GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY Submitted in partial fulfillment of requirement of Bachelor of Business Administration (B.B.

A) General

[Emblem of GGSIPU]

BBA IIIrd Semester (Morning) Batch 2010-2013

Submitted to:

Submitted by: SWATI E.no-03614101710

JAGANNATH INTERNATIONAL MANAGEMENT SCHOOL, KALKAJI

ACKNOWLEDGEMENT
The completion of any project depends upon the co-operation, coordination and combined efforts of several resources of knowledge, inspiration & energy. Words fall short acknowledging immense support lent to me yet I will try to give full credit to the deserver's. My sincere thanks goes to Mr. Avtar Singh Sethi( HOD, BBA) giving me an opportunity to discover more knowledge. I am thankful to my mentor Mrs. Jyoti k Arora for her support, guidance and cooperation throughout to accomplish this project also expressing deep sense of gratitude to our Class coordinator Ms. Neha Gupta for her valuable guidance, continuous encouragement and tremendous patience in discussing my problems, have been of the greatest help in bringing out my task in present shape. I am equally grateful to all my other teachers for their complete support. It would be unfair on my part if I do thank my classmates for their continuous help without which this work could never have been accomplished. They made me realize the importance of teamwork and also the leadership skills. I am grateful to all of them standing with me and supporting me in this project.

(Swati)

CERTIFICATE OF COMPLETION
This is to certify that Ms. SWATI, persuing BBA-3rd sem from JIMS KALKAJI, has completed her project on the topic FOREIGN DIRECT INVESTMENT under my guidance.

Her work is satisfactory.

Mrs. JYOTI K ARORA Astt.Prof,. IT

CONTENTS
Chapter1. FOREIGN DIRECT INVESTMENT Types of FDI History of the FDI Foreign direct investors Methods of FDI Advantages of FDI in India 9 22 12-15 16 17 18-20 20-21 22-37 23-24 25 26-32 33-36 36 37-40 37 38 39 40 41-49 41 42-44 44 45-48 48 48-52

Chapter 2. IMPACT OF FDI ON HOST COUNTRIES FDI in India FDI policy in India Sector specific FDI in India Foreign institutional investment Difference between FDI and FII

Chapter 3. FLOWS OF FDI Dollar flows to Asia Dollar flows growth rate FDI inflows FDI inflows in april-september in2005 to 2007

Chapter 4. FDI IN INDIAN FINANCIAL SECTOR Fdi in major sectors in india Financial sector Financial institutions Banking sector Impact of fdi in financial sector Effect of fdi on banking sector

1.) Objectives of the study 2.) Literature review 3.) Research and methodology FDI inflow FDI outflow Sector wise FDI inflow

53-56 57-60 61-64

4.) 5.) 6.) 7.) 8.)

Analysis and interpretation Findings and inferences Limitations Recommendations and conclusions Bibliography

65-69 70-71 72-73 74-76 77

EXECUTIVE SUMMARY
Foreign direct investment (FDI) has played an important role in the process of globalisation during the past two decades. The rapid expansion in FDI by multinational enterprises since the mid-eighties may be attributed to significant changes in technologies, greater liberalisation of trade and investment regimes, and deregulation and privatisation of markets in many countries including developing countries like India. Capital formation is an important determinant of economic growth. While domestic investments add to the capital stock in an economy, FDI plays a complementary role in overall capital formation and in filling the gap between domestic savings and investment. At the macro-level, FDI is a non-debt-creating source of additional external finances. At the micro-level, FDI is expected to boost output, technology, skill levels, employment and linkages with other sectors and regions of the host economy. The present study aims at providing a detailed understanding of the spatial and sectoral spread of FDI-enabled production facilities in India and their linkages with the rural and suburban areas. The corresponding impact on output, value added, capital and employment in the regions receiving FDI has also been worked out. The analysis is based on primary as well as secondary data. While the primary survey provides limited information for the requisite analysis, the secondary database has been a major source of detailed firm- and plant-level analysis. The secondary database provided a rich source of plant-level data which has been used extensively in the analysis. The Capitaline database provides data on more than 14,000 Indian listed and unlisted companies classified under more than 300 industries. The information used is based on FDI actually received. All firms with foreign equity participation of 10 per cent and above have been considered to be FDI-enabled firms or FDI firms. All other firms, with less than 10 percent foreign equity, are referred to as domestic firms. The analysis of the secondary data has been undertaken to cover the issues of a) Spatial spread and reasons thereof; b) Sectoral clustering; c) Depth of value added; d) Employment-generating effects; e) Labour and capital intensity; f) Comparative performance of FDI and domestic firms; g) Export potential.

Based on the population data compiled in the Population Census 2001, the cities / towns of FDI-enabled production facilities have been grouped into three classes of cities based on their size, Class-1 Class-2 Class-3 cities. Class-1 cities are towns with a population of 1,000,000 and above, Class-2 cities are towns with a population between 5,00,000 and 1,000,000, Class-3 cities are towns with a population of less than 5,00,000.

It is assumed that Class-3 cities are likely to be towns which are suburban and closer to rural areas of the country. The purpose of introducing city-size classes is to locate the movement and final plant location of FDI firms. The more the FDI moves into Class-3 cities, the higher its linkage with suburban/rural regions of the country. The data of 351 FDI firms with 1,171 plants spread over 275 cities have been used to gauge the current economic performance of these plants during the period April 2006 to March 2008. This information has been used to study agglomeration or clustering issues, as well as other performance indicators of firms and plants and NIC 3-digit sectors across states and cities. These indicators include FDI equity, net fixed capital, output, employment, value added, output-capital ratio and FDI sectoral intensity. The FDIspecific indicators have also been compared with corresponding domestic indicators. We provide information on the top 25 NIC sectors based on the sectoral share of market capitalisation for the FDI firms. Information is also provided for net fixed capital and equity (foreign and domestic). In the case of FDI firms, the top 25 NIC sectors exhaust about 91 per cent of the total market capitalisation, 83 per cent of foreign equity and 84 percent of net fixed capital. Market capitalisation of FDI firms accounts for 15 per cent of the total capitalisation (domestic plus FDI firms). The top 25 NIC sectors account for 92 per cent of the total market capitalisation in small cities. The corresponding shares are 74 per cent for foreign equity and 78 per cent for net fixed capital. FDI-enabled plants are spread across various states with a relatively high concentration in Maharashtra, Gujarat, Tamil Nadu, Karnataka and West Bengal. A significant proportion (54 per cent) of manufacturing plants is located in Class-3 cities. FDI-enabled service facilities have a relatively high concentration in Andhra Pradesh, Karnataka, Maharashtra and Tamil Nadu. The proportion of service facilities located in Class-3 cities is relatively less significant (35 per cent) vis-a-vis manufacturing plants. Foreign equity in FDI-enabled manufacturing sectors has relatively significant penetration (44 per cent) in Class-3 cities compared with that in service sectors (8 per cent). The same is true for market capitalisation and net fixed capital. Sectors with relatively high share of market capitalisation in Class-3 cities include non-ferrous metals; non-metallic mineral products; dairy products; basic iron and steel; and transport equipment. States with relatively high share of market capitalisation in Class-3 cities include Andhra Pradesh, Assam, Haryana, Rajasthan and Uttar Pradesh. About half the total output, valued-added and wages paid in the FDIenabled manufacturing firms originate in Class-3 cities. Class-3 cities account for relatively high shares of output, value-added and wages paid in sectors including non-metallic mineral products; building and construction parts; mining of iron ores; textiles; and growing and processing of crops. The share of value-added in output is relatively high in sectors including software and publishing; mining of iron ore; growing and processing of crops; non-metallic mineral products; special purpose machinery; tobacco products; and footwear. More than two-fifth of the market capitalisation originates in Class-3 cities. FDI-enabled firms in manufacturing sectors provide employment to about 15.6 lakh persons, accounting for about 4 per cent to 5 per cent of the total employment in the organised sector. Class-3 cities have relatively high scale of production, market capitalisation, valueadded, wages paid, output and employment per plant medium and large cities.
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CHAPTER-1 INTRODUCTION OF THE TOPIC

Foreign direct investment (FDI) has become a key battleground for emerging markets and some developed countries. Government-level policies are needed to enable FDI inflows and maximize their returns for both investors and recipient countries. Foreign direct investment (FDI) policies play a major role in the economic growth of developing countries around the world. Attracting FDI inflows with conductive policies has therefore become a key battleground in the emerging markets. Developed countries also seek to bring in more FDI and use various policies and incentives to attract overseas investors, particularly for capital-intensive industries and advanced technology. The primary aim of these policies is to create a friendly business environment where foreign investors feel comfortable with the legal and financial framework of the country, and have the potential to reap profits from economically viable businesses. The prospect of new growth opportunities and outsized profits encourages large capital inflows across a range of industry and opportunity types. Investors tend to look for predictable environments where they understand how decision-making processes work. Governments therefore are incentivized to build up a track record of rational decision making. The business environment often requires work to remove onerous regulations, reduce corruption and encourage transparency. Governments often also seek to improve their domestic infrastructure to meet the operational needs of investors. Providing fiscal incentives for attracting FDI is a subject of controversy analysts have argued both in favour and against the idea. A general consensus is developing in favour of certain incentives which have been proven historically to grow profits and therefore foreign investments. When policies are effective, significant FDI investments are injected into countries that help the domestic economy to grow. Different countries and regions offer various kinds of fiscal incentives, with a related variance in the level of FDI investments attracted. Governments are increasingly setting up promotional agencies to foster foreign direct investment. These agencies promote FDI-friendly policies, identify prospective sectors and investors, and structure specific deals and incentives for major foreign investors such as multi-national corporations (MNCs). Global trade associations also play a major role in some of these investment activities. These associations are tasked with creating a positive environment for foreign direct investors and ensuring that both investors and recipient countries enjoy a favourable environment.

