

16,232

8,961
6,130
4,029

5,035

6,051
4,322

36

v.

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

From April 2000 to January 2010

(Amount in Millions)
Sr. No

Country

Amount of FDI Inflows

% As To
Total FDI

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Mauritius
Singapore
U.S.A.
U.K.
Netherlands
Japan
Cyprus
Germany
France
U.A.E.

19,18,633.61
3,80,142.56
3,32,935.60
2,40,974.98
1,78,047.76
1,50,129.05
1,32,448.04
1,12,242.06
61,686.39
50,915.59

Inflow
44.01
8.72
7.64
5.53
4.08
3.44
3.04
2.57
1.42
1.17

37

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
38

potential loss of tax revenue is of particular concern to the Indian government. These are the
sectors which attracting more FDI from Mauritius Electrical equipment Gypsum and cement
products Telecommunications Services sector that includes both non- financial and financial
Fuels.

Singapore
Singapore continues to be the single largest investor in India amongst the Singapore with FDI
inflows into Rs. 3,80,142 crores up to January 2010
Sector-wise distribution of FDI inflows received from Singapore the highest inflows have
been in the services sector (financial and non financial), which accounts for about 30% of
FDI inflows from Singapore. Petroleum and natural gas occupies the second place followed
by computer software and hardware, mining and construction.

U.S.A.
The United States is the third largest source of FDI in India (7.64 % of the total), valued at
732335 crore in cumulative inflows up to January 2010. According to the Indian government,
the top sectors attracting FDI from the United States to India are fuel, telecommunications,
electrical equipment, food processing, and services. According to the available M&A data,
the two top sectors attracting FDI inflows from the United States are computer systems
design and programming and manufacturing

U.K.
The United Kingdom is the fourth largest source of FDI in India (5.53 % of the total), valued
at 2,40,974 crores in cumulative inflows up to January 2010
Over 17 UK companies under the aegis of the Nuclear Industry Association of UK have tied
up with Ficci to identify joint venture and FDI possibilities in the civil nuclear energy sector.
UK companies and policy makers the focus sectors for joint ventures, partnerships, and trade
are non-conventional energy, IT, precision engineering, medical equipment, infrastructure
equipment, and creative industries.

39

Netherlands
FDI from Netherlands to India has increased at a very fast pace over the last few years.
Netherlands ranks fifth among all the countries that make investments in India. The total flow
of FDI from Netherlands to India came to Rs. 1, 78,047 crores between 1991 and 2002. The
total percentage of FDI from Netherlands to India stood at 4.08% out of the total foreign
direct investment in the country up to August 2009.

Following Various industries attracting FDI from Netherlands to India are:

Food processing industries

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

radio paging

Horticulture

Electrical equipment that includes computer software and electronics

Service sector that includes non- financial and financial services

vi.

Analysis of sectors attracting highest FDI equity inflows

From April 2000 to March 2010

(Amount in Millions)
Sr. No

Country

Amount of FDI

% As To

Inflows

Total FDI

1.

Service Sector

9,65,210.77

Inflow
22.14

2.

(Financial &Non Financial)

Computer Software & Hardware

4,13,419.03

9.48
40

3.
4.
5.
6.
7.
8.
9.
10.

Telecommunication
Housing & Real Estate
Construction Activities
Automobile Industry
Power
Metallurgical Industries
Petroleum & Natural Gas
Chemical

3,68,899.62
3,25,021.36
2,65,492.96
1,90,172.22
1,79,849.92
1,25,785.57
1,11,957.00
1,01,680.18

