FDI FII in India A Comparative Analysis

FDI & FII In India _A Comparative Analysis
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GENERAL INTRODUCTION OF THE PROJECT

The Government of India has recognized the key role of the foreign direct investment
(FDI) and foreign institutional investment (FII) in its process of economic development,
not only as an addition to its own domestic capital but also as an important source of
technology and other global trade practices. In order to attract the required amount of FDI
and FII, it has bought about a number of changes in its economic policies and has put in
its practice a liberal and more transparent FDI and FII policy with a view to attract more
foreign direct institutional investment inflows into its economy. These changes have
heralded the liberalization era of the foreign investment policy regime into India and have
brought about a structural breakthrough in the volume of FDI and FII inflows in the
economy

The influx of FIIs has indeed influenced the secondary market segment of the Indian
stock market. But the supposed linkage effects with the real economy have not worked in
the way the mainstream model predicts. Instead there has been an increased uncertainty
and skepticism about the stock market in this country. On the other hand, the surge in
foreign portfolio investment in the Indian economy has introduced some serious
problems of macroeconomic management for the policymakers like inflation, currency
appreciation etc.

On the other hand FDI is what the government really needs to attract in various sectors
like infrastructure, education etc. it is much more stable than the foreign institutional
investment which comes via the stock market route, and has more accountability and
brings fundamental and tangible benefits to the economy.


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FOREIGN DIRECT INVESTMENT IN INDIA
India is a country that has been able to restore investor confidence in its markets, even
during the toughest of times. Increase in capital inflows, foreign direct investments (FDI)
and overseas entities participation reflect the fact that Indian markets have fared well in
recent times. Moreover, foreign companies are viewing the South-Asian nation as a
strategic hub for their operations and investments owing to investor-friendly policy
environment, positive eco-system and huge potential for growth.
India Incs increasing presence over the global canvas and Indian governments
consistent support to the FDI space have facilitated remarkable developments and
investments from overseas partners

PRE-LIBERALIZATION PERIOD (19471991)
Indian economic policy after independence was influenced by the colonial experience,
which was seen by Indian leaders as exploitative, and by those leaders exposure to
democratic socialism as well as the progress achieved by the economy of the Soviet
Union. Domestic policy tended towards protectionism, with a strong emphasis on import
substitution, industrialization, economic interventionism, a large public sector, business
regulation, and central planning, while trade and foreign investment policies were
relatively liberal. Five-Year Plans of India resembled central planning in the Soviet
Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical
plants, among other industries, were effectively nationalized in the mid-1950s.

POST-LIBERALIZATION PERIOD (SINCE 1991)
In the late 1970s, the government led by Morarji Desai eased restrictions on capacity
expansion for incumbent companies; removed price controls, reduced corporate taxes and
promoted the creation of small scale industries in large numbers. However, the
subsequent government policy of Fabian socialism hampered the benefits of the
economy, leading to high fiscal deficits and a worsening current account. The collapse of
the Soviet Union, which was India's major trading partner, and the first Gulf War, which

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caused a spike in oil prices, caused a major balance-of-payments crisis for India, which
found it facing the prospect of defaulting on its loans. India asked for a $1.8 billion
bailout loan from the International Monetary Fund (IMF), which in return demanded
reforms. In response, Prime Minister Narasimha Rao, along with his finance minister
Manmohan Singh, initiated the economic liberalization of 1991. The reforms did away
with the License Raj (investment, industrial and import licensing), reduced tariffs and
interest rates and ended many public monopolies, allowing automatic approval of foreign
direct investment in many sectors. By the turn of the 20th century, India had progressed
towards a free-market economy, with a substantial reduction in state control of the
economy and increased financial liberalization. This has been accompanied by increases
in life expectancy, literacy rates and food security, although the beneficiaries have largely
been urban residents.

The economy of India is the third largest in the world as measured by purchasing power
parity (PPP); the economy is diverse and encompasses agriculture, handicrafts, textile,
manufacturing, and a multitude of services. Although two-thirds of the Indian workforce
still earns 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

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has declined significantly since independence, mainly due to the green revolution and
economic reforms.

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

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.

Why does India, with a stable democracy and a smoother approval process, lag so far
behind China in FDI amounts? Although the Chinese approval process is complex, it
includes both national and regional approval in the same process. Federal democracy is
perversely an impediment for India. Local authorities are not part of the approvals
process and have their own rights, and this often leads to projects getting bogged down in
red tape and bureaucracy. India actually receives less than half the FDI that the federal
government approves.

INVESTMENT RISKS IN INDIA

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Sovereign Risk
India is an effervescent parliamentary democracy since its political freedom from British
rule more than 50 years ago. The country does not face any real threat of a serious
revolutionary movement which might lead to a collapse of state machinery. Sovereign
risk in India is hence nil for both "foreign direct investment" and "foreign portfolio
investment." Many Industrial and Business houses have restrained themselves from
investing in the North-Eastern part of the country due to unstable conditions. Nonetheless
investing in these parts is lucrative due to the rich mineral reserves here and high level of
literacy. Kashmir on the northern tip is a militancy affected area and hence investment in
the state of Kashmir are restricted by law

Political Risk
India has enjoyed successive years of elected representative government at the Union as
well as federal level. India suffered political instability for a few years in the sense there
was no single party which won clear majority and hence it led to the formation of
coalition governments. However, political stability has firmly returned since the general
elections in 1999, with strong and healthy coalition governments emerging. Nonetheless,
political instability did not change India's bright economic course though it delayed
certain decisions relating to the economy. Economic liberalization which mostly
interested foreign investors has been accepted as essential by all political parties
including the Communist Party of India Though there are bleak chances of political
instability in the future, even if such a situation arises the economic policy of India would
hardly be affected.. Being a strong democratic nation the chances of an army coup or
foreign dictatorship are minimal. Hence, political risk in India is practically absent.


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Commercial Risk
Commercial risk exists in any business ventures of a country. Not each and every product
or service is profitably accepted in the market. Hence it is advisable to study the demand /
supply condition for a particular product or service before making any major investment.
In India one can avail the facilities of a large number of market research firms in
exchange for a professional fee to study the state of demand / supply for any product. As
it is, entering the consumer market involves some kind of gamble and hence involves
commercial risk

Risk Due To Terrorism
In the recent past, India has witnessed several terrorist attacks on its soil which could
have a negative impact on investor confidence. Not only business environment and return
on investment, but also the overall security conditions in a nation have an effect on FDI's.
Though some of the financial experts think otherwise. They believe the negative impact
of terrorist attacks would be a short term phenomenon. In the long run, it is the micro and
macro economic conditions of the Indian economy that would decide the flow of foreign
investment and in this regard India would continue to be a favorable investment
destination.

3.3.2 In India, Foreign Direct Investment Policy allows for investment only in case of
the following form of investments:
Through financial alliance
Through joint schemes and technical alliance
Through capital markets, via Euro issues
Through private placements or preferential allotments


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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 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.


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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 sector wise 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.


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FDI POLICY IN INDIA

3.4.1 FOREIGN DIRECT INVESTMENT POLICY

FDI policy is reviewed on an ongoing basis and measures for its further liberalization are
taken. Change in sectoral policy/sectoral equity cap is notified from time to time through
Press Notes by the Secretariat for Industrial Assistance (SIA) in the Department of
Industrial Policy announcement by SIA are subsequently notified by RBI under FEMA.
All Press Notes are available at the website of Department of Industrial Policy &
Promotion. FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior
approval in most of the sectors including the services sector under automatic route. FDI
in sectors/activities under automatic route does not require any prior approval either by
the Government or the RBI. The investors are required to notify the Regional office
concerned of RBI of receipt of inward remittances within 30 days of such receipt and will
have to file the required documents with that office within 30 days after issue of shares to
foreign investors.

The Foreign direct investment scheme and strategy depends on the respective FDI norms
and policies in India. The FDI policy of India has imposed certain foreign direct
investment regulations as per the FDI theory of the Government of India. These include
FDI limits in India for example:

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 up to 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 banking services including credit card operations and in insurance
sector only in joint ventures with local insurance companies.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.

I. Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require
any prior approval either by the Government or RBI. The investors are only required to
notify the Regional office concerned of RBI within 30 days of receipt of inward
remittances and file the required documents with that office within 30 days of issue of
shares to foreign investors.
List of activities or items for which automatic route for foreign investment is not
available, include the following:

Banking
NBFC's Activities in Financial Services Sector
Civil Aviation
Petroleum Including Exploration/Refinery/Marketing
Housing & Real Estate Development Sector for Investment from Persons other than
NRIs/OCBs.
Venture Capital Fund and Venture Capital Company
Investing Companies in Infrastructure & Service Sector

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Atomic Energy & Related Projects
Defense and Strategic Industries
Agriculture (Including Plantation)
Print Media
Broadcasting
Postal Services

II. Procedure under Government approval

FDI in activities not covered under the automatic route, requires prior Government
approval and are considered by the Foreign Investment Promotion Board (FIPB).
Approvals of composite proposals involving foreign investment/foreign technical
collaboration are also granted on the recommendations of the FIPB. Application for all
FDI cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented
Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs
(DEA), Ministry of Finance. Application for NRI and 100% EOU cases should be
presented to SIA in Department of Industrial Policy & Promotion

Investment by way of Share Acquisition
A foreign investing company is entitled to acquire the shares of an Indian company
without obtaining any prior permission of the FIPB subject to prescribed parameters/
guidelines. If the acquisition of shares directly or indirectly results in the acquisition of a
company listed on the stock exchange, it would require the approval of the Security
Exchange Board of India.
New investment by an existing collaborator in India
A foreign investor with an existing venture or collaboration (technical and financial) with
an Indian partner in particular field proposes to invest in another area, such type of
additional investment is subject to a prior approval from the FIPB, wherein both the
parties are required to participate to demonstrate that the new venture does not prejudice
the old one.

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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.

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

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 is
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

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where there is ambiguity or a conflict of interpretation, the FIPB has stepped in to
provide solutions. Through its fast track working it has established its reputation as a
body that does not unreasonably delay and is objective in its decision making. It therefore
has a strong record of actively encouraging the flow of FDI into the country. The FIPB is
assisted in this task by a FIPB Secretariat. The launch of e- filing facility is an important
initiative of the Secretariat to further the cause of enhanced accessibility and transparency

About foreign direct investment In India.

It is the process whereby residents of one country (the source country) acquire ownership
of assets for the purpose of controlling the production, distribution, and other activities of
a firm in another country (the host country). The international monetary funds balance of
payment manual defines FDI as an investment that is made to acquire a lasting interest in
an enterprise operating in an economy other than that of the investor. The investors
purpose being to have an effective voice in the management of the enterprise. The united
nations 1999 world investment report defines FDI as an investment involving a long
term relationship and reflecting a lasting interest and control of a resident entity in one
economy (foreign direct investor or parent enterprise) in an enterprise resident in an
economy other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise
or foreign affiliate).

PROHIBITED SECTORS

FDI is prohibited in:
(a) Retail Trading (except single brand product retailing)
(b) Lottery Business including Government /private lottery, online lotteries, etc.
(c) Gambling and Betting including casinos etc.
(d) Chit funds
(e) Nidhi company

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(f) Trading in Transferable Development Rights (TDRs)
(g) Real Estate Business or Construction of Farm Houses
(h) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
substitutes
(i) Activities / sectors not open to private sector investment e.g. Atomic Energy and
Railway Transport (other than Mass Rapid Transport Systems).

Foreign technology collaboration in any form including licensing for franchise,
trademark, brand name, management contract is also prohibited for Lottery Business and
Gambling and Betting activities.

PERMITTED SECTORS

In the following sectors/activities, FDI up to the limit indicated against each
sector/activity is allowed, subject to applicable laws/ regulations; security and other
conditionalities. In sectors/activities not listed below, FDI is permitted up to 100% on the
automatic route, subject to applicable laws/ regulations; security and other
conditionalities.
Wherever there is a requirement of minimum capitalization, it shall include share
premium received along with the face value of the share, only when it is received by the
company upon issue of the shares to the non-resident investor. Amount paid by the
transferee during post-issue transfer of shares beyond the issue price of the share, cannot
be taken into account while calculating minimum capitalization requirement


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Table 2: FDI in Permitted Sectors to the limit indicated in %

Sl.No.

Sector/Activity

% of FDI
Cap/Equity

Entry Route
1)AGRICULTURE
1.1 Agriculture & Animal Husbandry 100% Automatic
1.2 Tea Plantation 100% Government
2)MINING
2.1 Mining and Exploration of metal 100% Automatic
2.2 Coal and Lignite Mining 100% Automatic
2.3 Mining and mineral separation of
titanium bearing minerals and ores
100% Government

3)Petroleum & Natural Gas
3.1 Exploration activities of oil and natural
gas fields
100%

Automatic

3.2 Petroleum refining by the Public Sector
Undertakings
49%

Government

4)DEFENCE
Defence Industry subject to Industrial
license under the Industries Act 1951
26% Government

5)Information Services
5.1 Broadcasting
5.2 Terrestrial Broadcasting FM (FM
Radio)
26% Government

5.3 Cable Network 49% Government
5.4 ISPs with gateways, radiopaging 74% Above 49% need
Govt. license
5.5 FDI limit in (HITS) Broadcasting
Service
74%

Automatic up to
49%
Government
route beyond
Headend-In-The-Sky (HITS) Broadcasting Service refers to the multichannel
downlinking and distribution of television programme in C-Band or Ku Band wherein
all the pay channels are downlinked at a central facility (Hub/teleport) and again
uplinked to a satellite after encryption of channel. At the cable headend these encrypted
pay channels are downlinked using a single satellite antenna, transmodulated and sent to
the subscribers by using a land based transmission system comprising of infrastructure
of cable/optical fibers network.

6)Print Media
6.1 Publishing of Newspaper and
periodicals

26% Government

6.2 Publication of Indian editions of
foreign magazines
26% Government


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6.3 Publishing/printing of Scientific and
Technical
100% Government

6.4 Publication of facsimile edition of
foreign newspapers
100%

Government

7)CIVIL AVIATION
7.1 Airports
(a) Greenfield projects 100% Automatic
(b) Existing projects 100% Automatic up to
74%
Government
route beyond
74%
7.2 Air Transport Services
(1) Scheduled Air Transport Service/
Domestic Scheduled Passenger Airline
49% FDI

Automatic

(2) Non-Scheduled Air Transport
Service
74% FDI Automatic up to
49%
Government
route beyond
49% and up to
74%
(3) Helicopter services/seaplane
services requiring DGCA approval
100%

Automatic

7.3 Other services under Civil Aviation sector
(1) Ground Handling Services 74% FDI Automatic up to
49%
Government
route beyond
49% and up to
74%
(2) Maintenance and Repair
organizations
100% Automatic

8) Courier services for carrying packages, parcels
and other items
100%

Government

9) Construction Development: Townships,
Housing, Built-up infrastructure
100%

Automatic

10) Industrial Parks new and existing 100% Automatic
Satellites Establishment and operation 74%

Government

11) Private Security Agencies

49 %

Government

12) Telecom services 74%

Automatic up to
49%
Government
route beyond

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49% and up to
74%
13) TRADING
13.1 (i) Cash & Carry Wholesale Trading/
Wholesale Trading
100%

Automatic

13.2 Single Brand product trading

51%

Government

13.3 E-commerce activities

100%

Automatic

14) FINANCIAL SERVICES
Asset Reconstruction Company (ARC)

49%

Government

Banking Private sector

74%

Automatic up to
49%
Government
route beyond
49% and up to
74%
Banking- Public Sector

20%

Government

15) Commodity Exchanges 49%

Government

16) Credit Information Companies

49%

Government

17) Infrastructure Company in the Securities
Market
49%

Government

18) Insurance

26%

Automatic

19) Non-Banking Finance Companies (NBFC)

100%

Automatic

20) Drugs & Pharmaceuticals 100% Automatic
21) Power(other than atomic
reactor power plants)
100% Automatic
22) Hotel & Tourism 100% Automatic


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CAUSES AND REASONS FOR LOW FDI

1. Image and Attitude

Though economic reforms welcoming foreign capital were introduced in the nineties it
does not seem so far to be really evident in our overall attitude. There is a lingering
perception abroad that foreign investors are still looked at with some suspicion. There is
also a view that some unhappy episodes in the past have a multiplier effect by adversely
affecting the business environment in India. Besides the Made in India label is not
conceived by the world as synonymous with quality.

