Professional Documents
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ON
CERTIFICATE
This is to certify that Deepak Kumar Gautam student of M.B.A IV SEM V.S.B. Meerut has under gone a project on Foreign Direct Investment &Foreign institutional investor
in India And
submitted a report based on the same as a mandatory requirement for obtaining the degree of Master of Business Administration from Uttar Pradesh Technical University, Lucknow.
CERTIFICATE
This is to certify that Deepak Kumar Gautam student of M.B.A IVsem, V.S.B. Meerut has under gone a research project on Analytical Study of Foreign Direct Investment in IndiaAnd submitted a report based on the same as a mandatory requirement for obtaining the degree of Master of Business Administration from Uttar Pradesh Technical University, Lucknow
ACNOWLEDGEMENT
ACKNOWLEDGEMENT
I extend my sincere thanks to all those who helped me in the completion of this project. Without their undying help and guidance, this project would not be what it is. I specially extend my heartfelt thanks to my Faculty guide Miss Garima Chaudhray for helping me at every step, and guiding me in every way
possible. This project would not have been successful without her help and continuous guidance throughout. A special note of thanks also goes out to the people from various fields for giving me their precious time and helping me with this project. I also extend my appreciation towards my family who encouraged me and were by my side whenever I needed them.
Shanila khan
INDEX
INDEX
TOPIC PAGE NO.
8 10 60
Objective of the study Research methodology Conclusion Recommendations & suggestions Limitations of research Bibliography Annexure
Chartered Bank
The Chartered Bank was founded by Scotsman James Wilson following the grant of a Royal Charter by Queen Victoria in 1853. Chartered opened its first branches in Mumbai, Kolkata and Shanghai in 1858, followed by Hong Kong and Singapore in 1859.The Bank started issuing banknotes of the Hong Kong dollar in 1862. With the opening of the Suez Canal in 1869 and the extension of the telegraph to China in 1871, Chartered was well placed to expand and develop its business.
Standard Bank
The Standard Bank was a British bank founded in the Cape Province of South Africa in 1862 by another Scotsman, John Paterson. Having established a considerable number of branches, Standard was prominent in financing the development of the diamond fields of Kimberley from 1867 and later extended its network further north to the new town of Johannesburg when gold
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was discovered there in 1885. Half the output of the second largest gold field in the world passed through The Standard Bank on its way to London. Standard expanded widely in Africa over the years, but from 1883 to 1962 was formally known as the Standard Bank of South Africa. In 1962 the bank changed its name to Standard Bank Limited, and the South African operations were formed into a separate subsidiary which took the parent bank's previous name, Standard Bank of South Africa Ltd.
PRODUCTS OF STANDARD CHARTERED BANK: Finance and Insurance Consumer Banking Corporate Banking Investment Banking Investment Management Private Banking Private Equity Mortgage Loans
Introduction
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FDI growth has been a key factor in the international nature of business that many are familiar with in the 21st century. This growth has been facilitated by changes in regulations both in the originating country
And in the country where the new installation is to be built. Corporations from some of the countries that lead the worlds economy have found fertile soil for FDI in nations where commercial development was limited, if it existed at all. The dollars invested in such developing-country projects increased 40 times over in less than 30 years. The financial strength of the investing corporations has sometimes meant failure for smaller competitors in the target country. One of the reasons is that foreign direct investment in buildings and equipment still accounts for a vast majority of FDI activity. Corporations from the originating country gain a significant financial foothold in the host country. Even with this factor, host countries may welcome FDI because of the positive impact it has on the smaller economy. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic products (GDP). The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan).But flows to non-industrialized countries are increasing sharply. Foreign direct investment (FDI) refers to long term participation by country A into country B. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) .Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (direct investor) in an entity resident in an economy other than that of the investor (direct investment enterprise).The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated. Foreign Direct Investment when a firm invests directly in production or other facilities, over which it has effective control, in a foreign country. Manufacturing FDI requires the establishment of production facilities.
