An Analytical Study Of Foreign

Direct Investment in India

SUBMITTED IN PARTIAL FULFILLMENT FOR THE

REQUIREMENT OR MBA-DEGREE

(2012-2014)
UNDER THE GUIDENCE OF - SUBMITTEDBY-

Ms. ANSHIKA ASTHANA DEEPESH PRAKASH

PROJECT GUIDE

INVERTIS UNIVERSITY BAREILLY

 TO WHOM IT MAY CONCERN

This is to certify that Mr.DEEPESH PRAKASH

student of MBA IVth Semester in our institute has

successfully completed his/her summer training

project entitled An Analytical Study of Foreigh

Direct Investment in India for the partial

fulfillment of the Master of Business Administration

degree.
(Dr . Saileswar Ghosh) (Ms Anshika Asthana)

Head of Department Project guide

 PREFACE

Global foreign direct investment (FDI) has not yet bounced

back to pre-crisis levels, though some regions show better

recovery than others. The reason is not financing

constraints, but perceived risks and regulatory uncertainty

in a fragile world economy

Through research methodology and pie charts I have

explained my study in this Report.

I have drawn a conclusion based on facts. For this

Faculties and student of Invertis University gave me

there views and likes and dislikes.

.
 ACKNOWLEDGEMENT

First of all I would like to express my thanks to

Dr.Saileswar Ghosh for giving me a Wonderful

opportunity to widen the horizons of my knowledge.

In no small measures, I would also like to gratefully

thank to all those who Gave me constructive

suggestions for the improvement of all the aspect

related To this project.

In particular, I would lke to thank Ms Anshika

Asthana MBA IVth semester guide For her valuable

suggestions and guidance.

I also owe a deep sense of gratitude to other faculty

members for their continuous Encouragement.

Despite all efforts, I have no doubt that error

obscurities remain that seen to afflict all research

project and for which I am culpable.

DEEPESH PRAKASH
LIST OF CONTENTS

Introduction .

Company profile

Review of literature ...

Needs of the Study..

Objectives of the study..

Research methodology...

Data presentations & analysis..

Findings .

Suggestion ..

Bibliography

Annexure
 Introduction and overview

What is Foreign Direct Investment ?

Meaning: These three letters stand for foreign direct

investment. The simplest explanation of FDI would

be a directinvestment by a corporation in a

commercial venture in another country. A key

to separating this actionfrom involvement in other

ventures in a foreign country is that the business

enterprise operates completelyoutside the economy

of the corporations home country. The investing

corporation must control 10 percentor 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 notin 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 generatedquite

in a bit of opposition from groups such as labor

unions. These organizations have expressed

concernthat investing at such a level another

country eliminates jobs. Legislation was

introduced in the early1970s that would have put

an end to the tax incentives of FDI. Butmembers of

the Nixon administration,Congress and business

interests rallied to make sure that this attack on

their expansion plans was notsuccessful. One key

to understanding FDI is to get a mental picture of the

global scale of corporations ableto 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 thehost 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

aforeign 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 inthe 21st century. This

growth has been facilitated by changes in regulations

both in the originating countryand in the country

where the new installation is to be built. Corporations

from some of the countries thatlead the worlds

economy have found fertile soil for FDI in nations

where commercial development waslimited, if it

existed at all. The dollars invested in such

developing-country projects increased 40

timesover in less than 30 years. The financial

strength of the investing corporations has

sometimes meantfailure 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 theoriginating

country gain a significant financial foothold in

the host country. Even with this factor,

hostcountries 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 measur e of

growing economicglobalization. Figure

below shows net inflows of foreign direct

investment as a percentage of grossdom estic

product (GDP). The largest flows of foreign

investment occur between the industrialized

countries ( North America, Western Europe and

Japan ).But flows to non-industrialized

countries are increasing sharply. Foreign direct

investment (FDI) refers to long term

participation by country A into country B. 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 ina net FDI inflow (positive or negative)

.Foreign direct investment reflects the objective

of obtaining alasting 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 existenceof 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

affiliatedenterprises, both incorporated and

unincorporated.

Foreign Direct Investment

when a firm invests directly in production or

other facilities, over which it has effective control,

in a foreign country.
Manufacturing FDI

requires the establishment of production facilities.