We do not get across effectively to the decision-making board room levels of corporate
entities where a final decision is taken. Our promotional effort is quite often of a general
nature and not corporate specific. India is, moreover, a multi-cultural society and a large
number of multinational companies (MNC) do not understand the diversity and the
Multi-plural nature of the society and the different stakeholders in this country.

On the other hand China is viewed as more business oriented, its decision- making is
faster and has more FDI friendly policies (ATK 2001). Despite a very similar historical
mistrust of foreigners and foreign investment arising from colonial experience, modern
(post 1980 China) differs fundamentally from India. Its official attitude to FDI, reflected
from the highest level of government (PM, President) to the lowest level of government
bureaucracy (provinces) is one of consciously enticing FDI with a warm welcome. They
recognize the multifaceted and mutual benefits arising from FDI.

2. Policy Frameworks

Foreign companies or investors that have set up an Indian company or Joint Venture have
become indigenized and thus can operate more or less competitively with other Indian

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company. They adjust themselves to the milieu. This is not, however, true of foreign
direct investors who are coming into India for the first time. To the uninitiated the hurdles
look daunting and the complexity somewhat perplexing.

Among the policy problems that have been identified by surveys as acting as additional
hurdles for FDI are laws, regulatory systems and Government monopolies that do not
have contemporary relevance.

3. Procedures
According to Boston Consulting Group, investors find it frustrating to navigate through
the tangles of bureaucratic controls and procedures.11 McKinsey (2001) found that, the
time taken for application/bidding/approval of FDI projects was too long.
Multiple approvals, excessive time taken (2-3years) such as in food processing and long
lead times of up to six months for licenses for duty free exports, lead to loss of
investors confidence despite promises of a considerable market size.
Bureaucracy and red tape topped the list of investor concerns as they were cited by 39 per
cent of respondents in the A T Kearney survey. According to a CII study, a typical power
project requires 43 Central Government clearances and 57 State Government level
(including the local administration) clearances. Similarly, the number of clearances for a
typical mining project is 37 at the Central Government level and 47 at the State
Government level. Though the number of approvals/clearances may not always be much
lower in the OECD countries such as the USA and Japan the regulatory process is
transparent with clear documentation requirements and decision rules based largely on
self-certification, and generally implemented through the legal profession.

The FICCI (2001) study similarly cites centre-state duality as creating difficulties at both
the approval and project implementation stages. These studies find that the bureaucracy
in general is quite unhelpful in extending infra-structural facilities to any project that is
being set up. This leads to time and cost overruns. At an operational level, multiple
returns have to be filed every month.


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4. Quality of Infrastructure

Poor infrastructure affects the productivity of the economy as a whole and hence its
GDP/per capita.It also reduces the comparative advantage of industries that are more
intensive in the use of such infrastructure. In the context of FDI, poor infrastructure has a
greater effect on export production than on production for the domestic market. FDI
directed at the domestic market suffers the same handicap and additional costs as
domestic manufacturers that are competing for the domestic market. Inadequate and poor
quality roads, railroads and ports, however raise export costs vis-a-vis global competitors
having better quality and lower cost infrastructure.

5. State Obstacles
Taxes levied on transportation of goods from State to State (such as octroi and entry tax)
adversely impact the economic environment for export production. Such taxes impose
both cost and time delays on movement of inputs used in production of export products
as well as in transport of the latter to the ports. Differential sale and excise taxes (States
and Centre) on small and large companies are found to be a deterrent to FDI in sectors
such as textiles (McKinsey 2001). Investments that could raise the productivity and
quality of textiles and thus make them competitive in global markets remain unprofitable
because they cannot overcome the tax advantage given to small producers in the domestic
market.
At the local level (sub-state) issues pertaining to land acquisition, land use change, power
connection, building plan approval are sources of project implementation delay. The
State level issues are also being considered by the Govindarajan committee with a view
to seeing how they can be alleviated.
6. Legal Delays

Though Indias Anglo Saxon legal system as codified is considered by many legal
experts to be superior to that of many other emerging economies it is often found in
practice to be an obstacle to investment. One of the reasons is the inordinate delay are the
interlocutory procedures that characterize judicial procedures.

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FOREIGN INSTITUTIONAL INVESTMENT

The term FII is used most commonly in India to refer to outside companies investing in
the financial markets of India. International institutional investors must register with the
FIIs
Who are they?

Institutions like pension funds ,mutual funds,
investment trusts, asset management
companies, nominees companies and
incorporated portfolio
managers

An investor or investment fund that is from or
registered in a country outside of the one in
which it is currently investing


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Securities and Exchange Board of India to participate in the market. One of the major
market regulations pertaining to FIIs involves placing limits on FII ownership in
Indian companies

FIIs
Where they can invest?

Under securities such as shares, debentures and warrants
issued by Indian companies which are
listed /to be listed on the Stock exchange in India

The schemes floated by domestic mutual funds, traded on
the primary and secondary markets
In government securities including treasury bills and debt
securities of Indian companies.


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FOREIGN INSTITUTIONAL INVESTMENT IN
INDIA

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.

Portfolio Investment
It refers to the purchase of stocks, bonds, debentures or other securities by an FII. FIIs
include pension funds, mutual funds, investment trusts, asset management companies,
nominee companies and incorporated/institutional portfolio managers.
In contrast to FDI, FIIs do not invest with the intention of gaining controlling interest in a
company. They typically make short-term investments. These investments are made-to-
book profits. Compared to FDI, a portfolio investor can enter and exit countries with
relative ease. This is a major contributing factor to the increasing volatility and instability

24

of the global financial system. Because of the very nature of such investment, FII money
is also called hot money. The rapid outflow of hot money, in the recent past, has
created exchange-rate problems in Argentina and in Southeast Asia. Since FIIs are very
sensitive, a mere change in perception about an economy can prompt them to pull out
investments from a country.

The following factors contributed significantly to the FII flows to India -
Regulation and Trading Efficiencies:
Indian stock markets have been well regulated by the stock exchanges, SEBI and RBI
leading to high levels of efficiency in trading, settlements and transparent dealings
enhancing the confidence level of FIIs in increasing allocations to India.

F and O Segment:
The highly successful derivatives market in India has provided additional depth to the
markets with high traded volumes and multiple instruments by which investors can
participate in the Indian equity markets. In fact the Single Stock Futures (SSF) market in
India is one of the most successful SSF market in Asia after Korea.

New Issuance:
We have witnessed extremely high quality issuance during the year from companies such
as NTPC, ONGC and TCS leading to strong FII participation with successful new
issuance of over $ nine billion, yet another record for the year.

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

25

approval process of SEBI and RBI be changed to a single approval process of SEBI. This
recommendation was implemented in December 2003.

Currently, entities eligible to invest under the FII route are as follows:
I. As FII: Overseas pension funds, mutual funds, investment trust, asset
management company, nominee company, bank, institutional portfolio manager,
university funds, endowments, foundations, charitable trusts, charitable societies,
a trustee or power of attorney holder incorporated or established outside India
proposing to make proprietary investments or with no single investor holding
more than 10 per cent of the shares or units of the fund.

II. As Sub-accounts: The sub account is generally the underlying fund on whose
behalf the FII invests. The following entities are eligible to be registered as sub-
accounts, viz. partnership firms, private company, public company, pension fund,
investment trust, and individuals.

FIIS REGISTERED WITH SEBI FALL UNDER THE FOLLOWING
CATEGORIES:

a) Regular FIIs- those who are required to invest not less than 70 % of their investment in
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.

26

While granting registration to the FII, permission was also granted for making
investments in the names of such clients. Asset management companies/portfolio
managers are basically in the business of managing funds and investing them on behalf of
their funds/clients. Hence, the intention of the guidelines was to allow these categories of
investors to invest funds in India on behalf of their 'clients'. These '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.

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).