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Service FDI requires building service facilities or an investment foothold via capital contributions or building office facilities. Foreign subsidiaries overseas units or entities. Host country the country in which a foreign subsidiary operates. Flow of FDI the amount of FDI undertaken over a given time. Stock of FDI total accumulated value of foreign-owned assets. Outflows/Inflows of FDI the flow of FDI out of or into a country. Foreign Portfolio Investment the investment by individuals, firms, or public bodies in foreign financial instruments. Stocks, bonds, other forms of debt. Differs from FDI, which is the investment in physical assets.
amounts of financial
Ray Vernon asserted that product moves to lower income countries as products move through their product life cycle. The FDI impact is similar: FDI flows to developed countries for innovation, and from developed countries as products evolve from being innovative to being mass-produced.
The Eclectic Paradigm Distinguishes between: Structural market failure external condition that gives rise to monopoly advantages as a result of entry barriers Transactional market failure failure of intermediate product markets to transact goods and services at a lower cost than internationalization
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Internationalization Theory When external markets for supplies, production, or distribution fails to provide efficiency, companies can invest FDI to create their own supply, production, or distribution streams. Advantages Avoid search and negotiating costs Avoid costs of moral hazard (hidden detrimental action by external partners) Avoid cost of violated contracts and litigation Capture economies of interdependent activities Avoid government intervention Control supplies Control market outlets Better apply cross-subsidization, predatory pricing and transfer pricing
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Definition
Foreign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investor's country of origin. A parent business enterprise and its foreign affiliate are the two sides of the FDI relationship. Together they comprise an MNC. The parent enterprise through its foreign direct investment effort seeks to exercise substantial control over the foreign affiliate company. 'Control' as defined by the UN, is ownership of greater than or equal to 10% of ordinary shares or access to voting rights in an incorporated firm. For an unincorporated firm one needs to consider an equivalent criterion. Ownership share amounting to less than that stated above is termed as portfolio investment and is not categorized as FDI. FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly. FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor. FDIs require a business relationship between a parent company and its foreign subsidiary. Foreign direct business relationships give rise to multinational corporations. For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country.
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History
In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic products (GDP). The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). But flows to non-industrialized countries are increasing sharply.
Foreign Direct investor A foreign direct investor is an individual, an incorporated or unincorporated public or private enterprise, a government, a group of related individuals, or a group of related incorporated and/or unincorporated enterprises which has a direct investment enterprise that is, a subsidiary, associate or branch operating in a country other than the country or countries of residence of the foreign direct Investor or investors.
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This classification is based on the types of restrictions imposed, and the various prerequisites required for these investments. Outward FDI: An outward-bound FDI is backed by the government against all types of associated risks. This
form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as 'direct investments abroad.' Inward FDIs: Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns.
Other categorizations of FDI Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC. Horizontal foreign direct investments happen when a multinational company carries out a similar business operation in different nations. Horizontal FDI the MNE enters a foreign country to produce the same products product at home. Conglomerate FDI the MNE produces products not manufactured at home. Vertical FDI the MNE produces intermediate goods either forward or backward in the supply stream. Liability of foreignness the costs of doing business abroad resulting in a competitive disadvantage.
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by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise
Foreign direct investment incentives may take the following forms: Low corporate tax and income tax rates
tax holidays other types of tax concessions preferential tariffs special economic zones investment financial subsidies soft loan or loan guarantees free land or land subsidies relocation & expatriation subsidies job training & employment subsidies infrastructure subsidies R&D support derogation from regulations (usually for very large projects)
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Entry Mode
The manner in which a firm chooses to enter a foreign market through FDI. International franchising Branches Contractual alliances Equity joint ventures Wholly foreign-owned subsidiaries
Investment approaches: Greenfield investment (building a new facility) Cross-border mergers Cross-border acquisitions Sharing existing facilities
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A more complete response might address the issue of global business partnering in very general terms. While it is nice that many business writers like the expression, think globally, act locally, this often used clich does not really mean very much to the average business executive in a small and medium sized company. The phrase does have significant connotations for multinational corporations. But for executives in SMEs, it is still just another buzzword. The simple explanation for this is the difference in perspective between executives of multinational corporations and small and medium sized companies. Multinational corporations are almost always concerned with worldwide manufacturing capacity and proximity to major markets. Small and medium sized companies tend to be more concerned with selling their products in overseas markets. The advent of the Internet has ushered in a new and very different mindset that tends to focus more on access issues. SMEs in particular are now focusing on access to markets, access to expertise and most of all access to technology.
