PREFACE

PROLOGUE
EXECUTIVE SUMMARY
OBJECTIVE
RESEARCH METHODOLOGY
1
Foreign Investment refers to investments made by inhabitants of a country in financial
assets and production process of another country. It can affect the factor productivity of the
recipient country and can also affect the balance of payments. In developing countries there
was a great need of foreign capital, not only to increase their productivity of labor but also
helps to build the foreign exchange reserves to meet the trade deficit.

It can come in two forms: Foreign Direct Invet!ent "FDI# and Foreign Port$o%io
Invet!ent "FPI#.Foreign Direct Investment involves in the direct production activity and
also of medium to long-term nature. But the Foreign ortfolio Investment is a short-term
investment mostly in the financial mar!ets and it consists of Foreign Institutional Investment
"FII#.
India, being a capital scarce country, has ta!en lot of measures to attract foreign investment
since the beginning of reforms in $%%$. &ill the end of 'anuary ())* it could attract a total
foreign investment of around +,- ./ billions out of which +,- (* billions is in the form of
FI. FII consists of around +,- $( billions in the total foreign investments. &his shows the
importance of FII in the overall foreign investment program.
0s India is in the process of liberali1ing the capital account, it would have significant impact
on the foreign investments and particularly on the FII, as this would affect short-term
stability in the financial mar!ets. 2ence, there is a need to determine the push and pull
factors behind any change in the FII, so that we can frame our policies to influence the
variables which drive-in foreign investment. 0lso FII has been sub3ect of intense discussion,
as it is held responsible for intensifying currency crisis in $%%)4s elsewhere.
India opened its stoc! mar!ets to foreign investors in ,eptember $%%( and has, since $%%*,
received considerable amount of portfolio investment from foreigners in the form of Foreign
Institutional Investments "FII# in e5uities. In order to trade in Indian e5uity mar!ets, foreign
corporations need to register with the ,6BI as Foreign Institutional Investors "FII#.
SEBIs definition of FIIs presently includes foreign pension funds, mutual funds,
charitable/endowment/university funds etc. as well as asset management companies and
other money managers operating on their behalf.
&he FIIs registered with ,6BI come from as many as (/ countries "including money
management companies operating in India on behalf of foreign investors#. It is, however,
instructive to bear in mind that these national affiliations do not necessarily mean that the
actual investor funds come from these particular countries. 7iven the significant financial
flows among the industrial countries, national affiliations are very rough indicators of the
8home4 of the FII investments. In particular institutions operating from 9uxembourg,
2
PROLOGUE
:ayman Islands or :hannel Islands or even those based at ,ingapore or 2ong ;ong are
li!ely to be investing funds largely on behalf of residents in other countries. <evertheless,
the regional brea!down of the FIIs does provide an idea of the relative importance of
different regions of the world in the FII flows.
Foreign Direct Investment "FDI# has the potential of enhancing economic activity and
employment in the country by complementing and supplementing domestic investment.
0dditional investments brought in through FDI, over and above investments possible with
the available domestic resources= assist in providing additional employment opportunities.
FDI also plays a vital role in the upgradation of technology, s!ills and managerial
capabilities.
&he Indian government has put in place a liberal and investor-friendly policy on FDI under
which FDI up to $))> is permitted on the automatic route in most sectors or activities,
including infrastructure and ?esearch and Development "?@D#. Due to the aforesaid
unperturbed policies of Indian government the FDI e5uity inflow in India increased to +, -
(A.*$ billion in the financial year ())/-)% from +, - B.B billion in fiscal ())B-)C.
3
The pro3ect title which is ta!en by me with the help of my Faculty and industry
7uide mainly focused on foreign institutional investment and its impact on Indian
stoc! mar!et. &he main focus of my pro3ect is to gain !nowledge about the core areas
in which foreign investment wor!s. It is natural that within a time period of two
months I can4t learn all the nuances of stoc! mar!et but it give me vital !nowledge or
a deep overview of FIIs and Indian stoc! mar!ets functions and the prominent areas.
&his research wor! starts with the general introduction of the Foreign Institutional
Investors in India after 97 "9iberali1ation, rivati1ation and 7lobali1ation# in $%%$.
?ules @ regulation through which FII enter into Indian mar!et @ finally what impact
it leaves on our sensex, also provides the advantage @ disadvantage of FII in India.
Foreign Institutional Investors feel affection with India. &hey are betting big time on
Dalal ,treet. &he amount of investment that has poured into India in last * Dears is
!ore t&'n tot'% invet!ent t&e( !')e in t&e co*ntr( ince In)i' got
In)e+en)ence, &he total investment that Foreign Investors "FIIs# have made in India
currently stands at --./... crore r*+ee or 01- Bi%%ion, &hese figures were as of
0pril ())A. In first . months of this year itself FIIs have put in 'ro*n) 21... crore
Ene of the reason which pulls the ,ensex to a life time high $B))),in 'uly ())A is
none other than FIIs only
By 3oining In)i' In$o%ine Li!ite) for summer internship program I really had a
great learning experience basically related with the Indian stoc! mar!et and the how
various components li!e, e5uities, stoc!s, IEs, derivatives "Future and options#,
:ommodities and the Futual Funds. &hese all are important aspects of stoc! mar!et.
Ether thing which I had learned that the stoc! mar!et is divided into two segments:
rimary mar!et @ ,econdary mar!et. In the rimary mar!et those companies who are
unlisted and who want capital from the public they issue their shares for the first time
in the mar!et which is called rimary Far!et. ,econdary mar!et includes 65uity
shares, ?ight issues, Bonus shares, and reference shares, :umulative reference
,hares, :umulative :onvertible reference ,hares and Bonds. &he share mar!et
which I had seen the guidance of my Industry 7uide is the most volatile mar!et. ,o,
the whole pro3ect was directed towards foreign institutional investment and its impact
on stoc! mar!ets in India
EXECUTIVE SUMMARY
4
OBJECTIVE
5
Before starting a pro3ect, we should !eep in mind the clear ob3ective of the
pro3ect because in the absence of the ob3ective one can4t reach the conclusion or the
end result of the pro3ect. ?esearch ob3ective answer the 5uestion GHhy this study is
being conductedI For every problem there is a research. 0s all the research is based
on some ob3ective, our research has also some ob3ectives which are as follows:
Pri!'r( o34ective5
&he primary ob3ective of this study is to analy1e the ?ole of Foreign Investors and its
impact on the Indian ,toc! Far!et. It determine the factors that influences the
dependency of Indian stoc! mar!et on foreign investors
Secon)'r( O34ective5
&o analy1e graphically, the stoc! mar!et returns of <et purchases and sales of by
FIIs in the sampling period.
&o analy1e the stoc! mar!et returns of indices and determine FIIJs percentage
change in investment.
&o analy1e the &rends in FII Investment in India in the sampling period.
&o analy1e the mar!et capitali1ation of the listed companies in B,6 due to the
impact of FIIs.
RESEARCH METHODOLOGY
6
A research design is the framewor! or plan, which guides the collection of the
data and analysis of the data. ?esearch Design is a blueprint that outlines each
procedure from the hypothesis to the analysis. &he purpose of the research design is
to ensure that the data collected is accurate and relevant. 0ny research wor! re5uires
clarity of ob3ectives and a set pattern, so that the ob3ectives can be achieved
efficiently. ?esearch Design is the conceptual structure within which research is
conducted. It constitutes the blueprint for collection, measurement, @ analysis of the
data. &he design used for carrying out this research is 6xploratory @ 6xperienced
based and Descriptive study
&his type of research is tentative and it is 5ualitative in nature. 6xploration is
particularly useful when researchers lac! a clear idea of the problems. &he approach
used in the study was both 5ualitative as well as 5uantitative as only theoretical
aspects are not considered but their practicality is also been observed.
So*rce o$ D't' Co%%ection5
&he whole study of the foreign investments and its impact on Indian stoc! mar!et and
is based on the given sources of information:
Heb based sources.
Hebsite of India Infoline 9td.
Efficial websites of ?BI, ,6BI.
Efficial websites of Indian stoc! exchanges "<,6 @ B,6#.
&ext boo!s and news bulletins.
?eports and Fanuals of Department of Industrial olicy @ romotion.
Hebsites related to ,toc! mar!et and financial news.
Sco+e o$ t&e t*)(5
&he scope of the study extends up to the analysis of analysis of stoc! mar!et returns
of dependent factors li!e investments through FDI and FII in a country. &he foreign
investment policies and guidelines which are imposed by 7overnment of India are
also ta!en under the scope of study.
7
ABOUT
I6DIA I6FOLI6E LTD
CORPORATE PROFILE
COMPETITIVE ADVA6TAGE
PRODUCT A6D SERVICES
BUSI6ESS 7 OPERATIO6S
I6FRASTRUCTURE
MA6AGEME6T TEAM
8
India Infoline 9imited is listed on both the leading stoc! exchanges in India, vi1. the ,toc!
6xchange, Fumbai "B,6# and the <ational ,toc! 6xchange "<,6# and is also a member of
both the exchanges. It is engaged in the businesses of 65uities bro!ing, Health 0dvisory
,ervices and ortfolio Fanagement ,ervices. It offers bro!ing services in the :ash and
Derivatives segments of the <,6 as well as the :ash segment of the B,6. It is registered
with <,D9 as well as :D,9 as a depository participant, providing a one-stop solution for
clients trading in the e5uities mar!et. It has recently launched its Investment ban!ing and
Institutional Bro!ing business.
I6DIA I6FOLI6E GROUP
&he India Infoline group, comprising the holding company, India Infoline 9imited and its
wholly-owned subsidiaries, straddle the entire financial services space with offerings
ranging from 65uity research, 65uities and derivatives trading, :ommodities trading,
ortfolio Fanagement ,ervices, Futual Funds, 9ife Insurance, Fixed deposits, 7oI bonds
and other small savings instruments to loan products and Investment ban!ing. India Infoline
also owns and manages the websites www.indiainfoline.com and www.Bpaisa.com
&he company has a networ! of %AC business locations "branches and sub-bro!ers# spread
across *CB cities and towns. It has more than /)),))) customers.
I6DIA I6FOLI6E LTD
India Infoline 9imited is listed on both the leading stoc! exchanges in India, vi1. the ,toc!
6xchange, Fumbai "B,6# and the <ational ,toc! 6xchange "<,6# and is also a member of
both the exchanges. It is engaged in the businesses of 65uities bro!ing, Health 0dvisory
,ervices and ortfolio Fanagement ,ervices. It offers bro!ing services in the :ash and
Derivatives segments of the <,6 as well as the :ash segment of the B,6. It is registered
with <,D9 as well as :D,9 as a depository participant, providing a one-stop solution for
clients trading in the e5uities mar!et. It has recently launched its Investment ban!ing and
Institutional Bro!ing business.
0 ,6BI authori1ed ortfolio Fanager= it offers ortfolio Fanagement ,ervices to clients.
&hese services are offered to clients as different schemes, which are based on differing
investment strategies made to reflect the varied ris!-return preferences of clients.
CORPORATE PROFILE
9
,ource: www.indiainfoline.com
I6DIA I6FOLI6E MEDIA 7 RESEARCH SERVICES LIMITED,
&he content services represent a strong support that drives the bro!ing, commodities, mutual
fund and portfolio management services businesses. ?evenue generation is through the sale
of content to financial and media houses, Indian as well as global.
It underta!es e5uities research which is ac!nowledged by none other than Forbes as JBest of
the HebJ and JKa must read for investors in 0siaJ. India InfolineJs research is available not
3ust over the internet but also on international wire services li!e Bloomberg ":ode: II99#,
&homson First :all and Internet ,ecurities where India Infoline is amongst the most read
Indian bro!ers.
I6DIA I6FOLI6E COMMODITIES LIMITED,
India Infoline :ommodities vt. 9imited is engaged in the business of commodities bro!ing.
Eur experience in securities bro!ing empowered us with the re5uisite s!ills and technologies
to allow us offer commodities bro!ing as a contra-cyclical alternative to e5uities bro!ing.
He en3oy memberships with the F:L and <:D6L, two leading Indian commodities
exchanges, and recently ac5uired membership of D7:L. He have a multi-channel delivery
model, ma!ing it among the select few to offer online as well as offline trading facilities.
10
I6DIA I6FOLI6E MAR8ETI6G 7 SERVICES
India Infoline Far!eting and ,ervices 9imited is the holding company of India Infoline
Insurance ,ervices 9imited and India Infoline Insurance Bro!ers 9imited.
"a# India Infoline Insurance ,ervices 9imited is a registered :orporate 0gent with the
Insurance ?egulatory and Development 0uthority "I?D0#. It is the largest :orporate 0gent
for I:I:I rudential 9ife Insurance :o 9imited, which is IndiaJs largest private 9ife
Insurance :ompany. India Infoline was the first corporate agent to get licensed by I?D0 in
early ())$.
"b# India Infoline Insurance Bro!ers 9imited India Infoline Insurance Bro!ers 9imited is a
newly formed subsidiary which will carry out the business of Insurance bro!ing. He have
applied to I?D0 for the insurance bro!ing license and the clearance for the same is awaited.
ost the grant of license, we propose to also commence the general insurance distribution
business.
I6DIA I6FOLI6E I6VESTME6T SERVICES LIMITED
:onsolidated shareholdings of all the subsidiary companies engaged in loans and financing
activities under one subsidiary. ?ecently, Erient 7lobal, a ,ingapore-based investment
institution invested +,D AC.A million for a ((.B> sta!e in India Infoline Investment
,ervices. &his will help focused expansion and capital raising in the said subsidiaries for
various lending businesses li!e loans against securities, ,F6 financing, distribution of retail
loan products, consumer finance business and housing finance business. India Infoline
Investment ,ervices rivate 9imited consists of the following step-down subsidiaries.
"a# India Infoline Distribution :ompany 9imited "distribution of retail loan products#
"b# Foneyline :redit 9imited "consumer finance#
"c# India Infoline 2ousing Finance 9imited "housing finance#
IIFL "ASIA# PTE LIMITED
IIF9 "0sia# te 9imited is wholly owned subsidiary which has been incorporated in
,ingapore to pursue financial sector activities in other 0sian mar!ets. Further to obtaining
the necessary regulatory approvals, the company has been initially capitali1ed at $ million
,ingapore dollars.
COMPETITIVE ADVA6TAGE OF I6DIA I6FOLI6E
11
India Infoline has many competitive advantages which attracts customers and
motivate its clients. ,ome of the facts which lead the India Infoline in the mar!et are
as follows:
P'rtici+'nt on t&e co*ntr(9 +re!ier e:c&'nge:
India Infoline 9td is a member of the country4s premier stoc! exchange M &he <ational
,toc! 6xchange of India "<,6#.
C%e'ring !e!3er&i+ on C'+it'% 7 Deriv'tive eg!ent:
India Infoline 9td. It has clearing memberships on both the :apital Far!et and Derivatives
segment of the exchange. He are also authori1ed to trade the retail debt mar!et.
De+oitor( P'rtici+'nt ;it& 6SDL 7 CDSL5
India Infoline 9td is depository participants with the country4s premier depository service -
<ational ,ecurities Depository 9imited "<,D9#, as well as with the only other depository
with a countrywide reach :entral Depository ,ervices 9imited ":D,9#.
Le')ing +riv'te ector 3'n< ' +'rtner5
Ban!ing partners are 2DF: Ban!, I:I:I Ban!, :iti Ban!, Ban! of Baroda M &he foremost
private sector ban!s in the country, which has the most technologically advanced
infrastructure in the country, with Internet ban!ing allowing access to information (. L A.
Ree'rc& C'+'3i%itie5
India Infoline has a dedicated team of analysts in our Bombay office M &hey provide
fundamental analysis of stoc!s and mar!ets, which are fundamentally strong, and provide
above mar!et returns to investors, but over a slightly longer time frame M &ypically C months
and above.
Tec&nic'% An'%(i5
0 daily technical newsletter is published by our in-house technical analyst, who is a
recogni1ed leading practitioner of the science. 2e trac!s the progress of the calls on a real-
time basis, and advises of any change in the profit points or stop loss levels. 0ll ,ervices
under one roof: India has moved to a &N( settlement system, where all trades and settled on
a rolling basis. 2owever this gives the clients no time to arrange deliveries to their bro!er,
through a separate depository participant. India Infoline 9td, being a trading-clearing
member, as well as a depository participant, allows seamless transfer of securities under the
same roof, with minimum delay and constant monitoring
PRODUCTS A6D SERVICES
12
India Infoline is a one-stop financial services shop, most respected for 5uality of its advice,
personali1ed service and cutting-edge expertise. It provide a bou5uet of products:
E=UITIES
India Infoline provided the prospect of researched investing to its clients, which was hitherto
restricted only to the institutions. ?esearch for the retail investor did not exist prior to India
Infoline leveraged technology to bring the convenience of trading to the investor4s location
of preference "residence or office# through computeri1ed access. India Infoline made it
possible for clients to view transaction costs and ledger updates in real time. Ever the last
fve years, India Infoline sharpened its competitive edge through the following initiatives:
MULTI>CHA66EL DELIVERY MODEL
&he :ompany is among the few financial intermediaries in India to offer a complement of
online and offline bro!ing. &he :ompany4s networ! of branches also allows customers to
place orders on phone or visit our branches for trading.