ACTS AND RULES

FII registration and investment are mainly governed by SEBI (FII) Regulations, 1995.
ELIGIBILITY FOR REGISTRATION AS FII: Following entities / funds are eligible to
get registered as FII:
1. Pension Funds

27

2. Mutual Funds
3. Insurance Companies
4. Investment Trusts
5. Banks
6. University Fund s
7. Endowments
8. Foundations
9. Charitable Trusts / Charitable Societies
Further, following entities proposing to invest on behalf of broad based funds (a fund
established or incorporated outside India, which has at least twenty investors with no
single individual investor holding more than 10% shares or units of the fund), are also
eligible to be registered as FIIs:
1. Asset Management Companies
2. Institutional Portfolio Managers
3. Trustees
4. Power of Attorney Holder

REGISTRATION PROCESS OF FIIS

FIIs are required to obtain a certificate by SEBI for dealing in securities. SEBI grants the
certificate SEBI by taking into account the following criteria:
i) The applicant's track record, professional competence, financial soundness, experience,
general reputation of fairness and integrity.
ii) Whether the applicant is regulated by an appropriate foreign regulatory authority.
iii) Whether the applicant has been granted permission under the provisions of the
Foreign Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for
making investments in India as a Foreign Institutional Investor.
iv) Whether the applicant is a) an institution established or incorporated outside India as a
pension fund, mutual fund, investment trust, insurance company or reinsurance company.
b) An International or Multilateral Organization or an agency thereof or a Foreign
Governmental Agency or a Foreign Central Bank. c) an asset management company,

28

investment manager or advisor, nominee company, bank or institutional portfolio
manager, established or incorporated outside India and proposing to make investments in
India on behalf of broad based funds and its proprietary funds in if any or d) university
fund, endowments, foundations or charitable trusts or charitable societies.
v) Whether the grant of certificate to the applicant is in the interest of the development of
the securities market.
vi) Whether the applicant is a fit and proper person.

The SEBIs initial registration is valid for a period of three years from the date of its grant
of renewal.

INVESTMENT CONDITIONS AND RESTRICTIONS FOR FIIS:

1. A Foreign Institutional Investor may invest only in the following:-
(a) Securities in the primary and secondary markets including shares, debentures and
warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in
India.
(b) Units of schemes floated by domestic mutual funds including Unit Trust of India,
whether listed or not listed in a recognized stock exchange
(c) Dated Government securities.
(d) Derivatives traded on a recognized stock exchange.
(e) Commercial paper.
(f) Security receipts
2. The total investments in equity and equity related instruments (including fully
convertible debentures, convertible portion of partially convertible debentures and
tradable warrants) made by a Foreign Institutional Investor in India, whether on his own
account or on account of his sub- accounts, should not be less than seventy per cent of the
aggregate of all the investments of the Foreign Institutional Investor in India, made on his
own account and on account of his sub-accounts. However, this is not applicable to any
investment of the foreign institutional investor either on its own account or on behalf of

29

its sub-accounts in debt securities which are unlisted or listed or to be listed on any stock
exchange if the prior approval of the SEBI has been obtained for such investments.
Further, SEBI while granting approval for the investments may impose conditions as are
necessary with respect to the maximum amount which can be invested in the debt
securities by the foreign institutional investor on its own account or through its sub-
accounts. A foreign corporate or individual is not eligible to invest through the hundred
percent debt route.
Even investments made by FIIs in security receipts issued by securitization companies or
asset reconstruction companies under the Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 are not eligible for the investment
limits mentioned above. No foreign institutional investor should invest in security
receipts on behalf of its sub-account.
INCREASING TREND OF FIIS
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 2011,
there were 1,722 FIIs registered with SEBI


30

Table 6: SEBI Registered FIIs in India
Year End of March
1998-99 450
1999-00 506
2000-01 527
2001-02 490
2002-03 502
2003-04 540
2004-05 685
2005-06 882
2006-07 996
2007-08 1279
2008-09 1609
2009-10 1,713
2010-11 1,722
2011-12 1757
2012-13 1742

INVESTMENT OPPORTUNITIES FOR FIIs

The following financial instruments are available for FII investments
a) Securities in primary and secondary markets including shares, debentures and warrants
of companies, unlisted, listed or to be listed on a recognized stock exchange in India;
b) Units of mutual funds;
c) Dated Government Securities;
d) Derivatives traded on a recognized stock exchange;
e) Commercial papers.
Investment limits on equity investments
a) FII, on its own behalf, shall not invest in equity more than 10% of total issued capital
of an Indian company.
b) Investment on behalf of each sub-account shall not exceed 10% of total issued capital
of an India company.

31

c) For the sub-account registered under Foreign Companies/Individual category, the
investment limit is fixed at 5% of issued capital.
These limits are within overall limit of 24% / 49 % / or the sectoral caps a prescribed by
Government of India / Reserve Bank of India.

Investment limits on debt investments

The FII investments in debt securities are governed by the policy if the Government of
India. Currently following limits are in effect:
For FII investments in Government debt, currently following limits are applicable:
For corporate debt the investment limit is fixed at US $ 500 million.

Taxation
The taxation norms available to a FII are shown in the table below.
Nature of Income Tax Rate
Long-term capital gains 10%
Short-term capital gains 30%
Dividend Income Nil
Interest Income 20%
Long term capital gain: Capital gain on sale of securities held for a period of more than
one year.
Short term capital gain: Capital gain on sale of securities held for a period of less than
one year.

Milestones
India embarked on a programme of economic reforms in the early 1990s to tie over its
balance of payment crisis and also as a step towards globalization.
An important milestone in the history of Indian economic reforms happened on
September 14, 1992, when the FIIs (Foreign Institutional Investors) were allowed to
invest in all the securities traded on the primary and secondary markets, including shares,

32

debentures and warrants issued by companies which were listed or were to be listed the
stock exchanges in India and in the schemes floated by domestic mutual funds.
Initially, the holding of a single FII and of all FIIs, NRIs (Non-Resident Indians)
and OCBs (Overseas Corporate Bodies) in any company were subject to a limit of 5%
and 24% of the company's total issued capital respectively.
From November 1996, FIIs were allowed to make 100% investment in debt securities
subject to specific approval from SEBI as a separate category of FIIs or sub-accounts as
100% debt funds. Such investments were, of course, subjected to the fund-specific ceiling
prescribed by SEBI and had to be within an overall ceiling of US $ 1.5 billion. The
investments were, however, restricted to the debt instruments of companies listed or to be
listed on the stock exchanges.
In 1997, the aggregate limit on investment by all FIIs was allowed to be raised from
24% to 30% by the Board of Directors of individual companies by passing a resolution in
their meeting and by a special resolution to that effect in the company's General Body
meeting.
From the year 1998, the FII investments were also allowed in the dated government
securities, treasury bills and money market instruments.
In 2000, the foreign corporates and high net worth individuals were also allowed to
invest as sub-accounts of SEBI-registered FIIs. FIIs were also permitted to seek SEBI
registration in respect of sub-accounts. This was made more liberal to include the
domestic portfolio managers or domestic asset management companies.
40% became the ceiling on aggregate FII portfolio investment in March 2000.This was
subsequently raised to 49% on March 8, 2001 and to the specific sectoral cap in
September 2001.
As a move towards further liberalization a committee was set up on March 13, 2002 to
identify the sectors in which FIIs portfolio investments will not be subject to the sectoral
limits for FDI.
Later, on December 27, 2002 the committee was reconstituted and came out with
recommendations in June 2004. The committee had proposed that,Ingeneral, FII
investment ceilings, if any, may be reckoned over and above prescribed FDI sectoral
caps. The 24 per cent limit on FII investment imposed in 1992 when allowing FII inflows

33

was exclusive of the FDI limit. The suggested measure will be in conformity with this
original stipulation.' The committee also has recommended that the special procedure for
raising FII investments beyond 24 per cent up to the FDI limit in a company may be
dispensed with by amending the relevant regulations.
Meanwhile, the increase in investment ceiling for FIIs in debt funds from US $ 1
billion to US $ 1.75 billion has been notified in 2004. The SEBI also has reduced the
turnaround time for processing of FII applications for registrations from 13 working days
to 7 working days except in the case of banks and subsidiaries.
All these are indications for the country's continuous efforts to mobilize more foreign
investment through portfolio investment by FIIs. The FII portfolio flows have also been
on the rise since September 1992. Their investments have always been net positive, but
for 1998-99, when their sales were more than their purchase
TRENDS IN FOREIGN INSTITUTIONAL INVESTMENT

Table 7 : FII Investment Details (Financial Year)