The formation of human capital is vital for the continued growth of FDI inflows. To enable the most beneficial, technology and IP-driven FDI, highly skilled personnel are necessary. Governments must therefore enact policies to provide training and skills upgrading to develop their workforce and meet the employment needs of foreign investors. Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payment. 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) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares. FDI is one example of international factor movement. 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. The figure below shows net inflows of foreign direct investment in the United States. 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, or FDI, is a type of investment that involves the injection of foreign funds into an enterprise that operates in a different country of origin from the investor.

FDI
A source of capital and investment involving foreign control of production A source of exploitation? A channel of technology transfer and industrial development?

FDI
Foreign direct investment (FDI) is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. The FDI relationship, consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm.

Reasons for FDI

Economic growth, de-regulation, liberal investment rules, and operational flexibility. All the factors that help increase the inflow of Foreign Direct Investment.

Foreign collaboration agreements

Technical collaboration agreements .Financial and technical collaboration agreements

Tax Implications of foreign collaboration

1. In the hands of Foreign collaborator 2. In the hands of Indian collaborator

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TYPES OF FDI

Greenfield investment: direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nations promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace.

downside of Greenfield investment is that profits from production do not feed back into the local economy, but instead to the multinational's home economy. This is in contrast to local industries whose profits flow back into the domestic economy to promote growth. Mergers and Acquisition Transfers of existing assets from local firms to foreign firms takes place; the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity.

Horizontal Foreign Direct Investment: investment in the same industry abroad as a firm operates in at home. Vertical Foreign Direct Investment: Takes two forms: 1) backward vertical FDI: where an industry abroad provides inputs for a firm's domestic production process 2) forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic production Horizontal Foreign Direct Investment: investment in the same industry abroad as a firm operates in at home. Vertical Foreign Direct Investment: Takes two forms: 1) backward vertical FDI: where an industry abroad provides inputs for a firm's domestic production process 2) forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic production
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Types of FDI based on the motives of the investing firm

Resource Seeking: Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. cheap labor and natural resources). This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe. Market Seeking: Investments which aim at either penetrating new markets or maintaining existing ones. Efficiency Seeking: Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm.

Typically, this type of FDI is mostly widely practiced between developed economies; especially those within closely integrated markets (e.g. the EU).

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Attractiveness as FDI Destination

Strong and stable government Pro-active government policies Investor-friendly and transparent decision making process Sound diversified industrial infrastructure Comfortable power situation Abundant skilled manpower Harmonious industrial relations Quality work culture Peaceful life Incentive packages Cosmopolitan composition Fluent English Chennai ranked second-best by BT Gallup Survey of Best Cities to do Business (Dec. 2001)

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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 massproduced. 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 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

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History
In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Figure below shows net inflows of foreign direct investments 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 nonindustrialized countries are increasing sharply.

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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 investors. Types of Foreign Direct Investment: An Overview FDIs can be broadly classified into two types: 1 2 Outward FDIs Inward FDIs

This classification is based on the types of restrictions imposed, and the various prerequisites required for these investments. Outward FDI: An outward-bound FDI is backed by the government against all types of associated risks. 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.
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 Liability of foreignness the costs of doing business abrad 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: 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) 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;
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A more complete response might address the issue of global business partnering in very general terms. While it is nice that many business writers like the expression, think globally, act locally, this often used clich does not really mean very much to the average business executive in a small and medium sized company. The phrase does have significant connotations for multinational corporations. But for executives in SMEs, it is still just another buzzword. The simple explanation for this is the difference in perspective between executives of multinational corporations and small and medium sized companies. Multinational corporations are almost always concerned with worldwide manufacturing capacity and proximity to major markets. Small and medium sized companies tend to be more concerned with selling their products in overseas markets. The advent of the Internet has ushered in a new and very different mindset that tends to focus more on access issues. SMEs in particular are now focusing on access to markets, access to expertise and most of all access to technology. 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
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 There are differences in market sophistication

Increasing Return from Ownership Advantages 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

Advantages of FDI in India

Domestic Investment Advantages FDI encourages domestic investment by providing: New markets Demand for inputs New technology Labor is mobile and often moves from multinational firms to domestic firms

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 Increased competition makes markets more efficient Investments in new sectors simulates the growth of new industry and new products Employment Generation and Labor Skills Foreign firms generate hundreds or thousands of jobs They generate employment in suppliers

Technology Advantages Foreign firms bring new technology Increased productivity of labor and capital Improved product standardization Reduced error rates Foreign firms invest in new technology Upgrades overall stock of capital More efficient in raising and using financial resources Unrestricted access to parent company's technology Access to tacit knowledge

Export Competitiveness Advantages Dominant technologies brought in by foreign companies makes products suitable for export Foreign technology increases production, reduces error rates and improves quality Foreign firms have strong distribution and marketing facilities Foreign firms have brand names that help exports

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CHAPTER-2

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 relationship in host country.

Foreign Direct Investment in India

The economy of India is the third largest in the world as measured by purchasing power parity (PPP), with a gross domestic product (GDP) of US $3.611 trillion. When measured in USD exchange-rate terms, it is the tenth largest in the world, with a GDP of US $800.8 billion (2006). is the second fastest growing major economy in the world, with a GDP growth rate of 8.9% at the end of the first quarter of 20062007. 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 highlyskilled 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.
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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 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 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 nonbanking 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.

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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.

FDI Policy in India

Foreign Direct Investment Policy FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. Change in sectoral policy/sectoral equity cap is notified from time to time through Press Notes by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy announcement by SIA are subsequently notified by RBI under FEMA. All Press Notes are available at the website of Department of Industrial Policy & Promotion. FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. The investors are required to notify the Regional office concerned of RBI of receipt of inward remittances within 30 days of such receipt and will have to file the required documents with that office within 30 days after issue of shares to foreign investors. The Foreign direct investment scheme and strategy depends on the respective FDI norms and policies in India. The FDI policy of India has imposed certain foreign direct investment regulations as per the FDI theory of the Government of India . These include FDI limits in India for example: Foreign direct investment in India in infrastructure development projects excluding arms and ammunitions, atomic energy sector, railways system , extraction of coal and lignite and mining industry is allowed upto 100% equity participation with the capping amount as Rs. 1500 crores. FDI figures in equity contribution in the finance sector cannot exceed more than 40% in banking services including credit card operations and in insurance sector only in joint ventures with local insurance companies. FDI limit of maximum 49% in telecom industry especially in the GSM services.

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 Sector Specific Foreign Direct Investment in India

Hotel & Tourism: FDI in Hotel & Tourism sector in India 100% FDI is permissible in the sector on the automatic route, The term hotels include restaurants, beach resorts, and other tourist complexes providing 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.

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: 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
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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:

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 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. 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.

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)

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Telecommunication:
FDI in Telecommunication sector i. In basic, cellular, value added services and global mobile personal communications by satellite, 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 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 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.

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Trading:
FDI in Trading Companies in India Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/trading house/super trading house/star trading house. However, under the FIPB route:i.) 100% FDI is permitted in case of trading companies for the following activities: exports; bulk imports with ex-port/ex-bonded warehouse sales; cash and carry wholesale trading; other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales. ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy: a. Companies for providing after sales services (that is not trading per se) b. Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India. c. Trading of hi-tech items/items requiring specialized after sales service d. Trading of items for social sector e. Trading of hi-tech, medical and diagnostic items. f. Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name. g. Domestic sourcing of products for exports. h. Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facilities commences simultaneously with test marketing. FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the world. Such companies would engage only in business to business (B2B) ecommerce and not in retail trading.

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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.

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.
Roads, Highways, Ports and Harbors FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors. Pollution Control and Management FDI up to 100% in both manufacture of pollution control equipment and consultancy for integration of pollution control systems is permitted on the automatic route. Call Centers in India / Call Centres in India FDI up to 100% is allowed subject to certain conditions. Business Process Outsourcing BPO in India. FDI up to 100% is allowed subject to certain conditions. Special Facilities and Rules for NRI's and OCB's NRI's and OCB's are allowed the following special facilities: 1. Direct investment in industry, trade, infrastructure etc. 2. Up to 100% equity with full repatriation facility for capital and dividends in the following sectors i. 34 High Priority Industry Groups ii. Export Trading Companies iii. Hotels and Tourism-related Projects iv. Hospitals, Diagnostic Centers

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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. 5. Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of the equity Capital or Convertible Debentures of the Company by each NRI. Investment in Government Securities, Units of UTI, National Plan/Saving Certificates. 6. On Non-Repatriation Basis: Acquisition of shares of an Indian Company, through a General Body Resolution, up to 24% of the Paid Up Value of the Company. 7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from Shares or Debentures of an Indian.

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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.

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

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

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

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 portfolio investment scheme. iii. Prohibitions on Investments: FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities: 1) Business of chit fund 2) Nidhi Company 3) Agricultural or plantation activities

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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.

Difference Between FDI and FII

FDI v/s 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.