Service FDI

requires building service facilities or an investment

foothold via capital contributionsor 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 foreignfinancial instruments. S t o c k s ,

b o n d s , o t h e r f o r m s o f d e b t . Differs from

FDI, which is the investment in physical

assets.

Portfolio theory

the behavior of individuals or firms

administering large amounts of financialassets.

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

developedcountries as products evolve from being

innovative to being mass-produced.

Distinguishes between:
 Structural market failure

external condition that gives rise to monopoly

advantages as aresult of entry barriers

Transactional market failure

failure of intermediate product markets to transact

goods and services at a lower cost than

internationalization The Dynamic

Capability Perspective

A firms ability to diffuse, deploy, utilize

and rebuild firm-specific resources for a

competitive advantage.
Ownership specific resources or

knowledge are necessary but not

s u ff i c i e n t for international investment or

production success.

It is necessary to effectively use and build

dynamic capabilities for quantity and/or

quality based deployment that is transferable to

the multinational environment.

Firms develop centers of excellence to

concentrate core competencies to the host

environment.
Monopolistic Advantage Theory

An MNE has and/or creates monopolistic

advantages that enable it to operate

subsidiaries abroadmore profitably than local

competitors.

Monopolistic Advantage comes from:

Superior knowledge

production technologies, managerial skills,

industrial organization,knowledge of product.

 Economies of scale

through horizontal or vertical

FDIInternationalization Theory W h e n external

markets for supplies, production, or

distribution fails to provide

e ff i c i e n c y, companies can invest FDI to create their

own supply, production, or distribution streams.

Advantages

Av o i d s e a r c h a n d n e g o t i a t i n g c o s t s

Avoid costs of moral hazard (hidden

detrimental action by external partners)

Avoid cost of violated contracts and

litigation

Capture economies of interdependent

activities

Av o i d g o v e r n m e n t i n t e r v e n t i o n

Control supplies

Control market outlets

Better apply cross-subsidization, predatory pricing

and transfer pricing

 History

In the years after the Second World War global FDI

was dominated by the United States, as much of the

world recovered from the destruction brought by the

conflict. The US accounted for around three-quarters

of new FDI (including reinvested profits)

between 1945 and 1960. Since that time FDI has

spread to become a truly global phenomenon, no

longer the exclusive preserve of OECD countries.

FDI has grown in importance in the global economy

with FDI stocks now constituting over 20 percent

of global GDP. Foreign direct investment (FDI) is a

measure of foreign ownership of productive assets,

such as factories, mines and land. Increasing

foreign investment can be used as one

measure of growing economic globalization.

Figure below shows net inflows of foreign direct

investment as a percentage of gross domestic

product (GDP). The largest flows of foreign

investment occur between the industrialized

countries (North America, Western

EuropeandJapan). But flows to non-

industrialized countries are increasing sharply.

Foreign Direct investor

A foreign direct investor is an individual, an

incorporated or unincorporated public or private

enterprise, a government, a group of related

individuals, or a group of related incorporated

and/or unincorporated enterprises which has a

direct investment enterprise that is, a subsidiary,

associate or branch operating in a country other

than the country or countries of residence of the

foreign direct investor or investors.

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. Thisform of

FDI is subject to tax incentives as well as

disincentives of various forms. Risk coverage

provided to the domestic industries and subsidies

granted to the local firms stand in the way of

outward FDIs, which are also known as 'direct

investments abroad.'

Inward FDIs:

Different economic factors encourage inward FDIs.

These include interest loans,tax breaks ,grants,

subsidies, and the removal of restrictions and

limitations. Factors detrimental to the growth of

FDIs includenecessities of differential performance

and limitations related with ownership patterns.

Other categorizations of FDI

Other categorizations of FDI exist as

w e l l . Ve r t i c a l F o r e i g n D i r e c t I n v e s t m e n t

t a k e s p l a c e w h e n 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 businessoperation 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

supplystream.Liability of foreignness the costs

of doing business abroad resulting in a

competitivedisadvantage.
Methods of Foreign Direct Investments

The foreign direct investor may acquire 10% or more

of the voting power of an enterprise in an

economythrough any of the following methods:

by incorporating a wholly owned subsidiary or

company

by acquiring shares in an associated enterprise

through a merger or an acquisition of an unrelated

enterprise

participating in an equity Joint Venture with

another investor or enterprise Foreign direct

investment incentives may take the following

forms:low corporate tax and income tax rates

tax holidays

other types of tax concessions

preferential tariffs

special economic zones

investment financial subsidies

soft loan or loan guarantees

free land or land subsidies

relocation & expatriation subsidies

job training & employment subsidies

infrastructure subsidies

R&D support
derogation from regulations (usually for very large

projects)