Financial Year Equity Debt Total
2000-01 10,206.7 -273.3 9,933.4
2001-02 8,072.2 690.4 8,762.6
2002-03 2,527.2 162.1 2,689.3
2003-04 39,959.7 5,805.0 45,764.7
2004-05 44,122.7 1,758.6 45,881.3
2005-06 48,800.5 -7,333.8 41,466.7
2006-07 25,235.7 5,604.7 30,840.4
2007-08 53,403.8 12,775.3 66,179.1
2008-09 -47,706.2 1,895.2 -45,811.0
2009-10 110,220.6 32,437.7 142,658.3
2010-11 110,120.8 36,317.3 146,438.1
2011-12 2,367.6 8,186.2 10,553.8
2012 - 13 4379.40 15384.0O 59185.00


34

IMPACT OF FIIs ON INDIAN STOCK MARKETS

On the flip side the increase of foreign investors in particular brings a very welcome
inflow of foreign capital, but there are always some dangers if certain limits are
exceeded. Firstly, the foreign capital is free and unpredictable and is always on the look
out of profits. Flls frequently move investments, and those swings can be expected to
bring severe price fluctuations resulting in increasing volatility. Here we analyze the
comparative trend of sensex and FII, how it affected the market, Here the grey curve
shows sensex indeces and black curve shows the FII cash flow, Here we can see how FII
cash inflows increases the market indices and cash outflows decreases the Indian stock
market indices
FII's increased role had changed the face of Indian stock market. It had brought both
quantitative and qualitataive change. It had also increased the market depth and breadth.
The emphasize on fundamentals had caused efficient pricing of shares.
Many qualitative tests like regression tests had proved that there is direct relation
between market movements and fund flows of FIIs. In this, we will analyze the
investments in different months and years, and tries to find the impact of FIIs in stock
market.
We often hear the terms "FIIs Fuel the Market Run". If we analyze the impacts, then the major
impacts are: -
They increased depth and breadth of the market.
They played major role in expanding securities business.
Their policy on focusing on fundamentals of the shares had caused efficient
pricing of shares.
These impacts made the Indian stock market more attractive to FIIs and also
domestic investors, which involve the other major player MF (Mutual Funds).
The impact of FIIs is so high that whenever FIIs tend to withdraw the money from
market, the domestic investors become fearful and they also withdraw from
market.


35

FDI v/s FII
A COMPARATIVE ANALYSIS

Both FDI and FII are related to investment in a foreign country. FDI or Foreign Direct
Investment is an investment that a parent company makes in a foreign country. On the
contrary, FII or Foreign Institutional Investor is an investment made by an investor in the
markets of a foreign nation. In FII, the companies only need to get registered in the stock
exchange to make investments. But FDI is quite different from it as they invest in a
foreign nation. The Foreign Institutional Investor is also known as hot money as the
investors have the liberty to sell it and take it back. But in Foreign Direct Investment, this
is not possible. In simple words, FII can enter the stock market easily and also withdraw
from it easily. But FDI cannot enter and exit that easily. This difference is what makes
nations to choose 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.


36

While FIIs are short-term investments, the FDIs are long term.
1. FDI is an investment that a parent company makes in a foreign country. On the
contrary, FII is an investment made by an investor in the markets of a foreign nation.
2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot
enter and exit easily.
3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital
availability in general.
4. The Foreign Direct Investment is considered to be more stable than Foreign
Institutional Investor

Table 11 : FDI & FII Inflows in the last 13 Years - A Comparison

Financial Year
(April-March) Total FDI Flows(US$ MN)
Net Investment by FII
(US$ MN)
2000-01 4,029 2160
2001-02 6,130 1839
2002-03 5,035 566
2003-04 4,322 10005
2004-05 6,051 10352
2005-06 8,961 9363
2006-07 22,826 6821
2007-08 34,835 16442
2008-09 41,874 -9837
2009-10 37,745 30253
2010-11 32,901 32226
2011-12 3542 125
2012 - 13 2240 150

Source: Department of Industrial Policy & Promotion (www.dipp.nic.in)


37

Table 12: A Comparison between the Net FII, FDI & the Sensex

Financial Year Sensex Close
Total FDI
Flows(US$ MN)
Net Investment by
FII (US$ MN)
2000-01
3262
4,029
2160
2001-02
3377
6,130
1839
2002-03
5839
5,035
566
2003-04
6603
4,322
10005
2004-05
9398
6,051
10352
2005-06
13787
8,961
9363
2006-07
20287
22,826
6821
2007-08
9647
34,835
16442
2008-09
17465
41,874
-9837
2009-10
20509
37,745
30253
2010-11
15,455
32,901
32226
2011-12 16367 34329 25643
2012- 13 18326 31767 24572

Source: www.bseindia.com

The Sensex has increased by 10525 points between 2000-01 and 2005-06, an increase of
more than 320%. In the corresponding period net FII has increased by more than 315%
and the FDI has gone up by 94%. From 2005-06 to 2009-10 the Sensex gained 6722
points, an increase of 49% and in the corresponding period the net FII went up by 244%
and the FDI inflows went up by 401%. The Sensex fell down by 10640 points in early
2008 i.e. by 52% due to heavy selling by the FIIs who pulled out their money from the
stock market due to the sub-prime crisis, credit crunch, bankruptcy, speculation etc. This
turned the FIIs into net sellers and hence during 2008-09 the net FII figure is in negative.
The FDI on the other hand surged ahead at 41,874 mn $, an increase of nearly 25%. This
implies that FDI inflow did not get affected by the recession worldwide and even if it was
it is not possible to pull out money invested through the FDI route as easily as it could be
done in the case of FII.


38

Table 13: A Comparison between the GDP, Net FII & FDI of the last 11 Years

Financial Year
GDP (at
factor cost)
Total FDI
Flows(US$ MN)
Net Investment by
FII (US$ MN)
2000-01 4.4 4,029
2160
2001-02 5.8 6,130
1839
2002-03 3.8 5,035
566
2003-04 8.5 4,322
10005
2004-05 7.5 6,051
10352
2005-06 9.5 8,961
9363
2006-07 9.7 22,826
6821
2007-08 9.2 34,835
16442
2008-09 6.7 41,874
-9837
2009-10 7.4 37,745
30253
2010-11 6.9 32,901
32226
2011- 12 3542 125
2012-13 2240 150
The GDP has increased from 4.4% to 7.4% from 2000-01 to 2009-10, peaking in 2006-07
at 9.7% when the net FII declined from US$ 9363 MN to US$ 6821 MN a fall of almost
26%., whereas the FDI grew by 187% and stood at US 22,826 $ MN. The GDP fell from
9.2% in 2007-08 to 6.7% in 2008-09 which can be attributed to very slow industrial
growth specially the manufacturing sector, the exports dried up, inflationary pressure etc.
India felt just the tip of the iceberg of the destructive economic recession, as it can be
seen how the net FII turned into negative figures, which hit the western countries hard.
The GDP remained above the 9% mark for three years from 2005-06 to 2007-08. In the
corresponding period the FDI increased by 300% and the net FII increased by 60%.
From the year 2008-09 the GDP has started declining due to global crisis however
economy is recovering from the crisis and building confidence among the foreign
markets which is leading to increase in FII.


39

Chart 12: Diagram showing comparison between GDP & FDI

The GDP growth rate was around the reasonably healthy levels of 4.4 and 5.8 percent
during 2000-01 and 2001-02 but it declined to 3.8 percent in 2002-03 which happened
due to the massive drought caused by the monsoon failure resulting in low production of
agricultural products. Also in the industrial sectors barring the sub-sector of electricity,
gas and water supply, growth in all industrial and service sub-sectors slowed in the third
quarter of 2002-03 compared to what was recorded in the second quarter of the year. In
some sectors (manufacturing is one) the slowdown was marginal; in others (financial
services, for example), the deceleration was substantial. In the same year the FDI can be
seen falling by 23%. After 2002-03 the GDP has shown an increasing trend as well as the
FDI as can be seen from the blue and red lines in the chart

0
2
4
6
8
10
12
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Total FDI Flows(US$ MN) GDP (at factor cost)

40

Chart 13: Diagram showing comparison between GDP & Net FII

The FII curve (red line) is one with many sharp fluctuations and presents at first an
increasing trend from 2000-01 to 2003-04 and then becomes stable but has a very gradual
declining slope from 2003-04 to 2006-07 going down from Rs. 45764 Crs to Rs. 30841
Crs, a decrease of 33% whereas in the corresponding the GDP increases from 8.5% to
9.7%. Both the net FII and GDP showed sharp declines in the year 2008-09 owing to
various factors like the global recession, sluggish manufacturing industry, inflation, low
demand for Indian goods abroad hurting exports, rising interest rates etc. in 2009-10 the
FII shows again a very steep rise breaching the Rs. 1 lakh Crore mark. Similarly the GDP
has also recovered but gradually from 6.7% to 7.4%.