I6TEGRATED MIDDLE A6D BAC8 OFFICE
&he customer can trade on the B,6 and <,6, in the cash as well as the derivatives segment
all through the available multiple options of Internet, phone or branch presence.
MULTIPLE>TRADI6G OPTIO6S
&he :ompany harnessed technology to offer services at among the lowest rates in the
business membership: &he :ompany widened client reach in trading on the domestic and
international exchanges.
TECH6OLOGY
&he :ompany provides a prudent mix of proprietary and outsourced technologies, which
facilitate business growth without a corresponding increase in costs.
SERVICE
:lients can access the customer service team through various media li!e toll-free lines,
emails and Internet- messenger chat for instant 5uery resolution. &he :ompany4s customer
service executives proactively contact customers to inform them of !ey changes and
initiatives ta!en by the :ompany. Business Horld rated the :ompany4s customer service as
8Best4 in their survey of online trading sites carried out in December ())*.
;6D F60&+?6,
13
Fembership on the Bombay ,toc! 6xchange 9imited "B,6 # and the <ational ,toc!
6xchange "<,6#
?egistered with the <,D9 and :D,9 as a depository participant
Bro!ing services in cash and derivative segments, online as well as offline.
resence across *B) cities and towns with a networ! of over /B) business locations
65uity client base of over B)),))) clients
rovision of free and world-class research to all clients
PMS "PORTFOLIO MA6AGEME6T SERVICE#
India Infoline 9td. offers F, to address varying investment preferences. 0s a focused
service, F, pays attention to details, and portfolios are customi1ed to suit the uni5ue
re5uirements of investors.
Eur ortfolio Fanagement ,ervice is a product wherein an e5uity investment portfolio is
created to suit the investment ob3ectives of a client. He at India Infoline invest your
resources into stoc!s from different sectors, depending on your ris!-return profile. &his
service is particularly advisable for investors who cannot afford to give time or donJt have
that expertise for day-to-day management of their e5uity portfolio.
RESEARCH
,ound investment decisions depend upon reliable fundamental data and stoc! selection
techni5ues. India Infoline 65uity ?esearch is proud of its reputation for, and we want you to
find the facts that you need. 65uity investment professionals routinely use our research and
models as integral tools in their wor!. &hey choose Ford 65uity ?esearch when they can
clear your doubts.
COMMODITIES
India Infoline4s extension into commodities trading reconciles its strategic intent to emerge
as a one-stop solutions financial intermediary. &he :ompany4s commodities business
provides a contra-cyclical alternative to e5uities bro!ing. &he :ompany was among the first
to offer the facility of commodities trading in India4s young commodities mar!et. 0verage
monthly turnover on the commodity exchanges increased from ?s ).*. to ?s ().)( billion.
&he commodities mar!et has several products with different and non-correlated cycles. En
the whole, the business is fairly insulated against cyclical gyrations in the business.
MORTGAGES
14
During the year under review, India Infoline ac5uired a AB> sta!e in Foneytree
:onsultancy ,ervices to mar! its foray into the business of mortgages and other loan
products distribution. &he :ompany brings on board expertise in the loans business coupled
with existing relationships across a number of principals in the mortgage and personal loans
businesses. India Infoline now has plans to roll the business out across its pan-Indian
networ! to provide it with a truly national scale in operations.
HOME LOA6S A6D PERSO6AL LOA6S
India Infoline 9td provides finance services in the form of loans against residential and
commercial property. &he company also provides personal loans as per the re5uirement,
with tremendous features li!e easy documentation, 5uic! processing and disbursal.
O6LI6E I6VESTME6T
India Infoline has made investing in Futual funds and primary mar!et so effortless. 0ll have
to do is register with us and that4s all. <o paperwor! no 5ueues and <o registration charges.
I6VEST I6 MUTUAL FU6DS
India Infoline offers a host of mutual fund choices under one roof, bac!ed by in-depth
research and advice from research house and tools configured as investor friendly.
O6LI6E APPLICATIO6 I6 I6ITIAL PUBLIC OFFERS "IPO#
:lient could also invest in Initial ublic Effers "IE4s# online without going through the
hassles of filling 0<D application formO paperwor!.
STOC8 MESSAGI6G SERVICE "SMS#
,tay connected to the mar!et remotely. &he trader of today, you are constantly on the move.
But how to stay connected to the mar!et while on the moveP ,imple, subscribe to India
InfolineJs ,toc! Fessaging ,ervice and get Far!et on the Fobile of clientQ &here are three
products under ,F, ,ervice. &hey are:
Far!et on the move.
Best of the lot.
R0, "Ralue 0dded ,ervice#
I6SURA6CE
15
0n entry into this segment helped complete the client4s product bas!et= concurrently, it
graduated the :ompany into a one-stop retail financial solutions provider. &o ensure
maximum reach to customers across India, we have employed a multi pronged approach and
reach out to customers via our <etwor!, Direct and 0ffiliate channels. Following the
opening of the sector in $%%%-())), a number of private sector insurance service providers
commenced operations aggressively and helped grow the mar!et.
&he :ompany4s entry into the insurance sector deris!ed the :ompany from a predominant
dependence on bro!ing and e5uity-lin!ed revenues. &he annuity based income generated
from insurance intermediation result in solid core revenues across the tenure of the policy.
?EALTH MA6GEME6T SERVICE
Imagine a financial firm with the heart and soul of a two-person organi1ation. 0 world-
leading wealth management company that sits down with you to understand your needs and
goals. He offer you a dedicated group for giving you the most personal attention at every
level.
6E?SLETTERS
&he Daily Far!et ,trategy is your morning dose on the health of the mar!ets. Five intra-day
ideas, unless the mar!ets are really choppy coupled with a brief on the global mar!ets and
any other cues, which could impact the mar!et. Eccasionally an investment idea from the
research team and a crisp round up of the previous dayJs top stories. &hatJs not all. 0s a
subscriber to the Daily Far!et ,trategy, you even get research reports of India Infoline
research team on a priority basis.
&he India Infoline Hee!ly <ewsletter is your flashbac! for the wee! gone by. 0 wee!ly
outloo! coupled with the best of the web stories from India Infoline and lin!s to important
investment ideas, 9eader ,pea! and features is delivered in your inbox every Friday
evening.
resence on the world wide web through www.indiainfoline.com
16
BUSI6ESS 7 OPERATIO6S
17
BUSI6ESS
Ever a period of time ?,9 has recorded a healthy growth rate both in business volumes and
profitability as it is one of the ma3or players in this line of business. &he business thrust has
been maily in the development of business from Financial Institutions, Futual Funds and
:orporate.
OPERATIO6S
&he operations of the company are broadly organi1ed along the following functions:
?6,60?:2 @ 0<09D,I,
&his group is focused on doing daily stoc! pic!s and periodical scrip segment specific
research. &hey provide the best of analysis in the industry and are valued by both our
Institutional and ?etail clientele.
F0?;6&I<7
&his group is focused on trac!ing potential business opportunities and converting them into
business relationships. 6valuating the needs of the clients and tailoring products to meet
their specific re5uirements helps the company to build lasting relationships
D609I<7
6nabling the clients to procure the best rates on their transactions is the core function of this
group.
I6FRASTRUCTURE
18
ADMI6ISTRATIVE CE6TER
&he company has offices located at prime locations in Fumbai, <ew Delhi, ;ol!ata and :hennai.
&he offices are centrally located to cater to the re5uirements of institutional and corporate clients
and retails clients, and for ease of operations due to proximity to stoc! exchanges and ban!s.
BAC8 OFFICE
&his group ensures timely deliveries of securities traded, liaison with stoc! exchange
authorities on operational matters, statutory compliance, handling tas!s li!e pay-in, pay-out,
etc. &his section is fully automated to enable the staff to focus on the technicalities of
securities trading and is manned by professionals having long experience in the field
COMMU6ICATIO6S
&he company has its efficient networ! of advance communication system and intends to
install :?F facility= besides this it is implementing interactive client information
dissemination system which enables clients to view their latest client information on web. It
has an installed multiple H0< to interconnect the branches to communicate on real time
basis.
&he company is e5uipped with most advanced systems to facilitate smooth functioning of
operations. It has installed its ma3or application on IBF machines and uses latest state of art
financial software.
19
Mr, 6ir!'% J'in
C&'ir!'n 7 M'n'ging Director
In)i' In$o%ine Lt),
<irmal 'ain, FB0 "IIF, 0hmedabad# and a :hartered and :ost 0ccountant, founded India4s
leading financial services company India Infoline 9td. in $%%B, providing globally acclaimed
financial services in e5uities and commodities bro!ing, life insurance and mutual funds
distribution, among others. Fr. 'ain began his career in $%/% with 2industan 9ever4s
commodity export business, contributing tremendously to its growth. 2e was also associated
with In5uire-Indian 65uity ?esearch, which he co-founded in $%%. to set new standards in
e5uity research in India.
Mr, R Ven<'t'r'!'n
E:ec*tive Director
In)i' In$o%ine Lt),
? Ren!ataraman, co-promoter and 6xecutive Director of India Infoline 9td., is a B. &ech
"6lectronics and 6lectrical :ommunications 6ngineering, II& ;haragpur# and an FB0 "IIF
Bangalore#. 2e 3oined the India Infoline board in 'uly $%%%. 2e previously held senior
managerial positions in I:I:I 9imited, including I:I:I ,ecurities 9imited, their investment
ban!ing 3oint venture with ' Forgan of +,0 and with BSH and &aib :apital :orporation
9imited. 2e was also 0ssistant Rice resident with 7 6 :apital ,ervices India 9imited in their
private e5uity division, possessing a varied experience of more than $C years in the financial
services sector.
MA6AGEME6T TEAM
20
T&e Bo'r) o$ Director
Mr 6i%e& Vi<'!e(
In)e+en)ent Director
In)i' In$o%ine Lt),
Fr. Ri!amsey, Board member since February ())B - a practising :hartered 0ccountant and
partner ";him3i ;unver3i @ :o., :hartered 0ccountants#, a member firm of 29B
International, headed the audit department till $%%) and thereafter also handles financial
services, consultancy, investigations, mergers and ac5uisitions, valuations etc= an I:0I study
group member for roposed 0ccounting ,tandard T *) on Financial Instruments
?ecognition and Fanagement, Finance :ommittee of &he :hamber of &ax :onsultants
":&:#, 9aw ?eview, ?eforms and ?ationali1ation :ommittee and Infotainment and Fedia
:ommittee of Indian Ferchants4 :hamber "IF:# and Insurance :ommittee and 9egal
0ffairs :ommittee of Bombay :hamber of :ommerce and Industry "B::I#. Fr. Ri!amsey is
a director of Filoni :onsultants rivate 9imited, 29B &echnologies "Fumbai# rivate
9imited and :hairman of 29B India.
Mr S't P'% 8&'tt'r
6on E:ec*tive Director
In)i' In$o%ine Lt),
Fr ,at al ;hattar, - Board member since 0pril ())$ - residential :ouncil of Finority ?ights
member, :hairman of the Board of &rustee of ,ingapore Business Federation, is also a life
trustee of ,I<D0, a non profit body, helping the under-privileged Indians in ,ingapore. 2e
3oined the India Infoline board in 0pril ())$. Fr ;hattar is a Director of public and private
companies in ,ingapore, India and 2ong ;ong= :hairman of 7uocoland 9imited listed in
,ingapore and its parent 7uoco 7roup 9td listed in 2ong ;ong, a leading property company of
,ingapore, :hina and Falaysia. 0 Board member of India Infoline 9td, 7ateway Distripar!s
9td T both listed T and a number of other companies he is also the :hairman of the ;hattar
2olding 7roup of :ompanies with investments in ,ingapore, India, +; and across the world
Mr 8r'nti Sin&'
In)e+en)ent Director
In)i' In$o%ine Lt),
Fr. ;ranti ,inha T Board member since 'anuary ())B T completed his masters from the 0gra
+niversity and started his career as a :lass I officer with 9ife Insurance :orporation of India. 2e served
as the Director and :hief 6xecutive of 9I: 2ousing Finance 9imited from 0ugust $%%/ to December
())( and concurrently as the Fanaging Director of 9I:2F9 :are 2omes "a wholly owned subsidiary of
21
9I: 2ousing Finance 9imited#. 2e retired from the permanent cadre of the 6xecutive Director of 9I:=
served as the Deputy resident of the 7overning :ouncil of Insurance Institute of India and as a member
of the 7overning :ouncil of <ational Insurance 0cademy, une apart from various other such bodies.
Fr. ,inha is also on the Board of Directors of 2industan Fotors 9imited, 9arsen @ &oubro 9imited,
9I:2F9 :are 2omes 9imited, 7remach Infrastructure 65uipments and ro3ects 9imited and :inemax
"India# 9imited.
Mr Ar*n 8, P*rv'r
In)e+en)ent Director
In)i' In$o%ine Lt),
Fr. 0.;. urvar M Board member since Farch ())/ M completed his Fasters degree in commerce from
0llahabad +niversity in $%CC and a diploma in Business 0dministration in $%CA. Fr. urwar 3oined the
,tate Ban! of India as a probationary officer in $%C/, where he held several important and critical
positions in retail, corporate and international ban!ing, covering almost the entire range of commercial
ban!ing operations in his illustrious career. 2e also played a !ey role in co-coordinating the wor! for the
Ban!Js entry into the field of insurance. 0fter retiring from the Ban! at end Fay ())C, Fr. urwar is
now wor!ing as Fember of Board of 7overnors of IIF-9uc!now, 3oined IIFMIndore as a visiting
professor, 3oined as a 2on.-rofessor in <FIF, and he is also a member of 0dvisory Board for Institute
of Indian 6conomic ,tudies "II6,#, Haseda +niversity, &o!yo, 'apan. 2e has now ta!en over as
:hairman of IndiaRenture 0dvisors vt. 9td., as well as I9 @ F, ?enewable 6nergy 9imited. 2e is also
wor!ing as Independent Director in leading companies in &elecom, ,teel, &extiles, 0utoparts,
6ngineering and :onsultancy.
S&'3n'! B'no
Br'nc& M'n'ger/ 8ot' Br'nc&
In)i' In$o%ine Lt),
Fs. ,habnam Bano, Branch Fanager, India Infoline 9imited, ;ota Branch. ,he started her career from I:I:I ersonal
9oans D,& as a ,ales 6xecutive, 0fter that she 3oined India Bulls ,ecurities 9td. 0s 0ssistant ?elationship Fanager. In
'an ())A, she 3oins India Infoline 9td. as ?elationship Fanager. &hen she promoted as Branch Fanager for ;ota Branch
of India Infoline 9td. ,he had diploma in :ivil 6ngineering, and FB0 in Finance. ,he is an excellent &eam Fanager for
her team. ,he is Fentor and guide in this pro3ect.
Pr'!o) Vi4'(
Senior Re%'tion&i+ M'n'ger/
In)i' In$o%ine Lt), 8ot'
22
Mr, Pr'!o) Vi4'( ,enior ?elation Fanager, wor!ing at ;ota Branch of India Infoline 9td. 2e 3oins
India Infoline as Far!eting 6xecutive in the year of ())C. 0fter 3oining the company he constantly
!eeps upgrading himself and got promoted to the designation of ,enior ?elation Fanager. 2e got his
graduation from Faharshi Dayanand ,araswati +niversity 03mer, ?a3asthan with flying colors. 2e
always ready to lend a hand to his colleagues and team members. 2e provides excellent guidance in
the accomplishment of the pro3ect report.
FOREIG6
I6VESTME6TS
23
ABSTRACT
DESCRIPTIO6 OF FII
GLOBAL PLAYERS I6 I6DIA
REASO6 FOR GRO?TH I6 FII
6EED OF FOREIG6 I6VESTME6TS
POLICY A6D GUIDELI6ES
Foreign investment refers to investments made by the residents of a country in the
financial assets and production processes of another country. &he effect of foreign
investment, however, varies from country to country. It can affect the factor productivity of
the recipient country and can also affect the balance of payments. Foreign investment
provides a channel through which countries can gain access to foreign capital. It can come in
two forms: foreign direct investment "FDI# and foreign institutional investment "FII#.
