A PROJECT REPORT ON

FOREIGN DIRECT INVESTMENT IN INDIA

SUBMITTED TO
UNIVERSITY OF MUMBAI

In partial fulfilment of the degree of

BACHELOR OF COMMERCE (FINANCIAL
MARKETS) (B.COM (FM))

Submitted by
Mr. Tejas Agarwal
Under The Guidance of
Prof.

PRAHLADRAI DALMIA LIONS COLLEGE OF

COMMERCE AND ECONOMICS MALAD (W),
MUMBAI

ACADEMIC YEAR
2016-2017
 DECLARATION

I, Mr. Tejas Agarwal, the student of Bachelor of Commerce (Financial

Markets) - Semester V (2016-17) hereby declare that I have completed this project
on Foreign Direct Investment in India
The information submitted is true & original to the best of my knowledge.

Students Signature
( )
 CERTIFICATE

This is to certify that Mr. Tejas Agarwal of

Bachelor of Commerce (Financial Markets) - Semester V (2016-17) has
successfully completed the project on Foreign Direct Investment in India
under the guidance of Prof.

Course Coordinator Principal

Project Guide/ Internal Examiner

External Examiner

3
 ACKNOWLEDGEMENT

Before we get into thick of things, I would like to add a few words of
appreciation for the people who have been a part of this project right from its
inception. The writing of this project has been one of the significant academic
challenges I have faced and without the support, patience, and guidance of the
people involved, this task would not have been completed. It is to them I owe
my deepest gratitude.
It gives me immense pleasure in presenting this project report on
"FOREIGN DIRECT INVESTMENT IN INDIA". It has been my privilege to
have a team of project guide who have assisted me from the commencement of
this project. The success of this project is a result of sheer hard work, and
determination put in by me with the help of my project guide. I hereby take this
opportunity to add a special note of thanks for Prof. ___________________,
who undertook to act as my mentor despite her many other academic and
professional commitments. Her wisdom, knowledge, and commitment to the
highest standards inspired and motivated me. Without her insight, support, and
energy, this project wouldn't have kick-started and neither would have reached
fruitfulness.
I also feel heartiest sense of obligation to my library staff members &

seniors, who helped me in collection of data & resource material & also in its

processing as well as in drafting manuscript. The project is dedicated to all

those people, who helped me while doing this project.

4
 TABLE OF CONTENTS
Sr. No. Topic Page No.
EXECUTIVE SUMMARY 06
1 INTRODUCTON & REVIEW 09
2 FOREIGN DIRECT INVESTMENT 21
3 SECTOR SPECIFIC FDI IN INDIA 28
4 FOREIGN DIRECT INVESTMENT 38
INDIA
5 FOREIGN INSTITUTIONAL 49
INVESTMENT
CONCLUSION 56
BIBLIOGRAPHY 57

5
 EXECUTIVE SUMMARY
Post liberalization period of India has witnessed a rapid expansion and enrichment of
various industrial activities. After the independence India followed a socialist-inspired
approach for most of its independent history, with strict government control over private
sector participation, foreign trade, and foreign direct investment. However, since the early
1990s, India has gradually opened up its markets through economic reforms by reducing
government controls on foreign trade and investment. The privatization of publicly owned
industries and the opening up of certain sectors to private and foreign interests has proceeded
slowly amid political debate.

Foreign Investment refers to investments made by residents of a country in financial

assets and production process of another country. After the opening up of the borders for
capital movement these investments have grown in leaps and bounds. But it had varied
effects across the countries. 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. Foreign investment provides a channel through which these
countries can have access to foreign capital. It can come in two forms: foreign direct
investment (FDI) and foreign portfolio investment (FPI). Foreign direct investment involves
in the direct production activity and also of medium to long-term nature. But the foreign
portfolio investment is a short-term investment mostly in the financial markets and it consists
of Foreign Institutional Investment (FII). The present study examines the determinants of
foreign portfolio investment in the Indian context as the country after experiencing the
foreign exchange crisis opened up the economy for foreign capital. India, being a capital
scarce country, has taken lot of measures to attract foreign investment since the beginning of
reforms in 1991.

6
Objective of the study:

To know the flow of investment in India

To know how can India Grow by Investment.
To Examine the trends and patterns in the FDI across different sectors and from
different countries in India
To know in which sector we can get more foreign currency in terms of investment in
India
To know which countries are safe to invest.
To know how much to invest in a developed country or in a developing.
To know which sector is good for investment.
To know which country in investing in which country
To know the reason for investment in India
Influence of FII on movement of Indian stock exchange
To understand the FII & FDI policy in India.

Research methodology
In order to accomplish this project successfully we will take following steps.

Data collection:

Secondary Data:
Internet, Books, newspapers, journals and books, other reports and projects, literatures
FDI:
The study is limited to a sample of investing countries e.g. Mauritius, Singapore, USA etc.
and sectors e.g. service sector, computer hardware and software, telecommunications etc.
which had attracted larger inflow of FDI from different countries.
FII:
Correlation: We have used the Correlation tool to determine whether two ranges of
data move together that is, how the Sensex, Bankex, IT, Power and Capital Goods
are related to the FII which may be positive relation, negative relation or no relation.
We will use this model for understanding the relationship between FII and stock
indices returns. FII is taken as independent variable. Stock indices are taken as
dependent variable

Hypothesis Test: If the hypothesis holds good then we can infer that FIIs have
significant impact on the Indian capital market. This will help the investors to decide
on their investments in stocks and shares. If the hypothesis is rejected, or in other

7
words if the null hypothesis is accepted, then FIIs will have no significant impact on
the Indian bourses.

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 Chapter 1

Introduction and overview

What is Foreign Direct Investment?

These three letters stand for foreign direct investment. The simplest explanation of FDI
would be a direct investment by a corporation in a commercial venture in another country. A
key to separating this action from involvement in other ventures in a foreign country is that
the business enterprise operates completely outside the economy of the corporations home
country. The investing corporation must control 10 percent or more of the voting power of the
new venture.

According to history the United States was the leader in the FDI activity dating back as far as
the end of World War II. Businesses from other nations have taken up the flag of FDI,
including many who were not in a financial position to do so just a few years ago.

The practice has grown significantly in the last couple of decades, to the point that FDI has
generated quite a bit of opposition from groups such as labor unions. These organizations
have expressed concern that investing at such a level in another country eliminates jobs.
Legislation was introduced in the early 1970s that would have put an end to the tax incentives
of FDI. But members of the Nixon administration, Congress and business interests rallied to
make sure that this attack on their expansion plans was not successful. One key to
understanding FDI is to get a mental picture of the global scale of corporations able to make
such investment. A carefully planned FDI can provide a huge new market for the company,
perhaps introducing products and services to an area where they have never been available.
Not only that, but such an investment may also be more profitable if construction costs and
labor costs are less in the host country.

The definition of FDI originally meant that the investing corporation gained a significant
number of shares (10 percent or more) of the new venture. In recent years, however,
companies have been able to make a foreign direct investment that is actually long-term
management control as opposed to direct investment in buildings and equipment.

9
FDI growth has been a key factor in the international nature of business that many are
familiar with in the 21st century. This growth has been facilitated by changes in regulations
both in the originating country and in the country where the new installation is to be built.
Corporations from some of the countries that lead the worlds economy have found fertile soil
for FDI in nations where commercial development was limited, if it existed at all. The dollars
invested in such developing-country projects increased 40 times over in less than 30 years.
The financial strength of the investing corporations has sometimes meant failure for smaller
competitors in the target country. One of the reasons is that foreign direct investment in
buildings and equipment still accounts for a vast majority of FDI activity. Corporations from
the originating country gain a significant financial foothold in the host country. Even with
this factor, host countries may welcome FDI because of the positive impact it has on the
smaller economy.