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Strategic asset seeking seeks to acquire assets in foreign firms that promote corporate long
term objectives.
Competition is less intense Products are in different stages of their life cycle Market demand is unsaturated There are differences in market sophistication
Ownership Advantages come from the application of proprietary tangible and intangible assets in the host country. Reputation, brand image, distribution channels Technological expertise, organizational skills, experience
Core competence skills within the firm that competitors cannot easily imitate or match.
Exposed to: New markets New practices New ideas New cultures New competition
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Employment Firms attempt to capitalize on abundant and inexpensive labor. Host countries seek to have firms develop labor skills and sophistication. Host countries often feel like least desirable jobs are transplanted from home countries. Home countries often face the loss of employment as jobs move.
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less than 10% of the FDI of China. Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country. India has continually sought to attract FDI from the worlds major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. FDI investments are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining industries. A number of projects have been announced in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors. The Indian national government also provided permission to FDIs to provide up to 100% of the financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 cores, approximately $352.5m. Currently, FDI is allowed in financial services, including the growing credit card business. These services include the non-banking financial services sector. Foreign investors can buy up to 40% of the equity in private banks, although there is condition that stipulates that these banks must be multilateral financial organizations. Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased. By 2004, India received $5.3 billion in FDI, big growth compared to previous years, but less than 10% of the $60.6 billion that flowed into China. Why does India, with a stable democracy and a smoother approval process, lag so far behind China in FDI amounts? Although the Chinese approval process is complex, it includes both national and regional approval in the same process. Federal democracy is perversely an impediment for India. 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.
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Political Risk
India has enjoyed successive years of elected representative government at the Union as well as federal level. India suffered political instability for a few years in the sense there was no single party which won clear majority and hence it led to the formation of coalition governments. However, political stability has firmly returned since the general elections in 1999, with strong and healthy coalition governments emerging. Nonetheless, political instability did not change India's bright economic course though it delayed certain decisions relating to the economy. Economic liberalization which mostly interested foreign investors has been accepted as essential by all political parties including the Communist Party of India Though there are bleak chances of political instability in the future, even if such a situation arises the economic policy of India would hardly be affected.. Being a strong democratic nation the chances of an army coup or foreign dictatorship are minimal. Hence, political risk in India is practically absent.
Commercial Risk
Commercial risk exists in any business ventures of a country. Not each and every product or service is profitably accepted in the market. Hence it is advisable to study the demand / supply condition for a particular product or service before making any major investment. In India one can avail the facilities of a large number of market research firms in exchange for a professional 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
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. 1500crores.
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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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.
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 Atomic Energy & Related Projects
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Defense and Strategic Industries Agriculture (Including Plantation) Print Media Broadcasting Postal Services
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I.
FDI is permitted as under the following forms of investments Through financial collaborations. Through joint ventures and technical collaborations. Through capital markets via Euro issues. Through private placements or preferential allotments.
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For foreign technology agreements, automatic approval is granted if i. Up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects, design, supervision, etc. ii. Up to 3% of net turnover is payable for franchising and marketing/publicity support fee, and up to 10% of gross operating profit is payable for management fee, including incentive fee.