8.46
7.46
6.09
4.36
4.13
2.89
2.57
2.33

The sectors receiving the largest shares of total FDI inflows up to march 2010 were
the service sector and computer software and hardware sector, each accounting for
22.14 and 9.48 percent respectively. These were followed by the telecommunications,
real estate, construction and automobile sectors. The top sectors attracting FDI into
India via M&A activity were manufacturing; information; and professional, scientific,
and technical services. These sectors correspond closely with the sectors identified by
the Indian government as attracting the largest shares of FDI inflows overall.
The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers) registered
maximum growth of 227 per cent during April 2008 March 2009 as compared to 11.71 per
cent during the last fiscal. The sector attracted USD 749 million FDI in FY 09 as compared
to USD 229 million in FY 08.
During the year 2009 government had raised the FDI limit in telecom sector from 49 per cent
to 74 per, which has contributed to the robust growth of FDI. The telecom sector registered a
growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal. The sector
attracted USD 2558 million FDI in FY 09 as compared to the USD 1261 million in FY 08,
acquired 9.37 per cent share in total FDI inflow.
India automobile sector has been able to record 70 per cent growth in foreign investment. The
FDI inflow in automobile sector has increased from USD 675 million to 1,152 million in FY
09 over FY 08. The other sectors which registered growth in highest FDI inflow during
April March 2009 were housing & real estate (28.55 per cent), computer software &
41

hardware (18.94 per cent), construction activities including road & highways (16.35 per cent)
and power (1.86 per cent).

Foreign Investment Promotion Board

The FIPB (Foreign Investment Promotion Board) is a government body that offers a single
window clearance for proposals on foreign direct investment in the country that are not
allowed access through the automatic route. Consisting of Senior Secretaries drawn from
different ministries with Secretary ,Economic Affairs in the chair, this high powered body
discusses and examines proposals for foreign investment in the country for restricted sectors (
as laid out in the Press notes and extant foreign investment policy) on a regular basis.
Currently proposals for investment beyond 600 crores require the concurrence of the CCEA
(Cabinet Committee on Economic Affairs). The threshold limit is likely to be raised to 1200
crore soon.The Board thus plays an important role in the administration and implementation
of the Governments 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 efiling facility is an important initiative of the Secretariat to further the cause of enhanced
accessibility and transparency .

42

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.

43

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

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.

44

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.
45

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

ii)

cent of the shares or units of the fund.

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 subaccounts, 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,

46

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.
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.

47

SEBI Registered FIIs in India

Year
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

End of March
0
3
156
353
439
496
450
506
527
490
502
540
685
882
996
1279
1609

2009-10

1805

48

v.
Year

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
2009-10

FII trend in India

Gross

Gross Sales (b)

Net

% increase in

Purchases

(Rs.crore)

Investment (a-

FII inflow

(a) (Rs. crore)

b)

17
5593
7631
9694
15554
18695
16115
56856
74051
49920
47061
144858
16953
346978
520508
896686
548876
-

(Rs. crore)
13
5127
4796
6942
8575
5958
1584
10122
9935
8755
2688
45764
45881
41466
30841
52182
-45732
-

4
466
2835
2752
6979
12737
17699
46734
64116
41165
44373
99094
171072
305512
489667
844504
594608
-

39338.46
-6.45
44.75
23.52
-30.52
126.59
739.02
-1.85
-11.88
69.30
1602.53
0.26
-9.62
-25.62
69.20
187.64
-

2010 data was not available

49

FII INFLOW

Gross Purchases (a) (Rs.crore)

Gross Sales (b) (Rs.crore)

Net Investment (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.

50

vi.

Co relation with Indices

Indices
Sensex
Bankex
Power
IT
Capital Goods

Co-relation with FII

0.80
0.18
0.33
0.13
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.

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
51

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

markets of a foreign nation.InFII, the companies only need to get registered in the stock
exchange to make investments. But FDI is quite different from it as they invest in a foreign
nation. The Foreign Institutional Investor is also known as hot money as the investors have
the liberty to sell it and take it back. But in Foreign Direct Investment, this is not possible. In
simple words, FII can enter the stock market easily and also withdraw from it easily. But
FDIcannot enter and exit that easily. This difference is what makes nations to choose FDIs
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

FDIs are

long

term.

FINDINGS
It is found that during 1990s the composition of capital flows changed notably and the
emphasis shifted from private debt flows to private non-debt flow particularly Foreign
Portfolio Investment (FPI) and Foreign Direct Investment (FDI). FDI responded most
52

vigorously and became the single largest source of external finance

FDI benefits domestic industry and provides opportunities for technological
upgradation, access to global managerial skills and practices, optimal utilisation of
natural and human resources, making host country's industry internationally
competitive, providing backward and forward linkages and access to
international quality goods and services.
It is seen from the analysis that large amount of FDI flows are confined to the
developed economies. But there is a marked increase in the FDI inflows to
developing economies from 1990 onwards.