Foreign direct investment (FDI) is a measure of foreign ownership of

productive assets, such as factories, mines and land. Increasing foreign
investment can be used as one measure of growing economic
globalization. Figure below shows net inflows of foreign direct investment
as a percentage of gross domestic product (GDP). The largest flows of
foreign investment occur between the industrialized countries (North
America, Western Europe and Japan).But flows to non-industrialized
countries are increasing sharply. Foreign direct investment (FDI) refers to
long term participation by country A into country B.

It usually involves participation in management, joint-venture, transfer of

technology and expertise. There are two types of FDI: inward foreign
direct investment and outward foreign direct investment, resulting in
a net FDI inflow (positive or negative) .Foreign direct investment reflects
the objective of obtaining a lasting interest by a resident entity in one
economy (direct investor) in an entity resident in an economy other
than that of the investor (direct investment enterprise).The lasting
interest implies the existence of a long-term relationship between the
direct investor and the enterprise and a significant degree of influence on
the management of the enterprise. Direct investment involves both the
initial transaction between the two entities and all subsequent capital

10
transactions between them and among affiliated enterprises, both
incorporated and unincorporated.

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

facilities, over which it has effective control, in a foreign country.
Manufacturing FDI requires the establishment of production facilities.
Service FDI requires building service facilities or an investment foothold via capital
contributions or building office facilities.
Foreign subsidiaries overseas units or entities.
Host country the country in which a foreign subsidiary operates.
Flow of FDI the amount of FDI undertaken over a given time.
Stock of FDI total accumulated value of foreign-owned assets.
Outflows/Inflows of FDI the flow of FDI out of or into a country.
Foreign Portfolio Investment the investment by individuals, firms, or public
bodies in foreign financial instruments.
Stocks, bonds, other forms of debt.
Differs from FDI, which is the investment in physical assets.

Portfolio theory the behavior of individuals or firms administering large amounts of

financial assets.

Product Life-Cycle Theory

Ray Vernon asserted that product moves to lower income countries as products move
through their product life cycle.
The FDI impact is similar: FDI flows to developed countries for innovation, and from
developed countries as products evolve from being innovative to being mass-
produced.

The Eclectic Paradigm

Distinguishes between:
Structural market failure external condition that gives rise to monopoly
advantages as a result of entry barriers
Transactional market failure failure of intermediate product markets to
transact goods and services at a lower cost than internationalization

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The Dynamic Capability Perspective
A firms ability to diffuse, deploy, utilize and rebuild firm-specific resources for a
competitive advantage.
Ownership specific resources or knowledge are necessary but not sufficient for
international investment or production success.
It is necessary to effectively use and build dynamic capabilities for quantity and/or
quality based deployment that is transferable to the multinational environment.
Firms develop centers of excellence to concentrate core competencies to the host
environment.

Monopolistic Advantage Theory

An MNE has and/or creates monopolistic advantages that enable it to operate
subsidiaries abroad more profitably than local competitors.
Monopolistic Advantage comes from:
Superior knowledge production technologies, managerial skills, industrial
organization, knowledge of product.
Economies of scale through horizontal or vertical FDI
Internationalization Theory
When external markets for supplies, production, or distribution fails to provide
efficiency, companies can invest FDI to create their own supply, production, or
distribution streams.
Advantages
Avoid search and negotiating costs
Avoid costs of moral hazard (hidden detrimental action by external partners)
Avoid cost of violated contracts and litigation
Capture economies of interdependent activities
Avoid government intervention
Control supplies
Control market outlets
Better apply cross-subsidization, predatory pricing and transfer pricing

Definition

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Foreign direct investment is that investment, which is made to serve the business interests of
the investor in a company, which is in a different nation distinct from the investor's country of
origin. A parent business enterprise and its foreign affiliate are the two sides of the FDI
relationship. Together they comprise an MNC.

The parent enterprise through its foreign direct investment effort seeks to exercise substantial
control over the foreign affiliate company. 'Control' as defined by the UN, is ownership of
greater than or equal to 10% of ordinary shares or access to voting rights in an incorporated
firm. For an unincorporated firm one needs to consider an equivalent criterion. Ownership
share amounting to less than that stated above is termed as portfolio investment and is not
categorized as FDI.

FDI stands for Foreign Direct Investment, a component of a country's national financial
accounts. Foreign direct investment is investment of foreign assets into domestic structures,
equipment, and organizations. It does not include foreign investment into the stock markets.
Foreign direct investment is thought to be more useful to a country than investments in the
equity of its companies because equity investments are potentially "hot money" which can
leave at the first sign of trouble, whereas FDI is durable and generally useful whether things
go well or badly.

FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises
which function outside of the domestic territory of the investor. FDIs require a business
relationship between a parent company and its foreign subsidiary. Foreign direct business
relationships give rise to multinational corporations. For an investment to be regarded as an
FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates.
The investing firm may also qualify for an FDI if it owns voting power in a business
enterprise operating in a foreign country.

History
In the years after the Second World War global FDI was dominated by the United States, as
much of the world recovered from the destruction brought by the conflict. The US accounted
for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960.
Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive
preserve of OECD countries.

FDI has grown in importance in the global economy with FDI stocks now constituting over
20 percent of global GDP. Foreign direct investment (FDI) is a measure of foreign ownership

13
of productive assets, such as factories, mines and land. Increasing foreign investment can be
used as one measure of growing economic globalization. Figure below shows net inflows of
foreign direct investment as a percentage of gross domestic product (GDP). The largest flows
of foreign investment occur between the industrialized countries (North America, Western
Europe and Japan). But flows to non-industrialized countries are increasing sharply.

Foreign Direct investor

A foreign direct investor is an individual, an incorporated or unincorporated public or private
enterprise, a government, a group of related individuals, or a group of related incorporated
and/or unincorporated enterprises which has a direct investment enterprise that is, a
subsidiary, associate or branch operating in a country other than the country or countries of
residence of the foreign direct investor or investors.

Types of Foreign Direct Investment: An Overview

FDIs can be broadly classified into two types:

1 Outward FDIs
2 Inward FDIs
This classification is based on the types of restrictions imposed, and the various prerequisites
required for these investments.

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Outward FDI: An outward-bound FDI is backed by the government against all types of
associated risks. This form of FDI is subject to tax incentives as well as disincentives of
various forms. Risk coverage provided to the domestic industries and subsidies granted to the
local firms stand in the way of outward FDIs, which are also known as 'direct investments
abroad.'
Inward FDIs: Different economic factors encourage inward FDIs. These include interest
loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors
detrimental to the growth of FDIs include necessities of differential performance and
limitations related with ownership patterns.

Other categorizations of FDI

Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when
a multinational corporation owns some shares of a foreign enterprise, which supplies input for it
or uses the output produced by the MNC.
Horizontal foreign direct investments happen when a multinational company carries out a
similar business operation in different nations.
Horizontal FDI the MNE enters a foreign country to produce the same products
product at home.
Conglomerate FDI the MNE produces products not manufactured at home.
Vertical FDI the MNE produces intermediate goods either forward or backward in
the supply stream.
Liability of foreignness the costs of doing business abroad resulting in a competitive
disadvantage.