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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. 2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit easily. 3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general. 4. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor

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CHAPTER-3

FLOWS OF FOREIGN DIRECT INVESTMENT

DOLLAR FLOWS TO ASIA

160000 140000 120000 100000 80000 60000 40000 20000 0 Asia

2001 2002 2003 2004 2005

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DOLLAR FLOWS GROWTH RATE

90 80 70 60 50 40 30 Growth %

FDI Inflow
20 10 0 -10 China Hong Kong India S Korea Taiwan

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FDI INFLOWS

6 5 4 3 2 1 0 2003-04 2004-05 2005-06

India

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APRIL - SEPTEMBER

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2005-06 2006-07

India

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CHAPTER-4 FDI IN INDIAN FINANCIAL SECTOR

FDI in major sectors in INDIA:Major of the Indian Economy which have benefited from FDI in India are: Financial sector Insurance Telecommunication Hospitality and tourism Pharmaceuticals Software and information technology

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FINANCIAL SECTOR:Financial Sector of India is intrinsically strong, operationally sundry and exhibits competence and flexibility besides being sensitive to Indias economic aims of developing a market oriented, industrious and viable economy. An established financial sector assists greater standards of endowments and endorses expansion in the economy with its intensity and exposure. The fiscal sector in India entails banks, financial organization, markets and services. The sector is classified as organized and conventional sector that is also recognized as unofficial finance market. Fiscal transactions in an organized industry are executed by a number of financial organizations which are commercial in nature and offer monetary services to the society. Further classification includes banking and non-banking enterprises, often recognized as activities that are client specific. The chief controller of the finance in India is the Reserve Bank of India (RBI) and is regarded as the supreme organization in the fiscal structure. Other significant fiscal organizations are business banks, domestic rural banks, cooperative banks and development banks. Non-banking fiscal organizations entail credit and charter firms and other organizations like Unit Trust of India, Provident Funds, Life Insurance Corporation, Mutual funds, GIC, etc.

financial Sector of India Chief Characteristics Some of the major characteristics of Financial Sector of India are:

The financial sector of India allows Most Favored Nation (MFN) reputation to all international banks and firms offering financial facilities. The sector has relaxed previous MFN tax exemption on banking activities. Allows 12 new financial bank division authorizations every year to international banks, that is higher as compared to the existing 8 every year. Raises the 10% limit of reinsurance by insurance firms in India. Permits 51% foreign endowment in fiscal advisory, issuing, hiring, business enterprise capital, business banking and non-banking credit firms.

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Financial sector reforms were initiated as part of overall economic reforms in the country and wide ranging reforms covering industry, trade, taxation, external sector, banking and financial markets have been carried out since mid 1991. A decade of economic and financial sector reforms has strengthened the fundamentals of the Indian economy and transformed the operating environment for banks and financial institutions in the country. The sustained and gradual pace of reforms has helped avoid any crisis and has actually fuelled growth. As pointed out in the RBI Annual Report 2001-02, GDP growth in the 10 years after reforms i.e. 1992-93 to 2001-02 averaged 6.0% against 5.8% recorded during 1980-81 to 1989-90 in the pre-reform period. The most significant achievement of the financial sector reforms has been the marked improvement in the financial health of commercial banks in terms of capital adequacy, profitability and asset quality as also greater attention to risk management. Further, deregulation has opened up new opportunities for banks to increase revenues by diversifying into investment banking, insurance, credit cards, depository services, mortgage financing, securitisation, etc. At the same time, liberalisation has brought greater competition among banks, both domestic and foreign, as well as competition from mutual funds, NBFCs, post office, etc. Post-WTO, competition will only get intensified, as large global players emerge on the scene. Increasing competition is squeezing profitability and forcing banks to work efficiently on shrinking spreads. A positive fallout of competition is the greater choice available to consumers, and the increased level of sophistication and technology in banks. As banks benchmark themselves against global standards, there has been a marked increase in disclosures and transparency in bank balance sheets as also greater focus on corporate governance.

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Economic development itself has proven to be a vehicle for real improvements in the environment, and foreign investment the means by which cleaner technologies and better environmental practices are introduced in countries where they are most needed. Globalisation, accompanied by open trade and investment, provides the conditions for improved economic prosperity as well as environmental protection. Business continues to be an important and engaged actor in the pursuit of sustainable development, and in partnership with others, can make its contribution most effectively in the framework of economic growth, more open trade and investment and a conducive regulatory framework.

FINANCIAL INSTITUTIONS:-

Commercial banks Central banks Credit rating agencies Credit reporting and debt collection Financial authorities Insurance companies Merchant banks Mutual funds Specialised financial institutions Venture capitalists

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BANKING SECTOR:A commercial bank (or business bank) is a type of financial institution and intermediary. It is a bank that provides transactional, savings, and money market accounts and that accepts time deposits. After the implementation of the GlassSteagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S. law, some use the term "commercial bank" to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. In some other jurisdictions, the strict separation of investment and commercial banking never applied. Commercial banking may also be seen as distinct from retail banking, which involves the provision of financial services direct to consumers. Many banks offer both commercial and retail banking services.

The role of commercial banks

Commercial banks engage in the following activities:

processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other means issuing bank drafts and bank cheques accepting money on term deposit lending money by overdraft, installment loan, or other means providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures safekeeping of documents and other items in safe deposit boxes distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a financial supermarket cash management and treasury merchant banking and private equity financing

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FDI in banking
The UPA Government had chosen to carry forward the policy of banking deregulation, following the footsteps of the NDA Government. On 28 th February, 2005, the same day that the Union Budget 2005-6 was presented before the Parliament, the Reserve Bank at the instance of the Finance Minister, released a roadmap for the presence of foreign banks in India. The RBI notification formally adopted the guidelines issued by the Ministry of Commerce and Industry under the previous government on March 5, 2004 which had raised the FDI limit in Private Sector Banks to 74 per cent under the automatic route, and went on to spell out the steps that would operationalise these guidelines. The RBI roadmap demarcates two phases for foreign bank presence. During the first phase, between March 2005 and March 2009, permission for acquisition of share holding in Indian private sector banks by eligible foreign banks will be limited to banks identified by RBI for restructuring. RBI may, if it is satisfied that such investment by the foreign bank concerned will be in the long term interest of all the stakeholders in the investee bank, permit such acquisition subject to the overall investment limit of 74 percent of the paid up capital of the private bank. Appropriate amending legislation will also be proposed to the Banking Regulation Act, 1949, in order to provide that the economic ownership of investors is reflected in the voting rights. Further, the notification announces that foreign banks will be permitted to establish presence by way of setting up a wholly owned banking subsidiary (WOS) or conversion of the existing branches into WOS. A clause on one-mode-presence, i.e. one form of banking presence, as branches or as WOS or as a subsidiary with a foreign investment in a private bank, has been added as the only safeguard against concentration. There are no caps specified for individual ownership (except the 74 per cent overall limit), which in the first phase would be left to RBIs discretion. 6 The second phase will commence on April 2009 after a review of the experience of the first phase. This phase would allow much greater freedom to foreign banks. It would extend national treatment to WOS, permit dilution of stake of WOS and allow mergers/acquisitions of any private sector banks in India by a foreign bank subject to the overall investment limit of 74 percent.

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Regulation of Foreign Investment in India General Rules Limiting Foreign Investment in Indian Companies A traditional argument against foreign equity participation in domestic companies is that thesebusinesses involve strategic national interests and therefore, operational and strategic control must be retained domestically (Lam, 1997). This view held sway in India until the early 1990s and foreign 3 investment in all domestic companies was restricted and could be undertaken only with the prior approval of the Government of India.The New Industrial Policy of 1991 was the first step toward liberalization. It introduced foreign direct investment (FDI) via the automatic route, allowing companies in selected industries to raise new equity capital (in some industries, up to fifty-one per cent ownership) by issuing new shares in foreign markets without prior approval from the Ministry of Commerce and Industry (MCI). Banking was not one of the thirty-five industries where foreign direct investment via the automatic route was allowed.The next significant step occurred in late 1992 when foreign institutional investors were first allowed to invest in outstanding domestic securities. Such investments are referred to as foreign institutional investment (FII). Initially, the holding of any single foreign institutional investor was limited to five percent of the companys total shares with an aggregate cap of twentyfour percent of the issued and paid-up capital for all foreign institutional ownership. These FII limits were intentionally designed to prevent a controlling interest by any foreign investor or group of investors. On April 4, 1997, the upper limit for FII was allowed to be increased up to thirty percent by the company concerned if its Board of Directors passed a resolution to that effect that was also ratified by its shareholders. Over time, the upper limit on FII was gradually increased first to forty percent (March 1, 2000) and ultimately to the industrys sectoral cap. In every instance, the new upper limit was subject to the same conditions (called the special procedure) as the thirty percent limit. Table 1 provides additional detail on the sequence of changes in FII limits. While FDI and FII both enable foreign institutions to invest in Indian firms, FDI and FII are quite different and are subject to very different regulatory treatment. FDI via the automatic route was viewed by the government as a source of new capital and was expected to create large block investors who would have a long term relationship with the firm and its management. On the other hand, FII did not directly generate new capital for the firm since investment was via secondary trading in existing securities and investment by any single institution was limited with the explicit objective of preventing significant influence by any foreign investor or group of investors. As a result of these different purposes and views 4 by the government, FDI and FII were regulated by different governmental bodies and were subject to separate legal limitations and regulatory procedures. The regulations were complex and allowed for different combinations of caps on FII and FDI. Depending on the industry, the caps could be independent or cumulative. Cumulative caps limited the sum of FII and FDI and the cumulative cap could be less than the sum of the two individual caps.
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For example, FII and FDI could each be allowed up to forty percent individually, but the sum could also be limited to a maximum of forty percent.2 A further complication is that the FDI regulation could include sub-limits based on the purchaser of the newly issued shares. For example, regulation that specified a forty percent limit on FDI could have a sub-limit of twenty percent on capital raised from foreign institutions but allow non-resident Indians (NRIs, or entities they controlled) to invest up to the full forty percent limit.

Impact Of Foreign Direct Investment in the Financial Sector:The arrival of new and existing models, easy availability of finance at relatively low rate of interest are key catalysts of growth in the globalised economy, particularly for emerging market economies. The role of Foreign Direct Investment in the present world is noteworthy. It acts as the lifeblood in the growth of the developing nations. Flow of the FDI to the countries of the world truly reflects their respective potentiality in the global scenario. Flow of FDI truly reflects the country's both economic and political scenario.

Impact of FDI on banking Indias financial system has very little exposure to foreign assets and their derivative products and it is this feature that is likely to prove an antidote to the financial sector ills that have plagued many other emerging economies. The global banking industry weathered turbulent times in 2007 and 2008. The impact of the economic slowdown on the banking sector in India has so far been moderate. Owing to at least a decade of reforms, the banking sector in India has seen remarkable improvement in financial health and in providing jobs. Even in the wake of a severe economic downturn, the banking sector continues to be a very dominant sector of the financial system. The aggregate foreign investment in a private bank from all sources is allowed to reach as much as 74% under Indian regulations. The third quarter of 2008 saw the beginning of negative net capital inflows into the country. Not with standing this bleak scenario, the investment pattern with regard to foreign direct investment (FDI) and inflows from non-resident Indians remains resilient and FDI inflows into the country grew by an impressive 145% between fiscal 2006 and 2007 and by a respectable 46.6% between fiscal 2007 and 2008. However, owing to the economic downturn, the growth in FDI inflows in fiscal 2009 slowed to 18.6% from the previous fiscal.