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i) For FDI up to 51% - US$ 0.5 million to be brought upfront ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million to be brought up front and the balance in 24 months c. Minimum capitalization norms for non-fund based activities: Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted non-fund based NBFCs with foreign investment. d. Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50 million as at b) (iii) above (without any restriction on number of operating subsidiaries without bringing in additional capital) e. Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above. f. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard.
companies (who are investing and the companies in which investment is being made) to the license conditions for foreign equity cap and lock- in period for transfer and addition of equity and other license provisions. ii. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI, beyond 49% requiring Government approval. These services would be subject to licensing and security requirements. iii. iv. No equity cap is applicable to manufacturing activities. FDI up to 100% is allowed for the following activities in the telecom sector : a. b. c. d. ISPs not providing gateways (both for satellite and submarine cables); Infrastructure Providers providing dark fiber (IP Category 1); Electronic Mail; and Voice Mail The above would be subject to the following conditions: e. FDI up to 100% is allowed subject to the condition that such companies would divest 26% of their equity in favor of Indian public in 5 years, if these companies are listed in other parts of the world. f. The above services would be subject to licensing and security requirements, wherever required. Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.
exports; bulk imports with ex-port/ex-bonded warehouse sales; cash and carry wholesale trading;
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Other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales.
ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy: a. Companies for providing after sales services (that is not trading per se) b. Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India. c. Trading of hi-tech items/items requiring specialized after sales service d. Trading of items for social sector e. Trading of hi-tech, medical and diagnostic items. f. Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name. g. Domestic sourcing of products for exports. h. Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facilities commences simultaneously with test marketing
FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the world. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading.
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2. Up to 100% equity with full repatriation facility for capital and dividends in the following sectors
34 High Priority Industry Groups Export Trading Companies Hotels and Tourism-related Projects Hospitals, Diagnostic Centers Shipping Deep Sea Fishing Oil Exploration Power Housing and Real Estate Development Highways, Bridges and Ports Sick Industrial Units Industries Requiring Compulsory Licensing
3. Up to 40% Equity with full repatriation: New Issues of Existing Companies raising Capital through Public Issue up to 40% of the new Capital Issue. 4. On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership engaged in Industrial, Commercial or Trading Activity. 5. Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of the equity Capital or Convertible Debentures of the Company by each NRI. Investment in Government Securities, Units of UTI, National Plan/Saving Certificates. 6. On Non-Repatriation Basis: Acquisition of shares of an Indian Company, through a General Body Resolution, up to 24% of the Paid Up Value of the Company. 7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from Shares or Debentures of an Indian