0
2
4
6
8
10
12
-15000
-10000
-5000
0
5000
10000
15000
20000
25000
30000
35000
Net Investment by FII (US$ MN) GDP (at factor cost)

41

Table 14: Foreign Exchange Rate, Net FII & FDI Inflow of last 10 Years

Financial Year

USD in
terms of
Indian Rupee
Total FDI
Flows(US$ MN)
Net Investment by
FII (US$ MN)
2000-01
47.22
4,029
2160
2001-02
48.63
6,130
1839
2002-03
46.59
5,035
566
2003-04
45.26
4,322
10005
2004-05
44
6,051
10352
2005-06
45.19
8,961
9363
2006-07
41.18
22,826
6821
2007-08
43.39
34,835
16442
2008-09
48.33
41,874
-9837
2009-10
45.65
37,745
30253
2010-11
44.96
32,901
32226
Source: www.ratesfx.com
In the ten years from 2000-01 to 2009-10 the net effect has been a decline of Rs 1.57 or
3.3%. During the year 2008-09 the FIIs turned sellers and hence net FII went into
negative figures while the FDI increased by 25%. The foreign exchange rate became the
lowest in 2006-07 at Rs. 41.18.


42

Chart 14: Graphical representation of Net FII & the Foreign Exchange Rate

The above diagram brings to light a very important occurrence regarding Net FII and the
Foreign Exchange Rate. It can be seen that whenever the red line (foreign exchange rate)
goes up the green line (Net FII) goes down. The exchange rate has steadily declined from
Rs. 48.63 in 2001-02 to Rs. 41.18 in 2006-07 and correspondingly the Net FII has
increased from 2160 mn $ in 2001-02 to 32226 mn $ in 2006-07. In 2008-09 when the
Net FII has crashed and went into negative figures the exchange rate went from Rs.43.39
in 2007-08 to Rs. 48.33 in 2008-09.

36
38
40
42
44
46
48
50
-15000
-10000
-5000
0
5000
10000
15000
20000
25000
30000
35000
Net Investment by FII (US$ MN) USD in terms of Indian Rupee

43

Chart 15: Graphical representation of FDI & the Foreign Exchange Rate

Not much relationship can be gathered between these two variables from the chart. The
green line denoting FDI has an overall increasing trend after being stable and rather
gradually declining during the period 2000-01 to 2004-05. The foreign exchange rate
sharply declines from around Rs. 45 to Rs.41 from 2005-06 to 2006-07 due to
unrestricted inflow of dollars thus increasing its supply thereby reducing the exchange
rate but in the same period the FDI has increased from 8,961 mn $ to 22,826 mn $. The
exchange rate again recovers from 2006-07 and rises again till 2008-09 after which we
can again see a sharp decline in 2009-10 but the FDI line remains stable.

36
38
40
42
44
46
48
50
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Total FDI Flows(US$ MN) USD in terms of Indian Rupee

44

CHAPTER 2: REVIEW OF LITERATURE

Foreign Direct Investment (FDI) as an important driver of growth. It is an important
source of non debt financial resources for country for economic development. Besides it
is a means of achieving technical knowhow and employment generation of employment.
However, many are of the view that FDI is a big threat to sovereignty of host and
domestic business houses. Faster exploitation of natural resources for profit may deprive
host from such resources in long run. Midst of debate on pros and cons of FDI, world
economy has observed a phenomenal change in volume and pattern of FDI. There is
clearly an intense global competition of FDI. India is not behind this global race of
attracting foreign investment. India emerged as an attractive
A favorable business environment fostered Indian economy after 1991-92, when
the government of India opened the door for foreign capital in the way of direct
investment and through foreign institutional investors. Consequently, the international
capital inflows have been increased tremendously during last two decades. The capital is
being invested by foreign investor through mutual funs, investment trusts, banks,
portfolio mangers, charitable trusts etc. and it has been boosting the growth of Indian
economy since then. Moreover, the growth rates in GDP i.e. around 7 to 8 percent per
year as compared to 2 to 4 percent in most of the developed economies and higher
interest rate attracted the foreign capital the most. This paper is an attempt to analyze the
relationship of FII investment with economic growth of India, in addition to comparative
analysis of preferred investment stock of FII.
FDI destination in services but has failed to evolve a manufacturing hub which
has greater economic benefit. FDI though one of the important sources of financing the
economic development, but not is not a solution for poverty eradication, unemployment
and other economic ills. India needs a massive investment to achieve the goals of vision
20-20. Policy makers need to ensure transparency and consistency in policy making
along with comprehensive long term development strategy.
The report of the project Foreign direct investment (FDI) and foreign institutional
investors(FII) in India mainly focused on the following areas:


45

A) FOREIGN DIRECT INVESTMENT (FDI)
Net foreign direct investment (FDI) flows into India reached 70630 crore in Indias
200607 fiscal year, means increase of 187% of the 24613 crore recorded during 2005
06, with the largest share of FDI flows from Mauritius, followed by the United States and
the United Kingdom. This study examines FDI in India, in the context of the Indian
economic and regulatory environment. This study present FDI trends in India, by country
and by sectors during the post liberalization period that is 1991 to 2007 year, using
official government data from Indian official government internet site like
that of RBI, SEBI. To illustrate the driving forces behind these trends, the study also
discusses the investment climate in India, Indian government incentives to foreign
investors, the Indian regulatory environment as it affects investment, and the effect of
Indias global, regional, and bilateral trade agreements on investment from top 10 FDI
investing countries. Finally, the study examines global FDI in Indias in top 10 sectors of
industry.
Mauritius
Mauritius invested Rs.19,18,633 million in India Up to the January 2010, equal to 44.01
percent of total FDI inflows. Many companies based outside of India utilize Mauritian
holding companies to take advantage of the India- Mauritius Double Taxation Avoidance
Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains
taxes, and may allow some India-based firms to avoid paying certain taxes through a
process known as round tripping.

The extent of round tripping by Indian companies through Mauritius is unknown.
However, the Indian government is concerned enough about this problem to have asked
the government of Mauritius to set up a joint monitoring mechanism to study these
investment flows. The potential loss of tax revenue is of particular concern to the Indian
government. These are the sectors which attracting more FDI from Mauritius Electrical
equipment Gypsum and cement products Telecommunications Services sector that
includes both nonfinancial and financial Fuels.


46

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.

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

47

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 nonfinancial and financial services

B) FOREIGN INSTITUTIONAL INVESTORS (FII)
Institutional Investor is any investor or investment fund that is from or registered in a
country outside of the one in which it is currently investing. Institutional investors
include hedge funds, insurance companies, pension funds and mutual funds. The growing
Indian market had attracted the foreign investors, which are called Foreign Institutional
Investors (FII) to Indian equity market, and this study present try to explain the impact
and extent of foreign institutional investors in Indian stock market and examining
whether market movement can be explained by these investors. It is often hear that
whenever there is a rise in market, it is explained that it is due to foreign investors' money and
a decline in market is termed as withdrawal of money from FIIs. This study tries to examine
the influence of FII on movement of Indian stock exchange during the post liberalization
period that is 1991 to 2007.


48

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.

49

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.

50

Objective of the Study

To check Influence of FII on movement of Indian stock exchange
To understand the FII & FDI policy in India.
To do comparative analysis on FDI & FII and its impact on Indian economy
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


51

Scope of Study

The study is confined to sector wise flow of FDI and FIIs in India and the impact of the
same on Indian economy. As it is seen that FII is a volatile investment as compared to
FDI the factors affecting the inflow of both types of investment are explored and their
investment annually is compared on the basis of certain common parameters.