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Despite the surge in investments, the stringent regulatory framework governing FDI has proved to be a significant hindrance. However, FDI norms have been relaxed to a considerable extent with respect to certain sectors. Private banks, for instance. Foreign investment, in addition to technological innovation and expertise, brings with it a plethora of risks. An unwarranted increase in the size of foreign holding in the banking sector will inevitably expose the country to risks not commensurate with those that an emerging market economy such as ours is equipped to grapple with. At the same time, it is important to recognize that FDI in banking can address several issues pertaining to the sector such as encouraging development of innovative financial products, improving the efficiency of the banking sector, better capitalization of banks and better ability to adapt to changing financial market conditions.

The Present Banking Scenario In recent times economy is been pushing to increase the role of multi-national banks in the banking sector. But it is opposed on the front that it will lead to state run insurers loosing business and workers their job. There are several reasons why giving foreign investors greater voting rights is fraught with dangers. When domestic or foreign investors acquire a large share holding in any bank and exercise proportionate voting rights, it creates potential problems not only of excursive concentration in the banking sector but also can expose the economy to more intensive financial crises at the slightest hint of panic. Opposition is not considering the need of present situation. FDI in banking sector can solve various problems of the overall banking sector. Such as 1.) 2.) 3.) 4.) 5.) 6.) 7.) Innovative Financial Products Technical Developments in the Foreign Markets. Problem of Inefficient Management Non-performing Assets. Financial Instability Poor Capitalization Changing Financial Market Conditions.

If we consider the root cause of these problems, the reason is low-capital base and all the problems is the outcome of the transactions carried over in a bank without a substantial capital base. In a nutshell, we can say that, as the FDI is a non-debt inflow, which will directly solve the problem of capital base. Along with that it entails the following benefits such as

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 Technology Transfer As due to the globalization local banks are competing in the global market, where innovative financial products of multinational banks is the key limiting factor in the development of local bank. They are trying to keep pace with the technological development in the banks. Now a days banks have been prominent and prudent in the rapid expansion of consumer lending in domestic as well as in foreign markets. It needs appropriate tools to assess (how such credit is managed) credit management of the banks and authorities in charge of financial stability. It may need additional information and techniques to monitor for financial vulnerabilities. FDI's tech transfers, information sharing, training programs and other forms of technical assistance may help meet this need. Better Risk Management As the banks are expanding their area of operation, there is a need to change their strategies exert competitive pressures and demonstration effect on local institutions, often including them to reassess business practices, including local lending practices as the whole banking sector is crying for a strategic policy for risk management. Through FDI, the host countries will know efficient management technique. The best example is Basel II. Most of the banks are opting Basel II for making their financial system more safer.

Financial Stability and Better Capitalization Host countries may benefit immediately. From foreign entry, if the foreign bank recapitalize a struggling local institution. In the process also provides needed balance of payment finance. In general; more efficient allocation of credit in the financial sector, better capitalization and wider diversification of foreign banks along with the access of local operations to parent funding, may reduce the sensitivity of the host country banking system and lead towards financial stability. So due to the aforesaid benefits economy has consistent flow of FDI over the past few years. In addition to that, the govt. has also taken step to enhance the FDI (eg. Telecom, civil aviation) FDI up to 100% through the Reserve Bank's automatic route was permitted for a no. of new sectors in 2005-06 such as Greenfield airport projects, export trading. All these measures have been contributing towards increasing direct investment.

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'FDI & FII have risen sharply during the 1990s reflecting the policies to attract nondebt creating flows. Cumulative foreign investment flows have amounted to US & 106 billion since 199091 and almost evenly balanced between direct invest flows (US & 49 bn) and portfolio flows (US & 57 bn). Since 1993-94, FDI flows have exceeded portfolio flows in the 5 years while portfolio flows have exceeded FDI in the remaining 8 years. As a proportion to FDI flows to emerging market and developing countries, FDI flows to India have shown a consistent rise from 1.6% in 1998 to 3.7% in 2005'1. India's FDI growth of above 30% during past 2 years is encouraging. Although the FDI inflows into India are small as compared to other emerging markets, their size is growing on the back of growing interest by many of the world's leading multinationals. India has improved its rank from fifteenth (in 2002) to become the second most likely FDI destination after China in 2005'1.

The IMF's study is in supportive to the above-discussed features of FDI. This study talk about the optimism over India emanates from a contribution of following factors. * India contributed nearly one fifth of Asian domestic demand growth over 2000-05. Looking forward, India slated to be the second largest demand driver in the region, after China. *India accounts for almost one quarter of the global portfolio flows to emerging market economies, nearly $ 12 bn in 2005. * India is the world's leading recipient of remittances, accounting for about 20% of the global flows. Even though above discussed factors are fair enough for the development of economy. But it is a noted fact that, economy drivers are reluctant towards more liberalization for FDI in the banking sector. As the ceiling rates are not increased, FDI in Financial Sector is not getting a wholesome environment. But the foreign investment is finding its own way to come in the economy. May be the way of FII. It is evident from the diagram. Now a days, foreign commercial and investment banks have quietly begun picking up public sector bank's bond issues. Bankers said that the funds were coming into these bonds; some of the foreign banks were also using the banks' bonds as an arbitrage opportunity in view of the increasing liquidity. So, therefore from last 2 years FIIs have exceeded the FDI and in portfolio investment into India since 2003-04 reflects both domestic and global factors. Compared with FII always FDI has a greater and long-term effect on the Indian market due to the whimsical nature of FII.
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The present scenario looks more closely at the paradigm of exponential growth and laments that India's role as an engine for global growth has been limited by the still relatively closed nature of its economy.

Growth Prospect Advantage India FDI The Reserve Bank of India (RBI), has allowed foreign players to set up branches in rural India and take over weak banks with an investment of up to 74 per cent, and further relaxations are on the anvil by 2010, with the second phase of opening expected to com-mence in April 2009. Some of the biggest names in global financial services and banks like Credit Suisse, Rabo Group and ANZ are seeking a banking license in India. The RBI has, in recent months, given fresh banking licenses to UBS - Switzerland's largest bank, Dresdner Bank and United Overseas Bank. ANZ and Rabobank Group, the Dutch Group, is now in the process acquiring a banking license. The Rabobank Group already holds 18.2 per cent stake in another local private bank YES Bank. Some of the existing players such as StanChart, Citi and HSBC, hold India as one of their top markets. Due to current Global crisis, we expect the deadline for second phase i.e. April 2009 to be extended further. However, banking authorities has not announced about the extension of the phase.

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OBJECTIVES OF THE STUDY

OBJECTIVES OF FOREIGN DIRECT INVESTMENT:1.) Sustaining a high level of investment - Since the underdeveloped countries want to industrialized themselves within a short period of time, it becomes necessary to raise the level of investment substantially. This requires, in turn, a high level of savings. However, because of general poverty of masses, the savings are often very low. Hence emerges a resource gap between investment and savings. This gap has to be filled through foreign capital. Technological gap - The under developed countries have very low level of technology as compared to the advanced countries. However they possess strong urge for industrialization to develop their economies and to wriggle out of the low level equilibrium trap in which they are caught. This raises the necessity for importing technology from advanced countries. Such technology usually comes with foreign capital when it assumes the form of private foreign investment or foreign collaboration. In the Indian case technical assistance received from abroad has helped in filling the technological gap through the following three ways: a.) Provision for expert services. b.) Training of Indian personnel. c.) Education research and training institution in the country 3.) Exploitation of natural resources - A number of underdeveloped countries possess huge mineral resources, which await exploitation. These countries themselves do not possess the required technical skill and expertise to accomplish this task. As a consequence, they have to depend upon foreign capital to undertake the exploitation of their mineral wealth. Undertaking the initial risk - Many under developed countries suffer from acute private entrepreneurs. This creates obstacles in the programs of industrialization. An argument advanced in favour of the foreign capital is that it undertakes the risk of investment in host countries and thus provides the much-needed impetus to the process of industrialization. Once the programme of industrialization gets started with the initiative of foreign capital, domestic industrial activity starts picking up as more and more of the host country enter the industrial field.

2.)

4.)

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5.)

6.)

Development of basic economic infrastructure:- It has been observed that the domestic capital of the under developed countries is often too inadequate to build up the economic infrastructure of its own. Thus these countries require the assistance of foreign capital to undertake this task. In the latter half of the 20th century, especially during the last 3-4 decades, international financial institutions and many governments of advanced countries have made substantial capital available to the under developed countries to develop their system of transport and communications, generation and distribution of electricity, development of irrigation facilities, etc. Improvement in balance of payments position - In the initial phase of the economic development, the under developed countries need much larger imports (in the form of machinery, capital goods, industrial raw materials, spares and components), then they can possibly export. As a result, the balance of payments generally turns adverse. This creates a gap between the earnings and foreign exchange. Foreign capital presents short run solution to the problem. This shows that the economic development of an underdeveloped country should obviously receive a boost as a result of foreign capital. Accordingly, if foreign capital is obtained on easy terms and without any strings, it should be welcomed. However, as noted by John P. Lewis, despite denials, the fact is that all foreign aid carries strings and every foreign aid relationship involves bargaining, however genteel, between aiding and receiving parties.

7.)

While empirical and econometric work on testing various theoretical hypotheses is embedded in the extant literature on FDI, there has been no comprehensive attempt to examine the spatial and sectoral spread of FDIenabled production facilities in India and their linkages with rural and suburban areas. The majority of the population, both urban and rural, is expected to gain, indirectly and differentially, from FDI. While FDI may benefit the economy at both macroeconomic and microeconomic levels through bringing in non-debt-creating foreign capital resources, technological upgrading, spill-over and allocative efficiency effects, it is equally important to probe whether people in the rural and suburban areas get affected through such benefits. FDI in relatively labour-intensive sectors including food processing, textiles and readymade garments, leather and leather products, and light machine tools, with plants set up in small cities close to rural and suburban areas, would tend to have relatively high employment-generating potential.