Foreign direct investment involves in direct production activities and is also of a medium- to
0B,&?0:&
24
long-term nature. But foreign institutional investment is a short-term investment, mostly in
the financial mar!ets. FII, given its short-term nature, can have bidirectional causation with
the returns of other domestic financial mar!ets such as money mar!ets, stoc! mar!ets, and
foreign exchange mar!ets. 2ence, understanding the determinants of FII is very important
for any emerging economy as FII exerts a larger impact on the domestic financial mar!ets in
the short run and a real impact in the long run. India, being a capital scarce country, has
ta!en many measures to attract foreign investment since the beginning of reforms in $%%$.
India is the second largest country in the world, with a population of over $ billion people.
0s a developing country, India4s economy is characteri1ed by wage rates that are
significantly lower than those in most developed countries. &hese two traits combine to
ma!e India a natural destination for foreign direct investment "FDI# and foreign institutional
investment "FII#. +ntil recently, however, India has attracted only a small share of global
foreign direct investment "FDI# and foreign institutional investment "FII#, primarily due to
government restrictions on foreign involvement in the economy. But beginning in $%%$ and
accelerating rapidly since ())), India has liberali1ed its investment regulations and actively
encouraged new foreign investment, a sharp reversal from decades of discouraging
economic integration with the global economy.
&he world is increasingly becoming interdependent. 7oods and services followed by the
financial transaction are moving across the borders. In fact, the world has become a
borderless world. Hith the globali1ation of the various mar!ets, international financial flows
have so far been in excess for the goods and services among the trading countries of the
world. Ef the different types of financial inflows, the foreign direct investment "FDI# and
foreign institutional investment "FII## has played an important role in the process of
development of many economies. Further many developing countries consider foreign direct
investment "FDI# and foreign institutional investment "FII# as an important element in their
development strategy among the various forms of foreign assistance.
&he Foreign direct investment "FDI# and foreign institutional investment "FII# flows are
usually preferred over the other form of external finance, because they are not debt creating,
nonvolatile in nature and their returns depend upon the pro3ects financed by the investor.
&he Foreign direct investment "FDI# and foreign institutional investment "FII# would also
facilitate international trade and transfer of !nowledge, s!ills and technology.
&he Foreign direct investment "FDI# and foreign institutional investment "FII# is the process
by which the resident of one country"the source country# ac5uire the ownership of assets for
the purpose of controlling the production, distribution and other productive activities of a
firm in another country"the host country#.
0ccording to the international monetary fund "IFF#, foreign direct investment "FDI# and
foreign institutional investment "FII# is defined as Gan investment that is made to ac5uire a
lasting interest in an enterprise operating in an economy other than that of investorI.
&he government of India"7EI# has also recogni1ed the !ey 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 re5uired amount
25
of foreign direct investment "FDI# and foreign institutional investment "FII#, it has bought
about a number of changes in its economic policies and has put in its practice a liberal and
more transparent foreign direct investment "FDI# and foreign institutional investment "FII#
policy with a view to attract more foreign direct investment "FDI# and foreign institutional
investment "FII# inflows into its economy. &hese changes have heralded the liberali1ation
era of the foreign direct investment "FDI# and foreign institutional investment "FII# policy
regime into India and have brought about a structural brea!through in the volume of foreign
direct investment "FDI# and foreign institutional investment "FII# inflows in the economy. In
this context, this report is going to analy1e the trends and patterns of foreign direct
investment "FDI# and foreign institutional investment "FII# flows into India during the post
liberali1ation period that is $%%$ to ())A year.
Institutional investors are a permanent feature of the financial landscape, and
their growth will continue at a similar and perhaps faster pace. !he factors
that underpin their development are far from transitory and in many cases have
only "ust started having an impact. !he behavioral characteristics of
institutional investors, therefore, will be an increasingly important determinant
of domestic and international financial mar#et conditions, and the implications
for financial mar#et stability warrant serious consideration$
B'n< $or Intern'tion'% Sett%e!ent/ Ann*'% Re+ort 2@@A/ +@1,
I6STITUTIO6AL I6VESTOR5
0n institutional investor is an investor, such as a ban!, insurance company, retirement fund,
hedge fund, or mutual fund that is financially sophisticated and ma!es large investments,
often held in very large portfolios of investments. Because of their sophistication,
institutional investors may often participate in private placements of securities, in which
certain aspects of the securities laws may be inapplicable.
TYPES OF I6STITUTIO6AL I6VESTORS
26
FOREIG6 I6STITUTIO6AL I6VESTOR "FII#
Foreign Institutional Investor is used to denote an investor - mostly of the form of an
institution or entity, which invests money in the financial mar!ets of a country different from
the one where in the institution or entity was originally incorporated.FII investment is
fre5uently referred to as hot money for the reason that it can leave the country at the same
speed at which it comes in. In countries li!e India, statutory agencies li!e ,6BI have
prescribed norms to register FIIs and also to regulate such investments flowing in through
FIIs.
Uension Funds
UFutual Funds
UInvestment &rust
UInsurance or reinsurance companies
U6ndowment Funds
U+niversity Funds
UFoundations or :haritable &rusts or :haritable ,ocieties
U0sset Fanagement :ompanies
U<ominee :ompanies
UInstitutional ortfolio Fanagers
U&rustees
Uower of 0ttorney 2olders
UBan!
DOMESTIC I6STITUTIO6AL I6VESTOR
Institutional
Investors
Institutional
Investors
FE?6I7<
I<,&I&+&IE<09
I<R6,&E? "FII#
FE?6I7<
I<,&I&+&IE<09
I<R6,&E? "FII#
DEF6,&I:
I<,&I&+&IE<09
I<R6,&E?
DEF6,&I:
I<,&I&+&IE<09
I<R6,&E?
Developmental
Financial
Institution
Developmental
Financial
Institution
Insurance
:ompanies
Insurance
:ompanies
Ban!s
Ban!s
0sset
Fanagement
:ompanies
0sset
Fanagement
:ompanies
27
Domestic Institutional Investor is used to denote an investor - mostly of the form of an
institution or entity, which invests money in the financial mar!ets of its own country where
the institution or entity was originally incorporated. In India, there are broadly four types of
institutional investors.
2 DEVELOPME6TAL FI6A6CIAL I6STITUTIO6
Developmental Financial Institutions li!e Industrial Finance :orporation of India "IF:I#,
Industrial :redit and Investment :orporation of India "I:I:I#, Industrial Development Ban!
of India "IDBI#, the ,tate Financial :orporations, etc. &he role played by these financial
institutions "FIs# is to extend funds to the companies for both long term financing and "more
recently# wor!ing capital financing. &he financial institutions extend both debt and e5uity
financing to their nominee directors in the companies.
- I6SURA6CE COMPA6IES
Insurance :ompanies li!e the 9ife Insurance :orporation "9I:#, 7eneral Insurance
:orporation "7I:#, and their subsidiaries, provide insurance to their customer in lieu of
premium paid.
B BA68S
6arlier ban!s used to finance only the wor!ing capital of the companies. But now they are
also extending long-term finance to the companies.
C ASSET MA6AGEME6T COMPA6IES
0sset management companies include all the wor!ing in the sector of mutual funds. &he
mutual funds collect funds from both individuals and corporate to invest in the financial
assets of other companies. In India, the mutual funds participate largely in the e5uity capital
of the companies. &he mutual fund industry which is the ma3or institutional investors in
India started in $%C* with the formation of +nit &rust of India, at the initiative of the
7overnment of India and ?eserve Ban!.
28
Foreign Institutional Investors "FIIs# are allowed to invest in the primary and secondary
capital mar!ets in India through the portfolio investment scheme "I,# administered by the
?eserve Ban! of India "?BI#. +nder this scheme, FIIs can ac5uire sharesOdebentures of
Indian companies through the stoc! exchanges in India. &he ceiling for overall investment
by FIIs is (. per cent of the paid up capital of the Indian company "() per cent in the case of
public sector ban!s, including the ,tate Ban! of India#. &he ceiling of (. per cent for FII
investment can be raised sub3ect to "i# approval by the company4s board and the passing of a
special shareholder resolution to that effect "ii# certain sector caps imposed by ?BI and the
7overnment of India. &he ?BI monitors the ceilings on FII investments in Indian companies
on a daily basis and publishes a list of companies allowed to attract investments from FIIs
with their respective ceilings. Figure . illustrates the dramatic increase in net portfolio
e5uity flows to India over the period ())(-())A, and especially over the bull rally that
climaxed in 'anuary ())/ when the ,ensex reached a lifetime high of ($,()C.AA points. FIIs
invested +,-$A billion in Indian stoc!s in ())A. 2owever, the onset of the current global
economic crisis saw FIIs pulling out a record -$* billion "?s CA,.A)# in ())/, the largest
outflows since India opened its doors to FIIs $B years ago. In ())% so far, FIIs have sold
another +,-(.$ billion worth of Indian stoc!s. &he :hildren4s Investment Fund
Fanagement "&:I# "a +;-based hedge fund# accounts for about $) per cent of this sum,
ma!ing it the single-largest seller of Indian stoc!s among FIIs. &he hedge fund registered its
biggest annual loss in ())/ and is li5uidating its investments in India at a steep discount to
the prices at which it bought the stoc!s last year. FII ownership in Indian stoc!s has now
fallen to $B.B per cent, a level last seen in December ())* in the early days of the bull
mar!et. :iti analysts estimate the value of FII ownership in Indian stoc!s to be about +,-%.
billion "?s ./. crore#. Deutsche Ban! 07 has shown the most confidence in Indian firms
during the difficult conditions of ())/. &he ban! remained the top holder of Indian stoc!s
among FIIs in ())/. &hough the value of its investment fell sharply due to the massive
decline in stoc! prices, it actually invested in more firms in ())/ than ())A. Deutsche Ban!
and its affiliates hold ?s $C,*...AA crore "+,-*.. billion# in Indian e5uities. 2,B: and
:itigroup own the second and third largest portfolios "&able C#. Deutsche Ban! is the only
FII that has increased its number of firms in its portfolio - from /. in ())A to // in ())/.
To+ B FII in In)i' 3( AUM 't t&e en) o$ -..A "o*rce5 ;;;,%ive!int,co!#
FII PRI ign'tor( ED*it( Ho%)ing 6o, o$ co!+'nie in
+ort$o%io
R crore US0 !i%%ion -..A -..E
Deutsche Ban! U $C,*.B *,*BC // /.
2,B: U $),.)) (,$*B %( $(C
:itigroup /,**A $,A$( $$( $/)
TOTAL B1/.A- E/-.B
PORTRAYAL
29
ADR i*e) 3( BRIC co!+'nie ")'t' ' o$ M'rc& 2F/ -..@#
Econo!( 6o, o$ co!+'nie i*ing
ADR
O;ner&i+ v'%*e USD
!i%%ion
G o$ BRIC
tot'%
Bra1il $)$ A(,(.( *%>
?ussia $$B C.,A)% *B>
India $.* $*,BBA A>
:hina $B/ *B,A.$ $%>
TOTAL 2AF/-C@
Source% www.adr.com
&hese 8top *4 FIIs have total e5uity holdings of approximately +,-A.( billion, or about / per
cent of the +,-%. billion total stoc! of FII investment estimated by :iti. Ether leading FIIs
include Morg'n St'n%e(/ Merri%% L(nc& C'+it'% M'r<et/ CLSA Ai'>P'ci$ic/ Go%)!'n
S'c& Invet!ent M'*riti*/ JPMorg'n C&'e/ UBS Sec*ritie Ai' 'n) Forti
Invet!ent M'n'ge!ent. International investors can also invest in Indian companies
through 0merican Depository ?eceipts "0D?s# that are traded on the <D,6 or other +,
mar!ets. $.* Indian companies issue 0D?s, with a total ownership value of +,-$*.C billion
"&able A#. &he (B largest such 0D?s are listed in &able / and have a total value of +,-$$
billion: the leading issuers of 0D?s include Infosys, I:I:I and 2DF:. ,even companies in
this list are in the current ,@ 6,7 India Index portfolio. &able % identifies some of the
main +, and non-+, investors that hold the 0D?s of Indian companies. Investors include:
8e( invetor in In)i'n ADR "o*rce5 ')r,co!#
TOP 2. HOLDERS OF I6DIA6
ADR
V'%*e
"US0 !#
G o$ +ort$o%io Fi%ing )'te
Barclays 7lobal Investors, <.0. +, $,.(..(( ).(% 'an-*$-())%
Fodi "Dogendra ;umar # +; $,**(./* $)).)) Ect-)A-())/
9 'aiswal @ ,ons vt. 9td. India *)$./C %A.$* Far-*$-())/
'.. Forgan Investment
Fanagement Inc.
+, (A$.AC ).*. Dec-*$-())/
Fidelity Fanagement @ ?esearch +, (*%./A ).)C 'an-*$-())%
'ennison 0ssociates 99: +, ($%.C$ ).BA 'an-*$-())%
9I: Futual Fund 0sset
Fanagement :ompany
India ()$.$B $.)( Far-*$-())/
&ata ,ons, 9td. India ()).B (B..* Far-*$-())/
:hina International Fund
Fanagement :o., 9td.
:hina $/B.A/ (.%* 'un-*)-())/
EppenheimerFunds, Inc. +, $/(./B ).(/ Dec-*$-())/
TOTAL C/1F.,CB
To+ 2. U M*t*'% F*n) Ho%)er O$
In)i'n ADR
V'%*e
"US0 !#
G o$ +ort$o%io Fi%ing )'te
i,hares F,:I 6merging Far!ets +, $,$*$.(. C.*/ 'an-*$-())%
30
Index Fund
Eppenheimer Developing Far!ets
Fund
+, $)%.B* (..$ <ov-*)-())/
Dodge @ :ox International ,toc!
Fund
+, /(.A/ ).*. Dec-*$-())/
0rtisan International Fund +, B/.AC ).AC Dec-*$-())/
2arbor :apital 0ppreciation Fund +, BC..* $.)) Dec-*$-())/
Fidelity Diversified International
Fund
+, .C../ ).$% 'an-*$-())%
i,hares F,:I 0ll :ountry 0sia 6x
'apan Ind Fund
+, .C.)% %.%( Dec-*$-())/
'anus :ontrarian Fund +, .(.$$ $.$. Ect-*$-())/
Ranguard 6merging Far!ets ,toc!
Index Fund
+, .)./. ).** Ect-*$-())/
DF0 6merging Far!ets Ralue
Fund Inc.
+, .)./* $.)B Ect-*$-())/
TOTAL 2/F11,.@
TOP 2. 6O6>US MUTUAL FU6D
HOLDERS OF I6DIA6 ADR
V'%*e
"US0 !#
G o$ +ort$o%io Fi%ing )'te
:hina International 0sia acific
0dvantage ,toc! F
:hina $/B.A/ A.C( 'un-*)-())/
'Forgan Funds - 'F India Fund
2ong
;ong
$B)./. C..% 'un-*)-())/
?aiffeisen 6uroasien 0!tien 0ustria $.$.*$ $*... 'ul-*$-())/
2,B: 7lobal Investment Fund
Indian 65uity Fund
,ingapore $*(..A *.C. ,ep-*)-())/
DI& Fonds 666 7ermany %*.(B B.() Fay-*$-())/
i,hares F,:I 6merging Far!ets +; //.)) C.CB Feb-(%-())/
'Forgan Investment Fd 'F 0sia
ex-'apan Fund
,ingapore /*./% /.)$ 'un-*)-())/
Blac!roc! India ,toc! Fund 'apan A%.A$ A.$C Dec-$)-())A
'Forgan Funds - 6merging
Far!ets 65uity Fund
+; C%.($ $.)C 'un-*)-())/
I<7 '.. Forgan 6merging
Far!ets 65uity
+; C%.). $).C) Dec-*$-())/
TOTAL 2/.@B,1
31
SOURCES OF FII I6 I6DIA5
&he sources of these FII flows are varied. &he FIIs registered with ,6BI come from as many
as (/ countries "including money management companies operating in India on behalf of
foreign investors#. +,-based institutions accounted for slightly over .$>= those from the
+; constitute about ()> with other Hestern 6uropean countries hosting another $A> of the
FIIs. It is, however, instructive to bear in mind that these national affiliations do not
necessarily mean that the actual investor funds come from these particular countries. 7iven
the significant financial flows among the industrial countries, national affiliations are very
rough indicators of the 8home4 of the FII investments. In particular institutions operating
from 9uxembourg, :ayman Islands or :hannel Islands, or even those based at ,ingapore or
2ong ;ong are li!ely to be investing funds largely on behalf of residents in other countries.
<evertheless, the regional brea!down of the FIIs does provide an idea of the relative
importance of different regions of the world in the FII flows.