Methods of Foreign Direct Investments

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in
an economy through any of the following methods:

by incorporating a wholly owned subsidiary or company

by acquiring shares in an associated enterprise

through a merger or an acquisition of an unrelated enterprise

participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:

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 low corporate tax and income tax rates

tax holidays

other types of tax concessions

preferential tariffs

special economic zones

investment financial subsidies

soft loan or loan guarantees

free land or land subsidies

relocation & expatriation subsidies

job training & employment subsidies

infrastructure subsidies

R&D support

derogation from regulations (usually for very large projects)

Entry Mode

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

International franchising

Branches

Contractual alliances

Equity joint ventures

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 Wholly foreign-owned subsidiaries

Investment approaches:

Greenfield investment (building a new facility)

Cross-border mergers

Cross-border acquisitions

Sharing existing facilities

Why is FDI important for any consideration of going global?

The simple answer is that making a direct foreign investment allows companies to
accomplish several tasks:

1 .Avoiding foreign government pressure for local production.

2. Circumventing trade barriers, hidden and otherwise.
3. Making the move from domestic export sales to a locally-based national sales office.
4. Capability to increase total production capacity.
5.Opportunities for co-production, joint ventures with local partners, joint marketing
arrangements, licensing, etc.;

A more complete response might address the issue of global business partnering in very
general terms. While it is nice that many business writers like the expression, think globally,
act locally, this often used clich does not really mean very much to the average business
executive in a small and medium sized company. The phrase does have significant
connotations for multinational corporations. But for executives in SMEs, it is still just
another buzzword. The simple explanation for this is the difference in perspective between
executives of multinational corporations and small and medium sized
companies. Multinational corporations are almost always concerned with worldwide
manufacturing capacity and proximity to major markets. Small and medium sized companies
tend to be more concerned with selling their products in overseas markets. The advent of the
Internet has ushered in a new and very different mindset that tends to focus more on access

17
issues. SMEs in particular are now focusing on access to markets, access to expertise and
most of all access to technology.

The Strategic Logic behind FDI

Resources seeking looking for resources at a lower real cost.

Market seeking secure market share and sales growth in target foreign market.

Efficiency seeking seeks to establish efficient structure through useful factors,

cultures, policies, or markets.

Strategic asset seeking seeks to acquire assets in foreign firms that promote
corporate long term objectives.

Enhancing Efficiency from Location Advantages

Location advantages - defined as the benefits arising from a host countrys

comparative advantages.- Better access to resources

Lower real cost from operating in a host country

Labor cost differentials

Transportation costs, tariff and non-tariff barriers

Governmental policies

Improving Performance from Structural Discrepancies

Structural discrepancies are the differences in industry structure attributes between

home and host countries. Examples include areas where:

Competition is less intense

Products are in different stages of their life cycle

Market demand is unsaturated

There are differences in market sophistication

Increasing Return from Ownership Advantages

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 Ownership Advantages come from the application of proprietary tangible and
intangible assets in the host country.

Reputation, brand image, distribution channels

Technological expertise, organizational skills, experience

Core competence skills within the firm that competitors cannot easily imitate or
match.

Ensuring Growth from Organizational Learning

MNEs exposed to multiple stimuli, developing:

Diversity capabilities

Broader learning opportunities

Exposed to:

New markets

New practices

New ideas

New cultures

New competition

The Impact of FDI on the Host Country Employment

Firms attempt to capitalize on abundant and inexpensive labor.

Host countries seek to have firms develop labor skills and sophistication.

Host countries often feel like least desirable jobs are transplanted from
home countries.

Home countries often face the loss of employment as jobs move.

FDI Impact on Domestic Enterprises

Foreign invested companies are likely more productive than local competitors.

19
 The result is uneven competition in the short run, and competency building
efforts in the longer term.

It is likely that FDI developed enterprises will gradually develop local

supporting industries, supplier relationships in the host country.

The Impact of FDI on the Host Country Employment

Firms attempt to capitalize on abundant and inexpensive labor.

Host countries seek to have firms develop labor skills and sophistication.

Host countries often feel like least desirable jobs are transplanted from
home countries.

Home countries often face the loss of employment as jobs move.

FDI Impact on Domestic Enterprises

Foreign invested companies are likely more productive than local competitors.

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

It is likely that FDI developed enterprises will gradually develop local

supporting industries, supplier relationships in the host country.

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 Chapter 2

Foreign Direct Investment

The economy of India is the third largest in the world as measured by purchasing power
parity (PPP), with a gross domestic product (GDP) of US $3.611 trillion. When measured in
USD exchange-rate terms, it is the tenth largest in the world, with a GDP of US $800.8
billion (2006). Is the second fastest growing major economy in the world, with a GDP growth
rate of 8.9% at the end of the first quarter of 2006-2007. However, India's huge population
results in a per capita income of $3,300 at PPP and $714 at nominal.

The economy is diverse and encompasses agriculture, handicrafts, textile, manufacturing, and
a multitude of services. Although two-thirds of the Indian workforce still earn their livelihood
directly or indirectly through agriculture, services are a growing sector and are playing an
increasingly important role of India's economy. The advent of the digital age, and the large
number of young and educated populace fluent in English, is gradually transforming India as
an important 'back office' destination for global companies for the outsourcing of their
customer services and technical support.

India is a major exporter of highly-skilled workers in software and financial services, and
software engineering. India followed a socialist-inspired approach for most of its independent
history, with strict government control over private sector participation, foreign trade, and
foreign direct investment. However, since the early 1990s, India has gradually opened up its
markets through economic reforms by reducing government controls on foreign trade and
investment. The privatization of publicly owned industries and the opening up of certain
sectors to private and foreign interests has proceeded slowly amid political debate. India faces
a burgeoning population and the challenge of reducing economic and social inequality.
Poverty remains a serious problem, although it has declined significantly since independence,
mainly due to the green revolution and economic reforms. FDI up to 100% is allowed under
the automatic route in all activities/sectors except the following which will require approval
of the Government: Activities/items that require an Industrial License; Proposals in which the
foreign collaborator has a previous/existing venture/tie up in India

FDI in India includes FDI inflows as well as FDI outflow from India. Also FDI foreign direct
investment and FII foreign institutional investors are a separate case study while preparing a

21
report on FDI and economic growth in India. FDI and FII in India have registered growth in
terms of both FDI flows in India and outflow from India. The FDI statistics and data are
evident of the emergence of India as both a potential investment market and investing
country. FDI has helped the Indian economy grow, and the government continues to
encourage more investments of this sort - but with $5.3 billion in FDI. India gets less than
10% of the FDI of China. Foreign direct investment (FDI) in India has played an important
role in the development of the Indian economy. FDI in India has - in a lot of ways - enabled
India to achieve a certain degree of financial stability, growth and development. This money
has allowed India to focus on the areas that may have needed economic attention, and address
the various problems that continue to challenge the country. India has continually sought to
attract FDI from the worlds major investors.

In 1998 and 1999, the Indian national government announced a number of reforms designed
to encourage FDI and present a favorable scenario for investors. FDI investments are
permitted through financial collaborations, through private equity or preferential allotments,
by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in
the arms, nuclear, railway, coal & lignite or mining industries. A number of projects have
been announced in areas such as electricity generation, distribution and transmission, as well
as the development of roads and highways, with opportunities for foreign investors. The
Indian national government also provided permission to FDIs to provide up to 100% of the
financing required for the construction of bridges and tunnels, but with a limit on foreign
equity of INR 1,500 crores, approximately $352.5m. Currently, FDI is allowed in financial
services, including the growing credit card business.