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Sector-wise FDI Inflows ( From April 2000 to January 2010) SECTOR AMOUNT OF FDI INFLOWS In Rs Million Services Sector Computer Software & hardware Telecommunications Construction Activities Automobile Housing & Real estate Power Chemicals (Other than Fertilizers) Ports Metallurgical industries Electrical Equipments Cement & Gypsum Products Petroleum & Natural Gas Trading Consultancy Services Hotel and Tourism Food Processing Industries Electronics Misc. Mechanical & Engineering industries 787420.81 391109.74 275441.38 213595.12 146799.41 217936.02 137089.37 87008.07 63290.50 109563.20 57379.63 70781.19 94417.17 62416.85 48647.43 52500.05 34362.49 33914.75 28310.13 In US$ Million 18118.40 8876.43 6215.55 5029.01 3310.23 5118.85 3129.66 1964.06 1551.88 2612.85 1324.92 1621.03 2244.17 1480.94 1112.92 1217.50 760.32 748.57 648.86 1194.20 PERCENT OF TOTAL FDI INFLOWS (In terms of Rs)
22.39 11.12 7.83 6.07 4.17 6.20 3.90 2.47 1.80 3.11 1.63 2.01 2.68 1.77 1.38 1.49 0.98 0.96 0.80 1.48
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media) Mining Textiles (Incl. Dyed, Printed) Sea Transport Hospital & Diagnostic Centers Fermentation Industries Machine Tools Air Transport ( Incl. air freight) Ceramics Rubber Goods Agriculture Services Industrial Machinery Paper & Pulp Diamond & Gold Ornaments Agricultural Machinery Earth Moving Machinery Commercial, Office & Household Equipments Glass Printing of Books (Incl. Litho printing industry) Soaps, Cosmetics and Toilet Preparations Medical & Surgical Appliances Education Fertilizers 21204.94 26736.94 17653.81 27241.42 27743.46 10955.32 10552.19 17462.43 11392.76 7937.13 13748.27 18612.76 11014.62 6649.12 5749.34 5798.71 5683.60 6066.23 4984.88 8087.87 14374.11 4282.17 522.86 611.03 402.59 644.73 658.04 247.88 240.71 409.92 247.60 188.39 316.97 429.06 248.15 148.37 134.22 132.74 126.51 135.80 114.54 177.42 309.09 96.59 0.60 0.76 0.50 0.77 0.79 0.31 0.30 0.50 0.32 0.23 0.39 0.53 0.31 0.19 0.16 0.16 0.16 0.17 0.14 0.23 0.41 0.12
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Photographic raw Film & Paper Railway related components Vegetable oils and Vanaspati Sugar Tea & Coffee Leather, Leather goods & Packers Non-conventional energy Industrial instruments Scientific instruments Glue and Gelatine Boilers & steam generating plants Dye-Stuffs Retail Trading (Single brand) Coal Production Coir Timber products
2580.20 3281.85 3769.18 1836.64 3774.81 1621.56 3640.58 1368.36 511.44 385.80 238.67 406.48 1074.67 614.10 50.17 139.59
63.90 75.11 83.69 41.58 84.28 36.74 86.84 29.47 11.64 8.44 5.40 9.52 25.18 15.42 1.12 3.10 3.72 0.15 1.27 4162.55
0.07 0.09 0.11 0.05 0.11 0.05 0.10 0.04 0.01 0.01 0.01 0.01 0.03 0.02 0.00 0.00 0.01 0.00 0.00 5.19
Prime Mover (Other than 178.30 electrical generators Defense Industries 6.87 Mathematical, Surveying 50.35 & drawing instruments Misc. industries 180561.54
3517310.79 145466.35
81010.63 3391.07
100.00 43
2002 to 2008) Advance of Inflows (from 2000 to 2004) RBI's NRI Schemes Grand Total Sector wise FDI inflows SOURCE: DIPP, Federal Ministry of Commerce and Industry, Government of India 89622.22 5330.60 3757729.96 1962.82 121.33 86395.85 -
Forbidden Territories:
Arms and ammunition Atomic Energy Coal and lignite Rail Transport Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds, copper, zinc.
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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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iii.
Sr. No. 1. 2. 3. 4.
Sector/Activity Hotel & Tourism NBFC Insurance Telecommunication: cellular, value added services ISPs paging Electronic Mail & Voice Mail with gateways, radio-
5.
Trading companies: primarily export activities bulk imports, cash and carry wholesale trading 100% Automatic 51% Automatic
6.
Power(other than atomic reactor power plants) 100% 100% Automatic Automatic Automatic
7. 8.
9.
Pollution Management
Control
and 100%
Automatic
10 11. 12.
Call Centers BPO For NRI's and OCB's: i. 34 High Priority Industry Groups ii. Export Companies iii. Hotels and TourismTrading
100% 100%
Automatic Automatic
100%
Automatic
Centers v. vi. vii. viii. ix. Shipping Deep Sea Fishing Oil Exploration Power Housing and Real Estate Development x. Highways, Bridges and Ports xi. xii. Sick Industrial Units Industries Requiring
Compulsory Licensing xiii. Industries Reserved for Small Scale Sector 13. Airports: Greenfield projects Existing projects 14 15. 16. 17. Assets reconstruction company Cigars and cigarettes Courier services Investing infrastructure telecom sector) companies (other 100% 100% 49% 100% 100% in 49% than Automatic Beyond 74% FIPB FIPB FIPB FIPB FIPB
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iv.