Significance of study

This study makes a humble effort to get an overview of both types investments first then
study their trends and make a comparative analysis between the two to see which factors
are they most sensitive to, whether the two types of investment are equally sensitive to
the same factors, which is more stable and also which type of investment direct or
portfolio is preferred by an emerging economy like India. Thus the study is beneficial for
foreign investors to analysis the future prospects of FDI and FIIs in India.


52

RESEARCH METHODOLOGY

Formation of problem

Should FDI and FII be strictly regulated?
What impact it has on Indian economy?
What are the areas or sectors that need more investment?

Methods of Collection of data

The research has been carried out by collection of secondary data with the use of
primarily the internet, books on banking and finance, various business magazines,
journals, newspapers.

Research Limitation
It is mainly based on the data available in various websites &other secondary sources.
The inference made is purely from the past years performance


53

CHAPTER - 5

ANALYSIS OF FDI INFLOW IN INDIA

Table 3: FINANCIAL YEAR-WISE FDI INFLOWS DATA
(Amount US$ million)
FINANCIAL YEAR-WISE FDI INFLOWS DATA:

Equity

FDI FLOWS
INTO INDIA
S.
No
.
Financial Year
(April-March)
FIPB
Route/
RBIs
Automatic
Route/
Acquisitio
n Route
Equity capital
of
unincorporate
d bodies
Re-
invested
earning
Other
capital
+
Total
FDI
Flows
%age
growth
over
previou
s year
(in US$
terms)
A
1991-
2000 15,483

15483
1 2000-01 2,339 61 1,350 279 4,029 -
2 2001-02 3,904 191 1,645 390 6,130 (+) 52
%
3 2002-03 2,574 190 1,833 438 5,035 (-) 18 %
4 2003-04 2,197 32 1,460 633 4,322 (-) 14 %
5 2004-05 3,250 528 1,904 369 6,051 (+) 40
%
6 2005-06 5,540 435 2,760 226 8,961 (+) 48
%
7 2006-07 15,585 896 5,828 517 22,826 (+) 146
%
8 2007-08 24,573 2,291 7,679 292 34,835 (+) 53
%
9 2008-09 31,364 702 9,032 776 41,874 (+) 20
%
10 2009-10 (P) (+) 25,606 1,540 8,668 1,931 37,745 (-) 10 %
11 2010-11 (P) (+) 19,430 874 11,939 658 32,901 (-) 13 %

54

12 2011-12 (P) 24,188 765 8,190 2,204 35,347
B CUMULATIV
E TOTAL

160,550

8,505

62,288

8,713

240,05
6

A+B 176033

Source: Department of Industrial Policy & Promotion

3.6.1 FIPB Route has been the most important source of FDI inflow for India and has
been reported at cumulative 176033 Million US$ since 1991. For the period 1991-2000
and 2001-2009 FDI inflows though this FIPB route was 15,483 Million US$ and 1,
60,550 US Million $ respectively which is seven time than previous decade. However,
due to liberalization in economic policy of the government other routes of FDI are also
becoming popular. For the corresponding period FDI inflow of reinvested earning has
been 62,288 Million US$, which is about one-fifth of the total FDI inflow so far. This
may be attributed to government initiatives of providing special tax benefits and other
facilities for reinvestment of earnings.

Despite the global financial credit squeeze brought by the recession India continues to be
an attractive destination for investment as there is tremendous potential for growth in the
vast and diverse markets of our country.


55

The graph from 2000-01 to 2004-05 have been almost hovering the same levels but
importantly havent gone down which is because the foreign investors saw immense
potential but were not getting enough incentives to enter with huge business propositions.
The breakout came from the year 2005-06 when the investment nearly doubled as
compared to 2000-01, after which there was no looking back as consistent economic
growth, de-regulation, liberal investment rules, and operational flexibility helped increase
the inflow of Foreign Direct Investment or FDI. So much so that even during the year
2008-09 when the recession had taken its toll on the western countries there was no
indication of falling investment via the FDI route as can be seen from the chart.
In percentage terms FDI inflow increased by 20% from 2007-08 to 2008-09.

0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
$

m
n

year
TOTAL FDI INFLOWS IN INDIA
Total
FDI
Flows

56

3.6.2 Table 4: SHARE OF TOP 10 INVESTING COUNTRIES IN FDI INFLOWS
FROM APRIL 2000 TO DECEMBER 2011
Sr.No Country
Amount of Foreign
Direct Investment
Inflows In Rs crore
%age to total Inflows(in
terms of US $)
1 MAURITIUS
280,915.57
40%
2 SINGAPORE
71,312.78
10%
3 JAPAN
56,431.86
8%
4 U.S.A.
46,731.47
7%
5 U.K.
41,025.66
6%
6 NETHERLANDS
30,624.62
4%
7 CYPRUS
26,831.30
4%
8 GERMANY
19,688.78
3%
9 FRANCE
12,301.17
2%
10 U.A.E.
9,544.71
1%
11 Other 15%

Source: Government of India (GOI) (2009). FDI Statistics, Ministry of Commerce & Industry, Department of
Industrial Policy and Promotion.


57

Mauritius
Mauritius invested Rs 280,915.5 crore in India from April .00 - Dec.11, equal to 40
percent of total FDI inflows. Many companies based outside of India utilize Mauritian
holding companies to take advantage of the India- Mauritius Double Taxation Avoidance
Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains
taxes, and may allow some India-based firms to avoid paying certain taxes through a
process known as round tripping.
The extent of round tripping by Indian companies through Mauritius is unknown.
However, the Indian government is concerned enough about this problem to have asked
the government of Mauritius to set up a joint monitoring mechanism to study these
investment flows. The potential loss of tax revenue is of particular concern to the Indian
government. These are the sectors which attracting more FDI from Mauritius Electrical
equipment Gypsum and cement products ,Telecommunications ,Services sector that
includes both nonfinancial and financial.

Singapore
Singapore continues to be the single largest investor in India amongst the Singapore with
FDI inflows into Rs. 71312.78 crore April .00 - Dec.11.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.

Japan
Japan ranked third in terms of cumulative foreign direct investment (FDI) in India;
accounting for Rs 56431.86 crore came in the period April 2000-Dec 2011, according to
the latest data released by the Department of Policy and Promotion (DIPP).
Japanese firms increasingly prefer India as an investment destination over China. The
number of Japanese companies in India has grown three fold over the last three years
from approximately 100 companies in 2006-07 to 300 in 2009-10


58

U.S.A.
The United States is the fourth largest source of FDI in India (7 % of the total), valued at
Rs 46731.47 crore in cumulative inflows from April.00 to Dec 11. 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 (6 % of the total), valued
at Rs 41025.66 crore in cumulative inflows from April.00 to Dec 11.Over 17 UK
companies under the aegis of the Nuclear Industry Association of UK have tied up with
FICCI to identify joint venture and FDI possibilities in the civil nuclear energy sector.
UK companies and policy makers the focus sectors for joint ventures, partnerships, and
trade are non-conventional energy, IT, precision engineering, medical equipment,
infrastructure equipment, and creative industries.

Netherlands
FDI from Netherlands to India has increased at a very fast pace over the last few years.
Netherlands ranks fifth among all the countries that make investments in India. The total
flow of FDI from Netherlands to India came to Rs 30624.62 crore inflows from April.00
to Dec 11. The total percentage of FDI from Netherlands to India stood at 4% 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 nonfinancial and
financial services.