These services include the non-banking financial services sector. Foreign investors can buy
up to 40% of the equity in private banks, although there is condition that stipulates that these
banks must be multilateral financial organizations. Up to 45% of the shares of companies in
the global mobile personal communication by satellite services (GMPCSS) sector can also be
purchased. By 2004, India received $5.3 billion in FDI, big growth compared to previous
years, but less than 10% of the $60.6 billion that flowed into China. Why does India, with a
stable democracy and a smoother approval process, lag so far behind China in FDI amounts?
Although the Chinese

Approval process is complex; it includes both national and regional approval in the same
process. Federal democracy is perversely an impediment for India. Local authorities are not

22
part of the approvals process and have their own rights, and this often leads to projects
getting bogged to projects getting bogged down in red tape and bureaucracy. India actually
receives less than half the FDI that the federal government approves.

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

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

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

23
Risk Due To Terrorism
In the recent past, India has witnessed several terrorist attacks on its soil which could have a
negative impact on investor confidence. Not only business environment and return on
investment, but also the overall security conditions in a nation have an effect on FDI's.
Though some of the financial experts think otherwise. They believe the negative impact of
terrorist attacks would be a short term phenomenon. In the long run, it is the micro and
macro-economic conditions of the Indian economy that would decide the flow of foreign
investment and in this regard India would continue to be a favorable investment destination.

Foreign Direct Investment Policy

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

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

o Foreign direct investment in India in infrastructure development projects excluding

arms and ammunitions, atomic energy sector, railways system , extraction of coal
and lignite and mining industry is allowed upto 100% equity participation with the
capping amount as Rs. 1500 crores.

o FDI figures in equity contribution in the finance sector cannot exceed more than

24
 40% in banking services including credit card operations and in insurance sector
only in joint ventures with local insurance companies.

o FDI limit of maximum 49% in telecom industry especially in the GSM services.

Government Approvals for Foreign Companies Doing Business in India

Government Approvals for Foreign Companies Doing Business in India or

Investment Routes for Investing in India, Entry Strategies for Foreign

Investors India's foreign trade policy has been formulated with a view to

invite and encourage FDI in India. The Reserve Bank of India has

prescribed the administrative and compliance aspects of FDI. A foreign

company planning to set up business operations in India has the following

options:

Investment under automatic route; and

Investment through prior approval of Government.

Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require any

prior approval either by the Government or RBI. The investors are only required to notify the

Regional office concerned of RBI within 30 days of receipt of inward remittances and file the

required documents with that office within 30 days of issue of shares to foreign investors.

List of activities or items for which automatic route for foreign investment is not available,
include the following:

Banking

NBFC's Activities in Financial Services Sector

25
 Civil Aviation

Petroleum Including Exploration/Refinery/Marketing

Housing & Real Estate Development Sector for Investment from Persons other
than NRIs/OCBs.

Venture Capital Fund and Venture Capital Company

Investing Companies in Infrastructure & Service Sector

Atomic Energy & Related Projects

Defense and Strategic Industries

Agriculture (Including Plantation)

Print Media

Broadcasting

Postal Services

Procedure under Government approval

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

Investment by way of Share Acquisition

A foreign investing company is entitled to acquire the shares of an Indian company without
obtaining any prior permission of the FIPB subject to prescribed parameters/ guidelines. If

26
the acquisition of shares directly or indirectly results in the acquisition of a company listed on
the stock exchange, it would require the approval of the Security Exchange Board of India.

New investment by an existing collaborator in India

A foreign investor with an existing venture or collaboration (technical and financial) with an
Indian partner in particular field proposes to invest in another area, such type of additional
investment is subject to a prior approval from the FIPB, wherein both the parties are required
to participate to demonstrate that the new venture does not prejudice the old one.

General Permission of RBI under FEMA

Indian companies having foreign investment approval through FIPB route do not require any
further clearance from RBI for receiving inward remittance and issue of shares to the foreign
investors. The companies are required to notify the concerned Regional office of the RBI of
receipt of inward remittances within 30 days of such receipt and within 30 days of issue of
shares to the foreign investors or NRIs.
Participation by International Financial Institutions
Equity participation by international financial institutions such as ADB, IFC, CDC, DEG,
etc., in domestic companies is permitted through automatic route, subject to SEBI/RBI
regulations and sector specific cap on FDI.

FDI in Small Scale Sector (SSI) Units

A small-scale unit cannot have more than 24 per cent equity in its paid up capital from any
industrial undertaking, either foreign or domestic.
If the equity from another company (including foreign equity) exceeds 24 per cent, even if
the investment in plant and machinery in the unit does not exceed Rs 10 million, the unit
loses its small-scale status and shall require an industrial license to manufacture items
reserved for small-scale sector. See also FDI in Small Scale Sector in India Further
Liberalized

Foreign direct investment: Indian scenario

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

27
 Chapter 3

Sector Specific Foreign Direct Investment in India

A. Hotel & Tourism:

FDI in Hotel & Tourism sector in India 100% FDI is permissible in the sector on the
automatic route.

The term hotels include restaurants, beach resorts, and other tourist complexes providing
accommodation and/or catering and food facilities to tourists. Tourism related industry
include travel agencies, tour operating agencies and tourist transport operating agencies, units
providing facilities for cultural, adventure and wild life experience to tourists, surface, air and
water transport facilities to tourists, leisure, entertainment, amusement, sports, and health
units for tourists and Convention/Seminar units and organizations.

For foreign technology agreements, automatic approval is granted if

i. up to 3% of the capital cost of the project is proposed to be paid for technical and
consultancy services including fees for architects, design, supervision, etc.

ii. up to 3% of net turnover is payable for franchising and marketing/publicity support

fee, and up to 10% of gross operating profit is payable for management fee, including
incentive fee.

B. Private Sector Banking:

Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route subject to guidelines issued from
RBI from time to time.

a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as

per levels indicated below:

28
 i. Merchant banking

ii. Underwriting

iii. Portfolio Management Services

iv. Investment Advisory Services

v. Financial Consultancy

vi. Stock Broking

vii. Asset Management

viii. Venture Capital

ix. Custodial Services

x. Factoring

xi. Credit Reference Agencies

xii. Credit rating Agencies

xiii. Leasing & Finance

xiv. Housing Finance

xv. Foreign Exchange Brokering

xvi. Credit card business

xvii. Money changing Business

xviii. Micro Credit

xix. Rural Credit

b. Minimum Capitalization Norms for fund based NBFCs:

29
 i) For FDI up to 51% - US$ 0.5 million to be brought upfront

ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront

iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5
million to be brought up front and the balance in 24 months

c. Minimum capitalization norms for non-fund based activities:

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

non-fund based NBFCs with foreign investment.

d. Foreign investors can set up 100% operating subsidiaries without the condition to
disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50
million as at b) (iii) above (without any restriction on number of operating subsidiaries
without bringing in additional capital)

e. Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will
also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the
subsidiaries also complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii)
above.

f. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines
of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard.