S.No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Financial Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Total FDI Inflows 4,029 6,130 5,035 4,322 6,051 8,961 22,826 34,362 35,168 16,232
% Growth Over Previous Year ---(+) 52 (-) 18 (-) 14 (+) 40 (+) 48 (+) 146 (+) 51 (+) 02 ----
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34,362
50
v.
Sr. No
Country
As
To FDI
Total Inflow 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Mauritius Singapore U.S.A. U.K. Netherlands Japan Cyprus Germany France U.A.E. 19,18,633.61 3,80,142.56 3,32,935.60 2,40,974.98 1,78,047.76 1,50,129.05 1,32,448.04 1,12,242.06 61,686.39 50,915.59 44.01 8.72 7.64 5.53 4.08 3.44 3.04 2.57 1.42 1.17
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Mauritius
Mauritius invested Rs.19, 18,633 million in India Up to the January 2010, equal to 44.01 percent of total FDI inflows. Many companies based outside of India utilize Mauritian holding companies to take advantage of the India- Mauritius Double Taxation Avoidance Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains taxes, and may allow some India-based firms to avoid paying certain taxes through a process known as round tripping.
The extent of round tripping by Indian companies through Mauritius is unknown. However, the Indian government is concerned enough about this problem to have asked the government of Mauritius to set up a joint monitoring mechanism to study these investment flows. The potential loss of tax revenue is of particular concern to the Indian government. These are the sectors which attracting more FDI from Mauritius Electrical equipment Gypsum and cement products Telecommunications Services sector that includes both non- financial and financial Fuels.
Singapore
Singapore continues to be the single largest investor in India amongst the Singapore with FDI inflows into Rs. 3, 80,142crores 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
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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 nonconventional 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, 78,047crores between 1991 and 2002. The total percentage of FDI from Netherlands to India stood at 4.08% out of the total foreign direct investment in the country up to August 2009.
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Food processing industries Telecommunications that includes services of cellular mobile, basic telephone, and radio paging Horticulture Electrical equipment that includes computer software and electronics Service sector that includes non- financial and financial services
vi.
Sr. No
Country
Amount Inflows
of
FDI %
As
To FDI
Total Inflow
1.
9,65,210.77
22.14
2. 3. 4. 5. 6. 7. 8. 9. 10.
Computer Software & Hardware Telecommunication Housing & Real Estate Construction Activities Automobile Industry Power Metallurgical Industries Petroleum & Natural Gas Chemical
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The sectors receiving the largest shares of total FDI inflows up to march 2010 were the service sector and computer software and hardware sector, each accounting for 22.14 and 9.48 percent respectively. These were followed by the telecommunications, real estate, construction and automobile sectors. The top sectors attracting FDI into India via M&A activity were manufacturing; information; and professional, scientific, and technical services. These sectors correspond closely with the sectors identified by the Indian government as attracting the largest shares of FDI inflows overall.
The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers) registered maximum growth of 227 per cent during April 2008 March 2009 as compared to 11.71 per cent during the last fiscal. The sector attracted USD 749 million FDI in FY 09 as compared to USD 229 million in FY 08.
During the year 2009 government had raised the FDI limit in telecom sector from 49 per cent to 74 per, which has contributed to the robust growth of FDI. The telecom sector registered a growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal. The sector attracted USD 2558 million FDI in FY 09 as compared to the USD 1261 million in FY 08, acquired 9.37 per cent share in total FDI inflow. India automobile sector has been able to record 70 per cent growth in foreign investment. The FDI inflow in automobile sector has increased from USD 675 million to 1,152 million in FY 09 over FY 08. The other sectors which registered growth in highest FDI inflow during April March 2009 were housing & real estate (28.55 per cent), computer software & hardware (18.94 per cent), construction activities including road & highways (16.35 per cent) and power (1.86 per cent).
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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.
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I.