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 multitudeof 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

softwareengineering. India followed a socialist-

inspired approach for most of its independent

history, with strictgovernment 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 byreducing

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 automaticroute 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 IndiaFDI in India includes, FDI inflows as well as

FDI outflow from India. Also FDI foreign direct

investmentand FII foreign institutional investors

are a separate case study while preparing a report

on FDI andeconomic 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

thegovernment continues to encourage more

investments of this sort - but with $5.3 billion in

FDI . India getsless than 10% of the FDI of China.

Foreign direct investment (FDI) in India has played

an important rolein the development of the Indian

economy. FDI in India has - in a lot of ways - enabled

India to achieve acertain degree of financial

stability, growth and development. This money

has allowed India to focus onthe areas that may

have needed economic attention, and address the

various problems that continue tochallenge 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 encourageFDI and present a

favorable scenario for investors. FDI investments

are permitted through financialcollaborations,

through private equity or preferential allotments, by

way of capital markets through Euroissues, and in

joint ventures. FDI is not permitted in the arms,

nuclear, railway, coal & lignite or

miningindustries. A number of projects have been

announced in areas such as electricity generation,

distributionand 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 thefinancing

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 thegrowing 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

multilateralf i n a n c i a l organizations. Up to
45% of the shares of companies in the

global mobile p e r s o n a l 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 thatflowed

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

bothnational and regional approval in the same

process. Federal democracy is perversely an

impediment for India. Local authorities are not part

of the approvals process and have their own rights,

and this often leadsto projects getting bogged down

in red tape and bureaucracy. India actually receives

less than half the FDIthat the federal government

approves.

Investment Risks in India

Sovereign Risk

India is an effervescent parliamentary democracy

since its political freedom from British rule more

than50 years ago. The country does not face any real

threat of a serious revolutionary movement which

mightlead to a collapse of state machinery.

Sovereign risk in India is hence nil for both

"foreign directinvestment" and "foreign

portfolio investment." Many Industrial and

Business houses have restrainedthemselves from

investing in the North-Eastern part of the country due

to unstable conditions. Nonethelessinvesting 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 arerestricted by law.

Political Risk

India has enjoyed successive years of elected

representative government at the Union as well

as federallevel. India suffered political instability for

a few years in the sense there was no single party

which wonclear majority and hence it led to the

formation of coalition governments. However,

political stability hasfirmly returned since the

general elections in 1999, with strong and

healthy coalition governmentsemerging.

Nonetheless, political instability did not change

India's bright economic course though itdelayed

certain decisions relating to the economy.

Economic liberalization which mostly

interestedforeign 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 arisesthe 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 alarge number of market

research firms in exchange for a professional fee

to study the state of demand /supply for any

product. As it is, entering the consumer market

involves some kind of gamble and hence involves

commercial risk .

Risk Due To Terrorism

In the recent past, India has witnessed several

terrorist attacks on its soil which could have a

negativeimpact on investor confidence. Not only

business environment and return on investment,

but also theoverall 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 thelong run, it is the micro and

macro economic conditions of the Indian economy

that would decide the flowof Foreign investment and

in this regard India would continue to be a favorable

investment destination.

FDI Policy in India

Foreign Direct Investment Policy

FDI policy is reviewed on an ongoing basis and

measures for its further liberalization are taken.

Change insectoral 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 a p p r o v a l i n m o s t o f t h e s e c t o r s

including the services sector under

automatic route. FDI i n 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

inwardremittances within 30 days of such receipt

and will have to file the required documents with

that officewithin 30 days after issue of shares to

foreign investors.The Foreign direct investment

scheme and strategy depends on the respective FDI

norms and policies inIndia. 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:

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 industryis

allowed upto 100% equity participation with the

capping amount as Rs. 1500 crores.

FDI figures in equity contribution in the finance

sector cannot exceed more than 40% in

bankingservices including credit card operations and

in insurance sector only in joint ventures with

localinsurance companies.

FDI limit of maximum 49% intelecom

industryespecially in the GSM services

Government Approvals for Foreign Companies

Doing Business in India.