59

3.6.3 Table 5: SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS

S.NO Sector
Amount of FDI
Inflows In
Rs crore
% age to
total
Inflows(In
terms of
US$)
1
SERVICES SECTOR (financial
& nonfinancial)
142,538.64
20%
2
TELECOMMUNICATIONS
(radio paging, cellular mobile,
basic telephone services)
57,035.16
8%
3
COMPUTER SOFTWARE &
HARDWARE
48,939.65
7%
4 HOUSING & REAL ESTATE
48,818.51
7%
5
CONSTRUCTION
ACTIVITIES (including roads
& highways)
46,215.77
6%
6
DRUGS &
PHARMACEUTICALS

42,668.31 6%
7 POWER
32,175.63
4%
8 AUTOMOBILE INDUSTRY
29,223.99
4%
9
METALLURGICAL
INDUSTRIES
25,468.79
4%
10
PETROLEUM & NATURAL
GAS
14,581.14
2%
11 Others 32%

Source: FDI Statistics, Ministry of Commerce & Industry, Department of Industrial Policy a


60

Chart 4

The combined FDI share of financial and non-financial services, computer hardware and
software, telecommunications and housing and real estate is 41.9% of the cumulative FDI
equity inflows during the period April 2000-December 2011. With the inclusion of the
construction sector (6.5%), the share of services in FDI inflows increases to 48.4%.
The IT industry is one of the booming sectors in India. At present India is the leading
country pertaining to the IT industry in the Asia -Pacific region. With more international
companies entering the industry, the Foreign Direct Investments (FDI) has been
phenomenon over the year. The rapid development of the telecommunication sector was

61

due to the FDI inflows in form of international players entering the market and transfer of
advanced technologies. The telecom industry is one of the fastest growing industries in
India. With a growth rate of 45%, Indian telecom industry has the highest growth rate in
the world.
The FDI in Automobile Industry has experienced huge growth in the past few years. The
increase in the demand for cars and other vehicles is powered by the increase in the levels
of disposable income in India. The options have increased with quality products from
foreign car manufacturers. The introduction of tailor made finance schemes, easy
repayment schemes has also helped the growth of the automobile sector. For the past few
years the Indian Pharmaceutical Industry is performing very well. The varied functions
such as contract research and manufacturing, clinical research, research and development
pertaining to vaccines are the strengths of the Pharma Industry in India. Multinational
pharmaceutical corporations outsource these activities and help the growth of the sector.
The Indian Pharmaceutical Industry has been experiencing a vast inflow of FDI.

The FDI inflow in the Cement Industry in India has increased with some of the Indian
cement giants merging with major cement manufacturers in the world such Holcim,
Heidelberg, Italcementi, Lafarge, etc. The FDI in Semiconductor sector in India were
crucial for the development of the IT and the ITES sector in India. Electronic hardware is
the major component of several industries such as information technology


62

Important Developments
The government of India is continuously working towards increasing FDI flows into the
country. FDI rose by an impressive 56 per cent to US$ 2.53 billion in November 2011.
The cumulative flows of for April-November 2011 aggregated to US$ 22.83 billion,
exceeding the total FDI of US$ 19.43 billion for 2010-11 fiscal.
Recently, the Government has approved 20 FDI proposals worth Rs 1,935.24 crore (US$
384.5 million). The approved major investments, that were consulted with Foreign
Investment Promotion Board (FIPB) as well, are enlisted below:
Sterlite Grid had proposed to act as an investment company and invest Rs 1,150
crore (US$ 228.48 million) via FDI
Equitas Micro Finance would invest Rs 230.7 crore (US$ 45.83 million) for
demerging its microfinance business with its wholly-owned subsidiary
TV Vision proposed to induce Rs 200 crore (US$ 39.81 million) of foreign
investment through an issue of equity shares via an initial public offer (IPO). The
deal is to undertake the business of broadcasting a non-news and current affairs
TV channel


63

CHAPTER 6

FINDINGS
After the analysis following are the findings of the study:

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

It brought about a structural breakthrough in the volume of the FDI inflows into
the economy maintained a fluctuating and unsteady trend during the study period.

It might be of interest to note that more than 50% of the total FDI inflows
received by India, came from Mauritius, Singapore and the USA.

The main reason for higher levels of investment from Mauritius was that the fact
that India entered into a double taxation avoidance agreement (DTAA) with
Mauritius were protected from taxation in India. .

FIIs inflows are determined by stock market characteristics regarding risk-return,
market capitalization, stock market turnover, macroeconomic factors like
economic growth, interest rate, inflation and liberalization policies

FIIs are directly proportional to foreign exchange rate, any inflow or outflow of
FII has direct impact on foreign exchange. However FDI is not much affected by
any change in rupee.


64

LIMITATION

This project report is based on secondary research only.


65

CHAPTER 7

CONCLUSION

According to Data analysis and findings, it can be concluded that Mauritius contributes
about 40% of FDI inflow in the country. Such a high level of FDI contributed by a low
tax country like Mauritius indicates that all is not well.
Mauritius has agreement with India on avoidance of double taxation. There are likely
chances that many MNCs may be first dummy companies in Mauritius before investing
in India. This is not good for financial stability of the country and is also a reason for loss
to state exchequers.
FDI usually is associated with export growth. It comes only when all the criteria to set up
an export industry are met. That includes, reduced taxes, favorable labor law, freedom to
move money in and out of country, government assistance to acquire land, full grown
infrastructure, reduced bureaucratic involvement etc. IT, BPO, Auto Parts,
Pharmaceuticals, unexplored service sectors including accounting; drug testing, medical
care etc are key sectors for foreign investment. Manufacturing is a brick and mortar
investment. It is permanent and stays in the country for a very long time. Huge
investments are needed to set this industry. It provides employment potential to semi
skilled and skilled labor. On the other hand the service sector requires fewer but highly
skilled workers. Both are needed in India. If India plays its cards right India may be the
hub for the service sector. Still high end manufacturing in auto parts and pharmaceuticals
should be Indias target.
FDI is what the government really needs to attract in various sectors like infrastructure,
education etc. it is much more stable than the foreign institutional investment which
comes via the stock market route, and has more accountability and brings fundamental
and tangible benefits to the economy

66

The FII (Foreign Institutional Investor) is monies, which chases the stocks in the market
place. It is not exactly brick and mortar money, but in the long run it may translate into
brick and mortar. Sudden influx of this drives the stock market up as too much money
chases too little stock. Where FDI is a bit of a permanent nature, the FII flies away at the
shortest political or economical disturbance. The Global Recession of 2008 is a key
example of the latter. Once this money leaves, it leaves ruined economy and ruined lives
behind. Hence FII is to be welcomed with strict political and economical discipline.
The global recession in 2008 proved how volatile the money pumped in by the FIIs into
the secondary segment of the financial market is, leading to huge losses for the domestic
investors who had to bear the brunt even though the economy as such was insulated from
the adverse effects of the recession. Whereas the sectors where there was FDI didnt
experience such knee-jerk reactions.

China receives mainly the FDI. They do not have instruments to receive the FII i.e. laws,
institutions and political and judicial framework. On the contrary, India should welcome
both and work hard to retain both.


67

CHAPTER 8

RECOMMENDATION
After the analysis of the project study, following recommendations can be made:
I. FDI

FDI can be instrumental in developing rural economy. There is immense scope
in Greenfield Projects. But the issue of land acquisition and steps taken to protect
local interests by the various state governments are not encouraging. MoU
Arecelor-Mittal controversy is one of the best examples of such disputes.

In order to improve technological competitiveness of India, FDI into R&D should
be promoted. Various issues pending relating to Intellectual Property Rights,
Copy Rights and Patents need to be addressed on priority. Special policy
amendments can be also instrumental in mobilizing FDI in R&D.

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.

Develop a strategic vision for FDI with focus on exports, technology, geographic
specialization, and employment creation.

Reduction in transaction costs, improvement of infrastructure and enabling trade
facilitation

The entire process of administration should be Decentralized


68

FDI policy environment still remains in centered around Delhi and not the state
capitals where they should be given the diversity of Indias economic geography.

The overly bureaucratic FDI facilities needs to be drastically reduce.
There needs to be a real single window that draws from the sectoral expertise of
the different ministries, and more importantly the private sector.

Government should facilitate FDI entry through B2B interventions by creating
platform for the same.

Globally the service sector received 43 per cent of total investment in emerging
markets As this is a State subject, the States have to take the lead in simplifying
and modernizing the policy and rules relating to this sector.

II. FII
Simplifying procedures and relaxing entry barriers for business activities and
providing investor friendly laws and tax system for foreign investors.

Allowing foreign investment in more areas. In different industries indices the
FIIs should be encouraged through different patterns like futures, options, etc.

Somewhere, a restriction related to the track record of Sub- Accounts is also to
be made on the investors who withdraw money out of the Indian stock market
who have invested with the help of participatory notes.

We have to modernize and also have to save our culture. Similarly the laws
should be such that it protects domestic investors and also promote trade in
country through FIIs.
Encourage industries to grow to make FIIs an attractive junction to invest.


69

Bibliography

www.rbi.org
www.fin.in.nic
www.sebi.org

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

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

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

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

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

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

FDI FII in India A Comparative Analysis

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