Introduction to FII
Since 1990-91, the Government of India embarked on liberalization and economic reforms with a view of bringing about rapid and substantial economic growth and move towards globalization of the economy. As a part of the reforms process, the Government under its New Industrial Policy revamped its foreign investment policy recognizing the growing importance of foreign direct investment as an instrument of technology transfer, augmentation of foreign exchange reserves and globalization of the Indian economy. Simultaneously, the Government, for the first time, permitted portfolio investments from abroad by foreign institutional investors in the Indian capital market. The entry of FIIs seems to be a follow up of the recommendation of the Narsimhan Committee Report on Financial System. While recommending their entry, the Committee, however did not elaborate on the objectives of the suggested policy. The committee only suggested that the capital market should be gradually opened up to foreign portfolio investments.
From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all the securities traded on the primary and secondary markets, including shares, debentures and warrants issued by companies which were listed or were to be listed on the Stock Exchanges in India. While presenting the Budget for 1992-93, the then Finance Minister Dr. Manmohan Singh had announced a proposal to allow reputed foreign investors, such as Pension Funds etc., to invest in Indian capital market.
II.
Foreign Institutional Investors means an institution established or incorporated outside India which proposes to make investment in India in securities. A Working Group for Streamlining of the Procedures relating to FIIs, constituted in April, 2003, inter alia, recommended streamlining of SEBI registration procedure, and suggested that dual approval process of SEBI and RBI be changed to a single approval process of SEBI. This recommendation was implemented in December 2003.
Currently, entities eligible to invest under the FII route are as follows:
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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.
a) Regular FIIs- those who are required to invest not less than 70 % of their investment in equity-related instruments and 30 % in non-equity instruments.
b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.
The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset management companies, nominee companies and incorporated/institutional portfolio managers or their power of attorney holders (providing discretionary and non-discretionary portfolio management services) to be registered as FIIs. While the guidelines did not have a specific provision regarding clients, in the application form the details of clients on whose behalf investments were being made were sought.
While granting registration to the FII, permission was also granted for making investments in the names of such clients. Asset management companies/portfolio managers are basically in the business of managing funds and investing them on behalf of their funds/clients. Hence, the intention of the guidelines was to allow these categories of investors to invest funds in India on behalf of their 'clients'. These 'clients' later came to be known as sub-accounts. The broad strategy consisted of having a wide variety of clients, including individuals, intermediated through institutional investors, who would be registered as FIIs in India. FIIs are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme.
iii.
Prohibitions on Investments:
FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities:
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1) Business of chit fund 2) Nidhi Company 3) Agricultural or plantation activities 4) Real estate business or construction of farm houses (real estate business does not include development of townships, construction of residential/commercial premises, roads or bridges). 5) Trading in Transferable Development Rights (TDRs).
iv.
Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds. Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India. Thereafter, the Indian stock markets were opened up for direct participation by FIIs. They were allowed to invest in all the securities traded on the primary and the secondary market including the equity and other securities/instruments of companies listed/to be listed on stock exchanges in India. It can be observed from the table below that India is one of the preferred investment destinations for FIIs over the years. As of March 2009, there were 1609 FIIs registered with SEBI.
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SEBI Registered FIIs in India Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 End of March 0 3 156 353 439 496 450 506 527 490 502 540 685 882 996 1279 1609
2009-10
1805
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v.
Year
1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
17 5593 7631 9694 15554 18695 16115 56856 74051 49920 47061 144858 16953 346978 520508 896686 548876 -
4 466 2835 2752 6979 12737 17699 46734 64116 41165 44373 99094 171072 305512 489667 844504 594608 -
13 5127 4796 6942 8575 5958 1584 10122 9935 8755 2688 45764 45881 41466 30841 52182 -45732 -
39338.46 -6.45 44.75 23.52 -30.52 126.59 739.02 -1.85 -11.88 69.30 1602.53 0.26 -9.62 -25.62 69.20 187.64 -
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FII INFLOW
1000000 800000 600000 400000 200000 0 -200000 Net Investment (a-b) (Rs.crore) Gross Purchases (a) (Rs.crore) Gross Sales (b) (Rs.crore)
There may be many other factors on which a stock index may depend i.e. Government policies, budgets, bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar exchange rate etc. But for my study I have selected only one independent variable i.e. FII and dependent variable is indices of nifty.