32
FII REGISTERED I6 I6DIA5
India opened its stoc! mar!ets to foreign investors in ,eptember $%%( and has, since $%%*,
received considerable amount of portfolio investment from foreigners in the form of Foreign
Institutional Investor4s "FII# investment in e5uities. &his has become one of the main
channels of portfolio investment in India for foreigners. In order to trade in Indian e5uity
mar!ets, foreign corporations need to register with the ,6BI as Foreign Institutional Investor
"FII#. ,6BI4s definition of FIIs presently includes foreign pension funds, mutual funds,
charitable, endowment university fund4s etc. as well as asset management companies and
other money managers operating on their behalf
&he sources of these FII flows are varied .&he FIIs registered with ,6BI come from as many
as (/ countries"including money management companies operating in India on behalf of
foreign investors#.+, based institutions accounted for slightly over .$> those from the +.;
constitute about ()> with other Hestern 6uropean countries hosting another $A> of the
FIIs. ortfolio investment flows from industrial countries have become increasingly
important for developing countries in recent years. &he Indian situation has been no
different. 0 significant part of these portfolio flows to India comes in the form of FII4s
investments, mostly in e5uities. 6ver since the opening of the Indian e5uity mar!ets to
foreigners, FII investments have steadily grown from about ?s.(C)) crores in $%%* to over
?s.(A($CB crores till the end of Feb ())/.
9et4s loo! at some of the data to get an idea about the trend of FIIs in India, and also to see
the future direction of their movement. India had B(/ FIIs were registered with ,6BI by end
of ())$ and by end of Feb-())/ the number increased to$*)*. &he trend in the number of
registered FIIs has been consistently on the rise as can be seen from the table= showing the
significant amount of confidence that Indian :apital mar!et has developed in the last few
years. <ot only has been the number increasing on a consistent basis, but the amount of
inflow into Indian mar!et has also seen a manifold increased. &he gross purchase, sales and
net investment figure on an annual basis gives a fair idea about the consistency of their
investments in our country.
0s we can see in the investment trends table, except for $%%/, the net investment by the FIIs
in the Indian mar!et has always been positive since liberali1ation which to a large extent
tells about the consistency of their presence in Indian mar!et. &his is also evident from the
fact that the number of FII registering in India is increasing in spite of the fact that ,6BI has
declined to issue any further < notes and also as!ed them to get registered.
&his shows that India still remains the hot spot for the foreign investors in the coming years.
33
6EED OF FOREIG6 I6STITUTIO6AL I6VESTME6T
$
2, I6FRASTRUCTURE RE6E?AL
&o !eep the Indian economy growing the infrastructure sector li!e power, transport, mining
@ metallurgy, textiles, housing, retail, social welfare, medical etc. has to be upgraded. 0fter
the 6nron fiasco, it is difficult to persuade anybody in the west to ta!e interest in any of
these sectors. 2ence India is left to its own devices to raise money and build this sector.
Borrowing abroad supplemented with Indian resources is the only way open to India. &his
upgrade is needed prior or in step with the industrial and service exports sector growth. It
has to be placed on a higher priority. Enly recently a suggestion to use a small portion of
India4s foreign reserves met with howl of protests. &he protestors in the Indian arliament
did not understand the proposal. 2ence the government is stuc! to steam roller its proposal
through the legislative process or succumb to political pressure and do nothing. &he latter is
not acceptable.
If India finds its own -. Billion a year for infrastructure then foreign investors will !ic! in
another similar portion. &he resulting money will very 5uic!ly rebuild the now cumbersome
infrastructure.
-, BRIDGE THE TECH6OLOGICAL GAP
34
Developing countries has a very low level of technology. &heir technology is not up to the
standards and they lac! in modern technology. Developing countries possess a strong urge
for industriali1ation to develop their economies and to wriggle out of the low-level
e5uilibrium trap in which they are caught. &his raises the necessity for importing
technologies from advanced countries. ,uch technology usually comes with foreign capital.
B, OPTIMUM UTILIHATIO6 OF RESOURCES
0 number of developing countries possess huge mineral resources which are. untapped and
unexploited. Due to lac! of technology these countries are not able to use their resources to
the fullest. 0s a result they have to depend on the foreign investment with the help of which
technology of the country and that will ultimately lead to the optimum utili1ation of the
resources. India has very huge reserves of mineral resources and to optimi1e their use or
rather for extracting them efficiently and effectively modern technology is re5uired which is
possible through foreign investment.
C, BALA6CI6G THE BALA6CE OF PAYME6T POSITIO6
In the initial phase of economic development, the under developing countries need much
larger imports. 0s a result the balance of payment position generally turns adverse. &his
creates gap between earnings and foreign exchange. &he foreign capital presents short run
solution to the problem. ,o in order to balance the Balance Ef ayment Foreign Investment
is needed.
1, DEVELOP THE DIVERSE MAR8ET
&he Indian mar!et is widely diverse. &he country has $A official languages, C ma3or
religions, and ethnic diversity as wide as all of 6urope. &hus, tastes and preferences differ
greatly among sections of consumers.
&herefore, it is advisable to develop a good understanding of the Indian mar!et and overall
economy before ta!ing the plunge. ?esearch firms in India can provide the information to
determine how, when and where to enter the mar!et. &here are also companies which can
guide the foreign firm through the entry process from beginning to end --performing the
re5uisite research, assisting with configuration of the pro3ect, helping develop Indian
partners and financing, finding the land or ready premises, and pushing through the
paperwor! re5uired.
MAJOR GLOBAL PLAYERS I6 I6DIA
35
DEUTSCHE GROUP5
DH, Investments part of Deutsche 0sset Fanagement, was founded in $%BC in
Fran!furtOFain. Hith fund assets under management of euro (CA billion, the company is one
of the &op $) companies worldwide. In 6urope, DH, is one of the leading mutual fund
companies and currently manages euro $A* billion. 0fter having of more than euro $.A
billion assets under management, DH, represents ((, *> of the fund mar!et in 7ermany/
ma!ing it the unchallenged number one. &he International nature of its business
differentiates DH, significantly from its domestic and international competitors. DH,
Investments4 activities span all the !ey 6uropean mar!ets. In the +,0, DH, is represented
by DH, ,cudder and manages assets of euro /C bn. In spring ())C, it launched its first
funds as well as the DH, brand in ,ingapore and India, continuing its successful expansion
in the 0sia-acific region, &hereafter, more funds were registered in other countries in 0sia-
acific.
CITIGROUP5
&he formation of :itigroup in $%%/ created a new model of financial services organi1ation
to serve its clients4 financial needs. 0s the company continues to grow and evolve, it4s
increasingly evident that such a large, complex grouping of businesses can indeed succeed.
Hith (AB,))) employees wor!ing in more than $)) countries and territories, :itigroup4s
globality and diversity contribute to its continued success.
HSBC GLOBAL I6VESTME6TS5
2,B: Investments is one of the worldJs premier fund management organi1ations. It has
established a strong reputation with institutional investors including corporations,
36
governments, insurance companies and charities the world over for delivering consistently
superior returns. In India we offer fund management services for institutional as well as
retail investors. Eur array of products includes 65uity Funds Income ODebt Funds.
MORGA6 STA6LEY 7CO I6TER6ATIO6AL LTD5
Forgan ,tanley is a global financial services firm and a mar!et leader in securities,
investment management and credit services. It has more than C)) offices in (A countries and
manages -.($ billion in assets for institutional and individual clients around the world.
,tanley Investment Fanagement "F,IF#, the asset management company of Forgan
,tanley was established in $%AB. Forgan ,tanley entered Indian mar!et in $%/% with the
launch of India Fagnum Fund. In $%%., Forgan ,tanley launched Forgan ,tanley 7rowth
Fund "F,7F#. It is one of the largest private sector schemes investing in e5uities.
DSP MERRILL LY6CH5
D, Ferrill 9ynch Futual Funds are managed by D, Ferrill 9ynch Fund Fanagers. D,
Ferrill 9ynch 9td. "D,F9# is a premier financial services provider and Ferrill 9ynch
"F9# holds %)> sta!e in D,F9. D,F9 was originally called D, Financial :onsultants
9td. &he firm traces its origins to D. ,. urbhoodas @ :o., a securities and bro!erage firm
with over $.) years of experience in the Indian mar!et. Ferrill 9ynch is one of the worldJs
leading wealth management, capital mar!ets and advisory companies with offices in *A
countries and territories and total client assets of approximately -$.B trillion.
THE GOLDMA6 SACHS GROUP/ I6C
37
&he 7oldman ,achs 7roup, Inc. is a ban! holding company that engages in investment
ban!ing, securities dealing, investment management and other financial services primarily
with institutional clients. 7oldman ,achs was founded in $/C%, and is head5uartered in the
9ower Fanhattan area of <ew Dor! :ity at /B Broad ,treet and has its secondary office at
*) 2udson ,treet, 'ersey :ity, <ew 'ersey. &he firm has offices in some financial centers
and acts as a financial advisor and money manager for corporations, governments, and
wealthy families around the world. 7oldman is a ma3or dealer in securities, offers its clients
mergers @ ac5uisitions advice, underwriting services, asset management, and engages in
proprietary trading, and private e5uity deals. It is a primary dealer in the +.,. &reasury
securities mar!et.
Global li5uidity is, of course, the primary cause of the recent surge in 0sian mar!ets
including India. 0lso low interest rate regime has led foreign investors to loo! for fresh
avenues to invest. &his has resulted in most emerging mar!ets seeing heavy inflows. FII4s
see India as a good destination to invest in and ma!e money. &hey are happy with the Indian
governmentJs commitment to economic reforms. &hey are also loo!ing closely at sectors
"and companies within these sectors# which they thin! have potential. Infact, the growing
competitiveness of Indian companies is an enticing factor.
LO6G>TERM CAPITAL GAI6S TAX:
&he tax an investor has to pays when he sells his shares after more than a year has been
abolished= so one can sell his shares without having to pay the government any !ind of tax.
RUPEE APPRECIATIO65
&he dollar has been falling in value vis-V-vis other currencies. 0s a result, FIIs don4t find the
thought of investing in the +, mar!et all that attractive. &hey !now they will ma!e more
money if they invest elsewhere.
REASO6 FOR GRO?TH I6 FII
38
ECO6OMIC GRO?TH5
0s mentioned earlier we witnessed a 7D growth rate of about /.B> last year. Eur
industries li!e &elecom, Ban!ing etc are doing relatively well. 0ll these ma!e our country
very attractive to invest in. &he sheer si1e of India and the relative stability the country
offers are other obvious plus points. Hhatever the case may be, a perception is gaining
momentum that foreign investors are here to stay at least in the short-term.
T
he role of foreign investment over the years can4t be ignored. It certainly has had an impact
on the Indian stoc! mar!et with a lot of benefits but along with these benefits there are a few
costs attached with it. &herefore it is useful to summari1e the benefits and costs for India of
having foreign inflows.
BE6IFITS
A# REDUCED COST OF E=UITY
FII inflows augment the sources of funds in the Indian capital mar!ets. FII investment
reduces the re5uired rate of return for e5uity, enhances stoc! prices, and fosters investment
by Indian firms in the country. &he impact of FIIs upon the cost of e5uity capital may be
visuali1ed by as!ing what stoc! prices would be if there were no FIIs operating in India.
B# STABILITY I6 THE BALA6CE OF PAYME6T
For promoting growth in a developing country such as India, there is need to augment
domestic investment, over and beyond domestic saving, through capital flows. &he excess of
domestic investment over domestic savings result in a current account deficit and this deficit
is financed by capital flows in the balance of payments. rior to $%%$, debt flows and
official development assistance dominated these capital flows. &his mechanism of funding
FII5 A COST BE6EFIT A6ALYSIS
39
the current account deficit is widely believed to have played a role in the emergence of
balance of payments difficulties in $%/$ and $%%$. ortfolio flows in the e5uity mar!ets, and
FDI, as opposed to debt-creating flows, are important as safer and more sustainable
mechanisms for funding the current account deficit.
C# 86O?LEDGE FLO?S
&he activities of international institutional investors help strengthen Indian finance. FIIs
advocate modern ideas in mar!et design, promote innovation, development of sophisticated
products such as financial derivatives, enhance competition in financial intermediation, and
lead to spillovers of human capital by exposing Indian participants to modern financial
techni5ues, and international best practices and systems.
D# STRE6GTHE6I6G CORPORATE GOVER6A6CE
Domestic institutional and individual investors, used as they are to the ongoing practices of
Indian corporate, often accept such practices, even when these do not measure up to the
international benchmar!s of best practices. FIIs, with their vast experience with modern
corporate governance practices, are less tolerant of malpractice by corporate managers and
owners "dominant shareholder#. FII participation in domestic capital mar!ets often lead to
vigorous advocacy of sound corporate governance practices, improved efficiency and better
shareholder value.
E# IMPROVI6G MAR8ET EFFICIE6CY
0 significant presence of FIIs in India can improve mar!et efficiency through two channels.
Firt/ when adverse macroeconomic news, such as a bad monsoon, unsettles many domestic
investors, it may be easier for a globally diversified portfolio manager to be more
dispassionate about IndiaJs prospects, and engage in stabili1ing trades.
Secon)/ at the level of individual stoc!s and industries, FIIs may act as a channel through
which !nowledge and ideas about valuation of a firm or an industry can more rapidly
propagate into India. For example, foreign investors were rapidly able to assess the potential
of firms li!e Infosys, which are primarily export-oriented, applying valuation principles that
prevailed outside India for software services companies.
COSTS
A# HEDGI6G A6D POSITIVE FEEDBAC8 TRAI6I6G
&here are concerns that foreign investors are chronically ill informed about india, and this
lac! of sound information may generate herding "a large number of FIIs buying or selling
together# and positive feedbac! "buying after positive returns, selling after negative
40
returns#.&hese ;inds of behavior can exacerbate volatility ,and push prices away from fair
values.
B# BALA6CE OF PAYME6T VUL6ERABILITY
&here are concerns that in an extreme event, there can be a massive flight of foreign capital
out of India, triggering difficulties in the balance of payments front. IndiaJs experience with
FIIs so far, however, suggests that across episodes li!e the o!hran blasts, or the ())$ stoc!
mar!et scandal, no capital flight has ta!en place. 0 billion or more of +, dollars of portfolio
capital has never left India within the period of one month. Hhen 3uxtaposed with IndiaJs
enormous current account and capital account flows, this suggests that there is little
vulnerability so far.
C# POSSIBILITY OF TA8EOVERS
Hhile FIIs are normally seen as pure portfolio investors, without interest in control,
portfolio investors can occasionally behave li!e FDI investors, and see! control of
companies that they have a substantial shareholding in. ,uch outcomes, however, may not
be inconsistent with IndiaJs 5uest for greater FDI. Furthermore, ,6BIJs ta!eover code is in
place, and has functioned fairly well, ensuring that all investors benefit e5ually in the event
of a ta!eover.
After the initiation of economic reforms in the early $%%)s, the movement of foreign capital
flow increased very substantially. &here are a lot of factors that determine the nature and
cause of foreign institutional investment in a country a few of them being inflation exchange
rate e5uity returns, government policies, price earring ratio and ris!. <ow if we try to
analy1e the relation of each of these factors with the level of foreign inflow in the country,
we might have a better understanding. let us broadly classify the factors into inflation, ris!
and stoc! mar!et returns and understand the basic principle behind the inflows.
A# E=UITY RETUR6S
0n increase in the return in the foreign mar!et will induce investors to withdraw from the
Indian "domestic# stoc! mar!et to invest in the foreign mar!et. Investors are believed to
follow a higher return, hence when the return in the domestic mar!et increases, FII flows to
the domestic mar!et. Hhile the flows are highly correlated with e5uity returns in India, they
are more li!ely to be the effect than the cause of these returns. . It is assumed that the e5uity
returns have a positive impact on the FII inflow but foreign investors can also get involved
in profit boo!ing. &hey can buy financial assets when the prices are declining, there by
3ac!ing-up the asset prices and sell when the asset prices are increasing and hence be the
cause of such returns so ma!ing it more of a bi-directional relationship.
DETERMI6A6TS OF FII
41
B# RIS8
Investors are considered to be ris! averse, hence when ris! in the domestic mar!et increases
they will withdraw from the domestic mar!et, when ris! in the foreign mar!et increases,
investors will withdraw from the foreign mar!et and invest in the Indian "domestic# mar!et.
Investments, either domestic or foreign, depend heavily on ris! factors. 2ence, while
studying the behavior of FII, it is important to consider the ris! variable. ?is! can be divided
into ex-ante and unexpected ris!. Hhile the ex-ante ris! certainly has an inverse relation
with the foreign investment nothing can be clearly said about the unexpected ris!.
C# I6FLATIO6
&he inflation no doubt has an inverse relation with the foreign investment inflow as the
investor would !eep in mind the purchasing power of the funds invested and as inflation
increase i.e. the purchasing power declines the investor is most li!ely to withdraw his
money.
Hhen inflation in the domestic country increases, the purchasing power of the funds
invested declines, hence investors will withdraw from the domestic mar!et. ,imilarly, when
inflation in the foreign country increases, the purchasing power of funds invested in the
foreign country declines, causing institutional investors to withdraw from the foreign mar!et
and ma!e investment in the domestic "Indian# mar!et.