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 beenformulated with a

view to invite and encourage FDI in India. The

Reserve Bank of India has prescribedthe

administrative and compliance aspects of

FDI. A foreign company planning to set up

businessoperations 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 bythe Government or RBI. The investors are

only required to notify the Regional office concerned

of RBI within 30days 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 thefollowing:

Banking

NBFC's Activities in Financial Services Sector

Civil Aviation

PetroleumIncluding Exploration/Refinery/Marketing

Housing & Real Estate Development Sector for

Investment from Persons other than NRIs/OCBs.

Venture Capital Fund and Venture Capital Company

Investing Companies in Infrastructure & Service

Sector
Atomic Energy & Related Projects

Defense and Strategic Industries

Agriculture (Including Plantation)

Print Media

Broadcasting
I.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

accommodationand/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 andorganizations.For

foreign technology agreements, automatic approval is

granted if i.up to 3% of the capital cost of the

project is proposed to be paid for technical

and consultancyservices 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 to10% 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 fromtime 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. F i n a n c i a l C o n s u l t a n c y

vi.Stock Broking

vii.Asset Management
viii.Venture Capitalix.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 Creditxix.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

monthsc.Minimum capitalization norms for non-fund

based activities: Minimum capitalization norm of US

$ 0.5 million is applicable in respect of all permitted

non-fund based NBFCs with foreign investment.

d. Foreign investors can set up 100% operating

subsidiaries without the condition to disinvest

aminimum 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

beallowed to set up subsidiaries for undertaking

other NBFC activities, subject to the subsidiaries

alsocomplying 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 theReserve 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

fromInsurance 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 thecompanies (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 andother license

provisions.ii.ISPs with gateways, radio-paging

and end-to-end bandwidth, FDI is permitted

up to 74% withFDI, beyond 49% requiring

Government approval. These services would be

subject to licensingand 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 . E l e c t r o n i c Mail; andd . Vo i c e

M a i l The above would be subject to the following

conditions:

.
e FDI up to 100% is allowed subject to the

condition that such companies would divest

26%of their equity in favor of Indian public in 5

years, if these companies are listed in other parts

of the world.f.The above services would be

subject to licensing and security

requirements, wherever required.Proposals for

FDI beyond 49% shall be considered by FIPB on

case to case basis.

Trading:FDI in Trading Companies in India

Trading is permitted under automatic route with FDI

up to 51% provided it is primarily export

activities,and the undertaking is an export

house/trading house/super trading house/star

trading house. However,under the FIPB route:-

i.100% FDI is permitted in case of trading

companies for the following activities:

exports;
bulk imports with ex-port/ex-bonded warehouse

sales;

cash and carry wholesale trading;

other import of goods or services provided at least

75% is for procurement and sale of goods

ands e r v i c e s a m o n g t h e c o m p a n i e s o f t h e

same group and not for third party use or

o n w a r d 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

companieswho wish to market manufactured

products on behalf of their joint ventures in

which they haveequity participation in

India.c.Trading of hi-tech items/items requiring

specialized after sales serviced.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

providedand 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

suchtest marketing facility will be for a period of two

years, and investment in setting up

manufacturingfacilities commences simultaneously

with test marketingFDI up to 100% permitted for e-

commerce activities subject to the condition that

such companies woulddivest 26% of their equity in

favor of the Indian public in five years, if these

companies are listed in other parts of the world. Such

companies would engage only in business to business

(B2B) e-commerce and notin retail trading.

Power:FDI In Power Sector in India

Up to 100% FDI allowed in respect of

projects relating to electricity generation,

transmission anddistribution, other than atomic

reactor power plants. There is no limit on the project

cost and quantum of foreign direct investment.

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 DNAtechnology, and specific

cell / tissue targeted formulations.FDI proposals for

the manufacture of licensable drugs and

pharmaceuticals and bulk drugs produced

byrecombinant 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 conditions.

Business Process Outsourcing BPO in India

FDI up to 100% is allowed subject to certain

conditions.
Special Facilities and Rules for NRI's and

OCB's

NRI's and OCB's are allowed the following special

facilities:1.Direct investment in industry, trade,

infrastructure etc.