C. Insurance Sector: FDI in Insurance sector in India

FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining
license from Insurance Regulatory & Development Authority (IRDA)

D. Telecommunication:

FDI in Telecommunication sector

i. In basic, cellular, value added services and global mobile personal communications by
satellite, FDI is limited to 49% subject to licensing and security requirements and
adherence by the companies (who are investing and the companies in which

30
 investment is being made) to the license conditions for foreign equity cap and lock- in
period for transfer and addition of equity and other license provisions.

ii. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to
74% with FDI, beyond 49% requiring Government approval. These services would be
subject to licensing and security requirements.

iii. No equity cap is applicable to manufacturing activities.

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

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

b. Infrastructure Providers providing dark fiber (IP Category 1);

c. Electronic Mail; and

d. Voice Mail

The above would be subject to the following conditions:

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

f. The above services would be subject to licensing and security requirements,

wherever required.

Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.
E. Trading:

FDI in Trading Companies in India

Trading is permitted under automatic route with FDI up to 51% provided it is primarily
export activities, and the undertaking is an export house/trading house/super trading
house/star trading house. However, under the FIPB route:-

i. 100% FDI is permitted in case of trading companies for the following activities:

31
 exports;

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

cash and carry wholesale trading;

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

ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy:

a. Companies for providing after sales services (that is not trading per se)

b. Domestic trading of products of JVs is permitted at the wholesale level for such
trading companies who wish to market manufactured products on behalf of their joint
ventures in which they have equity participation in India.

c. Trading of hi-tech items/items requiring specialized after sales service

d. Trading of items for social sector

e. Trading of hi-tech, medical and diagnostic items.

f. Trading of items sourced from the small scale sector under which, based on
technology provided and laid down quality specifications, a company can market that
item under its brand name.

g. Domestic sourcing of products for exports.

h. Test marketing of such items for which a company has approval for manufacture
provided such test marketing facility will be for a period of two years, and investment
in setting up manufacturing facilities commences simultaneously with test marketing

FDI up to 100% permitted for e-commerce activities subject to the condition that such
companies would divest 26% of their equity in favor of the Indian public in five years, if

32
these companies are listed in other parts of the world. Such companies would engage only in
business to business (B2B) e-commerce and not in retail trading.

F. Power:

FDI In Power Sector in India

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

G. Drugs & Pharmaceuticals

FDI up to 100% is permitted on the automatic route for manufacture of drugs and
pharmaceutical, provided the activity does not attract compulsory licensing or involve use of
recombinant DNA technology, and specific cell / tissue targeted formulations.

FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs
produced by recombinant DNA technology, and specific cell / tissue targeted formulations
will require prior Government approval.

H. Roads, Highways, Ports and Harbors

FDI up to 100% under automatic route is permitted in projects for construction and
maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and
harbors.

I. Pollution Control and Management

FDI up to 100% in both manufacture of pollution control equipment and consultancy for
integration of pollution control systems is permitted on the automatic route.

J. Call Centers in India / Call Centres in India

FDI up to 100% is allowed subject to certain conditions.

Business Process Outsourcing BPO in India

FDI up to 100% is allowed subject to certain conditions.

33
 K. Special Facilities and Rules for NRI's and OCB's
NRI's and OCB's are allowed the following special facilities:

1. Direct investment in industry, trade, infrastructure etc.

2. Up to 100% equity with full repatriation facility for capital and dividends in the
following sectors

i. 34 High Priority Industry Groups

ii. Export Trading Companies

iii. Hotels and Tourism-related Projects

iv. Hospitals, Diagnostic Centers

v. Shipping

vi. Deep Sea Fishing

vii. Oil Exploration

viii. Power

ix. Housing and Real Estate Development

x. Highways, Bridges and Ports

xi. Sick Industrial Units

xii. Industries Requiring Compulsory Licensing

3. Up to 40% Equity with full repatriation: New Issues of Existing Companies raising
Capital through Public Issue up to 40% of the new Capital Issue.

4. On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership

engaged in Industrial, Commercial or Trading Activity.

34
 5. Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of the
equity Capital or Convertible Debentures of the Company by each NRI. Investment in
Government Securities, Units of UTI, National Plan/Saving Certificates.

6. On Non-Repatriation Basis: Acquisition of shares of an Indian Company, through a

General Body Resolution, up to 24% of the Paid Up Value of the Company.

7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from Shares
or Debentures of an Indian

India Further Opens up Key Sectors for Foreign Investment

India has liberalized foreign investment regulations in key sectors, opening up commodity
exchanges, credit information services and aircraft maintenance operations. The foreign
investment limit in Public Sector Units (PSU) refineries has been raised from 26% to 49%.

An additional sweetener is that the mandatory disinvestment clause within five years has
been done away with. FDI in Civil aviation up to 74% will now be allowed through the
automatic route for non-scheduled and cargo airlines, as also for ground handling
activities. 100% FDI in aircraft maintenance and repair operations has also been allowed.

But the big one, allowing foreign airlines to pick up a stake in domestic carriers has been
given a miss again. India has decided to allow 26% FDI and 23% FII investments in
commodity exchanges, subject to the proviso that no single entity will hold more than 5% of
the stake.

Sectors like credit information companies, industrial parks and construction and development
projects have also been opened up to more foreign investment. Also keeping India's civilian
nuclear ambitions in mind, India has also allowed 100% FDI in mining of titanium, a mineral
which is abundant in India.

Sources say the government wants to send out a signal that it is not done with reforms yet. At
the same time, critics say contentious issues like FDI and multi-brand retail are out of the
policy radar because of political compulsions.

35
 Sector-wise FDI Inflows ( From April 2000 to January 2010)
SECTOR
AMOUNT OF FDI PERCENT OF TOTAL FDI
INFLOWS INFLOWS (In terms of Rs)
In Rs Million In US$
Million

Services Sector 787420.81 18118.40 22.39

Computer Software 391109.74 8876.43 11.12
& hardware
Telecommunications 275441.38 6215.55 7.83
Construction 213595.12 5029.01 6.07
Activities
Automobile 146799.41 3310.23 4.17
Housing & Real 217936.02 5118.85 6.20
estate
Power 137089.37 3129.66 3.90
Chemicals (Other 87008.07 1964.06 2.47
than Fertilizers)
Ports 63290.50 1551.88 1.80
Metallurgical 109563.20 2612.85 3.11
industries
Electrical 57379.63 1324.92 1.63
Equipment`s
Cement & Gypsum 70781.19 1621.03 2.01
Products
Petroleum & Natural 94417.17 2244.17 2.68
Gas
Trading 62416.85 1480.94 1.77
Consultancy 48647.43 1112.92 1.38
Services
Hotel and Tourism 52500.05 1217.50 1.49
Food Processing 34362.49 760.32 0.98
Industries
Electronics 33914.75 748.57 0.96
Misc. Mechanical & 28310.13 648.86 0.80
Engineering
industries
Information & 52115.90 1194.20 1.48
Broadcasting (Incl.
Print media)
Mining 21204.94 522.86 0.60
Textiles (Incl. Dyed, 26736.94 611.03 0.76
Printed)
Sea Transport 17653.81 402.59 0.50
Hospital & 27241.42 644.73 0.77
Diagnostic Centers
Fermentation 27743.46 658.04 0.79
Industries
Machine Tools 10955.32 247.88 0.31
Air Transport ( Incl. 10552.19 240.71 0.30
air freight) 36
Ceramics 17462.43 409.92 0.50
Rubber Goods 11392.76 247.60 0.32
Agriculture Services 7937.13 188.39 0.23
Forbidden Territories for FDI in India:

Arms and ammunition

Atomic Energy

Coal and lignite

Rail Transport

Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds,
copper, zinc.