D# EXCHA6GE RATE
Hhen the value of the home currency is stronger the FII investments will also increase as the
percentage of returns the FII get automatically increases and visa versa ,o it can be said that
the inflation and ris! in the domestic country and return in the foreign country adversely
affect the FII flowing to the domestic country, whereas inflation and ris! in the foreign
country and return in the domestic country have a favorable effect on the flow of FII.
42
As the Indian capital mar!et opened its gates for the foreign institutional investors with
time there has been an increasing trends of there participating in the capital mar!et. Hith
there increasing participation there has been a lot of effect on many parameters of the Indian
capital mar!et. &he ma3or effect of the increasing participation of the institutional investors
has been observed in the following areas.
LI=UIDITY5
M'r<et %iD*i)it( is a business, economics or investment term that refers to an assetJs ability
to be easily converted through an act of buying or selling without causing a significant
movement in the price and with minimum loss of value. 0n act of exchange of a less li5uid
asset with a more li5uid asset is called %iD*i)'tion.
LiD*i)it( also refers both to that 5uality of a business which enables it to meet its payment
obligations, in terms of possessing sufficient li5uid assets= and to such assets themselves.
0 li5uid asset has some or more of the following features.
It can be sold "$# rapidly, "(# with minimal loss of value, "*# anytime within mar!et hours.
&he essential characteristic of a li5uid mar!et is that there are ready and willing buyers and
sellers at all times. 0n elegant definition of li5uidity is also the probability that the next trade
is executed at a price e5ual to the last one. 0 mar!et may be considered deeply li5uid if there
are ready and willing buyers and sellers in large 5uantities. &his is related to a mar!et depth,
ROLE OF FII I6 CAPITAL MAR8ET I6 I6DIA
43
where sometimes orders cannot strongly influence prices. &he li5uidity of a product can be
measured as how often it is bought and sold= this is !nown as volume. Eften investments in
li5uid mar!ets such as the stoc! exchange or futures mar!ets are considered to be more
li5uid than investments such as real estate, based on their ability to be converted 5uic!ly.
PRICE BUILDI6G MECHA6ISM5
Hith the increasing participation of the institutional investors in the capital mar!et, it has
also helped the different companies to raise funds for there use through the capital mar!et in
India. 6arlier the companies use to go for debt financing which a cost has attached to it and
also in those days the cost of issuing an IE was higher as compared to the funds that were
being generated by the companies. Hith the help of FII the mar!et has become more
competitive fair value of their.
ROLE OF SPECULATIO65
7enerally people transact for three reasons hedging speculating and arbitraging 2edgers are
those to intend to hedge their ris!. ,peculation may be defined as the purchase or sale of a
good with a view to resale or repurchase at a later date, where the motive behind such action
is the expectation of changes in the prices.
,peculation is one of the most watched activity in any capital mar!et its importance varies in
different countries in countries li!e in +, it forms an integral part of the mar!et whereas in
developing countries li!e India its ta!en as a threat. It is often believe that speculators even
out the price fluctuation by due to change in demand and supply condition but the concerns
about the adverse effects of speculation come from two sources. First, the possibility that
speculation, instead of evening out price fluctuations, may end up exacerbating such
fluctuations. ,econd, is the problem of speculation destabili1ing rather than stabili1ing
prices and hence affecting resource allocation. &hrough speculation, future expected price
not only depends on, but also has an impact on the spot price.
&he mar!et for shares is sub3ect to much larger fluctuations than the mar!et for bonds or
even commodities. ,hares represent a share in the expected future profits of a company.
Hhen fortunes of companies M both in the short run as well as in the medium to long run M
fluctuate, so do share prices. +ncertainty regarding the future leads to heavy discounting of
future profits, and to focus on short-period expectations about capital value rather than long-
period prospects of the company. &he effect of foreign speculative activity in emerging
mar!ets can be particularly beneficial if in the emerging mar!et, li5uidity is poor
First, the potential of mar!et manipulation is acute in small emerging mar!ets and li5uidity
is often poor. 0lthough there are many policy initiatives that could increase li5uidity and
reduce the degree of collusion among large traders, there may not be a sufficient mass of
domestic speculators to ensure mar!et li5uidity and efficiency. ,econd, opening the mar!et
to foreign speculators may increase the valuation of local companies, thereby reducing the
cost of e5uity capital.
VOLATILITY5
44
Rolatility most fre5uently refers to the standard deviation of the change in value of a
financial instrument with a specific time hori1on. It is often used to 5uantify the ris! of the
instrument over that time period. Rolatility is typically expressed in annuali1ed terms, and it
may either be an absolute number "-B# or a fraction of the mean "B>#.
Rolatility is often viewed as a negative in that it represents uncertainty and ris!. 2owever,
volatility can be good in that if one shorts on the pea!s, and buys on the lows one can ma!e
money, with greater money coming with greater volatility. &he possibility for money to be
made via volatile mar!ets is how short term mar!et players li!e day traders hope to ma!e
money, and is in contrast to the long term investment view of buy and hold. In todayJs
mar!ets, it is also possible to trade volatility directly, through the use of derivative securities
such as options and variance swaps. Foreign institutional investment is certainly volatile in
nature and its volatility has certainly posed some threats to the Indian stoc! mar!et
considering its influence on the mar!et. 7iven the presence of foreign institutional investors
in ,ensex companies and their active trading behavior, small and periodic shifts in their
behavior lead to mar!et volatility. ,uch volatility is an inevitable result of the structure of
India4s financial mar!ets as well. Far!ets in developing countries li!e India are thin or
shallow in at least three senses. First, only stoc!s of a few companies are actively traded in
the mar!et. &hus, although there are more than /,))) companies listed on the stoc!
exchange, the B,6 ,ensex incorporates 3ust *) companies, trading in whose shares is seen
as indicative of mar!et activity. ,econd, of these stoc!s there is only a small proportion that
is routinely available for trading, with the rest being held by promoters, the financial
institutions and others interested in corporate control or influence. 0nd, third the number of
players trading these stoc!s is also small.
In such a scenario investment by the foreign institutional investors leads to a sharp price
increase this provides incentives to FII investment and enhances investment and when the
correction in the stoc! prices begins it would have to be a pull out by the FII and can result
in sharp decline in the prices. &he other reason for volatility is that the foreign institutional
investors are attracted to a mar!et by the expectation of price increase that tend to be
automatically reali1ed, the inflow of foreign capital can result in an appreciation of the rupee
vis-V-vis the dollar &his increases the return earned in foreign exchange, when rupee assets
are sold and the revenue converted into dollars. 0s a result, the investments turn even more
attractive triggering an investment spiral that would imply a sharper fall when any correction
begins. 0part from that the growing reali1ation by the FIIs of the power they wield in what
are shallow mar!ets, encourages speculative investment aimed at pushing the mar!et up and
choosing an appropriate moment to exit. &his manipulation of the mar!et would certainly
enhance the volatility and in volatile mar!ets even the domestic investors try to manipulate
the mar!et when the prices are really high. Everall the foreign institutional investors have
been bullish on the Indian stoc!s but the problem is that this bullish nature might be a result
of the activities outside the Indian mar!et it might be due to the performance of their e5uity
mar!et or their non e5uity returns. &herefore they see! out for best returns and diversified
geographical portfolio in order to hedge their ris! and when they ma!e some ad3ustments in
their portfolio and ma!e shifts in favor or against a country it borings about sharp changes.
45
POLICY 7
GUIDELI6ES
POLICY FRAME?OR8
DESCRIPTIO6 OF FII
GLOBAL PLAYERS I6 I6DIA
REASO6 FOR GRO?TH I6 FII
6EED OF FOREIG6 I6VESTME6TS
46
The policy framework for permitting FII investment was provided
under the Government of India guidelines vide Press Note date
September 14 1!!"# $he guidelines formulated in this regard were as
follows%
1) Foreign Instittional Investors !FIIs) in"l#ing instittions s"h as $ension
Fn#s% &tal Fn#s% Invest'ent Trsts% Asset &anage'ent (o')anies%
*o'inee (o')anies an# In"or)orate#+Instittional $ort,olio &anagers or their
)o-er o, attorney hol#ers !)rovi#ing #is"retionary an# non.#is"retionary
)ort,olio 'anage'ent servi"es) -ol# /e -el"o'e to 'a0e invest'ents n#er
these gi#elines1
2) FIIs -ol# /e -el"o'e to invest in all the se"rities tra#e# on the $ri'ary
an# 2e"on#ary 'ar0ets% in"l#ing the e3ity an# other se"rities+instr'ents
o, "o')anies -hi"h are liste#+to /e liste# on the 2to"0 45"hanges in In#ia
in"l#ing the 6T( 45"hange o, In#ia1 These -ol# in"l#e shares% #e/entres%
-arrants% an# the s"he'es 7oate# /y #o'esti" &tal Fn#s1 8overn'ent
-ol# even li0e to a## ,rther "ategories o, se"rities later ,ro' ti'e to ti'e1
3) FIIs -ol# /e re3ire# to o/tain an initial registration -ith 2e"rities an#
45"hange Boar# o, In#ia !24BI)% the no#al reglatory agen"y ,or se"rities
'ar0ets% /e,ore any invest'ent is 'a#e /y the' in the 2e"rities o, "o')anies
liste# on the 2to"0 45"hanges in In#ia% in a""or#an"e -ith these gi#elines1
*o'inee "o')anies% a9liates an# s/si#iary "o')anies o, a FII -ol# /e
treate# as se)arate FIIs ,or registration% an# 'ay see0 se)arate registration
-ith 24BI1
POLICY FRAME?OR8
47
4) 2in"e there -ere ,oreign e5"hange "ontrols in ,or"e% ,or varios )er'issions
n#er e5"hange "ontrol% along -ith their a))li"ation ,or initial registration% FIIs
-ere also s))ose# to fle -ith 24BI another a))li"ation a##resse# to :BI ,or
see0ing varios )er'issions n#er F4:A% in a ,or'at that -ol# /e s)e"ife# /y
:BI ,or the )r)ose1 :BI;s general )er'ission -ol# /e o/taine# /y 24BI /e,ore
granting initial registration an# :BI;s F4:A )er'ission together /y 24BI% n#er a
single -in#o- a))roa"h1
5) For granting registration to the FII% 24BI shol# ta0e into a""ont the tra"0
re"or# o, the FII% its )ro,essional "o')eten"e% fnan"ial son#ness% e5)erien"e
an# s"h other "riteria that 'ay /e "onsi#ere# /y 24BI to /e relevant1 Besi#es%
FII see0ing initial registration -ith 24BI -ere /e re3ire# to hol# a registration
,ro' the 2e"rities (o''ission% or the reglatory organi<ation ,or the sto"0
'ar0et in the "ontry o, #o'i"ile+in"or)oration o, the FII1
6) 24BI;s initial registration -ol# /e vali# ,or fve years1 :BI;s general
)er'ission n#er F4:A to the FII -ol# also hol# goo# ,or fve years1 Both
-ol# /e rene-a/le ,or si'ilar fve year )erio#s later on1
7) :BI;s general )er'ission n#er F4:A -ol# ena/le the registere# FII to /y%
sell an# reali<e "a)ital gains on invest'ents 'a#e throgh initial "or)s
re'itte# to In#ia% s/s"ri/e+renon"e rights o=erings o, shares% invest on all
re"ogni<e# sto"0 e5"hanges throgh a #esignate# /an0 /ran"h% an# to a))oint
a #o'esti" (sto#ian ,or "sto#y o, invest'ents hel#1
8) This 8eneral $er'ission ,ro' :BI -ol# also ena/le the FII to>
a1 6)en ,oreign "rren"y #eno'inate# a""onts in a #esignate# /an01 !There
"ol# even /e 'ore than one a""ont in the sa'e /an0 /ran"h ea"h
#esignate# in #i=erent ,oreign "rren"ies% i, it is so re3ire# /y FII ,or its
o)erational )r)oses)?
/1 6)en a s)e"ial non.resi#ent r)ee a""ont to -hi"h "ol# /e "re#ite# all
re"ei)ts ,ro' the "a)ital in7o-s% sale )ro"ee#s o, shares% #ivi#en#s an#
interests?
"1 Trans,er s's ,ro' the ,oreign "rren"y a""onts to the r)ee a""ont an#
vi"e versa% at the 'ar0et rate o, e5"hange?
#1 &a0e invest'ents in the se"rities in In#ia ot o, the /alan"es in the r)ee
a""ont?
e1 Trans,er re)aira/le !a,ter ta5) )ro"ee#s ,ro' the r)ee a""ont to the ,oreign
"rren"y a""ont!s)?
,1 :e)atriate the "a)ital% "a)ital gains% #ivi#en#s% in"o'es re"eive# /y -ay o,
interest% et"1 an# any "o')ensation re"eive# to-ar#s sale+renon"e'ent o,
rights o=erings o, shares s/@e"t to the #esignate# /ran"h o, a /an0+the
"sto#ian /eing athori<e# to #e#"t -ithhol#ing ta5 on "a)ital gains an#
48
arranging to )ay s"h ta5 an# re'itting the net )ro"ee#s at 'ar0et rates o,
e5"hange?
g1 :egister FII;s hol#ings -ithot any ,rther "learan"e n#er F4:A1
9) There -ol# /e no restri"tion on the vol'e o, invest'ent 'ini'' or
'a5i''.,or the )r)ose o, entry o, FIIs% in the )ri'ary+se"on#ary 'ar0et1
Also% there -ol# /e no lo"0.in )erio# )res"ri/e# ,or the )r)oses o, s"h
invest'ents 'a#e /y FIIs1 It -as e5)e"te# that the #i=erential in the rates o,
ta5ation o, the long ter' "a)ital gains an# short ter' "a)ital gains -ol#
ato'ati"ally in#"e the FIIs to retain their invest'ents as long ter'
invest'ents1
10) $ort,olio invest'ents in )ri'ary or se"on#ary 'ar0ets -ere s/@e"t to a
"eiling o, 30A o, isse# share "a)ital ,or the total hol#ings o, all registere# FIIs%
in any one "o')any1 The "eiling -as 'a#e a))li"a/le to all hol#ings ta0ing into
a""ont the "onversions ot o, the ,lly an# )artly "onverti/le #e/entres
isse# /y the "o')any1 The hol#ing o, a single FII in any "o')any -ol# also
/e s/@e"t to a "eiling o, 10A o, total isse# "a)ital1 For this )r)ose% the
hol#ings o, an FII gro) -ol# /e "onte# as hol#ings o, a single FII1
11) The 'a5i'' hol#ings o, 24A ,or all non.resi#ent )ort,olio invest'ents%
in"l#ing those o, the registere# FIIs% -ere to in"l#e *:I "or)orate an# non.
"or)orate invest'ents% /t #i# not in"l#e the ,ollo-ing>
a1 Foreign invest'ents n#er fnan"ial "olla/orations !#ire"t ,oreign
invest'ents)% -hi"h are )er'itte# ) to 51A in all )riority areas1
/1 Invest'ents /y FIIs throgh the ,ollo-ing alternative rotes>
i1 6=shore single+regional ,n#s?
ii1 8lo/al Be)ository :e"ei)ts?
iii1 4ro "onverti/les1
12) Bisinvest'ent -ol# /e allo-e# only throgh sto"0 e5"hange in In#ia%
in"l#ing the 6T( 45"hange1 In e5"e)tional "ases% 24BI 'ay )er'it sales other
than throgh sto"0 e5"hanges% )rovi#e# the sale )ri"e is not signif"antly
#i=erent ,ro' the sto"0 'ar0et 3otations% -here availa/le1
13) All se"on#ary 'ar0et o)erations -ol# /e only throgh the re"ogni<e#
inter'e#iaries on the In#ian 2to"0 45"hange% in"l#ing 6T( 45"hange o, In#ia1
A registere# FII -ol# /e e5)e"te# not to engage in any short selling in
se"rities an# to ta0e #elivery o, )r"hase# an# give #elivery o, sol# se"rities1
14) A registere# FII "an a))oint as (sto#ian an agen"y a))rove# /y 24BI to
a"t as "sto#ian o, 2e"rities an# ,or "onfr'ation o, transa"tions in 2e"rities%
settle'ent o, )r"hase an# sale% an# ,or in,or'ation re)orting1 2"h "sto#ian
shol# esta/lish se)arate a""onts ,or #etailing on a #aily /asis the invest'ent
"a)ital tili<ation an# se"rities hel# /y ea"h FII ,or -hi"h it is a"ting as
"sto#ian1 The "sto#ian -as s))osing to re)ort to the :BI an# 24BI se'i.
annally as )art o, its #is"losre an# re)orting gi#elines1
49
15) The :BI shol# 'a0e availa/le to the #esignate# /an0 /ran"hes a list o,
"o')anies -here no invest'ent -ill /e allo-e# on the /asis o, the ))er
)res"ri/e# "eiling o, 30A having /een rea"he# n#er the )ort,olio invest'ent
s"he'e1
16) :eserve Ban0 o, In#ia 'ay at any ti'e re3est /y an or#er a registere# FII
to s/'it in,or'ation regar#ing the re"or#s o, tili<ation o, the in-ar#
re'ittan"es o, invest'ent "a)ital an# the state'ent o, se"rities transa"tions1
:eserve Ban0 o, In#ia an#+or 24BI 'ay also at any ti'e "on#"t a #ire"t
ins)e"tion o, the re"or#s an# a""onting /oo0s o, a registere# FII1
17) FIIs investing n#er this s"he'e -ill /eneft ,ro' a "on"essional ta5 regi'e
o, a 7at rate ta5 o, 20A on #ivi#en# an# interest in"o'e an# a ta5 rate o, 10A
on long ter' !one year or 'ore) "a)ital gains1
These gi#elines -ere sita/ly in"or)orate# n#er the 24BI !FIIs) :eglations%
19951 These reglations "ontine to 'aintain the lin0 -ith the govern'ent
gi#elines throgh an inserte# "lase that the invest'ent /y FIIs shol# also /e
s/@e"t to 8overn'ent gi#elines1 This lin0age has allo-e# the 8overn'ent to
in#i"ate varios invest'ent li'its in"l#ing in s)e"if" se"tors1
In <ovember $%%B, ,6BI notified the Foreign Institutional Investors ?egulations which were largely
based on the earlier guidelines issued in $%%(. &he regulations re5uire FIIs to register with ,6BI and to
obtain approval from the ?eserve Ban! of India under the &oreign E'change (egulation )ct, *+,- to
enable them buy and sell securities, open foreign currency and rupee ban! accounts and remit and
repatriate funds.