India received large amount of FDI from Mauritius (nearly 40 percent of the total
FDI inflows) apart from USA (8.8 percent), Singapore (7.2 percent), U.K (6.1
percent), Netherlands (4.4 percent) and Japan (3.4 percent).

Among the sectors in India, services sector received the highest percentage of FDI
inflows. Other major sectors that received the large inflows of FDI, apart from services
sector, are electrical and electronics, telecommunications, transportations and
construction activities. It is found that nearly 41 percent of FDI inflows are in high
priority areas like services, electrical equipments, telecommunications, etc.

FDI has a significant effect on exports in India.

It is found that GDP growth rate of India is a pull factor in attracting FDI.
It is found that there is a positive correlation between FDI and variables like,
total export, GDP and employment
It is found that FDI has not created much employment in India which can be due
to sectoral distribution of FDI in the country. Since service sector is attracting
most of the FDI in India and it employs the maximum manpower which
53

unfortunately has less employment elasticity than other sectors.

The results show that FDI has played a very strategic and critical role in the
economic growth of India.

RECOMMENDATIONS

It is found that FDI as a strategic component of investment needed by India for its sustained
economic growth and development. FDI is necessary for creation of jobs, expansion of
existing manufacturing industries and development of the new one. Indeed, it is also needed

54

in the healthcare, education, R&D, infrastructure, retailing and in long- term financial
projects. So, the study recommends the following suggestions:
1. This study states that policy makers should focus more on attracting diverse types of FDI.
Like the policy makers should design policies where foreign investment can be utilized as
means of enhancing domestic production, savings, and exports; as medium of
technological learning and technology diffusion and also in providing access to the
external market.

2. Indian economy is largely agriculture based. There is plenty of scope in food processing,
agriculture services and agriculture machinery. FDI in this sector should be encouraged.

3. India has a huge pool of working population. However, due to poor quality primary
education and higher there is still an acute shortage of talent. This factor has negative
repercussion on domestic and foreign business. FDI in Education Sector is less than 1%.
Given the status of primary and higher education in the country, FDI in this sector must
be encouraged. However, appropriate measure must be taken to ensure quality. The issues
of commercialization of education, regional gap and structural gap have to be addressed
on priority.

4. It can also be suggested that the government should invest more for improvement of
infrastructure sectors, R&D activities, human capital, education sector, technological
advancement to attract more of FDI.

5. Government should ensure the equitable distribution of FDI inflows among states. The
central government must give more freedom to states, so that they can attract FDI inflows
at their own level. The government should also provide additional incentives to foreign
investors to invest in states where the level of FDI inflows is quite low.

6. India has a well developed equity market but does not have a well developed debt market.
Steps should be taken to improve the depth and liquidity of debt market as many
companies may prefer leveraged investment rather than investing their own cash.
55

7. Though service sector is one of the major sources of mobilizing FDI to India, plenty of
scope exists. Still we find the financial inclusion is missing. Large part of population still
doesnt have bank accounts, insurance of any kind, underinsurance etc. These problems
could be addressed by making service sector more competitive. Removal of sectoral cap
in insurance is still awaited.

8. FDI should be guided so as to establish deeper linkages with the economy, which would
stabilize the economy (e.g. improves the financial position, facilitates exports, stabilize
the exchange rates, supplement domestic savings and foreign reserves, stimulates R&D
activities and decrease interest rates and inflation etc.) and providing to investors a sound
and reliable macroeconomic environment.

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

Greenfield Projects. But the issue of land acquisition and steps taken to protect local
interests by the various state governments are not encouraging.

10. It is also suggested that the government while pursuing prudent policies must also
exercise strict control over inefficient bureaucracy and the rampant corruption, so that
investors confidence can be maintained for attracting more FDI inflows to India.
(According to JP Morgan risk index of India).

CONCLUSION
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
56

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.

Bibliography

57

www.rbi.org
www.fin.in.nic
www.sebi.org
www.indiahousing.com/fdi-foreign-direct-investment.html
www.answers.com/topic/foreign-direct-investment#History
www.unctad.org/sections/dite_iiab/docs/diteiiab20041_en.pdf
www.economywatch.com/foreign-direct-investment/
www.legalserviceindia.com/articles/fdi_india.html

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