37
 Chapter 4
Foreign Direct Investments in India

Foreign Investment through GDRs (Euro Issues)

Indian companies are allowed to raise equity capital in the international market through the
issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI and are
designated in dollars and are not subject to any ceilings on investment. An applicant company
seeking Government's approval in this regard should have consistent track record for good
performance (financial or otherwise) for a minimum period of 3 years. This condition would
be relaxed for infrastructure projects such as power generation, telecommunication,
petroleum exploration and refining, ports, airports and roads.

1. Clearance from FIPB

There is no restriction on the number of Euro-issue to be floated by a company or a group of
companies in the financial year. A company engaged in the manufacture of items covered
under Annex-III of the New Industrial Policy whose direct foreign investment after a
proposed Euro issue is likely to exceed 51% or which is implementing a project not contained
in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from
Ministry of Finance.

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

Foreign direct investments in India are approved through two routes

A. Automatic approval by RBI
The Reserve Bank of India accords automatic approval within a period of two weeks (subject
to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%;
74% and 100% is allowed depending on the category of industries and the sectoral caps
applicable. The lists are comprehensive and cover most industries of interest to foreign

38
companies. Investments in high priority industries or for trading companies primarily
engaged in exporting are given almost automatic approval by the RBI.
B. The FIPB Route Processing of non-automatic approval cases
FIPB stands for Foreign Investment Promotion Board which approves all other cases where
the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its
approach is liberal for all sectors and all types of proposals, and rejections are few. It is not
necessary for foreign investors to have a local partner, even when the foreign investor wishes
to hold less than the entire equity of the company. The portion of the equity not proposed to
be held by the foreign investor can be offered to the public.

Analysis of sector specific policy for FDI

39
Sr. No. Sector/Activity FDI cap/Equity Entry/Route
1. Hotel & Tourism 100% Automatic
2. NBFC 49% Automatic
3. Insurance 26% Automatic
4. Telecommunication: Automatic
cellular, value added 49%
services Above 49% need Govt.
ISPs with gateways, radio- 74% licence
paging 100%
Electronic Mail & Voice
Mail
5. Trading companies:
primarily export activities 51% Automatic
bulk imports, cash and
carry wholesale trading 100% Automatic
6. Power(other than atomic
reactor power plants) 100% Automatic
7. 100% Automatic
Drugs & Pharmaceuticals
8. 100% Automatic
Roads, Highways, Ports
and Harbors
9. 100% Automatic
Pollution Control and
Management
10 Call Centers 100% Automatic
11. BPO 100% Automatic
12. For NRI's and OCB's:

i. 34 High
100% Automatic
Priority Industry
Groups

ii. Export
Trading Companies

iii. Hotels and

Tourism-related
Projects

iv. Hospitals,
Diagnostic Centers

v. Shipping
40
vi. Deep Sea
Fishing
Analysis of FDI inflow in India
From April 2000 to August 2 (Amount US$ in Millions)
Sr. No Financial Year Total FDI Inflows % Growth Over Previous Year
1. 2000-01 4,029 ----
2. 2001-02 6,130 (+) 52
3. 2002-03 5,035 (-) 18
4. 2003-04 4,322 (-) 14
5. 2004-05 6,051 (+) 40
6. 2005-06 8,961 (+) 48
7. 2006-07 22,826 (+) 146
8. 2007-08 34,362 (+) 51
9. 2008-09 35,168 (+) 02
10. 2009-10 16,232 ----

TOTAL FDI INFLOWS IN INDIA

40,000

35,000 35,168
34,362

30,000

25,000
22,826
TOTAL FDI INFLOWS
20,000

16,232
15,000

10,000
8,961
6,130 6,051
5,000 5,035 4,322
4,029

41
Analysis of share of top ten investing countries FDI equity in flows
From April 2000 to January 2010
(Amount in Millions)
Sr. No Country Amount of FDI Inflows % As To Total FDI Inflow
1. Mauritius 19,18,633.61 44.01
2. Singapore 3,80,142.56 8.72
3. U.S.A. 3,32,935.60 7.64
4. U.K. 2,40,974.98 5.53
5. Netherlands 1,78,047.76 4.08
6. Japan 1,50,129.05 3.44
7. Cyprus 1,32,448.04 3.04
8. Germany 1,12,242.06 2.57
9. France 61,686.39 1.42
10. U.A.E. 50,915.59 1.17

A. Mauritius
Mauritius invested Rs.19,18,633 million in India Up to the January 2010, equal to 44.01
percent of total FDI inflows. Many companies based outside of India utilize Mauritian
holding companies to take advantage of the India- Mauritius Double Taxation Avoidance
Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains taxes,
and may allow some India-based firms to avoid paying certain taxes through a process known
as round tripping.

42
The extent of round tripping by Indian companies through Mauritius is unknown. However,
the Indian government is concerned enough about this problem to have asked the government
of Mauritius to set up a joint monitoring mechanism to study these investment flows. The
potential loss of tax revenue is of particular concern to the Indian government. These are the
sectors which attracting more FDI from Mauritius Electrical equipment Gypsum and cement
products Telecommunications Services sector that includes both non- financial and financial
Fuels.

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

C. U.S.A.
The United States is the third largest source of FDI in India (7.64 % of the total), valued at
732335 crore in cumulative inflows up to January 2010. According to the Indian government,
the top sectors attracting FDI from the United States to India are fuel, telecommunications,
electrical equipment, food processing, and services. According to the available M&A data,
the two top sectors attracting FDI inflows from the United States are computer systems
design and programming and manufacturing
D. U.K.
The United Kingdom is the fourth largest source of FDI in India (5.53 % of the total), valued
at 2,40,974 crores in cumulative inflows up to January 2010.
Over 17 UK companies under the aegis of the Nuclear Industry Association of UK have tied
up with Ficci to identify joint venture and FDI possibilities in the civil nuclear energy sector.
UK companies and policy makers the focus sectors for joint ventures, partnerships, and trade
are non-conventional energy, IT, precision engineering, medical equipment, infrastructure
equipment, and creative industries.
E. Netherlands
FDI from Netherlands to India has increased at a very fast pace over the last few years.
Netherlands ranks fifth among all the countries that make investments in India. The total flow

43
of FDI from Netherlands to India came to Rs. 1, 78,047 crores between 1991 and 2002. The
total percentage of FDI from Netherlands to India stood at 4.08% out of the total foreign
direct investment in the country up to August 2009.

Following Various industries attracting FDI from Netherlands to India are:

Food processing industries

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

radio paging

Horticulture

Electrical equipment that includes computer software and electronics

Service sector that includes non- financial and financial services

Analysis of sectors attracting highest FDI equity inflows

From April 2000 to March 2010

(Amount in Millions)
Sr. No Country Amount of FDI Inflows % As To Total
FDI Inflow
1. Service Sector 9,65,210.77 22.14
(Financial & Non-Financial)
2. Computer Software & Hardware 4,13,419.03 9.48
3. Telecommunication 3,68,899.62 8.46
4. Housing & Real Estate 3,25,021.36 7.46
5. Construction Activities 2,65,492.96 6.09
6. Automobile Industry 1,90,172.22 4.36
7. Power 1,79,849.92 4.13
8. Metallurgical Industries 1,25,785.57 2.89
9. Petroleum & Natural Gas 1,11,957.00 2.57
10. Chemical 1,01,680.18 2.33

The sectors receiving the largest shares of total FDI inflows up to march 2010 were the
service sector and computer software and hardware sector, each accounting for 22.14 and
9.48 percent respectively. These were followed by the telecommunications, real estate,
construction and automobile sectors. The top sectors attracting FDI into India via M&A

44
activity were manufacturing; information; and professional, scientific, and technical services.
These sectors correspond closely with the sectors identified by the Indian government as
attracting the largest shares of FDI inflows overall.