For all practical purposes, full convertibility of rupee is applicable to FII investments. 7radually, the
scope of FII operations has been expanded by permitting "a# additional categories of investors, "b#
recogni1ing other instruments in which they can invest, and "c# altering the individual and aggregate FII
shares in any one Indian company. &he latest position is that an FII "investing on its own behalf# or a
sub-account can hold up to $) per cent of paid-up e5uity capital "+:# of a company. &he total
investment by all FIIs and sub-accounts in any one company cannot exceed (. per cent of the total +:.
In companies which pass a special resolution in this regard, the total FII investment can reach up to *)
per cent of the +:. Imposition of investment ceilings, one expects, was aimed at:
FII in t&e In)i'n Stoc< E:c&'nge
50
one, preventing cornering of shares that could result in ta!e-over operations=B and two, to !eep price
fluctuations under limits. &he (. per cent limit does not include investments made by the foreign
portfolio investors outside the portfolio investment route, i.e., through the direct investment approval
process.
Investments made through purchases of 7D?s and convertibles are also excluded. For calculating the
FII investment limits, investments by <?Is and Everseas :orporate Bodies predominantly controlled by
them, which were included earlier, are no longer included for purposes of monitoring the FII investment
ceilings.C In the Budget ,peech ()))-())$ it was proposed to raise the upper limit to .) per cent.
In spite of the fact that FI has been given an important place in IndiaJs financial sector under the
liberali1ation pac!age, very few studies of the FII operations in India exist. Ene reason for this has been
the paucity of data. &he studies generally point to the positive relationship between FII investments and
movement of the Bombay ,toc! 6xchange share price index. He loo!ed at the relationship in a
somewhat different way. It has been noticed that net FII investments were lower in the fourth 5uarter in
all the years except $%%*, their first year of operations, and $%%%. &he average of B,6 ,ensex also fell in
the last 5uarter except in $%%* and $%%%. :ontrary to the expectations FII investments pic!ed up during
the last 5uarter itself after a dip in the third 5uarter of $%%%.
0verage level of ,ensex also did not decline during the last 5uarter. It does, however, appear that FIIs
buy in the first and second 5uarters following the depression created by their low activity or relative
selling pressure in the last 5uarter. &he decline, which starts in the third 5uarter, reaches the maximum in
the last 5uarter. Ene of the possible explanations for the B,6 ,ensex also declining during the last
5uarter could be that the local mar!et players loo! towards FIIs for leads. In such a situation, even with
relatively small turnovers, FIIs can swing the mar!et by their actions. &he extent of FII influence on
mar!et players can probably be gauged from the fact that ,6BI as!ed the stoc! exchanges not to release
FII trading details W.indu Business /ine, $%%%X/ as ,6BI decided to release the data with a one day lag
and after due confirmation with the FIIsJ custodians. &o give better empirical content to the general
understanding that FIIs influence the Indian e5uity mar!ets we tried to get detailed data on FII
transactions. Eur efforts at getting FII-wise information from the ?BI and ,6BI, however, did not meet
with any success.% In view of this, we had to rely on other sources. 0t the beginning of Farch ())), the
number of FIIs registered with ,6BI stood at B)(. &he sheer number of FIIs does not give a full picture
of the FII operations in India since each of the FIIs can represent unlimited number of subaccounts.
En the number of sub-accounts, however, no information is available. Hith the importance attached to
sub-account-wise investment limits one would have expected ,6BI to provide information on these.
0lso, a good number of FIIs are under common control "as indicated by their names, addresses and
telephone numbers# and render individual FII limits less relevant.
FII regitere) ;it& SEBI $'%% *n)er t&e $o%%o;ing c'tegorie5
a# Reg*%'r FII-
Foreign investors, who are re5uired to invest not less than A) > of their investment in
e5uity-related instruments and *) > in non-e5uity instruments.
b# 2.. G )e3t>$*n) FII>
&hose who are permitted to invest only in debt instruments.&he 7overnment guidelines for
FII of $%%( allowed, inter-alia, entities such as asset management companies, nominee
companies and incorporatedOinstitutional portfolio managers or their power of attorney
holders "providing discretionary and non-discretionary portfolio management services# to be
registered as FIIs. Hhile the guidelines did not have a specific provision regarding clients, in
51
the application form the details of clients on whose behalf investments were being made
were sought.
Hhile granting registration to the FII, permission was also granted for ma!ing investments
in the names of such clients. 0sset management companiesOportfolio managers are basically
in the business of managing funds and investing them on behalf of their fundsOclients.
2ence, the intention of the guidelines was to allow these categories of investors to invest
funds in India on behalf of their JclientsJ. &hese JclientsJ later came to be !nown as sub-
accounts. &he broad strategy consisted of having a wide variety of clients, including
individuals, intermediated through institutional investors, who would be registered as FIIs in
India. FIIs are eligible to purchase shares and convertible debentures issued by Indian
companies under the ortfolio Investment ,cheme.
Tren) o$ Foreign Intit*tion'% Invet!ent in In)i',
ortfolio investments in India include investments in 0merican Depository ?eceipts "0D?#O
7lobal Depository ?eceipts "7D?#, Foreign Institutional Investments and investments in
offshore funds. Before $%%(, only <on-?esident Indians "<?Is# and Everseas :orporate
Bodies were allowed to underta!e portfolio investments in India. &hereafter, the Indian stoc!
mar!ets were opened up for direct participation by FIIs. &hey were allowed to invest in all
the securities traded on the primary and the secondary mar!et including the e5uity and other
securitiesOinstruments of companies listedOto be listed on stoc! 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. 0s of Farch ())A, there were %%C FIIs registered with ,6BI.
REGISTRATIO6 PROCESS OF FIIS
0 FII is re5uired to obtain a certificate by ,6BI for dealing in securities. ,6BI grants the
certificate ,6BI by ta!ing into account the following criteria:
2, &he applicantJs trac! record, professional competence, financial soundness, experience,
general reputation of fairness and integrity.
-, Hhether the applicant is regulated by an appropriate foreign regulatory authority.
B, Hhether the applicant has been granted permission under the provisions of the Foreign
6xchange ?egulation 0ct, $%A* ".C of $%A*# by the ?eserve Ban! of India for ma!ing
investments in India as a Foreign Institutional Investor.
C, Hhether the applicant is,
a# 0n institution established or incorporated outside India as a pension fund, mutual fund,
investment trust, insurance company or reinsurance company.
b# 0n International or Fultilateral Ergani1ation or an agency thereof or a Foreign
7overnmental 0gency or a Foreign :entral Ban!.
52
c# 0n asset management company, investment manager or advisor, nominee company,
ban! or institutional portfolio manager, established or incorporated outside India and
proposing to ma!e investments in India on behalf of broad based funds and its
proprietary funds in if any.
d# +niversity fund, endowments, foundations or charitable trusts or charitable societies.
1. Hhether the grant of certificate to the applicant is in the interest of the development of the
securities mar!et.
F, Hhether the applicant is a fit and proper person. &he ,6BI4s initial registration is valid for
a period of three years from the date of its grant of renewal.
I6VESTME6T CO6DITIO6S A6D RESTRICTIO6S FOR FIIS5
0 Foreign Institutional Investor may invest only in the following:-
"a# ,ecurities in the primary and secondary mar!ets including shares, debentures and
warrants of companies, unlisted, listed or to be listed on a recogni1ed stoc! exchange in
India.
"b# +nits of schemes floated by domestic mutual funds including +nit &rust of India,
whether listed or not listed on a recogni1ed stoc! exchange.
"c# Dated 7overnment securities.
"d# Derivatives traded on a recogni1ed stoc! exchange.
"e# :ommercial paper.
"f# ,ecurity receipts.
&he total investments in e5uity and e5uity related instruments "including fully convertible
debentures, convertible portion of partially convertible debentures and tradable warrants#
53
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. 2owever, this is not applicable to any investment of the foreign
institutional investor either on its own account or on behalf of its sub-accounts in debt
securities which are unlisted or listed or to be listed on any stoc! exchange if the prior
approval of the ,6BI has been obtained for such investments. Further, ,6BI 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. 0 foreign corporate or individual is
not eligible to invest through the hundred percent debt route.
6ven investments made by FIIs in security receipts issued by securiti1ation companies or
asset reconstruction companies under the ,ecuriti1ation and ?econstruction of Financial
0ssets and 6nforcement of ,ecurity Interest 0ct, ())( are not eligible for the investment
limits mentioned above.
PROHIBITIO6S O6 I6VESTME6TS5
<o foreign institutional investor should invest in security receipts on behalf of its sub-
account. 0 foreign corporate or individual is not eligible to invest through the hundred
percent debt route. FIIs are not permitted to invest in e5uity issued by an 0sset
?econstruction :ompany. &hey are also not allowed to invest in any company which is
engaged or proposes to engage in the following activities:
$# Business of chit fund
(# <idhi :ompany
*# 0gricultural or plantation activities
.# ?eal estate business or construction of farm houses "real estate business does not include
development of townships, residentialOcommercial premises, roads or bridges.#
B# &rading in &ransferable Development ?ights "&D?#.
In this section I am going to discuss or describe the main business of the report i.e. analysis
of secondary data. It includes data in an organi1ed form, discussion on its significance and
analy1ing the results. For this I had divided this section in further two subsections i.e. the
first subsection fulfill the re5uirement of first ob3ective which is pertaining to FDI. &he
ob3ective for FDI is to examine the trends and patterns in the foreign direct investment "FDI#
across different sectors and from different countries in India during $%%$-())A period means
during post liberali1ation period. 0nd the second subsection fulfills the analysis of second
ob3ective which is pertaining to FII. &he ob3ective for FII is to examine the influence of FII
on movement of Indian stoc! exchange during the post liberali1ation period that is $%%$ to
())A.
Foreign Direct Invet!ent in In)i'
54
FDI5 A6 I6TRODUCTIO6,
F&I is the process whereby residents of one country "the source country# ac5uire ownership
of assets for the purpose of controlling the production, distribution, and other activities of a
firm in another country "the host country#. &he international monetary fund4s balance of
payment manual defines FDI as an investment that is made to ac5uire a lasting interest in an
enterprise operating in an economy other than that of the investor. &he purpose of an
investors4 should be an effective voice in the management of the enterprise.
T&e Unite) 6'tion ?or%) Invet!ent Re+ort/ 2@@@ )e$ine FDI '/
)n investment involving a long term relationship and reflecting a lasting interest and
control of a resident entity in one economy 0foreign direct investor or parent enterprise1 in
an enterprise resident in an economy other than that of the foreign direct investor 0 &2I
enterprise, affiliate enterprise or foreign affiliate1.
FDI5 I6DIA6 SCE6ARIO
Foreign Direct Investment is permitted as under the following forms of investments
&hrough financial collaborations.
&hrough 3oint ventures and technical collaborations.
&hrough capital mar!ets via 6uro issues.
&hrough private placements or preferential allotments.
FORBIDDE6 TERRITORIES
Foreign Direct Investment is not permitted in the following industrial sectors:
0rms and ammunition.
0tomic 6nergy.
?ailway &ransport.
:oal and lignite.
Fining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, 1inc.
?etail &rading "except single brand product retailing#.
9ottery Business
7ambling and Betting
Business of chit fund
<idhi :ompany
&rading in &ransferable Development ?ights "&D?s#.
0ctivityOsector not opened to private sector investment.
FOREIG6 I6VESTME6T THROUGH GDR
Indian companies are allowed to raise e5uity capital in the international mar!et through the
issue of 7lobal Depository ?eceipt "7D?s#. 7D? investments are treated as FDI and are
55
designated in dollars and are not sub3ect to any ceilings on investment. 0n applicant
company see!ing 7overnmentJs approval in this regard should have consistent trac! record
for good performance "financial or otherwise# for a minimum period of * years. &his
condition would be relaxed for infrastructure pro3ects such as power generation,
telecommunication, petroleum exploration and refining, ports, airports and roads.
2, C%e'r'nce $ro! FIPB I
&here is no restriction on the number of 6uro-issue to be floated by a company or a group of
companies in the financial year. 0 company engaged in the manufacture of items covered
under 0nnex-III of the <ew Industrial olicy whose direct foreign investment after a
proposed 6uro issue is li!ely to exceed B$> or which is implementing a pro3ect not
contained in 0nnex-III, would need to obtain prior FIB clearance before see!ing final
approval from Finistry of Finance.
-, Ue o$ GDR I
&he proceeds of the 7D?s can be used for financing capital goods imports, capital
expenditure including domestic purchaseOinstallation of plant, e5uipment and building and
investment in software development, prepayment or scheduled repayment of earlier external
borrowings, and e5uity investment in 'ROHE,s in India.
B, Retriction I
2owever, investment in stoc! mar!ets and real estate will not be permitted. :ompanies may
retain the proceeds abroad or may remit funds into India in anticipation of the use of funds
for approved end uses. 0ny investment from a foreign firm into India re5uires the prior
approval of the 7overnment of India.
FDI5 E6TRY FOR I6VESTME6T I6 I6DIA
Foreign direct investments in India are approved through two routes M
56
2, A*to!'tic '++rov'% 3( RBI I
&he ?eserve Ban! of India accords automatic approval within a period of two wee!s
"sub3ect to compliance of norms# to all proposals and permits foreign e5uity up to (.>=
B)>= B$>= A.> and $))> is allowed depending on the category of industries and the
sectoral caps applicable. &he 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 ?BI.
For the 0utomatic ?oute no prior 7overnment approval is re5uired if the investment to be
made falls within the sectoral caps specified for the listed activities. Enly filings have to be
made by the Indian company with the concerned regional office of the ?eserve Ban! of
India "G?BII# within *) days of receipt of remittance and within *) days of issuance of
shares
0ll itemsOactivities for FDI investment up to $))> fall under the 0utomatic ?oute except
the following:
57
0ll proposals that re5uire an In)*tri'% Licene.
0ll proposals in which the $oreign co%%'3or'tor has a previous ventureO tie up in India
0ll proposals relating to ac5uisition of e:iting &'re in an existing Indian :ompany
by a foreign investor.
0ll proposals falling o*ti)e noti$ie) ector'% +o%ic(J c'+ or under sectors in which
FDI is not permitted.
-, T&e FIPB Ro*te I Proceing o$ non>'*to!'tic '++rov'% c'e I
FIB stands for Foreign Investment romotion Board which approves all other cases where
the parameters of automatic approval are not met. <ormal processing time is . to C wee!s.
Its approach is liberal for all sectors and all types of proposals, and re3ections 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 e5uity of the company. &he portion of the e5uity not
proposed to be held by the foreign investor can be offered to the public.
Investment proposals falling outside the automatic route would re5uire prior 7overnment
approval. Foreign Investment re5uiring 7overnment approvals are considered and approved
by the Foreign Investment romotion Board "GFIBI#. Decision of the FIB usually
conveyed in .-C wee!s. &hereafter, filings have to be made by the Indian company with the
?BI. FIB 0pproval has been re5uired
For all activities, which are not covered under the 0utomatic ?oute
:omposite approvals involving foreign investmentO foreign technical collaboration
ublished &ransparent 7uidelines vs. 6arlier :ase by :ase 0pproach
Downstream Investment
B, CCFI Ro*te5
Investment proposals falling outside the automatic route and having a pro3ect cost of ?s.