2.Up to 100% equity with full repatriation facility for

capital and dividends in the following sectorsi . 3 4

High Priority Industry Groupsii.Export

Tr a d i n g C o m p a n i e s iii.Hotels and Tourism-

related Projectsiv.Hospitals, Diagnostic

Centersv . S h i p p i n g v i certain
.Deep Sea F i s h i n g vii.Oil

Explorationviii.Power ix.Housing and Real Estate

Developmentx . H i g h w a y s , Bridges and

P o r t s xi.Sick Industrial Unitsxii.Industries

Requiring Compulsory Licensing

36

3.Up to 40% Equity with full repatriation:

New Issues of Existing Companies raising

C a p i t a l through Public Issue up to 40% of the new

Capital Issue.4 . O n n o n - r e p a t r i a t i o n b a s i s : U p

to 100% Equity in any Proprietary or

P a r t n e r s h i p e n g a g e d i n 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, Unitsof UTI, National

Plan/Saving Certificates.6.On Non-Repatriation

Basis: Acquisition of shares of an Indian

Company, through a General BodyResolution, up

to 24% of the Paid Up Value of the Company.

7.Other Facilities: Income Tax is at a Flat Rate of

20% on Income arising from Shares or Debenturesof

an Indian
India Further Opens Up Key Sectors for Foreign

Investment

India has liberalized foreign investment

regulations in key sectors, opening up

commodity exchanges,credit information

services and aircraft maintenance operations.

The foreign investment limit in PublicSector

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

awaywith. FDI in Civil aviation up to 74% will now

be allowed through the automatic route for non-

scheduledand 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 missagain. India has decided to allow 26%

FDI and 23% FII investments in commodity

exchanges, subject tothe proviso that no single entity

will hold more than 5% of the stake.Sectors like

credit information companies, industrial parks

and construction and development projectshave

also been opened up to more foreign investment. Also

keeping India's civilian nuclear ambitions inmind,

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 sametime, critics say contentious issues like

FDI and multi-brand retail are out of the policy radar

because of political compulsions.

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 PublicSector

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

awaywith. FDI in Civil aviation up to 74% will now

be allowed through the automatic route for non-

scheduledand 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 missagain. India has decided to allow 26%

FDI and 23% FII investments in commodity

exchanges, subject tothe proviso that no single entity

will hold more than 5% of the stake.Sectors like

credit information companies, industrial parks

and construction and development projectshave

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 sametime, critics say contentious issues like

FDI and multi-brand retail are out of the policy radar

because of political compulsions.

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 direct investments in India

a r e a p p r o v e d t h r o u g h t w o routes

1. Automatic approval by RBI

The Reserve Bank of India accords

automatic approval within a period of two

w e e k s ( s u b j e c t t o compliance of norms) to all

proposals and permits foreign equity up to 24%;

50%; 51%; 74% and 100% isa l l o w e d d e p e n d i n g

on the category of industries and the

sectoral caps applicable. The lists

a r e comprehensive and cover most industries of

interest to foreign companies. Investments in

high priorityindustries or for trading companies

primarily engaged in exporting are given almost

automaticapproval 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 t h e parameters of automatic

approval are not met. Normal processing time is

4 to 6 weeks. Its approach isliberal for all sectors

and all types of proposals, and rejections are few.

It is not necessary for foreigninvestors to have a

local partner, even when the foreign investor wishes

to hold less than the entire equityof the company. The

portion of the equity not proposed to be held by the

foreign investor can be offered tothe public.

Foreign Investment Promotion Board
The FIPB (Foreign Investment Promotion

Board) is a government body that offers a

single windowclearance for proposals on foreign

direct investment in the country that are not allowed

access through theautomatic 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 foreigninvestment in

the country for restricted sectors ( as laid out

in the Press notes and extant

foreigninvestment policy) on a regular basis.

Currently proposals for investment beyond 600

crores require theconcurrence of the CCEA

(Cabinet Committee on Economic Affairs). The

threshold limit is likely to ber a i s e d t o 1 2 0 0

crore soon.The Board thus plays an

important role in the administration

a n d implementation of the Governments FDI policy.

In circumstances where there is ambiguity or a

conflictof interpretation, the FIPB has stepped in

to provide solutions. Through its fast track

working it hasestablished 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. TheFIPB is assisted

in this task by a FIPB Secretariat. The launch of e-

filing facility is an important initiativeof the

Secretariat to further the cause of enhanced

accessibility and transparency .