The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers) registered
maximum growth of 227 per cent during April 2008 March 2009 as compared to 11.71 per
cent during the last fiscal. The sector attracted USD 749 million FDI in FY 09 as compared
to USD 229 million in FY 08.

During the year 2009 government had raised the FDI limit in telecom sector from 49 per cent
to 74 per, which has contributed to the robust growth of FDI. The telecom sector registered a
growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal. The sector
attracted USD 2558 million FDI in FY 09 as compared to the USD 1261 million in FY 08,
acquired 9.37 per cent share in total FDI inflow.

India automobile sector has been able to record 70 per cent growth in foreign investment. The
FDI inflow in automobile sector has increased from USD 675 million to 1,152 million in FY
09 over FY 08. The other sectors which registered growth in highest FDI inflow during
April March 2009 were housing & real estate (28.55 per cent), computer software &
hardware (18.94 per cent), construction activities including road & highways (16.35 per cent)
and power (1.86 per cent).
Foreign Investment Promotion Board

The FIPB (Foreign Investment Promotion Board) is a government body that offers a single
window clearance for proposals on foreign direct investment in the country that are not
allowed access through the automatic route. Consisting of Senior Secretaries drawn from
different ministries with Secretary ,Economic Affairs in the chair, this high powered body
discusses and examines proposals for foreign investment in the country for restricted sectors (
as laid out in the Press notes and extant foreign investment policy) on a regular basis.
Currently proposals for investment beyond 600 crores require the concurrence of the CCEA
(Cabinet Committee on Economic Affairs). The threshold limit is likely to be raised to 1200
crore soon. The Board thus plays an important role in the administration and implementation
of the Governments FDI policy. In circumstances where there is ambiguity or a conflict of
interpretation, the FIPB has stepped in to provide solutions. Through its fast track working it

45
has established its reputation as a body that does not unreasonably delay and is objective in
its decision making. It therefore has a strong record of actively encouraging the flow of FDI
into the country. The FIPB is assisted in this task by a FIPB Secretariat. The launch of e-
filing facility is an important initiative of the Secretariat to further the cause of enhanced
accessibility and transparency.

Low Income Countries in Global FDI Race

The situation of foreign direct investment has been relatively good in the recent times with an
increase of 38%. Normally, the foreign direct investment is made mostly into the extractive
industries. However, now the foreign direct investors are also looking to pump money into
the manufacturing industry that has garnered 47% of the total foreign direct investment made
in 1992. However, the situation has not been the same in the countries with a middle income
range.

The middle income countries have not received a steady inflow of foreign direct income
coming their way. The situation is comparatively better in the low income countries. They
have had an uninterrupted and continually increasing flow of foreign direct investment. It has
been observed that the various debt crises, as well as, other forms of economic crises have
had less effect on these countries.

These countries had lesser amounts of commercial bank obligations, which again had been
caused by the absence of proper financial markets, as well as the fact that their economies
were not open to foreign direct investment. During the later phases of the decade of 70s the
Asian countries started encouraging foreign direct investments in their economies. China has
received the most of the foreign direct investment that was pumped into the countries

with low income. It accounted for as much as 86% of the total foreign direct investment made
in the lower income countries in with low income. It accounted for as much as 86% of the
total foreign direct investment made in the lower income countries in 1995.

The economic liberalization in China started in 1979. This led to an increase in the foreign
direct investment in China. In the years between 1982 and 1991 the average foreign direct

investment in China was US$ 2.5 billion. This average increased by seven times to become
US$ 37.5 billion during 1995. A significant amount of the foreign direct investment in China
was provided in the industrial sector.

46
It was as much as 68%. Around 20% of the foreign direct investment of China was made in
the real estate sector. During the same period Nigeria had been the second best in terms of
receiving foreign direct investment. In the recent times India has

Risen to be the third major foreign direct investment destination in the recent years. Foreign
direct investment started in India in 1991 with the initiation of the economic liberation.

There were more initiatives that enabled India to garner foreign direct investments worth US$
2.9 billion from 1991 to 1995. This was a significant increase from the previous twenty years
when the total foreign direct investment in India was US$1 billion. Most of the foreign direct
investment made in India has been in the infrastructural areas like telecommunications and
power. In the manufacturing industry the emphasis has been on petroleum refining, vehicles
and petrochemicals Vietnam is a low income country, which is supposed to have the same
potential as China to generate foreign direct investment.

The foreign direct investment laws were introduced in Vietnam in 1987-88. This led to an
increase in the foreign direct investment made in the country. The amount stood at US$ 25
million in 1993 compared to US$ 8 million in 1993. This amount increased by 3 times after
the USA removed its economic sanctions in 1994. The gas and petroleum industries were the
biggest beneficiaries of the foreign direct investment. Bangladesh started receiving increasing
foreign direct investment after 1991, when the economic reforms took place in the country.

After 1991 it was possible for foreign companies to set up companies in Bangladesh without
taking permission beforehand. The foreign direct investment rose from US$ 11 million in
1994 to US$ 125 million in 1995. As per the available statistics the manufacturing industry,
comprising of clothing and textiles took up 20% of the total approved foreign direct
investment. Food processing, chemicals and electric machinery were also important in this
regard. The increase in the foreign direct investment in Ghana was remarkable as well. The
figures increased from US$11.7 million, on an average, from 1986 to 1992 to US$ 201
million, on an average, from 1993 to 1995. This improvement was brought about by the
privatization of the Ashanti Goldfields.

47
48
 Chapter 5
Foreign Institutional Investment

FOREIGN INSTITUTIONAL INVESTMENT

I. Introduction to FII
Since 1990-91, the Government of India embarked on liberalization and economic reforms
with a view of bringing about rapid and substantial economic growth and move towards
globalization of the economy. As a part of the reforms process, the Government under its
New Industrial Policy revamped its foreign investment policy recognizing the growing
importance of foreign direct investment as an instrument of technology transfer,
augmentation of foreign exchange reserves and globalization of the Indian economy.
Simultaneously, the Government, for the first time, permitted portfolio investments from
abroad by foreign institutional investors in the Indian capital market. The entry of FIIs seems
to be a follow up of the recommendation of the Narsimhan Committee Report on Financial
System. While recommending their entry, the Committee, however did not elaborate on the
objectives of the suggested policy. The committee only suggested that the capital market
should be gradually opened up to foreign portfolio investments.

From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all the
securities traded on the primary and secondary markets, including shares, debentures and
warrants issued by companies which were listed or were to be listed on the Stock Exchanges
in India. While presenting the Budget for 1992-93, the then Finance Minister Dr. Manmohan
Singh had announced a proposal to allow reputed foreign investors, such as Pension Funds
etc., to invest in Indian capital market.

II. Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside India
which proposes to make investment in India in securities. A Working Group for Streamlining
of the Procedures relating to FIIs, constituted in April, 2003, inter alia, recommended
streamlining of SEBI registration procedure, and suggested that dual approval process of
SEBI and RBI be changed to a single approval process of SEBI. This recommendation was
implemented in December 2003.