8.)

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9.)

The present study makes a modest contribution by providing a comprehensive analysis of the various aspects of the impact of FDI on the Indian economy. The objectives of the study are as follows:

i) Spatial Spread- To take stock of the spatial spread of FDI-enabled production facilities in India during the past five years. The production facilities to be studied include manufacturing plants as well as service-providing facilities as these evolved either as greenfield or as M&A processes, located in cities other than metros and Tier 1 cities and in rural areas, in particular. ii) Sectoral Clustering- To bring out sectoral clustering across the states and substate regions (cities, towns and rural areas of districts) in order to assess the types of production facilities that have entered relatively small towns and rural areas outside municipal limits. iii) Depth of Value-Added- To enable a comprehensive understanding of the valueadded features of the FDI-linked production facilities and their role in providing employment opportunities. iv) Employment-Generating EffectsTo analyse the impact of FDI on various rural activities, especially in the agriculture and food-processing sectors, and to assess the positive and negative impact of employment through FDI-enabled production activities. v) Labour and Capital Intensity To identify FDI-enabled sectors by their levels of skill, scale, capital and labour requirements, to compare these features with domestically invested production facilities that produce similar products and services, and to provide comprehensive documentation of FDI-enabled production facilities by their labour and capital requirements. vi) Comparative Performance To compare the efficiency and profit levels of MNC affiliates established in India with firms under their parent companies operating outside India. To make similar comparative analyses in a particular sector between FDI-enabled production facilities and domestically invested production facilities. vii) FOREX Implications To understand the implications of repatriation of profits earned in India versus profits retained and invested. viii) Backward and Forward Linkages To estimate the backward and forward linkages of FDI-enabled sectors by mapping these on the latest available input/output tables for India.

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ix) FDI in Service Sectors To study the impact of FDI in service sectors on the rural economy. x) Special Economic Zones (SEZs) To study the concentration of production facilities in SEZs, analyse the relative performance of such plants inside and outside SEZs, and examine the impact of such production on the Index of Industrial Production. xi) Export Potential To assess the share of export-seeking FDI in various sectors of production in order to gauge the untapped potential of exports of labour-intensive goods from India. xii) Greenfield FDI versus FDI through Mergers and Acquisitions To document the sectoral distribution of FDI through these two routes, and to compare the rural and suburban linkages through these two routes. xiii) Nationality of FDI: Highlighting the Mauritius Route Riddle To decompose the nationality of FDI entering through the Mauritius route. This is important to understand the motives of investors from different countries, and helps India when it negotiates bilateral/plurilateral trade and investment agreements with these countries. xiv) Data Reporting by RBI / Sectoral Classification Given the comprehensive nature of this study, we will identify the issues of sectoral classification and data-reporting in unison with the ongoing work of the Technical Monitoring Group (TMG) on Foreign Direct Investment, which submitted its First Action Report in June 2003. To know the flow of investment in India To know how can India Grow by Investment . To Examine the trends and patterns in the FDI across different sectors and from different countries in India To know in which sector we can get more foreign currency in terms of investment in India To know which country s safe to invest . To know how much to invest in a developed country or in a developing. To know Which sector is good for investment . To know which country in investing in which country To know the reason for investment in India Influence of FII on movement of Indian stock exchange To understand the FII & FDI policy in India.

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LITERATURE REVIEW
Review of various literatures available on FDI reveals that foreign investment is still a matter of debate. Whether FDI is boom or bane for host countries economic growth and development? Opinions are still divided. FDI has its own advantages and disadvantages. Many scholars argue that through FDI developed nations may try to invade the sovereignty of host country. In order to earn quick profit they may exploit the natural resources at the faster rate and thus leave the host country deprived in the long run. It have been feared that FDI is a big threat to survival of domestic players. Many are of the opinion that basic objective of foreign investments is to earn profits by ignoring the overall social & economic development of the host nation. Thus, through this section an attempt has been made to discuss various issues raised by different scholars on the subject. It is universally acknowledged that FDI inflow offers many benefits to an economy. UNCTAD (1999) reported that Transnational Corporations (TNCs) can complement local development efforts by (i) increasing financial resources for development; (ii) boost export competiveness; (iii) generate employment and strengthening the skill base; (iv) protecting the environment to fulfill commitment towards social responsibility; (v) enhancing technological capabilities through transfer, diffusionand generation. However, Te Velde, (1999) has rightly reported that in the absence of pro-active government policies there are risk that TNCs may actually inhibit technological development in a host country. Borensztein, et. al. (1998) reveals that technological development in a host country. Borensztein, et. al. (1998) reveals that FDI has a net crowding in effect on domestic private and public investment thus advancing overall economics growth. Crowding in effects of FDI varies with regions. There has been strong evidence of crowding-in in Asia and strong net crowding out effect in Latin America (Agosin and Mayer, 2000). By and large, studies have found a positive links between FDI and growth. However, FDI has comparatively lesser positive links in least developed economies, thereby suggesting existence of threshold level of development (Blomstrom and Kokka, 2003 and Blomstrom et. al., 1994). Athreye and Kapur (2001) emphasized that since the contribution of FDI to domestic capital is quite small, growth-led FDI is more likely than FDI-led growth. Dua and Rasheed (1998) indicted that the Industrial production in India had a unidirectional positive Granger-Casual impact on inward FDI flows. They also concluded that economics activity is an important determinant of FDI inflows in India and not vice-versa. Tseng and Zebregs (2002) reported that even in case of China causality between market size/growth and magnitude of FDI holds true. There is global race for attracting FDI, but how much it would contribute to host countrys economics development is to be assessed. Developing countries need to have reached a certain level of educational, technological and infrastructure development before being able to benefit from a foreign presence in their markets. Blomstrom et. al. (1994) have rightly observed that, the host country must be capable of absorbing the new technology manifested in FDI.
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An additional factor that may prevent a country from reaping the full benefits of FDI is imperfect and underdeveloped financial markets (OECD 2002). India appears to be well placed in terms of reaping benefits because it has relatively well developed financial sector, strong industrial base and critical mass of well educated workers. FDI is motivated mainly by the possibility of high profitability in growing markets, along with the possibility of financing these investments at relatively low rates of interest in the host country. The basic concept of international trade theory was founded by David Ricardo arguing that countries engaged in foreign trade due to comparative cost advantages. Heckscher, Ohlin, and Samuelson further developed Ricardos theory of comparative advantage by arguing that a country specialized in producing and exporting goods in which it has comparative advantage due to natural endowments of the factors of production in the host country relative to elsewhere. This suggests that the ability to produce at lower opportunity cost relative to another country is a major factor in the location decision (Ohlin, 1933). Recently, the Gravity Model has become a popular method to analyze the importance of countries attractive location f actors for FDI. The Gravity Model is based on the interactions of various potential sources across border. The model has an inverse relationship between country of origin and destinations. model has an inverse relationship between country of origin and destinations. The basic gravity model proposes that trade between two countries is a function of the size of their economies as measured by the national income and population and the geographical distance between the two countries. There are few studies on FDI and its determinants in Malaysia. Some studies on FDI and its determinants are found in Zubir Hassan (2003), Hooi (2008) and Ang (2008). Zubair Hasan (2003) shows that foreign exchange rate, export expansion, and infrastructural development are important factors in attracting FDI into Malaysia. The exchange rate variable has a negative relationship with FDI. This implies that a weak currency reduces FDI inflows which contradict the hypothesized sign. Other factors such as growth rate, capital flight, and balance of payments have smaller impact on FDI inflows. The Engel-Granger test for cointegration however failed to support any longterm Relationships between FDI and each explanatory variable. In the same spirit, Hooi (2008) used Granger causality test and error correction method to examine the impact of FDI on growth and growth on FDI. The Indirect impact of FDI on growth is analyzed through manufacturing sector. He finds that the relationship between FDI and growth of the manufacturing sector is independent of each other and concludes that there is no long-run relationship between FDI and growth. Study by Ang (2008) includes a wider coverage of FDI determinants with data spanning from 1960 to 2005. Among the variables tested are financial development, wage rates, income, economic growth, government spending on infrastructure, openness, exchange rate, inflation rate, corporate tax and financial crisis 1997-1998. The findings suggest that all the factors are important determinants of FDI. Economic growth rate has the smallest effect on FDI while exchange rate has the biggest role in attracting more FDI. The study concludes that higher corporate tax rate and ringgit appreciation have dampen effects on FDI inflows.
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Surprisingly, the study shows that macroeconomic uncertainty promotes greater FDI. The possible explanation given to this is investors perceived that during macroeconomic uncertainty there is a greater potential for investment return. The highly significant causal relationships of the variables in Angs study raise some doubts. Although the problem of endogeneity bias is addressed via 2SLS estimation, the stationarity properties of the series are not tested. It is widely found that most time series data are nonstationary series, hence the high correlation among the variables may not reflect their true relationship but simply they are trending together over time. Therefore, the estimation of the dynamic relationships among the variables needs a different estimation technique. Moreover, the highly statistically significant estimates of the coefficients are the results of five different equations that exclude some of the variables from the equations. While the evidence of no long-run relationship between FDI and its determinants in the previous studies is due to the failure to model cointegration relationship appropriately. Thus, these issues provide the motivational of this paper. This study aims to investigate the determinants of FDI in Malaysia for the period 1970-2008 using different approach analyzing the dynamics of the variables. This model applies cointegration analysis based on an autoregressive distributed lag (ARDL) technique. Specifically, it seeks to identify the most important variables that affect the FDI inflow in Malaysia and provides some new evidence on the existence of long-run relationship between FDI and its determinants.