Low Income Countries in Global FDI Race

The situation of foreign direct investmenthas

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, nowthe foreign direct

investorsare 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 thesame 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 incomecountries. They have had an

uninterrupted and continually increasing flow of

Foreign Direct Investment. It has been observed that

the various debtcrises, 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 theabsence of proper financial markets,

as well as the fact that their economies were not

open to foreigndirect investment. During the

later phases of the decade of 70s the Asian

countries started encouragingforeign direct

investments in their economies. China has received

the most of the foreign direct investment that was

pumped into the countrieswith low income. It

accounted for as much as 86% of the total foreign

direct investment made in the lower income

countries in with low incom e. It accounted

for as much as 86% of the tot al foreign

directinvestment made in the lower income

countries in 1995.The economic liberalization in

China started in 1979. This led to an increase in

the foreign directinvestment in China. In the

years between 1982 and 1991 the average foreign

direct investment in Chinawas US$ 2.5 billion.

This average increased by seven times to become

US$ 37.5 billion during 1995. Asignificant amount

of the foreign direct investment in China was

provided in the industrial sector.It was as much as

68%. Around 20% of the foreign direct investment of

China was made in the real estatesector. During the

same period Nigeria had been the second best in

terms of receiving foreign directinvestment. In the

recent times India has risen to be the third major

foreign direct investment destinationin the recent

years. Foreign direct investment started in India in

1991 with the initiation of the

economicliberation.There were more initiatives that

enabled India to garner foreign direct investments

worth US$ 2.9 billionfrom 1991 to 1995. This was a

significant increase from the previous twenty years

when the total foreigndirect investment in India was

US$1 billion. Most of the foreign direct investment

made in India has beenin the infrastructural

areas like telecommunications and power. In

the manufacturing industry theemphasis 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

theforeign direct investment made in the country. The

amount stood at US$ 25 million in 1993 compared

toUS$ 8 million in 1993. This amount increased by 3

times after the USA removed its economic

sanctionsi n 1994. The gas and

petroleum industrieswere the

biggest b e n e f i c i a r i e s of the foreign

direct
investment. Bangladesh started receiving

increasing foreign direct investment after

1991, when theeconomic 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$ 125million in 1995. As

per the available statistics the manufacturing

industry, comprising of clothing andtextiles took

up 20% of the total approved foreign direct

investment. Food processing, chemicals

andelectric machinery were also important in this

regard. The increase in the foreign direct

investment inGhana was remarkable as well. The

figures increased from US$11.7 million, on an

average, from 1986 to1992 to US$ 201 million, on an

average, from 1993 to 1995. This improvement was

brought about by the privatization of the Ashanti

Goldfield.

Objective of the study

To know the flow of investment in India

To know how can India Grow by Investment .

To Examine the trends and patterns in the FDI

across different sectors and from different countriesin

India

To know in which sector we can get more foreign

currency in terms of investment in India

Research methodology
In order to accomplish this project successfully we

will take following steps.

Data collection:

Secondary Data:Internet, Books , newspapers,

journals and books, other reports and projects,

literatures

FDI:The study is limited to a sample of investing

countries e.g. Mauritius, Singapore, USA etc.

and sectorse.g. service sector, computer hardware

and software, telecommunications etc. which had

attracted larger inflow of FDI from different

countries.

FII:

Correlation:

We have used the Correlation tool to determine

whether two ranges of data movetogether that

is, how the Sensex, Bankex, IT, Power and

Capital Goods are related to the FIIwhich may be

positive relation, negative relation or no relation.We

will use this model for understanding the

relationship between FII and stock indices

returns.FII is taken as independent variable. Stock

indices are taken as dependent variable

Hypothesis Test:

If the hypothesis holds good then we can infer that

FIIs have significant impacton the Indian capital

market. This will help the investors to decide on

their investments in stocksand shares. If the

hypothesis is rejected, or in other words if the

null hypothesis is accepted, thenFIIs will have no

significant impact on the Indian bourses.

 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 thevolume of the FDI inflows into

the economy maintained a fluctuating and unsteady

trend during the study period. It might be of interest

to note that more than 50% of the total FDI inflows

received by India , camefrom Mauritius, Singapore

and the USA.The main reason for higher levels of

investment from Mauritius was that the fact that India

entered into adouble 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 butthere is less co-

relation with Bankex and IT. One of the reasons for

high degree of any linear relation canalso be due to

the sample data. The data was taken on monthly

basis. The data on daily basis can givemore

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.
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