49
Currently, entities eligible to invest under the FII route are as follows:

i) As FII: Overseas pension funds, mutual funds, investment trust, asset management
company, nominee company, bank, institutional portfolio manager, university
funds, endowments, foundations, charitable trusts, charitable societies, a trustee or
power of attorney holder incorporated or established outside India proposing to
make proprietary investments or with no single investor holding more than 10 per
cent of the shares or units of the fund.
ii) As Sub-accounts: The sub account is generally the underlying fund on whose
behalf the FII invests. The following entities are eligible to be registered as sub-
accounts, viz. partnership firms, private company, public company, pension fund,
investment trust, and individuals.

FIIs registered with SEBI fall under the following categories:

a) Regular FIIs- those who are required to invest not less than 70 % of their investment
in equity-related instruments and 30 % in non-equity instruments.
b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset
management companies, nominee companies and incorporated/institutional portfolio
managers or their power of attorney holders (providing discretionary and non-discretionary
portfolio management services) to be registered as FIIs. While the guidelines did not have a
specific provision regarding clients, in the application form the details of clients on whose
behalf investments were being made were sought.

While granting registration to the FII, permission was also granted for making investments in
the names of such clients. Asset management companies/portfolio managers are basically in
the business of managing funds and investing them on behalf of their funds/clients. Hence,
the intention of the guidelines was to allow these categories of investors to invest funds in
India on behalf of their 'clients'. These 'clients' later came to be known as sub-accounts. The
broad strategy consisted of having a wide variety of clients, including individuals,
intermediated through institutional investors, who would be registered as FIIs in India. FIIs
are eligible to purchase shares and convertible debentures issued by Indian companies under
the Portfolio Investment Scheme.

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III. Prohibitions on Investments:
FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They
are also not allowed to invest in any company which is engaged or proposes to engage in the
following activities:
1) Business of chit fund
2) Nidhi Company
3) Agricultural or plantation activities
4) Real estate business or construction of farm houses (real estate business does not include
development of townships, construction of residential/commercial premises, roads or
bridges).
5) Trading in Transferable Development Rights (TDRs).

IV. Trends of Foreign Institutional Investments in India.

Portfolio investments in India include investments in American Depository Receipts (ADRs)/
Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in
offshore funds. Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate
Bodies were allowed to undertake portfolio investments in India. Thereafter, the Indian stock
markets were opened up for direct participation by FIIs. They were allowed to invest in all
the securities traded on the primary and the secondary market including the equity and other
securities/instruments of companies listed/to be listed on stock exchanges in India. It can be
observed from the table below that India is one of the preferred investment destinations for
FIIs over the years. As of March 2009, there were 1609 FIIs registered with SEBI.

SEBI Registered FIIs in India

Year End of March
1992-93 0
1993-94 3
1994-95 156
1995-96 353
1996-97 439
1997-98 496
1998-99 450
1999-00 506
2000-01 527
2001-02 490
2002-03 502

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 2003-04 540
2004-05 685
2005-06 882
2006-07 996
2007-08 1279
2008-09 1609
2009-10 1805

FII trend in India

Year Gross Gross Sales (b) Net % increase in
Purchases (Rs.crore) Investment FII inflow
(a) (Rs. crore) (a-b)
(Rs. crore)
1992-93 17 4 13 -
1993-94 5593 466 5127 39338.46
1994-95 7631 2835 4796 -6.45
1995-96 9694 2752 6942 44.75
1996-97 15554 6979 8575 23.52
1997-98 18695 12737 5958 -30.52
1998-99 16115 17699 1584 126.59
1999-00 56856 46734 10122 739.02
2000-01 74051 64116 9935 -1.85
2001-02 49920 41165 8755 -11.88
2002-03 47061 44373 2688 69.30
2003-04 144858 99094 45764 1602.53
2004-05 16953 171072 45881 0.26
2005-06 346978 305512 41466 -9.62
2006-07 520508 489667 30841 -25.62
2007-08 896686 844504 52182 69.20
2008-09 548876 594608 -45732 187.64

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 FII INFLOW
1000000

800000
Gross Purchases (a) (Rs.crore) Gross Sales (b) (Rs.crore)
600000

400000

200000
Net Investment (a-b) (Rs.crore)
0

-200000

There may be many other factors on which a stock index may depend i.e. Government
policies, budgets, bullion market, inflation, economic and political condition of the country,
FDI, Re./Dollar exchange rate etc. But for my study I have selected only one independent
variable i.e. FII and dependent variable is indices of nifty.
V. Co relation with Indices

Indices Co-relation with FII

Sensex 0.80
Bankex 0.18
Power 0.33
IT 0.13
Capital Goods 0.44

From the above table we can say that FII has a positive impact on all the indices which means
that if FIIs come in India then it is goods for the Indian economy. FIIs have more co-relation
with Sensex so we can say that they are mostly invest in big and reputed companies which
are included in Sensex.

Power and Capital Goods sector have more co-relation with FII investment which shows
more interest of FIIs in those sectors.

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Difference between FDI and FII

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

FDI is more preferred to the FII as they are considered to be the most beneficial kind of
foreign investment for the whole economy.

Specific enterprise - It aims to increase the enterprises capacity or productivity or change its
management control. In an FDI, the capital inflow is translated into additional production.
The FII investment flows only into the secondary market. It helps in increasing capital
availability in general rather than enhancing the capital of a specific enterprise. The Foreign
Direct Investment is considered to be more stable than Foreign Institutional Investor. FDI not
only brings in capital but also helps in good governance practices and better management
skills and even technology transfer. Though the Foreign Institutional Investor helps in
promoting good governance and improving accounting, it does not come out with any other
benefits of the FDI. While the FDI flows into the primary market, the FII flows into
secondary market. While FIIs are short-term investments, the FDIs are long term.

1. FDI is an investment that a parent company makes in a foreign country. On the

contrary, FII is an investment made by an investor in the markets of a foreign
nation.

54
2. FII can enter the stock market easily and also withdraw from it easily. But FDI
cannot enter and exit easily.

3. Foreign Direct Investment targets a specific enterprise. The FII increasing

capital availability in general.

4. The Foreign Direct Investment is considered to be more stable than Foreign

Institutional Investor

CONCLUSION

55
A large number of changes that were introduced in the countrys regulatory economic policies
heralded the liberalization era of the FDI policy regime in India and brought about a
structural breakthrough in the volume of the FDI inflows into the economy maintained a
fluctuating and unsteady trend during the study period. It might be of interest to note that
more than 50% of the total FDI inflows received by India , came from Mauritius, Singapore
and the USA.
The main reason for higher levels of investment from Mauritius was that the fact that India
entered into a double taxation avoidance agreement (DTAA) with Mauritius were protected
from taxation in India. Among the different sectors, the service sector had received the larger
proportion followed by computer software and hardware sector and telecommunication
sector.
According to findings and results, we have concluded that FII did have significant impact on
Sensex but there is less co-relation with Bankex and IT. One of the reasons for high degree of
any linear relation can also be due to the sample data. The data was taken on monthly basis.
The data on daily basis can give more positive results (may be). Also FII is not the only factor
affecting the stock indices. There are other major factors that influence the bourses in the
stock market.

Limitations of research
Profit of MNC will go outside the India.
Balance of payment can be unfavorable for India
The Government should control on much investment.
Government must safeguard the interest of Indian economy.

Bibliography
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56
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