C,))) million or more would re5uire prior approval of :abinet :ommittee of Foreign
Investment "G::FII#. Decision of ::FI usually conveyed in /-$) wee!s. &hereafter, filings
have to be made by the Indian company with the ?BI
Investment proposals falling within the automatic route and having a pro3ect cost of ?s.
C,))) million or more do not re5uire to be approved by ::FI
OPTIO6S FOR FOREIG6 I6VESTORS I6 I6DIA
58
A foreign company planning to set up business operations in India has the following
options:
Incor+or'te) Entit(
A 'n Unincor+or'te) Entit(
I6CORPORATED E6TITY
0 foreign company can enter India for its business operations by incorporating a company
under the :ompanies 0ct, $%BC through
'oint Rentures= or
Hholly Ewned ,ubsidiaries
Joint Vent*re
'oint Renture with an Indian artner preferably with ma3ority e5uity participation &hough a
wholly owned subsidiary has been the most preferred option, foreign companies have also
been setting up shop in India by forging strategic alliances with Indian partners. &he trend in
this respect is to choose a partner who is in the same fi eldOarea of activity and has suffi cient
experience and expertise in his line of activity.
?&o%%( o;ne) S*3i)i'r( Co!+'n(
0 foreign company can set up a wholly owned subsidiary company in India for carrying out
its activities. ,uch subsidiary is treated as an Indian resident and an Indian :ompany for all
Indian regulations "including Income &ax, F6F0 and :ompanies 0ct#, despite being $))>
foreign owned. 0t least two members are mandatory.
Incorporation of a company with the ?egistrar of :ompanies "G?o:I# is a two-step process:
59
2, Ebtaining approval from ?egistrar of :ompanies "?o:# for the name of the Indian
:ompany. Finimum . alternative names are re5uired to be given for consideration.
&he name of the company should clearly reflect the main ob3ects of the company.
-, Drafting Femorandum and 0rticles of 0ssociation of the :ompany and obtaining
:ertificate of Incorporation.
Foreign e5uity in such Indian companies can be up to $))> depending on the re5uirements
of the investor, sub3ect to e5uity caps in respect of the area of activities under the Foreign
Direct Investment "FDI# policy.
AS A6 U6I6CORPORATED E6TITY
0s a foreign :ompany through
9iaison EfficeO ?epresentative Effice
ro3ect Effice
Branch Effice
,uch offices can underta!e activities permitted under the Foreign 6xchange Fanagement
"6stablishment in India of branch or office of other place of business# ?egulations, ())).
For registration and incorporation, an application has to be filed with ?egistrar of
:ompanies "?E:#. Ence a company has been duly registered and incorporated as an Indian
company, it is sub3ect to Indian laws and regulations as applicable to other domestic Indian
companies.
Li'ion O$$iceJRe+reent'tive O$$ice5
In the establishment of companies regarding foreign investment &he role of the liaison office
is limited to collecting information about possible mar!et opportunities and providing
information about the company and its products to prospective Indian customers. It can
promote exportOimport fromOto India and also facilitate technicalOfinancial collaboration
between parent company and companies in India. 9iaison office can not underta!e any
commercial activity directly or indirectly and can not, therefore, earn any income in India.
0pproval for establishing a liaison office in India is granted by ?eserve Ban! of India "?BI#.
Pro4ect O$$ice5
Foreign :ompanies planning to execute specific pro3ects in India can set up temporary
pro3ectOsite offices in India. ?BI has now granted general permission to foreign entities to
establish ro3ect Effices sub3ect to specified conditions. ,uch offices can not underta!e or
carry on any activity other than the activity relating and incidental to execution of the
pro3ect.
ro3ect Effices may remit outside India the surplus of the pro3ect on its completion, general
permission for which has been granted by the ?BI.
Br'nc& O$$ice5
60
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set
up Branch Effices in India for the following purposes, with the prior approval of ?BI and
subse5uent registration with ?o:: :
2, 6xportOImport of goods
-, ?endering professional or consultancy services
B, :arrying out research wor!, in which the parent company is engaged.
C, romoting technical or financial collaborations between Indian companies and parent or
overseas group company.
1, ?epresenting the parent company in India and acting as buyingOselling agents in India.
F, ?endering services in Information &echnology and development of software in India.
E, ?endering technical support to the products supplied by the parentO group companies.
'# Foreign airlineO shipping company.
Br'nc& O$$ice established with the approval of ?BI may remit outside India profit of the
branch, net of applicable Indian taxes and sub3ect to ?BI guidelines ermission for setting
up branch offices is granted by the ?eserve Ban! of India "?BI#.
Branch Effice on G,tand 0lone BasisI in ,6S:
,uch Branch Effices would be isolated and restricted to the ,pecial 6conomic Sone ",6S#
alone and no business activityO transaction will be allowed outside the ,6Ss in India, which
include branchesO subsidiaries of its parent office in India. <o approval shall be necessary
from ?BI for a company to establish a branchOunit in ,6Ss to underta!e manufacturing and
service activities sub3ect to specified conditions.
0pplication for setting up 9iaison EfficeO ro3ect EfficeO Branch Effice may be submitted in
form F<: $ "available at ?BI website at www.rbi.org.in #
6RIs have few more entry options for investments in India
OPTIO6S FOR 6O6>RESIDE6T I6DIA6
61
Invet!ent in ' $ir! or ' +ro+riet'r( concern 3( ot&er t&'n 6RI
0 <on-?esident Indian or a erson of Indian Erigin resident outside India may invest by
way of contribution to the capital of a firm or a proprietary concern in India on non-
repatriation basis provided,
i# 0mount is invested by inward remittance or out of <?6O F:<?O<?E account maintained
with 0D
ii# &he firm or proprietary concern is not engaged in any agriculturalOplantation or real estate
business i.e. dealing in land and immovable property with a view to earning profit or earning
income there from.
iii# 0mount invested shall not be eligible for repatriation outside India.
<?IO IE may invest in sole proprietorship concernsO partnership firms with repatriation
benefits with the approval of 7overnment O?BI.
Invet!ent in ' $ir! or ' +ro+riet'r( concern 3( 6RI
<o person resident outside India other than <?IsOIE shall ma!e any investment by way of
contribution to the capital of a firm or a proprietorship concern or any association of persons
in India. &he ?BI may, on an application made to it, permit a person resident outside India to
ma!e such investment sub3ect to such terms and conditions as may be considered necessary.
0 Hor!ing 7roup for ,treamlining of the rocedures relating to FIIs, constituted in 0pril,
())*, inter alia, recommended streamlining of ,6BI registration procedure, and suggested
that dual approval process of ,6BI and ?BI be changed to a single approval process of
,6BI. &his recommendation was implemented in December ())*. :urrently, entities eligible
to invest under the FII route are as follows:
i# 0s FII: Everseas pension funds, mutual funds, investment trust, asset management
company, nominee company, ban!, 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 ma!e proprietary
investments or with no single investor holding more than $) per cent of the shares or
units of the fund#.
ii# 0s ,ub-accounts: &he sub account is generally the underlying fund on whose behalf
the FII invests. &he following entities are eligible to be registered as sub-accounts, vi1.
partnership firms, private company, public company, pension fund, investment trust, and
individuals.
EPILOGUE
62
S?OT A6ALYSIS
CO6CLUSIO6
RECOMME6DATIO6S
S()$ *N*+,SIS
63
Strengt&
2# rovides the most
important resource i.e. is
finance.
-# :ontributes to the
economic growth of the
country.
B# Balances the balance of
payment position.
?e'<ne
2# Focuses more on developing countries.
-# 2ampering the progress due to anytime
withdrawal.
B# rovides only short term opportunities.
C# rovides more returns than in domestic
countries.
1# Develops relationship between two
countries.
O++ort*nitie
2# Better infrastructure.
-# 6xploitation of resources
to the maximum.
B# Better technology
available.
T&re't
2# 0nytime withdrawal of investments.
-# Investments made in Foreign countries
poses threat to the Indian companies.
B# Increased returns.
STRE6GTHS5
$. Provi)e !ot i!+ort'nt reo*rce i,e, $in'nce5 &o start any business and to ma!e the
idea to be actually implemented it needs finance. &he FIIs brings the inflow of money
into the country. Fany pro3ects that re5uire funding is done with the help of FIIs. &oday
in this world, the Finance is the only resource, which has the capability to be easily
transferred from one place to another, and hence providing as a base for business
opportunities .Free flow of capital is conducive to both the total world welfare and to the
welfare of each individual.
(. Contri3*te to t&e econo!ic gro;t& o$ t&e co*ntr(5 Hhen FIIs enters the domestic
country they bring in the money and acts as the facilitator of the business development.
0s money comes into the country, it provides various benefits to the leading sectors and
ultimately results into the development of various sectors. 6.g. in India I.& sector is the
most booming sector and has shown the signs of improvement thus attracting the FIIs.
*. B'%'nce t&e 3'%'nce o$ +'(!ent5 In the initial phase of economic development, the
under developing countries need much larger imports. 0s a result, the balance of
payment position generally turns adverse. &his creates gap between earnings and foreign
exchange. &he foreign capital presents short run solution to the problem. ,o in order to
balance the Balance of ayment Foreign Investment is needed.
.. Provi)e !ore ret*rn t&'n in )o!etic co*ntrie5 FIIs provide more returns to the
investors as compared to the domestic country. &his is one of the most important strength
of FIIs. &he main reason is that the countries in which th Foreign Institutional Investors
invest their money, provides more opportunities and many benefits. ,o investors invest in
foreign countries rather than in the domestic countries.
64
B. Deve%o+ re%'tion&i+ 3et;een t;o co*ntrie5 Due to FIIs the investors from different
countries come into picture and various people also come into the contact with each
other. &his develops a sense of relationship between different people and develops a nice
intra-cultural atmosphere.
?EA86ESSES5
$. Foc*e !ore on )eve%o+ing co*ntrie5 &he main wea!ness of foreign institutional
investments is that they provide opportunities to only the developing and developed
countries. &he Foreign institutional investors focuses on the developing countries rather
than on the underdeveloped countries and because of this the under developed countries
remain underdeveloped. ,o this drawbac! of the FIIs should be improved upon by
ma!ing their investments in the under developed countries.
(. H'!+ering t&e +rogre )*e to 'n(ti!e ;it&)r';'%5 &he FIIs do not provide any
guarantee i.e. the Foreign institutional investors can anytime withdraw their money when
they want to so this ma!es the nature of the FIIs unpredictable and ultimately hampering
the progress of the economy of that country. &he very good example of this is the mass
withdrawal of the FIIs in the far eastern countries li!e Falaysia, Indonesia etc in $%%C-
%A.
*. Provi)e on%( t&e &ort ter! o++ort*nitie: FIIs provide only the short term
opportunities i.e. they do not provide the long term opportunities as they are very much
supple in nature and there by limiting its scope to short term opportunities. 0s far as the
mar!et seems to be good the FIIs are attracted and after that they are not predictable. ,o
FIIs are bound to provide only the short term opportunities.
OPPORTU6ITIES5
$. Better in$r'tr*ct*re5 Better infrastructure is available only when there is ade5uate
finance available and this comes with the help of FIIs. Infrastructure covers many
dimensions, ranging from roads, ports, railways and telecommunication systems to
institutional development "e.g. accounting, legal services, etc.# studies in china reveal the
extent of transport facilities and the proximity to ma3or ports as having a positive
significant effect on the location of FII within the country. oor infrastructure can be
developed with the help of the foreign investment. Foreign investors also point potential
for attracting significant FII if host country government permits more substantial foreign
participation in the infrastructure sector.
(. E:+%oit'tion o$ reo*rce to t&e !':i!*!5 &he ma3or resources i.e. manpower,
material and machines can be utili1ed to its fullest so as to get the maximum benefit out
of it. &hrough FIIs, the reserves or the resources that are untapped because of the lac! of
funds can be exploited. otential areas for exploration ventures include gold, diamonds,
65
copper, lead 1inc, cobalt silver, tin etc. &here is also scope for setting up manufacturing
units for value added products.
*. Better tec&no%og( 'v'i%'3%e5 &echnology is the main aspect on which the growth of the
country is determined. Developing countries has a very low level of technology. &heir
technology is not up to the standards and they lac! in modern technology. Developing
countries possess a strong urge for industriali1ation to develop their economies and to
wriggle out of the low-level e5uilibrium trap in which they are caught. &his raises the
necessity for importing technologies from advanced countries. ,uch technology usually
comes with foreign capital.
THREATS5
$. An(ti!e ;it&)r';'% o$ invet!ent5 &he FIIs are more flexible in nature i.e. unli!e
FDI they are not guaranteed. Foreign Institutional Investors can withdraw at any time
they want. Foreign Direct Investment is for a fixed period and the investments could not
be withdrawn until a specified period. &he recent example was the net outflows of the
money from the stoc! mar!et that affected the whole economy and its conse5uences are
very much appalling resulting into posing threats to the economy.
(. Invet!ent !')e in Foreign Co!+'nie +oe t&re't to In)i'n co!+'nie5 Fany
F<:s have their set up in India and these F<:s provide a stiff competition to the
domestic industries. &he Foreign Institutional Investors invest their money in these
F<:s and they are e5uipped with the latest technology to provide products at cheaper
rates. Foreover, the Indian laborers are opposing the use of modern technology as the
company downsi1es the number of wor!ers that substitutes the modern technology.

*. Incre'e) ret*rn re*%t in o*t$%o; o$ !one(5 Increased returns can pose a threat to
the domestic country as the money flows out of the country and this may affect the
economy of the domestic country. &he returns that the Foreign Institutional Investors are
getting are very much high and this returns they ta!e to their home country and this leads
to the outflow of money from domestic country to the foreign country.
66
Foreign Institutional Investments are very much needed for India. &hey are necessary for
the continuous development of our country. &he economy of our country has shown a better
performance and has led to the economic growth due to the FIIs. &hough there are threats
from the Foreign Institutional Investments we should be positive and see the future of our
country. In last B) years, India has developed a strong and professionally competent
technical, mar!eting and business manpower in 9ivestoc! production and Information
&echnology.
&his is an added advantage over many developing countries of 0sia and 0frica. 0vailability
of competent and comparatively low-cost manpower in India is a great asset which is
attracting foreign investors. 0s a result of stagnancy or in some cases reduction in
agricultural production, demand for several inputs li!e machinery and e5uipment, feeds,
pharmaceuticals etc. has reduced in some countries of 0merica and 6urope.
It is therefore not surprising that these business enterprises have focused their attention to
emerging 0sian mar!ets, particularly India and :hina. India is in a better position as it has a
strong technical manpower base and large number of 6nglish spea!ing population.
I6DIA9S FUTURE
The future of the India is bright and moreover due to FIIs the economy will gain a swing in
the future in short run as well as long run. India is a pool of various resources, their effective
utili1ation is possible only with the investments and in large sum. &he prosperity of India
will soon be visible in the near future. By evolving the strategy to improve the competitive
position in these areas, overall level of competitiveness can be raised thereby enhancing the
export potential of the country.
&hus, India could ta!e a proactive initiative in see!ing an international discipline on
investment incentives with a built in exception based on the level of industriali1ation. ,oon
India will be leading country.
CO6CLUSIO6
67
Foreign investment is a valuable non-debt creating, external resource supplement
inade5uate savings and has a ma3or role in transforming technology, improving managerial
s!ills and facilitating mar!et development. In our economic system, capital is the fuel that
generates profits.
India must extend a hospitable environment for foreign investors by providing essential
guarantees for investors for
$ $# 6nter and exit.
( (# Eperate on e5ual terms alongside local operators.
* *# ?epatriate their investments when needed
India has a pool of human resource and this can attract the Foreign Institutional Investors to
invest their money into our country there by increasing the output with the help of tapping
the human resource.
&he ready availability of the re5uired infrastructure in the form of serviceable roads, ports,
telecommunications, airports and water and power facilities is a pre-re5uisite for attracting
large volume of foreign investments.
:ontinued export and careful management of India4s imports will also be crucial in
maintaining India4s ability to maintain and continue to build international e5uity and debt
Institutional Investors confidence.
0n environment should be created in India whereby investors would be confident in
remitting funds into India, instead of 3ust obtaining approval and waiting for the time to
invest.
&hough Foreign Investments poses threats, the strengths should also be considered and the
opportunities that Foreign Institutional Investments provide. If India has to attract huge
amounts of Foreign Investments, it needs to first overcome the barriers that exist. &here
should be no room for Bureaucracy, ?ed &apism and a laid bac! attitude. 0pprovals should
be easily forth coming.
Both the FIIs and FDI should be invited to the fullest and given importance so that it will
create a win-win situation on the part of both the parties. Both the parties will be benefited
from Foreign Investments i.e. India will get capital and the investors will get returns to
maximum.