Literature Survey
FDI plays a multidimensional role in the overall development of host economies. It is widely discussed in the literature that, besides capital flows, FDI generates considerable benefits. These include employment generation, the acquisition of new technology and knowledge, human capital development, contribution to international trade integration, creation of a more competitive business environment and enhanced local/domestic enterprise development, flows of ideas and global best practice standards and increased tax revenues from corporate profits generated by FDI (Klein et al., 2001; Tambunan, 2005). While FDI is expected to create positive outcomes, it may also generate negative effects on the host economy. The costs to the host economy can arise from the market power of large firms and their associated ability to generate very high profits or by domestic political interference by multinational corporations. But the empirical evidence shows that the negative effects from FDI are inconclusive, while the evidence of positive effects is overwhelming, i.e., its net positive effect on economic welfare (Graham, 1995). FDI in manufacturing is generally believed to have a positive and significant effect on a countrys economic growth (Alfaro, 2003). However, based on empirical analysis of data from cross-country FDI flows for 1981-1999, Alfaro (2003) points out that the impact of FDI on growth is ambiguous. FDI in the primary sector tends to have a negative impact on growth, while investment in manufacturing has a positive effect, and the impact of FDI in services is ambiguous. In general, multinational enterprises have increasingly contributed to capacity addition and total sales of manufacturing.
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Further, FDI plays an important role in raising productivity growth in sectors in which investment has taken place. In fact, sectors with a higher presence of foreign firms have lower dispersion of productivity among firms, thus indicating that the spill-over effects had helped local firms to attain higher levels of productivity growth (Haddad and Harrison,1993). Besides being an important source for diffusion of technology and new ideas, FDI plays more of a complementary role than of substitution for domestic investment (Borenzstein et al., 1998). FDI tends to expand the local market, attracting large domestic private investment. This crowding in effect creates additional employment in the economy ( Jenkins and Thomas, 2002). Further, FDI has a strong relation with increased exports from host countries. FDI also tends to improve the productive efficiency of resource allocation by facilitating the transfer of resources across different sectors of the economy (Chen, 1999). Little empirical evidence is available on the impact of FDI on the rural economy, in general, and on poverty, in particular. However, in recent times, there has been increasing interest in studying the linkage between growth and poverty. FDI inflows are associated with higher economic growth ( Jalilian and Weiss, 2001; Klein et al., 2001), which is critically important for poverty reduction. But the pattern and nature of the growth process in an economy also assumes importance. It has been found that FDI had a positive impact on poverty reduction in areas where the concentration of labour-intensive industries was relatively high (Doanh, 2002). It has been shown by Bajpai (2004) that Indias labour-intensive manufacturing can potentially absorb a major section of the labour force and it holds the key to achieve dynamic growth in the country. Further, Aggarwal (2001) showed that high-tech industries are not attracting efficiency-seeking FDI; medium- and low-tech industries with foreign stakes seem to have performed better, indicating that Indias comparative advantage in exports lies with low-tech industries. However, Siddharthan and Nollen (2004) showed that in the information technology sector, exports by MNE affiliates are greater when they have larger foreign equity stakes. Though it is expected that growth tends to benefit the poor, this has not happened in many countries. There is no clear picture whether growth reduces poverty (World Bank, 2000). It is believed that increased flow of capital raises capital intensity in production, resulting in lower employment generation. However, a higher level of investment accelerates economic growth, showing wider positive effects across the economy. Tambunan (2005) found that FDI has positive effects on poverty reduction mainly through three important ways, viz., labour-intensive growth with export growth as the most important engine; technological, innovation and knowledge spill-over effects from FDI-based firms on the local economy; and poverty alleviation programmes or projects financed by tax revenues collected from FDI-based firms. However, the host countrys policies and institutions, the quality of investment, the nature of the regulatory framework and the flexibility of labour markets are important to attain the expected benefits from FDI (De Melo, 1999; Klein et al., 2001). The impact of FDI has been found to be the strongest in countries with higher education levels (Borenzstein et al., 1998; Jalilian and Weiss, 2001). However, FDI may indirectly benefit the poor by creating better employment and earning opportunities for the unskilled workforce in developing countries (ODI, 2002).

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India-specific studies on FDI have dealt with determinants of FDI, technology spillovers, export growth and good governance practices transferred from foreign to domestic firms (Banga, 2003; Kumar, 2002, 2003; Pant, 1995; Siddharthan and Nollen, 2004). These effects have been estimated through firm-level case studies and through cross-section industry data. However, the impact of FDI on the economy is still not clear and there is little evidence on the economy-wide impact of FDI in India. However, there is great interest among academics and policy makers to critically examine the impact of FDI on the different sectors of the economy and various regions of the country. In India, FDI equity flows are concentrated in a few states (Morris, 2004). Of the total approved FDI flow, Maharashtra accounted for the largest proportion with 46 per cent, followed by Gujarat with 15 per cent, and Delhi with 7.7 per cent. Other states with significant and large investments were Andhra Pradesh, Karnataka and Tamil Nadu. Among these states, only a few cities were involved in a significant amount of FDI. These included Ahmedabad, Bangalore, Kolkata, Chennai, Coimbatore, Goa, Hyderabad, Jamnagar, Kancheepuram, Mumbai, Pune and Raigarh, indicating that the geographical flow of FDI in India is skewed in favour of relatively large cities. However, for all investments, it is regions with metropolitan cities that have the advantage in headquartering the country operations of MNEs, thereby attracting the bulk of FDI. The study suggests that there are vast gains to be made by attracting FDI, especially in services and high-tech skilled labour-seeking industries. Aggarwal (2007) has shown that there are wide variations in the FDI inflow across the states of India. Only seven states accounted for over 97 per cent of the total amount of export-oriented FDI and 83 per cent of total FDI approvals during 19912001. The presence of Export Processing Zones was found to be a relevant pull factor in attracting export-oriented FDI. Further, while explaining the sensitivity of FDI to labour market conditions, the study revealed that labour market rigidities and labour costs are more pronounced for export-oriented FDI than for domestic marketseeking FDI. Infrastructure and regional development are found to be key factors in attracting higher FDI, both in the export and domestic market-seeking sectors. FDI plant location is a complicated phenomenon. By utilising plant-level data across 100 of the largest cities in 17 states of India, Goldar (2007) established that the interstate and inter-city distribution of plants of foreign firms is almost identical to that of domestic firms. This indicates that the factors influencing the location of plants of foreign companies are, by and large, the same as those for domestic companies. But the number of plants of foreign companies in a city is positively related to the size of the city, civic amenities in the city, size of the largest city in the state and investment climate in the state. The presence of a metropolitan city in the state probably captures the advantage in headquartering the country operations of multinational companies.

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Examining industry-specific spill-over effects, Bergman (2006) has shown that pharmaceutical MNCs in India made a positive contribution to the growth and development of the industry. Spill-over effects through imitation, industrial management skills and competition were explicitly observed in the industry. Such effects were generated not only in product development, but also in marketing and documentation techniques. The foreign firms presence has indirectly encouraged domestic firms to increase their managerial efforts and to adopt some of the marketing techniques used by MNCs. Further, the presence of foreign firms has intensified competitive pressure in the industry and stimulated domestic firms to use accessible resources more efficiently. Indias comparative advantage in pharmaceuticals has boosted the Indian pharmaceutical enterprises to move and operate abroad.

FDI benefits the host country in a number of ways. However, most of the studies conducted in India and abroad have been confined to firm/industry-level analyses that focus on determinants and spill-overs from MNEs to domestic firms. In the Indian context, there is a perception that the flow of FDI, either through greenfield investment or mergers and acquisitions, and their associated benefits are concentrated only in urban/metropolitan areas. It is thus important to know whether and by how much FDI has reached relatively small cities/ towns since many of these are likely to haveneighbouring rural clusters. The present study is a modest attempt to quantify the linkage of benefits that FDI in India has provided to its rural population.

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RESEARCH AND METHODLOGY

1.)

RESEARCH METHODLOGY
The most important thing to run any sector in the modern world is information. The ability to gather, analyze, evaluate, present and utilize information is therefore is a vital skill today. In order to accomplish this project successfully I will take following steps. 1) Data Collection: The analysis will be done with the help Secondary data. The data is collected mainly from websites, annual reports, world bank reports, research reports, already conducted survey analysis, database available etc. 2.) Analysis:Appropriate Statistical tools like correlation and regression will be used to analyze the data like to analyze the growth and patterns of the FDI and FII flows in India during the post liberalization period, the liner trend model will be used. Further the percentage analysis will be used to measure the share of each investing countries and the share of each sectors in the overall flow of FDI and FII into India.

Methodology
The major source of information is the database available at the Department of Industrial Policy and Promotion (DIPP), Department of Industry, Ministry of Commerce and Industry, Government of India. The study has used the Capitaline database of Capital Market that provides information on 14,000 listed and unlisted Indian companies organised under more than 300 industries. While these sources provide much of the general information on the aspects under focus in this study, primary data would have helped corroborate the findings. A primary survey of a select sample of FDI-enabled production units was also carried out. However, since we could not get adequate number of responses, we had to base our analysis on the secondary data. Econometric tools have been used to understand issues relating to determinants of plant location and agglomeration of industries. As a follow-up to our discussion with DIPP, the major focus of our analysis has been the manufacturing sectors. However, we have also provided descriptive features of FDI-enabled firms in service sectors.

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Sector-wise FDI inflows

Over the recent past, the sector-wise inflows of FDI have undergone a change. This is clear from the variation in thesector ranks based on their share in total FDI inflows. For comparison, we divide the period from August 1991 to March 2009 into two subperiods of approximately the same length: the initial period of August 1991 to December 1999 and the second sub-period of 2000 to the latest available (which is the reference period of this study).