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vi.
From the above table we can say that FII has a positive impact on all the indices which means that if FIIs come in India then it is goods for the Indian economy. FIIs have more co-relation with Sensex so we can say that they are mostly invest in big and reputed companies which are included in Sensex.
Power and Capital Goods sector have more co-relation with FII investment which shows more interest of FIIs in those sectors.
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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
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To know the flow of investment in India To know how can India Grow by Investment. To Examine the trends and patterns in the FDI across different sectors and from different countries in India To know in which sector we can get more foreign currency in terms of investment in India To know which country s safe to invest. To know how much to invest in a developed country or in a developing. To know which sector is good for investment. To know which country in investing in which country To know the reason for investment in India Influence of FII on movement of Indian stock exchange To understand the FII & FDI policy in India.
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Research methodology
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Research methodology
In order to accomplish this project successfully we will take following steps. Data collection: Secondary Data: Internet, Books, newspapers, journals and books, other reports and projects, literatures FDI: The study is limited to a sample of investing countries e.g. Mauritius, Singapore, USA etc. and sectors e.g. service sector, computer hardware and software, telecommunications etc. which had attracted larger inflow of FDI from different countries. FII: Correlation: We have used the Correlation tool to determine whether two ranges of data move together that is, how the Sensex, Bankex, IT, Power and Capital Goods are related to the FII which may be positive relation, negative relation or no relation.
We will use this model for understanding the relationship between FII and stock indices returns. FII is taken as independent variable. Stock indices are taken as dependent variable
Hypothesis Test: If the hypothesis holds good then we can infer that FIIs have significant impact on the Indian capital market. This will help the investors to decide on their investments in stocks and shares. If the hypothesis is rejected, or in other words if the null hypothesis is accepted, then FIIs will have no significant impact on the Indian bourses.
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Conclusion
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CONCLUSION
A large number of changes that were introduced in the countrys regulatory economic policies heralded the liberalization era of the FDI policy regime in India and brought about a structural breakthrough in the volume of the FDI inflows into the economy maintained a fluctuating and unsteady trend during the study period. It might be of interest to note that more than 50% of the total FDI inflows received by India came from Mauritius, Singapore and the USA. The main reason for higher levels of investment from Mauritius was that the fact that India entered into a double taxation avoidance agreement (DTAA) with Mauritius were protected from taxation in India. Among the different sectors, the service sector had received the larger proportion followed by computer software and hardware sector and telecommunication sector. According to findings and results, we have concluded that FII did have significant impact on Sensex but there is less co-relation with Bankex and IT. One of the reasons for high degree of any linear relation can also be due to the sample data. The data was taken on monthly basis. The data on daily basis can give more positive results (may be). Also FII is not the only factor affecting the stock indices. There are other major factors that influence the bourses in the stock market.
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Bibliography
www.rbi.org www.fin.in.nic www.sebi.org
http://books.google.co.in/books?id=0VUafaE3pOIC&pg=PA4&dq=types+of+foreign+direct+investment&hl=en&ei= efzrS_rEAoy5rAfv34DbBg&sa=X&oi=book_result&ct=bookthumbnail&resnum=1&ved=0CDUQ6wEwAA#v=onepage&q=types%20of%20foreign%20direct%20investment&f=f alse http://www.indiahousing.com/fdi-foreign-direct-investment.html http://finance.indiamart.com/investment_in_india/fdi.html http://www.answers.com/topic/foreign-direct-investment#History http://www.unctad.org/sections/dite_iiab/docs/diteiiab20041_en.pdf http://www.economywatch.com/foreign-direct-investment/ http://www.legalserviceindia.com/articles/fdi_india.htm
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