RECOMME6DATIO6S
68
A66EXURE
AgencieJ )e+'rt!ent invo%ve) ;it& c%e'r'nce
'++rov'%
FDI +er!itte) in v'rio* ectorJ 'ctivitie
Sector>;ie FDI in$%o; "A+ri% -... to J'n, -..@#
A33revi'tion
Re$erence 'n) Bi3%iogr'+&(
Agencie Invo%ve) ;it& C%e'r'nce A++rov'%
69
In#strial 4ntre)rener
&e'oran#' ,or #eli"ense#
in#stries
Be)art'ent o, In#strial
$oli"y an# $ro'otion% 2IA
htt)>++#i))1ni"1in
A))roval ,or In#strial Ci"ense +
(arry.on./siness li"ense
Be)art'ent o, In#strial
$oli"y an# $ro'otion% 2IA
htt)>++#i))1ni"1in
A))roval ,or Te"hnology Trans,er>
11 Ato'ati" rote
21 8overn'ent a))roval
!$ro@e"t A))roval Boar#)
:eserve Ban0 o, In#ia
Be)art'ent o, In#strial
$oli"y an# $ro'otion% 2IA
---1r/i1org1in
htt)>++#i))1ni"1in
A))roval ,or fnan"ial "olla/oration>
11 Ato'ati" rote
21 8overn'ent a))roval !FI$B)
:eserve Ban0 o, In#ia
Be)art'ent o, 4"ono'i"
A=airs
---1r/i1org1in
htt)>++f n'in1ni"1in
A))roval ,or In#strial $ar0
11 Ato'ati" rote
21 *on.Ato'ati" :ote
!4')o-ere# (o''ittee)
Be)art'ent o, In#strial
$oli"y an# $ro'otion% 2IA
htt)>++#i))1ni"1in
:egistration as a (o')any D
(ertif"ate o, (o''en"e'ent o,
/siness
Be)art'ent o, (o')any
A=airs !:egistrar o,
(o')anies)
htt)>++#"a1ni"1in
&atters relating to FBI $oli"y
Be)art'ent o, In#strial
$oli"y an# $ro'otion% 2IA
htt)>++#i))1ni"1in
Foreign 45"hange &atters :eserve Ban0 o, In#ia ---1r/i1org1in
Ta5ation 'atters Be)art'ent o, :evene htt)>++f n'in1ni"1in
Bire"t ta5ation isses
(entral /oar# o, Bire"t Ta5es htt)>++in"o'eta5in#ia1gov1
in
45"ise an# (sto's Isses
(entral Boar# o, 45"ise an#
(sto's
---1"/e"1gov1in
I')ort o, goo#s
Bire"torate 8eneral o,
Foreign tra#e
htt)>++#g,t1#elhi1ni"1in
4nviron'ental (learan"es
&inistry o, 4nviron'ent an#
Forests
htt)>++env,or1ni"1in+
6verseas Invest'ent /y In#ians
6verseas Invest'ent
Bivision% :eserve Ban0 o,
In#ia
---1r/i1org1in
$
FDI Per!itte) G In V'rio* SectorJ Activitie
70
SECTORS ?HERE FDI UP TO -F G ALLO?ED
2# Bro')c'ting5
a# FM R')io M FDI N FII investment up to ()> with prior 7overnment approval
sub3ect to guidelines by Finistry of Information @ Broadcasting.
b# U+ Lin<ing 6e; 7 C*rrent A$$'ir TV C&'nne% M up to (C> "FDI N FII# with
prior FIB approval.
-# Print !e)i'5 ublishing newspaper and periodicals dealing with news and current
affairs - FDI up to (C> with prior 7overnment approval
B# De$ene in)*trie5 FDI up to (C> with prior 7overnment approval
C# In*r'nce5 Foreign e5uity "FDINFII# up to (C> under the automatic route
1# Petro%e*! 'n) 6't*r'% G' Sector5 ?efining in case of ,+s: up to (C> with prior
FIB approval.
SECTORS ?HERE FDI UP TO C@ G ALLO?ED
i, Bro')c'ting:
', Setting *+ &'r);'re $'ci%itie *c& ' *+>%in<ing/ HUB/ etc,> FDINFII e5uity up to
.%> with prior 7overnment approval sub3ect to up-lin!ing olicy notified by
Finistry of Information @ Broadcasting.
3, C'3%e net;or<- Foreign e5uity "FDINFII# up to .%> with prior 7overnment
approval sub3ect to :able &elevision <etwor! ?ules "$%%.# notified by Finistry of
Information @ Broadcasting.
c, DTH - Foreign e5uity "FDINFII# up to .%> with prior 7overnment approval. FDI
can not exceed ()> sub3ect to guidelines by Finistry of Information @ Broadcasting.
ii, Do!etic Sc&e)*%e) P'enger Air%ine Sector - FDI up to .%> under the automatic
route with no direct or indirect participation of foreign airlines.
iii, Aet Recontr*ction Co!+'nie I up to .%> "only FDI# with prior FIB approval.
iv, Petro%e*! Re$ining B( PSU, <o divestment of domestic e5uity in existing ,+s
would be permitted for increasing the FDI up to .%>.
v, Co!!o)it( e:c&'nge I FDI NFII up to .%> with a sub-limit for FII at (*> and for
FDI at (C>.
vi, Stoc< e:c&'nge > FDI NFII up to .%> with a sub-limit for FII at (*> and for FDI at
(C>.
71
vii, Cre)it In$or!'tion Co!+'nie> FDI NFII up to .%> with a sub-limit for FII at (.> in
the :I:s listed on the ,toc! 6xchanges.
SECTORS ?HERE FDI UP TO 12G IS ALLO?ED
,ingle Brand product retailing- with prior 7overnment approval sub3ect to:-
'# roducts being sold under the same brand internationally.
3# roducts sold being of a single brand. ?etailing of multiple products sold under different
brand names, even if produced by the same manufacturer, would not be allowed.
c# ,ingle Brand product retailing would cover only such products as are branded at the
manufacturing point.
SECTORS ?HERE FDI UP TO ECG ALLO?ED
2, &elecommunication services: basic and cellular M FDI up to A.> allowed. FDI up to .%>
is under automatic route. Beyond .%> and upto A.> re5uires FIB approval. Foreign
e5uity includes FDI, FII, <?I, F::Bs, 0D?s, 7D?s, convertible preference shares, and
proportionate foreign e5uity in Indian promotersO Investing :ompany.
-, I, with gateways, radio-paging, end-to-end bandwidth M FDI up to A.> with FDI
beyond .%> re5uiring prior 7overnment approval
B, 6stablishment and operation of satellites - FDI up to A.> with prior 7overnment
approval.
C, rivate sector ban!s - Foreign e5uity "FDI N FII# up to A.> under the automatic route.
1, <on-,cheduled airlines, :hartered airlines - FDI up to A.> under the automatic route
sub3ect to no direct or indirect participation by foreign airlines.
F, :argo airlines and 7round handling- FDI up to A.> allowed under the automatic route.
E, rivate sector ban!s - Foreign e5uity "FDI N FII# up to A.> under the automatic route
FDI UP TO 2.. G ALLO?ED SUBJECT TO CO6DITIO6
2, Deve%o+!ent o$ E:iting Air+ort I FDI up to A.> under automatic route and beyond
this under FIB route
72
-, E:+%or'tion 'n) !ining o$ co'% 'n) %ignite $or c'+tive con*!+tion5 FDI up to $))>
under automatic route sub3ect to provisions of :oal Fines "<ationali1ation# 0ct, $%A*
B, Tr')ing5 &rading of items sourced from small scale sector under govt. approval route
C, Tr')ing5 &est mar!eting of such items for which a company has approval for
manufacture under govt. approval route
1, Co*rier ervice $or c'rr(ing +'c<'ge/ +'rce% 'n) ot&er ite! ;&ic& )o not co!e
;it&in t&e '!3it o$ t&e In)i'n Pot O$$ice Act/ 2A@A5 rior 7overnment approval
sub3ect to existing laws and sub3ect to existing laws and exclusion of activity relating to
distribution of letters, which is exclusively reserved for the ,tate.
F, Te' Sector/ inc%*)ing te' +%'nt'tion5 rior 7overnment approval sub3ect to divestment
of (C> e5uity within five years
E, 6on B'n<ing Fin'nce Co!+'nie5 FDI up to $))> under the automatic route sub3ect
to minimum capitali1ation norms
A, Contr*ction Deve%o+!ent +ro4ect5 FDI up to $))> on the automatic route sub3ect to
minimum capitali1ation norms= minimum area development and loc!-in on original
investment.
@, ISP ;it&o*t g'te;'(/ in$r'tr*ct*re +rovi)er +rovi)ing )'r< $i3er/ rig&t o$ ;'(/
)*ct +'ce/ to;er "C'tegor( I#K e%ectronic !'i% 'n) voice !'i%5 FDI up to .%> under
automatic route. Beyond .%> and up to $))> sub3ect to FIB approval sub3ect to
divestment of (C> e5uity in B years if the investing companies are listed in other parts of
the world.
2., Do!etic Sc&e)*%e)J 6on>Sc&e)*%e) 7 C&'rtere) 'ir%ineJAir tr'n+ort ervice5
<?I investment up to $))> permitted under the automatic route with no direct or
indirect participation of foreign airlines.
22, Po;er tr')ing5 +p to $))> sub3ect to compliance with regulations under 6lectricity
0ct, ())*.
2-, Cig'r 7 Cig'rette5 +p to $))> with prior FIB approval and ,ub3ect to industrial
license under the Industries "Development @ ?egulation# 0ct, $%B$.
2B, 0lcohol distillation and brewing - $))> FDI under automatic route sub3ect to license by
appropriate authority.
SECTOR>?ISE FDI I6FLO?S "A+ri% -... to J'n*'r( -..@#
73
SECTOR AMOU6T OF FDI I6FLO?S G o$ TOTAL FDI
I6FLO?S "In R#
R Mi%%ion US0 Mi%%ion
,ervices ,ector A/A.()./$ $/$$/..) ((.*%
:omputer ,oftware @ hardware *%$$)%.A. //AC..* $$.$(
&elecommunications (AB..$.*/ C($B.BB A./*
:onstruction 0ctivities ($*B%B.$( B)(%.)$ C.)A
0utomobile $.CA%%..$ **$).(* ..$A
2ousing @ ?eal estate ($A%*C.)( B$$/./B C.()
ower $*A)/%.*A *$(%.CC *.%)
:hemicals "Ether than Fertili1ers# /A))/.)A $%C..)C (..A
orts C*(%).B) $BB$.// $./)
Fetallurgical industries $)%BC*.() (C$(./B *.$$
6lectrical 65uipments BA*A%.C* $*(..%( $.C*
:ement @ 7ypsum roducts A)A/$.$% $C($.)* (.)$
etroleum @ <atural 7as %..$A.$A ((...$A (.C/
&rading C(.$C./B $./).%. $.AA
:onsultancy ,ervices ./C.A..* $$$(.%( $.*/
2otel and &ourism B(B)).)B $($A.B) $..%
Food rocessing Industries *.*C(..% AC).*( ).%/
6lectronics **%$..AB A./.BA ).%C
Fisc. Fechanical @ 6ngineering industries (/*$).$* C././C )./)
Broadcasting "Incl. rint media# B($$B.%) $$%..() $../
Fining ($()..%. B((./C ).C)
&extiles "Incl. Dyed, rinted# (CA*C.%. C$$.)* ).AC
74
,ea &ransport $ACB*./$ .)(.B% ).B)
2ospital @ Diagnostic :enters (A(.$..( C...A* ).AA
Fermentation Industries (AA.*..C CB/.). ).A%
Fachine &ools $)%BB.*( (.A.// ).*$
0ir &ransport " Incl. air freight# $)BB(.$% (.).A$ ).*)
:eramics $A.C(..* .)%.%( ).B)
?ubber 7oods $$*%(.AC (.A.C) ).*(
0griculture ,ervices A%*A.$* $//.*% ).(*
Industrial Fachinery $*A./.(A *$C.%A ).*%
aper @ ulp $/C$(.AC .(%.)C ).B*
Diamond @ 7old Ernaments $$)$..C( (./.$B ).*$
0gricultural Fachinery CC.%.$( $./.*A ).$%
6arth Foving Fachinery BA.%.*. $*..(( ).$C
:ommercial, Effice @ 2ousehold
65uipments
BA%/.A$ $*(.A. ).$C
7lass BC/*.C) $(C.B$ ).$C
rinting of Boo!s "Incl. 9itho printing# C)CC.(* $*B./) ).$A
,oaps, :osmetics and &oilet reparations .%/..// $$..B. ).$.
Fedical @ ,urgical 0ppliances /)/A./A $AA..( ).(*
6ducation $.*A..$$ *)%.)% )..$
Fertili1ers .(/(.$A %C.B% ).$(
hotographic raw Film @ aper (B/).() C*.%) ).)A
?ailway related components *(/$./B AB.$$ ).)%
Regetable oils and Ranaspati *AC%.$/ /*.C% ).$$
75
,ugar $/*C.C. .$.B/ ).)B
&ea @ :offee "rocessing @ warehousing
coffee @ rubber#
*AA../$ /..(/ ).$$
9eather, 9eather goods @ ac!ers $C($.BC *C.A. ).)B
<on-conventional energy *C.).B/ /C./. ).$)
Industrial instruments $*C/.*C (%..A ).).
,cientific instruments B$$... $$.C. ).)$
7lue and 7elatin */B./) /... ).)$
Boilers @ steam generating plants (*/.CA B..) ).)$
Dye-,tuffs .)C../ %.B( ).)$
?etail &rading ",ingle brand# $)A..CA (B.$/ ).)*
:oal roduction C$..$) $B..( ).)(
:oir B).$A $.$( ).))
&imber products $*%.B% *.$) ).))
rime Fover excluding electrical generators $A/.*) *.A( ).)$
Defense Industries C./A ).$B ).))
Fathematical, ,urveying @ drawing
instruments
B).*B $.(A ).))
Fisc. industries $/)BC$.B. .$C(.BB B.$%
S*3 Tot'% B12EB2.,E@ A2.2.,FB 2..,..
SOURCE5 DIPP/ Fe)er'% Minitr( o$ Co!!erce 'n) In)*tr(/ Govern!ent o$ In)i'
ABB Asian Bevelo)'ent Ban0
AB: A'eri"an Be)ository :e"ei)t
A&( Asset &anage'ent (o1
A&FI Asso"iation o, &tal Fn#s in In#ia
A&F Asso"iation o, &tal Fn#s in In#ia
B24 Bo'/ay 2to"0 45"hange
GLOSSARY OF ABBREVIATIO6S
76
(II (on,e#eration o, In#ian In#stry
BI$$ Be)art'ent o, In#strial $oli"y an# $ro'otion
F&(8 Fast &oving (ons'er 8oo#s
FI Finan"ial Instittions
F(( Foreign (ontrolle# (o')anies
FBI Foreign Bire"t Invest'ent
FII Foreign Instittional Investor
F$I Foreign $ort,olio Invest'ent
8B$ 8ross Bo'esti" $ro#"t
8B: 8lo/al+A'eri"an Be)ository :e"ei)ts
8*$ 8ross *ational $ro#"t
IF( International Finan"e (or)oration
I&F International &onetary Fn#
I$6 Initial $/li" 6=ering
CI( Ci,e Insran"e (or)oration o, In#ia
*AE *et asset vale
*:I *on.resi#ent In#ian
*24 *ational 2to"0 45"hange
$I2 $ort,olio Invest'ent 2"he'e
:BI :eserve Ban0 o, In#ia
24BI 2e"rities an# 45"hange Boar# o, In#ia
T*( Transnational "or)orations
FCI$ Fnite# Cin0e# Insran"e $lan
FTI Fnit Trst o, In#ia
Boo<5
2, 6CFM> Deriv'tive !'r<et !o)*%e
-, Ric&'r) I, Levin/ D'vi) S, R*3in/ St'titic For M'n'ge!entK Prentice
H'%t P*3%ic'tion/ E
t&
e)ition -..F
Re$erence 7 Bi3%iogr'+&(
77
B, Sc&in)%er 7 8oo+er/ Ree'rc& Met&o) In B*ineK Pe'ron E)*c'tion
P*3%ic'tion/ F
&
e)ition -..E
?e3ite5-
2, ;;;,nein)i',co!J
-, &tt+5JJ;;;,3ein)i',co!J
B, &tt+5JJ;;;,in)i'in$o%ine,co!J
C, &tt+5JJ;;;,!one(contro%,co!J
1, &tt+5JJgoog%e,co!J$in'nce
F, &tt+5JJ;;;,3ein)i',co!J
E, ;;;,)eriv'tivein)i',co!J
A, ;;;,c'+it'%!'r<et,co!J
@, ;;;,;i<i+e)i',co!J
2., &tt+5JJ;;;,eD*it(+'n)it,co!J
22, ;;;,3%oo!3erg,co!J
78