Data has been collected from secondary sources. Secondary data: In case of FDI the data were collected from: Newspapers Internet Text books Bank branches of delhi
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ANALYSIS AND INTERPRETATION

Analysis
All the completed questionnaires were entered in an Excel database and SPSS software was used to tabulate the aggregated results. All individual company data remain confidential. Of the 284 FDI-enabled firms, there are 129 manufacturing firms (25 are common with the secondary data base) and 155 service companies (9 are common with the secondary data base). These companies are spread across four zones East, North, South and West and also large and small cities, where large cities comprise Class-1 and Class-2 cities combined, and small cities are Class-3 cities. The large cities are towns with a population of 5,00,000 and above, and Class-3 cities are towns with a population of less than 5,00,000. This bifurcation of large cities and small cities was made partially to address the question of where FDI goes within a particular zone. More specifically, the interest was in knowing whether FDI is concentrated in large cities, i.e., metros, or small cities/towns/rural areas. Of the 284 firms which could be surveyed, there is concentration of firms in the North and South zones followed by the West zone; there are few FDI-enabled firms in the East zone. The maximum number of surveyed manufacturing firms is in the North and South zones, whereas the maximum number of service firms is in the South zone. The distribution of sample firms zone-wise and sector-wise shows that nearly 83.5 per cent of all firms are in large cities, whereas only 16. per cent of the firms are in small cities. However, this is a biased sample, because the surveyors could not reach firms in our sample and had to choose from other firms too.

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The sector-wise and zone-wise distribution of foreign equity holdings of FDI-enabled firms in large and small cities. There are 138 firms with foreign equity holding of more than 50 per cent, 127 firms with foreign equity holding of 10-50 per cent, and only 19 firms with foreign equity holding of less than 10 per cent. Therefore, the total number of FDI-enabled firms, i.e., with foreign equity of more than 10 per cent, is 265. However, for our analysis we consider all firms to be FDI-enabled. There is a larger number of service firms (86) with foreign equity holding of more than 50 per cent vis-vis manufacturing, whereas there are only 52 firms with foreign equity holding of more than 50 per cent. Among the zones, the West zone has the maximum number of firms with foreign equity holding of more than 50 per cent, and all these firms are in large cities. The zone-wise distribution of the equity holdings of firms. The distribution of foreign equity capital holding also shows that nearly 8.2 per cent of all the firms in large cities have an equity holding of more than 50 per cent, but 18.1 per cent of the firms have an equity holding of more than 50 per cent in small cities. In the West zone, large cities have the maximum number of firms with a foreign equity holding of more than 50 per cent. The service firms in large cities have an equity holding of more than 50 per cent and this pertains more to the West zone. In contrast, the maximum number of firms with an equity holding of less than 10 per cent is in the South zone (57.9 per cent). The zone-wise listing status of FDI-enabled firms, both services and manufacturing, in large and small cities. Of the sample of 284 firms, 125 firms are listed and 159 are unlisted firms. Of the 125 listed firms, 65 are manufacturing firms and 60 are service firms. Further, 79 companies of this set of 125 are listed on both the NSE and BSE stock exchanges, whereas 31 companies are listed only on the BSE and 15 only on the NSE. In terms of distribution, nearly 46.2 per cent of the firms in large cities are listed and the remaining 53.8 per cent are unlisted. On the other hand, listed firms in small towns recorded 33.3 per cent and the unlisted firms recorded 66.7 per cent. Between the NSE and the BSE, more companies in both services and manufacturing are listed on the BSE than the NSE.

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The zone-wise and sector-wise distribution of FDI-enabled service firms. Of the 155 surveyed service firms, 139 service firms were in large towns, whereas only 16 firms were in small towns. The maximum number of service firms are in the South zone in large cities (47), followed by Maharashtra (45) in large cities. The maximum number of service firms are in other services (93), followed by non-financial services, which has about 32 service firms. An attempt has been made to see the resource category of manufacturing firms in the sample. The three resource categories include labour-intensive industries, capital-intensive industries and technology-intensive industries. The respondents were asked to select the resource category which most suited their firm (i.e., Rank 1), followed by other resource categories, namely, as Rank 2 and 3, respectively. Of the sample size of 1293 firms, 38 firms ranked capital intensive as their first choice, followed by 31 firms which accorded Rank 1 to the labourintensive category and 60 firms that ranked themselves as technology-intensive. Also, 38 firms have given Rank 1 to capital-intensive, followed by 26 firms which have given Rank 2 to technology-intensive and 12 firms which have given Rank 3 to labour-intensive industry. The majority of the firms which have given Rank 1 to capital-intensive industries have given Rank 2 to technology-intensive and Rank 3 to labour-intensive.

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The survey also revealed that most of the surveyed manufacturing firms are located in large cities, with the maximum number of firms being capital-intensive. The number of employees in manufacturing firms and service firms in a sample of 254 firms. The total number of employees in 254 firms is 1,70,610, with 1,37,183 males and 33,387 females. Of the total number of employees, 87,812 are employed in manufacturing firms and 82,798 in service firms. But in large cities, taking into account all zones, 79,213 people are employed in service firms, vis--vis 74,857 in manufacturing firms. Overall, nearly 51.5 per cent of the employees in 254 firms are employed in manufacturing firms vis--vis 48.5 per cent in service firms. It may be observed that the percentage of females employed in service firms is high in large cities (13.1 per cent) vis--vis the high percentage of females employed in manufacturing in small cities (23.0 per cent). Thus, large cities provide more employment to women in service firms, whereas a large percentage of women are employed in manufacturing in small cities. The zone-wise number of employees per firm for the surveyed 254 FDI-enabled firms. The number of employees per firm is 672. However, the number of employees per firm in manufacturing is 791 compared to 579 in services. The number of employees per firm is higher in large cities in both manufacturing and services vis-vis small cities. The mode of transport from the FDI firm to the closest urban/metro centre. Of a sample of 121 manufacturing firms for which data was available from the questionnaires, nearly 97 firms (71 in large cities and 26 in small cities) mentioned road transport as the major means of transport to the nearest urban centre and 23 firms (22 in large cities, 1 in small city) said rail was the most important mode of transport, followed by only one firm which said that the mode of transport most commonly used and available is air transport. The findings are similar for service firms; nearly 106 service firms (92 in large cities and 14 in small cities) out of the sample of 136 said that road is the most important mode of transport, followed by 29 firms (only large cities) for whom rail was the most important mode of transport, and only one service firm mentioned the air route as a means of transport. The quality of transport from the firm to the nearest urban centre/metro. Of the 111 firms for which data is available, 59 firms mentioned that the quality of transport is good from the firm to the nearest urban centre, 36 firms opined that the quality of transport is average and 16 firms rated the quality of transport as excellent. Of a sample of 123 service firms, 37 service firms mentioned the quality of transport from the firm to the nearest urban centre to be excellent, 69 firms termed the quality to be good and only 17 said the quality of transport was average. Across the sample, a large number of service and manufacturing firms mentioned the quality of transport to the nearest urban centre from the firm to be good.

The infrastructure facilities available within a radius of 10 kilometres from the firm. It appears that the presence of FDI-enabled firms is concurrent with the existence of schools, colleges and hospitals within a radius of 10 km. This scenario is similar across zones, except for the East zone where data for small cities is not available.

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The number of firms that have led to improved infrastructure facilities in the region. Of a sample of 124 manufacturing firms across zones and large and small cities, 98 firms opined that setting up the FDI-enabled firms had led to improvement in infrastructure. 91 firms observed that the presence of FDI-enabled units has led to improved road infrastructure, followed by 72 firms which said that setting up FDIenabled firms has resulted in improved electricity and 61 firms said that FDI-enabled firms have also led to the setting up of a hospital in the area and that facilities like education, drinking water, recreation and other services also improved in the region. The same holds true if an FDI-enabled service firm is set up. Nearly 52 service firms said that the setting up of an FDI-enabled service firm has led to improvements in road infrastructure, 39 facilities stated that there is an improvement in electricity supply and 37 firms said that there is access to hospitals. Though zone-wise the story is the same, it differs between large and small cities; 14.7 per cent of the manufacturing firms in large cities said that the setting up of the FDI-enabled firms has not led to improvements in infrastructure facilities, but 85.3 per cent said that there is an improvement in infrastructure facility due to the setting up of an FDIenabled firm. Similarly, 42.9 per cent of the FDI-enabled firms in manufacturing in small cities said that the FDI firm has not led to improvement in infrastructure facilities, whereas 57.1 per cent said that there is an improvement in infrastructure facilities due to the setting up of an FDI-enabled firm; and 46.7 per cent of the service firms in small towns said that the setting up of the service firm has not improved infrastructure in the area, while only 53.3 per cent of the service firms in small towns said that the FDI-enabled service firm has led to improvements in infrastructure.In the case of large cities, 61.5 per cent said that the setting up of FDI service firms has not led to improved infrastructure facilities, but 38.5 per cent said that the setting of FDI service firms led to improved infrastructure facilities.

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FINDINGS AND INFERENCES

Major Findings
Of the sample of 284 surveyed firms, there is a concentration of firms in the North and South zones followed by the West zone, with few firms in the East zone. The maximum number of manufacturing firms is located in the North and South zones, whereas the maximum number of service firms is in the South zone, with the majority of firms being in the large cities. Of the 284 firms, 129 are manufacturing firms and 155 are service firms. The zone-wise and sector-wise distribution of sample firms shows that nearly 83.5 per cent of the firms are in large cities, whereas only 16.5 per cent of the firms are in small cities. There are 138 firms with foreign equity holding of more than 50 per cent, 127 firms with foreign equity holding of 10-50 per cent and 19 firms with foreign equity holding of less than 10 per cent. However, there is a larger number of service firms (86) with foreign equity holding of more than 50 per cent vis--vis manufacturing where only 52 firms have foreign equity holding of more than 50 per cent. Among the zones, the West zone has the maximum number of firms with foreign equity holding of more than 50 per cent and all of them are in large cities. Nearly 46.2 per cent of the firms in large cities are listed and the remaining 53.8 per cent firms are unlisted. On the other hand, in small towns listed firms accounted for 33.3 per cent, whereas unlisted firms accounted for 66.7 per cent. Between the NSE and the BSE, more companies in both services and manufacturing are listed on the BSE than the NSE. Of the sample of 155 service firms, 139 service firms are located in large towns, whereas only 19 service firms are located in small towns. The maximum number of service firms are in the South zone in large cities (47) followed by Maharashtra (45) in large cities. The maximum number of service firms relate to other services (93), followed by nonfinancial services, which have about 32 service firms. In manufacturing, out of 129 firms, 98 are located in large cities and the remaining 31 firms are located in small cities. As per zone-wise classification, the South zone has 36 FDIenabled firms located in large cities followed by the West, North and East zones. Similarly, among FDI-enabled firms in small cities, the North zone has a higher number of firms followed by the South zone and data for the remaining zones was not reported. The majority of the firms report that road transport is the most important means of transport to the closest urban centre or metro. Across zones, a large number of service firms and manufacturing firms mentioned that the quality of transport to the nearest urban centre from the plant/facility was good. Nearly 60 per cent of the service firms belong to Other services, and most of the service firms are located in large cities, compared to small cities in all zones. Most manufacturing firms are located in large cities with the maximum number of firms being capitalintensive.

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Overall, nearly 51.5 per cent of the employees in 254 firms are employed in manufacturing firms vis--vis 48.5 per cent in service firms. The percentage of females employed in service firms is greater in large cities (13.1 per cent), whereas the percentage of females employed is greater in manufacturing firms in small cities (23.0 per cent). Thus, large cities provide more employment to women in service firms, whereas a large percentage of women are gainfully employed in manufacturing in small cities. The number of employees per firm is greater in large cities in both manufacturing and services vis--vis small cities. The presence of FDI-enabled firms is concurrent with the existence of schools, colleges and hospitals within a radius of 10 km. This scenario is similar across zones except for the East zone, where data for small cities is not available. Both manufacturing and service firms mention that the setting up of an FDI firm has led to improved infrastructure in the area; however, this is truer for large towns than small towns. The majority of the small towns mentioned that the setting up of an FDI firm has not led to improvements in infrastructure in the area.

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LIMITATIONS
Currently, foreign companies are only allowed to own 10% of a business in the retail sector. Prime Minister Manmohan Singh is trying to convince his coalition partners To open up FDI along the lines of what is allowed in other industries. FDI limits for other sectors are as follows: Banking-74% Non-banking financial companies-100% Insurance-26% Telecommunication-74% Private petrol refining-100% Construction development-100% Coal& lignite-74% Trading-51% Electricity-100% Pharmaceuticals-100% Transportation infrastructure-100% Tourism-100% Mining-74% Advertising-100% Airports-74% Films-100% Domestic airlines-49% Mass transit-100% Pollution control-100% Print media-26%

Limits for FDI FDI in the banking sector has been liberalized by raising FDI limit in private sector banks to 74 per cent under automatic root including investment by foreign investment in India. The aggregate foreign investment in a private bank from all sources will be 74 per cent of paid-up capital of the bank. FDI and Portfolio investment in nationalized banks are subject to overall statutory limit of 20 per cent. The same ceiling also applies in respect of such investment in State Bank of India and its associate banks.

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Limitations of FDI in India

Domestic Investment Disadvantages FDI crowds out domestic investment by: Being a monopolistic competitor Raises demand for money Raises interest rates Foreign firms have more: Advertising power Ability to dominate the market

Technology Disadvantages Technology brought may be inappropriate The technology may be too capital-intensive Pollution-intensive technologies may be exported from countries where they are banned Sometimes, external transactions allow foreign technology to be acquired more cheaply, especially if the technology is mature

Environment Disadvantages Foreign firms operating in regions where rules are non-existent or not enforced have greatly exceeded emissions and effluent levels allowed in their home countries Foreign firms have exercised significant political influence to prevent the imposition of rules regarding the environment

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RECOMMENDATIONS AND CONCLUSION

conclusion
Foreign firms do generate technological development in the host country. Crowding out is not a major problem. Host countries should enforce environmental regulations. This will not make foreign firms leave the country, as the cost of conforming to regulations is much lower than the difference in cost of labor. Benefits in increased: Competition Efficiency Innovation A.) CONCLUSIONS Over the past few years, ESCWA member countries have implemented a number of measures aimed at boosting the attractiveness of the business environment. Those measures included the reduction in corporate taxes, creation of one-stop shops to reduce the time needed to approve and register investments, and the reduction in minimum capital requirements. As a result, FDI inflows to ESCWA member countries have increased from less than $11 billion in 2003 to reach more than $60 billion in 2008. Over the past two years combined, FDI inflows were higher than the cumulative total of the previous 15 years. A significant amount of these inflows have largely stemmed from within the region, as evidenced by a sharp increase in the number of GCC companies and banks that have expanded their businesses into other ESCWA member countries. The outstanding performance of the FDI inflows to ESCWA member countries did not persist in the face of the ongoing turmoil in the global financial markets and the deterioration of the world economic growth. In 2008, ESCWA member countries witnessed a decline in FDI inflows for the first time since the year 2001. FDI inflows deteriorated to $60 billion in 2008 compared to $64 billion in 2007, which represents a drop of 6.3 per cent. Further deterioration in the level of FDI inflows to ESCWA member countries is expected in 2009. Indeed, preliminary data show that the downward trend in FDI accelerated in the first quarter of 2009, with FDI declining by 50 per cent in the countries of the Organisation for Economic Co-operation and Development (OECD). Moreover, for 2009, the United Nations Conference on Trade and

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Development (UNCTAD) has predicted a decline of 50 per cent in global FDI inflows and of 60 per cent in FDI inflows to developing countries. Looking ahead, the ESCWA region is expected to continue to attract FDI flows in the medium term. The oil sector in particular is expected to attract significant FDI. In the medium term, enhancing the infrastructure could increase the overall economic competitiveness, which in turn will help to attracting FDI inflows. In the long term, human capital needs to be enhanced in order to promote innovation and increase productivity, which in turn can draw domestic and foreign capital. One of the main features of FDI inflows into the ESCWA region is its heavy concentration in three countries, namely, Saudi Arabia, the United Arab Emirates and Egypt. These countries captured more than three quarters of total FDI in the region in 2008. In addition, foreign investments have largely targeted the energy sector. Consequently, the oil-exporting countries in the region need to accelerate their efforts aimed at diversifying their economies, while the non-oil exporting countries need to develop further their investment policies in order to direct FDI towards the most productive and strategic sectors in their economies, such as industry and agriculture. Despite the recent increase in FDI inflows to ESCWA member countries in the period 2002-2007, the percentage of FDI inflows remains small as a function of the size of the ESCWA region compared to other emerging markets. ESCWA member countries need to encourage more investments, both domestic and foreign, and there is a need for greater progress at the economic, structural and regulatory levels. There are still several factors that constrain FDI to ESCWA member countries, including weak enforcement of legislation, excessive levels of bureaucracy and corruption, dominance of the public sector and slow implementation of privatization programmes. A large number of changes that were introduced in the countrys regulatory economic policies heralded the liberalization era of the FDI policy regime in India and brought about a structural breakthrough in the volume of the FDI inflows into the economy maintained a fluctuating and unsteady trend during the study period. It might be of interest to note that more than 50% of the total FDI inflows received by India , came from Mauritius, Singapore and the USA. The main reason for higher levels of investment from Mauritius was that the fact that India entered into a double taxation avoidance agreement (DTAA) with Mauritius were protected from taxation in India. Among the different sectors, the service sector had received the larger proportion followed by computer software and hardware sector and telecommunication sector. According to findings and results, we have concluded that FII did have significant impact on Sensex but there is less co-relation with Bankex and IT. One of the reasons for high degree of any linear relation can also be due to the sample data. The data was taken on monthly basis. The data on daily basis can give more positive results (may be). Also FII is not the only factor affecting the stock indices. There are other major factors that influence the bourses in the stock market.

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RECOMMENDATIONS
ESCWA member countries need to take appropriate measures aimed at encouraging both domestic and foreign investments. Within that context, the following policy options are recommended: (a) ESCWA member countries suffer from bureaucratic institutional frameworks that impose high entry and exit costs to firms. These burdens impede commercial transactions and deter FDI. Endeavours must therefore aim to create a more transparent and efficient institutional environment; (b) ESCWA member countries need to continue their efforts aimed at enhancing their governance standards given that private investors are highly sensitive to good governance. In particular, inconsistent implementation of laws continues to be a powerful deterrent to foreign investments in many countries of the region; (c) In order to develop fully their investment opportunities, ESCWA member countries need to pursue endeavours aimed at enhancing transport and communication infrastructures. To that end, embedding partnerships with the private sector could be a valuable option; (d) Facilitating access to credit is paramount for drawing investors. This can be achieved by disseminating information on credit conditions and strengthening the legal rights of borrowers and lenders; (e) Many ESCWA member countries still suffer from a weak protection for small stakeholders. Increasing the protection of investors could attract private capital. In particular, strengthening investor rights could increase intraregional investments in a number of promising sectors in industry and agriculture; (f) ESCWA member countries need to pursue more investment in education. By upgrading the educational system and making it more compatible with business needs, ESCWA member countries could attract technology-transferring FDI inflows; (g) ESCWA member countries need to reinvigorate their regional integration. In particular, the integration process needs to include the liberalization of services and investment flows.

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BIBLIOGRAPHY
1.) A. KOUTSOYIANNIS, Modern Microeconomics, second edition 2.) RUDDAR DUTT and K.P.M SUNDHARAM, Indian Economy, S.Chand,2004 49th edition 3.) G.S GUPTA, Managerial Economics 4.) LIPSEY & CHRYSTAL, Economics,10th edition 5.) CHRISTOPHER R THOMAS, S. CHARLES MAURICE and SUMIT SARKAR, Managerial Economics, 9th edition

6.) LUKE M. FROEB and BRIAN T. McCann, Managerial Economics 7.) DIVID P. DOANE and LORI E. SEWARD, Business Economics, TATA McGRAW-HILL, Edition

8.) CARBAUGH, International Economics, 11th edition

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